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Draft BEREC Report on Access to physical infrastructure in the context of market analyses BoR (18) 228

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During its 37th plenary meeting (5-7 December 2018, Prague) the Board of Regulators has approved the draft BEREC Report on access to physical infrastructure in market analyses  (BoR (18) 228) for public consultation.

The EU needs significant investment in next generation access (NGA) networks that are capable of supporting a wide range of services in order to meet the needs of end-users (both residential and business consumers). Physical infrastructure (such as ducts and poles used to deploy networks) represents a significant proportion of the investment in NGA networks. Civil engineering works are lengthy and costly processes, for instance due to the need to gather the necessary permissions and the intensive use of human resources, among other issues. Moreover, replicating existing physical infrastructure is sometimes not technically feasible and, in many cases, not economically profitable. Measures aimed at facilitating greater use of existing physical infrastructure can reduce the civil engineering works required to deploy new networks, significantly lowering costs.

In this context, most NRAs in the EEA currently regulate access to physical infrastructure in the market for wholesale local access provided at a fixed location (market 3a). Some NRAs also regulate access to physical infrastructure in market 3b or market 4.  BEREC has not previously studied how NRAs have chosen to precisely address access to physical infrastructure in their market analyses. Therefore, following a questionnaire completed by NRAs, this report depicts the different approaches taken regarding the regulation of access to physical infrastructure.

The public consultation will run from 12 December 2018 to 23 January 2019 (17:00 CET)

Enquiries about the consultation, including registration problems with the online platform, should be sent to the following email address: PC_Physical_Infrastructure@berec.europa.eu

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P11

Access to physical infrastructure can be considered the most upstream of the fixed telecommunications services, as set out below in Figure 1. Accordingly, market power in relation to such access can be used to leverage market power in downstream markets. This is clearly recognised in the widespread use of access to physical infrastructure as a remedy in downstream markets in existing regulation, the more pronounced role for this remedy in Article 72(2) of the EECC[22] and the promotion of access to all types of physical infrastructure in the BCRD.

Figure 1 – Hierarchy of markets upstream of the fixed retail market[23]

As the answers to the questionnaire submitted to NRAs show, access to physical infrastructure is currently generally regulated as a remedy in most cases under market 3a. The specific scope of such SMP-based regulation, in terms of whether there are restrictions to geographic areas or usage[24], depends on the specific assessment of the scope of the remedy necessary to adequately respond to the identified competition problems.

Furthermore, it is clear from the answers to the questionnaire that these current approaches have to varying degrees provided a solid basis for competitive investment in network construction by alternative network operators.

Future potential challenges

The current situation notwithstanding, there are potential challenges to the existing regulatory structures which might arise from a number of directions. As discussed, the extent of such challenges are highly dependent on the precise nature of the the market conditions and the regulation applied in each Member State (for example the approach used for market definition, or the scope of the remedy needed to address competition concerns in that market) and are linked to the market developments in individual Member States.

The potential challenges include:

Technological changes that might require a redefinition of the markets and physical infrastructure remedy. This might include greater convergence in wireless and fixed services, or between markets 3a, 3b and 4;
Increased infrastructure-based competition (promoted by access to physical infrastructure) within Markets 3a or 4, such that continued regulation of access to physical infrastructure within these markets might need to be derived from a modified greenfield assessment (see Annex 3 for consideration of modified greenfield arguments in this context);
The development of offers of access to physical infrastructure from alternative operators (notably under the BCRD), to the point where the SMP status of the incumbent operators regarding physical infrastructure could be questioned;
A recognition that the competition concerns which might need to be addressed by the physical infrastructure remedy are wider than the concerns identified by the NRA under the market review process (the remedies on physical infrastructure thus being constrained by reference to the existing market’s competition concerns).

Clearly there are a range of potential responses to these challenges that might be appropriate, given the structure of regulation and market developments in a given Member State. These would include:

Treating access to physical infrastructure as a sub-market of market 3a, where applicable;
Widening the scope of the regulation, with reference to the changing nature of the competition problem in the existing markets (e.g. access to physical infrastructure is imposed in a particular market but it is not restricted to a particular usage, as a consequence of the impact of factors such as the convergence process or technological changes);
Cross service market regulation for physical infrastructure, as envisaged in the EECC (Article 72(2)), which, as noted, indicates that the remedy regarding access to civil engineering may be imposed irrespective of the precise scope of the relevant market as determined by the market analysis;
Parallel regulation under multiple markets (e.g. consideration of the physical infrastructure remedy not only in the context of a particular market, but also in each one of the other markets susceptible to ex ante regulation where access to infrastructure may be instrumental for the development of the competitive process);
Reliance on the BCRD (see however Annex 4 for the possible limits of this approach).

This paper does not attempt to assess these alternatives, nor the degree to which the changes in the new regulatory framework may assist in making existing regulation more robust to challenges. Instead the focus of the remaining subsection of Section 5 and the supporting annexes will be devoted to considering how an alternative approach, that is the definition of a separate market for physical infrastructure, might be constructed (including some consideration of the three criteria test and the assessment of SMP in this newly-defined market).

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5.2 Overview of the relevant issues to consider when access to physical infrastructure is a separate market

P12

As has been indicated, the possible consideration of physical infrastructure as a market on its own may become an increasingly important topic, in particular if some of the trends that have been highlighted in Section 5.1 above become more apparent and relevant.

Therefore, some reflections on the way NRAs could perform a market analysis, in the event that access to physical infrastructure was to be identified as a relevant market, are provided below, with further details in Annex 2 of this report.

As set out in BEREC’s 2018 Work Programme[25], the purpose of this exercise is to provide an analysis of the potential to isolate access to physical infrastructure in order to conduct market analyses that would be methodologically robust and consistent with the regulatory framework. The considerations that follow do not express any preference for the appropriate course of action regarding the tackling of the potential challenges mentioned section 5.1, this will be up to each NRA, taking into account the specificities of their case at the national level.

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5.2.1 Assessment of prevailing conditions downstream

P13

When performing a market analysis for the purposes of ex ante regulation, the starting point should be an assessment of retail markets over a given time horizon, taking into account demand-side and supply-side substitutability. The analysis should consider whether the identified retail market is prospectively competitive or whether any lack of competition is durable, by taking into account expected or foreseeable market developments.

If a retail market is not deemed effectively competitive from a forward-looking perspective, NRAs will then have to identify and assess the corresponding wholesale markets, which may be candidates for ex ante regulation. On the contrary, if the retail market would be effectively competitive in the absence of ex ante wholesale regulation on the corresponding relevant market(s), this should lead the NRA to conclude that regulation is no longer needed.

On the basis of the modified Greenfield approach, the assessment of whether retail markets are effectively competitive should be undertaken assuming the absence of regulation based on a finding of SMP. The analysis should however take into account the effects of other types of regulation applicable to the relevant retail and related wholesale market(s) throughout the relevant period. For the purposes of this report, that means in particular that the NRA will have to ascertain to what extent the existence of general legislation (namely the BCRD), as well as other instruments that are different from SMP regulation and that might be in place (such as symmetric regulation regulating access to physical infrastructure), may be sufficient on their own to prevent distortions of competition at the retail level.

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5.2.2 Market definition

P14

When analysing access to physical infrastructure as a separate market, NRAs would have to take into account the product and geographic dimensions of the market.

In this respect, NRAs might first want to ascertain to what extent, if ex ante regulation on the SMP operator is absent, a merchant market might exist. A merchant market might not be identified if it would be in the best interest of (vertically integrated) suppliers that the relevant wholesale product was only available for internal (self-supply) purposes, in view of the provision of retail services.

In these instances, and in the event that consumer harm may materialise at the retail level, a notional market could be constructed, whereby the implicit self-supply of the relevant wholesale input (access to physical infrastructure) by the incumbent to itself would be taken into account.[26]

Product market definition

Regarding product market definition, NRAs should start their analysis by grouping together products or services that are used for the same purpose (end use). In this regard, wholesale access to telecommunications physical infrastructure might constitute a valid starting point. Telecommunications physical infrastructure would be described as all physical infrastructure that have been primarily made available or could be made available for the purpose of deploying a telecommunications network.

In view of identifying the focal product (the product from which the market definition exercise is started), the local access to physical infrastructure of telecommunications operators[27] is likely to be a natural candidate. It can then be analysed whether it would be necessary and appropriate – based on demand- and supply-side substitution or the homogeneity of competitive conditions – to also include other parts beyond the access segment in the market definition.

When performing an analysis of demand-side substitution, NRAs may want to assess to what extent wholesale access to non-telecommunications physical infrastructure, which could potentially be used for telecommunications networks (but which has originally not been built for said purposes, e.g. physical infrastructure from utilities) may impose a direct or indirect constraint on telecommunications physical infrastructure.

Likewise, NRAs may also want to assess whether the market should be defined in reference to a specific set of downstream services or more broadly.

In this regard, it is worth highlighting that, on the basis of the BCRD, a whole range of “network operators” other than telecommunications operators are requested to negotiate in good faith access to their physical infrastructure for the purpose of deploying a high-speed electronic communications network. This can include inter alia (i) utilities (including gas, electricity, heating, water companies); and (ii) undertakings with infrastructure intended to provide transport services (including railways, roads, ports and airports)[28]. Additionally, in some Member States, public administrations owning physical infrastructure must also provide wholesale access to their infrastructure.

Geographic market definition

Regarding the geographic dimension of the market, one of the key issues to be addressed would be to what extent the competitive conditions that govern wholesale access to the telecommunications physical infrastructure may be affected by the varying presence in each geographic unit of alternative providers of telecommunications physical infrastructure. For instance, if there is no credible alternative presence to that of the incumbent operator in the whole territory, it may be concluded that the market is national (if the physical infrastructure of the incumbent operator is available nationally)[29].

The conclusion may however be different in the event that the NRA identifies some geographic areas where alternative operators supplying telecommunications physical infrastructure are capable of providing wholesale access services that are fully equivalent to the type of access provided by the incumbent operator. In this regard, relevant parameters that may be taken into account by the NRA when studying the competitive conditions prevailing in the different geographic areas are (i) the area covered by the alternative telecommunications physical infrastructure (e.g. in terms of the number of building units passed); (ii) the type of infrastructure available (e.g. whether the infrastructure provides a connection to the dwellings where electronic communications services are to be provided); and (iii) the existence (or not) of coverage gaps in the alternative telecommunications physical infrastructure.

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5.2.3 Application of the three criteria test

P15

The three criteria test[30] would need to be satisfied in the event that an NRA would consider access to the telecommunications physical infrastructure as a relevant market, separate from e.g. markets 3 or 4 of the Commission Recommendation on Relevant Markets.

In broad terms, it can be assumed that, if an NRA was to consider applying ex ante regulation to the telecommunications physical infrastructure market due to the existence of competition problems that have an effect at the retail level, the first criterion would be readily satisfied. In fact, NRAs that have imposed access obligations on telecommunications physical infrastructure have in general considered that civil engineering is an essential asset, which cannot be easily replicated by new entrants.

The impact of national legislation implementing the BCRD may also be relevant for the purpose of the application of the three criteria test. Although this assessment would have to be performed by each NRA individually, it has been noted throughout this report that there are significant differences between the BCRD and the obligations that can be imposed under ex ante regulation.

See Annex 4 for further details on this subject.

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5.2.4 SMP assessment

P16

If an NRA was to define wholesale access to telecommunications physical infrastructure as a relevant market, the SMP assessment would in most cases be premised on the potential existence of single SMP, that is of an entity that individually holds such a position of economic strength (though the potential for joint SMP, at least in some limited geographies, must be acknowledged).

In countries where cable operators are present, another issue that may be raised in an SMP assessment is the extent to which the physical infrastructure that was used by the cable operator for the purpose of deploying its own network may also be used for the purpose of deploying other types of networks (such as copper/fibre networks) and thus may effectively constrain to some degree the market power of the incumbent operator in the physical infrastructure market (or be argued to be in a position of joint dominance).

In this regard, features such as coverage may become relevant for the purpose of assessing the competitive pressure that the physical infrastructure of the cable operator may exert.

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P17

NRAs have to date imposed access to physical infrastructure through existing wholesale markets (largely 3a) either as an ancillary remedy or by including physical infrastructure in the relevant market and imposing respective remedies.

This is consistent with the EECC, which notes that access to civil engineering can be deemed a self-standing remedy for the improvement of competition in the retail markets, which may be imposed irrespective of whether the assets that are affected by the obligation are part of the relevant market, provided that the obligation is necessary and proportionate.

As evidenced by the responses to the BEREC questionnaire, the majority of NRAs believe that the current list of relevant markets contained in the Annex to the Commission Recommendation is sufficient at this time to impose access to physical infrastructure where needed (in particular, as an SMP remedy).

However, some NRAs have identified both current and prospective future analytical and practical issues with this approach, and these may become more prominent in the years to come. This would in particular be the case if some of the trends highlighted in section 5.1 become more apparent and relevant.

A market centred on access to physical infrastructure may offer a potential path to resolving these issues, depending on national circumstances.

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7. ANNEXES

P18

The questionnaire sent out by BEREC also included questions about the regulation of dark fibre. Since dark fibre is distinct from physical infrastructure (according to the definition in the BCRD), BEREC decided to include this information in this Annex.

In total, 20 NRAs regulate access to dark fibre. 19 NRAs declared that dark fibre is regulated under market 3a, while in three of these countries it is also regulated under market 3b and in one country it is regulated under market 4 (Table 8).

Table 8: Markets on which access to dark fibre is imposed

Regarding the stage of the market analysis where dark fibre is dealt with (see Table 9), the situation is similar to physical infrastructure (see section 4.1): a relatively small proportion of NRAs deal with dark fibre in the market definition and the SMP analysis. This indicates that dark fibre is in many cases an “ancillary” remedy (e.g. for backhaul).

Table 9: Role of dark fibre in the market analysis process

The following tables show the remedies applied to dark fibre.

Table 10: Price control and cost accounting obligations related to dark fibre


Table 11: Transparency obligations related to dark fibre


Table 12: Access obligations related to dark fibre


Table 13: Non-discrimination obligations related to dark fibre

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P19

Annex 2: Overview of the relevant issues that may be taken into account if a separate market for access to physical infrastructure is considered

P20

This Annex provides a detailed overview of the way a market analysis would be conducted, in the event an NRA was to consider access to physical infrastructure as a separate market[39].

1. Assessment of prevailing conditions downstream

When performing a market analysis for the purposes of ex ante regulation, the starting point should be an assessment of retail markets over a given time horizon, taking into account demand-side and supply-side substitutability. The analysis should consider whether the identified retail market is prospectively competitive or whether any lack of competition is durable, by taking into account expected or foreseeable market developments.

If a retail market is not deemed effectively competitive from a forward-looking perspective, NRAs will then have to identify and assess the corresponding wholesale markets, which may be candidates for ex ante regulation. On the contrary, if the retail market is effectively competitive in the absence of ex ante wholesale regulation on the corresponding relevant market(s), this should lead the national regulatory authority to conclude that regulation is no longer needed.

On the basis of the modified Greenfield approach, the assessment of whether retail markets are effectively competitive should be undertaken assuming the absence of regulation based on a finding of SMP. The analysis should however take into account the effects of other types of regulation applicable to the relevant retail and related wholesale market(s) throughout the relevant period. For the purposes of this report, that means in particular that the NRA will have to ascertain to what extent the existence of general legislation (namely the BCRD), as well as other instruments that are different from SMP regulation and that might be in place (such as symmetric regulation regulating access to physical infrastructure), may be sufficient on their own to prevent distortions of competition at the retail level.

2. Market definition

The definition of relevant markets and the assessment of SMP should be based on the same methodologies as under EU competition law. For these purposes, the jurisprudence of EU courts, as well as the administrative practice of the European Commission, for example as reflected in the 1997 Market Definition Notice[40], can be taken into account.

As noted in the 2018 EC Guidelines on market analysis and the assessment of significant market power under the EU regulatory framework for electronic communications networks and services (the Guidelines[41]), market definition is not a mechanical or abstract process but requires the analysis of all available evidence of past market behaviour and an overall understanding of the mechanics of a given sector. In particular, a dynamic rather than a static approach is required when carrying out a forward-looking market analysis[42].

The extent to which a product in a given geographical area constitutes a relevant market depends on the existence of competitive constraints on the price-setting behaviour of the service provider(s) concerned. There are two main competitive constraints to consider in assessing the behaviour of undertakings in the market: (i) demand-side and (ii) supply-side substitution. A third source of competitive constraint on an operator’s behaviour is the existence of potential competition, which is however generally not taken into account at the stage of market definition but rather at a later stage of the analysis[43].

In telecommunications markets, it is not uncommon that the incumbent is the only undertaking that is in a position to provide a wholesale service, usually on regulated terms. Absent ex ante regulation of SMP operator, it may thus be the case that no merchant market exists, if it is in the best interest of (vertically integrated) suppliers that the relevant wholesale product or service is only available for internal (self-supply) purposes, in view of the provision of retail services.

In some jurisdictions, the situation described above may apply, in particular if there is no significant supply of physical infrastructure on commercial terms or on the basis of the BCRD. In those instances, and in the event that consumer harm may materialise at the retail level, NRAs may want to construct a notional market, whereby the implicit self-supply of the relevant wholesale input (access to physical infrastructure) by the incumbent to itself would be taken into account. Defining hypothetical or notional markets where currently there is only self-supply is not unfamiliar under the Regulatory Framework. Market 3a largely did not exist beyond self-supply until the introduction of the local loop unbundling remedies.

2.1 Product market definition

As indicated in the Guidelines, the relevant product market comprises all products or services that are sufficiently interchangeable or substitutable, not only in terms of their objective characteristics, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand in the market in question.

NRAs should thus start their analysis by grouping together products or services that are used for the same purpose (end user)[44].

The first step in the process would include identifying the focal point against which the substitution analysis will be undertaken. In this regard, wholesale access to telecommunications physical infrastructure could constitute a valid starting point.

For the purpose of the analysis, physical infrastructure could be defined along the lines set in the BCRD, according to which physical infrastructure:

“means any element of a network which is intended to host other elements of a network without becoming itself an active element of the network, such as pipes, masts, ducts, inspection chambers, manholes, cabinets, buildings or entries to buildings, antenna installations, towers and poles”.

Telecommunications physical infrastructure would thus be described as all physical infrastructures – as defined in the BCRD – that have been primarily made available or could be made available for the purpose of deploying a telecommunications network, and that will typically be owned (or at least, operated) by telecommunications operators.

In view of identifying the focal point, a number of additional issues may be considered by NRAs.

Firstly, NRAs may want to assess whether the candidate focal product markets should be defined in reference to a specific set of downstream services or more broadly, for example if it should be defined as (i) wholesale access to telecommunications physical infrastructure for the purpose of deploying the local access parts of a telecommunications network, or if it should be defined more broadly as (ii) wholesale access to telecommunications physical infrastructure.

In this context, the different degrees of competition that may prevail may need to be factored in. For instance, the local access network is characterised by a higher degree of capillarity than the backhaul network, which may make it more difficult to be replicated; therefore, some physical infrastructure access providers may be capable of providing wholesale services for the purpose of deploying a backhaul telecommunications network, but not for the purpose of deploying the access part of the network.

However, when considering market boundaries, NRAs should be cognizant of how network functions are converging (i.e. networks are being constructed for multiple purposes).

Regardless of the stance that an NRA may take in each individual case, it is worth noting that the EECC appears to endorse the view that wholesale access to physical infrastructure could be granted for the purpose of providing a full range of products and services, when indicating that access to physical infrastructure should not merely be deemed an ancillary remedy to other wholesale products/services or a remedy limited to undertakings availing themselves of such other wholesale products/services[45].

The increasing convergence of products and services (a feature that may be accelerated when 5G technology becomes widely available), and the risk that new disruptive services outside traditional definitions may arise, may also be factors that would provide reason for a broad (multi-service) definition of the relevant market.

Demand-side substitutability

As noted in the Guidelines, demand-side substitutability is used to measure the extent to which customers are prepared to substitute the service or product that constitutes the focal point by other services or products, in response to a hypothetical small but significant and non-transitory relative price increase. The possibility for customers to substitute a product or service for another may be hindered, among other things, by significant switching costs.

When performing an analysis of demand-side substitution, NRAs may want to assess to what extent wholesale access to non-telecommunications physical infrastructure (that is, physical infrastructure that was in principle not available for the purpose of deploying a telecommunications network) may pose a direct constraint over telecommunications physical infrastructure.

In this regard, it is worth highlighting that on the basis of the BCRD, a whole range of “network operators” other than telecommunications operators are requested to negotiate in good faith access to their physical infrastructure for the purpose of deploying a high-speed electronic communications network. This includes inter alia (i) utilities (including gas, electricity, heating, water companies); and (ii) undertakings with infrastructure intended to provide transport services (including railways, roads, ports and airports). Additionally, in some Member States, public administrations owning physical infrastructure must also provide wholesale access to their infrastructure.

Access to non-telecommunications physical infrastructure may be provided on commercial terms, or in the case of disagreements on the access or pricing terms, via the dispute resolution mechanisms foreseen in the BCRD.

ARCEP’s 2017 decision regarding market 3a[46] provides a recent example of the way an analysis of demand-side substitution could be performed. According to ARCEP’s decision, the physical infrastructure owned by public administrations is substitutable with the physical infrastructure of telecommunications operators, as in general in France public infrastructure can usually host high-speed broadband networks.

In ARCEP’s view, however, this is not the case for the physical infrastructure available for the disposal or treatment of waste water and sewage, as even in large cities such as Paris this infrastructure poses a number of technical and operational constraints that make it a poor substitute for the telecommunications physical infrastructure[47].

Likewise, ARCEP concludes that the physical infrastructure of utilities (electricity, heating, water and gas companies) and transport companies are also poor substitutes for telecommunications physical infrastructure. In its decision, ARCEP points to a number of factors for excluding alternative wholesale physical infrastructure access services from the scope of the relevant product market, such as the existence of technical and operational constraints, the lack of capillarity of some of the infrastructure (e.g. that of railway and road companies) and the absence of demand by telecommunications operators thus far.

In this regard, the existence (or absence) of demand for non-telecommunications physical infrastructure may provide some empirical evidence as to substitutability between the different types of infrastructure. For instance, ARCEP refers in its decision to the fact that some telecommunications operators have decided to modify their NGA deployment strategy in Paris by ceasing to use the physical infrastructure available for the disposal or treatment of waste water and sewage and having access instead to the telecommunications physical infrastructure of the SMP operator as indirect evidence regarding the lack of substitutability between both types of products.

When performing an analysis of demand-side substitutability, NRAs may also want to evaluate to what extent indirect constraints may exert competitive pressure over the prices that could be set for access to the telecommunications physical infrastructure. As detailed in the Explanatory Note to the Commission Recommendation on Relevant Markets, if there is competitive pressure stemming from alternatives available at the retail level, such alternatives could be included in the wholesale reference market if the following conditions are met: (i) access seekers would be forced to pass a hypothetical wholesale price increase onto their consumers at the retail level based on the wholesale/retail price ratio; (ii) there would be sufficient demand substitution at the retail level based on indirect constraints such as to render the wholesale price increase unprofitable; and (iii) the customers of the access seekers would not switch to a significant extent to the retail arm of the integrated hypothetical monopolist, in particular if the latter does not raise its own retail prices.

Broadly, in this context, it would thus be necessary to ascertain to what extent a price increase by the hypothetical monopolist in the reference market (wholesale access to the telecommunications physical infrastructure) may be counteracted by the switching that would occur at the retail level to alternative means of access that do not make use of the wholesale input (the telecommunications physical infrastructure).

Supply-side substitutability

As noted in the Guidelines, supply-side substitutability assesses the extent to which suppliers other than those offering the product or service in question would be able to switch their line of production or offer the relevant products or services in the immediate-to-short term, without incurring significant additional costs. The exact timeframe to be used to assess the likely response of other suppliers to a relative price increase will depend on the characteristics of each market.

NRAs would thus need to ascertain whether alternative suppliers would be capable of rapidly switching their productive assets to supply physical infrastructure that is apt for the deployment of telecommunications networks, without incurring significant sunk costs.

Additional factors that might be taken into account include an evaluation of whether the capacity of alternative suppliers is committed under long-term supply agreements, as well as an analysis of the existing legal and regulatory requirements that could hinder time-efficient entry into the market and as a result discourage supply-side substitution[48].

2.2 Geographic market definition

Once the relevant product market has been identified, the next step is to define the geographical dimension of the market. The process of defining geographic markets follows the same principles as those seen when delineating the relevant product markets, including an assessment of demand- and supply-side substitution in response to a relative price increase.

As noted in the Guidelines, the relevant geographic market comprises an area in which the undertakings concerned are involved in the supply and demand of the relevant products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas in which the prevailing conditions of competition are significantly different. Areas in which the conditions of competition are heterogeneous do not constitute a uniform geographic market[49].

When assessing this dimension of the market, the choice of the relevant geographic unit becomes of the utmost importance. In this regard, the Explanatory Note to the Commission Recommendation on Relevant Markets indicates that NRAs should ensure that geographic units are (i) of an appropriate size, i.e. small enough to avoid significant variations of competitive conditions within each unit but yet big enough to avoid a resource intensive and burdensome micro-analysis that could lead to a fragmentation of markets, (ii) able to reflect the network structure of all relevant operators, and (iii) have clear and stable boundaries over time[50].

For the purpose of selecting the relevant geographic unit, NRAs may also want to take into consideration BEREC’s Common Position on geographical aspects of market analysis (definition and remedies)[51], as well as the earlier findings that may have been made in the context of the ex ante regulation of markets 3 and 4 (if such exercise was undertaken by the NRA).

In order to gain a better understanding of the way telecommunications operators make their investment decisions, NRAs may want to appraise their strategic or business plans, which may provide some insights into what is the geographic unit that is deemed relevant for the purpose of seeking access to telecommunications physical infrastructure.

Depending on the circumstances of each case, the relevant geographic unit may in the end be related to the network topology of the telecommunications operators, but it may also be linked to administrative boundaries (e.g. towns, communes, municipalities, postal codes, etc.) if competitive conditions are sufficiently homogenous within -and appreciably different outside- the chosen administrative area.

Following the delineation and a first assessment of the situation prevailing in the geographic units, those units that have largely homogeneous competitive conditions can be aggregated. When undertaking this exercise, NRAs should look inter alia at the number and size of competitors, the distribution of their market shares, the price differences or variation in prices across geographies, and other related competitive aspects which may result from relevant competitive variations between geographic areas (nature of demand, differences in commercial offers, marketing strategies, etc.).

The key issue to be addressed is thus the extent to which the competitive conditions that govern wholesale access to the telecommunications physical infrastructure[52] may be affected by the varying presence in each geographic unit of alternative providers of telecommunications physical infrastructure. For instance, if there is no credible alternative presence to that of the incumbent operator in the whole territory, it may be concluded that the market is national (if the physical infrastructure of the incumbent operator is available nationally).

The conclusion may however be different in the event that the NRA identifies some geographic areas where alternative operators supplying telecommunications physical infrastructure are capable of providing wholesale access services that are fully equivalent to the type of access provided by the incumbent operator.

In this regard, relevant parameters that may be taken into account by the NRA when studying the competitive conditions prevailing in the different geographic areas are (i) the area covered by the alternative telecommunications physical infrastructure (e.g. in terms of the number of building units passed); (ii) the type of infrastructure available (e.g. whether the infrastructure provides a connection to the dwellings where electronic communications services are to be provided); and (iii) the existence (or not) of coverage gaps in the alternative telecommunications physical infrastructure.

3. Application of the three criteria test

The three criteria test would need to be satisfied in the event that an NRA would consider access to the telecommunications physical infrastructure as a relevant market, separate from e.g. markets 3 or 4 of the Commission Recommendation on Relevant Markets.

In this respect, the Recommendation notes that when identifying markets other than those set out in the Annex to the Recommendation, NRAs should demonstrate that the following three criteria are cumulatively met:

a) the presence of high and non-transitory structural, legal or regulatory barriers to entry;
b) a market structure which does not tend towards effective competition within the relevant time horizon, having regard to the state of infrastructure-based and other competition behind the barriers to entry;
c) competition law alone is insufficient to adequately address the identified market failure(s).

The fulfilment of the three criteria test would need to be demonstrated by the NRA, on the basis of the specific circumstances applying to its national case.

In broad terms, it can be assumed that, if an NRA was to consider applying ex ante regulation to the telecommunications physical infrastructure market due to the existence of competition problems that have an effect at the retail level, the first criterion would be readily satisfied. In fact, NRAs that have imposed access obligations on telecommunications physical infrastructure have in general considered that civil engineering is an essential asset, which cannot be easily replicated by new entrants.

In this regard, the BCRD indicates (in Recital 7) that “the roll-out of high-speed fixed and wireless electronic communications networks across the Union requires substantial investments, a significant proportion of which is represented by the cost of civil engineering works. Limiting some of the cost-intensive civil engineering works would make broadband roll-out more effective”. The BCRD goes on to state at Recital 9 that “measures aiming at increasing efficiency in the use of existing infrastructures and at reducing costs and obstacles in carrying out new civil engineering works should provide a substantial contribution to ensuring a fast and extensive deployment of high-speed electronic communications networks while maintaining effective competition […]”.

Concerning the second criterion, the Explanatory Note to the Commission Recommendation on Relevant Markets refers to the relationship between the three criteria test and the SMP assessment. According to the Explanatory Note, the three criteria test focuses on the overall characteristics and structure of a given market, while the assessment of SMP determines whether an operator active in a market should be made subject to ex ante regulation.

The set of indicators that may be used for performing the three criteria test and the SMP assessment may nevertheless be similar, in particular with regards to the fulfilment of the second criterion. In this regard, the discussion of the SMP assessment below may also be of interest in the context of the second criterion.

With regard to the third criterion, the Explanatory Note points to several factors that might be taken into consideration when assessing whether competition law is sufficient on its own to remedy the identified market failures. This might not be the case when (i) the regulatory obligation that is deemed appropriate to solve the problem cannot be readily imposed under competition law (e.g. access obligations or cost accounting obligations); (ii) the compliance requirements are extensive and must be maintained over time (e.g. the need for detailed accounting for regulatory purposes, assessment of costs, monitoring of terms and conditions including technical parameters and so on); (iii) frequent and/or timely intervention is indispensable; (iv) creating legal certainty is of paramount concern (e.g. multi-period price control obligations).

In this regard, it is worth noting that access to the physical infrastructure of the SMP operator may require the introduction of a number of additional regulatory and compliance measures (including e.g. the determination of the terms, prices and technical conditions that will govern access) that may not be immediately available under competition law. Likewise, some of the obligations imposed on the SMP operator – such as publication of a reference offer or cost accounting – may have to be revised regularly, to take into account market developments.

The impact of national legislation implementing the BCRD may also be relevant for the purpose of the application of the three criteria test. Although this assessment would have to be performed by each NRA individually, it is worth noting that there seem to be some differences between the BCRD and the obligations that can be imposed under ex ante regulation, as discussed in the report.

4. SMP assessment

According to Article 14(2) of the Framework Directive, an undertaking is deemed to have SMP if, either individually or jointly with others, it holds a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of its competitors, customers and consumers.

If an NRA was to define wholesale access to telecommunications physical infrastructure as a relevant market, the SMP assessment would in most cases be premised on the potential existence of single SMP, that is of an entity that individually holds such a position of economic strength (though the potential for joint SMP, at least in some limited geographies, must be acknowledged).

In this regard, the Guidelines point to a number of factors that may be relevant for assessing single SMP in a (hypothetical) telecommunications physical infrastructure market, including inter alia: barriers to entry and expansion; control of an infrastructure not easily duplicated; economies of scale and scope; absence of or low countervailing buying power; vertical integration; conclusion of long-term and sustainable access agreements; and engagement in contractual relations with other market players that could lead to market foreclosure.

One of the problems that may be confronted by an NRA engaging in such an assessment relates to the gathering of data. Information on parameters such as capillarity and availability of the physical infrastructure, effective use, saturation of the ducts, technical procedures and operations necessary to enable access, prospective investments in infrastructure, etc. may to some extent be available from the incumbent operator and even from large alternative telecommunications players. However, such detailed information may be more difficult to gather from smaller players (who may not have the resources to administer the data) or for instance from local public administrations that have physical infrastructure at their disposal.

Issues with data gathering may be exacerbated in the event that an NRA concludes that the physical infrastructure market includes both telecommunications and non-telecommunications physical infrastructure. Indeed, even large players, such as utilities with a national presence, may have difficulties in providing granular information on assets that are not strictly related to what constitutes their core business. Likewise, the information gathered by the NRA may not be uniform and consistent, due to the (potential) large number of players that might be required to provide the same sets of data.

In this regard, the creation of single information points at the national level, as encouraged by the BCRD, may to some extent assist NRAs in gathering the data that is needed for performing an SMP assessment.[53]

In countries where cable operators are present, another issue that may be raised in an SMP assessment is the extent to which the physical infrastructure that was used by the cable operator for the purpose of deploying its own network may also be used for the purpose of deploying other types of networks (such as copper/fibre networks) and thus may effectively constrain to some degree the market power of the incumbent operator (or be argued to be in a position of joint dominance).

In this respect, while cable networks rely on a different technology for the provision of retail electronic communications services than other providers (such as e.g. copper/fibre operators), prima facie the physical infrastructure of cable and other telecommunications operators is used in the same way in order to deploy their respective networks.

This does however not exclude the possibility that access to the physical infrastructure of the cable operator by other telecommunications providers may pose some technical and operational constraints (due e.g. to the different network topology of cable). It will in the end be up to each NRA to decide whether these (potential) differences should be evaluated at the stage of market definition or later when performing the SMP analysis, if at all.

Other features, such as coverage, may also become relevant for the purpose of assessing the competitive pressure that the physical infrastructure of the cable operator may exert. In many Member States, the coverage of cable is not equivalent to that of the incumbent operator, which normally has a ubiquitous, nation-wide network. The existence of coverage gaps, even in the geographic areas where the cable operator has a presence (e.g. depending on the neighbourhoods within a given city), may also be a relevant factor when assessing the extent to which cable physical infrastructure can constrain the market power of the incumbent operator.

Lastly, as part of the SMP assessment, NRAs may want to evaluate the existence of countervailing buyer power and the prospects of potential entry.

In an analysis of countervailing buyer power, the extent to which customers could counteract a potential price increase, due for instance to the volumes purchased or their ability to switch providers or sponsor new entry, would be assessed. Regarding the scope for potential entry, the existence of high entry barriers is a factor that, if confirmed, would militate against the prospects of new entry.

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Annex 3: Sustaining regulation through the modified Greenfield approach

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At this time, consideration of physical infrastructure mostly as a remedy to market 3a may tie wholesale access to the infrastructure of the SMP operator to the findings of the NRA in that reference market, as defined in the Commission Recommendation on Relevant Markets. Yet, the very success of the remedy under market 3a or other markets could, in some cases, lead to pressure for deregulation and its removal.

A “modified Greenfield approach” is intended to study the functioning of markets in the absence of ex ante regulation. In this case, deregulating market 3a would automatically lead to a deregulation of access to physical infrastructure, which would open the possibility for the incumbent operator to discriminate against its competitors that deployed their networks based on the assumption that they could rent access to the incumbent (although to an extent limited by the BCRD).

In the long run, this could allow for the incumbent to drive its competitors out of the retail market, or it would at least provide the incumbent with an unfair competitive advantage. In this context, it could be argued that the deregulation of market 3a would then be inappropriate, even if market 3a was considered to be currently competitive.

In this scenario, a market analysis recommending the imposition of remedies only on access to physical infrastructure (and no other remedy) on market 3a products could be envisaged. However, it is unusual to apply such reasoning when it concerns a remedy associated with a market[54]. Indeed, the “modified Greenfield approach” is traditionally applied by considering remedies that apply to products actually included in the market.

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