Chapter 3: Responses to consultation
Chapter 4: Oftel position on main points which arose in consultation
Annex A Definition of SMP in ALLD
2 In the light of the consultation, the Director General determined on 23 December 1997 that two operators have SMP in the provision of leased lines in respect of the areas in which they are licensed to operate: British Telecommunications plc (BT) and Kingston Communications (Hull) Ltd with Hull City Council (Kingston) as joint licensee. The Director General can review his determinations of SMP status at any time. He currently does not expect to do this before 1999 but will do so sooner should there be significant changes in the UK leased lines market.
3 The purpose of this statement is to respond to the points raised in consultation and to clarify the role of the SMP classification under the ALLD in the UK regulatory context. Oftel recognises that the issues addressed here are important to the industry and welcomes comments on any aspects of the Statement. It would be helpful if comments could be sent before the end of April 1998. They should be sent to:
Vince Affleck
Oftel
50 Ludgate Hill
London EC4M 7JJ
4 Comments on this document can be sent to Oftel by e-mail. Oftel will set up a link between this document on Oftel’s pages and any comments placed on respondents’ own web pages. Respondents are requested to mark their consent to such a link being set up. Please contact Cate McLaurin at Oftel on 0171 634 8752 to arrange this. Confidential responses should not be sent via the Internet.
6 The Leased Lines Directive (as amended) (ALLD) creates a framework for ensuring that users have access to a minimum set of leased lines from at least one organisation throughout a Member State. Organisations who are determined by Oftel to have SMP and directed by the Director General to comply with the Leased Lines Directive Conditions 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.
7 An SMP designation reflects the position of an operator in the leased lines market in the geographical area specified. It is not a commentary on whether or not that operator has acted anti-competitively or whether it is anticipated that it will do so. The designation is intended to ensure that established operators do not unfairly prevent or hinder competitors from becoming established in the market.
8 Rules to control anti-competitive behaviour exist independently of the rules applied to those having SMP. Thus an operator without SMP status might still be found to have market power in a specific product market and might try to use this power in an anti-competitive way. Oftel will continue to have the ability to act against licensees’ anti-competitive behaviour in particular markets including, but not limited to, abuse of a dominant position in a particular relevant market, regardless of whether or not that operator is deemed to have SMP under the ALLD. Likewise, the fact that an operator has SMP does not necessarily mean that they have market power in every product market within the sector.
9 Further, a determination that an operator has SMP for the purposes of the ALLD is without prejudice to any decision about SMP under another Directive and it is possible that different operators might be determined to have SMP under the other EU Directives with an SMP regime. An SMP designation depends on the exact definition of the SMP test in individual directives. Also, the exercise of NRA discretion may give different weights to the factors in the test according to the objectives of the Directive.
10 The definition of SMP in the ALLD is set out in Annex A. The trigger for consideration of SMP is set initially in terms of market share. A share of 25% of the market gives rise to a presumption of SMP. This can be supported or rebutted by taking into account the following factors:
11 The ALLD allows for the geographical market to cover the whole or part of the territory of a Member State within which a licensee is authorised to operate.
The SMP determinations
12 The Leased Lines Directive (as amended) and the rules applying to those who have SMP are a part of EC law. It is the Member State's responsibility to implement EC law correctly. The European Telecommunications Directives create a framework of rules, but leave Member States with discretion as to how they should be implemented in their national laws.
13 It is important to understand the intended relationship between SMP and other tests of market power, such as dominance (particularly given that much of the UK regulatory regime for telecoms is designed around tests aimed at the identification or prevention of abuse of market power). It is clear from the definition set out in the Directive that dominance and SMP are not the same but complementary.
14 In considering its SMP determinations, Oftel took account of the views of the Commission’s ONP Committee and Oftel’s proposals are consistent with them.
15 BT contends that Oftel has not made a sufficiently rigorous assessment of the leased lines market and that many of the statements in the Consultative Document are unsupported assertions. It queries why Oftel has aggregated analogue, digital and national and international circuits together for the purposes of calculating market share whilst Oftel has the disaggregated information, why Oftel only takes account of the minimum set for the purposes of market share and why CWC was not considered to have SMP when CWC was shown to have 23% of the digital private circuit market. BT also argued that the process for identifying SMP should depend on a full market analysis. BT did not agree that there were no other ‘well established’ operators, that newer market entrants had access to only limited financial resources, or that companies such as CWC could be considered ‘inexperienced.’
Cable & Wireless Communications (CWC)
16 CWC supported Oftel’s proposed nominations and considered that any wider application of the SMP categorisation would impose a disproportionate burden on organisations which would undermine the incentives that currently exist for the development of competition.
17 CWC argued that the relevant geographic market should depend on the geographic coverage of the combined licences of an organisation, looked at as a single legal entity. Treating each individual licensee as an ‘organisation’ for the purposes of identifying SMP could, they said, give rise to confusion, particularly where operators hold multiple, overlapping licences.
18 CWC also commented that SMP as a tool may be suitable for regulating former incumbents in newly liberalised environments, but is likely to be less appropriate for the regulation of operators with market power in dynamic competitive markets. They pointed out the importance of the availability of alternative, more flexible, competition-based controls for regulating individual markets. CWC supported Oftel’s proposal to consider the minimum set as the basis for establishing SMP but suggested that were Oftel to change its view to include leased circuits outside the minimum set, then less weighting should be given to them than the minimum set in determining an operator’s share of the market. CWC agreed with Oftel’s proposed geographic market but queried the attention given to its share of the digital market. It considered that in any review, CWC’s market share should be based on market data more finely tuned to the requirements of the ALLD.
Kingston
19 Kingston supported Oftel’s interpretation of the objectives of the Directive but questioned the appropriateness or desirability of designating Kingston as an SMP operator. In particular, Kingston endorsed the distinction between the considerations of an SMP determination and the economic analysis undertaken in a competition or fair trading investigation. However, they noted that a large percentage of the lines they provided were local ends of long national connections predominantly supplied by other operators and considered that these lines may therefore be better considered as part of the national market. They accepted though that they may have transitory dominance in the leased lines market in Hull.
20 In addition, Kingston disagreed with some of Oftel’s conclusions on the extent to which they satisfied some of the other criteria in the SMP test, particular in relation to market power. Whilst recognising the effectiveness of the SMP framework in Member States where competition needs to develop quickly, they questioned its efficacy or suitability in the already competitive UK markets. Kingston believed that they were not treated in the same way as other regional operators with whom they should be compared, but rather that Kingston’s position in the Hull area market was being treated as equivalent to BT’s position in the UK as a whole. Kingston wanted the SMP analysis to reflect national, as opposed to local market conditions. On this basis, they believed they could not be said to have SMP.
Reuters and Bass
21 Reuters and Bass agreed with the proposed determinations of BT but argued that BT’s leased line prices should be regulated more strongly. Reuters believed that while BT’s tariffs for short circuits in the City of London where it faced competition compared well internationally, it compared poorly for longer circuits where it faces little challenge. Reuters believed that BT’s prices should be based on long run incremental cost or failing that BT should be required to provide interconnect terms for leased lines. Bass were concerned at the relatively high price and the lack of competition in analogue voice circuits. It considered Oftel must ensure that BT and Kingston passed on savings within network structure on a year by year basis and that BT should be able to discriminate in favour of high spending customers.
Communication Workers Union
22 The Communication Workers Union’s response sought the collection and publication of regional information on a systematic basis so that interested parties could judge for themselves the extent of developing regional competition.
23 Oftel sought to explain the relationship between SMP and dominance in the consultative document. Dominance is a familiar economic concept and the procedure for identifying it in telecoms markets has been widely discussed with the industry. Dominance has been defined by the European Court as an operator’s ability to act independently of competitors and customers. It depends on the position of an operator in an economic product market. Many respondents sought to place SMP in the same framework. However, this is not the approach of the ALLD. SMP under the ALLD is not related to a specific product market as defined under EC competition law, but is considered within the broad sector of leased lines provision. It is true that both are tests which analyse an operator’s position in markets in which it operates and which is intended to deal with the ability of firms with market power to distort the fairness of market conditions. But even at such a general level, the two concepts are not the same – dominance for EU purposes is generally considered when an operator has a market share above 40%, yet the presumption of the existence of SMP arises where a market share is around 25%.
Using the SMP framework and controlling anti-competitive behaviour
24 The SMP test is not a basis for regulating anti-competitive behaviour. It is a framework for the application of specific rules with which an operator determined to have SMP must comply. Oftel will only use the SMP test to identify operators on whom the SMP obligations in the ALLD should be imposed. Fair trading rules exist for the control of anti-competitive behaviour. The two systems – a regulatory framework for leased lines provision combined with controls on anti-competitive behaviour – are complementary and serve different functions. The determinations do not affect Oftel’s general approach to regulating anti-competitive behaviour under licence conditions.
25 SMP, in the context of the ALLD, reflects the need for users to have access to a minimum set of leased lines at any point in the UK. On the other hand, sanctions for anti-competitive behaviour can be applied to other operators not designated as having SMP, in specific economically defined markets, where that operator has market power or is dominant. The relevant economic market in such cases can be a specific leased lines product and may be relatively small.
Defining an organisation
26 The statutory instrument implementing the ALLD proceeds on the basis that the term ‘organisation having SMP’ means an individual licensee (as opposed to a wider definition of ‘organisation’ to include all subsidiaries and other group companies, equivalent to an ‘undertaking’ in competition law). This approach is in line with the way the UK has implemented EC telecoms legislation to date.
Relationship between market share and market power
27 Several respondents questioned the use of the 25% market share test as the trigger for considering the existence of SMP, in favour of a more sophisticated economic analysis based on the existence of dominance in a relevant market. Given that SMP is not the same as dominance, Oftel used a 25% market share trigger because that is what is the Directive requires. Having a market share above that level does not of itself mean that an operator has SMP, but raises a presumption that it has to be considered in the light of other factors, particularly those set out in the test.
The relevant market for calculation of market share
28 The market share information available to Oftel at the time of the Consultative Document related to the retail revenue from all leased lines provided in the UK. However, the recitals of the ALLD clearly state that the Directive does not apply to leased lines where one end of the leased line is located outside the Community. Before making the determination, Oftel obtained and considered further information from operators which shows that for leased lines for the whole of the UK covered by the Directive the Market share is as follows:
Revenues Market share
£million %
BT 1095 84.9
Kingston 3 0.2
CWC 164 12.7
Others 27 2.1
Total 1289 100
29 In addition, Oftel has now established that CWC’s share of the digital market in respect of the leased lines covered by the Directive is 17.5%, ie significantly lower than the 25% criteria.
30 The evidence strongly suggests that neither CWC nor any regional operator approach a 25% share of leased lines circuits covered by the Directive in any particular geographic area. Similarly, if Oftel took account of the market share for all leased lines types (ie used the data set out above) or sub-divided the minimum set, the market share analysis would still result in BT and Kingston being the only operators having a greater than 25% market share in leased lines in their respective licensed areas.
Level of Prices for Leased Lines
31 The ALLD requires the prices for leased circuits provided by organisations nominated as having SMP to be cost orientated. Oftel notes the representations made by Bass and Reuters concerning the current level of prices charged by BT and Kingston. Oftel is currently reviewing the competitive situation in the supply of leased lines.
A1 For the purposes of this Directive, an organization 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 lines 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 organization with a market share of less than 25% in the relevant market has significant market power. They may also determine that an organization 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 organization’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.