November 1997
Chapter 1 The amended leased lines directive and significant market power framework
Chapter 2 Identification of SMP in the UK
Annex A Article 2.3 of the Leased Lines Directive (as amended)
Annex B Measurement of market share for particular organisations
The consultation period will run until 19 December 1997. Written comments should be submitted to:
Vince Affleck
Consultation on Significant Market Power and the Leased Lines Directive
Oftel
50 Ludgate Hill
London
EC4M 7JJ
Written comments will be made publicly available in Oftel’s Library except where respondents indicate that their response or parts of it are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly marked as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.
Comments on this document can also be sent to Oftel on the Internet (if they are relatively short) by filling in the form on the Web pages or by using the following e-mail address: press.office.oftel@gtnet.gov.uk
Oftel intends to set up a link between this document on Oftel’s pages and any responses placed on respondents’ own Internet pages. Please contact Cate MacLaurin at Oftel on 0171 634 8752 to organise this. Confidential responses should not be sent via the Internet.
Copies of the DTI consultation document on implementation of the Leased Lines Directive are available from:
Jane Duck
Communications and Information Industries Directorate
Department of Trade and Industry
Room 203
151 Buckingham Palace Road
London
SW1W 9SS
1 For the purposes of identifying which UK organisations have Significant Market Power (SMP) under the ONP Leased Lines Directive (92/44/EC) as amended by the Adaptation to a Competitive Environment Directive (97/51/EC) ( together Amended Leased Lines Directive ALLD) the UK National Regulatory Authority (NRA) is Oftel. This document sets out Oftel’s proposals for identifying operators who have SMP in leased lines in the UK (NB leased lines are more commonly called private circuits in the UK). As foreshadowed in the current DTI consultation on implementation of the ALLD, Oftel proposes to determine that two operators – BT in respect of the area of the UK except Hull and Kingston (and Kingston-Upon-Hull City Council as dual licensee) – have SMP. The document also sets out the methodology which Oftel intends to adopt for SMP determinations.
2 On completion of the consultation process, Oftel will issue a formal determination, which will be transmitted by DTI to the European Commission in accordance with Article 11.1(a) of the ALLD. In parallel with this document, DTI is consulting on its proposed Statutory Instrument for implementation of the ALLD. These documents are complementary and should be read together. The DTI document is available from the DTI address as above.
3 Oftel is consulting separately on which operators are considered to have SMP for the purposes of the Interconnection Directive.
Overview
1.1 The Leased Lines Directive sets out a regulatory framework for ensuring that users have access to a minimum set of leased lines from at least one organisation in every Member State and that until an effective competition is achieved, prices for leased lines are cost orientated, non-discriminatory and transparent.
1.2 The Directive has recently been amended by a new Directive (97/51/EC) which adapts the original Leased Lines Directive (as well as the ONP Framework Directive) to the liberalised markets that will exist after 1 January 1998 when ‘special and exclusive rights’ in telecommunications across the European Union have to be withdrawn.
1.3 The principle change introduced by the Amending Directive is that whereas previously the Leased Lines Directive applied to organisations with special and exclusive rights, it will now only apply to organisations in the UK identified as having Significant Market Power (SMP) or if there are no such organisations in the relevant private circuit market, to at least one organisation in that market who has been nominated by Oftel, in order to ensure that the provisions of the Directive apply throughout the UK.
1.4 Organisations who have been determined by Oftel to have SMP are required to provide a ‘minimum set’ of leased lines and are subject to certain obligations designed to ensure transparency, non-discrimination and cost orientation. SMP is described in terms of the position and status within a Member State’s telecommunications industry and particularly its role in end-to-end communications for consumers.
Obligations imposed by the ALLD on organisations who have Significant Market Power
1.5 Organisations who have SMP will be subject to the obligations set out in Articles 37 and 10 of the ALLD. These obligations will be imposed on organisations with SMP by inclusion of the Leased Lines Directive Conditions in their licences as set out in Schedule 1 to the proposed Telecommunications (Open Network Provision and Leased Lines) Regulations 1997, set out in the DTI Consultative Document. The main obligations are:
The Significant Market Power Test
1.6 The SMP test is set out in Article 2.3 of the ALLD, see Annex A. It lists various factors which the NRA must take into account when considering whether an organisation has SMP although no single factor has decisive weight. In considering SMP the objective of the Directive that all users in the Community must be able to have access to a minimum set of private circuits throughout every Member State has to be taken into account. A presumption of SMP will arise when an organisation has 25% or more market share of the relevant leased lines market in the UK. Nevertheless, the NRA is given a discretion to determine that an organisation with a market share of less than 25% has SMP, or conversely that an organisation with a market share of more than 25% does not have SMP. The additional factors listed in the Directive are:
Organisation
1.7 Consistent with the UK government’s implementation of other EU Directives to date, Oftel proposes to take the ‘organisation’ referred to in the ALLD to be an individual licensee.
1.8 The UK private circuit market has been liberalised for some considerable time and there are now a number of operators offering leased lines services in competition to the former monopolists, BT and Kingston. One feature of the UK market is the tendency of the smaller operators to extend the area of their operations, either by network roll-out under licences covering wider areas (often including a national licence), or by mergers with other licensees. An organisation may in fact hold several licences, some of which overlap – with the result that a single organisation may in fact exist as several different licensees.
1.9 However, where an organisation has more than one licence, Oftel would consider which licences were relevant in defining the activities of the organisation in a particular geographical area. Oftel would look closely at all the factors set out in Article 2(3) and where several factors were compelling, Oftel would consider exercising its discretion under the Directive to determine an organisation as having SMP even though their market share of leased lines in respect of the relevant licence was less than 25%.
The relevant product market under the ALLD
1.10 Leased lines, as defined in the ALLD, means the telecommunications facilities which provide for transparent transmission capacity between network termination points, and which do not include on-demand switching (switching functions which the user can control as part of the leased line provision). They may also include systems which allow flexible use of the leased line bandwidth, including certain routing and management capabilities.
1.11 The Directive provides that the relevant leased lines market must be assessed on the basis of the type(s) of leased lines offered in a particular geographic area. The minimum set consists of:
1.12 Oftel has considered whether these consist of different markets. Whilst there is a
case for considering analogue and digital leased lines separately, Oftel has concluded that they are not sufficiently different markets for the purposes of assessing market power within the context of the Leased Lines Directive. Oftel will keep this decision under review and this decision will not not bind Oftel when investigating competition complaints involving leased lines.
The ‘relevant geographic market’
1.13 The ALLD allows for the geographical area to cover the whole or part of the territory
of a Member State within which an organisation is authorised to operate. This approach is
not the same as that generally adopted for the purpose of economic analysis of market power, particularly in the context of EC competition rules, in which the relevant geographic market is defined by demand and supply conditions.
Measuring market share
2.1 A market share of 25% or more gives rise to a rebuttable presumption that an operator has SMP. It is therefore crucial to adopt consistent and reliable indicators of market share
as the starting point for identifying organisations who have SMP. The method of calculating market share will depend on the availability of reliable data. A great deal of information is collected from operators at a national level. However because of the difficulty of collecting consistent information from all operators without imposing undue burdens on the operators, only limited information is available for areas defined by regional licences.
2.2 Oftel considers that revenues are the most appropriate measure for calculating market shares for leased lines. On a national basis, revenue data is available and will be used to calculate the market shares of those operators who are nationally licensed for the purposes of determining whether an operator has SMP. For operators who are licensed regionally, Oftel will use available information, such as numbers of connections to estimate market share. Given that these estimates on a regional basis will be less robust than market shares calculated on a national basis, Oftel will pay more attention to the other factors set out in paragraph 1.5 which must be taken into account when determining SMP.
2.3 The most appropriate measure for calculating market shares for the purposes of the ALLD is share of retail revenues for rental and set-up/connection charges of all private circuits. The interpretation of the market share for particular organisations is set out in Annex B. Market share is measured across all leased circuits together, both analogue and digital, and for both domestic leased circuits and the UK half of International Private Leased Circuits. Revenues will be calculated over a 12 month period between April and March. (For the purposes of the imminent determinations the period taken is April 1996 to March 1997). The market information collected by Oftel does not follow the minimum set exactly and for international private leased circuits does not differentiate between intra-EU IPLCs and those terminating outside the EU. Nevertheless, the market share information available for the year to March 1997 (showing analogue and digital circuits separately) is as follows (NB figures may not sum due to roundings):
| 1996/97 Retail Revenues for Leased Lines |
| Analogue (£million) |
Share | Digital (£million) |
Share | Total Revenues (£million) | Total Share of relevant market | |
| Total UK | 359 | 100% | 1110 | 100% | 1468 | 100% |
| BT | 355 | 99% | 813 | 73% | 1169 | 80% |
| CWC | 0 | 0% | 257 | 23% | 257 | 18% |
| All other operators | 0 | 0% | 38 | 3% | 38 | 3% |
| Kingston | 2 | 100% | <1 | 100% | 3 | 100% |
| Source: Oftel Market Information |
2.4 It can be seen that BT has a market share considerably greater than 25% in both analogue and digital circuits and that Kingston has 100% in the Hull area. CWC has 23% of the digital private circuit market. However, this share is boosted by high revenues from large capacity circuits (the minimum set in the Directive covers up to 2048 Kbits) and by a large proportion of international circuits which terminate outside the EU (which are also outside the scope of the Directive). Taking into account these points and that Mercury’s market share is likely to fall further with greater competition from new operators, Mercury’s actual market share in relation to those digital leased lines covered by the Directive is therefore likely to be comfortably below 25%.
Control of the means of access to customers
2.5 Counting the capacity of local ends will also give an indication of the relative market position of the operators. When calculating capacities, each inland analogue circuit is counted as two ends, each international analogue circuit is counted as one end, inland digital circuits are counted as twice the number of 64kbits equivalent circuits (so for example a 256 kbit circuit would be counted as 4 [x 64kbits] x 2 = 8 local ends) and international digital circuits are counted as the number of 64kbits equivalent circuits. This gives the following shares as at 31 March 1997:
| Leased Lines Sector : Capacity of Local ends as at 31/3/97 | ||
| Number/64kbits equivalents (000s) | Share | |
| Total UK | 3,183 | 100% |
| BT | 2,532 | 80% |
| CWC | 524 | 16% |
| All other operators (together) | 117 | 4% |
| Kingston (Hull area) | 3 | 100% |
| Source: Oftel Market Information | ||
Other factors
2.6 While the market share tests give clear results in most cases, the ALLD does not require the NRA to base SMP determinations solely on market share – indeed in some circumstances the further factors specified in the Directive may outweigh it. These factors and their application are discussed below.
Ability to influence the leased lines market conditions
2.7 Oftel considers that the ability to influence the leased lines market conditions is “the ability of an organisation to raise and sustain prices above the competitive level”. Oftel believes that BT has such power in the leased lines markets in the UK (outside Hull) and that Kingston has such power in the Hull area. Oftel does not believe that CWC has market power in any of its inland markets, thus for the purposes of the ALLD the extent of its market power (which is now only in some international markets) is insufficient to outweigh the overall market share test. Nor does any other cable operator or any other UK licensed operator have the ability to influence market conditions to the extent necessary to distort competition.
Experience in the market
2.8 Both BT and Kingston (or their predecessors) have been supplying telephony services since the early part of this century. Kingston in particular has been and continues to be the dominant operator in Hull since no other fixed operator has direct access to customers in the Hull area. Thus both these operators have considerable experience of providing services (and entered the market well before their UK competitors).
Turnover/access to resources
2.9 Kingston and BT are, or are part of, groups which offer a range of services other than leased lines. All these groups have had access to capital sufficient to enable them to invest significantly in the UK and in businesses offering services outside the UK. The BT group has a large turnover relative of £14.9 billion in comparison to the whole UK market. The turnover of the Kingston group, at £108 million, is small in comparison to the UK market as a whole but large in comparison to the Hull market.
2.10 Many other operators in the UK are members of groups with substantial turnover either in businesses in the UK unrelated to telecommunications or businesses overseas. This could materially affect the balance in identifying SMP should any of these operators be close to meeting the 25% market share threshold, or if other market factors also indicated that conclusion. Oftel considers that in the present circumstances of the UK market, this factor does not have decisive weight in any individual case.
Conclusion
2.11 On the basis of the approach set out above, (and bearing in mind the necessity to ensure that the provisions of the Directive apply throughout the UK), Oftel proposes to nominate BT in respect of the leased lines market throughout the UK (except Hull) and Kingston in respect of the leased lines market in the Hull area as having Significant Market Power.
Decisions about SMP under other Directives
3.1 This document sets out Oftel’s proposed approach to identifying SMP for the purposes of the ALLD only. Determinations made under the ALLD will not be decisive for determinations under other Directives with an SMP regime, although Oftel would expect to apply a consistent methodology. Decisions about SMP under other Directives will have to be made on a case by case basis, considering the tests set out in the Directives in question and based on such information as is best suited to the purpose.
Future Developments
3.2 The Commission will review the ALLD before 31 December 1999. Oftel does not at present expect that it will be necessary to review its SMP determinations before 1999, unless there are significant changes to market conditions in the UK.
Relationship between SMP nominations and other Market Power Controls
3.3 It will be clear from this consultation that SMP is different from the usual approaches to competition analysis in competition cases. A determination that an operator has SMP is a reflection of the nature and status of that operator within the geographical limits of its licence. It is not a comment on its position or behaviour in a particular telecommunications service or product market. Conversely both EU and UK competition rules are generally applied by reference to an undertaking’s position in specific service or product markets. Accordingly, a determination that an organisation has (or does not have) SMP has no bearing on its position in an individual market under EU or UK competition rules. Likewise, use of UK or EU competition rules in terms of behaviour in a particular product market – such as exercise of the Fair Trading Condition in the UK or an action under Article 85 or 86 of the EC Treaty – does not imply that an operator has SMP in the wider sectors of activity set out in the Directive.
3.4 Oftel will shortly be issuing a further statement on market definition and competition analysis as part of its review of effective competition. This document will also discuss the relationship between these different tests as well as the interaction of other tests based on market power (eg Well Established Operator status).
A1 “For the purposes of this Directive, an organisation shall be presumed to have significant market power when its share of the relevant leased-lines market in a Member State is 25% or more. The relevant leased-lines market shall be assessed on the basis of the type(s) of leased line offered in a particular geographical area. The geographical area may cover the whole or part of the territory of a Member State.
A2 National regulatory authorities may determine that an organisation with a market share that is less than 25% of the relevant leased-lines market has significant market power. They may also determine that an organisation with a market share that is 25% or more of the relevant leased-lines market does not have significant market power.
A3 In either case, the determination shall take into account the organisation’s ability to influence the leased lines market conditions, its turnover relative to the size of the market, its access to financial resources and its experience in providing products and services in the market”.
BT
B1 BT is currently licensed to operate everywhere in the UK except the Hull area. Thus for the purposes of calculating BT’s market share in terms of revenues, the total from which BT’s share will be calculated is all UK operators’ revenues less revenues from the Hull area.
Kingston
B2 Kingston has historically been the monopoly supplier of telecommunications in the Hull area. Kingston‘s licence only allows them to operate in the Hull area, where it faces no local access competition and thus controls access to 100% of customers. Because of this, its market share can be measured in retail revenues from the Hull area.
Regional operators
B3 In the case of CWC, where the telecoms operations of the merged Mercury, NYNEX, Videotron and Bell Cablemedia are all being run under a single national licence (the Mercury licence), the relevant market will be the national market.