ITS Regional Conference in Rome, September 2008

1. Lessons learned from the regulation of LLU for the future regulation of NGA networks ITS Regional Conference in Rome, September 2008 Martin Lundborg SBR Juconomy Consulting AG

2. LLU has been mandated in Europe for about the last ten years as a key tool to deal with competition problems deriving from SMP operators. • Since then there has been substantial uptake in a large number of European countries, leading to more competition in the downstream access markets. • At the same time, the migration of the legacy copper networks to fiber access networks (NGA networks) has started • Are there any lessons to be learned from the past regulation of LLU for the future regulation of NGA networks. Introduction

3. Which factors have been the most important for the development of LLU in the past? • How important are the regulated tariffs for the success of LLU? • I.e. regarding the margin between retail and wholesale prices as well as the wholesale tariffs. • What are the implications for NRAs regulating fixed access networks, especially within the future deployment of NGA networks? Research questions

4. Focus on regulation of SMP networks • Study covers EU countries only: • Identical regulatory framework • Consistent and comparable data available • Comparable landscape (at the least for EU-15) Research method

5. Content 1 Lessons learned from LLU 2 Implications for the regulation of NGA a Technological changes b Level of regulation c Wholesale offers 3 Summary and conclusions

6. ULL has been the most successful wholesale access product in the EU: Development of LLU

7. LLU is only making up a small proportion of all access lines and the development has been heterogeneous in the EU. Development of LLU

8. Hypothesis: The success of LLU is depending on: • The wholesale prices for the LLU • The price margins between retail and wholesale prices • The success of DSL because of the higher value creation via the local loop • Absence of alternative access technologies (e.g. CATV) Quantitative model - Description

9. Quantitative model - Results Results are significant • Results are significant at 95%-level and the correlation coefficient is high  R2: 0,86 • Effects can only be seen after several years of implementation (no results for 2004) • For details, we refer to our paper Corellation between take-up of LLU and following independent variables • Wholesale prices • Monthly fee for LLU • One-time fee for LLU • Retail prices of the incumbent • Retail residential monthly charge • Retail business monthly charge • Controlling variables • Broadband/DSL penetration • Penetration of alternative technologies (negative)

10. Conclusions from the model • Both the wholesale access prices and the retail prices are relevant. • The outcomes of the variables studied cannot be seen to a significant extent in the short run. • Other factors than those researched might also play a significant role. • E.g. functional separation too early to make any conclusions. Quantitative model - Conclusions Interpretation The regulation of wholesale offers requires an effective price regulation The price regulation must consider both wholesale prices and retail prices (price-margin-squeezes)

11. Content 1 Lessons learned from LLU 2 Implications for the regulation of NGA a Technological changes b Level of regulation c Wholesale offers 3 Summary and conclusions

12. Higher risk of regulatory failure combined with the need for price regulation of both wholesale and retail prices as long as regulation is implemented Technological changes and outcomes on regulation Development / Changes Implications for regulation • Introduction of multi-service networks • Implementation of different network structures/technologies • The network roll-out differs acc. to operators and regions due to: • Different current infrastructures • Different regional/geographical/ demographical structures • Availability of alternative infrastructure • Etc. • Great uncertainties regarding the future  Difficulties regarding forward looking approach, ex-ante regulation and cost determinations • High number of regulatory decisions to be made • Complex price-margin-squeeze tests • Complex regulatory determination of cost based prices

13. Content 1 Lessons learned from LLU 2 Implications for the regulation of NGA a Technological changes b Level of regulation c Wholesale offers 3 Summary and conclusions

14. Appropriate level of regulation Alternative decisions regarding levels of regulation Deregulation Continue current regulation Regulatory holidays No/less regulation Continued regulation • Improves incentives for SMP operators to invest (e.g. Jorde, Sidak and Teece AND De Bijl and Peitz). • The introduction of NGA tends to make regulation more difficult and might therefore increases risks of regulatory failures. • Regulation of SMP operators required to safeguard competition. • E.g. Marcus and Elixman concludes that the lightening of regulation in USA has lead to non-geographic overlapping duopolies and disenvestments by ANOs.

15. Appropriate level of regulation Considerations in case of existance of SMP • Trade-off between investment incentives by SMP operators (by less regulation) and safeguarding of competition (including price regulation) • SMP problems will remain (extensive investment requirements in access networks, economies of scales etc.) • More difficult regulation due to complex NGA environment Need for case by case regulation to prevent over- or underregulation  Argument for the European regulatory framework

16. Content 1 Lessons learned from LLU 2 Implications for the regulation of NGA a Technological changes b Level of regulation c Wholesale offers 3 Summary and conclusions

17. Wholesale offers will change due to NGA • The current unbundling at the MDF might disappear, but there are still other more or less practical potential wholesale offers for all network structures. • E.g. FTTB: This means that the ANO has to roll-out his network to the basement/building, which is costly  Additional access obligations for ducts/dark fibre might be required.

18. Regulation of wholesale offers will change due to NGA Large number of new wholesale offers to regulate Price regulation required to safeguard success of wholesale access offers Complex regulation with a large number of regulatory decisions + As wholesale offers and networks are new, there are almost no accounting data or „cost experience“ to rely on

19. Content 1 Lessons learned from LLU 2 Implications for the regulation of NGA a Technological changes b Level of regulation c Wholesale offers 3 Summary and conclusions

20. If regulation of wholesale access should be successful, wholesale and resale prices must be subject to regulation to prevent too high access prices and price margin squeezes • This implies, that for countries and regions without a sufficient number of access networks and with SMP operators, price regulation is required if the wholesale access offers should experience a significant uptake. Summary and conclusions regarding LLU regulation Lessons lerned from regulation of LLU • The complexity of regulation tends to be much more complex due to sub-national markets, multiple technologies, high number of wholesale access offers and multi-service networks. • Further, as networks are (or will be) rolled-out, the regulators must strike the balance between investment incentives for SMP operators and development of competition. • This calls for a flexible regulation such as the European Framework. Outcomes on regulation of NGA

21. SBR JUCONOMY Consulting AG SBR Attorneys-at-Law Vienna Office Parkring 10/1/10 1010 Vienna Austria Tel: + 43-1-513 514 0-0 Fax: + 43-1-513 514 0-95 Düsseldorf Headquarters Nordstrasse 177 40477 Düsseldorf Germany Tel: + 49-211-68 78 88-0 Fax: + 49-211-68 78 88-33 Kittl@sbr-net.com Schuster@sbr-net.com Ruhle@sbr-net.com Lundborg@sbr-net.com Ehrler@sbr-net.com

22. Network structures: Technological changes and outcomes on regulation