ESIS extension / Estonia / Alternative Networks / Update Memo 5

The following report outlines new developments in the past three months and the state of on-going developments.

Several important developments on Estonian alternative infrastructure market have taken place: Estonian Energy (Eesti Energia AS) announced of the possible entry to telecommunications market and AS Comtrade announced of offering data communication services over cable networks staring July 2000. Also, in the beginning of June Legal Chancellor Eerik-Juhan Truuväli sent an inquiry to the Parliament about altering the Cable Distribution Act, condemning monopolies and unreasoned restrictions of action (see 2.4.).

Alternative infrastructure in the meaning of this document is the infrastructure of telecommunications owned by companies for whom provision of communication services is not the main activity, but rather a contribution to the main activity. Such companies can be companies of power engineering, railroads, road maintenance, etc. Alternative communications networks are also deemed to mean communications networks owned by organisations that for some reasons (security, price, etc.) do not use public communications networks.

The role of alternative networks in Estonia has been small. It arises from the facts that during 1940 – 1991 Estonia was a part of the Soviet Union and the national communications networks were part of the Soviet networks. Also, the prices for telecommunication services were fixed by the State. There was no possibility to build and operate alternative networks. After regaining independence on August 20, 1991 the Estonian telecommunication market started to develop rapidly and by year 2001 (with the ending of the exclusive rights granted to AS Eesti Telefon) the market should be completely liberalised. Consequently, operating in the telecommunication market (incl. operating alternative networks) is at the moment discouraged both by the existing legislation and by rapid technological advancements. This is causing enterprises to stay on awaiting position, as the positive and negative aspects of the technology of telecommunication services they are operating in the context of long-run developments are not clear.

This report covers the following companies offering public services and/or owning public infrastructure that are or could be active in the telecommunication market:

Developments of 1999 and the first half of 2000 can be briefly summarised as follows:

2. Constraints to co-operation between businesses and regulatory constraints

The main factor influencing the Estonian telecommunication market has been the Concession Agreement signed in 1992 which granted exclusive rights to ETC for eight years (till 01.01.2001) to provide basic services (national and international switched fixed voice telephony services, telex and telegraphic services, their installation and interconnection to them).

According to Concession Agreement the Estonian Telephone Company has to submit its business plan to the Government of Estonia. In the first quarter of 2000 Estonian Telekom referred to the enterprise as a stock-enterprise and did not consider it possible to present a business plan to one of the investors since it would damage the interests of other stockholders. However, Estonian Telephone Company presented in June 2000 a business plan for 10 years and Estonian National Communications Board will present the results of the analyses of the business plan by July 20, 2000. According to the analyse results a position in approving of changes in tariffs will be taken.

As the exclusive rights granted to Estonian Telephone Company (ETC) will end on January 1 2001, but the Concession Agreement will remain in force till 2017, both the Ministry of Transport and Communications and the ETC see the necessitate to alternate the Concession Agreement. Meetings of the specialists on the subject started in May, by autumn the alterations should be approved.

The main law regulating the area is the Telecommunications Act with which the state intends to create favourable conditions for the development of telecommunications and to promote free competition.

With the adoption of the Telecommunications Act in 2000 all sections regulating the telecommunication market were deleted in the Communications Act. At the same time all provisions concerning the postal services network remained in effect. The Government of the Republic regulations and the regulations of the Minister of Transport and Communications that had been regulating this area till the entry into force of the Telecommunications Act lost their effect as well.

The term 'alternative networks' is not explicitly used, although the Act regulates the area.

Another important law is the Cable Distribution Act that regulates the terms of deployment and conditions of operation of cable networks, and the provision of cable television services and telecommunication services by cable operators. The Cable Distribution Act came enter into force on June 1, 1999.

The Act also regulates the provision of telecommunication services via cable networks. Telecommunication service has been defined as follows (§ 11):

Since according to the Legal Chancellor Eerik-Juhan Truuväli the Cable Distribution Act consists aspects inaugurating monopoly positions and restricting actions, the Chancellor sent an inquiry to the Parliament for altering the law (see 2.4.7.).

A public telecommunications network can be operated and a public telecommunication service can be provided by an entrepreneur who has the respective authorisation from the state. In case the owner of an alternative communications network wants to provide a telecommunication service to another enterprise, the operating permit is not required, unless there is a connection with a public communications network. At the same time provision of a large part of telecommunication services have been currently established as an exclusive right of Estonian Telephone Company and the markets will open on 1 January, 2001.

One of the main entry barriers that discourage operating in telecommunication market (including provision of telecom services through alternative networks) is the Concession Agreement. It granted exclusive rights for the provision of basic services (national and international switched fixed voice telephony services, telex and telegraphic services, their installation and interconnection to them) to the Estonian Telephone Company.

The concession holder shall, on terms and conditions to be agreed between the concession holder and the party interested in interconnection, allow, facilitate and effect the interconnection to its network of the Basic Services and systems of other telecommunications operators, according to the Communication Act of the Republic of Estonia, and established international standards. (§ 4.12 Concession Agreement)

For the building and management of a public local network a respective application has to be submitted to the concession holder that can make a subcontract on the management of the local network. (§ 5.3).

Non-basic telecommunication services (e.g. mobile and data communication, paging services, satellite communication or value-added services) can be offered freely although a licence is needed for building and operating networks and/or if there is interconnection to the PSTN. There is competition in all of these liberalised markets.

The Cable Distribution Act (§ 12) has stipulated a conditional local monopoly established through a public tender arranged by the National Communications Board:

The Cable Distribution Act excludes the operation of dominant telephone network operators in the cable distribution market and there are also several other restrictions:

The non-transferable activity licences for the duration of ten years, stipulated in the law, for the construction and operating of the cable television network are issued by the National Communications Board:

The passing of the Telecommunications Act has changed the earlier system for the issuing of activity licenses. The entrepreneurs that were operating in the telecommunication market before the entry of this law into force have to submit a notice and application for activity license to the National Communications Board by 1 September, 2000. After that they will have the right to continue their earlier activities till the decision of the National Communications Board. To the new companies entering the market the new act shall be applied from 1 August, 2000.

To operate a public telecommunications network or a telecommunications network connected with it or with a telecommunications network located in a foreign country or to provide a telecommunication service, a person has to notify the Communications Board in writing. The information needed in the notices is stipulated in § 9 and the persons may commence after the notice has been registered in the Communications Board (§ 10).

Besides notification in certain cases the person has to obtain the license that is non-transferable and issued for a term of ten years unless the applicant for license requests a shorter term (§ 12):

The license will be issued not later than within six weeks after the receipt of an application according to the requirements at the Communications Board.

Besides the licence there is also the non-transferable technical authorisation licence that is granted for a specified time for the use of the limited resource of telecommunications (§ 18).

The Communication Board decides the issue of the licence or refusal within six weeks.

The Act regulates the organisations with significant market power with special provisions. These enterprises are determined by the Communication Board, taking into account the concrete market of telecommunication services and the area. These are enterprises enjoying the exclusive right granted by the state or local government to operate in the (local) communication market and/or whose market share together with the parent undertaking or subsidiary is at least 25 per cent of the turnover of the concrete public telecommunication service market or at least 25 per cent of the traffic in the case of the interconnection service market and who do not prove that the holding of such market share does not endanger free competition. (§ 8).

As an exception, the National Communications Board can deem also an entrepreneur whose market share accounts for less than 25 % of the turnover of the particular market to be an entrepreneur with a significant market power (§ 8). The decision on entrepreneurs with a significant market power is adopted for each year by December 1 of the previous year. In case the market share of an entrepreneur accounts for at least 40% of the turnover of the market, the activities of such a company as an entrepreneur with a significant market power are regulated in addition to this act also by the Competition Act (RT I 1998, 30, 410; 1999, 89, 813).

2.3 Attitude of the incumbent operator towards alternative network providers

According to the opinion of the Estonian Telephone Company (ETC) the role of alternative networks in the voice telephony market is small. Monopoly status in the provision of international phone calls is protected by the Concession Agreement. In the data communication market the situation is different – ETC has been operating in competitive environment from the very beginning.

Estonian Energy, Estonian Gas Company, Estonian Railway Company and others use mainly corporate networks for internal communication. ETC has not given any official information considering their plans to extend their respective services after the end of Concession Agreement at the moment. However interest of foreign investors/operators in the Estonian market after the expiry of the exclusive rights granted with the Concession Agreement can be assumed.

By ETC it is believed, main competition to be taking place in the international long-distance calls area. There could be also increasing competition in the data communication market.

2.4. Developments concerning alternative communications networks over the last three months

Pursuant to the Cable Distribution Act the National Communications Board is arranging public competitions which are carried out by municipalities for the issue of cable television network licenses.

As of June 2000 public competitions were announced in smaller places: in Rapla, Vasalemma and Rae.

Since the passing of the Cable Distribution Act 70 cable television network licences have been issued, all of which are temporal activity licenses permitting operation of networks becoming invalid when the cable network will be given to be operated by the winner of the public competition.

The competition for the cable distribution market in Tallinn continues. Previously Starman Cable Television (Starman Kaabeltelevisioon AS) has filed a complaint disputing the issuing of a cable distribution activity license to Tallinna Cable Television (Tallinna Kaabeltelevisioon, trade mark Tele2). The license was expected to be in effect for ten years and allowed creation of a cable television network that is covering entire Tallinn.

During the reporting period the Tallinn Administrative Court decided to curtail the usage of the 10-year cable television network license and monopoly rights arising from it. According to the ruling of the court Tele2 has the right to operate the network it had prior to the issuing of the network licence, it is not allowed to extend the network.

At end of March the Administrative Court of Tallinn repealed the regulation of the Communication Board which obligated Starman to cease offering cable television services in City of Tallinn and in the city district of Haabersti.

In 1999, Supertel Eesti OY started to provide long-distance calls through the Internet but according to the precept of the National Communications Board, Estonian Telephone Company deprived the company of the possibility to use connection lines and number series.

At the beginning of May, Tallinn Administrative Court decided to govern an independent communication-technological expert analysis, dependent of which further actions of Supertel as provider of Internet-based long-distance calls will be decided. Representative of the Estonian Telephone Company applied a request for the expert assessment to which the representative of the Ministry of Transport and Communications agreed. Although Supertel protested against it, the court granted the claim and determined an expert analysis.

Parties will have to present the names of the candidates of the experts in June since the expert analyses will be transacted by an independent group of experts consisting of three members.

2.4.5. The possible entry of Estonian Energy to the telecommunication market

In the second quarter of this year Estonian Energy announced of a possible entry to the telecommunication market using electric cables for data communication.

On April 17 the Estonian Privatisation Agency proclaimed the competition for privatisation of 66 per cent of the shares of the Estonian Railway Company (ERC) which will be held as a two-staged tender with preliminary negotiations.

At the first stage of the tender the bidder must produce his business plan for the ERC in writing; at this stage he does not submit a tender of the purchase price nor other financial obligations. Tenders can be submitted till July 17, 2000.

Last year the net turnover of the ERC was 1.4 billion EEK (89 Million EUR) and the value of the company according to the Privatisation Agency is 20 per cent of the Estonian GDP. The privatisation of the ERC was also foreseen in the Memorandum of the Economic Policy and in the Development Plan of the Estonian Economy presented to the International Monetary Fund.

At the beginning June Legal Chancellor Eerik-Juhan Truuväli sent an inquiry to the Parliament to alter the Cable Distribution Act, condemning monopolies and unreasoned restrictions of action, claiming the Act to be in contradiction to the Constitution.

As a vital problem the Legal Chancellor sees possibilities to establish a monopoly, however it remains unclear, on what grounds the decision to issue one or more cable television network licenses in a region is made. The valid law provisions the Communication Board to issue only one cable television network license in every cable television network region on the base of a public competition, if some of the applicants undertakes also the provision of telephony services. The Legal Chancellor designates the fact the public interest to restrict the area is not evident from the law. Also the people living in a cable network region are forced to buy services from one company.

Also if the Cable Distribution Act enters into force the situation may arise where the lawful investments, which were made until the entry of the law into force might contradict with the law later passed. In addition there exist some minor conflicts with the Telecommunications Act passed afterwards. As a major violation of the Constitutional right the Legal Chancellor displays the fact, it is impossible for the owner of a lawfully established cable television network to use his or her property freely and even if the established network is to be sold to any other enterprise, value of the property is intricate to estimate.

3. Inventory of the major "public" utilities with a potential for use in IS applications

AS Eesti Energia is 100% state-owned energy company. It produces 97 % of Estonia’s electrical energy and with about 7500 employees is a major employer in the country. The length of airlines is 117,221 kilometres and cable lines 6,000 kilometres.

The special department, established already in 1949, is dealing with communications networks. Independently from this department an economic entity - Eesti Energia Televõrk - was established and it is operational from 1 April 2000. Eesti Energia Televõrk is operating the corporate network that covers the whole Estonian territory offering telecommunication services to Eesti Energia and its subsidiaries.

The corporate network covers the whole territory connecting all major energy facilities – power stations, management centres, etc. There are following technologies used:

The networks of the company are mainly used for corporate purposes. The usage area covers the telephony communication inside the company with connection to the public network of Estonian Telephone Company (29 digital stations) and data communication. The latter is used for operative data communication and transmitting the commercial data of the electricity system as well as connecting the computers of the company.

In the short-run, there are plans to develop image transfer services for operative management, security control and videoconferencing. Long-run plans are not clear at the moment but large-volume co-operation with major telecommunication operators is considered.

Eesti Energia has also announced possible entry to telecommunications market as technology to offer data communication services over the cable already exists on the market.

AS Eesti Gaas is a joint stock company in private law, based on private capital and owned by three of the large gas companies of Europe (Russian OAO Gazprom (31%), German Ruhrgas AG (32%), Neste OY (10%) and smaller shareholders, among whom there are individuals and legal persons. The activities of AS Eesti Gaas focus on the purchase, sale and pipeline transportation of natural gas. In addition, the company is engaged with gas system construction, gas meter verification and the training of gas-related specialists for the company.

The customers of Eesti Gaas and its subsidiaries include 141,948 residential clients, 615 commercial and public institutions, 173 industrial consumers, 60 district heat generators and 4 heat and power co-generators. The company and its subsidiaries manage 848 km of transmission pipes, 27 gas distribution plants, 2 gas measuring stations and 1243 km of gas distribution pipelines. There are currently 515 employees in Eesti Gaas.

The corporate communication network was established during the Soviet period, when installing a communication cable along with a gas pipe was very common. Today the network is used for internal telephony and data communication with gas distribution centres.

No strategic decision has been adopted about the future of the communication lines. In the sections where the company does not use the full capabilities of the network, they are willing to rent it out. On the other hand, they rent some channels themselves from the Estonian Telephone Company, because for instance in Tallinn and also elsewhere their own network only reaches the borders of the town.

AS Eesti Raudtee is the biggest public 100% state-owned transport company. It has 5700 employees and operates 62 stations.

The field of information and communication technology is especially important for operative communications, but also for connecting to the inter-company data communications network extending to several directions all over the country. For corporate communications, both analogue and digital transmission is used. Backbones (copper and optics) and radio transmissions are used as channels. There is also connection to the public network of the Estonian Telephone Company.

The main thing considered in developing the communication system, is its stability. It is guaranteed by the inclusion of free resources and creating a possibility for parallel usage of different communication types. Free resources are created by doubling equipment (double processors in the telephone stations) or communication channels (re-routing). Both processes have already been started and are being actively developed.

There are also plans to start the digitisation of existing channels going through communication backbones (copper) in order to create a backup solution for established radio linkages and optic cables.

In the field of telecommunications co-operation with other enterprises takes place in renting out free channel volume (radio links to mobile phone operators) and providing telephony services (to companies closely related to Estonian Railways).

No strategic decision on what to do with the communications networks after liberalisation in co-operation with other service providers has been made yet.

AS Eesti Veevärk is a private enterprise that has 33 shareholders, 29 of whom are local governments (most of them have a participation of ca 0.1 - 4.6 % each). Other shareholders are NEFCO (11.2%), AS Tartu Veevärk (13.2%), AS Narva Vesi (13.8%) and AS Võru Vesi. The company employs 40 people.

The company has no internal communications networks. However, the need for internal communication networks is felt since it would enable to communicate with lower costs and more operatively. There are no more concrete plans yet.

The most widespread provision of telecommunication services is foreseen to be by cable distributors. Wide-scale cable distribution started in Estonia in 1987 when Levi Kaabel (belonging to Levicom Group) established the first cable TV network in Kuressaare town. There was overall rapid development in Europe in this area as it was possible to receive and transmit dozens of programs with simple equipment. This development was followed in Estonia. The development of cable TV took place mainly in the Western, Central and Southern parts of Estonia where only a few TV programs transmitted by local transmitters were available in contrast to Northern Estonia.

The second leap in the Estonian cable TV market took place in 1992 when local transmitters stopped the transmission of Russian television programs. The rapid development of cable-TV networks started in Tallinn and other places in Northern Estonia where most of the Russian-speaking people live. This was also a period of cable television piracy, as most of the established networks of Northern Estonia (including those built in Tallinn) were not technically nor legally correctly built.

The third milestone is the adoption of the Cable Distribution Act in spring 1999 by Riigikogu, in force since June 1, 1999. This law started to organise the market to an important extent and establish conditions for the development.

By now there is an intense competition in the market. There are 135 private entities and according to unofficial data cable TV is available to ca 30% of the population and ca 50% of the homes that are in the districts covered by cable TV are connected to it.

The cable TV operators in Estonia could be divided into three groups: Netcom AB, Telia AB and local investors.

The first group consists of the leading Scandinavian telecommunication corporation Netcom AB (trademark Tele2) in Estonia. Its subsidiary Levicom Broadband operates fixed telecommunications networks including cable TV networks in Estonia and Lithuania. Levicom Broadband is a holding company that owns two cable TV operators in Estonia - Tallinna Kaabeltelevisioon and Levi Kaabel.

Tallinna Kaabeltelevisiooni AS was established in 1994. It is operating in Tallinn and has a permanent cable distributing license for the term of ten years (the license has been disputed by Starman Kaabeltelevisiooni AS) that has given them the exclusive right for the creation of the cable TV network that covers entire Tallinn.

The second interest group in the Estonian cable -TV market is Swedish national telecommunications company Telia AB (through its subsidiary Telia InfoMedia AB) which owns 80% of the cable TV operator Starman Kaabeltelevisiooni AS. Starman is currently the biggest cable TV operator in Estonia, accounting for 27% of the market.

At the same time the Swedish telecommunications company Telia has announced its decision to sell its 60% participation in AS Starman due to the Cable Distribution Act that entered into force in June 1999 and according to which an owner of a cable TV network cannot be a company that accounts for more than 40% of telephony services provided in Estonia or is related with such a company through economic interests.

NetCom AB has announced about interest to obtain majority of the stock of the Estonian biggest cable operator Starman. As a result NetCom with its subsidiaries would become the main competitor to the Estonian Telephone Company.

The third group of cable-TV operators consists of operators based on local capital. The biggest of them are STV Kaabeltelevisioon and Telset in Tallinn and RHR Grupp in Pärnu.

AS STV Kaabeltelevisioon (STV) was established in 1991 and by now the company has become a significant actor in the market. Through cable modems, both data communication services (with connection to the Internet) and telephony services are provided.

In several small Estonian towns the cable TV operators use conventional coax networks working in 47-230 MHz frequency bands (ca 16-18 TV channels). To develop these networks into telecommunications networks with bi-directional communications, huge investments are needed and it is still technically problematic. To some extent, the existing networks could be developed to offer Internet services via cable modems.

Most cable-TV subscribers are, however, located in Tallinn, where almost all operators are using higher frequencies (up to 860 MHz) that enable to broadcast up to 50 TV channels. The topology of the network and the technology remain the same (coax cable network) but it is technically easier and less expensive to develop these networks into two-way telecommunications networks.

STV Kaabeltelevisioon, Telset and Starman Kaabeltelevisioon are using HFC-technology (Hybrid Fibre Coax) where local coax networks are connected to main stations via fibre-optic network. The technology and topology of local networks is similar to those mentioned above except in in-house networks that are developed based on star topology that enables more easily to provide to customers different packages of TV programs.

Levicom Broadband (Tallinna Kaabeltelevisioon in Tallinn and Levi Kaabel in Tartu) uses modern FTTB (Fibre-To-The-Building) network structure where every house is connected with a circle topology fibre network. In-house network is star topology network, where coaxial cable with two pairs of copper lines is used to reach the clients. This enables to provide all telecommunication services. This network is ready for offering telecommunication services and its bandwidth is much wider compared to conventional telephone network.

* According to some data the total number of customers reaches almost 200 000, 110 000 of which are customers from Tallinn.

In several places all over Estonia (Tallinn region, Läänemaa, Hiiumaa) data communication services over the wireless network are being offered.

There are currently no telecommunication operators using alternative communications networks to a considerable extent. Even when telecommunication services are provided through alternative communications networks, separate telecommunication operators have not been created or involved for that purpose and the companies that own alternative networks operate their own network. Consequently there are no separate operators, these are sub-units of the same organisation.

In the future, involvement of telecommunication companies can be expected, as several companies surveyed stressed their willingness to involve telecommunication companies. First signs of such developments have occurred already in the first half of 2000.

Venture capital fund NEV belonging to investment bank Lõhmus, Haavel and Viisemann has invested into telecommunication company AS ComTrade that announced coming to the market with a new service. In co-operation with cable operators Starman and STV, permanent Internet connection is offered via cable starting July 2000.

For individuals Internet connection with 512Kbps speed for 495 kroons (32 EUR) will be offered. For enterprises the speed 2Mbit/s with monthly fee 2000-4000 kroons (128-256 EUR) will be provided.

Eesti Energia established an independent economic entity - Eesti Energia Televõrk - that was established on the bases of department of communication networks. The entity is operational from 1 April 2000. Eesti Energia Televõrk is operating the corporate network that covers the whole Estonian territory offering telecommunication services to Eesti Energia and its subsidiaries.

Eesti Energia also announced in the second quarter of 2000 of possible entry to telecommunication market offering data communication services over the cable.

3.5. Services provided by the operators of alternative communications networks

In the Estonian telecommunication market data communication services by cable distribution operators can only be mentioned. Although several companies providing public services have their internal corporate networks that could be used, in principle, for the provision of telecommunication services, the services provided by them are small in scale.

Most cable-TV operators in Estonia are providing the service that contains up to 20 TV programmes. The cable TV operators in Tallinn and a few small towns that use higher frequencies (up to 860 MHz) provide the service that contains up to 50 TV channels and up to 20 FM radio programmes. A more important telecommunication service is the Internet connection provided through cable distribution.

After the expiry of the rights stipulated in the Concession Agreement the fast extension of the range of services is expected, incl. to the provision of telephone services. AS ComTrade, Levicom Broadband and Uninet Andmeside have all announced about their plans to offer telephony services. However, starting 2001 three main companies in the market will be AS Eesti Telefon, Tele2 and Uninet. Currently none of the companies has announced their prices for next year, but probably tariffs for local call minute rises while international call minute drops essentially.

The present report has been compiled based on the materials of news agencies BNS and ETA as well as the newspapers "Postimees", "Päevaleht" and "Äripäev", and the opinions expressed by various experts.

Please note that this report has been prepared under the sole responsibility of the ESIS II contractors.
It does not necessarily reflect the views of the Commission, nor does the Commission accept responsibility for the accuracy or completeness of information contained herein.
The ESIS Team of contractors welcomes any additional information or corrections.

Company	Main shareholder	Number of completed outlets	Number of connected outlets	Index rate	Market share
Starman Kaabeltelevisioon	Telia InfoMedia AB	95 000	39 000	41%	27%
STV	local **	100 000	35 000	35%	24%
Levi Kaabel	Levicom Broadband OÜ (Tele 2)	44 000	23 000	52%	16%
Telset	local **	35 000	12 000	34%	9%
Tallinna Kaabeltelevisioon	Levicom Broadband OÜ (Tele 2)	18 000	3 000	16 %	2%
Others	local **	-	33 000	-	21%
In total	-	-	145 000	-	100 %