REVISION OF THE BROADBAND GUIDELINES CONTRIBUTION FROM ALT LAW FIRM

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1 European Commission Directorate-General for Competition Unit C4 State aid in the Information, Communication and Media sectors 1049 Brussels Belgium Ref: HT.3095 Oslo, 30 August 2011 REVISION OF THE BROADBAND GUIDELINES CONTRIBUTION FROM ALT LAW FIRM 1 Introduction ALT Law Firm welcomes the opportunity to submit comments on the revision of the Broadband Guidelines. ALT Law Firm is a business law firm with a particular focus on European law. 1 We advise public authorities and businesses in State aid matters, and have experience with State aid granted to broadband development. We have amongst others advised the municipality of Tromsø (northern part of Norway) in the notification of State aid to the rapid deployment of a Next Generation Access network in rural areas of the municipality. The project involves the grant of aid of approximately 12 million. As Norway is not a member of the European Union, the aid was notified to the EFTA Surveillance Authority under the rules of the European Economic Area (EEA) Agreement. 2 The State aid rules in the EEA Agreement are broadly equivalent to the State aid rules in the EU. The application of the State aid rules in Iceland, Liechtenstein and Norway is enforced by the EFTA Surveillance Authority. In assessing broadband projects we have experienced some challenges. We would like to share some of our thoughts on how the Broadband Guidelines could be improved. The views presented are the views of ALT Law Firm and not the views of any of our clients. 1 For more information about ALT Law Firm, see 2 The EFTA Surveillance Authority s decision approving the aid is available on ALT Law Firm Org.nr Rosenkrantzgate 20, 0160 Oslo, Norway

2 2 General comments 2.1 The application of the Altmark criteria in broadband cases If a measure complies with the so-called Altmark criteria, it is deemed not to constitute State aid. Hence, no notification would be necessary. The description of the relationship between the Altmark criteria and the Broadband Guidelines could be improved. In our opinion, many broadband projects are not notified because of misinterpretation of the Altmark criteria in relation to broadband projects. In Norway, counties and municipalities have granted approximately 130 million in support for broadband projects with funding received from the central government since Counties and municipalities have also used their own funds to grant aid to broadband projects. None of these projects have been notified to the EFTA Surveillance Authority for approval. To the knowledge of ALT Law Firm, the only Norwegian broadband aid that has been notified is the aid granted to broadband in rural Tromsø, mentioned above. It is unlikely that all other counties and municipalities have been able to adapt all its broadband projects to the Altmark criteria. Thus, it is likely that large amounts of aid have been granted in violation of the State aid rules. The Commission appears to interpret the Altmark criteria rather strict with regard to aid to broadband, both in the Broadband Guidelines and in its decision-making practice. In our opinion, this interpretation does not appear to be fully consistent with how the Court of Justice later has interpreted its ruling in the Altmark case. However, the most pressing issue is to make the Commission s view on the application of the Altmark criteria clearer. This could contribute to fewer misinterpretations by regional authorities and a more correct application of the State aid rules. 2.2 Introduction of a block exemption regulation Several broadband projects in the rural regions are small and involves minor amounts of aid. Complying with detailed guidelines which gives ample room for interpretations creates a high cost of compliance and administrative burden compared to the costs of the projects. Municipalities, which may be unfamiliar with the State aid rules in general and the Broadband Guidelines in particular, may feel obliged to procure costly legal advice. Given the many cases already decided by the Commission and the experience gathered, the introduction of a block exemption regulation for minor grants of aid to broadband projects may be contemplated. Such rules could simplify and speed up the process in broadband cases while still leave the Commission in control of cases that merit a more thorough investigation. 2.3 Introduction of regulation through the back door Some of the conditions of the Broadband Guidelines are of a more regulatory nature than what is normally the case for State aid guidelines. One example is the requirements for wholesale access. Such rules impose obligations of a regulatory nature on the individual grantors of the aid rather than on the regulatory authorities. A municipality which grants aid will, under the present rules, have to ensure that the wholesale prices of the aid recipient are 3 See press release of 4 March 2011 from the Norwegian Ministry of Local Government and Regional Development: 2

3 not excessive. In markets where no published prices are available, this can be quite a task for a municipality unfamiliar with both the telecom market and telecom regulations. In our opinion, the present rules on wholesale access and pricing is liable to create problems for two reasons. Firstly, a municipality may not be the best placed authority to survey the broadband markets. The fact that a municipality grants aid to a project should not mean that it at the same token is appointed a semi-regulatory authority responsible for ensuring wholesale access and the correct pricing of such access. Secondly, the regulation of the broadband market becomes highly fragmented as the conditions for wholesale access would differ from region to region. If regulation of the broadband market is needed, for example with regard to third party wholesale access, this should preferably be ensured through regulation of the broadband market as such. In our opinion, it should not be introduced through the back door by adding regulatory requirements to the conditions that have to be complied with to get State aid approved. 3 Questionnaire Please find our brief comments to the questionnaire below. For ease of reference, our comments are made in italics. On behalf of ALT Law Firm Bjørnar Alterskjær Robert Lund Kristian Dahle Trygstad 3

4 1. General questions QUESTIONNAIRE for STAKEHOLDERS 1.1. Have you been involved in projects of public funding for broadband deployment (for example, as aid recipient, access seeker, customer of the subsidised network, etc.)? If yes, please highlight what you consider to be the main achievements, challenges and issues which would be relevant in relation to the revision of the Guidelines. If you are familiar with more State aid Broadband projects, please highlight what you consider the main strengths and weaknesses of the different projects. Answer: ALT Law Firm has been the legal advisor for the municipality of Tromsø (Norway) in the rapid deployment of a Next Generation Access network in rural areas of the municipality. The main challenges in the revision of the guidelines would be to simplify the guidelines, make them more operational and reduce the requirements of a more regulatory nature What is your assessment of the Commission's policy in the field of State aid to broadband in general? In your view, were the Guidelines able to achieve the Commission's policy objectives as detailed in section 2.2 above? In your view, did the Guidelines strike the right balance between promoting investment in basic broadband and NGA networks and limiting the distortion of competition arising from public intervention? 1.3. In your view, what are the main technological, market and regulatory developments in this field since 2009 that should be considered and should have an impact on the content of the revised Broadband Guidelines? 2. Subject of the aid The current version of the Broadband Guidelines distinguishes between basic broadband and NGA networks as subjects of State aid measures Do you consider that distinction is justified in light of current economic, technological and regulatory developments in this field? Answer: Yes, the distinction is still justified. However, as the speed has also increased with regard to basic broadband, a clearer definition of basic and NGA-networks could be contemplated, for example with regard to Mbps. 4

5 2.2. Would you consider it useful to devote specific sections of the Guidelines to the rules and conditions applying to the use of public funding to subsidize specific infrastructure elements (for instance, ducts, dark fibre, backhaul networks, etc.) or to other activities related to broadband network roll-out (such as civil engineering costs, upgrade of inhouse cabling, etc.)? Answer: As with all rules, there is a danger that such rules could become too detailed and complicated. In our opinion, it should not matter which infrastructure element is subsidized as long as the aid is necessary and proportionate. In line with the NGA Recommendation, the Broadband Guidelines define very high speed, Next Generation Access ("NGA") networks in paragraph 53 as follows: "NGA networks are wired access networks which consist wholly or in part of optical elements and which are capable of delivering broadband access services with enhanced characteristics (such as higher throughput) as compared to those provided over existing copper networks." 2.3. Do you think that this definition is still adequate? In other words, at this stage of technological and market development, besides fixed, mainly fibre based networks, would you consider any other broadband technologies as falling into the definition of NGA networks? Please provide detailed justification and examples of commercial utilization to motivate your answer. Answer: The definition could be improved. With the development of technologies that increase the speed of other broadband technologies, such networks could end up having similar characteristics as NGA networks. At present, this is sometimes the case with copper broadband with optical elements and some mobile broadband technologies. As the new rules will be applicable in the future, with possible improvements of technologies, or even brand new technologies, a more neutral definition could be considered. A definition related to speed and/or capacity or other objective parameters would in our view be better than a definition that relates to the difference to existing copper networks In your opinion, shall the Commission change the current qualitative definition of NGA (i.e. mainly fibre based solutions) to a more quantitative one (for instance by setting explicit thresholds for download/upload speeds or defining any other technology criteria)? Please motivate your answer. Answer: Yes, see our answer to question Areas of public intervention The Broadband Guidelines identify so-called "white", "grey" and "black" areas depending on whether there are already adequate private infrastructures in place According to your experience with State aid broadband schemes, would you consider other criteria (for instance download/upload speeds or other technology, regulatory or market criteria) as relevant to identify areas with non-adequate broadband coverage? Do you consider an adequate criterion that if a minimum (download) speed of 2 Mbps is not available at affordable prices, the area shall be considered as "white area"? Answer: A clear and simple definition would be preferable. A criterion relating to a minimum download speed would be a clear, simple and verifiable criterion. However, given the need for high speeds both in daily life and in businesses, a speed of 2 Mbps seems low. 5

6 The Guidelines distinguish between different types of "white NGA areas" - depending on the existing basic broadband infrastructures in place (white NGA/basic white in paragraph 79, white NGA/basic grey in paragraph 73 and white NGA/basic black in section of the Guidelines) to ensure that distortions of competition are limited In your experience, has this distinction and the ensuing differences in the applicable compatibility conditions helped preserving competition and private incentives to invest? The Guidelines request that the investment plans of private operators in the next 3 years shall be taken into account when defining the target areas for public intervention (see footnote 31) Do you consider that the defined 3 years period is still an adequate time horizon? In your view, what proofs private operators can put forward to demonstrate their investment plans in a certain area? Answer: Yes, 3 years is adequate. Realistic business plans backed by supporting documents with regard to time horizon and financing should suffice to demonstrate investment plans. 4. General compatibility criteria The Guidelines list the general compatibility criteria in paragraph 51 that all State aid broadband measures have to comply with In your experience, have these conditions reached their objective to foster investments, preserve private incentives to invest and to support effective competition on the subsidized networks? Answer: To a certain extent, but the conditions are in many ways too detailed, in particular for smaller projects. In paragraph 51(e), the Guidelines encourage Member States to use existing infrastructure to avoid duplication of resources and to reduce the aid amount but without giving an undue advantage to the existing incumbents (who typically have significant existing infrastructure in place) Do you have experience or examples on the implementation of such condition? In your opinion, how should such condition be implemented in practice to be effective in achieving its objective? Under what circumstances do you consider that access to the incumbent's infrastructure in line with the applicable regulatory framework is a sufficient safeguard? Answer: Yes, one example is the case concerning State aid to NGA networks in rural Tromsø (Norway) mentioned above. In that case it is foreseen that masts (light poles and masts used in the low voltage grid) owned by the municipality of Tromsø may be used by the supplier in the construction of the new broadband network to avoid duplication and to avoid unnecessary construction in a fragile arctic environment. Tunnels may also be used. With regard to the last question: It is always a risk that some incumbents are better placed than others, but that is the case in any business. Access to the incumbent's infrastructure in 6

7 line with the applicable regulatory framework should be a sufficient safeguard to avoid unfair competition. 5. Aid to Next Generation Access networks The Guidelines require that the subsidized NGA networks shall support effective and full unbundling and satisfy all different types of network access that operators may seek (see paragraph 79) Do you have experience with the implementation of the "open access" (i.e. full and effective access) requirement of the Guidelines in case of subsidized NGA networks? Do you have examples for difficulties or disputes and for good practices? Answer: We have experience with this requirement from the Tromsø case. There were some challenges in setting up a system to ensure access. Such rules are in our view better suited for regulatory authorities. In the end, the result was in our view good and a description of the system can be found in the EFTA Surveillance Authority s approval: For a period of at least ten years, the NGA network shall be open to all parties who wish to rent capacity or fibre. In this period, third party operators will have non-discriminatory wholesale access to the subsidised network. The operator will be obliged to publish its reference offer for wholesale access services on its website. The prices shall be equal for equal services and third parties shall not be treated less favourably than the supplier/operator of the network. On a yearly basis, the operator will be obliged to submit information to the municipality that shows that this obligation is respected, and in particular inform the municipality about access requests it has received and the conditions of the access that has been granted, including prices. Third party access includes both passive and active infrastructure. According to the Norwegian authorities, this open access policy will support effective and full unbundling and satisfy all different types of network access that operators may seek (including but not limited to access to ducts, dark fibre and bit stream access). If the operator does not respect the obligation of ensuring wholesale access, the municipality may demand recovery of the aid, either partly or in full. This will be specified in the contract entered into between the operator and the municipality. The municipality of Tromsø has by of 9 March 2011 informed the Norwegian Post and Telecommunications Authority (NPT) about its intention to grant aid to the development of an NGA network in rural Tromsø and requested information about the applicable conditions for wholesale access. According to the answer given by the NPT to the municipality of Tromsø on 9 March 2011, the market for wholesale access to NGA broadband networks is currently not regulated in Norway. The contract between the municipality and the supplier/operator will therefore contain an obligation on the operator to base its prices on available information on wholesale prices in more competitive areas of Norway, be it information it possesses itself or information available by other means. On a yearly basis, the operator will have to submit information to the municipality of Tromsø showing that this obligation is respected. Once NPT has decided to regulate the market for NGA broadband access and impose a price control obligation on operators with significant 7

8 market power and make the regulated prices publicly available, the operator of the NGA network in Tromsø will be obliged to base its wholesale prices on the average published wholesale prices Do you consider it adequate that all technologically possible access products are requested from the aid beneficiary to compensate for the advantage obtained by the public funds? Would you consider that certain access remedies could under certain circumstances be deemed to be redundant (e.g. duct access and dark fibre access) and therefore there is no need to request them in all circumstances to ensure a sufficient level of competition? Do you consider that a proportionality analysis shall also be carried out in analogy with the existing Telecoms Regulatory Framework and that only a minimum set of access remedies should be imposed to meet the objective of increasing competition and reducing distortion of competition arising from public intervention? If yes, please explain in detail. Pursuant to paragraph 79, the wholesale access obligations on the aid beneficiary should last for at least seven years - without prejudice to any other regulatory obligations Do you consider this 7 year period adequate to ensure competition in the areas concerned without discouraging private investments? Would it be justified to require a longer period, for instance in case of passive access products (e.g. ducts)? If yes, please explain in detail. Answer: 7 years appears adequate. The Guidelines expresses its preference for multiple fibre networks: "In this respect it should be noted that "multiple fibre" architecture allows full independence between access seekers to provide high-speed broadband offers and is therefore conducive to long-term sustainable competition. In addition, the deployment of NGA networks based on multiple fibre lines supports both "point-to-point" and "point-to-multipoint" topologies and is therefore technology neutral." 5.4. What is your experience with multiple fibre infrastructures? Do you share the view that it may not be economically justifiable to deploy multiple fibre networks in rural areas? Or would you see multiple fibre infrastructures as an essential investment to achieve competition in the concerned area in the long run? Certain types of network architectures (e.g. FTTH/P2P networks) are argued to be better in promoting competition as they allow full and effective unbundling (as compared for instance to FTTH/GPON infrastructure), albeit being generally regarded as more costly technological choices Have you been involved in NGA projects? Do you have experience with requesting effective unbundling, perhaps on different technology architectures? Do you have examples of good practices using one or the other technology? 8

9 5.6. Besides the conditions specified in paragraphs 75 and 79, do you consider any other conditions that beneficiary companies constructing subsidized NGA networks shall comply with in order to increase competition and reduce the distortion to competition arising from the public intervention? 6. The role of the National Regulatory Authorities ("NRAs") The Guidelines foresee an important role of the NRAs in helping granting authorities to set the wholesale access conditions. According to paragraph 79, "in setting the conditions for wholesale network access, Member States should consult the relevant NRA. NRAs are expected in the future to continue either to regulate ex ante or to monitor very closely the competitive conditions of the overall broadband market and impose where appropriate the necessary remedies provided by the applicable regulatory framework. Thus, by requiring that access conditions should be approved or set by the NRA under the applicable Community rules, Member States will ensure that, if not uniform, at least very similar access conditions will apply throughout all broadband markets identified by the NRA concerned." 6.1. In your opinion, how could NRAs help (national or local) authorities with their State aid broadband measures? Do you consider appropriate that access conditions should always be approved by the NRAs? Do you consider any limitations for the involvement of the NRAs in State aid broadband measures? If you have been directly involved in aid projects, did you experience any difference when the access conditions were imposed as a regulatory measure as opposed to an access obligation deriving from the State aid rules? Answer: In our view, access conditions should be imposed as a regulatory measure rather than indirectly through the State aid rules. For our further reasoning, see our general comments. In several State aid cases, the NRAs undertook to solve disputes between the operator of the subsidized network and the access seekers, should any such dispute emerge Do you have experience with such procedure? How do you see the role of NRAs to solve disputes between the access seekers and the operator of the subsidized network? 7. Transparency of State aid measures According to the Commission's case practice in this field, granting authorities shall share all the important information of the schemes with stakeholders. Inter alia, they have to publish on a central webpage the mapping information on the target areas, the planned State aid measure, and all information shall remain public for minimum 1 month to allow all third parties to comment. The tender procedures for granting aid have to be conducted in line with the principles of EU Public Procurement Directives, respecting all conditions for transparency and non-discrimination Do you consider that the information made available in the described ways is adequate to ensure transparency? Do you have suggestions on how the transparency of State aid 9

10 broadband schemes could be further improved? Can you provide examples of good practice when it comes to information provided on the State aid broadband measures in different stages of the procedure? 8. Other points Several Member States requested vertical separation on the subsidised networks (the wholesale operator of the network shall not engage in retail service provision) to avoid risk of discrimination, support competition and push take-up rates as a result of public intervention In your view, what would be the costs and the benefits of requesting this condition? In what circumstances would you consider vertical separation to be an effective remedy? Some public authorities argue for a need of "strategic role" of the State in the broadband sector to achieve their social and economic objectives. In most cases, that is translated in the choice of retaining public ownership of the subsidised broadband networks (mainly passive infrastructure elements, like ducts, manholes, dark fibre) while the wholesale and retail operation of the networks is tendered out to private operators In what circumstances would you consider that public ownership is justified? What are in your view the advantages/disadvantages of public ownership of the infrastructure? 9. Non-aid measures: MEIP and SGEI The Guidelines provide clarifications on broadband measures falling outside the scope of State aid rules, in particular when public funding for the roll-out of broadband is carried out at market terms ("MEIP" Section of the Guidelines) and when Member States consider that the provision of a broadband network should be regarded as a service of a general economic interest ("SGEI" Section of the Guidelines) Do you have any experience with "MEIP" or SGEI" instruments used in European countries? Answer: See our general comment on aid granted in Norway Do you consider that the current level of detail provided in the Guidelines on MEIP and SGEI is sufficient? Do you have any comment on the applicability of these provisions? Answer: On these issues, the level of detail should be improved The Guidelines insist on a strict definition of what constitutes an SGEI in the liberalised telecom sector (universal and compulsory nature, open and neutral network, separation of wholesale and retail operations etc.). Have you experienced special difficulties with the implementation of this type of measures? Answer: See our general comment on aid granted in Norway. 10

11 9.4. Do you consider it adequate that for SGEIs all technologically possible access products are requested or would you consider that certain access remedies could under certain circumstances be deemed to be redundant (e.g. duct access and dark fibre access) and therefore there is no need to request them to ensure a sufficient level of competition? If yes, please explain in detail. 10. Final Remarks You are invited to highlight and explain any other relevant points related to the Broadband Guidelines. Answer: See our general comments above. 11