Pricing Shared Access in Sweden

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1 Discussion note for: Pricing Shared Access in Sweden 12 October 2004 Final draft for public consultation Andersen Management International A/S A part of Ementor Danmark A/S

2 Table of Contents 1 INTRODUCTION REGULATORY OBJECTIVES REGULATORY STRATEGY INFRASTRUCTURE COMPETITION VERSUS SERVICE COMPETITION THE LADDER OF INVESTMENT PROPOSED REGULATORY STRATEGY SHARED ACCESS AND ALLOCATION OF SHARED (COMMON) COSTS SHOULD THE RENTAL CHARGE BE INDEPENDENT OF SIMULTANEOUS PSTN USAGE? PRACTICAL IMPLICATIONS FOR THE COSTING AND PRICING OF SHARED ACCESS REMARKS TO COMMENTS RECEIVED FROM THE INDUSTRY VOIP AND THE RELATION BETWEEN SHARED ACCESS, FULL ACCESS AND THE RETAIL PSTN SUBSCRIPTION INTERNATIONAL EXPERIENCE WITH PRICING OF SHARED ACCESS INTERRELATIONSHIP WITH OTHER WHOLESALE ACCESS SERVICES BIT-STREAM ACCESS REMARKS TO COMMENTS RECEIVED FROM THE INDUSTRY WHOLESALE LINE RENTAL CONCLUSION

3 1 Introduction This paper discusses how to determine the price of shared copper access in Sweden based on a number of proposed regulatory objectives and a formulated regulatory strategy for access services in general and broadband access in particular. The opinions expressed in the paper are those of the authors and do not necessarily reflect the views of Post- of Telestyrelsen. The note also briefly discusses the pricing of bit-stream access and wholesale line as these are interlinked with the price of copper access. Where relevant, the note addresses the recent industry comments received in response to PTS s proposed SMP decisions for LLU and bit-stream access. 2 Regulatory objectives The following objectives have been identified by AMI and PTS: General objective 1 : To ensure that private individuals, legal entities and public authorities have access to secure and efficient electronic communications and the greatest possible benefit regarding the range of electronic communications services and their price and quality. This objective shall mainly be achieved through the promotion of competition and the international harmonisation of the sector. However, universal services shall always be available for everybody on equivalent terms throughout Sweden at affordable prices. Specific objectives: 1. To stimulate efficient use of, and feasible investment in, network infrastructure and broadband facilities; 2. To stimulate effective and sustainable competition in the market for voice and broadband services; and 3. To stimulate the deployment of broadband services in Sweden. Regulatory remedies Any regulatory remedy should be proportionate to the identified market failure. The least burdensome effective remedy should be selected. Regulation should be transparent and predictable to reduce regulatory uncertainty for the industry. 1 As set out in section 1 of the The Electronic Communications Act (2003:389) 1

4 3 Regulatory strategy 3.1 INFRASTRUCTURE COMPETITION VERSUS SERVICE COMPETITION Effective and sustainable infrastructure competition is superior to service competition, as it allows for head-to-head competition between operators and a minimal need for regulatory intervention with competitors not being reliant on the infrastructure of TeliaSonera. Sustainable infrastructure competition requires that new entrants are able to compete against TeliaSonera on a level playing field, however. This may not be feasible due to the substantial economies of scale, scope and density involved in building an access network. A regulatory preference for stimulating infrastructure based competition at the expense of service based competition (e.g. through adopting relatively high access charges) might lead to inefficient investments in infrastructure. High access charges may cause inefficient duplication of access network infrastructure by new entrants. To the extent that entry is discouraged, high access charges will also cause underinvestment in competitive broadband infrastructure such as e.g. DSLAM equipment placed in TeliaSonera s local exchanges, co-location and backbone networks. The adoption of relatively low access charges may on the other hand result in too little investment in alternative access infrastructure and in the long term decrease the level of infrastructure competition in the supply of broadband services. In other words, operators operating in downstream markets will have a choice as to whether they should invest in their own upstream infrastructure (build) in order to provide services to end-users, or to seek access (buy) from an existing upstream provider (TeliaSonera). Creating the right incentive for operators to make an efficient build/buy choice is a matter of determining appropriate pricing principles. To obtain economic efficiency, a regulator should: Encourage the use of existing facilities of the SMP operator where this is economically desirable, avoiding inefficient duplication of infrastructure costs by new entrants (incentive to buy); Encourage investment in new facilities where this is economically justified by o new entrants investing in competing infrastructure o the SMP operator upgrading and expanding its networks (incentive to build). When access charges are based on LRIC they do not distort the build/buy decision of new entrants. Entrants will be encouraged to use existing facilities if, and only if, it is 2

5 economically desirable to do so. Just as important, LRIC-based access charges also mean retaining investment incentive for incumbents to upgrade or extend the existing network when new technology is available. When charges are set on the basis of LRIC, infrastructure competition is encouraged in those areas where it is efficient to have competing infrastructure, whereas service competition is encouraged in those areas where the investment in competing infrastructure is not efficient. Areas suited for infrastructure competition will be determined by the market - not PTS. In its regulation on local loop unbundling, the European Commission recommends using LRIC as the most appropriate costing standard. This is also the standard originally adopted by PTS. However, choosing the general costing principle may be regarded as only the first stage in developing a pricing principle for a specific service. While a cost-based methodology such as LRIC may be considered appropriate for pricing a given service, it is not always clear exactly which costs should be included in determining the LRIC price of providing a service. We discuss these issues in the context of shared access in section THE LADDER OF INVESTMENT Investments in the access network are associated with substantial economies of scale, scope and density. As the large SMP operator is already able to benefit from these economies today, it will be very difficult for new entrants to penetrate the market without access to the SMP operator s network. Economies of scale (scale, scope or density to be precise) are present in many different parts of the network such as e.g.: Access network (i.e. the copper network) DSLAM Buildings Backbone/ATM network There may also be substantial economies of scale involved at the retail level, providing customer service, billing etc. To compete against the SMP operator, new entrants will need to achieve similar economies of scale, either by obtaining a large customer base of its own or through access to the SMP operator s infrastructure. When access is available at different levels of the incumbent s network, new entrants will be able invest in the infrastructure gradually as sufficient economies of scale become achievable. This has also been referred to as climbing the ladder of investments, which is illustrated in the figure below. 3

6 Figure 1: The ladder of investment Investment by new entrant Competition Infrastructure based Access network VoIP or PSTN DSLAM, splitter etc Services, IT Customer service, marketing, billing etc Service based Service provided by SMP Non Full copper access + colo Shared copper access + colo Bit-stream access Wholesale line rental Source: Andersen Management International A/S Entrants may start offering broadband access by simply reselling the wholesale services of the SMP operator (corresponding to point 4 in Figure 2 below) or through bitstream access which can be provided at different levels of the network, where the degree of differentiation (or independence) increases when moving from point 3 to 1. Figure 2: Different points of access 0 Copper access Source: ERG Common Position on Bitstream Access Adopted on 2nd April 2004 modified by Andersen Management International A/S Point 3: The incumbent provides the DSL access link plus a backhaul service and hands over the Bitstream to the access seeker at an IP Point of Interconnection. Point 2: The incumbent provides the DSL access link plus a backhaul service and hands over the Bitstream to the access seeker at an ATM Point of Presence. Point 1: The incumbent provides the DSL access link and hands over the Bitstream to the access seeker directly after the DSLAM. 4

7 When the operator has obtained a sufficient number of subscribers at a given exchange, allowing it to exploit the economies of scale, it may install its own DSLAM and switch to shared (or full) access (through access at point 0). Finally, the operator may want to also supply a voice subscription to the customer and switch to full access or even build its own access network. By using more and more of his own infrastructure, the entrant is able to add gradually more value to the product offered to the end users and at the same time reduce the reliance on the wholesale products of the SMP operator. In order to enable such a step-by-step increase of investment to take place, PTS needs to acknowledge the interrelationship between the different access services and ensure a consistent pricing structure. This is discussed in more detail in sections 4 and PROPOSED REGULATORY STRATEGY The use of LRIC will leave it to the market to decide between building and buying network infrastructure and broadband facilities. Likewise it will be left to the market to choose the appropriate access technology such as e.g. full access, shared access, bitstream access or wholesale line rental/resale of broadband services. Finally, as regards voice, it will be left to the market to decide between PSTN and VoIP. It is not for the regulator to stimulate one over the other. To align the incentives of the market participants with those of the national economy, the price of access to essential/bottleneck facilities such as the local copper loop and co-location should be based on LRIC. As regards access to other infrastructure/services, such as bit-stream access and wholesale line rental, that are necessary to sustain competition but cannot be considered to constitute essential/bottleneck facilities in the presence of LLU, the focus of PTS will be to ensure that the market power of the SMP operator is not used to squeeze competitors out of the market. In most cases, this may be ensured by requiring the SMP operator to provide access to such services and facilities on nondiscriminatory terms at a price based on the retail price of the SMP operator minus any retail related costs of the SMP operator. That is, the portion of retail costs (e.g. marketing, billing, collection etc.) that would be avoided when providing the service to an access seeker. The price that TeliaSonera can charge in the wholesale market will then be constrained by the level of competition in the market for end-users. 5

8 4 Shared access and allocation of shared (common) costs A fundamental feature of shared access is that it is provided over a subset of the full frequency spectrum of the copper line. A special issue therefore arises for shared access, as a significant portion of the costs, i.e. the costs of the copper line, is shared between the PSTN service (using the low frequency band) and the shared access service (using the high frequency band). The question is how to allocate these shared costs between PSTN and shared access. This is not an issue for full access where the buyer takes over both the low and high frequency band 2. When the current PSTN subscription charge is sufficient for TeliaSonera to recover the costs of its lines, there would be no need to recover any of the cost of copper line through shared access. Hence, any allocation of copper line costs to the price of shared access would, in the absence of any adjustments to existing prices, lead to the over-recovery of the costs of a line over which a shared access is provided. In turn, this would confer an unfair competitive advantage on TeliaSonera in downstream markets, as it would need to recover less revenue in these markets compared to access seekers, in order to fully recover the costs of its business. If some of these shared costs related to the copper line were to be recovered from the shared access service, TeliaSonera would need to ensure that corresponding reductions were made to the current PSTN subscription charges to avoid over recovery of costs. However, if such a scheme were implemented, consumers not subscribing to broadband services would be paying a higher price for PSTN rental charge than broadband users, which would make such a scheme difficult to implement. To the extent that TeliaSonera is capable of recovering the shared costs from the PSTN subscription, the most reasonable solution seems to be to allocate all the shared costs of the copper line to the PSTN subscription, i.e. not to include any of these costs in the price of shared access. This would be in line with the principle of nondiscrimination as TeliaSonera itself has access to the broadband frequency at no additional costs for the copper line. It also meets the goal of assisting the uptake of broadband services in Sweden by providing for a relatively inexpensive way to deliver broadband access. To ensure full cost recovery for TeliaSonera, such a pricing scheme for shared access is dependent on TeliaSonera being able to recover the line costs from the PSTN subscription. If the customer were to cancel its PSTN subscription, the loop would need to be considered fully unbundled and priced accordingly. Whether the narrow band 2 It may be noted that this observation is in line with the Model Reference Paper of 13 September 2002 stating that: The products shared access, full access, PSTN subscription and bit-stream access (discussed below), are naturally closely linked together. It is important to ensure consistency between the included network element costs (the total annualised cost of the actual copper pair should be the same whether it is used for providing PSTN services, full access, shared access or PSTN services plus bit-stream access). How the shared costs are allocated between the services for the final price setting is a different issue (p. 24). 6

9 frequency is being used by TeliaSonera or some other operators, renting this part of the line from TeliaSonera is in principle irrelevant. The key point is that TeliaSonera should be able to recover its costs via the low frequencies 3. An operator interested in renting the low frequency band of the line would therefore need to pay for all the shared costs, irrespective of whether it uses the high-frequency band or not. The cost of shared access should thus be estimated as the LRIC specific to shared access. These are sometimes also referred to as the Marginal Costs 4. In the interest of coherence, however, it may be more appropriate to refer to them as the LRIC of shared access. The Long Run Incremental Costs of providing shared access, given that PSTN is already provided. A price for shared access based on LRIC, which excludes the shared cost of the copper line, sends the right investment signals to new entrants. When a PSTN line is already in place, the broadband frequencies can be used by another operator (or TeliaSonera itself) without any additional cost of establishing a new copper line. All other things being equal, the operators should therefore prefer to use the existing copper lines for providing broadband access rather than duplicating the costs of copper lines by building their own lines or buying fully unbundled lines from TeliaSonera. Thereby the broadband service is provided to consumers at the lowest cost to the national economy. It may be argued that an access price that makes no contribution to the cost of a line will not ensure allocative efficiency. A service using a network element should in principle contribute to its cost. On the other hand the relatively inexpensive cost of shared access is in line with the objective of stimulating the uptake of broadband services in Sweden. Access seekers also face the right signal when deciding whether to buy full access or shared access to the local loop. Only in situations where the access seeker values the narrow band frequencies higher than the cost of providing the line should he request a fully unbundled line instead of a shared line. 3 Capital cost (such as copper and trenches) are clearly independent of whether the line is used for shared access or not and should thus not be included in the cost of shared access. Many of the direct operating costs of the line (such as line repair and maintenance) may also be independent of the usage and should therefore in principle not be included in the cost of shared access either. On the other hand, this might reduce the price of shared access to an unacceptably low level (see section 4.4). PTS might thus consider including direct operating costs in the costs of shared access as well. To the extent that TeliaSonera allocates operating costs across both PSTN, full and shared copper access this would seem justifiable. Indirect operating costs (such as e.g. IT costs and general overhead) should be recovered by all services using the copper line. 4 Marginal Costs (MC) measure the costs of increasing the production output by one additional unit or the costs saved by reducing the production output by one unit, holding the production levels of all other services constant. This definition implies that MC include only the direct volume-sensitive costs of the given service, excluding all cost categories that do not either demonstrate a causal relationship with the unitary change in output, or do not vary with the output. 7

10 4.1 SHOULD THE RENTAL CHARGE BE INDEPENDENT OF SIMULTANEOUS PSTN USAGE? In Italy, the regulator has opted for a solution where the (low) price of shared access is not dependent on the narrow band frequencies being used for PSTN 5. One operator suggests that the price of shared access in Sweden likewise should be independent of any PSTN subscription. Such an approach provides new entrants with increased predictability: The price will not suddenly rise for reasons that may be outside the control of the new entrant, such as e.g. the broadband customer terminating his PSTN subscription. With a view to PSTN only, one might furthermore argue that the risk of termination is one that TeliaSonera would have faced in any case, that this should be factored into the price of the PSTN subscription, and that TeliaSonera would therefore not need to receive further compensation when the PSTN subscription is terminated. The solution would violate the LRIC methodology, however, as the incumbent would no longer be able to recover the LRIC of the services offered. If the operator were to build the network again, facing a demand for shared access to the broadband frequencies, but no access to PSTN, the incremental costs of supplying this demand would include the costs of the line. Over time as demand changes, the artificially low prices for shared access, would bias the investment decisions of both TeliaSonera and new entrants, with both parties investing too little in infrastructure 6. In a world where VoDSL is a viable substitute for calls over the PSTN, such an arrangement would also unfairly favour new entrants. According to a recent survey of national regulators in the EU and EFTA, conducted by the Norwegian regulator, Post- Teletilsynet, almost all countries (of the 14 regulators who responded to the survey) have a pricing methodology, under which the price of shared access increases to the price of full access when the PSTN subscription with the incumbent operator is terminated. Some regulators have approved this practice, while others have just registered the practice without any objections PRACTICAL IMPLICATIONS FOR THE COSTING AND PRICING OF SHARED AC- CESS In practice the LRIC of shared access will include costs like 5 The relevant documentation is only available in Italian: 6 The solution would thus achieve so-called static efficiency (productive and allocative efficiency at a given point in time) at the expense of dynamic efficiency (efficient investments over time). 7 Post og Teletilsynet, Prising av ADSL ved oppsigelse av telefonabonnement,

11 IT system development and operational costs; Connection costs; Wholesale management costs; and Contribution to common indirect costs (cost related to running an access network not directly related to the copper line). 4.3 REMARKS TO COMMENTS RECEIVED FROM THE INDUSTRY One operator notes that the price of shared access should be determined at a level which motivates investment in alternative infrastructure. A price of zero SEK is unacceptable and would lead to inefficiently high use of the copper network. First of all it may be noted that a price based on LRIC will not be zero as the price will include a number of costs specific to shared access plus a number of indirect costs. Secondly, the price of shared access cannot be set specifically to stimulate investment in alternative infrastructure as this would violate the goal of cost efficiency. If the price of shared access were set substantially above costs, new entrants would indeed be stimulated to invest in alternative infrastructure but at a higher costs to the national economy than this infrastructure could be provided though shared access. Only where the access price is set below LRIC (ex shared line costs) will this lead to inefficiently high use of the existing copper network. The operator further notes that the price of full access should be lower than the PSTN subscription to avoid price squeezes. Here it should be noted that full copper access is typically used for ADSL (and possibly also PSTN). The relevant benchmark for wholesale copper access is therefore not the PSTN subscription, but rather the retail price of ADSL (or maybe even the combined price of ADSL and PSTN subscription). In addition, it could be mentioned that the PSTN subscription pricing is regulated to ensure affordability rather than efficiency. Finally, it may be mentioned that PTS is in fact considering introducing a requirement for TeliaSonera to offer Wholesale Line Rental (WLR), something which will allow new entrants interested in competing for PSTN subscribers to do so using WLR rather than copper access. 4.4 VOIP AND THE RELATION BETWEEN SHARED ACCESS, FULL ACCESS AND THE RETAIL PSTN SUBSCRIPTION Under the proposed pricing scheme, the price of copper access will increase substantially when the access seeker also provides voice telephony to the end user. Even though the voice service may technically be provided over the xdsl connection using the broadband frequencies, the status of the line will change from shared access to full access as the customer will terminate his PSTN subscription with TeliaSonera. From the new entrant s perspective the marginal cost of supplying the voice subscription amounts to the difference between the price of full and shared access (plus any other costs related to voice provision), whereas the marginal revenue corresponds to 9

12 the price of the voice subscription. When the retail price of TeliaSonera s voice subscription is priced below the price of full access, this could potentially become a problem when the price of shared access is low. Consequently, the new entrant already offering xdsl on shared access may not find it profitable to also supply voice as the marginal cost might exceed the marginal revenue. Consider the following example of prices: TeliaSonera retail voice subscription Full access 80 SEK 100 SEK Shared access 10 SEK Here the new entrant will face an additional rental cost of =90 associated with providing the voice subscription. As the retail price of TeliaSonera is only 80, the entrant may find it hard to compete, in particular if TeliaSonera is also offering VoIP on top of their retail subscription. Although this should cause PTS some concern, it is worth noting that the new entrant will now be able to offer voice calls (and other add on services) at a lower costs than before, using VoIP/VoDSL. The lower per minute calls could well offset the disadvantage from the increased rental costs, allowing the entrant to offer a more attractive price packages than the incumbent. If TeliaSonera also provides VoIP on top of a retail subscription, however, the entrant may still find it hard to compete. As a general rule it might thus be worth for PTS to ensure that the price of shared access does not fall below the price of full access less TeliaSonera s subscription charge. 10

13 5 International experience with pricing of shared access The suggested approach of excluding shared costs from the charge of shared access is supported by regulators in a number of EU member states as well as Australia. Ofcom in the UK e.g. states that: 8 If some of the common costs of the loop were recovered from the LLU charges for shared access, BT would need to ensure that appropriate reductions were made to BT's current retail narrowband charges so that there was no over recovery of costs. Further, if charges for access to the high frequency portion of a local loop contributed to the common cost allocation, consumers not taking up broadband services would pay a higher rental charge for narrowband services than that paid by broadband users. Hence, any split of these costs between the high and low frequency portions of the loop other than 100% of common costs being recovered from the narrowband channel would be difficult to implement. [..] Therefore, Ofcom's initial view is that, in setting charges for shared access, the costs common to the low frequency and high frequency portions of a loop should be entirely allocated to the low frequency portion (i.e. voice telephony). Ofcom is aware that this arrangement (as would any other in which the common costs of the loop are not totally allocated to the higher frequency portion) may give rise to a cost-recovery issue if customers decide to cease their voice telephony subscriptions with BT in order to receive both data and voice services on the higher frequency portion of the loop (via voice over DSL). Ofcom's view on this issue is that, when a customer with a shared loop decides not to take voice services from BT, the loop will then be considered to be fully unbundled in respect of rental charges. In relation to the assessment of Telstra s (the incumbent) undertaking for the Line Sharing Service (LSS), the ACCC in Australia notes that: 9..the Commission does not consider it appropriate for Telstra to recover an additional amount of its line costs in the price of the LSS. If other services are meeting these costs, then there is no need for increasing the price of substitutable services and nor will there be an inefficient shift in demand towards the LSS if line costs continue to be excluded. The inclusion of line costs in LSS charges, by contrast, will result in Telstra over-recovering its overall line costs. 8 Ofcom: Review of the wholesale local access market, Chapter 7, Local loop unbundling, 12 May ACCC: A final report on the assessment of Telstra s undertaking for the Line Sharing Service, August report%20LSS%20undertaking%20August% pdf 11

14 The two tables below include a comparison of the charges for full and shared access across EU member states: Table 1: Monthly rental charges in for full and shared loops in Member States (July 2003) Country Full loops Shared loops Austria Belgium Denmark France Finland Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK Source: EU Commission, 9th Report on the Implementation of the Telecommunications Regulatory Package, November

15 Table 2 Indexed monthly rental charges for shared copper access No Country Index 1. Belgium Netherlands Germany Italy France Portugal Iceland Spain Denmark Greece Sweden Austria UK Finland Luxembourg Norway Ireland Source: RegTP, International Tariff Comparison, May In Australia, the ACCC has recently estimated a cost of shared access (excluding shared line costs) for Telstra at 8 AUD per month, roughly equal to 35 SEK. As can be seen, the cost of shared access in Sweden are among the highest in the EU, despite of the fact that TeliaSonera is currently not allowed to include the shared costs related to the copper line in the price of shared access. It can also be seen that even in the countries where the pricing principle proposed by PTS has been adopted, the annual charges for shared access are still materially different from zero, indicating that there are indeed a certain number of costs that can be related to the provision of shared access

16 6 Interrelationship with other wholesale access services In addition to full and shared copper access, two other wholesale access services can be foreseen to be implemented in Sweden: 1. Bit-stream access 2. Wholesale subscription It is worth briefly discussing the pricing of these services and the relationship with copper access (LLU) to ensure a coherent regulatory framework. PTS should consider ensuring that the relative prices of the different access options in relation to one another and in relation to the retail prices prevailing in the market do not distort investment decisions. 6.1 BIT-STREAM ACCESS As noted in the LRIC Model Reference Paper, bit-stream access allows other operators to provide Internet access to end-users by using ADSL transmission on the existing copper pair used for PSTN services. Instead of installing their own equipment, operators use the existing DSLAM equipment of the incumbent (SMP) operator. The bit-stream access service will normally include: Lease of capacity on the copper (similar to shared access); Lease of capacity in the SMP operator s DSLAM; Transport of traffic from the DSLAM to the nearest point in the SMP operator's ATM network. The service might also include installation of the ADSL filter at the customer's premises. In order to use the service, the other operator will normally need to have a separate agreement regarding access to the ATM network of the SMP operator (e.g. using a Virtual Private Circuit). Bit-stream access is an attractive alternative to LLU, particular in areas where the number of potential ULL lines per local exchange is low. In these areas it may not be economical feasible for new entrants to install their own ADSL equipment at the local exchange. Forcing new entrants to make such investments would also be highly inefficient. Instead, it will be more efficient for new entrants to buy bit-stream access to the customer from TeliaSonera. Requiring relatively few investments compared to shared access and ULL, bit stream access may constitute a natural first step in entering the market for broadband services. It allows the entrant to build a customer base and gradually move up the ladder of investment to more capital intensive service provision. Pricing bit-stream access on the basis of LRIC would be an obvious starting point for reasons similar to those pointed out for LLU. If bit-stream access were regulated on 14

17 the basis of LRIC, however, one would need to decide how to allocate the shared cost of the copper line. As for shared access, there would be a strong argument for allocating all the shared costs to PSTN 11. As bit-stream access is not an essential facility for new entrants, who also have the alternative option of full or shared copper access, however, a price regulation based on LRIC might be considered too intrusive to TeliaSonera and not proportionate to the underlying market failure. Instead PTS has suggested regulating the price of bit-stream access on the basis of retail-minus. A price determined on the basis of retail-minus will indirectly be determined by the market via the retail price of broadband services, determined by the competition in the end-user market. The retail minus approach is discussed in more detail below. 6.2 REMARKS TO COMMENTS RECEIVED FROM THE INDUSTRY One operator notes that a retail-minus scheme will not ensure that TeliaSonera can recover its costs. While this is certainly true in theory, it will only occur in situations where TeliaSonera chooses to lower its retail prices below its costs. To price below costs will only be optimal for TeliaSonera: 1. to force out the competitors (which would be a case of predatory pricing); or 2. in response to fierce competition from other operators with access to different, more cost effective, infrastructure. Should the latter case materialize, however, there will be a basis for PTS conducting a renewed assessment of the competitive situation and the need for regulatory remedies. One would expect such a review to lead to the abolishment of the retail minus regulation. One operator notes that retail prices as a result of competitive pressure may vary between different geographical areas. The operator asks which retail price should then be used for the retail-minus scheme. Although the issue is outside the scope of this paper it is worth high lightning at this stage as PTS should ensure that regulatory intervention does not lead to any distortions that disfavour rural customers 12. A number of operators all question the use of different pricing principles for bitstream access and copper access. Where one operator is primarily concerned about the retail minus scheme leading to prices below LRIC, another considers that a price based 11 One possibility would be to base the initial prices of bit-stream access on line-sharing costs combined with an uplift factor to reflect any additional costs associated with xdsl Bitstream access. The uplift costs would depend on the point at which access was obtained to the xdsl Bitstream. 12 Note that there are a number of issues that need to be considered when setting a retail minus price, for example: Should the basis be an average retail or lowest retail price be used. If average is used, how is average determined? How is the minus (cost saving) calculated? 15

18 on retail minus will never provide end users with lower prices. A third operator is primarily concerned with investment decisions being biased. The comments indeed have some merit, in particular from a static efficiency point of view. However, the difference in approach is primarily motivated by reference to the principle of proportionality according to which a LRIC regulation might be considered unnecessarily burdensome for TeliaSonera. Moreover, bit-stream access should be seen as a stepping stone to more infrastructure based competition. Too low a price for bit-stream access might hamper the incentive to invest in more infrastructure intensive solutions such as e.g. ULL, where the operator installs his own DSLAM equipment. A price based on retail minus is likely to be higher than a price based on LRIC (in particular where all the shared costs are allocated to PSTN). 6.3 WHOLESALE LINE RENTAL Wholesale line rental provides another means for operators to supply network access, but is not a direct substitute to bit-stream access or copper access services as the wholesale subscription service is to supply customers with PSTN services - not broadband access. The service enables new entrants to offer both line rental and calls to end-users, competing against the retail subscription service of TeliaSonera. Any regulation of wholesale line rental will need to acknowledge that the PSTN retail subscription charge is regulated. The aim of this regulation at the retail level is to ensure that end-users have access to PSTN services at affordable prices. As opposed to wholesale copper access and interconnection, the regulated price is not determined with the purpose of providing the incumbent and new entrants with efficient investment signals. In order for new entrants to be able to compete against TeliaSonera for PSTN line rental, they require a certain margin between the (regulated) retail price of TeliaSonera and the wholesale line rental. As the subscription charge is not based on LRIC, a LRIC based charge for wholesale line rental would not be appropriate either, as it would not ensure a reasonable competition margin. Instead, a retail-minus scheme seems to be the most appropriate solution, with the margin being based on the cost saved by TeliaSonera by not having to provide the retail part of the service. New operators are then encouraged to enter if, and only if, they can produce these retail services (such a marketing, billing, customer support etc) at lower costs than the incumbent. 16

19 7 Conclusion To ensure that consumers have access to secure and efficient electronic communications and the greatest possible benefit regarding the range of electronic communications services and their price and quality, PTS should stimulate efficient use of, and investment in, network infrastructure and broadband facilities and stimulate effective and sustainable competition in the market for voice and broadband services. Infrastructure competition should be encouraged where it is economically feasible. It should be left to the market to decide where infrastructure competition is feasible. To send the right build/versus buy segments to the market, the price of bottleneck/essential facilities/services should be set on the basis of LRIC. The shared (common) capital costs of the line should not be included in the price of shared access. This will ensure an efficient use of the network while simultaneously stimulating the uptake of broadband services in Sweden by providing a relatively inexpensive means of access. This requires that TeliaSonera be able to recover its line cost via the voice subscription. If the customer were to cancel its voice subscription (either with TeliaSonera or another operator renting the line from TeliaSonera) this would no longer be the case. The line would therefore need to change status from shared access to full access. If this were not the case, the incentives to invest would be distorted. As far as possible, PTS should ensure that the price of shared access does not fall below the price of full access minus the price of TeliaSonera s retail subscription. Otherwise this might constitute a barrier for new entrants wanting to provide voice services in combination with broadband services. To allow infrastructure competition to develop, entrants should be able to climb the ladder of investment step-by-step, gradually rolling out their network infrastructure. To enable such a step-by-step entry to take place, PTS needs to ensure a consistent pricing structure across the different access products. As regards Bitstream access, PTS has proposed to adopt a retail-minus methodology. Basing prices on the basis of LRIC might not be considered a proportionate remedy as these services are not strictly essential to new entrants who also have access to full and shared copper access. A retail minus scheme also seems to be most appropriate solution for wholesale line rental. By determining the price of Bitstream access and Wholesale Line Rental on the basis of retail minus, new entrants are provided with a margin on which to compete against TeliaSonera and build up a critical customer base. As the retail-minus price is expected to be above LRIC, new entrants will then have the incentive to move from Bitstream access to shared copper access (or full access) when sufficient economies of scale can be obtained, installing their own DSLAM equipment at the local exchanges of TeliaSonera. This allows entrants to climb the ladder of investment and meets the goal of stimulating efficient and feasible infrastructure investments in Sweden. 17

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