Next Generation Access networks in Europe - briefing

18 September 2008
by eub2 -- last modified 18 September 2008

The European Commission has launched a public consultation on the regulatory principles to be applied by EU Member States to Next Generation Access broadband networks (NGA). NGA optical fibre-based networks enable bitrates several times higher than those currently available on traditional copper wire networks. NGAs are required to deliver high-definition content (such as high definition television) and interactive applications. The objective of a common regulatory framework for NGA is to foster a consistent treatment of operators in the EU and thereby ensure the necessary regulatory predictability to invest. The Commission is consulting on the basis of a draft Recommendation, addressed to the regulators in the 27 EU Member States and suggesting definitions for harmonized categories of regulated services, access conditions, rates of return and appropriate risk premiums. The public consultation will be open until 14th November 2008. The Commission will then finalise the Recommendation in the light of comments received and formally adopt it in 2009.

What are Next Generation Access networks?

Currently broadband is provided by telecommunications operators to their subscribers via the same copper wires that have been used for telephony since its invention in the 19^th century. However, new broadband services such as online gaming, high-definition TV and interactive applications require ever higher bandwidths that cannot be provided over copper infrastructure. To provide these services it is necessary to replace the copper infrastructure connecting the end-users to the local switches (the "local loop") by optical fibre. These new fibre-based access networks are referred to as "Next Generation Access networks" or "NGAs".

Two main forms of next-generation fibre access can be distinguished depending on how close the fibre is brought to the end-user. Fibre can be rolled out all the way to the customer's premises (Fibre To The Home, "FTTH"), or it can be rolled out to an intermediary concentration point (Fibre To The Node, "FTTN" also designated as Fibre To The Cabinet "FTTC" ) and copper wires remain in use for the final connection to the customee. FTTN architecture allows download speeds of up to 50 Mbit/s depending on the configuration, FTTH architecture allows download speeds of 80 Mbits/s or more with current technologies, and almost unlimited bandwidth in the long term with technological advances in photonics equipment.

Why regulate NGAs?

Broadband is currently regulated in the EU Member States by the national telecoms regulators in order to avoid distortions of competition. Incumbent operators are required to provide access to their networks, which cannot be duplicated in a reasonable time period, in order to enable consumers to choose between broadband providers. The roll out of NGA networks does not remove the existing competition concerns regarding broadband, i.e. that incumbents could leverage the dominant position they enjoy as owners of non-replicable legacy access infrastructure to monopolise new broadband services provided over this infrastructure and thereby limit consumer choice. Currently, the wholesale broadband markets warrant ex-ante regulation, under the Commission Recommendation on relevant markets (see IP/07/1678). Unless it can be established that NGA access services are markets different from the current regulated wholesale broadband markets, dominant operators with significant market power (SMP) in these markets are within the scope of the Recommendation and access to their NGA networks should be regulated. Proper broadband regulation remains a necessity to ensure a level playing field amongst NGA investors and brings benefits to consumers, including better services, more choice and better prices.

Who regulates NGAs?

The regulation of broadband in each Member State is the responsibility of the national regulatory authority (NRA). In accordance with the EU's Telecom Rules, where an NRA determines that a relevant market is not effectively competitive, it shall identify operators with significant market power and impose appropriate regulatory obligations.

While operators are starting to roll out NGA networks, national regulatory authorities are developing their regulatory responses. Already some NRAs have adopted obligations concerning access to the NGA infrastructure of the dominant operator (including France and Portugal in the case of FTTH and Germany in the case of FTTN). Other NRAs have further specified obligations concerning infrastructure sharing.

The national regulators have started reflecting on the regulation of NGA and published a position paper on this issue at the occasion of the review of the EU electronic regulatory framework.

Why is the Commission now intervening?

The Commission believes that it is important to provide regulatory guidance to the NRAs at this early stage of NGA rollout. Inconsistent regulatory responses throughout the EU would undermine national and cross-border investment in NGA. Moreover, competition may be harmed due to improper regulation or the absence of regulation which would allow incumbent operators who own most of the infrastructure to monopolise the broadband retail services.

The Commission is committed to ensuring that the transition to NGA takes place in a consistent, efficient and timely manner. In order to achieve this objective, it is necessary to contribute to the establishment of an EU-wide consistent regulatory environment. Such an environment should provide reasonable levels of legal certainty for potential investors while promoting the development of sustainable competition during the transition to high speed networks.

Once adopted, the Commission's Recommendation will provide a framework to examine the measures proposed by the national regulators for the rollout of NGAs, when regulators notify their drafts under the Community consultation mechanism (the so-called Article 7 procedure). For a key development such as the roll out of NGA networks, it is more efficient to provide overall ex-ante guidance to the national regulators than case-by-case comments.

What will be the potential effects of the Commission's intervention?

So far, fibre networks have been deployed slowly across the EU, covering a marginal share of national markets. Next Generation Networks (NGNs) today account for slightly more than one million subscribers in the EU, in comparison with between 1.5 and three million in the US, 2.8 million in South Korea and eight million in Japan.

Investment in Europe is currently low. To upgrade the EU networks completely, up to €300 billion investment could be necessary, according to estimates by McKinsey. The deployment of NGA networks will however occur gradually, starting from the densest areas. Investments in the range of €20 to €40 billion over the coming 3 to 4 years could occur provided that the conditions are set right. Regulatory predictability is clearly one of these conditions. The Commission's Recommendation will provide regulatory certainty to investors by ensuring a consistent application of regulatory remedies throughout the EU, thereby facilitating cross-border investment, and consolidating the internal market for electronic communications.

As importantly, the Recommendation will guarantee fair competition during the roll out of NGA by ensuring that national regulators mandate appropriate access to the legacy physical infrastructure of the SMP operators, thus allowing entrants to roll out competing networks and services. This will ensure long term sustainable competition and increase consumer choice and innovation.

How will consumers benefit from the Commission's intervention?

The deployment of NGA is necessary to allow EU consumers to use various new broadband services. Therefore, the NGA rollout will contribute to long term consumer welfare. It will also offer large growth opportunities to the IT and content industries and to the European economy as a whole.

Enhanced competition between operators helps to encourage service innovations and to convey broadband prices to the lowest level, as illustrated already in the French market. More competition and choice for consumers are the essence of the new EU Telecoms Rules proposal see IP/07/1677).

How does the Recommendation fit with the current review of the Regulatory Framework?

The Recommendation is based on the current Framework and the revised Recommendation on relevant markets and in particular the revised definition of the two wholesale broadband markets ("market 4" and "market 5"). The objective of the Recommendation is to foster the application of consistent access remedies on dominant NGA operators following the review of the two broadband markets by the national regulatory authorities.

Operators are starting to rollout NGA throughout the EU and NRAs are currently in the process of reviewing their national broadband markets. There is thus an urgent need of regulatory predictability. The Commission hence proposes to address the issue of NGA regulation through a specific Recommendation.

Will regulation only be imposed on dominant operators (SMP operators)?

The overall objective of the Recommendation will be to foster the application of consistent regulatory remedies on dominant NGA operators in broadband markets in order to prevent them from leveraging their dominant position to new broadband services markets. The recommendation is therefore mainly "asymmetric", i.e. rules are imposed only on dominant operators with significant market power.

However, the Commission also recommends NRAs to facilitate and encourage build-and-share projects between SMP operators and other alternative providers for new investments.

Is access to ducts the ultimate remedy?

In general, the Commission considers the facilitation of infrastructure competition as the preferred regulatory option. It allows sustainable competition in the long term and increases consumer choice and innovation. With civil works representing up to 80% of the total rollout costs of NGA, an efficient remedy would be to ensure a cost orientated non-discriminatory sharing of legacy physical infrastructure. There may however be cases where infrastructure competition is not viable because no ducts are available or because the population density is too low for a sustainable business model. In such cases access to other passive elements (dark fibre) or access to active elements - service based competition ("bitstream") - should be mandated, according to the draft Recommendation.

The approach of the draft Recommendation is to ensure that investment occurs at the lowest possible level of the network infrastructure. The linkage and gradation of the remedies between access to ducts, other civil infrastructures and fibre would create an environment favourable for investment and the development of effective infrastructure-based competition. It would require NRAs to analyse the entire telecoms value chain in a consistent manner and in particular to analyse markets 4 & 5 in a coordinated way. This should lead to a minimum, proportional and consistent set of remedies.

What services will be regulated over NGA in the future?

From a competition law perspective, services provided over NGA networks should in principle be considered as incremental upgrades and should therefore not be treated as new markets, unless there are clear indications of a lack of substitutability as compared to current product markets.

However, the deployment of NGA networks will lead to the emergence of new retail services (for example very high bandwidth Internet connectivity services, managed IPTV, High Definition audiovisual content or services requiring high speed symmetric bandwidths or a bundle of these services). Such new services may, in turn, generate wholesale demand for broadband access services with different characteristics from the wholesale broadband access services that are part of the currently regulated relevant product market, for example because they do not only consist in a higher bandwidth, but also of additional features specific to the new applications concerned (e.g. need for guaranteed throughput). In these circumstances, imposing access obligations to these additional features would not be appropriate, unless there was evidence that their provision constituted also a market which is not competitive and which required ex ante regulation.

What is the appropriate rate of return for NGA investments?

The Commission recognises the need to compensate companies for the higher risks they face when investing in NGA through a sufficient rate of return on the capital employed. In its draft Recommendation, the Commission proposes the Capital Asset Pricing Model (CAPM) as an adequate methodology to calibrate such a rate of return and acknowledges that the potential high measure of systematic risk associated with specific investment in NGA should be taken into account when deriving the required rate of return.

The Commission does however not propose an EU-wide rate of return for investments in NGA.

Together with the principle of gradation of remedies, a proper methodology for calculating the rate of return on NGA investment will foster infrastructure investment of both incumbent and alternative operators.

Is geographic segmentation relevant in the case of NGA?

Some market players call for a geographically differentiated application of access remedies because the conditions for investment in NGA might differ from one area to another, depending on factors such as the density of population or the availability of rights of access to property to roll out fibre. However, this is not sufficient to conclude that these different areas constitute distinct geographic markets. As stated in previous cases (e.g. the Commission decision to approve OFCOM's proposal to de-regulate part of UK broadband market, regulatory obligations should be designed on the basis of a sound competition law analysis. Therefore, local market segmentations below the national level can only be justified where different conditions of competition arise that can be appreciated by evidence such as differences in the distribution of market shares and prices. Given that NGA networks are still in an early stage of rollout, it is doubtful that they could bring about such differences in the coming years.

Source: European Commission