POSITION PAPER on the European Commission's package of measures to revise the regulatory framework for electronic communications Brussels/Berlin, 29.11.2016 Transparency register/ registrationnumber.: 1420587986-32 The Verband kommunaler Unternehmen (VKU) represents over 1,450 local utilities in Germany in the sectors of energy, water/waste water, waste management and telecommunication. With almost 260.000 associated employees, the members of VKU achieved a turnover of over 111 billion euros in 2014, in which year they also invested over 9.4 billion euros. In the end-customer segment, the VKU s member companies have a market share of 54 percent in electricity, 56 percent in natural gas, 85 percent in drinking water, 67 percent in heating supply and 40 percent in waste-water disposal. They also dispose of 31,500 tons of waste every day and make a vital contribution towards ensuring the highest recycling rates in Germany compared to any other EU member state with 65 percent. The local utility companies provide broadband to 5.7 million customers. 1.7 billion euros are planned to be invested until 2018 to supply fast internet connection to a total of 6,3 million of customers. Verband kommunaler Unternehmen e.v. Invalidenstraße 91 10115 Berlin Fon +49 30 58580-0 Fax +49 30 58580-100 info@vku.de www.vku.de
I. Background The digital transformation is one of the most important current social, political and economic challenges. Local public utilities, as pivotal infrastructure service providers, contribute substantially to the success of the digital transformation by providing services and infrastructure that are indispensable in the digital age, not only for the individual citizen but also for economic value creation. High-speed connectivity has come to play a key role in the competition of regions to attract both businesses and individuals: Without high-speed internet connections, neither the Energy Union nor an "Industry 4.0" can be achieved; neither can citizens benefit from e-government or electronic health services. In its Communication "Connectivity for a Competitive Digital Single Market - Towards a European Gigabit Society", the European Commission thus aims to equip all private households in Europe with connectivity of at least 100 Mbit/second by 2025 and provide the most important points of economic and social life with gigabit speeds. Cities, municipalities, countries and their companies already make a significant contribution towards achieving these goals in Europe by encouraging the development of high performance fibre networks, including beyond metropolitan areas. Especially in sparsely populated, rural regions with low customer density the high civil engineering costs of such projects and the resulting long payback periods tend to considerably reduce their attractiveness for exclusively profit-oriented operators. Local public utilities, on the other hand, take responsibility for their respective region as modern public service providers within a competitive framework, but striving for more than economic advantage. In the VKU's membership alone, more than one in ten local public utility companies are active in the broadband roll-out, even more are planning to enter the market. Last year, broadband investments by local public utilities amounted to around EUR 500 million; for 2018, investments of EUR 1.7 billion are planned. With the broadband infrastructure provided by local public utilities, about 5.7 million customers are currently being supplied; by 2018, this figure will stand at around 6.3 million. This commitment and the current diversity of suppliers in the European broadband sector need continued regulatory support. In this sense, the recast-package presented by the European Commission contains many important propositions. VKU welcomes in particular the connectivity goals set for 2025 and the clear commitment to fibre technology. Nevertheless, VKU would like to point out some key issues that have an impact on whether and how these objectives as well as the evolution towards a digital economy and society in Europe in more general terms can be achieved in practice. 2 / 8
II. Establishing a binding market survey process to prevent destructive overbuild of fibre infrastructure (Art 20 22 Code Directive) VKU in principle welcomes the European Commission s objective to provide clarity regarding the current status and medium-term prospects of broadband roll-out in Europe in order to facilitate planning and improve coverage in undersupplied regions. Naturally, the proposed mapping-process and declarations regarding future investments expressed within this framework should leave operational and business models as well as strategic planning unaffected. Otherwise, the market survey processes for digital exclusion areas as provided for by Art 22 section 1 and 2 of the Code-Directive can be a suitable means to achieve planning reliability and increase the economic attractiveness of rollout projects in undersupplied regions. For Germany, it has proved successful for this process to be carried out directly by the municipalities wishing to improve coverage throughout their territory; this should in any case remain an option on member state level. In order to archive real planning reliability, marked surveys need to have a binding effect on all parties involved during a specific time frame. This must apply in particular to negative notifications, that is, the declaration of a lack of interest in deploying broadband in a given area or a failure to participate in the survey. These negative notifications are usually the basis for municipalities and their respective local utilities to actively get involved in infrastructure deployment themselves. However, under the current national and European legal framework, negative notifications may be withdrawn at any moment. In practice, suppliers that did not express any interest in investing in a certain area during the market survey, often declare a newfound willingness to do so once a municipal deployment project has been announced or even after construction works have started. What is more, this late commitment tends to be focused around economically more lucrative sections within a rollout area such as industrial parks, increasing the cost for deployment in the remaining sections and often leading to a need for additional subsidies. In view of the fact that in most of these cases, not fibre but lower-quality infrastructure is deployed by the late-coming supplier, a short-term, strategic involvement rather than a long-term, sustainable business commitment seems to be the rationale behind these kinds of projects. Outside of particularly densely populated areas, such duplication of infrastructure and cherry-picking is economically unviable, renders first mover investment in undersupplied regions highly unattractive and jeopardizes universal coverage. Effective regulatory remedies to limit this kind of business practise should thus be put in place, in particularly for cases where subsidies are involved. It is, however, not clear from the current
formulation of Art. 22 section 4 in combination with Art 20 section 1, Art 21 section 1 and Art 29 to what extent the market survey procedure envisaged by the EU Commission would indeed have a binding effect. What is more, it is incomprehensible why such a complex combination of several individual provisions has been chosen to convey the desired regulatory effect in the first place rather than a single, easily identifiable reference. Furthermore, it remains in doubt as to whether a sufficient disciplinary effect can be obtained solely through voluntary sanctions imposed on national government authorities in accordance with Art 29. III. Preserving infrastructure competition, fostering diversity of supply (Part II "Networks", Title II "Access", Code Directive) Based on VKU s understanding, the provisions proposed by the European Commission under Part II "Networks", Title II "Access", entail a significant shift of the regulatory focus from wholesale to retail markets (in particular Art.61, Art. 65 section 1 and 2, Art. 66 section 2 and Art. 71 of the Code Directive). In principle, the European Commission's effort to focus more clearly on the needs of consumers when designing regulatory instruments is comprehensible; however, we do not believe the proposed provisions actually contribute to achieving this objective. The currently high level of competition in European broadband wholesale markets is based primarily on reliably regulated access to the last-mile (subscriber line). Deregulation on the wholesale level would challenge this access and deprive local public and other alternative telecommunications network operators of the necessary prerequisites for their individual network deployment. As a result, competition on the wholesale level would decrease, fostering the emergence of infrastructure monopolies, allowing competition between internet access service providers, yet no longer between network operators. Under such circumstances, the product range that downstream providers can actually offer on the retail level is determined solely by the infrastructure owner. For end customers, this results in a situation of spurious competition: different labels, but identical access product. To create genuine and sustainable diversity of supply, we thus need a wide range of different players on all levels of supply, capable to create their own infrastructure assets in a competitive and stimulating environment. What is more, infrastructure monopolies tend to incentivise the asset owner to push the technological limits of the existing network as long as possible rather than investing in deployment of technologically up-to-date infrastructure and increased bandwidths. This applies in particular to broadband roll-out in rural areas: From a shareholder perspective, these investments remain equally unattractive, with or without comprehensive
access regulation. Local public utilities, on the other hand, invest in high-speed connectivity of out of a sense of responsibility for their respective region rather than mere profit-making. This commitment should not be undermined. The VKU therefore urges to preserve the current, reliable ex-ante regulatory regime, either by adapting the corresponding provisions to this effect or by maintaining the wording of the current Access Directive. IV. Symmetrical access obligations: Taking into account the results of the Cost Reduction Directive (Art. 59 section 2 Code Directive) The EU Commission proposes to impose symmetric network access obligations for civil engineering infrastructure up to the first concentration point in cases in which such infrastructure cannot be replicated in an economically viable way; in sparsely populated areas, symmetrical obligations may even be imposed beyond this point. VKU believes this to be highly problematic for two reasons: Firstly, the provisions regarding the circumstances under which a symmetrical access obligation can be imposed are formulated so vaguely, that their scope and the practical consequences they would entail, both on member state level as well as in individual cases, are extremely difficult to assess. This leads to considerably regulatory insecurity among alternative operators, ultimately resulting in investment restraint. This is particularly true for local public utilities: as they invest mostly in areas of low economic attractiveness, clear and stable regulatory conditions granting them sovereignty to determine the conditions of access to their networks is of the utmost importance. The exception clause for local projects does not provide a suitable remedy in this sense as it is, in turn, not formulated in sufficiently clear terms. Secondly, the desired regulatory effect reducing the cost of broadband deployment through synergies is already being achieved by the EU Cost Reduction Directive (2014/61/EU). The proposed scheme therefore does not provide any added value. Owing to their cross-sectorial infrastructure competence (energy, water), local public utilities are particularly well positioned to leverage potential synergies as foreseen by the Cost reduction Directive. Creating new access requirements for companies other than the SMP operator does not entail proven benefits regarding the achievement of universal coverage. It leads, on the contrary, to a significant depreciation of existing infrastructure and inhibits future investments by alternative operators.
VKU therefore calls for the introduction of additional symmetrical access obligations to be abandoned and Article 59 section 2 of the Code Directive to be deleted. V. Specifying provisions on co-investment projects (Art. 74 and Annex IV Code Directive) Co-investment agreements can be a suitable means to increase the attractiveness of cost-intensive development projects without unduly restricting competition. However, the Commission's proposal currently lacks the clarity necessary to archive this end: Based on the provisions under Art. 74 of the Code Directive as well as the details laid out in Annex IV, it is for instance not discernable whether or not the proposed regulatory relief for SMP-operators may be granted on the sole ground that an appropriate co-investment offer has been submitted, albeit not having led to an actual agreement with a competing operator. Such a scheme could prove to be problematic as it incentivises the SMP-operator to submit a co-investment offer that is by design unattractive to its competitors in order to obtain the benefit of preferential regulatory treatment without the involvement of other operators. While it is true that the co-investment offer is to remain open for new co-investors at any moment during the life cycle of the respective infrastructure, including if no initial co-investment agreement had been reached, late-coming competitors can be offered significantly less attractive investment conditions (and in principle, rightly so). Although they constitute an important framework for the design of co-investment offers, the criteria set out in Annex IV are thus too vague to prevent abusive use of the proposed co-investment schemes. The VKU therefore calls for a clarification of the respective provisions, namely of Art. 74, in order to limit the application of regulatory relief schemes to cases where a substantial co-investment agreement has indeed been reached. VI. Supporting market-driven solutions for a universal functional internet access (Art 79 86 Code Directive) Functional internet access offering a certain minimum speed and quality of connection has become a fundamental prerequisite for political and social participation of citizens. Obliging Member States to ensure the availability of such a connection for all citizens at
least in their place of residence and at affordable prices must thus certainly be welcomed. However, lessons learned from telecommunications services other than broadband suggest that universal service obligations for one or more operators is not the most advisable option to achieve economically efficient universal minimum connectivity and affordable access products. For instance, the simultaneous drop in retail prices and improvement of services offered we have seen in the past in the field of voice telephony was primarily due to the increase and since then stable level of competition within the respective markets. A universal service obligation, on the other hand, invariably restricts competition, in particular to the disadvantage of smaller providers, whether or not any company may be a priori excluded a priori from process of designating a universal service provider. What is more, the European broadband infrastructure is still in the process of being constructed. Under these circumstances, a universal service obligation would incentivise the designated universal service provider to focus investments on lower-quality technology solutions providing speeds and reliability of connection on a level just sufficient to provide the required functional Internet access rather than to invest directly into high-quality fibre connectivity. Universal functional Internet access should thus be achieved in a sustainable, competitive framework and by the entire range of infrastructure operators and access service providers, supported through appropriate funding instrument and a modern state aid regime. The VKU accordingly calls for Article 81 (3) to (5) of the Code Directive to be deleted. VII. Being cautious when it comes to centralizing regulatory powers (BEREC Regulation) Executive agencies can improve efficiency in managing the implementation of legislation and serve to pool the necessary technical expertise. However, in recent years, ever more regulatory powers have been transferred to these entities; in consequence, democratically elected decision-making bodies are being increasingly bypassed when it comes to agreeing on regulatory decisions that often go far beyond mere technical implementation or enforcement provisions. VKU observes with great concern that European as well as national regulatory authorities, whether existing or yet to be established, are being bestowed with this kind of extensive regulatory powers. A recent example of this trend is the establishment of the
Council of European Energy Regulators (CEER) in 2011; a further expansion of its competencies is currently being discussed in the context of the Energy Unions. Similar trends are now observed in the telecommunications sector. The VKU therefore urges to reconsider the establishment of a European agency for electronic communications and to maintain the current legal structure of BEREC as well as the scope of its competencies.