Entente cordiale? New European Commission recommendation on non-discrimination and cost modelling takes freely from past approaches applied by NRAs

The recent European Commission draft recommendation on 'consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment' was published on Friday 7 December. It offers a wealth of important policy statements that will critically affect the competitive landscape for broadband networks in Europe over the next decade. It is a complex and nuanced document which (unlike some Commission statements of the last few years) might have been written by an EU national regulatory authority (NRA) and will repay careful reading by specialists. It is not possible to give full justice to it here, but we will try to give an initial flavour.

In essence, the document is highly focused on broadband inputs (passive network infrastructure and wholesale broadband access), even in areas where it need not have been: for example, it says nothing about non-discrimination remedies outside these relevant markets.

It is at least to some extent 'joined up' with the Digital Agenda for Europe, as it looks for next-generation access networks that include some fibre deployment and are capable of meeting the Digital Agenda targets. It is not fully technology-neutral, but does leave the door open for fibre to the cabinet and wireless deployments as modern equivalent assets. It also takes recent remedies into account: for example, the option of virtual network access is included seamlessly.

On non-discrimination the good news is that there are both 'carrots' and 'sticks' available as remedies. The bad news is that carrots are only available if sticks are also used and there is sufficient competitive constraint from cost-oriented local loop unbundling or competing infrastructures – an approach which is relatively prescriptive. The main carrot is the option of no price control for next-generation access; the sticks are as follows.

• Equivalence of inputs (seen here as the better solution), a concept in effect created by Ofcom, is the strong form of non-discrimination: it requires that operators with significant market power have to use their own wholesale product, using the same prices, systems, and processes. Functional separation is not required.
• Equivalence of Outputs or “technical and economic replicability” is the principal alternative, and the Commission's definition differs only slightly from today's combination of a non-discrimination obligation, an ex-ante margin-squeeze test, plus key performance indicators with service level agreements and guarantees. This is (arguably) similar to the approach implemented by some NRAs (for example, ARCEP in France for monitoring local-loop unbundling).

On costing methodologies for access products, the Commission is in favour of bottom-up LRIC+, but with an important change and a major caveat. The important change is that the re-use of long-lived civil engineering assets from the copper access network (such as ducts and poles) should be treated as a regulated asset base and carried forward at book value only (net of depreciation). This means that for over-depreciated assets (and indeed fully depreciated assets still in use) the costs will be lower than LRIC+. This mixed depreciation approach is similar to that used recently by ARCEP in France (the so-called Couts Courant Economique, or CCE) and by IBPT in Belgium. Ofcom has also taken a similar approach to the pre-1997 local loop assets of BT.

The major caveat is this: the Commission is in favour of a range of results from EUR8 to EUR10 (in 2012 real terms) per copper access line per month, and for countries where the result is within this range it will not insist on the use of the new methodology (which will be both time-consuming and quite expensive). For countries with results outside this range, it will seek that they should move to using such a methodology by the end of 2016. Of course, it is still an open question whether a mixed LRIC+/RAB approach will lead to prices for copper access which are this low in all EU countries: the EUR8–10 range may be too narrow, given the quite different topographies and demographies seen across the countries in the EU27.

By seeking to harmonise methodologies in this manner, the Commission is (ironically) demonstrating some of the benefits of allowing NRAs to seek their own paths: if the approaches they choose are coherent and are seen to work, these previously radical approaches can later be adopted by different countries. Our slogan is therefore: "Long live harmonisation! Long live the freedom to experiment!"

There are many aspects of the draft recommendation that are contentious, and some which may prove impractical. The Commission is unlikely to hold a public consultation on this document as it has previously consulted on these issues, but it is already in the process of consulting with BEREC, so EU stakeholders would be well advised to discuss these matters immediately with their NRA if they hold strong views.

Analysys Mason has a great deal of experience in all the matters discussed in this note, including margin-squeeze tests, key performance indicators, equivalence of inputs, and building regulatory bottom-up cost models for access networks using LRIC+ and mixed depreciation approaches such as the ones discussed above. For further information, see our Regulation expertise page.