Broadband Development

Transcription

1 Broadband Development 5 November 2014 Alexandre Verheyden Jones Day 1

2 Key points for discussion The Commission Recommendation of 11 September 2013 on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment The Commission Recommendation of 9 October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation A missed opportunity? 2

3 The Recommendation on nondiscrimination and costing methodologies 3

4 Context Part of the legislative package for a Connected Continent: Building a Telecoms Single Market adopted by the Commission on 11 September 2013 Still lack of consistent application of remedies for markets 4 and 5 despite Commission powers under new Art. 7a Framework Directive and 2010 NGA Recommendation Non-discrimination obligation (Art. 10 Access Directive) Cost orientation obligation (Art. 13 Access Directive) Results in regulatory uncertainty in a time of transition for copper to NGA networks; hampers cross-border investment, reduces competition and impedes innovation No reference to risk of OTT model over overall telco business model 4

5 Objectives General objective: promote efficient investment and innovation in new and enhanced infrastructures whilst recognising the need to maintain effective competition, which is an important long term investment incentive (Recital 3) Less intrusive regulation and greater flexibility Specific objectives: 1. ensure a level playing field through the application of stricter non-discrimination rules 2. establish predictable and stable regulated wholesale copper access prices 3. increase certainty on the circumstances which should lead to the non-imposition of regulated wholesale access prices for NGA services (Recital 3) 5

6 1. Stricter non-discrimination rules Surest way to achieve effective non-discrimination is Equivalence of Input (EoI) Defined as the provision of services and information to internal and third-party access seekers on the same terms and conditions, including price and quality of service levels, within the same time scales using the same systems and processes, and with the same degree of reliability and performance. Proportionality test in light of national circumstances: are the compliance costs (e.g., due to the re-design of existing systems) outweighed by the competition benefits? Likely to be proportionate for NGA wholesale inputs (often provided over new systems) Less likely to be proportionate for legacy copper-based wholesale inputs Where EoI is disproportionate, Equivalence of Output (EoO) should be applied Defined as the provision to access seekers of wholesale inputs comparable, in terms of functionality and price, to those the SMP operator provides internally to its own downstream businesses albeit using potentially different systems and processes. 6

7 Need to ensure technical replicability of the SMP operators new retail offers The relevant wholesale access product should be available to access seekers within a reasonable time prior to the launch of a corresponding retail offer by the SMP operator Effective compliance monitoring Key Performance Indicators (KPIs), at least relating to: Ordering process Provision of service Quality of service, including faults Fault repair times Migration between different regulated wholesale inputs Service Level Agreements and Service Level Guarantees 7

8 2. Predictable and stable regulated wholesale copper access prices Recommended costing methodology for setting copper and NGA wholesale access prices Bottom-up long run incremental costs-plus (BU LRIC+), estimating current cost that a hypothetical efficient operator would incur to build a modern efficient NGA network (including a mark-up for recovery of common costs) All assets should be valued at their replacement costs Except for reusable legacy civil engineering assets: Defined as those legacy civil engineering assets that are used for the copper network and can be reused to accommodate an NGA network Should be valued at the regulatory accounting value net of the accumulated depreciation, indexed by an appropriate price index (to avoid risk of cost over-recovery) Flexibility to model modern efficient NGA network in light of the principle of technological neutrality and in view of different national circumstances 8

9 Recommended costing methodology to be implemented by 31 December 2016 at the latest Exception if currently applied methodology meets the conditions set out in point 40 and notably: Objectives of the recommended costing methodology (e.g., flexibility of method, incentive to deploy) Address issue of decline of volume and gradual replacement by fiber Asset valuation method taking into account that nonreplicability of certain civil infrastructure assets in the competitive process stability of copper network prices over time confirming reliability of alternative cost assessment method only minimal modifications to cost assessment method to meet these criteria 9

10 Recommended costing methodology to be implemented by 31 December 2016 at the latest Exception for NRAs with limited resources: interim access prices on the basis of a benchmark (comparable countries in terms of cost inputs). Quid of statement: potential for limited local costs variations 10

11 Likely to lead to a Union average monthly rental access price for the full LLU within a band between 8 and 10 If current price falls within the band: NRA may continue to apply current methodology until 31 December 2016 If current price falls outside the band: NRA should calculate access price on the basis of the recommended methodology and notify it as soon as possible, bearing in mind the potential need for gradual price adjustments Recommended costing methodology to be maintained over at least 2 market review periods (2 x 3 years). Data input to be updated when conducting market review Critical analysis: less regulation translates into actual rate regulation 11

12 3. Non-imposition of regulated wholesale access prices for NGA services For active NGA wholesale inputs, when: 1. the NRA imposes on passive and active NGA wholesale inputs: a) EoI (including a detailed implementation roadmap); b) Technical replicability; and c) Economic replicability test; and 2. sufficient competitive safeguards exist, i.e., if there is a demonstrable retail price constraint resulting from: the actual take-up of upstream passive wholesale inputs (e.g., LLU or VULA), or the presence of alternative infrastructures. 12

13 For passive NGA wholesale inputs, when: 1. the NRA imposes on passive NGA wholesale inputs: a) EoI (including a detailed implementation roadmap); b) Technical replicability; and c) Economic replicability test; and 2. sufficient competitive safeguards exist, i.e., if there is a demonstrable retail price constraint resulting from: a copper anchor (a cost oriented copper wholesale access product calculated on the basis of the recommended costing methodology), or the presence of alternative infrastructures. How effective is this likely to be? 13

14 The ex ante economic replicability test (ERT) Retail price of the relevant retail products Price of the relevant NGA-based regulated wholesale access inputs Flagship products NRAs should assess the most relevant retail products including broadband services ( flagship products ) offered by the SMP operator on the basis of the identified NGA-based wholesale access layer. 14 Incremental downstream costs (incl. a mark-up for common costs) EEO test subject to adjustments in specific market circumstances Downstream costs are estimated on the basis of the costs of the SMP operator s own downstream businesses (EEO test). [ ] Where market entry or expansion has been frustrated in the past (as shown for example, by past behavioural findings) or where very low volumes of lines and their significantly limited geographic reach as compared to the SMP operator s NGA network indicate that objective economic conditions do not favour the acquisition of scale by alternative operators, NRAs may make adjustments for scale to the SMP operator s downstream costs in order to ensure that economic replicability is a realistic prospect. In such cases, the reasonably efficient scale identified by the NRA should not go beyond that of a market structure with a sufficient number of qualifying operators to ensure effective competition, bearing in mind also competition from other platforms.

15 Ex ante economic replicability test is without prejudice to ex post margin squeeze tests applied pursuant to competition law NRA should set out and make public in advance: the parameters of the ex ante economic replicability test; the procedure that it will follow to conduct the test (to be started no later than 3 months after the launch of the relevant retail product); the remedy it will adopt when the test is not passed. BEREC Draft Guidance (September 2014) 15

16 Examples of how national regulators have applied the Recommendation France: 4 th review of markets 4 and 5 completed in June ARCEP decided not to impose asymmetrical access regulation on Orange s fibre network (except for civil engineering infrastructures) in view of the French network sharing legislation. Orange required to provide legacy copper-based wholesale inputs on an EoO basis, including KPIs and obligation to ensure technical replicability of any new retail offers (incl. bundles). EoI disproportionate. Maintains on Orange the obligation to provide access to its civil engineering infrastructure on an EoI basis (obligation imposed since 2008) 16

17 UK: 3 rd review of markets 4 and 5 completed in June Ofcom continues to allow BT pricing flexibility on VULA prices (market 4), subject to EoI obligations. Ofcom to adopt final decision regulating VULA margin: Proposes to assess the margin at BT s fibre portfolio level, which provides the most flexibility to BT over the relative margins it earns on different bundles Proposes an adjusted EEO approach that is based on BT s costs but with two adjustments to reflect advantages that BT might have: BT s longer average customer lifetimes; and BT s lower unit bandwidth costs (which reflects the potential scale and scope of BT s network) 17

18 The Netherlands: On 31 October 2014, ACM adopted a draft decision on market 4 (currently submitted to consultation) Non-discrimination EoO for Main Distribution Frame (MDF) access and VULA over copper EoI for FttH Optical Distribution Frame (ODF) access Tariff regulation Maintained price cap for MDF access. ACM proposes not to follow the recommended BULRIC+ methodology to preserve regulatory certainty for market players and because resulting tariff is very close to the price band set out by the Commission BULRIC+ methodology for VULA. Conditions for recommended nonimposition of regulation not met in the absence of EoI Maintained Discounted Cash Flow (DCF) methodology for FttH ODF access. ACM proposes not to follow the recommendation not to impose regulation and impose economic replicability test, in order to preserve regulatory certainty for market players and because DCF methodology offers greater flexibility to KPN for the determination of its tariffs. 18

19 The new Recommendation on relevant markets 19

20 Overview 2003 Recommendation: 18 markets, of which 7 retail and 11 wholesale Market 11: wholesale unbundled access to the local loop Market 12: wholesale broadband access (bitstream and equivalent) 2007 Recommendation: 7 markets, of which only 1 retail market Market 4: wholesale (physical) network infrastructure access Market 5: wholesale (non-physical) broadband access (incl. bitstream) 2014 Recommendation: 4 wholesale markets, no retail markets Markets 1 and 2 no longer fulfill three criteria test In fact, 5 wholesale markets since market 3 is divided in: Market 3A: wholesale local access at fixed location (WLA) Market 3B: wholesale central access at fixed location (WCA) Market 4: wholesale high-quality access at fixed location 20

21 Has ex ante regulation been effective? EC is keen to show that ex ante regulation has worked: Given the advances in competition that have been achieved thanks to regulation, this Recommendation identifies only markets at the wholesale level (+ reduction of the number of wholesale markets) However, for broadband: OLOs remain mostly dependent on access to fixed incumbent s infrastructure ladder of investment has not worked Limited market penetration of OLOs: in most countries fixed incumbent remains dominant, or at best in duopoly with cable Fibre roll-out may reduce physical access points and flexibility to offer customized services Convergence of services and tendency to purchase bundles also reduces competitivity of OLOs (due to lack of TV and/or mobile offers) importance of replicability of entire bundled offer 21

22 General approach The general approach to identifying markets susceptible to ex ante regulation has not changed: Start from finding of market failure at retail level Strong preference for regulation at wholesale level, starting with market most upstream Modified greenfield approach: are markets effectively competitive in the absence of regulation? Forward-looking perspective Three criteria test Barriers to entry/expansion? Tendency towards effective competition? Relative efficiency of competition law? 22

23 Developments since 2007 (1/2) Technological developments DSL NGA roll-out (esp. FTTx): but no breaks in chain of substitution between copper-based and fibre-based broadband services (V)DSL acceleration techniques (vectoring etc.): higher speeds on copper pair New virtual access technologies: virtual access at local level, i.e. closer to customer than traditional bitstream Cable Coaxial cable upgrade to DOCSIS 3.0 (upgrade to 3.1 foreseen in coming years) Economically viable wholesale access offers? LTE Potential for wireless-fixed competitive interactions 23

24 Developments since 2007 (2/2) Market trends OTT services: alternative to services normally provided by operators (e.g. SMS, voice calls, TV), challenging traditional business models however not yet at level where they can be considered actual substitutes and at EU level, only been found to exercise limited competitive constraints Bundles: experience to date has not indicated that there is a need for ex ante regulation of bundles but NRAs must ensure that the vertically integrated SMP operator s regulated elements of the bundle can be effectively replicated 24

25 Retail markets (1/2) Distinction between retail mass market (consumers and SMEs using standardized products) and retail high quality market (business customers requiring tailored, more advanced & reliable services with extra features) Retail mass market trends Tendency to buy bundles (combining 2 or more of voice, data, TV, mobile) but EC considers that it is not generally justified to define market for bundles OTT breaks link between network access and service provision (broadband access alone suffices for delivery of entire service bouquet may remove incentive to buy bundle) Current lack of fixed/mobile substitution may change with development of LTE but fixed technologies also continue to evolve, so it remains to be seen if LTE can offer comparable capacity/speeds as fixed infrastructures, at comparable prices 25

26 Retail markets (2/2) Evidence from Article 7 procedure suggests that both retail markets [mass market/high quality] remain characterized by lack of effective competition in the absence of wholesale regulation Mass market: in the absence of regulation, the fixed incumbent would be the only operator with a ubiquitous network, which means that in certain areas, where alternative platforms are not present, the incumbent could act as a monopolist 26

27 Wholesale markets (1/4) Markets 4, 5 and 6 of the 2007 Recommendation have been retained, but their boundaries are redefined: Market 3A for wholesale local access provided at fixed location (WLA) ~ former market 4 for wholesale (physical) network infrastructure access at fixed location Market 3B for wholesale central access at fixed location for mass-market products ~ former market 5 for wholesale broadband access (comprising non-physical or virtual network access including bitstream access) Market 4 wholesale high-quality access at fixed location ~ former market 6 for wholesale terminating segments of leased lines 27

28 Wholesale markets (2/4) Main distinguishing criterion between markets 11 and 12 (Rec. 2003) and markets 4 and 5 (Rec. 2007): physical vs. non-physical (virtual) access (e.g. LLU/SLU vs. bitstream) Main distinguishing criterion between markets 3A and 3B of the 2014 Recommendation: location of the point of handover, i.e. local vs. central Aim: include in market 3A non-physical access with LLU-like features Development of NGA network infrastructures (FTTH, FTTC): reduced physical unbundling capabilities (e.g. no physical access at ODF in PON architecture) Development of (V)DSL acceleration techniques to increase speed over copper pair (e.g. vectoring): SLU access obligations could impede realization of full benefits of VDSL2 vectoring Development of virtual access products closer to the end user, offering greater flexibility/customization 28

29 Wholesale markets (3/4) Markets 4 and 5 (Rec. 2007) Physical access (unbundling) vs. non-physical (virtual) access (bitstream) Access at street cabinet (SLU) or MDF (LLU) vs. access at MDF or higher points (regional/local) Degree of flexibility for differentiating retail offers Non-physical/virtual wholesale access can belong to market 3A if it fulfills these cumulative conditions (local, uncontended, flexible) Markets 3A and 3B (Rec. 2014) Local access (closer to the customer premises than national or regional level) vs. non-local or central access (regional/national level) Generic access (service-agnostic transmission capacity uncontended in practice, i.e. providing guaranteed bandwidths) vs non-generic access (contended) Degree of flexibility to differentiate retail offers: greater and more flexible control vs. less direct and more standardized control over access lines 29

30 Wholesale markets (4/4) Retail market: distinction between mass-market (standard products with best-efforts QoS) and business demand (tailored products with high QoS, availability guarantees etc.) Market 4: wholesale high-quality access provided at fixed location comprises range of wholesale inputs used to meet the needs of retail business customers, including: Terminating segments of leased lines (trunk segments already deregulated in 2007): uncontended connections with symmetrical upload/download speeds corresponds to former market 6 Other wholesale access products with advanced quality characteristics such as guaranteed availability and high QoS (SLAs, 24/7 support, short repair times, etc.), high quality network management (high upload speeds, low contention rates, etc.) WLA inputs (Market 3A) can be used to provide wholesale high-quality access; however WCA inputs (Market 3B) only suitable for massmarket retail offers 30

31 Lifting of regulation on geographic basis The fact that WLA and WCA markets in general fulfil the 3 criteria test does not preclude that specific competitive situations justify lifting of regulation At retail level, sufficient intra-platform or inter-platform competitive restraints on vertically integrated incumbent may exist at national or sub-national level Alternative infrastructures such as cable or LTE may exercise sufficient competitive constraint but usually their geographical coverage is regionally limited (cable) or the degree of competitive constraint varies geographically (LTE: urban vs. non-urban areas) Hence, NRAs may consider partial deregulation on geographic basis 31

32 Cable regulation (1/8) Experience under 2007 Recommendation: Only 2 NRAs have included cable in market 4 definition based on indirect substitution (PT and UK); none have regulated cable in market 4 Only 10 NRAs have included cable in market 5: 2 based on direct substitution (EE and MT), 8 based on indirect substitution (AT, DE, DK, FI, HU, NL, PT and UK); only DK has regulated cable in market 5 due to specific national circumstances In all cases, inclusion of cable was considered unjustified by EC in its Article 7 comments Regulation of cable outside markets 4 and 5: NL (failed attempt) and BE 32

33 Cable regulation (2/8) Belgian cable regulation: Analysis of markets for broadcast services Retail market (DSL + cable, regional) found insufficiently competitive Cable operators found to have SMP in their respective coverage areas Access obligations imposed: Resale of analogue + digital TV offer Access to digital TV platform (to allow customization of channel bouquet, digital TV interface) Resale of broadband access offer (to allow replication of bundles with broadband) In parallel, incumbent obliged to include multicast functionality in WBA, i.e. in market 5 (to allow replication of bundles with IPTV) 33

34 Cable regulation (3/8) Danish case The incumbent controls both the copper/fibre infrastructure and the coaxial cable networks EC concluded in its Article 7 decision that NRA was wrong to include cable networks in market 5 based on indirect substitution Nevertheless, EC allowed regulation to stand due to unique national circumstances, in order to prevent anti-competitive arbitrage by the incumbent: TDC would be able to offer high bandwidth connections to its endusers via its cable TV network, which alternative operators dependent on TDC s copper network would not be able to compete with. It would further create incentives for TDC not to invest in copper network expansion (VDSL2) in those areas where it has cable network coverage thereby depriving wholesale customers from the possibility to provide higher bandwidth end-user services. 34

35 Cable regulation (4/8) Attempt to regulate cable in the Netherlands 2008 OPTA market analysis of broadcasting market 2 wholesale product markets: (i) wholesale broadcasting transmission services and (ii) delivery at wholesale level of access to the broadcasting transmission platform of the individual cable operators All cable operators found to have SMP in their respective coverage areas in both wholesale markets Obligations imposed: Obligation to provide wholesale analogue and digital transmission at cost oriented tariff (all 4 operators) Resale of standard analogue TV package ( WLR-C remedy) (UPC and Ziggo only) 35

36 Cable regulation (5/8) In 2010, OPTA s 2008 broadcasting market analysis decision was overturned by the CCB (College van beroep voor het bedrijfsleven), because CCB concluded that the geographical market definition (relevant geo market = coverage area of each cable operator) was flawed 2011: new broadcasting market analysis decision: OPTA concludes that cable regulation is not necessary because market tends towards effective competition because of the following reasons: Decline of the importance of analogue TV due to quicker than expected transition to digital TV Increased competition stemming from investments in copper and fibre networks, allowing for provision of IPTV Expansion of TV products offered by competitors (KPN, Tele2, etc.) Potential competitive pressure exerted by development of OTT television 36

37 Cable regulation (6/8) The new Recommendation will make it easier for NRAs to regulate cable: EC notes that cable operators are now technologically able to make economically viable offers of wholesale access products and that in a growing number of Member States direct or indirect constraints stemming from CATV-based WCA offers do exist [ ]. Given the upgrade of CATV to DOCSIS 3 [ ] it may become increasingly appropriate to include CATV bitstream in the relevant product market. EC stresses importance of taking into account self-supply and indirect pricing constraints The new Recommendation may also allow partial deregulation of copper and hybrid copper/fibre networks because of (indirect) competitive constraint from cable networks in their coverage areas 37

38 Cable regulation (7/8) Nevertheless, EC notes that: Experience from Article 7 procedure has shown that due to technical constraints cable unlikely to be significant constraint on WLA products at national or even sub-national level Cable can only be included in WCA market if three conditions are met: OLOs would be forced to pass on hypothetical wholesale price increase in retail prices Sufficient demand substitution at retail level so as to render wholesale price increase unprofitable OLO customers would not switch to significant extent to retail arm of the vertically integrated incumbent Simple resale of broadband connectivity over cable not to be included in WCA market 38

39 Cable regulation (8/8) Conclusion: It remains unlikely that NRAs will be able to include cable in WLA market based on direct or indirect constraints during next regulatory period Inclusion of cable in WCA market: Direct constraints: depends on technological developments (viable CATV bitstream products) Indirect constraints: three-step test remains high hurdle (Partial) deregulation of vertically intergrated incumbents based on constraints from cable or LTE also seems unlikely in next regulatory period 39

40 Thank you 40