Supervisory Authority Annual Report 2012 Governance of the Network and the Digital Agenda Franco Bernabé (Chairman) (Rome, 20 March 2012)
Good morning everyone. I would like to start my report by thanking the members of the Supervisory Authority and the personnel of the due diligence support structures who worked hard over these years to achieve the results described in the Annual Report. In 2008, when Telecom Italia decided to set up Open Access and start up the process of presenting the commitments enhancing competition, we considered this initiative as the equivalent of launching a real innovation of governance for the access network, no less important than the technological or commercial networks we normally deal with in our sector. Three years later we can say that this innovation significantly improved the competitive outlook in favour of the alternative operators, therefore benefiting customers. In order to better understand the logics beneath this statement, we need to recall the competitive and regulatory context at that time. In 2008, the Authority deemed necessary to strengthen the 2002 provisions regarding parity of treatment to promote greater competition in the access to the fixed network and in the related markets. To eliminate both the causes and the consequences of some types of behaviour criticised by the Authority, Telecom Italia adopted some Undertakings, approved at the end of 2008, with the following aims: (a) To further grant parity of treatment; (b) To improve the quality of the fixed access network; (c) To improve transparency in the fixed access network ; (d) To preserve competition while moving towards the new generation networks (NGAN). Telecom Italia s choice of the Undertakings followed the recognition of the relevant value of access network for the economic and social development of the national economic system. Today, after over three years of intensive activity in the implementation of the Undertakings, we are able to assess the effectiveness of the operational separation model adopted by Telecom Italia in terms of real achievement of the initial objectives. It should be pointed out that such a model, which derives from voluntary Undertakings, gained a strongly regulatory character. As a matter of fact, most of the Undertakings were lately transformed into remedies, thus confirming the relevance of the form of equivalence proposed by Telecom Italia, and of its impact on the competitive framework. 1. The Italian operational separation model and the action of the Supervisory Authority The model of operational separation developed by Telecom Italia today represents a consolidated best practice at the European level, so that BEREC, the body grouping the 27 Regulatory Authorities of the Member States, substantially considers it to be comparable to the functional separation of Openreach in terms of capacity to promote effective solutions for equivalent access. 1 1 BEREC Guidance on functional separation under Articles 13a and 13b of the revised Access Directive and national experiences, February 2011.
BEREC further recently highlighted that operational separation is a sufficient, proportionate approach to grant parity of treatment through the equivalence of output. 2 As a matter of fact, the Openreach model of functional separation required, much longer times and higher implementation costs when compared with those related to Open Access and to the implementation of the Undertakings. We should - as well - recall that the voluntary separation undertaken by Telecom Italia anticipated the European Directives in the sector by over a year introducing rules which regulate the presentation of the commitments and the evaluation of the consequent impact on the regulation of access and related markets. Such an overview shine a positive light on the Italian Authority who action anticipated the European regulatory framework, still rigidly tied to market analyses as the only means to impose remedies to remove distortions in competition. Actually the reinforcement of equivalence could only pass through voluntary commitments rather by the typical access remedies provided for in the Directives. As a matter of fact, the imposition of these measures implies the assessment of the existence of exceptional conditions never till now - ascertained by any EU national Authority. Among Telecom Italia s Undertakings, the setting up to the Supervisory Authority is undoubtedly of great importance. This choice to set up such an authority was led by the need to grant, through a third party aware of the complexity of the corporate processes, the correct implementation of the Undertakings. This new body was assigned the task of checking potential violations of the Undertakings, ex oficio or following complaints by third parties. In order to perform this task, the Supervisory Authority was provided with the power to obtain the needed information and data by Telecom Italia s facilities involved in the provision of SPM access services to alternative operators. In other words, the Supervisory Authority was asked to perform the delicate role of facilitator of the interaction between Telecom Italia, the alternative operators and the Regulatory Authority on the complex and extensive issues related to the Undertakings. This role has been efficiently and effectively performed by the Supervisory Authority. Such a positive evaluation was also confirmed by the assessment made by the Authority on the implementation of the Undertakings. With its recent Resolution N. 600/11/CONS the Authority has, in fact, completed the investigation started in 2008, finally ascertaining the correct and effective implementation of the Undertakings. As a consequence all the pending sanctioning proceedings were dismisses. 2. Quality improvement of the network and of parity of treatment The combined effects deriving from the implementation of the Undertakings, from the activity of the Supervisory Authority and from the activity of the Italian Authority, together with the resources invested for this purpose by Telecom Italia, contributed to the constant improvement of the quality of the access network. 2 BEREC s Review of the Common Positions on wholesale unbundled access, wholesale broadband access and wholesale leased lines: Stage 1 High Level Principles on issues of non-discrimination, March 2012.
As highlighted by the Authority in Resolution 679/11/CONS, in the period going from October 2010 to September 2011, significant improvements occurred in all the quality indicators, thus enabling us to go even beyond the targets set by the Authority. In particular: i) The percentage of so-called network KOs 3 was 1.46%, compared to the target rate of 2.87%; ii) Preliminary maintenance 4 undertaken was over 113% with respect to the interventions planned, compared to a target of 95%; iii) The breakdown rate 5 fell by approximately 14.1%, compared to a target of 8%. Even better results were recorded with respect to technical parity of treatment between the commercial divisions of Telecom Italia and alternative operators. These results may be clearly emphasized thanks to the monitoring system included in the Undertakings, which makes easily available a number of quality performance indicators (KPI) related to Open Access SPM services provided to Telecom Italia a final customers and alternative operators. These KPI refer to: - Delivery processes (e.g. activation of a new line); - Assurance processes (e.g. repair of breakdowns); - Availability/unavailability of the network and services; - Availability/unavailability of the wholesale management and assistance systems. The results recorded for 2011 highlighted that last year, as well as in 2010, the services guaranteed to alternative operators were - at least - in line with (if not even better than) those guaranteed to the Telecom Italia s commercial divisions with regard to all the key aspects of service quality. More in details: a) The average delivery time of a new line to alternative operators was actually 1 day shorter than the one recorded for a Telecom Italia retail customer; b) The average time needed to repair a voice breakdown for alternative operator customers was likewise 1.5-2 working hours shorter compared to the rate recorded for Telecom Italia retail customers; c) The average time to repair a breakdown on a broadband line was the same for alternative operators and Telecom Italia customers; d) The average time of service unavailability (i.e. the percentage of time in which the service does not work) was substantially the same for alternative operators and Telecom Italia customers. Finally, the indicators regarding the availability of wholesale services and management or assistance systems are now close to 100% (in particular, they are all higher than 99.9%). 3 Cancellations of requests for wholesale services by alternative operators due to problems relating to the access network. 4 State of advancement in the programmes for the renewal of the copper wire network in terms of percentage of measures undertaken compared to those planned. 5 Number breakdowns reported for which on the spot intervention was required, compared to the total number of active lines.
3. The development of the competitive scenario Market trends provide a valid tool for the assessment of the effectiveness of the Italian separation model, framed by Open Access and the Undertakings granting technical and economic equivalence in the supply of SPM access services. Such a solution actually represents a preventive answer for any competitive concerns deriving from the presence of a single vertically integrated operator in the fixed access network. In the 2009-2011 period, in a telephone access market scenario characterized by a decrease of over 500,000 lines, the alternative operators accounted for approximately 2.2 million net acquisitions. This figure derives from the activation of over 2.1 million wholesale accesses provided by Telecom Italia, 6 and only 60,000 new access lines furnished independently by alternative operators (less than 3% of the total!). Consequently, in three years the share of alternative operators on the telephone access market has grown by 10.5%, rising from 23.1% at the end of 2008 to 33.6% at the end of 2011. In the same period, the broadband access market recorded a growth of approximately 2.3 million ADSL lines, 370,000 of which were acquired by Telecom Italia and approximately 1.9 million by alternative operators. 7 Consequently the share of the alternative operators in the broadband access market increased by 7.5%, rising from 39.5% at the end of 2008 to 47% at the end of 2011. Given these figures, any statements still claiming insufficient parity of internal-external treatment allegedly blocking increased competition may be considered absolutely groundless. Similarly, the Telecom Italia unbundling tariff cannot be considered as a cause of any alleged lack of penetration of the service and as a factor limiting competition. Actually, thanks to 5 million unbundling lines at the end of 2011, corresponding to a penetration rate of 23% on the total copper wire lines, Italy occupies one of the top places in the EU, only after France (27%) and Germany which records the highest penetration rate of unbundling lines (29%) but also the highest monthly tariff for the service (10.02 /month). Furthermore, Italy within the so-called Big Five in the EU is the county where alternative operators still benefit from the highest price differential between the average retail tariff 8 and the unbundling tariff 9. Such a differential is now set at 72%, compared to 68% in France and Spain, 65% in the UK and 59% in Germany. Finally, price trends for Telecom Italia s and the major alternative operators retail price offers once again confirmed the great level of competition and the absence of any price squeeze issue due to Telecom Italia wholesale tariffs. Examining, for example, the main flat rate voice + internet offers (i.e. double play) for residential customers, we may notice that while 6 Of which 1.2 million local loop unbundling lines, 0.5 million naked bitstream lines and 0.4 million wholesale line rental lines. 7 Of which over 1.8 million through wholesale access services (approximately 1.2 million local loop unbundling lines and approximately 0.6 million bitstream lines) and approximately 60,000 via new fibre accesses. 8 The average retail tariff is calculated as a weighted average of the March 2012residential and business tariff with respective weights of 75% and 25%. 9 Values of March 2012full unbundling service tariff.
nominal prices virtually did not change since 2008, 10 due to the recourse to increasingly aggressive and long-lasting promotions (even exceeding 24 months), in the 2009-2011 period, effective prices of the alternative operators decreased significantly by as much as 25%, and the differentials compared to Telecom Italia s retail [?] prices have widened considerably, in most cases to up to 30%. 11 4. Access network investments and development plans Despite market trends and the negative economic situation, in the last 3-year period, Telecom Italia invested approximately 7 billion euro in our country s fixed network. In terms of the impact of investments on revenues, in 2011, Telecom Italia, with 14.3% (net of the LTE tender), registered a higher rate than the EU major traditional operators : British Telecom (13.7%), Deutsche Telekom (12.7%), France Telecom (11.0%) and Telefonica (10.9%). 12 This commitment will also continue over the next 3-year period 2012-2014, when Telecom Italia plans to invest a total of over 9 billion euro in the domestic market. Telecom Italia investment plans will provide a major contribution toward the achievement of the infrastructural objectives set down in the European Digital Agenda which, as we know, calls for the elimination of the digital divide by 2013 and, by 2020, for 30 Mbit/s coverage for 100% of the population and 100 Mbit/s connectivity for 50% of households. With reference to the NGAN, by 2014 we will achieve coverage of approximately 6 million premises (corresponding to 25% of the population). In the context of the 2020 Digital Agenda targets, our coverage plan will continue and extend to over 200 towns and approximately 50% of the population, with the deployment of optical fibre infrastructures in two phases: 1) In the first phase, with the deployment of the FTTCab architecture, connectivity at a speed from 30 to over 50 Mbit/s will be made available, in line with the first 2020 target of the Digital Agenda; 2) In the second phase, the fibre network will be extended to single premises, completing the FTTH architecture. Such a two-stage intervention follows criteria of efficiency; as a matter of fact, the FTTCab solution requires much lower investments and installation times compared to FTTH, and thus allows customer needs to be promptly met. Moreover, technological evolution will enable continuing increases in transmission speed on the FTTCab networks: such a situation needs to be adequately emphasized. Through vectoring 13 we are already able to provide 100 Mbit/s connections, while trials of a phantom solution 14 allowed us to achieve 300 Mbit/s. 10 At the same VAT rates and for the same range of services and accessory products included in the bundling. 11 Source: Analysis of the competitive context for flat consumer voice + internet offers, study conducted by Between for Telecom Italia, March 2012. 12 The estimates refer to the first 9 months of 2011. The data for Telefonica is organic. The data for FT refers to the entire Group and for the 3 rd quarter of 2011 only (the domestic figure is available for the first half of 2011 and is 10.9%). 13 VDSL2 vectoring has considerably enhanced the capacity of traditional accesses (up to 100 Mbit/s and higher within 400 metres from the cabinet) by the use of algorithms and techniques for eliminating interference between all the various outgoing twisted pairs on a cabinet.
The impact of these new technologies could be significant especially in Italy, since approximately 60% of the customers are located within 400 metres of the street cabinets. The greater efficiency of the FTTCab solution has been confirmed by the net predominance at the European level of NGAN projects based on fibre to the cabinets. These projects are being developed in Germany, the UK, Austria, Belgium, Denmark as well as the Netherlands, though this was the only EU country that started the installation of FTTH-P2P architecture in 2008. Technological evolution highlighted that there are no technical reasons grounding discussions which sparked a heated debate in recent years - over an a priori preference of certain types of NGAN architecture Telecom Italia s main concern is to guarantee, in reasonable times, the access speeds required by the market without limiting competition, and the FTTCab solution fully responds to these objectives. Also BT, widely considered the European champion of equivalence, is setting up its own NGAN network based on the FTTCab solution. Such a deployment is not actually raising any fears of risks for competition. Telecom Italia s strategy for the development of NGAN solutions is therefore perfectly coherent with the expectations of the European Commission which, in a recent intervention of the Commissioner for the Digital Agenda, declared that the 2020 targets could be achieved with a gradual approach, based on a mix of technologies in which all the FTTH, FTTCab, mobile LTE and cable solutions, introduced in an incremental manner and on the basis of the specific requirements of the various geographical areas, will have an important role to play. 15 5. The NGAN rules In recent days we have published the Reference Offers for NGAN wholesale access services. These offers include all the options set forth in the European Recommendation on the regulation of NGAN access,,even going beyond in certain cases such as the dark-fibre connection service, the so-called end to end between the Telecom Italia exchange and the premises of the user, which is not provided in any European country. The Authority has, in fact, adopted a regulatory model requiring the maximum opening of the Telecom Italia new generation access network in terms of both wholesale passive and active services. As a matter of fact, the authorities in other EU countries have laid down a much less strict set of NGAN requirements than the one applicable in Italy. 16 14 Starting from two coupled copper wire twisted pairs (with the so-called bonding technique), the VDSL2 phantom creates a third virtual twisted pair added to the two physical ones, and thanks to the vectoring that eliminates the interference between the carriers, creates a single high speed channel (300 Mbit/s within 400 metres and 100 Mbit up to 1 km from the cabinet, according to tests by Alcatel-Lucent and Huawei) 15 Unblocking the broadband bottleneck, intervention by Neelie Kroes, European Commissioner for the Digital Agenda, at the Cable Congress of the European Cable Communications Association, Brussels, 8 March 2012. 16 Other Member States, however, have privileged a well-defined model regulating competition. For example, countries like France, Spain and Portugal have opted for the promotion of an infrastructure-based competition model, based solely on the access to the infrastructures (cable lines) of the traditional operator, and on the symmetrical sharing of vertical wiring created by various operators (without any bitstream requirement) or, as
We should question whether, in the end, these rules will manage to create greater incentives to invest in alternative access infrastructures, or whether, on the contrary, they will finally promote even for NGAN services, as already happened for copper wire legacy networks a competition almost solely based on traditional operators wholesale services. 6. The governance of the access network Although the positive impact of Open Access and of the Undertakings on competition has been backed up, as already mentioned, by market trends, and has received positive feedbacks not only from the national Authority but also on the European level, there has recently been a proliferation of legislative initiatives aimed at imposing new forms of separation on Telecom Italia, in clear conflict with the existing regulatory framework. We refer, in particular, to the proposals aiming at imposing by law the separation of the access network, allowing third parties, to manage of activities and perform functions related to Telecom Italia s network, such as the activation and maintenance of unbundled lines provided to alternative operators. First of all, imposing regulatory requirements by means of a law conflicts with the competence granted to independent Regulatory Authorities by European laws implemented in Italian legislation. Such a consideration is not only ours; this position has recently been held by the European Commission itself. It is hardly necessary to point out that these control-oriented proposals are also in clear conflict with the Italian Constitutional law, since they directly affect (without any justification of public interest) the right of the network owner (who - we should recall is a private subject) to dispose of its assets. In other words, these interventions are in net contrast with the rule of law, and are clearly a form of expropriation. Besides the illegitimacy of these measures, granting to several entities competences over the activation and maintenance of unbundled lines would prove to be wholly unfeasible under a technical point of view. Anyhow, even if it was theoretically feasible, such a provision would certainly not guarantee any benefits for consumers. In the first place, it would prove nearly impossible to safeguard the constitutional right to the privacy of communications, as well as to maintain the integrity and security of the network which Government s provisions themselves deem to be of strategic importance. Moreover, the quality levels of the network which are required by a universal service provider could not be guaranteed. With reference to the technical unfeasibility of the proposed solution, we need to consider that the single copper wire twisted pair transferred to an alternative operator in an unbundling agreement is part of a high capacity cable (containing several thousand copper wire twisted pairs), so that it is technically impossible to assign to various third party companies the task to assure the maintenance of single twisted pairs inside this cable. Who will solve conflicts between operators in case of cable damage? in the Netherlands, on the sole requirement of fibre unbundling on FTTH-P2P architecture. Countries such as Germany and UK, on the other hand, have favoured a service-based competition model mainly based on the bitstream/vula access requirement, without providing for any requirements on access to dark fibre and vertical wiring.
Who will be the subject responsible for its repair? Obviously, it should be the owner of the whole network and certainly not the operators enjoying unbundling, each of which should be involved pro-quota and only through the company in charge of maintenance. Moreover, how would it be possible to face the typical problems of interference that must be evaluated and solved, taking into account the whole set of transmission services carried over the cable? And, last but not least in terms of relevance, the problem of identifying the operator in charge of granting the secrecy of telephone line tapping operations requested by the judiciary authorities would also arise. These are only few examples of technical problems which may rise. These problems already highlight the unfeasibility of the proposed measures, which - not surprisingly - have no precedents in any EU country. 7. Concluding remarks The end of a 3-year period is the right occasion to assess the effectiveness and efficiency of our operational separation model. The greater separation between the activities linked to the Open Access SPM services, achieved thanks to the implementation of the Undertakings, enabled us to reach the primary objective set by the Authority since the public consultation of 2007 on the structure of the access network: effective competition in the supply of fixed network retail products and services. Telecom Italia firmly believes that competition is a fundamental factor for the development of the entire sector. It is undeniable that competition enabled us to provide customers with benefits in terms of price and quality which would not have been possible under monopoly conditions. The high level of competition reached in these years has been stated we could say certified by the market data: the market shares of alternative operators are always growing while the effective prices for consumers are continuously decreasing. The aim of regulation, therefore, can no longer be to preserve subsidised competition as in the initial stages of market opening. We hope that, based on the further guarantees offered by our separation model, the Authority will continue firmly on the path of a gradual mitigation of requirements at the retail level. On their side, alternative operators shall overcome that sort of competition by litigation which is no longer justified given the current equivalence standards. However, we should not forget that one of the main goals of regulatory activity is to promote infrastructural competition in the access networks as well. Such a goal still seems far from being achieved in Italy. The experience gained in recent years highlights that a regulation leading to a service based competition runs the risk of causing a constant proliferation of asymmetric rules. Such a regulation will finally act as a constraint on the system and will discourage investments, both by the incumbent and by the alternative operators. The aims set by the Government for the Italian Digital Agenda require the commitment of huge resources by our sector. Telecom Italia has always invested in the development of a single fixed access network for the country, and is planning to go on doing so in order to provide Italy with an increasingly
widespread and grassroots broadband and ultrabroadband infrastructure, designed to promote growth and to sustain the development of innovative services for households and enterprises. We hope that everyone will thoroughly do what they are ment to do, so that the deployment of new optical fibre networks can enable an infrastructural competition. Thank you for your attention.