EUROPEAN COMMISSION. Commission Decision concerning Case DK/2014/1665: Review of the LRAIC model on the fixed markets in Denmark for the year 2015

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1 EUROPEAN COMMISSION Brussels, C(2014) 9090 final Danish Business Authority (DBA) Dahlerups Pakhus Langelinie Allé 17 DK-2100 Copenhagen Denmark For the attention of: Ms. Betina Hagerup Director General Telecom Fax: Dear Ms. Hagerup, Subject: Commission Decision concerning Case DK/2014/1665: Review of the LRAIC model on the fixed markets in Denmark for the year 2015 Comments pursuant to Article 7(3) of Directive 2002/21/EC I. PROCEDURE On 24 October 2014, the Commission registered a notification from the Danish national regulatory authority (DBA) 1, concerning the review of the LRAIC model and prices set on the wholesale markets for call origination 2 and call termination on the public telephone network provided at a fixed location, wholesale (physical) network infrastructure access at a fixed location, wholesale broadband access and wholesale terminating segments of leased lines 3 in Denmark Under Article 7 of Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive), OJ L 108, , p. 33, as amended by Directive 2009/140/EC, OJ L 337, , p. 37, and Regulation (EC) No 544/2009, OJ L 167, , p. 12. Corresponding to market 2 in the Commission Recommendation 2007/879/EC of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to exante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services (Recommendation on Relevant Markets), OJ L 344, , p. 65. Corresponding respectively to markets 1, 3a), 3b) and 4 in Commission Recommendation 2014/710/EU of 9 October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services (Recommendation on Relevant Markets), OJ L 295, , p. 79. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2)

2 The national consultation 4 ran from 9 September to 29 September On 4 November 2014 a request for information (RFI) 5 was sent to DBA and a response was received on 7 November Additional information was provided on 10 November Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities (NRAs), the Body of European Regulators for Electronic Communications (BEREC) and the Commission may make comments on notified draft measures to the NRA concerned. II. II.1. DESCRIPTION OF THE DRAFT MEASURE Background Since 2002, DBA is regulating a number of the SMP operators' wholesale access prices using a LRAIC methodology. 6 Accordingly, on the basis of the last reviews of markets 2 to 6, a price control has been imposed on each of the above-mentioned markets. 7 With regard to broadband markets the Commission has on a number of occasions reminded DBA to bring its costing model in line with the Commission's 2013 Recommendation on consistent non-discrimination obligations and costing methodologies 8 as soon as possible 9. II.2. Draft measure In the currently notified draft measure DBA revises the fixed LRIC model in order to ensure compliance with the Recommendation on non-discrimination and costing methodologies and implements the price control obligation imposed for the year Revised costing model In accordance with the Commission Recommendation on non-discrimination and costing methodologies, DBA is using a fibre (FTTH) network as a modern equivalent asset (MEA) for copper and cable TV access networks. All access technologies have been modelled and DBA performed a cost adjustment on the fibre-based MEA network in order to price copper-based services. DBA has modelled a single efficient NGA network for copper and NGA access products in order to neutralise the inflationary volume effect as recommended. 10 The revised LRIC model takes into account reduced trenching costs In accordance with Article 6 of the Framework Directive. In accordance with Article 5(2) of the Framework Directive. DBA order n. 385 of 27 April 2011 relating to price control methodology. See cases DK/2014/1627, DK/2014/1573, DK/2012/ , DK/2012/1399, DK/2012/1385, DK/2012/1399, 1391, DK/2012/1340, DK/2012/1341, DK/2013/1488, DK/2013/1518, DK/2013/1519, DK/2013/1525, DK/2012/1301, DK/2012/1319, DK/2011/1180, DK/2011/1187, DK/2011/1188, DK/2011/1189, DK/2011/1198, DK/2011/1264. Commission Recommendation 2013/466/EU of 11 September 2013 on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment, OJ L 251, , p.13. See for example the Commission's comments in case DK/2013/1518 and case DK/2013/1519. DBA has taken into account that TDC owns the largest cable-tv network (the YouSee network) in order to model the total number of active customers. 2

3 and the economic lifetime for copper cable is prolonged from 20 years to 30 years. DBA proposes to modify some parameters of the WACC (set at 5.42%) in the context of the revised LRIC model, which covers now three technologies, i.e. copper, fibre and coaxial TV. In particular, in order to ensure price stability DBA proposes to increase the length of the period for risk free interest from 2-3 to 4-5 years wholesale access prices The draft measure proposes price caps for the three access technologies: copper, cable TV and fibre. DBA proposes some general principles governing the cost calculations. Similarly to the previous market analysis, the DONG area is subject to specific pricing conditions. In order to simplify the cost structure, DBA proposes to introduce a fixed reduction for the wholesale product for the DONG area. 11 In line with the NGA Recommendation 12, DGA proposes to include a risk premium on fibre access except in the DONG area where TDC's fibre network is fully deployed and where TDC owns already two of the three parallel networks, limiting therefore any incentive to further invest into fibre. 13 With regard to copper access, DBA proposes to apply a uniform access price to copper ADSL and VDSL (the pricing reflects the weighted average usage of ADSL and VDSL lines) given that there are very limited differences in costs and that end users do not assign different values to ADSL and VDSL. Rates for fixed origination and termination services The origination rates are LRAIC based while the rates for termination service are based on a pure LRIC methodology. DBA proposed in the revised LRAIC model to define IPtelephony (VoiP) as the modern equivalent asset (MEA) to PSTN. The following rates are set for 2015 (in DKK/minute). 14 DKK per minute High rate* Low rate Per call Origination Local Termination Local * Monday-Saturday 8am-7.30pm Calls on public holidays are charged at the low rate In the reply to the RFI, DBA explains that the fixed reduction reflects the significant difference in costs of fibre between the two areas. This is calculated by using LRAIC with two different datasets containing access infrastructure and costs for the DONG area and the rest of the country. The size of the fixed reduction is calculated as the difference in the calculated prices of raw fibre between the two areas. Commission Recommendation of 20 September 2010 on regulated access to Next Generation Access Networks (NGA), OJ L 251, The risk premium is limited to 1 percentage point of the WACC for fibre in the rest of the country. In the reply to the RFI, DBA explains its reasoning for such a low risk premium: TDC rolls out fibre projects case-by-case, has the third largest market share in Europe on the broadband retail market and Denmark has the highest broadband penetration in Europe. These three conditions are all limiting the investment risk of TDC compared to other European countries even outside the DONG area. The corresponding values in Euro (conversion rate on ) are the following: (i) origination high rate 0.29 and low rate 0.16; (ii) termination high rate 0.06 and low rate

4 Rates for copper access products There are three different virtual WBA and VULA access products in Denmark, respectively provided at POI0 (at the street cabinet or local central office), Layer 2 and Layer 3. For VULA POI0, the regulated price follows the cost calculation from DBA s LRAIC model (the cost is calculated as the cost of the copper local (sub) loop plus a share of the Multiservice Access Node (MSAN). Under the current market 4 decision, Layer 2 and Layer 3 virtual access can be produced based on either i) a copper sub loop to an active street cabinet and a fibre from the street cabinet to the local central office, or ii) a full copper loop. Hence, DBA proposes to calculate layer 2 and layer 3 virtual access prices as a weighted average of the costs calculated in i) and ii). Such weighting is based on the number of lines in the entire country. 15 Accordingly, DBA proposes the following 2015 price structure for copper access products (DKK/year): 16 Rates for cable TV access DBA proposes to maintain the current capacity based pricing principle based around a LRAIC determined price per uncontended Mbit/s per cable modem termination system (CMTS). Accordingly, the following pricing scheme for cable-based WBA is proposed (in DKK/year) 17 : In order to simplify the price structure, DBA proposes not to differentiate anymore wholesale access prices to houses and multi-dwelling units. The two price lists refer to exclusive and shared access. The corresponding values in Euro (conversion rate on ) are the following: (i) sub-loop unbundling and 40.72; (ii) VULA POI0 (at street cabinet) and 51.81; (iii) full local loop unbundling and 47.44; (iv) VULA POI0 (at local central) and ; (v) Layer 2 WBA/VULA and 64.23; (vi) Layer 3 WBA/VULA and Prices for other services such as dual pair bonding, Ethernet transport, multicasting and unicasting services are as well set. The corresponding values in Euro/per year are about the following: (i) Uncontended traffic, per Mbit/s per CMTS and 0.18; (ii) Plug connection (per end-user)

5 Download Upload Uncontended traffic, per Mbit/s per CMTS 709 1,336 Plug connection (per end-user) Rates for terminating leased lines On the market for terminating segment of leased lines the LRAIC cost methodology is applied to co-location and migration services. 18 Others In addition the rates of ancillary services to accesses such as migration and backhaul rates have been amended. III. COMMENTS The Commission has examined the notification and the additional information provided by DBA and has the following comments: 19 Need to further justify the extension of the economic lifetime for copper cables in the final measure DBA proposes to prolong the lifetime of the copper cable in the LRAIC model from 20 to 30 years. In this respect, DBA explains in the reply to the request for information that while the technical lifetime of the coppers pairs is 50 years, the economic lifetime is more difficult to assess in a purely forward looking perspective. DBA therefore takes into account the historical usage - copper and coaxial cable have been in use for much longer than 20 years in Denmark - as well as the deployment of new copper-based technologies (pair bonding, phantoming, G-fast, etc.) to justify the prolongation of the copper cable lifetime to 30 years. Against this background, the Commission recalls that setting the correct economic life of assets is important in order to send efficient market entry signals for build or buy decisions and avoid the risk of over- or under-recovery of infrastructure costs. Furthermore, while one of the aims of the recommended costing methodology is to ensure the stability of prices over time, the extension of the economic lifetime of the copper cable will have a downward effect on the local loop access prices. Finally, the Commission recognizes that when setting the economic life time of copper assets, NRAs take into account the expected technological and network developments of the different network components. However, any change in lifetime in this respect may, in view also of the technological developments such as pair bonding, phantoming, G-fast, apply principally to the copper sub-loop, rather the entire copper loop. The Commission takes note of DBA's explanations that the proposed LLU price decrease is moderate 20 and mainly the result of general reduction of costs as well Historical costs are maintained for the remaining products on this market. In accordance with Article 7(3) of the Framework Directive. The current price is approximately 8.2 and the proposed price is

6 as a finer assessment of the costs of equipment prices and usage. The Commission, nevertheless, asks DBA to further justify in this final measure the rationale for extending the copper loop lifetime to 30 years, particularly in view of the economically useful life of the copper loop, and the technological developments alluded to above. Pursuant to Article 7(7) of the Framework Directive, DBA shall take the utmost account of the comments of other NRAs, BEREC and the Commission and may adopt the resulting draft measure; where it does so, shall communicate it to the Commission. The Commission s position on this particular notification is without prejudice to any position it may take vis-à-vis other notified draft measures. Pursuant to Point 15 of Recommendation 2008/850/EC 21 the Commission will publish this document on its website. The Commission does not consider the information contained herein to be confidential. You are invited to inform the Commission 22 within three working days following receipt whether you consider that, in accordance with EU and national rules on business confidentiality, this document contains confidential information which you wish to have deleted prior to such publication. 23 You should give reasons for any such request. Yours sincerely, For the Commission, Robert Madelin Director-General Commission Recommendation 2008/850/EC of 15 October 2008 on notifications, time limits and consultations provided for in Article 7 of Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, OJ L 301, , p. 23. Your request should be sent either by CNECT-ARTICLE7@ec.europa.eu or by fax: The Commission may inform the public of the result of its assessment before the end of this three-day period. 6