DG COMP, Unit C4 dealing with State Aid in the Information, Communication and Media sectors European Commission 1049 Brussels BELGIUM

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1 DG COMP, Unit C4 dealing with State Aid in the Information, Communication and Media sectors European Commission 1049 Brussels BELGIUM 28 August 2012 Geo s Response to the Draft Guidelines for the application of State Aid rules in relation to the rapid deployment of broadband networks We welcome this further round of consultation on a revision to these Community guidelines. We responded to the Commission s earlier consultation in 2011 and we welcome the opportunity to comment further on the Commission s latest draft. We have been involved with three broadband projects which have attracted public funding in the UK. The first was FibreSpeed in Wales - Geo was contracted by the Welsh Government to design, build and operate the FibreSpeed network in North Wales. FibreSpeed provides full open access to wholesale services on a non-discriminatory basis under a business model which is fully structurally separated from all downstream service providers, of which there are a number competing to use these assets to provide services to end-users. We also completed the Pre-Qualification Questionnaire for Cornwall & the Isles of Scilly and we were involved in the initial stages of the BDUK NGA procurement. Overall, we think that the proposed new guidelines are an improvement on the current text and present a clearer, more cogent expression of the Commission s policy in the application of the state aid rules. We welcome the Commission s emphasis on attainment of the Digital Agenda targets and the recognition of the degree of ambition that is required to achieve them. We agree with the Commission that statefunded networks should be genuinely open and broadband procurements should be properly competitive. Protecting existing networks and planned private investments We welcome the assertion in paragraph (4) that State Aid should be complementary to and not a substitute for investments by market players. State Aid should only be permitted in areas of clear market failure. It is important that member states ensure that a thorough inventory is taken of existing and planned investments in order to avoid distortion of competition. In order to do this, care needs to be taken and considerable granularity applied when demarcating white, grey and black areas, because competitive conditions may vary within regions (see further comments below).

2 For example, a particular city may, overall, be a black area for broadband or NGA, but may have sizeable pockets of white. Similarly, if a backhaul network runs through several geographic regions, the guidelines should specify how the route of the backhaul network and its surrounding access areas should be treated. We note the sentence in paragraph (57): In the identification of the targeted areas, whenever the public intervention is limited to the backhaul part of the network, the State Aid assessment will take in account the situation on both the backhaul markets and the access markets. It would be helpful if this principle could be applied when the Commission is considering whether or not to approve further intervention in a grey area where a backhaul network is present. Procuring authorities could potentially take the view that only the linear route of the backhaul network should be considered grey, whereas we believe that the access areas surrounding an existing or planned backhaul network should also be considered grey. When a next generation broadband network is deployed with a view to stimulating the provision of broadband/ NGA services in a particular area, it is clear that such access networks will materialise some time after the completion of the backhaul network. Investors in new access networks will naturally take time to come to market. So when assessing whether or not to grant approval for an intervention in an area which is served by a backhaul network, regard should be had not just to surrounding existing and proposed access networks, but also the expectation of attracting future investment over a longer-term horizon, that might not be conceived until the impact of the backhaul network has been established. Section Services of General Economic Interest We welcome the restructuring of the section on the SGEI definition (Section 2.2.2). We think that this section is now easier to read and comprehend. Section Other administrative and regulatory measures We welcome the Commission s acknowledgement in paragraphs (28) and (29) of the importance of Member States facilitating the deployment of broadband networks by removing unnecessary hurdles to investment. We believe that issues such as infrastructure sharing and increasing the speed and reducing the cost of acquiring rights of way are crucial to enabling investment in new networks and we will be responding to the Commission s consultation on this subject. Section The Compatibility Assessment We welcome the restructuring of the section on the balancing test (paragraphs (35) (38)) to remove the reference to white, grey and black areas. We agree that these are more sensibly dealt with in Section 3 (application of the principles) than in Section 2 which sets out the main principles of the Commission s policy. Balancing Test the objective of the measure The Commission acknowledges externalities as an important factor to consider when identifying whether there has been market failure. We agree that the wider benefits to the community and the economy would be a valid consideration for any public intervention in this area. The objectives of the Digital Agenda for Europe ( DAE ) are that all Europeans should have basic broadband by 2013 and that, by 2020, (i) all Europeans have access to much higher internet speeds of above 30 Mbps and (ii) 50% or more of European households subscribe to internet connections above 100 Mbps. The Commission notes in paragraph (38) that In pursuing the DAE objectives, a balance has to be carefully struck between the wish to provide very high speed infrastructure in urban areas to 2

3 enhance their competitiveness and the need to avoid that a new digital divide emerges in rural areas, thus endangering the cohesion objectives. We agree that a balance needs to be struck and believe that this can be dealt with by the application of the principles in terms of the step change required, as described in paragraphs (48) and (78). We welcome the recent decision by the Commission to approve State Aid to an ultra-fast broadband network in Birmingham. Balancing Test the design of the measure We note that the Commission seeks to avoid duplication and incoherence caused by a multiplicity of schemes at regional and municipal level and is therefore encouraging national framework schemes to ensure coherency and reduce the administrative burden on local authorities. Our concern about such umbrella schemes is that they may be a somewhat blunt instrument which could fail to deal adequately with differences in levels of competition (in terms of existing and planned investments) at a regional and sub-regional level. We therefore welcome the Commission s acknowledgement of the importance of the role of NRAs in designing pro-competitive national schemes. We believe that NRAs are most likely to be aware of the competitive situation in regional markets, as they will have examined this during the course of their market reviews under Article 15 of the Framework Directive. We do not believe that such consultation between the public authorities and the NRAs necessarily takes place currently, so we suggest that the Commission endeavours to ensure that new procedures are put in place within Member States, as indeed is suggested in paragraph (41). We welcome the proposal in paragraph (41) that NRAs should produce recommendations on market analysis for local authorities. We are less confident that it is appropriate for NRAs to issue guidelines on wholesale access products and pricing. This is because NRAs might be inclined to recommend the same wholesale access products as they have imposed as remedies in their market reviews. We do not believe that it would always be appropriate to replicate those remedies as conditions for the award of public funding as the Guidelines themselves are already (rightly) quite clear on what access products should be offered. We welcome the Commission s suggestion (in paragraph (42)) that national competition authorities can provide useful advice in relation to large framework schemes to help establish a level playing field for the bidding operators and to avoid that a disproportionately high share of state funds is earmarked to one operator, thereby strengthening its (possibly already dominant) market position. In this respect, the concurrency of powers in the UK between Ofcom and the newly formed Competition and Markets Authority is not necessarily helpful. The CMA would tend to defer to Ofcom in matters concerning communications infrastructure and Ofcom would tend to regard government procurement projects as an area of policy with which it should not interfere. We believe that the UK Communications Act does not place sufficient emphasis on the encouragement of competition in networks and would hope that this is addressed in the forthcoming review of this legislation. We welcome the introduction of the concept of a step change, i.e. that a subsidised network should ensure a step change in terms of broadband availability, i.e. by bringing significant new investments or significant new capabilities. We agree that investments related only to the upgrade of the active components of the network should not be considered eligible for State Aid. We also agree that the 3

4 deployment of vectoring technologies may not amount to significant new investments and thus may be ineligible for State Aid. Section Types of Broadband Network Paragraph (53) deals with the definition of NGA networks. We do not believe that the Commission s proposed definition is sufficiently technology-neutral. The proposed definition is wired access networks which consist wholly or partly of optical elements and which are capable of delivering broadband access services with enhanced characteristics (such as higher throughput) as compared to those provided over existing copper networks. NGA networks are therefore wired fibre-based or advanced upgraded cable networks. Footnote 61 goes on to say: At this stage of technological and market development, neither satellite nor mobile or wireless network technologies (including LTE) appear to be capable of providing very high speed (symmetrical) broadband services, in particular since these technological solutions are shared, thus the speeds will depend on the number of connected users in the area covered. We dispute the Commission s assessment of the capabilities of wireless networks. One of the service providers using Fibrespeed s backhaul network, namely AB Internet in Anglesey, is currently achieving actual speeds of 45Mbit/s downstream and 15 Mbit/s upstream to the rural customers it serves, as detailed in this press release: This performance is equal to or better than that achieved by BT s FTTC connections. We would also point out that, whilst wireless networks may be shared, so indeed are copper networks. We therefore believe that the Commission should leave open the possibility of allowing State Aid for the deployment of wireless networks, particularly where the network seeking approval is a wholesale-only backhaul network over which ISPs will deploy networks as they see fit. Even if such networks might be considered interim NGA networks (as per paragraph (54)) they may be a valuable first step towards FTTP networks in rural or disadvantaged areas. Moreover, the concept of consisting wholly or partly of optical elements is somewhat nebulous, since most networks consist of optical elements at some level. The ISPs connected to Fibrespeed s network are using its fibre backhaul in the same way that BT s FTTC providers (who use copper in the last mile) use BT s fibre for backhaul. Having said that, we agree with the sentiments expressed in paragraph (54) that the ultimate goal is for future-proof NGA networks which represent a sustainable and non-temporary technological advancement by extending fibre to the customer premises and which support infrastructure-based competition. We very much welcome the new wording in paragraph (56) which permits Member States to decide what form their intervention should take, i.e. they are permitted to finance next generation backhaul networks (as the Welsh Government did with Fibrespeed), or civil engineering works, as well as access networks. However, as we have said above and below, it is important to consider how the areas surrounding such backhaul networks will be treated for State Aid purposes. 4

5 Section The distinction between white, grey and black areas We think that the explanation of white, grey and black areas for basic broadband in paragraphs (57) to (66) and for NGA networks in paragraphs (69) to (74) are a considerable improvement on the corresponding sections in the current guidelines. However, we think it would be helpful if some guidance were provided as to the way in which geographical zones are delineated or defined. How granular should the examination of the existence of networks and services be? In our view, a considerable level of granularity is required, since market conditions vary greatly within, as well as between, towns, cities and local and regional authority areas. We note that the requirements in paragraph (67)(a) concerning mapping and analysis of coverage aim to ensure a certain level of detailed analysis of the competitive environment, but we do not feel the guidelines are prescriptive enough on this point (see below). We reiterate the comments we have made about paragraph (57) above. The new wording says that whenever the public intervention is limited to the backhaul part of the network, the State Aid assessment will take into account the situation on both the backhaul markets and the access markets. We agree with this, but think the Guidelines should go further with respect to backhaul networks. Where an existing backhaul network is the subject of a previous State Aid intervention, further State Aid should only be granted for investment in the access networks surrounding that backhaul network if they are coherent and integrated with the existing network in order to maximise the benefit from each intervention. Any subsequent state intervention should be accompanied by rigorous analysis demonstrating the absence of overlap with existing schemes at all levels including access, middle mile and backhaul. With regard to paragraph (59), we have some concerns that procuring authorities are not always able in practice to verify that there are no private investors planning to roll out infrastructure in the relevant area. We would welcome further guidance as to how such authorities might identify all the relevant interested parties. With regard to grey areas (paragraph (61) onwards), we would point out that a period of grace or quarantine should be granted following the deployment of a publicly funded network before further statefunded investment is permitted. For example, if a wholesale-only backhaul network is installed, it may take a period of one or two years for service providers to enter the market and provide broadband services which utilise that network. The Fibrespeed network is a case in point. Six months following the installation of the network, only ten business customers were connected. Now three years on from the installation, there are over 190 businesses and over 1000 residential consumers on the network, achieving penetration levels on some of the target business sparks of 25 35%. Section Additional provisions for basic broadband networks We think it is helpful that the Guidelines specify the additional conditions that must be satisfied for basic broadband networks (Section 3.2.2) and NGA networks (Section 3.3.2). However, it would be helpful if the Guidelines should make clear that the conditions in paragraph (67) apply to both basic broadband and NGA projects. Mapping and analysis of coverage: We agree that a central database of available infrastructure (as suggested in paragraph (67)(a) ) would be a useful way of increasing transparency for the benefit of procuring authorities and potential investors. However, we think that the Commission would have to be more prescriptive about what is required in order for anything meaningful and useful to be introduced. 5

6 In the UK, Ofcom is required under the Digital Economy Act 2010 to report every three years on the state of the UK s communications infrastructure. However, this report is not currently useful for State Aid planning purposes, since it focuses on the availability of services rather than networks. Ofcom feels that producing a national inventory or map of potentially shareable infrastructure is not currently justified. Public consultation and competitive tender process: The current round of BDUK procurements in the UK are not publicised in terms of the scope of proposed deployments. The procuring authorities write individually to network operators of whom they are aware asking for details of existing or planned investments in the area. In most cases, scant detail is provided regarding the proposed project area. At the moment, there is often no public consultation for NGA projects in the UK. We therefore welcome the suggestion in paragraph (67)(b) that there should be a central webpage hosted by the member state government which publicises projects proposed for funding measures. We also welcome the new requirement that Member States must use a dedicated central website at the national level to publish all on-going tender procedures on broadband State Aid measures. We believe that the more transparent the process is, the more likely the process is to be effectively competitive. Use of Existing Infrastructure: One of the principle inhibitors to competition in tendering for broadband procurements is lack of access to incumbent or existing networks. It is vital that potential bidders are able to access existing infrastructure on the same terms as other bidders. The following new wording in paragraph (67)(f) of the Guidelines on this subject is therefore of crucial importance and must be retained: Any operator which owns or controls infrastructure (irrespective of whether it is actually used) in the target area and which wishes to participate in the tender, should fulfil the following conditions: (i) to inform the aid granting authority and the NRA about that infrastructure during the public consultation; (ii) to provide access to such infrastructure to all other potential bidders at the same terms and conditions as the operator uses them for its own tender; (iii) to provide all relevant information and access to other bidders at a point in time which would allow the latter to include such infrastructure in their bid. Member States should set up a national database on the availability of existing infrastructure that could be re-used for broadband roll-out. The fact that the BDUK procurement in the UK has been left with only two bidders is largely due to lack of open access to the incumbent s network. Without access to either dark fibre or passive infrastructure access (except in very limited circumstances), other potential bidders were simply not able to build an economic case to compete with a vertically integrated incumbent who did have access to these passive elements without any restrictions on their use. We believe that unless such network inputs are provided on a fully equivalent basis to the incumbent s own downstream businesses, it is almost impossible for new entrants to compete with these established businesses, which also have the advantage of being able to leverage their dominance of existing revenues in these areas and whose own bids are to remain as the monopoly infrastructure provider (whereas new competitors have to bid to compete with them). Wholesale Access: We welcome the fact that the wording in this section has been strengthened. We agree that effective wholesale access prevents the creation of regional monopolies. We also agree that such conditions do have and should have no relation to findings of Significant Market Power in the Article 7 market review process. However, the draft Guidelines then go on to suggest in paragraph (67)(g): The type of wholesale access obligations imposed on a subsidised network should be aligned with the portfolio of access obligations laid down under the sectoral regulation. We do not believe this is consistent with the previous sentence disassociating the wholesale access conditions from SMP findings. We think this 6

7 sentence should be deleted so that only the wording on the use of the access products listed in the NGA Recommendation and in Annex II to the Guidelines remains. Transparency: We welcome the Commission s proposal that the aid beneficiary should be obliged to provide entitled third parties with comprehensive and non-discriminatory access to information on its infrastructure deployed under a State Aid contract. Section the distinction between white, grey and black areas for NGA networks The distinction between broadband networks and NGA networks is often a fine one. Member States must therefore take even greater care when granting funding for the deployment of NGA networks, and the Guidelines should reflect this. It is even more vital that procuring authorities undertake a thorough audit of the presence of existing networks, including backhaul networks. We think that paragraph (72) should include a direct reference to the need to take into account the presence of networks which operators would be willing to make available for backhaul purposes. We think it is right that the Commission should require the additional conditions set out in Section to be met in the case of NGA networks. We welcome the new provisions with respect to passive and neutral infrastructure, wholesale access and open topology in this section. We agree that State Aid should only be granted to passive and neutral NGA infrastructures, though we would welcome some examples of what sort of models the Commission has in mind. The section on wholesale access places more emphasis than in Section on the availability of passive, rather than active infrastructure. We welcome the suggestion that the access obligation should include the right to use ducts, poles, dark fibre and street cabinets, but it would be helpful if specific mention were made of the need to mandate access to this passive infrastructure for backhaul, as well as in the access network. Our experience with both FibreSpeed in Wales and the Cornwall Procurement has demonstrated the importance of backhaul in the provision of NGA networks. Where public funds are made available for the provision of an NGA network, the Commission should ensure that the beneficiary is required to provide not only wholesale access to its passive and active infrastructure in the local loop, but also access (passive and active) to its backhaul network. If access to backhaul is controlled by a single vertically integrated operator, there will not be effective competition between service providers. We also suggest that it is worth being clear that there be no restrictions placed upon the use of the passive infrastructure for specific purposes and that the terms offered by the incumbent are the same as the ones they enjoy themselves (i.e. truly equivalent). For example, the Physical Infrastructure Access (PIA) product developed by Ofcom and BT in the UK has not been used by competitors as it can only be used for access links and then only for residential broadband. The same cables cannot be used to connect businesses with leased lines, or fibre to mobile or wireless networks, or backhaul for other service providers. When BT invests in new fibre cables on the same routes, it is not restricted in this way and can thus avail itself of revenue streams from the new fibre infrastructure across all these markets. With the majority of revenues coming from outside the residential market, and currently being captured by the incumbent at the wholesale level as a minimum, these restrictions are fatal to any competitor trying to attract investment to an alternative build case in competition with the incumbent provider. In the UK, this led BT to indicate at the start of the BDUK procurement process that it would match any investment by local authorities an offer which strongly influenced the resulting procurements but which other businesses simply cannot replicate without access to passive inputs on the same basis as BT. 7

8 True open access offers a wider range of products facilitating services for all telecommunications needs, such as being able to offer leased lines over dark fibre access. The weakness of the Cornwall Procurement is that, in offering only active products at the wholesale level, it does not allow other infrastructure-based service providers to compete with the incumbent, encourages only resale of similar retail products, and doesn t encourage any further private investment. FibreSpeed, in contrast, allows full competition at all levels of the market and has facilitated further private investment in Wales. The availability of FibreSpeed dark fibre in Wales has led to the launch of three sub-sea cables linking the UK with Dublin, thus making further inward investment to Wales more attractive. We also agree with the new wording which requires an open topology network architecture (i.e. point to point as well as point to multi-point). Section Aid to ultra-fast broadband networks We welcome the condition in paragraph (78) that any subsidised network providing ultrafast broadband should be operated as a wholesale network only. We would welcome clarification as to whether this applies only where one or more NGA networks (which do not provide FTTP) is present or also where an ultrafast broadband network is proposed where either no broadband or basic broadband is already present. We would also welcome clarification as to how ultra-fast broadband should be defined for the purpose of these guidelines. The UK government currently defines ultra-fast as 80 Mbps or above and envisages the use of FTTC. Paragraph (77) of the Commission s draft guidelines implies, on the other hand, that only FTTP providing a minimum of 100 Mbps would be deemed to be ultra-fast (which we would endorse). Rather than using the term ultra-fast, perhaps it would be simpler to state that if an FTTP network is deployed, it must be a wholesale only network, but any other form of NGA network would only attract the conditions in Sections and Section 4 Final Provisions We welcome the intention in paragraph (83) to give these Guidelines retrospective effect. We agree that Member States should be required to amend existing framework schemes to bring them in line with the transparency, wholesale access and passive access provisions of the Guidelines. 8