NOTIFICATION OF DRAFT MEASURES PURSUANT TO ARTICLE 7(3) OF DIRECTIVE 2002/21/EC REGARDING THE APPROVAL OF THE ECONOMIC REPLICABILITY TEST THAT WILL

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1 NOTIFICATION OF DRAFT MEASURES PURSUANT TO ARTICLE 7(3) OF DIRECTIVE 2002/21/EC REGARDING THE APPROVAL OF THE ECONOMIC REPLICABILITY TEST THAT WILL APPLY TO TELEFÓNICA S BROADBAND PRODUCTS (RESIDENTIAL SEGMENT) As set in Directive 2002/21/EC, CNMC has conducted an analysis of the economic replicability test that will apply to Telefónica s broadband products destined to the residential segment, as required in the latest revision of the markets for wholesale local access provided at a fixed location and wholesale central access provided at a fixed location for mass-market products (markets 3a and 3b of the Commission Recommendation of 9 October 2014 on relevant product and service markets). Markets 3a-3b were notified by the CNMC to the European Commission under case number ES/2015/ On December 21 st, 2017, the CNMC has reached its preliminary conclusions regarding the economic replicability test. CNMC hereby notifies the outcome of its revision, consistent with article 7(3) of Directive 2002/21/EC. The measures proposed by CNMC are set out in the attached notification form. Under Article 6 of the Directive 2002/21/EC and according to national procedures, CNMC conducted a national consultation which started on April 28 th, 2017 and ended on June 8 th, This draft measure has taken into account the comments received during the public consultation. 1

2 Standard Form relating to Notifications of Draft Measures Pursuant to Article 7 of Directive 2002/21/EC Section 1 Market definition 1.1 The relevant product/service market. Is this market mentioned in the Recommendation on relevant markets? 1.2 The relevant geographic market. 1.3 A brief summary of the opinion of the national competition authority, where provided. 1.4 A brief overview of the results of the public consultation to date on the proposed market definition (e.g. how many comments were received, which respondents agreed with the proposed market definition, which respondents disagreed with it). 1.5 Where the relevant market is different from those listed in the Recommendation on relevant markets, a summary of the main reasons justifying the proposed market definition by reference to Section 2 of the Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications and services 1, and the three main criteria mentioned in the Recommendation on relevant markets and the accompanying Explanatory Note. Not applicable, as this notification relates to implementation measures as foreseen in CNMC s decision regarding markets 3a-3b of the Commission Recommendation of 9 October 2014 on relevant product and service markets (wholesale local access provided at a fixed location and wholesale central access provided at a fixed location for mass-market products). In markets 3a as well as in certain geographic areas of market 3b (defined as market 3b_2), Telefónica de España, S.A.U. was found to have SMP in the relevant market. Regarding price control, it was determined that Telefónica s NGA (fibre) based retail offers would be subject to an economic replicability test, to be developed by CNMC. For a full summary of the CNMC s regulation of markets 3a-3b, reference is made to Case ES/2015/ Section 2 Designation of undertakings with significant market power 1 OJ C 165, , p. 6. 2

3 2.1 The name of the undertakings designated as having, individually or jointly, significant market power. Where applicable, the name of the undertakings considered no longer to have significant market power. 2.2 The criteria used to designate an undertaking as having significant market power, individually or jointly, or not. 2.3 The name of the main undertakings (competitors) active in the relevant market. 2.4 The market shares of the undertakings mentioned above and the basis for calculation of market share (e.g. turnover, number of subscribers). Please provide a brief summary of: 2.5 The opinion of the national competition, authority where provided. 2.6 The results of the public consultation to date on the proposed designation(s) as undertakings having significant market power (e.g. total number of comments received, numbers agreeing/disagreeing). Not applicable, see answer to Section 1. Section 3 Regulatory obligations 3.1 The legal basis for the obligations to be imposed, maintained, amended or withdrawn (Articles 9 to 13 of Directive 2002/19/EC). As specified in the CNMC s decision regarding markets 3a-3b, the decision to develop an economic replicability test was adopted in accordance with the price control obligations set in Article 13 of the Access Directive. 3.2 The reasons for which the imposition, maintenance or amendment of obligations on undertakings is considered proportional and justified in the light of the objectives laid down in Article 8 of Directive 2002/21/EC. Alternatively, indicate the paragraphs, sections or pages of the draft measure where such information is to be found. As noted, in the context of the revision of markets 3a, b and 4 ( the Broadband markets resolution ), the CNMC determined that Telefonica s NGA-based retail broadband offers would be subject to an economic replicability test, in line with the Commission Recommendation on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment. 3

4 This draft measure sets the key aspects that govern the economic replicability test that the CNMC will apply to Telefonica s catalogue of residential, ultra-fast broadband products with the goal of supervising the prices that Telefónica aims to charge alternative operators for the provision of regulated wholesale access services to its FTTH network (the so called NEBA local -VULA type productand fibre NEBA -fibre bistream product-). As outlined in the Broadband markets resolution, this methodology introduces several simplifying features and modifications to the 2007 replicability test that is currently in use, following the European Comission s 2013 Recommendation, while maintaining the analysis of Telefónica s most significant bundled products. Although the focus of this methodology is the NEBA local wholesale service, it will also play an important role in determining the related fibre NEBA service s price (see Sections II.2, II.3, II.4 and II.5 for further information). This service can be divided into two separate components, each with its own price: first, network access, which spans the connection between the end user and the MPoP and, second, capacity, which includes all transmissions between the MPoP and Indirect Access Point. Whereas fibre NEBA s capacity price will continue to set on a cost-oriented basis 2, the network access price will be set to equal the NEBA-local price determined in compliance with the ERT. This is in line with the Broadband markets resolution, which requires that the replicability of Telefónica s products be analysed on the basis of each wholesale service taken individually. The relationship between NEBA local and fibre NEBA also has another implication: it rules out the possibility of using a mix of wholesale services, which has been the standard practice up until now. In contrast with the current methodology, the ERT will not be applied to Telefónica s entire catalogue. Instead, its scope is reduced to focus on flagship ultra-fast broadband products which are determined by objective criteria (see Section III.2 for further information), resulting in a list of five products. The CNMC then takes a dynamic approach to determining a product s replicability; the assessment is based on a net present value framework that takes into account the revenues and costs that the hypothetical operator s subscribers generate over the length of their lifespan (see Section IV.2 for further information). The operator s revenues and costs are modelled following an Equally Efficient Operator standard, which states that the theoretical operator s economies of scale and overall cost structure are comparable to those of Telefónica (see Section IV.3). Specifically, the CNMC uses a BU-LRIC standard to model the costs (see section IV.4). The price that results from the ERT sets an upper limit to the monthly access fee Telefónica can charge for NEBA local and fibre NEBA, while giving it 2 Since alternative operators demand capacity at the MPoP regardless of the underlying access technology (either copper or fibre) and copper NEBA is subject to the cost orientation obligation, the capacity price is the same for both copper and fibre networks and is set at the cost oriented price. 4

5 freedom to specify the exact price structure of additional components such as one-off fees for migration between services, cancellation, etc. The monthly access fee set by Telefonica in compliance with the ERT methodology will be revised every six months using information submitted in biannual requests, in which Telefónica may also propose new prices for the following period. If the revised monthly access fee resulting from the application of the ERT on the basis of actual data were to be lower than that set by Telefónica for the previous six-months, the monthly access fee for NEBA local and fibre NEBA would be adjusted automatically (see Section IV for further information). 3.3 Where the remedies proposed are other than those set out in Articles 9 to 13 of Directive 2002/19/EC, please indicate what "exceptional circumstances" within the meaning of Article 8 (3) of that directive justify the imposition of such remedies. Alternatively, indicate the paragraphs, sections or pages of the draft measure where such information is to be found. Section 4 Compliance with international obligations In relation to the third intend of the first subparagraph of Article 8(3) of Directive 2002/19/EC, please state where applicable: 4.1 Whether the proposed draft measure intends to impose, amend or withdraw obligations on market players as provided for in Article 8(5) of Directive 2002/19/EC. 4.2 The name of the undertakings concerned. 4.3 What international commitments entered into by the Community and the Member States are to be met. 5