Germany faces EU court action over network law

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BRUSSELS -- Germany faces almost certain legal action at the European Union's highest court by June after the European Commission on Friday stepped up its action against a German law that protects Deutsche Telekom's fiber-optic network from rivals.

Deutsche Telekom is building a €3 billion ($4 billion) ultrafast broadband network offering services like Internet TV, but the German government has offered the company a "regulatory holiday" that allows it to deny rivals access to the network.

With Berlin refusing to change the law, the EC said it will now send a letter of reasoned opinion to the government, the second step of EU treaty infringement procedures. If the government still fails to give a satisfactory response to the commission, it could see Germany facing proceedings at the Luxembourg-based EU Court of Justice as early as June.

EU information society commissioner Viviane Reding and EU competition commissioner Neelie Kroes wrote to German economy minister Michael Glos last year expressing concern about the proposed law.

When the law came into effect in February, the Commission launched its first effort to redress the measures, a letter of formal notice. Berlin's reply rejected the accusations, saying that changes in its law address gaps relating to new telecoms markets which EU telecoms regulations does not cover, and are not designed to protect any single company. German economy minister Michael Glos also said the measures are needed to ensure Deutsche Telekom's returns from the huge investment in building the network.

But EC officials are adamant that national governments are no longer authorized to set restrictions on emerging markets such as broadband Internet, which are supposed to remain free to competition. A commission spokesman said there was "no willingness on the German side to respect EU law."

The fiber-optic system, which uses the so-called VDSL technology, allows transmission of data at 25 times the speed commonly used today. However, public demand for VDSL services has been slower than Deutsche Telekom had hoped for and the telecoms law aims to boost confidence in the future of new Internet connections. Indeed, at 16.4%, overall broadband penetration in Germany is already significantly weaker than in other EU member states such as Denmark and the Netherlands, which have a penetration of nearly 30%.

Deutsche Telekom already has spent about €1 billion ($1.3 billion) to connect 10 bigger cities to the network and offer combined Internet, phone and TV services. It has pledged to extend its VDSL network to 50 cities by the end of 2008. The group threatened to pull the plug on building the Internet service if it had to open up to rivals, potentially jeopardizing 5,000 jobs.

The German government, which owns 32% of Deutsche Telekom, would be severely embarrassed by any EU court action. Germany is holding the six-month rotating presidency of the EU and is expected to set an example during its helming.
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