March 2000

1.  Introduction

Oftel welcomes the timely publication by DG Information Society of this Working Document on unbundled access to the local loop. In particular, we welcome the guidance the Working Document provides on the application of Article 16 of the Voice Telephony Directive (98/10/EC), Article 4 of the Interconnection Directive (97/33/EC), and Article 82 of the Treaty on European Union to this area. Oftel has already adopted the approach to bitstream access suggested in the Working Document and has stated its intention to mandate full Local Loop Unbundling by July 2001 at the latest.

2.  Assessment of effective competition

2.1  Oftel supports the view that in circumstances where competition in the local loop is limited, bitstream access and local loop unbundling can play an important part in facilitating competition in higher bandwidth access and services. However Oftel is concerned that the working document does not set out clearly enough the conditions in which such action is necessary. While Oftel does not dispute that the local access network is one of the least competitive segments of the liberalised telecommunications market, it is not appropriate for Member States to mandate local loop unbundling (of whichever variety) without a rigorous analysis of the state of competition in the market for local access, and a careful assessment of the effect that mandating local loop access might have on all relevant markets.

2.2  Oftel believes that regulation should only be imposed if it is likely to bring benefit to consumers. It is also essential that regulation is restricted to the minimum necessary. Oftel believes three explicit tests for open access are necessary to ensure these two principles are observed:

1. Does the operator of the network in question possess market power in the relevant market?
2. Are the costs of mandating open access reasonable in the light of expected benefits?
3. Is open access an effective and proportionate regulatory instrument to tackle the obstacle to effective competition which has been identified?

2.3 It should be for NRAs to assess the level of competition in the relevant market, and carry out an analysis of costs and benefits, effectiveness and proportionality before deciding whether or not it is appropriate to mandate local loop unbundling. The appropriate framework is set out in the submission (Attachment to Annex D) of the Independent Regulators’ Group to the European Commission on the 1999 communications review.

Oftel believes that the Recommendation should state the need for such an exercise to be carried out before regulatory action is decided upon.

2.4 For the same reason Oftel believes it to be essential that a regular review of any such policies should be carried out, to assess and respond to any market developments and judge whether competition is becoming or has become effective. In the UK, such a review will be carried out four years after local loop unbundling comes into force, and every two years thereafter for as long as local loop unbundling is mandated.

The Recommendation should suggest that NRAs carry out a regular review of the state of competition in the relevant market, and adjust their policies accordingly.

2.5 The Working Document deals briefly with the need for Member States to consider the prevailing level of competition in the local access network. Oftel would like this point to be expanded, with guidance provided to NRAs along the lines set out above, in any Recommendation. All comments below assume a circumstance in which it has been found that local loop competition in a Member State is limited.

3. Varieties of local loop unbundling

3.1 Oftel agrees that bitstream access alone is not sufficient to ensure the promotion of competition in the provision of high bandwidth services. However, it is not clear from the Working Document whether it is considered that all three forms of local loop unbundling are necessary, or if two forms only would suffice.

The working document states:

3.2 Oftel considers that the question of how many forms of local loop unbundling should be implemented should be decided by NRAs, on the basis of the state of competition in the relevant market. It would not be appropriate to require all access mechanisms irrespective of the particular circumstances.

3.3 In particular, it should not automatically be assumed that it is necessary to implement line sharing as well as full local loop unbundling. NRAs should assess the costs and benefits of introducing line sharing, in the light of the circumstances, and decide accordingly.

If the Commission believes all three forms are required it should spell out its reasons for reaching this conclusion. Oftel would prefer that the Recommendation state that (in circumstances where local loop competition is not effective) bitstream access is not in itself enough, and that the NRA should consider additional measures, which may include LLU or line sharing or both.

4.  Timing

4.1 December 2000 is proposed as the target date for the launch of full local loop unbundling, but no target date is specified for the launch of bitstream access and line sharing. While Oftel does not consider that it is necessary to set specific launch dates for bitstream and line sharing, we do think it is important to set out a clear context for the timing of the introduction of all three elements.

4.2 It is crucial for the development of competition in the provision of high bandwidth services to allow bitstream access as soon as the incumbent launches DSL services. Preparations for bitstream access should begin sufficiently early so that the launch date for bit stream access is the same as the incumbent’s launch date for DSL services. It is also important that the incumbent should be required to have in place appropriate accounting separation arrangements, so that the incumbent’s compliance with the principle of non-discrimination can be monitored. Both of these points should be emphasised in any Recommendation.

4.3 The timing of the launch of full local loop unbundling and line sharing should depend on the practicalities of implementation. Full local loop unbundling and associated co-location require considerable preparatory work on organisational and technical matters, and in particular on the development of the incumbent’s operational support systems. We would therefore suggest that both full unbundling and line sharing should be short to medium term goals. If both are to be introduced, it may be that, depending on operational issues, it is more efficient to focus on one and then the other.

Oftel suggests that the Recommendation should give highest immediate priority to bitstream access with full LLU and line sharing as short term goals.

5. December 2000 target date

5.1 Oftel welcomes an early target date for full local loop unbundling. However, the target should be a meaningful one. Some Member States have not begun their domestic consultation process, and these Member States would undoubtedly face difficulties in launching full local loop unbundling by December 2000. Even once a decision is taken, there are many practical issues to work through. Unbundling is a complex issue to manage effectively; it will not serve consumer interests if, at the time of launch, the processes for handing over customers from the incumbent to a competitor (for example) do not work. It would therefore be more appropriate to recommend that Member States should have carried out the necessary analyses and (on the assumption that those analyses show that unbundling is justified) put in place the necessary legal framework by December 2000. Full unbundling should follow as soon as reasonably practicable thereafter. Even this is a challenging timetable.

5.2 Oftel finds the Commission’s intentions as to what exactly should be done by the target date of December 2000 unclear. The Working Document states:

Does this mean that by December 2000 the legal instruments to mandate local loop unbundling should be in place; or that the legal instruments should be in force; or that the incumbent should be offering unbundled loops (and if so, on what scale)?

5.3 Oftel suggests that, bearing in mind the points made above in relation to the time needed to implement local loop unbundling, it would be appropriate to take the first of these interpretations: that the necessary legal instruments should be in place by the target date, and that provision of unbundled loops should follow as soon as possible thereafter.

6. Line sharing

6.1 Oftel notes the Commission’s view of the application of the Voice Telephony Directive and the Interconnection Directive to line sharing. It believes that incumbents will not readily accept the Commission’s position. Therefore, if after reviewing comments, the Commission’s position is unchanged, it should summarise its legal analysis in the clearest possible terms.

6.2 Oftel agrees that in appropriate circumstances line sharing may be beneficial to the development of competition giving the choice to consumers of paying for a single line with two suppliers and reducing the barriers to switching between suppliers.

6.3 However, Oftel considers that the tone of this section is too prescriptive. The suggestion that the Recommendation should state that NRAs consider requests for line sharing to be ‘reasonable’ and that requests may only be refused on technical grounds, does not appear to allow for the consideration of particular circumstances in any Member State. The tests set out in paragraph 2.2 should be applied to line-sharing also.

7.  Pricing

7.1 Oftel agrees that prices for full local loop unbundling should follow the principle of non-discrimination, transparency and cost-orientation, and that LRAIC plus a mark-up (calculated using current cost accounting principles) is an appropriate formula. We also agree that the principle of non-discrimination is likely to be the most practical solution when setting prices for the high frequency portion of the local loop for line sharing. As the working document suggests, the availability of one or both forms of unbundling should put pressure on the incumbent’s pricing of bitstream services.

8.  Significant Market Power

8.1 The Working Document states (paragraph 2.1.2) that in accordance with the principle of proportionality, full local loop unbundling should be imposed "only on operators that have significant market power in the market for provision of access to the fixed public telephone network". Oftel agrees that operators without SMP should not have a requirement to provide local loop unbundling, but it does not necessarily follow that all operators with SMP should have such a requirement. Any decision to impose unbundling should be based on the tests at paragraph 2.2.

9.  Margin squeezes

9.1  Oftel accepts the suggested test for assessing whether a margin squeeze has occurred, but suggests that the ‘relevant retail market’ should be more clearly defined. For the purposes of a margin squeeze investigation, the relevant retail market should include all of those services from which revenues are available to competitors as a result of their renting of the line from the incumbent. Where tariffs are unbalanced, it is particularly important to ensure that the market is defined in a way that allows a proper margin squeeze test to take place.

9.2  The purpose of a margin squeeze test is to establish that more efficient competitors are not being excluded from the market by an anti-competitive practice. It is therefore clearly important that the tests should be set up in a way that reflects this objective. The market definition is particularly important when tariffs are unbalanced, because if too narrow a definition of the relevant market is adopted, the margin squeeze test might not achieve its objective. In particular, if the relevant retail market is defined as consisting only of the line rental, and excludes call services, the margin squeeze test could result in incumbents being required to provide loops at a price below cost.

9.3  This would have two undesirable consequences. First, contrary to the objective stated in the working document (section 1.4) it would remove any incentive for competitors to provide competing infrastructure. Second, the high profits on calls would lead to a situation where inefficient entry would be encouraged, since it would be possible to cherry pick high volume customers who would be very profitable.

9.4  In Oftel’s view, the appropriate pricing rule is as set out in the Commission’s document. That is, either LRAIC or ECPR could be used as the appropriate pricing standard. The ECPR would be a means of ensuring that efficient entry was encouraged and inefficient entry discouraged, while LRAIC would represent the economic value of a line in a competitive market.

9.5 It is important to note that a line rental may be below the price of an unbundled loop does not automatically imply that a margin squeeze is operating. The key issues are:

• whether the incumbent’s retail operation could trade viably if it had to pay the charges for access to the local loop borne by competitors
• whether the revenues available to a competitor are the same as those available to the incumbent.

9.6 Provided these conditions are satisfied, the structure of the retail tariffs of the incumbent is of little relevance to a margin squeeze investigation. Oftel would like this point to be made clear in any Recommendation.

10.  Guidance

10.1 Oftel is preparing draft guidance for the benefit of market players to accompany the regulatory obligation to supply unbundled loops which is due to be inserted into BT’s licence. A copy of the proposed obligation (in the form of a draft new condition to be inserted in BT’s licence) and the corresponding draft guidance is enclosed. The need for guidance will vary from one regulatory regime to another, in part according to the national legal tradition concerning the appropriate balance in legal provisions between flexibility for the NRA to respond to developments and regulatory certainty. Nevertheless, there are probably some aspects of Oftel’s guidance which would be applicable across Europe. The Commission may therefore like to address the issue of complementary NRA guidance when it publishes its final Recommendation.

Click here to view the draft guidelines

Click here to view the licence modifications