13 September 2002

Contents

Summary

Chapter 1 Background and introduction

Chapter 2 Wholesale regulation under the AID

Chapter 3 Other obligations that may be imposed on SMP 16 operators under the AID and conditions for the supply of mandated access

Annex 1 Definitions and examples of access

Annex 2 Standard access reference offer

Annex 3 Further guidance on information, transparency and non-discrimination

Annex 4 Maintaining incentives to innovate

Annex 5 Further comments

Annex 6 Cross Reference AID Articles with Clauses in Draft Communications Bill

Summary

S.1 On the 25 July 2003, a new package of European Directives will establish a framework for the regulation of electronic communications networks, services and associated facilities throughout the EU.

S.2 These 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 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 only apply to the regime under the new EU Directives.

S.4 In line with the new EU Directives, these guidelines are intended to be generic and technologically neutral. This means that they cover all forms of regulatory access obligations and will 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.5 In giving this guidance the objective is that:

• competing operators and service providers 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 have clear indications of what is likely to be 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.6 Obligations covered by the guidelines will only be imposed on market players designated with SMP following a market review undertaken 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 guidelines to take account of any agreed harmonised approach.

S.7 Oftel proposes that, in most cases, it is likely to impose access obligations in the form of an obligation to meet all 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 agreements and provision times) are reasonable and what should be included in the reference offer.

S.8 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 on which they are offered. However, such an approach by Oftel would not relieve the SMP operator of the general obligation to meet all reasonable requests for access.

S.9 The Communications Bill will transpose the Directives into UK law. The draft Bill can be found at www.communicationsbill.gov.uk. References to the relevant Articles in the new Directives are used throughout these guidelines and a table cross-referencing these Articles with the Clauses in the draft Communications Bill (Draft Communications Bill, published in May 2002) is at annex six of this document.

S.10 Oftel expects to update these guidelines in light of experience.

Chapter 1

Background and introduction

Background

1.1 The new EU Directives establishing a framework for the regulation of electronic communications networks, services and associated facilities throughout Europe, entered into force (on publication in the Official Journal of the European Community (OJ)) on 24 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, the 25 July 2003 (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);
• the Universal Service Directive (USD);
• the Directive on Privacy and Electronic Communications (PEC); and
• the Access and Interconnection Directive (AID).

1.3 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.

1.4 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 National Regulatory Authorities (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 the existing licence conditions.

1.5 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.

1.6 The negotiation of the PEC lagged behind the other four Directives. The PEC was published in the OJ on 31 July 2002. Member States are required to transpose this Directive by 31 October 2003. The PEC aims to ensure protection to the right to privacy with respect to the processing of personal data in the electronic communications sector.

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 considered as access under the AID can be found in annex one. 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 one).

Scope of the guidelines

1.11 Any references in these guidelines to the new EU Directives relate to the final adopted text of the Directives published in the OJ on 24 April 2002. These guidelines only apply to the regime under the new Directives, specifically 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 access 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.

1.13 These guidelines do not concern the 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).

1.14 During the consultation on the draft guidelines, Oftel received representations that the guidelines should apply to providers of Conditional Access (CA) designated with SMP. Before issuing any revised guidelines, Oftel intends to consult on the application of these guidelines to CA providers designated with SMP.

Access and Interconnection

1.15 As explained above the term access includes interconnection. However, in addition to any SMP obligations that may be imposed under the AID, Oftel is also consulting on Guidelines on the interconnection of public electronic communications networks.

1.16 Article 4(1) of the Access Directive requires all operators of a public electronic communications network to be given the right and the obligation to negotiate interconnection with each other. This is incorporated into national legislation through Condition 1 of the draft General conditions of entitlement, May 2002 (which Oftel is also consulting on), that imposes the obligation to negotiate interconnection on Public Electronic Communications Network Providers PECNs). The Guidelines on the interconnection of public electronic communications networks set out the criteria by which PECNs can be identified for the purpose of Condition 1 of the general conditions.

1.17 Therefore, under the proposed Condition 1 of the general conditions, all PECN providers (whether or not they are determined as having SMP) will have the obligation to negotiate interconnection with other PECNs. Any additional obligations on SMP operators will be imposed following the access guidelines, and where access obligations are imposed, since the term access includes interconnection, these obligations will also apply to interconnection.

1.18 The relevant consultation documents can be found on Oftel’s website at: www.oftel.gov.uk/publications/licensing/2002/enti0502.htm; and www.oftel.gov.uk/publications/eu_directives/2002/intg0902.htm.

Status of the guidelines

1.19 While these 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 therefore, be dealt with on its merits and in pursuance of the requirements of the new regime, as set out in paragraph 2.6. However, the Director would expect to give reasons for any departure from the approach described in these guidelines.

1.20 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. Oftel may seek to amend these guidelines to reflect any agreed harmonisation positions at a European level in the future.

1.21 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. These guidelines 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 per cent of households (and about 21 per cent of residential consumers and seven per cent 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 (BFWA) 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), the NRA must apply appropriate regulation. In the case of wholesale markets, the relevant provisions are set out in Articles 8 to 13 of the AID.

Sectoral or competition controls?

2.4 The FD recognises that sectoral 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 sectoral 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 a framework in which competition can emerge rather than relying solely on retrospective competition law. However, as competition develops, competition law remedies may provide an effective solution and deterrent to further anti-competitive practices and these might be sufficient to prevent anti-competitive behaviour.

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; and

f) the provision of pan-European services.

2.8 When deciding whether or not to impose an access obligation on an SMP operator, Oftel will undertake a Regulatory Option Appraisal (ROA). This will take into account the factors listed in Articles 8 and 12(2) in the AID, any other relevant factors, when making the decision whether or not to impose an access obligation. (Oftel has published separate guidelines, available on Oftel’s website at, www.oftel.gov.uk/publications/about_oftel/2002/roa0602.htm, on the way it intends to carry out a ROA).

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

2.10 There may be circumstances where the benefits of mandating access would not be large enough to justify the obligation, 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 three 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.

Market reviews, regulatory option appraisal and the access guidelines

2.11 As can be seen from figure 1 below, these guidelines do not cover the process of deciding whether or not an access obligation is appropriate, nor do they consider all of the possible remedies or outcomes that might stem from the market review process. Two sets of related guidelines are also available which cover the process of market reviews and regulatory option appraisal:

• Oftel's market review guidelines: criteria for the assessment of significant market power, August 2002 (www.oftel.gov.uk/publications/about_oftel/2002/smpg0802.htm); and
• Regulatory option appraisal guidelines: assessing the impact of policy proposals, June 2002 (www.oftel.gov.uk/publications/about_oftel/2002/roa0602.htm).

Figure 1: Market review process and the Access Guidelines

The nature of the access obligation

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

2.13 As previously discussed in chapter one, 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 a finding of SMP and a regulatory option 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.

2.14 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.

2.15 During the current set of market reviews Oftel intends to assess products that are currently supplied by SMP operators, in particular those that result from existing regulatory requirements. Oftel will also consider whether it is appropriate to require SMP operators to continue to supply particular existing products.

2.16 Should an individual undertaking require a new product 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.

2.17 Oftel considers that the precise details of new 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 fair commercial negotiation are also preferable to regulatory intervention. Oftel may facilitate such 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

2.18 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.

2.19 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).

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

2.21 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 may 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.

2.22 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 to receive at least a reasonable rate of return, on any necessary investments made to supply a product at a price the requesting operator is willing to pay.

Demand for new wholesale products

2.23 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.

2.24 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.

2.25 Oftel has used a similar approach in its assessment of reasonable demand in phase 1 of its direction to resolve a dispute in the provision partial private circuits (Phase 1 Direction to resolve a dispute concerning the provision of partial private circuits, 14 June 2002). Oftel requested that BT provide information on the costs incurred in developing and providing a new product and to undertake a feasibility study to set an indicative price. Requesting operators were asked to state indicative levels of demand. Based on this information, Oftel will assess whether the level of demand will allow BT to recover its efficiently incurred costs within a reasonable time frame. Should Oftel decide that demand is sufficient, requesting operators will be required to enter into a binding agreement to meet the forecasts.

Innovative products

2.26 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.

2.27 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. Furthermore 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. Oftel considers that the incentives on a vertically integrated SMP operator to innovate are protected by allowing sufficiently generous terms (pricing of innovative products is discussed further in chapter three) in the supply of innovative wholesale products to other operators.

2.28 Figure 2 shows a simplified version of the test of whether or not a request for a particular wholesale product is a ‘reasonable’ request.

Figure 2: Test to decide whether or not a request is ‘reasonable’

Reviewing access obligations

2.29 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 attached 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 should 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 adverse effect on competition, Oftel will view this behaviour as a constructive refusal to supply.

3.2 As discussed in chapter two, 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 these requirements.

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:

3.6 The main aim of a ‘non-discrimination’ condition (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 adverse effect on competition.

3.7 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.

3.8 ‘Non-discrimination’ does not necessarily mean that there should be no differences in treatment between undertakings, rather that any differences should be objectively justifiable, for example by:

a) differences in underlying costs, or
b) no material adverse effect of competition.

3.9 Oftel considers that in markets where there is significant market power, there is a rebuttable presumption that a vertically integrated SMP operator discriminating in favour of its own downstream business would have a material adverse effect on competition.

3.10 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 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; and
b) it can objectively justify any differentiation.

3.11 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 adverse effect on competition of the action proposed. Annex 3 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

3.12 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.

3.13 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 adverse effect on competition.

3.14 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.

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 information. 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 information or any new wholesale product is published in the form of a RO. ROs should be produced in the format indicated in annex two 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, or changes and updates to an RO for an existing product (for example updates to technical specifications listed in the RO), should be released in a timely manner in such a way as to ensure that there is no material adverse 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 may also be subject to non-discrimination. That is, an SMP operator will 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, confidential information and non-discrimination.

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 obligations concerning cost accounting systems.

3.21 Where an access obligation has been applied, an SMP Operator will also 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 before setting a charge control.

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 (ie where the permissible return on capital employed is equal to the firm’s average cost of capital) 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 it is appropriate to apply.

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 implemented by requiring that charges are based on the ‘retail minus’ principle or by directing that prices should be set at ‘retail minus’. Retail minus means setting the maximum charge for a wholesale service equal to the retail price (set by the SMP operator) less the retail costs fairly incurred by the retail activity of the SMP operator, or of its subsidiaries. Setting prices at retail minus ensures that an SMP operator cannot ‘squeeze’ the margins of competitors buying wholesale inputs;

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 the 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 level, 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; and

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 about 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. The issue of innovation is explored further in annex four and in Oftel’s response to comments received during the consultation in annex five

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, such as, 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.

3.26 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. This is usually referred to as the cost of capital which is the minimum rate of return required to induce investment. Oftel will especially ensure that the imposition of any direct charge controls do not distort or reduce incentives towards efficient investment in alternative competing infrastructures.

3.27 Once competition starts to develop in markets subject to direct charge controls and charges become increasingly driven by competitive forces, Oftel may replace previous 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

3.28 These guidelines briefly outline Oftel’s approach to accounting separation under the new regime; they do not cover the details of how specific accounting separation obligations will be imposed under the new regime.

3.29 Article 11 of the AID allows NRAs to impose obligations for accounting separation in relation to specified activities related to interconnection and/or access. Oftel will issue more explicit guidance on accounting separation as part of its implementation work for the new EU Directives.

3.30 Oftel may oblige any operator 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 compliance with non-discrimination requirements imposed under Article 10 of the AID in relation to interconnection and/or access, and to prevent cross-subsidy.

3.31 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 activities of a vertically integrated operator.

3.32 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.

3.33 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

3.34 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:

3.35 In addition, Article 13(1) allows NRAs to impose price controls "where a market analysis indicates that a lack of effective competition means that the operator concerned might […] apply a price squeeze" and, as noted below in paragraph 3.39, Oftel would not consider that prices that impose a margin squeeze are ‘fair and reasonable’.

3.36 In its recent Direction to resolve a dispute concerning access to an ATM switch (Direction to resolve a dispute between BT, Energis and Thus concerning xDSL interconnection at the ATM switch, June 2002) Oftel set out (at paragraph 4.24) a ‘rule’ requiring BT to maintain an appropriate margin between interconnection services and corresponding downstream services. An obligation to provide information suitable for refuting any accusation of a margin squeeze to Oftel on request has also been imposed. Oftel might consider taking a similar approach to the prevention of margin squeeze where it considers it appropriate, in the future.

3.37 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 also be beneficial to impose an obligation requiring that SMP operator to publish prices in the relevant downstream market.

3.38 In these circumstances, Oftel would consider imposing obligations requiring SMP operators to publish prices in a related upstream market. For example, under Article 14(3) 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(3) 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

3.39 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 ‘fair and reasonable’ to mean, amongst other things, that terms and conditions under which products are offered are consistent with those which would be offered in a competitive market, sensible, practical, and do not impose a margin squeeze on competitors. ‘Fair and reasonable’ conditions might also include a requirement on an SMP operator to consult with other industry members on new network interfaces where failure to do so might have a material adverse effect on competition.

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

3.41 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 should be able to recover at least its efficiently incurred costs over a reasonable period but not make an excessive rate of return;
b) the services offered must be sufficiently unbundled, so that a competing operator only pays for what it needs; and
c) prices must not impose a margin squeeze on competitors.

3.42 The RO should provide sufficient information to enable operators to make technical and commercial judgements such that there is no material adverse effect on competition. 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.

3.43 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.

3.44 A minimum list of areas to be covered in a RO, including SLAs, is set out in annex two.

Requests for products

3.45 Oftel intends to attach generic conditions to the process for requesting new products from SMP operators. These conditions will require that the process for requesting new products does not discriminate in how requests are handled from the SMP operator’s downstream arm compared to other downstream operators, and that all requests are considered in a timely manner.

3.46 In addition, following a market review, Oftel may consider it appropriate to attach specific conditions, related to reasonableness and timelines, to the process for considering requests to supply specific products.

3.47 In considering a dispute over whether an SMP operator has made an adequate response to a request for a product within a reasonable timescale, the Director will consider the clarity of the request. However Oftel would not expect the SMP operator to:

a) refuse to consider a request on the grounds that the request is inadequately formulated; or
b) suspend consideration of multiple requests on the grounds that it can deal only with a consolidated request.

3.48 In either case, Oftel would expect early discussions between the SMP operator and the other operators so that, where necessary, reformulated requests can be submitted and processed expediently. If necessary, Oftel may consider imposing a further condition to meet this objective.

3.49 Notwithstanding the above, Oftel continues to expect the process for considering requests for products, to be led and managed by the industry.

Regular monitoring

3.50 Article 11 of the Authorisation Directive allows NRAs to require information to verify compliance with conditions imposed under the specific Directives, including obligations made under Article 8 of the AID. Therefore, in order to monitor compliance with non-discrimination requirements and the terms of agreed SLAs; Oftel may require SMP operators to supply on a regular basis suitable information on the service levels provided to all parties requesting products and services.

3.51 However, to ensure that only information that is necessary for monitoring compliance with the appropriate condition is collected, Oftel would normally expect to request the necessary information each time that it was required, rather than imposing a blanket condition on an SMP operator to supply regular and continuous information.

Incentives to comply with access obligations

3.52 The draft Communications Bill sets out that any person subject to conditions under the new regime owes a duty to any other person who may be affected by failure to meet its obligations. That is, an SMP operator subject to an obligation to meet all reasonable requests for access owes a duty to other operators to comply with that obligation.

3.53 Unless SMP operators take all reasonable steps and exercise due diligence to meet a reasonable request for access then it is liable to pay damages if the requesting operator issues legal proceedings and is successful.

3.54 In addition to civil liability to other operators, it is anticipated that the new regime will provide that, under certain circumstances, and after taking specific steps, OFCOM may impose a penalty of up to 10% of the operator’s turnover as appropriate and proportionate to the offence.

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:

a) 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);

b) 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);

c) 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);

d) 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;

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

f) 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);

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

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

i) virtual network services such as MVNO;

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

k) 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) Charges, terms of payment and 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).

p) Standard terms and conditions of supply

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 SLAs will depend on the nature of the specific service it refers to.

Annex 3

Further guidance on information, transparency and non-discrimination

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 products in non-competitive markets, 28 days for products in markets that are moving towards competition 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. Under the new regime, there will be no obligation to give notice for changes to competitive services. Oftel will generally set periods of notice for access products at, 90 days or 28 days, dependent upon what is appropriate, following the analysis of competition in the relevant market.

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; and
b) Network 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 points at which other operators can interconnect, 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 a Reference Offer). However, where novel technical network information is required Oftel will look closely at the format in which it is supplied, and may if appropriate specify the format and the minimum information required.

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:

Non-Discrimination

Pricing differences

A3.6 A non-discrimination requirement implies that equivalent products should be available at the same price to the SMP operators’ retail arm 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.

Volume discounts

A3.7 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 way. 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 is likely to prohibit the use of volume discounts in markets in which an SMP operator would itself benefit disproportionately by virtue of its relative size over its competitors.

Annex 4

Maintaining incentives to innovate

A4.1 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 innovative.

The need to foster innovation

A4.2 The desire to ‘innovate’ should be inherent in any freely functioning competitive market. Operators within that market will continually be striving to gain competitive advantage and increased market share through making advances on their competitors. These 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.

When will ‘innovation’ be a factor?

A4.3 Oftel will consider representations from operators that a special approach is required by virtue of the innovative nature of offerings in the course of determining whether an access obligation in a given market is proportionate to meeting the objectives of promoting competition and protecting consumer interests, and if so, on which conditions.

SMP undertaking introducing innovative wholesale product

A4.4 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.

A4.5 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. Furthermore 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. Oftel considers that the incentives on a vertically integrated SMP operator to innovate are protected by allowing sufficiently generous terms in the supply of innovative wholesale products to other operators. 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.

A4.6 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, when SMP undertakings stimulate demand by introducing a new product which is not introduced to meet demand from others, Oftel would consider it reasonable for the SMP undertaking to establish the nature, description and retail price of the product.

A4.7 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. 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.

A4.8 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 would be a serious risk of reducing incentives to innovate.

Charge setting: practical issues

A4.9 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, it will generally be 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.

A4.10 Oftel does not believe that any competing operator purchasing the innovative wholesale product should be charged for activities, such as retail marketing, which it has to undertake for itself. But 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.

Intellectual property rights

A4.11 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 an access obligation.

A4.12 Oftel will consider the identification of IP rights on a case-by-case basis, but for the purposes of these guidelines 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 substantial.

A4.13 Oftel recognises that IP rights will protect some types of information, but where that information is essential to allow competitors to the SMP operator the access necessary for them to offer a competing product, Oftel would expect the SMP operator to make the information available.

A4.14 Oftel would expect any operator requesting the information to be able to demonstrate that the information is essential. For information to be considered as essential, the denial or absence of it must:

• make unavailable the access necessary to allow a competing retail product to be offered;
• be incapable of being objectively justified; and
• be indispensible; that is there is no actual or potential substitute available or obtainable through alternative means.

A4.15 In any case, Oftel would expect an SMP operator to make available information on standard interfaces or network topology for its network, in accordance with the type of information required in the RO.

.

Annex 5

Further comments

Non-discrimination and innovative services

A5.1 In the draft guidelines issued for consultation in April 2002, Oftel considered the question of exclusivity agreements when competitors requested products from SMP operators, which are a result of an innovative idea or proposal on the behalf of the requesting operator. In these circumstances, Oftel stated that it was not opposed to exclusivity agreements in themselves, although failure by an SMP operator to accurately judge the competitive effect of an exclusivity agreement could lead to the enforcement of a non-discrimination obligation.

A5.2 Following consultation, and the limited number of responses from OLOs on this point, Oftel has given further consideration to its position on exclusivity agreements between requesting operators and SMP operators in markets where there is market power. In these circumstances, exclusive agreements may breach general competition rules on the prohibition of restrictive agreements and/or the abuse of a dominant position. Furthermore, in markets where Oftel judges it appropriate to impose an access obligation in the form of an obligation to meet all reasonable requests, exclusivity agreements are inconsistent with this obligation.

A5.3 Where innovation takes place at the retail level, Oftel notes that general provisions to protect innovative parties, such as IP rights and copyright, already exist. Where the retail innovation requires an element of wholesale innovation by the SMP operator, differences in the way in which different parties are granted access to the wholesale innovation may be justified. Paragraph 3.10 considers this in more detail.

Regulation of innovative products

A5.4 Oftel received many responses to the consultation on the draft access guidelines dealing with the subject of the regulation of innovative products supplied by SMP operators. These comments suggest that there is a need for clarification on two points:

a) Oftel’s intention to regulate innovative products; and
b) appropriate regulation for innovative products.

Oftel’s intention to regulate innovative products

A5.5 Some respondents commented on Oftel’s intention to regulate new, emerging markets. The access guidelines describes how Oftel intends to approach the issue of innovative products in markets, which are reviewed as part of the EU Directives in accordance with the Commission’s guidelines, and where SMP is found to exist at the wholesale level.

A5.6 In its draft recommendation (see www.oftel.gov.uk/ind_info/eu_directives/draft_rec_relmar.pdf), the Commission has listed those markets that it considers NRAs should review to consider whether sectoral regulation is appropriate. If, in the future, Oftel considers that it should investigate a new, emerging market that is not on the Commission’s list, Oftel would first need to consult the European Commission following the procedure set out in Article 7 of the Framework Directive. Oftel will also carry out its market review and option appraisal exercise before deciding whether or not an access obligation would be appropriate. As clarified above these guidelines do not assume that an access obligation will always be appropriate in every market.

Appropriate regulation for innovative products

A5.7 Oftel has explained that it believes that it is not necessary, in order for a firm to benefit from an innovation, for it to be the sole exploiter of that innovation. Given that Oftel proposes to set charges for innovative wholesale products on a retail minus basis, an operator with significant market power introducing an innovative service should receive approximately the same return from selling the retail product itself or selling the underlying wholesale service to another retailer. Access on these terms should therefore preserve incentives for innovation.

A5.8 Several other respondents also made comments concerning the importance of first mover advantage to protect operators incentives to innovate and the need to avoid over regulation, preventing the exploitation of First mover Advantage (FMA).

A5.9 Oftel considers that it is possible to distinguish between pre-existing or ex-ante market power which the SMP operator may possess and any temporary or ex-post market power which may be conferred by the innovation. Where the first-mover advantage arises from ex-ante market power (and is material), then arguments about incentives to innovate are not relevant to the question of whether action to prevent leverage into related markets is justified. The first supplier of the innovative retail service might be able to able to undercut competitors that entered subsequently, not because it had lower costs but because of the first mover advantage. This would be materially anti-competitive if the first mover advantage was to arise simply from the exploitation of a position of upstream market power through delay in the supply of the innovative wholesale input.

A5.10 Access at retail minus, as described above, does not prevent the exercise of ex post market power deriving from the uniqueness of the innovation, which can be reflected in the retail price and hence wholesale charge for the service.

Requests for new products

A5.11 During the consultation Oftel received comments from several respondents concerning the process used to request products from BT. A number of respondents argued that the current Statement of Requirements (SoR) process was ineffective and led to difficulties in obtaining access to new products or services. BT noted however that several improvements to the process had been undertaken and that it did work.

A5.12 Having taken account of all of the comments received and upon further consideration of the process Oftel has made some additions to the final guidelines.

A5.13 Oftel considers that it is appropriate to attach generic conditions to the process to ensure that there is no discrimination in how requests are handled and that all requests are considered in a timely manner. Oftel intends to monitor compliance with these conditions as appropriate. In addition, following a market review or having resolved a dispute, Oftel may also consider it appropriate to attach specific conditions, related to reasonableness and timelines in the supply, or the process for handling requests to supply, specific products.

A5.14 While the stimulation for these changes is derived from comments relating to the existing SoR process, the changes are generic and are intended to apply to any process that sets out how third parties may make requests for access to new products from an SMP operator.

Annex 6

Cross reference: AID Articles with Clauses in Draft Communications Bill

This table has been produced as a summary of the European Directives tables, which were published with the draft Communications Bill in May 2002. Those tables show where Articles in the Directives have been implemented into draft the Communications Bill.