WIREDGOV

The European Commission has adopted a Recommendation indicating to national telecoms regulators how they should regulate third-party competitive access to ultra-fast fibre networks (also known as 'next generation access' – NGA – networks) that bring high-speed broadband connections to homes and workplaces.

Regulators should apply the new guidance in their daily decision making as soon as the text has been published in the EU's Official Journal.

Under the telecoms Framework Directive (2002/21/EC) they are obliged to take "utmost account of the Commission's Recommendation, justifying any departure from it.

The Recommendation provides regulatory clarity to telecom operators, ensuring an appropriate balance between the need to encourage investment and the need to safeguard competition.

It will help to stimulate investment in competitive high-speed broadband networks, which is a key objective of the Commission's Digital Agenda for Europe (IP/10/581) and Europe 2020 strategy.

The Recommendation forms part of a package of broadband measures presented by the Commission this week(see IP/10/1142).

The Commission's Recommendation on regulated access to Next Generation Access networks sets out a common EU-wide approach to regulation of fibre-based networks. Fibre networks complement or replace traditional copper-based fixed access networks that can offer only limited bandwidth. Deploying fibre requires substantial investments. However, fibre is the next step in the natural technological evolution of the fixed-line telecommunications industry and essential to meeting the ambitious broadband targets set out in the Digital Agenda (see IP/10/581, MEMO/10/199 and MEMO/10/200).

The EU's telecoms rules require national telecoms regulators to encourage efficient investment and promote competition. When competition is not effective, regulators can impose ex ante regulatory measures on dominant firms to address this market failure following a thorough market review as set out in the EU's telecoms Framework Directive (2002/21/EC). The new Commission Recommendation gives guidance to regulators on how they should do this in fibre-based 'next generation access' markets.

Next Generation Access

Both well-established incumbent telecoms operators and newer operators are currently upgrading their existing copper networks to fibre by investing in 'fibre to the node' (FTTN) or 'fibre to the home' (FTTH) networks. In the EU, large telecoms operators (which may have previously enjoyed a monopoly) compete with other operators offering services based on, for example, cable networks, 'local loop unbundling' (LLU) based on unbundled access to the last mile of the incumbents' networks, and bit stream access to such networks.

Need for Commission action

The deployment of fibre-based NGAs in the EU is still at a relatively early stage. However, an increasing number of national regulators have begun to consider questions of regulated access to NGAs as part of their regular market reviews. The Commission is being notified of a growing number of regulatory measures as part of the Article 7 consultation procedure (see MEMO/09/539). Based on the scrutiny of these measures, the Commission judged that unless it provided guidance to telecoms regulators, there was a clear danger of divergences between Member States' telecoms markets. Such a situation could lead to market distortions as a result of inconsistent regulation and lead to uncertainty for companies investing in next generation access networks.

The Commission's Recommendation will bring greater consistency and clarity to telecoms regulators' decisions, so as to encourage timely and efficient investment in NGAs throughout the EU Single Market while fostering competition in the market for broadband services.

Balancing needs of established and new market players

The NGA Recommendation gives national regulators the tools to support new entrants to the NGA market, and to support infrastructure-based investment from established market players. For example, when setting cost-oriented access prices for companies with dominant positions in national broadband markets, regulators will also have to take properly into account any investment risk occurred, by means of a risk premium. At the same time, the Recommendation aims to facilitate market entry and competition by alternative operators, allowing them to climb the 'ladder of investment' and gradually to deploy their own network infrastructure.

Specifically, the NGA Recommendation reinforces a number of principles to be followed by the EU's regulators:

• First, while there will be no 'regulatory holidays' for dominant firms, price regulation for access to fibre networks will fully reflect investment risk, and will enable investing companies to make attractive profits. Given the potential size of investments under consideration and the currently low returns in many financial asset classes, this is a propitious framework for companies willing to invest

• Second, national regulators must have at their disposal a full range of access remedies from which, in the light of national market circumstances, they select the appropriate combination to drive market entry and infrastructure-based competition

• Third, ex ante regulation in a fibre setting should reflect differences in the conditions of competition between individual markets and areas (rural and urban) within a given market, resulting in light-touch regulation where competitive forces are strong (cable operators and future mobile internet)

• Finally, the Recommendation strongly supports arrangements for co-investment in NGA networks and allows setting lower access prices to the unbundled fibre loop in return for up-front commitments on long-term or volume contracts.
  
  
  

National Regulators must take "utmost account"

From a legal perspective, Article 19 of the Framework Directive (Directive 2002/21/EC) requires Member States to ensure that their telecoms regulators take the utmost account of the Commission's Recommendation as they carry out their tasks. These rules also state that when a regulator chooses not to follow a Commission Recommendation, it should provide the Commission with written explanations. To date, the level of compliance by telecoms regulators with past Commission Recommendations in the telecoms sector has been high. The NGA Recommendation will take effect as soon as it has been published in the EU's Official Journal. From that point, national telecoms regulators will be expected to apply the new guidance in their daily decision-making, cooperating through the Body of European Regulators for Electronic Communications (BEREC).

Frequently asked questions

What is the legal basis of the NGA Recommendation?

The Commission's Recommendation on regulated access to Next Generation Access networks is based on Article 19 of Directive 2002/21/EC (the telecoms Framework Directive).

Aren't companies that invest huge sums in NGA entitled to protection for an initial period?

There are no regulatory holidays for NGA networks. In fact, experience shows that ex ante regulation can resolve structural problems and open up markets to competition by laying down the conditions for market entry, giving potential new entrants regulatory clarity and thus encouraging investment. Regulated undertakings will benefit in particular from NRAs having to take investment risk fully into account.

The telecoms sector is a great example of regulation and competition working hand in hand, and regulation could be progressively phased out as competition in the market develops.

Why are the same principles being applied to new fibre networks as were previously applied to copper-based infrastructure?

The Commission's approach follows EU competition law principles, which are based on an economic analysis of services and markets, rather than the specific infrastructure which delivers them. It is essential to establish a fair market for all participants, no matter what the underlying infrastructure or technology. But the Recommendation does not merely extend the rules developed for copper to new fibre networks - it contains numerous innovative provisions which adapt existing rules to the new fibre context (see above).

What does "significant market power" (SMP) mean, in the context of EU telecoms regulation?

Generally ex ante economic regulatory measures can be imposed only if competition is not functioning in the market analysed. This is the case when a regulator finds that an operator has SMP and thus decides to impose appropriate remedies. The notion of SMP is equivalent to the competition law concept of dominance, as defined in the case law of the EU's Court of Justice and General Court.

Under the procedures set out in Article 7 of the telecoms Framework Directive (2002/21/EC), the national regulatory authorities are required, in consultation with industry, to analyse their national markets for electronic communications and propose appropriate regulatory measures to address market failures. They should then notify their findings and proposed measures to the Commission and other national authorities.

More precisely, the regulator must define the boundaries of the relevant market, assess whether any one or more players has SMP in this market and where operators are found to be dominant, propose appropriate regulatory remedies to ensure effective competition.

Won't the return on a company's investments in next generation access networks be effectively capped once a Regulator determines that a company has significant market power?

When finding that a firm is dominant on a given market the national regulator has to impose regulatory obligations in line with Article 8 of the Directive on access to electronic communications (2002/19/EC). This imposition will not be arbitrary, but proportionate to the nature of the problem and the respective market structures. National regulators are recommended to impose an appropriate (rather than exhaustive) set of remedies in response to market dominance.

For instance, in some circumstances, a regulator may decide not to impose unbundled access to the fibre loop, for example in areas where existing infrastructure, such as fibre-to-the home networks and/or cable, and attractive consumer prices are likely to result in effective competition. In addition, if access obligations are imposed, circumstances may allow national regulators to grant price flexibility (i.e. freedom from more stringent pricing obligations such as ex ante cost-orientation) to a dominant firm. The Recommendation also states that retail-minus access pricing may be used for bit stream access products.

Today's average retail revenue per user (ARPU) for current-generation broadband in the EU is about €37 per month, a figure which is projected to increase by 10-15% for future very high-speed broadband products. The Recommendation's approach is sufficiently flexible and nuanced to not act as an implicit cap on investors' returns.

Why does the Regulation not specify an EU-wide level of the risk premium to be applied by national regulators?

Regulated access prices need to reflect the specific economic situation of the NGA network in question, including the estimated investment risk. Such conditions can vary considerably depending on the market conditions and the kind of investment, and it would therefore be disproportionate and unjustified to impose a single EU risk premium or access price. Setting regulated prices (even more so than designing remedies) is regarded as best left to national regulators, on the basis of a thorough economic analysis of each individual case, in line with the principles outlined in the Commission's Recommendation.

What did the Commission do to prepare this Recommendation?

The Commission has worked closely with the EU's 27 telecoms national regulators and the Body of European Regulators for Electronic Communications (BEREC) in developing its approach. The Recommendation also went through two public consultations in 2008 and 2009, totalling some 170 submissions.

Submissions to the two public consultations can be found at

http://ec.europa.eu/information_society/policy/ecomm/library/public_consult/index_en.htm

EU Member States also strongly support the text, and voted in favour in the Communications Committee in June 2010.

For more information:

http://ec.europa.eu/information_society/newsroom/cf/itemdetail.cfm?item_id=6070

See also MEMO/10/426.