EUROPEAN COMMISSION. Dear Mr Michaelides,

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1 EUROPEAN COMMISSION Brussels, C(2014) final Γραφείο Επιτρόπου Ρυθμίσεως Ηλεκτρονικών Επικοινωνιών Και Ταχυδρομείων (OCECPR) Helioupoleos Λευκωσία Cyprus For the attention of: Mr. Polis Michaelides Commissioner Fax: Dear Mr Michaelides, Subject: Commission Decision concerning case CY/2014/1677: The retail market for the minimum set of leased lines in Cyprus Commission Decision concerning case CY/2014/1679: Wholesale highquality access provided at a fixed location in Cyprus Article 7(3) of Directive 2002/21/EC: No comments Commission Decision concerning case CY/2014/1678: The wholesale market for trunk segments of leased lines in Cyprus Comments pursuant to Article 7(3) of Directive 2002/21/EC I. PROCEDURE On 17 November 2014, the Commission registered three notifications from the Cypriot national regulatory authority, Office of the Commissioner of Electronic Communications and Postal Regulation (OCECPR) 1, concerning the following markets: the retail market for the minimum set of leased lines, 2 the wholesale market for trunk segments of leased 1 2 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 7 of Commission Recommendation 2003/311/EC of 11 February 2003 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with the Framework Directive, OJ L 114, , p. 45 (2003 Recommendation on Relevant Markets). This market has been removed from the list of the relevant markets that may warrant ex ante regulation which is contained in the currently applicable 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/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel

2 lines, 3 and the market for wholesale high-quality access provided at a fixed location 4 in Cyprus. The national consultations 5 ran from 8 April 2014 to 8 May On 25 November 2014, a request for information 6 was sent to OCECPR and a response was received on 28 November 2014; on 2 December a supplementary request for clarifications was sent to OCECPR and a response was received on the same day. 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 The retail market for the minimum set of leased lines and the wholesale markets for trunk and terminating segments of leased lines in Cyprus were previously notified to and assessed by the Commission under cases CY/2006/ OCECPR designated the Cyprus Telecommunication Authority (CYTA) as having SMP in those three markets, taking into account high market shares (98% on the retail market and 100% on both of the wholesale markets), as well as high barriers to entry and expansion, lack of potential competition and low countervailing buyer power. OCECPR imposed a full set of remedies, consisting of transparency, non-discrimination, accounting separation and price control. With regard to price control of the retail leased lines, OCECPR maintained the existing Fully Distributed Costs model; for the wholesale products OCECPR intended to implement a bottom-up Long Run Incremental Costs model and, pending its implementation, to set the prices on the basis of a retail-minus (20%) methodology. The Commission made no comments. II.2. Market definition Minimum set of leased lines Leased lines are defined as telecommunication facilities which allow for a dedicated, symmetrical connection. At the retail level the relevant market includes the services offered over leased lines, SDH/HDSL/SDLS digital lines and Ethernet; services previously provided over ATM connections are no longer part of the relevant market, as they are no longer provided in Cyprus (all customers migrated to Ethernet). Services offered over xdsl and cable infrastructure (DOCSIS) are outside the scope of the relevant market, as they do not offer the same functionalities as traditional leased lines (in terms of contention, download/upload speed and security). Wholesale terminating and trunk segments of leased lines The market boundaries between terminating and trunk segments have been identified on Corresponding to market 14 of the 2003 Recommendation on Relevant Markets. Corresponding to market 4 in the Recommendation on Relevant Markets. In accordance with Article 6 of the Framework Directive. In accordance with Article 5(2) of the Framework Directive. SG-Greffe(2006) D/

3 the basis of the network topology: terminating segments of leased lines ensure dedicated capacity between the end user's premises and the point of presence of the network operator; trunk segments, on the other hand, are the elements of the backbone network between the different exchanges of the network operators. OCECPR determined that analogue leased lines are no longer provided, hence only digital lines are considered. Based on the characteristics of the products, OCECPR concludes that the market consist of services provided over traditional leased lines, Ethernet, and VPN. Connections provided over ADSL, VDSL2, cable (DOCSIS) and satellite are excluded from the market definition, as they do not offer the same functionalities 8. The relevant geographic market is the Republic of Cyprus. II.3. Finding of significant market power and assessment of the three criteria Minimum set of leased lines With regard to the minimum set of leased lines OCECPR considers that the three criteria test 9 as contained in the Recommendation on Relevant Markets is no longer met. Therefore OCECPR considers that this market is no longer susceptible to ex ante regulation in accordance with the Framework Directive. OCECPR considers that wholesale regulation (both existing and proposed for the next review period) has significantly lowered barriers to entry in this market. There are 3 alternative operators who are active on the retail leased lines market, either on the basis of their own infrastructure, or on the basis of regulated wholesale inputs. Moreover OCECPR considers that the market structure has a tendency towards effective competition within the relevant review period. Wholesale terminating and trunk segments of leased lines OCECPR proposes to designate CYTA as the operator with SMP on both wholesale markets. With regard to the market for wholesale trunk segments, which is no longer listed in the Recommendation on Relevant Markets, OCECPR conducts the three criteria test to consider whether this market is still susceptible to ex ante regulation. It concludes that due to the market's characteristics the criteria are cumulatively met, and therefore the market should continue to be regulated ex ante. With regard to the SMP assessment on the market for wholesale terminating segments of leased lines OCECPR concluded that CYTA remains the sole supplier, and despite some alternative infrastructure investments no other provider has entered this market. OCECPR has also analysed other indicators, such as potential competition and barriers to entry, lack of countervailing buyer power, economies of scale and scope, and past anticompetitive behaviour. 8 9 OCECPR states that the publication of new (2014) Recommendation on relevant markets coincided with the conclusion of the analysis of the market for wholesale terminating segments (i.e. market 6 of the previous Recommendation). OCECPR considers that the products that were included in Market 6 of the 2007 Recommendation are also included in Market 4 of the 2014 Recommendation. OCEPR has conducted a substitutability analysis when defining the relevant market and has found that there are no available Bitstream products bearing high quality characteristics currently being offered in the Cypriot Market or expected to be offered during the period covered by this market analysis, which are used by operators for leased line connectivity. Therefore, there is no need to extend the definition of Market 6 of the 2007 Recommendation in the Cypriot context. High entry barriers, no tendency towards effective competition, insufficiency of competition law instruments. 3

4 With regard to the SMP assessment on the market for trunk segments of leased lines, OCECPR bases its conclusion mainly on the evidence of very high market shares which remained stable over the last 7 years. 10 Moreover, despite significant investments by three alternative operators 11 in their own networks, only one competitor has entered the market for wholesale trunk leased lines on the basis of a commercial offer. OCECPR notes that two other operators have developed their own backbone network, which is used for self-supply, however OCECPR considers that they would be unlikely to enter the wholesale market in the event of price increase by CYTA (which could be expected in the event of a potential deregulation of trunk segments). Further, OCECPR underlines that the relative small size of the market for trunk segments of leased lines is a deterrent to the emergence of further potential competitors. Beside the high market shares, OCECPR has also analysed other indicators, such as potential competition and barriers to entry, lack of countervailing buyer power, economies of scale and scope, and past anti-competitive behaviour. OCECPR observed that, while there are a few potential alternatives on the market for trunk segments, the customers have strong preference to purchase from a single supplier. Given CYTA's network coverage advantages it has become the supplier of choice. Moreover, alternative operators who invested in their own backbone network continue to also rely on CYTA's trunk segments. II.4. Regulatory remedies Minimum set of leased lines OCECPR proposes to withdraw any existing remedies which were previously imposed on CYTA on the market for retail leased lines. Wholesale terminating and trunk segments of leased lines OCECPR proposes to maintain previously imposed remedies on the markets for terminating and trunk segments of leased lines (with some amendments and clarifications concerning transparency and non-discrimination). Therefore CYTA will be subject to the following obligations: - to provide access, including co-location; - non-discrimination; - accounting separation; - price control (based on a bottom up Long Run Incremental Cost model) and cost accounting. III. COMMENTS The Commission has examined the notification and the additional information provided by the OCECPR and has the following comment: The exact determination of CYTA's market share on the market for trunk segments of leased lines is not possible, as figures for the supplies to CYTA's largest customer (Primetel) are aggregated. Nevertheless, on the market for trunk segments CYTA has a share of the market in excess of 85%, while it remains the sole supplier on the market for terminating segments. Primetel, Cabelnet, and MTN. In accordance with Article 7(3) of the Framework Directive. 4

5 Potential for relaxing regulation of the market for trunk segments of leased lines The Commission notes OCECPR's conclusions concerning the three criteria test and the designation of CYTA as the SMP operator. In particular, the Commission notes very high and stable market share, customer preferences for a single supplier, unwillingness of alternative operators to enter the market, and the limited size of the market (both in terms of geography and value 13 ). Nevertheless the Commission observes that the entry on the market for trunk segments faces relatively fewer obstacles as compared to terminating segments (where the geographical coverage and granularity of the network has a higher importance). The Commission notes that at least one operator has already established itself on the market for trunk segments, while two others have invested in their own infrastructure and could potentially enter the market within a relatively short time (in the event of price increases by CYTA, which could potentially make market entry attractive for other operators). Moreover, persistently falling revenues in this market may suggest that alternative operators have been gradually substituting the wholesale inputs provided by CYTA with their own infrastructure (self-supply), therefore exerting competitive pressure on the access provider. For the above reasons the Commission asks OCECPR to consider, already at this stage, withdrawing the price control obligation imposed on CYTA in the market for wholesale trunk segments of leased lines. The Commission considers that the development of competitors, actual or potential, may exert a constraint on price, and that the other proposed remedies, in particular access and non-discrimination, together with monitoring for any potential margin squeeze, could sufficiently address the remaining competitive concerns identified by OCECPR. The withdrawal of price control at this stage would be a first and gradual step towards full deregulation of this market, which is the likely next step for this market, and which the Commission understands is the intention of OCECPR in the next review. 14 Pursuant to Article 7(7) of the Framework Directive, OCECPR 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 15 the Commission will publish this document on its website. The Commission does not consider the information contained The revenues on the market for trunk segments of leased lines have decreased significantly over the last years, from approx. 700,000 (in 2009) to expected revenues of around only 100,000 for the year In the supplementary reply to Commission's Request for Information OCECPR stated that it considers it prudent to maintain the regulation of this market during the forthcoming regulatory period, also in view of CYTA's strong market position in other telecommunication markets. However, OCECPR indicated that it will work towards the deregulation of this market in the next review. 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

6 herein to be confidential. You are invited to inform the Commission 16 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. 17 You should give reasons for any such request. Yours sincerely, For the Commission, Robert Madelin Director-General Your request should be sent either by or by fax: The Commission may inform the public of the result of its assessment before the end of this three-day period. 6