Contents

Summary

Chapter 1 Background and introduction

Chapter 2 Wholesale regulation under the AID

Chapter 3 Other obligations that may be imposed on SMP operators under the AID and conditions for the supply of mandated ‘access’

Chapter 4 Consultation

Annex 1 Definitions and examples of ‘access’

Annex 2 Standard ‘access’ reference offer

Annex 3 Further guidance on information and transparency

Annex 4 Further Guidance on non-discrimination

Annex 5 Maintaining incentives to innovate

Annex 6 Pricing principles

Summary

S.1 Agreement has now been reached between the Council of Ministers and the European Parliament on a new package of Directives that will establish a framework for the regulation of electronic communications networks, services and associated facilities throughout the EU.

S.2 These draft guidelines set out how Oftel proposes to apply certain provisions of the Access and Interconnection Directive (AID) which relate to imposition of ‘access’ obligations on operators found to have Significant Market Power (SMP). ‘Access’ includes interconnection, provision of part-circuits suitable for connection between different network elements, provision of wholesale services suitable for use by service providers without their own infrastructure and also access to such facilities (for example, co-location) as may be necessary for the provision of a service. In particular, the draft Guidelines aim to:

• describe the circumstances in which Oftel would consider the imposition of such wholesale ‘access’ obligations to be appropriate;
• give guidance on the nature of the wholesale products Oftel would expect to be supplied as a result of an obligation to provide ‘access’; and
• describe the conditions under which products should be made available.

S.3 These guidelines will only apply after the final version is published (after consultation) and will only apply to the regime under the new Directives.

S.4 In line with the new EU Directives, the rules in the draft guidelines are intended to be generic and technologically neutral. This means that they should cover all forms of regulatory access obligations (including interconnection) and be applicable to all operators of communications networks and service providers, whether the service provided is fixed or mobile and irrespective of the type of content and services that may be delivered.

S.4 In giving this guidance the objective is that:

• competing operators and service providers should have a fair expectation of the kind of regulatory obligations that Oftel is likely to consider appropriate. This should assist them in conducting negotiations with SMP operators for the supply of wholesale products and referring disputes to Oftel where necessary; and

• SMP operators will have clear indications of what is expected of them in the provision of wholesale products. This should enable them to factor in regulatory considerations when taking business decisions – creating a culture of compliance and reducing the need for regulatory action.

S.5 Obligations covered by the final guidelines will only be imposed on market players designated with SMP following a market analysis in accordance with the new EU Directives. Oftel will have regard to practices elsewhere in Europe, bearing in mind the importance of harmonisation of regulatory approaches throughout the EU and may revise the final guidelines to take account of any agreed harmonised approach.

S.6 Oftel proposes to impose access obligations in the form of an obligation to meet reasonable requests for access. Oftel proposes that it will be obligatory to set out terms and conditions in a reference offer. The guidelines explain how Oftel would assess whether a request is reasonable, whether the terms (including non-price terms such as service level guarantees and provision times) are reasonable and what should be included in the reference offer.

S.7 Generally, it will be most effective for the market players to define the wholesale products that are to be provided under the broad ‘access’ obligation and to negotiate suitable terms. However, where such commercial processes cannot reasonably be expected to succeed in a timely manner, Oftel may specify products to be offered, and may specify timescales and terms of offer. However, such an approach by Oftel would not relieve the SMP player of the general obligation mentioned above.

S.8 The Director welcomes comments from industry on these draft guidelines by 5 July 2002.

Chapter 1

Background and introduction

Background

1.1 Agreement has now been reached between the Council of Ministers and the European Parliament on a new package of Directives that will establish a framework for the regulation of electronic communications networks, services and associated facilities throughout Europe. The Directives will enter into force when they are published in the Official Journal of the European Community (publication is expected in April 2002). Member States have 15 months in which to transpose the provisions into national legislation and to bring regulation into line with the new Directives. The Directives are designed to be implemented in all Member States on the same day (15 months plus one day after entry into force).

1.2 The new package of Directives consists of:

• the Framework Directive (FD);
• the Authorisation Directive (AD); and
• the Universal Service Directive (USD);
• the Access and Interconnection Directive (AID);
• the Data Protection Directive (DPD) .

1.3 The DPD is lagging behind the other four Directives and has not yet been adopted.

1.4 The FD sets the overall framework, including objectives and principles which Oftel must take into account when making regulatory decisions. In addition, the FD sets out the principle that, in most cases, market reviews must be carried out before regulation is imposed and that regulation is only to be imposed where the market is not effectively competitive. That is, where one or more operators has Significant Market Power. SMP has been newly defined so that it is equivalent to the competition law concept of dominance.

1.5 The AD requires the abolition of the existing licensing regime which will be replaced by the concept of ‘authorisation’. The providers of electronic communications networks and services will thus no longer be required to obtain explicit approval before they can offer networks and services although, where NRAs require it, operators may be required to submit a notification of their intention to offer networks and services. The AD sets out a maximum list of obligations that can apply to all providers of networks and services. These 'general conditions' will replace existing licence conditions.

1.6 The USD sets out a procedure for designating providers of universal service and a minimum set of services that these operators must provide. In addition to dealing with universal service, the USD details specific obligations that may be imposed on particular providers that are found to have SMP in retail markets, much as the AID does for wholesale markets. Also included in the USD are provisions covering consumers’ contracts with telecoms providers, number portability and procedures for providing consumers with an out of court dispute resolution process.

The Access and Interconnection Directive (AID)

1.7 The AID deals with wholesale relationships between providers of networks and services and associated facilities. The AID places general obligations on operators to negotiate interconnection. This Directive also sets out the responsibilities of NRAs and the limits of their discretion in imposing obligations related to access or interconnection. For the most part, such obligations can be imposed only on those found to have SMP in the relevant wholesale market.

1.8 Whilst the AID establishes a clear set of tests which must underpin any obligation to supply access or interconnection, it leaves NRAs to decide on the nature of the obligations which may be imposed.

1.9 If an operator is found to have SMP in a given wholesale market, the regulatory solution may be to require the provision of one or more wholesale products on regulated terms and conditions or attach conditions to the provision of a product which already exists. This type of regulation might be imposed in order to allow competitors to deliver products to their customers using their own infrastructure and facilities where possible, but making use of those of the SMP operator where this is not feasible.

1.10 Under the AID, this kind of obligation is referred to as ‘access’. The definition of ‘access’ in the AID encompasses interconnection. (References to ‘access’ in this document should be seen as including interconnection). Further details about the definitions used in the AID and examples of services that Oftel considers will be access under the AID can be found in Annex 1. Essentially, the term ‘access’ applies to any wholesale service that enables competitors to deliver their own services to customers. The wholesale product may be a network element, an end-to-end communications ‘service’ or an interconnection ‘service’. It may also consist of the right to use or have access to a facility associated with an electronic communications network or service (an ‘associated facility’, see Annex 1).

Scope of the guidelines

1.11 Any references in these draft guidelines to new Directives in the package relate to the final adopted text of the Directives dated 4 February 2002. These guidelines will only apply after the final version is published (after consultation) and will only apply to the regime under the new Directives, particularly the imposition of obligations on SMP operators (set out in Articles 9 to 13 of the AID) in accordance with Article 8 of the AID.

1.12 These guidelines do not concern imposition of ‘access’ under Articles 5 and 6 of the AID on undertakings without SMP. This means that they do not cover measures taken to ensure end-to-end connectivity of networks and interoperability. Neither are these guidelines applicable to obligations on all operators to provide access to conditional access systems or Electronic Programme Guides (EPGs). These guidelines also do not cover generic principles relating to the freedom to provide services or rights and obligations to interconnect (under Articles 3 and 4 of the AID).

1.13 It is intended that the final guidelines will apply across the electronic communications sector to the extent that regulation of the sector is within Oftel’s remit. They should thus be read as referring to access to all forms of electronic communications networks, services and associated facilities whether delivered by radio or wireless means, fixed or mobile and irrespective of the content conveyed over those networks.

Status of the guidelines

1.14 While these draft guidelines set out in general terms how Oftel currently considers that it is likely to address given situations relating to the imposition of obligations on SMP operators under the new regime, the Director General cannot fetter his discretion as to future regulatory action and therefore cannot be bound by the guidelines. Each case must be dealt with on its merits. However, the Director would expect to give reasons for any departure from the approach described in these guidelines.

1.15 It is envisaged under Article 7 of the FD that NRAs will work together to develop an agreed position on the application of the key provisions of the AID where discretion is allowed on the part of NRAs including those relating to obligations on SMP operators. Oftel will contribute to the development of any harmonised positions. In addition to these guidelines, Oftel will need to take into account such continuing developments in Europe. Oftel may also seek to amend the final guidelines to reflect any agreed harmonisation positions at a European level in the future.

1.16 The new EU Directives will inter alia revoke the current Interconnection Directive (EC Interconnection Directive, 97/33/EC) and require the abolition of the current licence regime. Once these guidelines are finalised, they will apply to the imposition of all access obligations imposed on SMP operators under the new EU Directives. Existing policy statements and guidelines that relate to obligations under the current regime (eg guidelines on interconnection and interoperability, July 1999 (in as far as they relate to the provision of interconnection) and guidelines on Special Network Access, July 2000) will cease to have effect when the new regime has been fully implemented.

Chapter 2

Wholesale regulation under the AID

2.1 Compared to some of its European neighbours, the UK is relatively well-placed in the development of competition amongst competing communications delivery routes. Cable networks cover around 50% of households (and about 18% of residential consumers and 9% of business consumers have connections via cable networks) and the mobile market will shortly be expanding to include a fifth operator of third generation networks. New technologies such as Broadband Fixed Wireless Access (BWFA) are emerging, which offer the prospect of further competing delivery routes in broadband markets.

2.2 However, competition issues remain in some areas of telecommunications influenced by the presence of former monopolies and by some characteristics of telecoms networks. An example is the local access network where BT has the only truly ubiquitous network. And, of course, interconnection rules remain necessary to ensure that new entrants can interconnect with the networks of established operators.

2.3 Under the new Directives, where an NRA finds, following a market review, that a market is not effectively competitive (ie one or more players in the market have SMP), they must apply appropriate regulation. In the case of wholesale markets, the relevant provisions are set out in Articles 8 to 13 of the AID.

Ex ante or ex post controls?

2.4 The FD recognises that ex ante controls should be used when they are the only effective means of ensuring that competition develops in the communications sector. Article 16 of the Framework Directive makes it clear that ex ante regulation should not be imposed (and should be withdrawn where it already exists) if a market is effectively competitive. However, it is also made clear that where a market is not effectively competitive, SMP players must be identified and appropriate obligations must be imposed.

2.5 In general, and in line with the approach of the Directives, where there is entrenched market power, it will usually be more appropriate to apply sectoral regulation to provide an ex ante framework in which competition can emerge rather than relying solely on retrospective (ie ex post) action. However, as competition develops, competition law remedies may provide an effective solution and deterrent to further anti-competitive practices and it may not therefore be necessary to impose the same ex ante obligations or indeed, any such obligations. In addition, even where ex ante obligations have been imposed, it may be more appropriate to use competition law to deal with any subsequent complaints.

Mandating an ‘access’ obligation under Article 12 of the AID

2.6 The imposition of an access obligation must be in accordance with Article 8 of the AID and therefore must be:

• based on the nature of the problem identified;
• proportionate; and
• justified in light of the objectives in Article 8 of the Framework Directive.

2.7 When considering whether these criteria are met and whether it is appropriate to impose an access obligation, Article 12(2) AID provides further guidance. It provides that an NRA must take account in particular of the following factors:

a) the technical and economic viability of using or installing competing facilities, in the light of the rate of market development

b) the feasibility of providing the access proposed, in relation to the capacity available

c) the initial investment by the facility owner, bearing in mind the risks involved in making the investment

d) the need to safeguard competition in the long term

e) any relevant intellectual property rights

f) the provision of pan-European services

2.8 Oftel will take into account the factors listed in paragraphs 2.6 – 2.7 (and any other relevant factors) through conducting an analysis in terms of an option appraisal exercise (Oftel will soon publish guidelines on the way it intends carry out option appraisals). In making this assessment, Oftel will focus on the impact of requiring the provision of wholesale products on competition, as the main driver of benefits to consumers over the long term. The aim in the context of ex ante communications regulation is not merely to preserve competition at existing levels (preventing detriment to competition), but take action which will contribute to eroding market power and increasing competition.

2.9 As a general rule, for regulation to be appropriate it should deliver appreciable benefits to end-users over the status quo through stimulating competition in a way that will deliver more choice for customers and/or provide greater opportunity for competitors to drive down prices. It should be designed to achieve these outcomes in a way which does not undermine prospects for development of sustainable competition in the long term.

2.10 There may be circumstances where the consequences of mandating access eg on innovation or investment could outweigh any apparent benefits in the development of competition, and in these cases Oftel might conclude that imposing an access obligation would be disproportionate altogether. However, the terms and conditions attached to an access obligation may also have a large impact on the proportionality of an access obligation. Chapter 3 describes in more detail how Oftel may vary the conditions attached to the access obligations to take account of the level of competition, and maintain incentives to invest and innovate.

The nature of the access obligation

2.11 Article 12(1) of the AID states that NRAs may impose obligations on operators to:

2.12 As previously discussed in Chapter 1, the definition of ‘access’ is very broad but the types of product under consideration in any particular case will be limited by the scope of the market definition in which an operator has been designated to have SMP. If, following an appraisal, Oftel decides that an access obligation on a particular SMP operator or operators would deliver benefits to end users, Oftel considers that it would be appropriate to impose an ‘access’ obligation formulated in terms of an operator being obliged to meet all reasonable requests for products within the relevant wholesale market in which it has been found to have SMP.

2.13 Oftel may also specify that a particular product, or minimum set of products, should be supplied within a particular wholesale market. This could be in addition to the more general obligation for an SMP operator to meet all reasonable requests for other products within the relevant market. Should an individual undertaking require a different product specification within the wholesale market it should submit a request to the SMP operator, and both parties should negotiate in good faith to reach a conclusion on the products to be supplied. In particular, an SMP operator should ensure that it supplies products which are sufficiently unbundled to enable purchasing undertakings to make maximum use of their own or competitively supplied networks and facilities.

2.14 Whilst Oftel may, as described above, specify classes of product which it considers should be supplied and set terms and conditions associated with these products, Oftel believes that the precise details of the products should, first and foremost, be refined through commercial negotiation. Industry players are generally in a much better position than NRAs to define products. Terms and conditions set as the result of commercial negotiation are always preferable to regulatory intervention. On completion of a market review therefore, the Director currently intends that he will normally require the SMP operator and, if appropriate, the requesting operator to negotiate and agree within a given timescale any remaining details about the product specification and terms and conditions. Oftel may facilitate these negotiations (eg through establishing an industry working group which it attends or chairs) if it appears that there are areas of disagreement where consensus is unlikely to be reached.

Reasonable requests

2.15 Recital 19 of the AID explains that an obligation to meet all reasonable requests means that requests should only be refused on the basis of objective criteria such as technical feasibility or the need to maintain network integrity. In addition, operators should not be compelled to provide products which are not in their powers to provide.

2.16 Once an SMP operator is subject to an obligation as described in the previous section, it must meet all requests that are:

• reasonable (Article 12(1) AID);
• technically feasible (Recital 19 AID); and
• do not require the operator to provide something which is not within its power to provide (Recital 19 AID).

2.17 If this is not the case, the request may be refused.

2.18 There may be cases where a request has been specified in a way that is not technically achievable or where supply of the requested product would have a major and unavoidable impact on the network. In these cases, refusals on the basis that such requests are unreasonable will be justified. However, these are extreme examples. In most situations, even when there are apparent problems concerning the provision of a particular product, it is normally possible for these to be resolved through commercial negotiation.

2.19 If matters are not resolved during a commercial negotiation and the Director is presented with a dispute over the ‘reasonableness’ of a request, he must follow the relevant dispute resolution provisions set out in the new Directives. In doing so, assuming that the request is technically feasible, the Director is likely to consider whether a request is reasonable by considering whether it represents an ‘undue burden’ on the operator supplying it (taking account of any specific action and expense that may be incurred in providing the product). In other words, the Director is likely to consider that a request, which is technically feasible, is reasonable if the SMP operator can reasonably expect a fair return on any necessary investments it has made which are associated with the supply of the product at a price the requesting operator is willing to pay.

Demand for wholesale products

2.20 Should a product be new or untested (and thus it is unclear whether demand will materialise) difficulties in assessing whether or not the SMP operator can expect a reasonable return may be encountered. Where the SMP operator will incur significant development costs in supplying a product for which the demand is uncertain Oftel may specify that the requesting operator should take on an appropriate level of risk. This could, but would not necessarily, involve:

• the requesting operator committing to a level of demand at a price that would justify investment by the SMP operator in supplying the wholesale product; and/or
• allowing the SMP operator to specify a pricing structure based on forecast demand and/or specify a process of balancing payments between the SMP operator and the requesting operator at the end of a set period.

2.21 Oftel will only consider the above approaches when the SMP operator can demonstrate that significant development costs will be reasonable and efficiently incurred, and incurred directly as a result of the new product.

Innovative products

2.22 One circumstance where an SMP operator may argue that it should be permitted to refuse a request for a wholesale product is when the wholesale product has been developed to allow the SMP operator to launch an innovative retail product. In these circumstances, an SMP operator might argue that an obligation to supply the wholesale product to competitors would reduce its incentives to innovate.

2.23 Oftel considers that the SMP operator should be required to supply an equivalent wholesale product when introducing innovative retail services. Oftel does not consider that it is necessary for an SMP operator to be the sole exploiter of an innovation to benefit from that innovation. Given sufficiently generous terms (pricing of innovative products is discussed further in Chapter 3) a vertically integrated operator should be indifferent between selling the retail product itself or selling the underlying wholesale product to another retailer. Moreover, because of the risk of leverage of market power from the wholesale market to the retail market, an operator with SMP should not be exempt from supplying wholesale products.

2.24 Figure 1 shows a simplified version of the test of whether or not a request for a particular wholesale product is a ‘reasonable’ request.

Figure 1 Test to decide whether or not a request is ‘reasonable’

Reviewing access obligations

2.24 The AID requires NRAs to conduct regular market reviews to determine the level of competition in a market and adjust obligations as appropriate. Should Oftel, from a review, find that the competitive conditions within a market have changed since a regulatory obligation was introduced, it will adjust requirements on operators as appropriate. This may mean, where a market is or is soon to become effectively competitive, withdrawing an obligation to supply access altogether; or it may result in the conditions attaching to an access obligation (in particular pricing) being revised to reflect the competitive conditions in the market. Oftel will give sufficient notice of any changes in obligations to enable reasonably efficient undertakings relying on the access provided to adjust their business plans and/or make alternative arrangements as necessary.

Chapter 3

Other obligations that may be imposed on SMP operators under the AID and conditions for the supply of mandated ‘access’

3.1 In addition to obligations which may be imposed under Article 12 of the AID, Articles 9 – 11 and 13 of the AID allow NRAs to impose obligations relating to transparency, non-discrimination, price control, and regulatory accounting. Oftel’s intention in attaching other obligations relating to the supply of wholesale products is that those products be made available on terms which are consistent with those which would apply in a competitive market. If an SMP operator supplies a wholesale product but attaches conditions to that product which have a material effect on competition, Oftel will view this behaviour as a constructive refusal to supply.

3.2 As discussed in Chapter 2, the AID requires that all obligations must be imposed in accordance with Article 8 of the AID, that is, they must be:

• based on the nature of the problem identified;
• proportionate; and
• justified in light of the objectives in Article 8 of the FD.

3.3 This section describes when and how Oftel would normally expect to apply obligations relating to terms and conditions including consideration of how Oftel’s approach is likely to be adapted to ensure obligations meet the requirements set out in paragraph 2.6.

Non-discrimination obligations

3.4 Particular competition concerns arise where an undertaking with SMP is vertically integrated. A vertically integrated undertaking may have an incentive to provide products on terms which discriminate in favour of its own business. For this reason, an obligation on a vertically integrated operator with SMP to provide ‘access’ will nearly always be accompanied by a requirement to do so on non-discriminatory terms.

What is non-discrimination?

3.5 Article 10(2) of the AID states that:

"Obligations of non-discrimination shall ensure, in particular, that the operator applies equivalent conditions in equivalent circumstances to other undertakings providing equivalent services and provides services and information to others under the same conditions and of the same quality as it provides for its own services, or those of its subsidiaries or partners."

The main aim of a ‘non-discrimination’ condition (currently referred to as ‘undue discrimination’ in UK law) is to ensure that a vertically integrated SMP operator does not treat itself in a way that benefits itself, its subsidiaries or its partners in such a way as to have a material effect on competition.

3.6 In practical terms this means that a vertically integrated SMP operator should supply products in such a way that competing service providers are placed in an equivalent position to the retail arm of the SMP operator regarding the information they receive about products and the terms and conditions under which they are made available.

3.7 ‘Non-discrimination’ does not necessarily mean that there should be no differences in treatment between undertakings, but rather that there should be no differences that would materially effect competition.

3.8 In order to ensure compliance with its obligations as regards non-discrimination under the AID, in general, an SMP operator should ensure that:

a) it does not make services available to third parties on terms which are materially less favourable than those they make available to themselves for the same or equivalent services; and

b) it does not differentiate between undertakings purchasing the products in setting terms, conditions and prices unless there would be no material effect on competition in doing so.

3.9 Oftel is likely to consider differences in underlying costs to be a valid justification for making products available on different terms to different parties – ie it may not judge differences in such circumstances to be discriminatory. Oftel would also consider other justifications for differentiation between customers (eg on the grounds of varying degrees of risk presented or overall economic benefit gained from discrimination) on a case by case basis, taking account of any material effect on competition of the action proposed.

3.10 Annex 4 provides some examples of issues that may arise and how Oftel would be likely to approach these issues.

Non discrimination and new retail product launches

3.11 A vertically integrated operator will, in particular, need to consider its obligations to provide ‘access’ on non-discriminatory terms when it intends to launch a new retail service and has been designated as having SMP in an associated wholesale market. Such an operator must ensure that, when launching a retail service, it is in a position to meet all reasonable requests for corresponding wholesale products. If this is not the case, the enforcement of the non-discrimination obligation may mean that the SMP operator, in order to comply with its obligation, may have to withdraw the related retail product.

3.12 Oftel would normally consider that provision of an equivalent wholesale product in the wholesale market in which an operator has been designated as having SMP should occur in sufficient time for simultaneous launch by competitors of a competing retail product so as to avoid a material effect on competition.

3.13 Oftel acknowledges that an issue may arise where competing undertakings need to undertake significant network build or technological development to make use of a given wholesale product or where it may take a significant amount of time for the wholesale product to be developed. Oftel will first consider whether it is possible for an interim or alternative product to be supplied that permits operators to compete to the greatest extent possible while technological upgrades are carried out.

Non-discrimination and innovative services

3.14 One circumstance where a competitor may argue that it should receive preferential or ‘discriminatory’ treatment is when it has requested a product from an SMP operator which it considers innovative, that is a product which it could reasonably expect in a competitive environment to provide and input to a retail service that would give it first mover advantage over its rivals. Oftel is not opposed to exclusivity agreements in themselves in circumstances where a product is truly innovative. However, failure by an SMP operator to accurately judge the competitive effect of an exclusivity agreement could lead to action being taken by Oftel to enforce a non discrimination obligation.

Transparency obligations

3.15 Article 9 of the AID permits NRAs to establish requirements for the provision of information which may range from information on pricing, terms and conditions to publication of technical interfaces and network characteristics. It also enables NRAs to require publication of a reference offer. NRAs will be empowered to change the terms of this reference offer to give effect to obligations imposed (eg cost-orientation) under the AID.

Notification and publication of Reference Offer (RO)

3.16 Oftel will normally require that any wholesale product is published in the form of a RO. ROs should be produced in the format indicated in Annex 2 of this document (except for LLU reference offers, which should follow the format set out in Annex II of the AID).

3.17 The initial RO for a new wholesale product should be released in a timely manner in such a way as to ensure that there is no material effect on competition. Oftel may set a deadline for the publication of a RO on completion of a market review or at the conclusion of a dispute. In the case of a vertically integrated SMP operator, the timing of publication will also be subject to non-discrimination. That is, an SMP operator will only meet its obligation not to discriminate if information (including terms, conditions and prices) is supplied to the retail arm of the operator at the same time as to competing operators and service providers.

3.18 If using a wholesale product requires competitors to make significant technical adjustments or to build out their networks, sufficient time between publication of the RO and launch of the new wholesale product should be allowed for a reasonably efficient operator to make the necessary preparations.

3.19 Annex 3 provides further details on wholesale price notification, technical information and confidential information.

Charge controls

3.20 Article 13 of the AID sets out that an NRA may impose obligations relating to cost recovery and price controls, including obligations for cost orientation of prices and obligation concerning cost accounting systems.

3.21 An SMP Operator will usually be under a non-discrimination requirement, which requires it to offer services and facilities to all requesting operators under equivalent terms and conditions, including charges, that it grants to itself and its subsidiaries or partners.

3.22 In determining whether a charge control is needed in addition to the general non-discrimination requirement, Oftel will have regard to the conditions of the specific market to which the service or facility under consideration belong. Oftel will, therefore, assess the level of competition present in the relevant market.

3.23 Article 13(2) of the AID requires that NRAs ensure that any cost recovery mechanism or pricing methodology that is mandated serves to promote efficiency and sustainable competition and maximise consumer benefits. Therefore, Oftel intends to consider all the short-term and long-term costs and benefits that may result to consumers from imposing some form of charge control. For example, in markets where the investment involves significant risk, cost-based charge control may adversely affect the incentives to invest and a lower level of investment is likely to damage consumers. Hence, only in those circumstances where Oftel believes that the benefits brought by charge control are enough to counter the costs it generates, would Oftel introduce such a control. These considerations will also impact on Oftel’s decision of what form of charge control to introduce.

3.24 Bearing in mind the above, Oftel considers that, in general:

a) in markets which are not effectively competitive (ie there is an SMP operator or operators), but where market power is found to be diminishing it may be sufficient to rely on the imposition of a general non-discrimination obligation which is implemented through requiring charges based on the ‘retail minus’ principle. Retail minus consists in setting the maximum charge for a wholesale service equal to the retail price (set by the SMP operator) less the costs incurred by the retail activity of the SMP operator, or of its subsidiaries;

b) in markets which are not effectively competitive and there is little prospect of competition developing (eg because there is persistent upstream SMP which limits development of downstream market) it is generally appropriate to introduce price regulation in the form of cost based prices. This form of price regulation differs from retail minus as it determines the absolute level of prices rather than just the relative one and sets a direct limit on the level these prices can reach. A retail minus charge on the other hand will include any supernormal profits in the retail price and thus is likely to be higher than a cost-based charge in most cases;

c)when new or innovative services are being launched which involve a high degree of risk, even if the SMP operator has a substantial market share, it is generally appropriate to avoid any cost-based form of regulation. In such markets, either no charge control or, if at all possible, a retail minus form of regulation, may be more appropriate. Oftel believes that in these cases uncertainty on the level of costs and demand justifies a less interventionist position. Any attempt to set a limit on the absolute level of charges is likely to mean the regulator substituting its judgement about the circumstances and prices under which the new service or investment is likely to be viable to the one of a better informed market player. This could distort commercial and investment decisions to the point of deterring investment and discouraging innovative market offerings to the detriment of consumers. This issue is explored further in Annex 5 on innovative wholesale products.

Direct charge controls

3.25 Where Oftel considers it appropriate to introduce some form of regulation on the absolute level of charges, it will generally determine cost-based charges or introduce an on-going charge control (eg an RPI-X price cap). However, if the services and facilities are ‘non-standard’, as their costs may vary geographically quite substantially or they may be bespoke (eg physical co-location space), Oftel would not normally establish absolute charges. In those circumstances, Oftel would expect the relevant charges to be commercially negotiated between the parties following the general pricing principles discussed in Annex 6.

3.26 Once competition starts to develop in markets subject to direct charge controls and charges become increasingly driven by competitive forces, Oftel may substitute previous detailed controls with less stringent safeguard caps (eg an RPI-0 price control). It is intended that these safeguard caps will be kept until Oftel believes competition is effective and consumers no longer need any protection or it may be decided to move towards reliance on non-discrimination obligations alone.

Accounting separation

3.27 Article 11 of the AID allows NRAs to impose obligations for accounting separation in relation to specified activities related to interconnection and/or access. As part of its implementation work for the new EU Directives, Oftel will issue guidance on accounting separation. These guidelines are not intended to cover the details of accounting separation obligations under the new regime.

3.28 Oftel intends to oblige operators designated as having SMP to prepare and publish regulatory financial information in a form and to methodologies agreed with Oftel. The main purpose of this information is to ensure that the operator complies with regulatory obligations such as assessing potential anti-competitive behaviour or ensuring charges are cost-orientated.

3.29 The form and content of the regulatory accounting information will take account of the information needs of various stakeholders and would typically provide for separate statements for a number of business activities of a vertically integrated operator (showing inter group transactions on a non-discriminatory charge/cost basis), details of cost components that are used to provide regulated services and products and service specific data (to demonstrate cost-orientation).

3.30 Transparency of this information is aided by publication of a set of independently audited financial statements together with detailed explanatory documents showing the methodologies used to prepare the information. These documents should include, for example, details of accounting, attribution, valuation and long run incremental cost methodologies all agreed with Oftel at the appropriate level.

3.31 This regulatory accounting information will also provide important data in respect of the setting of charge controls, market sector reviews and specific casework.

Margin squeezes

3.32 A vertically integrated operator may have an incentive to put pressure on competitors by reducing the margin between the wholesale and the retail price to the point where it is not sufficient to cover the operator's retail costs. Oftel will normally guard against this type of behaviour by monitoring compliance with a non-discrimination obligation (wholesale prices that are set at a maximum of the SMP operator's retail price minus the costs of retail activities can be considered to be non discriminatory prices) and the information specified under an accounting separation obligation. In particular, Article 11 of the AID allows NRAs to:

"…require a vertically integrated company to make transparent its wholesale prices and its internal transfer prices, inter alia, to ensure compliance where there is a requirement for non-discrimination under Article 10 or, where necessary, to prevent unfair cross subsidy."

3.33 It is not generally feasible for NRAs to constantly monitor the prices of all wholesale and retail products to assess whether or not an SMP operator is squeezing the margins of its competitors. Where there are incentives on SMP operators to attempt to impose a margin squeeze on their competitors it can be beneficial to impose an obligation requiring that SMP operator to publish prices in the relevant downstream market (Oftel has recently issued a statement which discusses these issues under the current regime: BT’s regulatory obligations to provide advance notification of price changes and to maintain a published price list, March 2002). In these circumstances, Oftel would consider imposing obligations requiring SMP operators to publish prices in a related upstream market. For example, under Article 14(2) of the Framework Directive, where an undertaking has SMP in a specific market, it may also be deemed to have SMP in a closely related market, where the links between the two markets are such as to allow the market power held in one market to be leveraged into the other market, thereby strengthening the market power of the undertaking. Should Oftel judge that obligations imposed at the upstream level under the AID are insufficient, Oftel may consider deeming an operator to have SMP in a relevant downstream market in order to impose an obligation to publish certain retail prices under Article 17 of the Universal Service Directive. In addition to the provision under Article 14(2) of the FD, the AID allows NRAs to seek the Commission’s approval to impose obligations on SMP operators over and above those set out in Articles 9-13.

Reasonableness, timeliness

3.34 Under Article 12 of the AID, NRAs are able to attach conditions relating to fairness, reasonableness and timeliness to requirements to supply wholesale products. Oftel intends to apply this to all obligations to provide access. Oftel takes ‘reasonableness’ to mean, amongst other things, that terms and conditions under which products are offered are fair between the parties, sensible and practical, non discriminatory and proportionate.

3.35 Timeliness in the provision of information, and of the products themselves, is also critical to ensuring that access obligations are effective.

3.36 Oftel intends to ensure that terms and conditions of supply including delivery timescales, service level agreements and penalties for non-delivery, are provided and generally accessible in the reference offers which are to be made available for all regulated wholesale products.

3.37 ROs should be updated periodically and should include a clear description of the services on offer, the terms and conditions under which these services are made available, including prices, and the ordering and provisioning procedures. Oftel expects all terms and conditions contained in the RO to be reasonable. The following list contains some additional guidance as to what Oftel shall consider to be ‘reasonable’ in this context:

a) the SMP Operator must offer the required services on terms that are no less favourable than those on which it provides equivalent services to its own operations (ie it must offer services to at least the same quality, the same timescales and at the same prices as it does to itself or to its subsidiaries or partners);

b) the SMP operator should be able to recover its efficiently incurred costs over a reasonable period; and

c) the services offered must be sufficiently unbundled, so that a beneficiary operator only pays for what it needs.

3.38 The RO should provide sufficient information to enable operators to make technical and commercial judgements such that no material distortion of competition is caused. Availability of some of this information may be restricted to interested parties for security reasons or for the sensitive commercial value of it. It may also be subject to any non-disclosure or other reasonable confidentiality conditions.

3.39 Oftel intends to require, as part of the contractual terms, provision of a reasonable Service Level Agreement (SLA) which provides for a minimum acceptable level of service. This must be provided on release of the initial RO, but may, like other terms in the RO, be subject to change in the light of experience. In addition, SMP operators will be obliged to respond to reasonable requests for higher levels of service, subject to agreement, on an appropriate fee. Where trials are held, these should be designed in such a way as to facilitate the formulation of appropriate SLAs.

3.40 A minimum list of areas to be covered in a RO including terms of the SLA is set out in Annex 2.

Disputes over terms and conditions

3.41 SMP operators should negotiate in good faith on the contents of ROs including SLAs in advance of publication to ensure that they meet the requirement for terms and conditions of supply to be ‘reasonable’.

3.42 Should there be a dispute over the reasonableness of terms and conditions including SLAs or over whether an SMP operator has made an adequate response within a reasonable timescale – which Oftel would normally consider to be one month – the Director will consider the clarity of the Statement of Requirements (SoR) underlying any request. However the SMP operator will not be entitled:

a) to refuse to consider a request on the grounds that the SoR is inadequately formulated; or

b) to suspend consideration of multiple requests on the grounds that it can deal only with a consolidated request.

3.43 In order to monitor compliance with the terms of SLAs agreed, Oftel will normally require the regular publication or provision of suitable information on service levels provided.

Chapter 4

Consultation

4.1 This document sets out the principles which Oftel proposes to follow in assessing whether to mandate wholesale products under the AID on SMP players in the UK and in any necessary specification of the terms and conditions on which such products should be supplied.

4.2 A 12-week period of consultation will follow publication of this document. Having considered the representations made on these draft guidelines and any further matters that the Director considers relevant he will issue a final set of guidelines. The Director does not intend to allow a further period of consulting on his final guidelines and consultees should take account of this in preparing their submission. Oftel is happy to meet with interested parties during the consultation period.

4.2 Comments are invited on all the issues this document raises, and in particular on those highlighted in the text as questions for stakeholders by 5 July 2002. Oftel expects to publish a Statement setting out the Director’s final guidelines, in the light of responses received, in July/August 2002.

Consultation

4.3 Comments should be made in writing and sent, by 5 July 2002, to:

Heather Clayton
Regulatory Policy Directorate
Oftel
50 Ludgate Hill
London, EC4M 7JJ
Tel: 020 7634 8979
E-mail: heather.clayton@oftel.gov.uk

4.4 Written comments will be made publicly available in Oftel’s Research and Intelligence Unit, and where possible, published on Oftel’s internet site 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 identified as containing confidential material. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.

Cabinet office code of practice on written consultation

4.5 Oftel considers that this document meets the Cabinet Office code of practice on written consultation documents. The code is reproduced below for convenience. If you have any comments or complaints about this consultation process please contact:

Oftel Co-ordinator for the code of practice:

Robert Jex,
Oftel,
50 Ludgate Hill,
London EC4M 7JJ,

e-mail: rob.jex@oftel.gov.uk

Tel: 020 7634 5340
Fax: 020 7634 8943

1) Timing of consultation should be built into the planning process for a policy (including legislation) or service from the start, so that it has the best prospect of improving the proposals concerned, and so that sufficient time is left for it at each stage.

2) It should be clear who is being consulted, about what questions, in what timescale and for what purpose.

3) A consultation document should be as simple and concise as possible. It should include a summary, in two main pages at most, of the main questions it seeks views on. It should make it as easy as possible for readers to respond, make contact or complain.

4) Documents should be made widely available, with the fullest use of electronic means (though not to the exclusion of others), and effectively drawn to the attention of all interested groups and individuals.

5) Sufficient time should be allowed for considered responses from all groups with an interest. Twelve weeks should be the standard minimum period for consultation.

6) Responses should be carefully and open-mindedly analysed, and the results made widely available, with an account of the views expressed, and reasons for decisions finally taken.

7) Departments should monitor and evaluate consultations, designating a consultation co-ordinator who will ensure that all the lessons are disseminated.

Annex 1

Definitions and examples of ‘access’

A1.1 Under the AID, access is defined in Article 2:

A1.2 The definition of ‘access’ encompasses interconnection, which is described as:

A1.3 An associated facility is defined in Article 2(d) Framework Directive (FD) as

A1.4 Examples of types of ‘access’, drawn from the AID and from current Oftel practice are:

i) unbundled local loops (individual network components enabling maximum use by the purchasing operators’ of its own facilities and technology whilst having access to the customer over the ‘last mile’ of an SMP operator’s network);

ii) interconnection including partial private circuits and ATM xDSL interconnection (enabling one operator to connect its network to another to enable its users to communicate with those on the other network);

iii) wholesale ADSL services (an end-to-end service provider product allowing the purchaser to deliver their own ‘value added’ services such as Internet access over the provider’s network);

iv) reseller products such as calls and access (providing an end-to-end technical solution while permitting the purchasing undertaking (known as ‘systemless’ service providers under the current regime) to take on non-communications functions such as marketing and customer service including billing and technical support;

v) access to digital TV platforms (conditional access) (an ‘associated facility’ enabling a content or service provider to provide services to end-users);

vi) co-location facilities or access to operational support systems or billing/other information (associated facilities which support the provision of other wholesale products such as unbundled local loops);

vii) open access to technical interfaces, protocols or other key technologies that are indispensable for the interoperability of services or virtual network services;

viii) specified services needed to ensure interoperability of end-to-end services to users, including facilities for intelligent network services or roaming on mobile networks;

ix) virtual network services such as MVNO;

x) access to number translation or systems offering equivalent functionality; and

xi) access to fixed and mobile networks including ‘carrier selection’ and ‘roaming’ facilities.

Annex 2

Standard ‘access’ reference offer: minimum contents

Reference Offer

a) Description of the services and facilities to be provided, including their technical characteristics.

b) Locations of the points of interconnection and access and of other associated facilities (ie co-location space, masts).

c) Technical standards for access and interconnection (including any usage restrictions and other security issues).

d) Conditions for access to ancillary, supplementary and advanced services (including operational support systems, information systems or databases for pre-ordering, provisioning, ordering, maintenance and repair requests and billing).

e) Ordering and provisioning procedures.

f) Terms of payment, including billing procedures.

g)Interoperability tests, where applicable.

h) Traffic/network management.

i) Maintenance and quality of interconnection and access services.

j) Measures to ensure compliance with requirements for network integrity.

k) Intellectual property rights.

l) Dispute resolution procedure between parties before requesting national regulatory authority intervention.

m) Duration and renegotiation of agreements.

n) Confidentiality of non-public parts of the agreements.

o) Rules for allocation between operators when supply is limited (eg for purpose of co-location or location of masts).

Service Level Agreement

a) Specific time scales for acceptance or refusal of a request for supply and for completion, testing and hand-over/delivery of services and facilities, for provision of support service (such as fault handling and repair).

b) Specific service level commitments (ie the quality standards the Operator must meet when performing its contractual commitments).

c) Amount of immediate compensation (‘liquidated damages’) paid for failure to perform the contractual commitments.

d) Definition and limitation of liability and indemnity.

e) Procedures in the event of alterations being proposed to the service offerings (eg launch of new services, changes to existing services, change to prices).

These lists are not [intended to be exhaustive, as the content of the reference offer and SLA will depend on the nature of the specific service it refers to.

Annex 3

Further guidance on information and transparency

Changes to prices, terms and conditions of existing wholesale products

A3.1 Oftel currently operates a three tier system of notification for interconnection products, requiring 90 days notification for non-competitive products, 28 days for prospectively competitive and one day for competitive standard services. Oftel intends, under the new regime which operates under the AID, to bring the approach used for ‘access’ generally in line with that for interconnection.

Technical information

A3.2 Operators designated as having SMP in a particular market should supply sufficient technical information during negotiations to enable competitors to construct proposed product specifications that are efficient and meet their reasonable requirements. Sufficient information should be given from and/or before the launch of a product to enable competitors to make full and effective use of any product supplied. SMP operators should not refuse access to such information on the basis of confidentiality although may make it subject to a non-disclosure agreement.

A3.3 The technical information required to be supplied by SMP operators to facilitate negotiations on or use of wholesale products can broadly be divided into two types.

a) Interface information: This will include all of the interface information which operators are currently required to notify to Oftel and publish under Condition 15 of their standard licence conditions.

b) Network configuration information: This includes all other information reasonably necessary to enable the operator requesting access to provide a service over the point of access. It may include information on the way in which the recipient operator routes traffic over the network, and such issues as contention ratios or bit rates used (where applicable).

A3.4 Much of the technical information required is likely to be in a form specified by a standards institute or agreed with industry bodies (or already used in conjunction with BT’s Reference Interconnection Offer). However, where novel technical information in network configuration is required Oftel will look closely at the format in which the information is supplied. It is possible that Oftel may consider the supply of information in a non-standard format as a refusal to supply the technical information necessary to allow the other operator to compete in the downstream market.

Confidentiality

A3.5 Different kinds of information may need to be made available in different ways. Not all information needs to be publicly available, but could be given on signing of a non-disclosure agreement, for example. Confidentiality of information supplied for the purposes of negotiating all access and interconnection arrangements is supported by provisions in Article 4(3) AID which states that:

Annex 4

Further Guidance on non-discrimination

A4.1 The following are examples of issues that may arise and how Oftel would be likely to approach them:

A4.2 Pricing differences: A non-discrimination requirement implies that equivalent products should be available at the same price to the SMP operators’ service provider as to competitors. However, the products provided to other undertakings will not necessarily be identical to those used by the SMP undertaking’s retail arm. In particular, the various functions associated with provision of the wholesale product (eg customer support, billing etc) may (depending on the nature of the product concerned) only be relevant to the product as supplied to other undertakings. There may therefore be some justifiable differentiation in pricing based on differences in underlying costs. Differentiation of this kind should in fact be a spur to competition, preserving incentives for operators to invest in their own facilities to enable the service to be provided, rather than relying on others to do so.

A4.3 Volume discounts: These are a common feature of commercial arrangements, and can be advantageous for both parties, allowing the supplier to provide incentives for increased take-up of its product and allowing the purchaser to take advantage of cost-savings arising from economies of scale. Oftel would normally consider volume discounts to be acceptable provided they are applied in a consistent manner treating undertakings in equivalent positions in an equivalent manner. However, where a volume discount has the effect of advantaging the SMP operator, Oftel is likely to consider it unduly discriminatory or anti-competitive. For this reason, Oftel would prohibit the use of volume discounts in markets in which an SMP operator would be the only operator benefiting by virtue of its relative size over its competitors (likely to be those identified as being non-competitive).

A4.4 Different terms for different types of purchaser: eg a public communications network operator, a provider of electronic communications services or (business) end-user. Oftel would not generally consider differential pricing of the same product to different classes of undertaking operating in the same market to be justifiable, unless there are genuine differences in the underlying costs of serving particular types of customer. However, Oftel sees no difficulties in products being offered on different terms to customers operating in different markets, providing this differentiation does not result in a material detriment to competition or raise barriers to entry in a particular market.

Annex 5

Maintaining incentives to innovate

A5.1 This annex sets out the background behind Oftel’s approach as outlined in the above guidelines to examination of wholesale products which may be considered to be innovative.

The need to foster innovation

A5.2 The desire to ‘innovate’ should be inherent in any freely functioning and fast-moving competitive market. Operators within that market will continually be striving to gain competitive advantage and increased market share through making advances on their competitors. This may be realised through increased efficiency allowing reduced costs, or by technological innovation or improvements in quality, which will give their product an ‘edge’ over those of competitors. Innovation is key in stimulating demand for new products and services, driving forward competition and delivering choice and quality for consumers, and is recognised as such in the high level objectives for regulators in Article 8 of the FD.

A5.3 In a market which is not effectively competitive, a new entrant may have the inspiration to create an innovative product, but lack the ability to deliver it effectively or in a widespread manner because of bottlenecks in the underlying infrastructure. Equally, it may be justifiable on competition grounds to require an SMP operator to make innovative wholesale products available. However, it is important not to do so inappropriately or disproportionately on terms which would undermine incentives to innovate.

When will ‘innovation’ be a factor?

A5.4 Oftel will consider representations from operators that a special approach is required by virtue of the innovative nature of an offering in the course of determining whether access in a given case is proportionate to meeting the objectives of promoting competition and protecting consumer interests, and if so, on which conditions.

A5.5 There are different issues at stake depending on whether the ‘innovating’ operator is the operator with SMP or a new entrant requesting a product from an SMP operator. The two are thus examined separately below.

SMP undertaking introducing innovative wholesale product

A5.6 An SMP undertaking may argue that it should be given the opportunity to be the exclusive provider of a given product on the grounds that requiring provision of a wholesale product on non-discriminatory terms will give it no incentive to develop innovative new products.

A5.7 However, Oftel does not believe that it is necessary for a firm to be the sole exploiter of an innovation to benefit from that innovation. Given sufficiently generous terms a vertically integrated operator with upstream market power should be indifferent between selling the retail product itself or selling the underlying wholesale service to another retailer. It will still be the exclusive provider of the wholesale product until such time as competitors emerge at the network level, and thus should retain the incentive to innovate to drive demand. Moreover, because of the risk of leverage of market power from the wholesale market to the retail market, the SMP operator should not be exempted from an obligation to supply on non-discriminatory terms.

A5.8 For these reasons Oftel considers it appropriate that the requirement to provide a wholesale product on transparent, non-discriminatory and reasonable terms as described in these guidelines should largely stand. However, it would seem justified for a more relaxed approach to be taken to product description and transparency requirements. In view of the fact that in this case it would be the SMP undertaking itself stimulating demand by introducing a new product and not introducing the product to meet demand from others Oftel would consider it reasonable for the SMP undertaking to set the agenda in establishing the nature and description of the product.

A5.9 There are also strong arguments that, in recognition of the risk involved in introducing an innovative wholesale service, and to maintain incentives to innovate and invest, the maximum wholesale price should be set at retail minus (ie a non-discriminatory price). Retail minus consists in setting the maximum charge for a wholesale service equal to the retail price less the costs incurred by the retail activity of the SMP operator, or of its subsidiaries.

A5.10 If a vertically integrated supplier with market power was always required to make available innovative wholesale services on cost based terms (ie with a maximum return on capital equal to the costs of capital there is a serious risk of a reduction in incentives to innovate.

Charge setting: practical issues

A5.11 In agreeing these terms Oftel does not intend to substitute any judgement made about the retail price under which an innovative service is likely to be viable. Rather more it generally is sympathetic to the position of the innovator who will be uncertain as to whether the innovation will generate high profits or be wasted. Oftel does not wish to be seen to be exploiting the benefits of hindsight.

A5.12 Oftel does not believe that any competing operator purchasing the innovative wholesale product should be charged for activities, such as marketing, which it has to undertake for itself. Any element of supernormal profit in the retail price can be retained in the wholesale charge. Where such profits reflect the innovative nature of the service provided, then this retail minus rule will preserve incentives to innovate.

Third party request for innovative product

A5.13 It is equally important to maintain incentives to innovate amongst undertakings without SMP. Lack of effective competition in a particular sector could prevent new entrants from establishing new and innovative services that they would have been able to deliver had the inputs been readily available or easy to duplicate. In order to replicate as far as possible the conditions that would be seen in a competitive market it is important that new entrants are able to reap some of the benefits of innovation. Incentives to innovate may be provided by varying some of the conditions that would normally attach to access requirements where the product requested is ‘innovative’. The following three conditions are particularly relevant:

i) Non-discrimination – should other undertakings have access to the product at the same time as the requesting operator?

ii) Pricing – what pricing principles should the product be subject to?

iii) Transparency – when should information about the product be made available?

A5.14 Under normal competitive conditions an innovating operator would expect to have some first mover advantage in the launch of its product. This would seem to suggest that, at least for a limited period, an innovative product supplied to a third party should be restricted – ie there should be some (justified) discrimination in treatment between the requesting undertaking and its competitors. When an SMP operator supplies a third party with a wholesale product that operator has to make this available to all, but a third party gets first mover advantage since the SMP operator will have developed the product at its request. However, as discussed in Chapter 3, an SMP operator subject to a non-discrimination obligation must take particular care not to breach this condition.

A5.15 Another important issue is the pricing of the innovative wholesale input. In most circumstances where access is mandated, pricing is constrained by a requirement that the SMP undertaking supplies wholesale services to itself at the same price as they are provided to others as discussed in the section on charging principles above. However, in this circumstance, by virtue of the fact that the product is innovative, the SMP undertaking will not be supplying an equivalent retail product at the time the wholesale input is made available. This means that there will be no natural constraints on the pricing of the innovative input. Innovative products are likely to be abnormally risky. The appropriate terms of provision of the wholesale product depend on who bears the risk that a new product will fail. Where the third party bears all this risk, Oftel would be likely to consider cost-based terms appropriate. However, in the first instance, the pricing of such wholesale products should be a matter for commercial negotiation.

Intellectual property rights

A5.16 Article 12 of the AID requires NRAs to take account of any relevant intellectual property rights in considering whether it is proportionate to mandate or attach conditions to a form of access. Oftel intends to take the following approach where information is protected by intellectual property rights:

A5.17 Oftel would expect any operator requesting the information to be able to demonstrate that the information is essential for them to be able to offer a competitive product in the retail market. For a service to be deemed essential it must:

• be likely to eliminate all competition in the relevant market on the part of the person requesting the service
• be incapable of being objectively justified; and
• be indispensible; that is there is no actual or potential substitute in existence

A5.18 For access to the service to be regarded as essential it will be necessary for the operator to demonstrate that it is not economically viable to create a second service on a similar scale to the service alleged to be essential. It would not be enough to argue that the facility could not be replicated economically by reason of the limited scale of the retail service the other operator intends to offer.

A5.19 For the purposes of these guidelines Oftel will assume intellectual property to include patents, know-how, and software copyright. Patent covers analogous rights such as registered designs and semi-conductor topographies. Know how is also widely defined (Article 10 of Regulation EC 240/96). In particular Oftel notes that the information must be secret, identified (recorded) and importantly substantial.

A5.20 This definition excludes information in standard interfaces with BT’s network or the software running them which Oftel would in any event expect an SMP undertaking to make available. Oftel does not believe that such information will actually be secret. Nor will it consider a licence of it to be of economic use to another operator since it will become freely available.

A5.21 In addition Oftel does not believe that information about network configuration is likely to be substantial for these purposes. Nor does it believe that restricting the availability of network configuration information is likely to have countervailing benefits in encouraging and disseminating technical developments. Accordingly Oftel does not believe that such information should be treated as intellectual property for these purposes.

A5.22 Oftel is unlikely to consider confidentiality as an objectively justified reason for non-disclosure of information about significant changes to network configuration, except in the case where these changes are part of intellectual property rights. But even when this information constitutes intellectual property, if it is essential to allow other operators to compete then Oftel will generally require the vertically integrated operator to grant a licence over it on reasonable terms.

Annex 6

Pricing principles

A6.1 In those circumstances where it will have to determine charges or set a starting charge for an on-going charge control, Oftel expects to adopt the following pricing principles:

i) charges should be such that only relevant long run incremental costs are recovered where these costs have been reasonably and efficiently incurred;

ii) charges should be such that an appropriate attribution for common and joint costs is included; and

iii) charges should be such that a reasonable return on the capital invested can be earned.

Reasonable and efficient costs

A6.2 In assessing costs Oftel shall pay regard at what the costs of an efficient operator providing the relevant services and facilities would be. In some cases Oftel may consider a bottom-up cost model or benchmarking exercise to be appropriate and, if Oftel were to infer from it that there is an efficiency gap, Oftel would consider legitimate to adjust it.

Recovery of common and joint costs

A6.3 Not all the costs incurred by a multi-product operator can be directly and unambiguously related to the production of specific services. However, in order not to incur losses, the operator has to recover also these costs, usually referred to as common and joint costs. Therefore, when setting direct price control, Oftel considers that a reasonable mark-up for common and joint costs should be included. However, when setting this mark-up, care should be taken that no double-recovery takes place. Hence, if all common and joint costs are already being recovered through other services and facilities, no mark-up should be added to the long run incremental costs of the service or facility in question.

Return on capital

A6.4 In order to ensure that the incentive to invest is preserved, Oftel considers that prices should allow a return on capital that takes into account the level of risk involved in the relevant activity. This is usually referred to as the cost of capital which is the minimum rate or return required to induce investment in the firm. Oftel will especially ensure that the imposition of any charge controls will not distort or reduce incentives towards efficient investment in alternative competing infrastructures.