EUROPEAN COMMISSION. Commission decision concerning Case FR/2014/1604: Leased lines markets in France

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1 EUROPEAN COMMISSION Brussels, C(2014) 4055 Autorité de Régulation des Communications électroniques et des Postes (ARCEP) 7, square Max Hymans F Paris-Cedex 15 France For the attention of: Mr Jean-Ludovic Silicani President Fax: Dear Mr Silicani, Subject: Commission decision concerning Case FR/2014/1604: Leased lines markets in France Comments pursuant to Article 7(3) of Directive 2002/21/EC I. PROCEDURE On 10 May 2014 the Commission registered a notification from the French national regulatory authority, Autorité de régulation des communication électroniques et des postes (ARCEP), concerning the wholesale markets for terminating segments of leased lines 1 and trunk segments of leased lines 2 in France. Two national consultations 3 have been carried out: from 27 November 2013 to 8 January 2014, and from 19 February to 26 March Corresponding to market 6 in the Commission Recommendation 2007/879/EC of 17 December 2007 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 communication networks and services, OJ L 344, , p. 65, (the Recommendation). This market is not listed in the Recommendation. However, this market was listed as market 14 of the Commission Recommendation 2003/311/EC of 11 February 2003 on relevant product and services markets within the electronic communications sector susceptible to ex ante regulation in accordance with the Framework Directive, OJ L 114, , p. 45. In accordance with Article 6 of the Framework Directive. Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel

2 A request for information (RFI) 4 was sent to ARCEP on 19 May 2014 and the reply was received on 22 May Additional information was received on 27 May 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. DESCRIPTION OF THE DRAFT MEASURE II.1. Background ARCEP previously notified the wholesale markets for terminating and (intra- and interterritorial) trunk segments of leased lines in 2010 and In 2010, ARCEP found France Télécom (FT) to have significant market power (SMP) on all identified relevant markets, i.e. mainland France - la Reunion; mainland France Guyana; and Martinique Guyana and made it subject to a set of obligations. In 2011, ARCEP regulated four additional inter-territorial trunk segments of leased lines (Saint-Barthélemy - Metropolitan France; Saint-Barthélemy Guadeloupe; Saint-Barthélemy Martinique; Saint-Barthélemy Saint-Martin). The operator Global Caribbean Network (GCN) was found to have SMP on all markets and the full set of obligations was imposed on it with the exception of accounting separation. In both cases, the Commission had no comments. II.2. Market definition II.2.1. Wholesale market for terminating segments of leased lines ARCEP includes in the market all active products fulfilling the specific business requirement in terms of high quality data connectivity services (i.e. including guaranteed repair time), irrespective of transmission capacity, interface (traditional PDH/SDH or alternative ATM/Ethernet) or underlying infrastructure (copper or fibre). ARCEP proposes to refine the boundaries between market 5 and market 6 of the Recommendation given there is evidence of a strong differentiation occurring in France between standard mass-market bitstream and bitstream access tailored for specific business purposes with high quality requirements. Accordingly, ARCEP proposes to no longer include in market 5 DSL bitstream access with guaranteed repair time (of less than 4 hours) and includes it instead in market 6 together with the traditional copper leased lines and ad hoc dedicated fibre local loop accesses. 6 ARCEP concludes that the relevant market is national in scope, covering mainland France and the overseas territories Pursuant to Article 5(2) of the Framework Directive. Notifications registered respectively under case numbers FR/2010/1050 (second round review), and FR/2011/1238 (territory of Saint-Barthélémy). I.e. Business specific offers, FTTO-type ( BLOD ). Such infrastructures should be distinguished from mass-market FTTH loops which are subject to symmetrical regulation in France. Départements et collectivités d'outre-mer. 2

3 II.2.2. Wholesale markets for trunk segments of leased lines The relevant product market includes the sub-marine cables 8 which are composed of two parts: a submarine element and a terrestrial complement. The product market includes all trunk segment services, irrespective of transmission capacity and interface. ARCEP defines 15 individual markets for inter-territorial trunk segments of leased lines (i.e. trunk segments between territories). 9 ARCEP further explains that while there is currently no submarine cable serving Saint- Pierre-et-Miquelon, a call for tender has been launched for its deployment, which is foreseen to be completed within the timeframe of the present market analysis. Should this be the case, ARCEP explains they will have to analyse the resulting market. II.3. The three criteria test with respect to trunk segments of leased lines 10 After carrying out the three criteria test 11, ARCEP concludes that the segments Mayotte- Mainland France, Mayotte-Reunion will not be subject to ex ante regulation; in particular because Orange is subject to a number of obligations under the State fiscal aid scheme, e.g. non-discriminatory access, non-excessive pricing 12. The segments Martinique Guadeloupe, Martinique Mainland France and Guadeloupe Mainland France will remain unregulated but based on the observation of the high (by international comparison) tariffs, ARCEP intends to put in place (through a separate decision) a tariff monitoring system as from The same approach (i.e. no ex-ante regulation but price monitoring) will apply to Saint-Martin Mainland France, Guadeloupe-Saint-Martin and Martinique-Saint Martin. The routes Réunion - Mainland France, Saint-Barthélemy trunk segments, Guyane - Mainland France, as well as Guyane-Martinique, are found to be susceptible to ex ante regulation Contrary to the previous market analysis, ARCEP excludes from the market definition microwave links because of their inability to meet the necessary quality of service and evolution requirements. Indeed, already in its previous analysis, ARCEP had stressed that the substitutability with microwave links could be compromised for future capacity needs because of: (i) the difficult deployment of new infrastructures in Saint-Barthélemy, and (ii) economic non-viable deployment of high capacity microwave links. According to ARCEP these observations have materialised. Martinique Mainland France; Guadeloupe Mainland France; Martinique Guadeloupe; Saint- Martin Mainland France; Saint-Martin Guadeloupe; Saint-Martin Martinique; Saint-Barthélemy Mainland France; Saint-Martin Saint-Barthélemy; Saint-Barthélemy Martinique; Saint- Barthélemy Guadeloupe; Guyane - Mainland France; Martinique Guyane; Réunion Mainland France; Mayotte Mainland France; Réunion Mayotte. ARCEP is also analysing the three criteria with respect to market 6 but since the latter is on the list of relevant markets, ARCEP's three criteria test will be summarized only with respect to trunk segments. ARCEP investigates the following three criteria: (i) high barriers to entry, (ii) no tendency towards effective competition, and (iii) insufficiency of competition alone to address the identified market failures. See law n of 25 May 2009 relating to oversee territories economic development. 3

4 Although a second cable (LION) has been deployed on the route Réunion - Mainland France as compared to the previous market analysis (when SAFE was the single cable conveying the traffic), Orange keeps the control over both cables, and in particular both landing stations. With regard to Saint-Barthelemy trunk segments, ARCEP is of the view that GCN has a control over an infrastructure which is particularly difficult to duplicate given the small volumes of data exchanged with Saint-Barthélemy. GCN has the monopoly of commercializing capacities and landing on the GCN cable. Absent other providers on the GCN cable, only the deployment of another cable could impact on the competitive situation on the market. ARCEP notes in this respect that according to available data the project of extending the SSCS cable (to serve Saint-Barthelemy and the Dutch part of Saint Martin) does not guarantee that the deployment and commercial launch of this cable would take place within the timespan of the present market analysis. Concerning the segments Guyane-Mainland France and Guyane-Martinique ARCEP concludes that barriers to entry are high since Orange has sole access to the nonreplicable landing station of the cable America II, which is the only cable serving Guyane. ARCEP further argues that there is no trend towards effective competition over the review period, despite some on-going projects whose evolution ARCEP will continue to closely follow. In ARCEP's view competition law is not sufficient to remedy the identified competition problems, particularly concerning the terrestrial complementary services 13. II.4. Finding of significant market power II.4.1. Wholesale terminating segments of leased lines ARCEP finds Orange to have SMP on the basis of mainly (i) size of the company and difficult duplication of infrastructure, (ii) market shares (71%), (iii) vertical integration and economies of scale, and (iv) first mover advantage. II.4.2. Wholesale trunk segments of leased lines Orange and GCN are found to have SMP as follows: a) Orange on the segments Mainland France - French Guyane, French Guyane Martinique and Mainland France La Réunion In line with its previous market analysis, ARCEP distinguishes in its SMP analysis between the terrestrial complement and the sub-marine cable as competitive pressures on these two components of the relevant product market differ. With regard to the submarine cables, ARCEP finds that whereas other members of the consortia can offer leased lines services over America II (Mainland France-Guyane) and SAFE (Mainland France Reunion) to alternative operators, Orange is the only operator active on the services market in France that is also member of the consortia and able to provide endto-end connectivity between Mainland France and Reunion. Orange is also the owner of the LION 1 part of the new LION cable between Mainland France and La Réunion Terrestrial complementary services are traffic conveyance services between the landing station and the point of presence of the alternative operators. LION has been deployed in two branches: LION 1 deployed by Orange (between Ile Maurice, La Réunion and Madagascar), and LION 2 deployed by the consortium Orange group-société Réunionnaise du Radiotéléphonie (SFR Group). 4

5 Concerning the terrestrial complementary services, ARCEP finds that only Orange can provide traffic conveyance services between the landing station and the point of presence of the alternative operators because it has sole access to the landing stations concerned. According to ARCEP, Orange's monopoly on the landing stations and terrestrial complementary services would allow it to levy its market power also on the sub-marine cables. b) GCN on the Saint-Bathélemy segments GCN is the only owner of the GCN cable, the only wholesale provider and the only market player able to install new capacities on this segment. There is no competitive pressure on GCN on the relevant segments. ARCEP will remain attentive to the launch of competitive offers and should such offers (based on sub-marine and/or terrestrial complement) appear the NRA may re-analyse the market. II.5. Regulatory remedies II.5.1. Wholesale terminating segments of leased lines ARCEP intends to impose on Orange the following obligations: (i) access, (ii) nondiscrimination, (iii) transparency, including the publication of a reference offer and transmission of interconnection conventions, (iv) quality of service, (v) price control, and (vi) cost accounting/accounting separation. Copper-based offers on traditional interfaces (LPT offers) will be subject to cost orientation. Concerning copper access, ARCEP proposes progressive and partial lifting of price control to start in ARCEP considers 3 tariff zones: (i) a 'cost-oriented tariff monopolistic zone corresponding to MDFs which are not unbundled, i.e. where Orange is the only operator proposing copper bitstream business offers; (ii) zones, where infrastructure-based competition has recently developed 15, i.e. MDFs where there is at least one alternative operator in addition to Orange proposing copper bitstream business offers with repair times less than 4 hours, and which have been unbundled for less than 7 years and where ARCEP mandates 'non-eviction tariffs'; and (iii) zones, where infrastructure-based competition has materialised (where the price control would be lifted) corresponding to MDFs where there is at least one alternative operator in addition to Orange proposing copper bitstream business offers with repair times less than 4 hours and which have been unbundled for at least 7 years 16. ARCEP will review annually the boundaries of the de-regulated areas. With respect to ad hoc dedicated fibre local loop accesses part of market 6, ARCEP proposes, instead of the currently nationally applicable price regulation, to differentiate between two zones: (i) a zone which is effectively competitive and might be deregulated given that at least one alternative operator is in the position to provide a competitive I.e. «zone géographique dite «zone de concurrence récente par les infrastructures cuivre».the respect of the non-eviction principle will be checked against the average costs borne by an efficient operator operating both on the mass and business markets, i.e. un opérateur tiers générique efficace et mixte. This should allow operators to propose alternative unbundling-based offers in the relevant geographic zone. I.e. zone géographique dite «zone de concurrence établie par les infrastructures cuivre». ARCEP indicates that in those areas, more than 50% of DSL access with repair time 4h are provided by alternative operators on the basis of LLU. ARCEP indicates in its reply to the request for information that Orange s retail market share (self-supply) remains in Q below [ ]% (compared to [ ]% in Q4 2008), and is expected to further decrease during the market review. 5

6 offer throughout the entire territory, and (ii) a zone which is not sufficiently competitive, where the non-eviction regime will be maintained and reinforced by a non-excessive pricing regime. ARCEP will identify the boundaries of the zone prone for de-regulation on the basis of a network topology model, in order to assess in each commune that the reach of the alternative operators fibre networks is at least comparable to Orange s network 17. ARCEP proposes to eventually lift price regulation from the communes where three criteria 18 are cumulatively met and to review annually the boundaries of the deregulated areas on the basis of data collected commune per commune. ARCEP sustains, however, that the state of competition in some areas would justify the partial lifting of price regulation already as of January 2015, i.e. prior to the development of the model. 19 II.5.2. Wholesale trunk segments of leased lines ARCEP intends to impose on Orange the following obligations on the segments Mainland France - la Reunion, Mainland France - Guyane, Martinique - Guyane: (i) access to the terrestrial complement, optical termination and colocation, (ii) nondiscrimination, (iii) transparency, including the publication of a reference offer, (iv) price control (cost orientation) with respect to SAFE (la Réunion) and AMERICA II (Guyane/Martinique), and (v) cost accounting 20. Similar obligations, also applicable to the submarine cable, are proposed to be imposed on GCN on the Saint-Barthélemy routes The work on the network topology model would start immediately after the adoption of the present draft measure and would last for a period of months. ARCEP clarifies that in the context of the public consultation several operators and municipalities have requested that, such as proposed for copper-based access (which is subject to price de-regulation only when unbundling has occurred for at least 7 years) price de-regulation for fibre-based access occurs only after a certain period of time in order to ensure a temporary protection of their investments in FTTH. In this respect, ARCEP states that it would consider the introduction of such a criterion when setting the forthcoming network topology model. ARCEP explains that the effective competition zone identified is reduced as compared to the zone initially proposed in the public consultation. A first approach was to include in this zone communes where at least 5 altnets are present. A more detailed analysis (commune per commune) showed that this criterion does not guarantee a sufficient coverage of altnets s networks and therefore effective competition. ARCEP therefore proposes the following 3 criteria: the theoretical economic potential of a given territory (measured by the density of >10 employees businesses) should be >50/km2; the number of deployments should be sufficiently significant, i.e. more than 50 active accesses sold on the retail market; and presence in the commune of active altnets' effectively deployed networks with a network reach at least comparable to that of Orange, i.e. at the least 50% of BLOD-based accesses available in the commune has been constructed by altnets. ARCEP has already identified around 10 communes where the 3 criteria are fulfilled and indicates that Orange s share of the fibre infrastructures is around 33% on average in those communes. Like in the previous market review, an accounting separation obligation is not proposed on this market. 6

7 III. COMMENTS On the basis of the present notification and the additional information provided by ARCEP, the Commission has the following comment. 21 Geographic differentiation of price remedies on the market for terminating segments of leased lines ARCEP proposes to identify zones where sufficient competitive pressure exerted on Orange would lead to lifting price regulation on its copper-based and as well on its fibre-based wholesale accesses for businesses. The Commission acknowledges that in certain areas alternative high quality copper-based or fibre-based products (fulfilling the high quality requirements of business customers) are offered in competition with Orange, and that these areas exhibit more competitive characteristics. This is also evidenced by the relatively high market shares of alternative operators in some areas, as well the fact that alternative operators seem to have fully replicated Orange s fibre infrastructure (for business purposes) in some communes. The Commission notes, however, that the delineation of the different zones is primarily based on the presence of one or more alternative operators providing a wholesale offer, although, specifically for fibre-based wholesale access, ARCEP looks at other criteria as well. The latter include the percentage share of accesses provided by the various operators and will take into consideration the reach of the alternative operators network in order to assess the competitive conditions and, consequently, lift price control in some areas. The Commission would like to recall that the number of operators present in a given area is not by itself a criterion sufficiently detailed or robust to identify real differences in competitive conditions. Irrespective of the outcome of the pending acquisition process of a major LLU player by a coaxial cable-based wholesale broadband access provider or of any other possible transaction, the Commission wishes to observe that the market structure at any given moment could have an impact on the strategy of the various operators to deploy FTTH networks and on the availability of adequate wholesale access offers. Against this background, the Commission calls on ARCEP to include in its final measure additional evidence that will be taken into account for delineating the boundaries of the areas. Such evidence should include information on the distribution of market shares and the evolution of shares over time in a given MDF or area and evidence of differentiated retail or wholesale pricing, which might indicate different competitive pressures and may even, if such differences are strong and stable enough, lead to identify different product markets (e.g. a segmentation according to bandwidths), which could be subject to different price remedies. 21 In accordance with Article 7(3) of the Framework Directive. 7

8 Furthermore, ARCEP proposes to differentiate areas characterised by different competitive levels and to vary price remedies accordingly in a national market on which an operator has still SMP. The Commission notes that ARCEP is using the term "competitive area" to characterise the zones where price control will be relaxed or lifted while pursuant to Article 16(3) Framework Directive when a market is effectively competitive all remedies should be withdrawn. Against this background, the Commission would like to stress that the term "competitive area" ("zone de concurrence ) is misleading when used to describe areas for which ARCEP establishes SMP and sets certain remedies. In order to ensure legal certainty, ARCEP should use an appropriate wording in its final measure. Pursuant to Article 7(7) of the Framework Directive, ARCEP 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 22 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 23 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. 24 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. 8