Local Loop Unbundling a Failed Model for Local Competition? The German Experience

1. Local Loop Unbundling a Failed Model for Local Competition?The German Experience Dr. Bernhard KallenRalph-Georg Woehrl International Telecommunications Society 14th European Regional Conference August 23-24, 2003 Helsinki, Finland

2. Contents Access regulation: Current situation EC approach: Preference for service competition FCC’s new ruling: Significant relief of regulatory measures German experiences: LLU a success story?

3. Access regulationCurrent Situation in Europe and the US Market situation: • The telecommunication sector goes broadband, enabling people to make the first steps towards the information society. • Telecommunication network operators have to meet extraordinary challenges.A variety of different access technologies (DSL, Cable, Fibre, WLAN, 3G etc.) is available to serve as the broadband connector for the information society. Regulatory impact: • Decision-making by existing and new companies is strongly determined by sector-specific regulation. • Regulatoryauthorities are now in a situation where intervention in this sector has crucial, far reaching impacts on society as ever before. Diverging approaches between the EU and the US: • The FCC and the EC seem to have diverging approaches as to how to regulate the local access market. The two approaches are underpinned by opposed convictions. • The FCC believes in the inter-platform-based competition as the only force capable of delivering investment and growth. • In Europe, the opinion is thatservice-based competition and wholesale access to incumbents' local networks are the only way forward.

4. EU approachCompetition via wholesale access for service provider Objectives of the EU 1998 regulatory package • Liberalisation: break-up of state owned POTS monopolies • ONP: regulation to ensure most benefits to customers • network access: price regulation strictly cost-based to foster competition The aim of the New Regulatory Framework (NRF) • EC recommendation on relevant markets, explanatory memorandum p. 25“Regulation mandating access to existing networks serves as transitional measure to ensure service competition and customer choice until such time as sufficient infrastructural competition exist.” • NRF enables more flexible regulation, AID gives NRAs a variety of instruments and remedies to chose the one minimum necessary to address market failure • The definition of 12 wholesale market out of 18 relevant markets shows that EC does not believe in platform-competition but service competition via wholesale access for narrowband (WLR) as well as for broadband services (DSL bit-stream). WLR: Wholesale line rental

5. Significant relief for US-IncumbentsILECs and CLECs benefit from the new FCC rules The Federal Communications Commission (FCC) delegated more authority to the Public Utility Commissions (PUC): • Intensity of competition on the local markets diverges too much to enhance or stabilize it with a unique set of regulatory measures • Therefore: No one-fits-all-solution for regulation exists FCCs decision provides substantial unbundling relief to the ILECs for broadband: • Unbundling of new fibre loops, line sharing and broadband services at cost based tariffs will no longer be required • Unbundled switching for business customers was eliminated from UNE-P, for mass market customers the decision was delegated to the PUCs It seemed that the conflict between FCCs members was primarily induced by the future role of PUCs FCCs decision offers both advantages and disadvantages to the ILECs and CLECs: • ILECs obtained substantial regulatory relief for their broadband facilities • CLECs will benefit from the stronger role for the states, since the PUCs tend to be more regulatory and ILECs will be forced to contend with 51 different sets of rules

6. ULL in EuropeEU officials state ULL has been a flop Officials of the DG competition claim*: • Although ULL obligations are in place at national level since 1998 and at European level since December 2000, the market structure has not changed significantly. • Alternative network operators do not make use of ”Unbundled Local Loops”. • What once was described as the big breakthrough for local competition has so fare been an expensive regulatory experiment almost without any effect on competition. • The reason for that is to a large extent the pricing policy of incumbent operators and the price regulation of NRAs. Price-squeezing is pursued by incumbents and is not adequately sanctioned by the regulators. Pricing of ULL is not to blame for the poor development. The data shows no correlation between prices and demand for ULLs. The mix of access obligations is responsible for the undesirable situation. *Robert Klotz, Juan Delgado, Jerome Fehrenbach (2003), Zugangsentgelte in der Telekommunikation,WUW 4/2003, Brussels

7. German experiencesRegulation has borne two types of competitors Regulatory setting in 1998 RegTP set framework for competition in a fully liberalised sector. • Implementation of ONP • Promotion of competition between local fixed networks The German regulatory approach in 1998 was based on two elements: • First, OLOs are able to connect subscribers via ULLs. • Second, no obligation for Telekom to provide local carrier (pre-) selection Market (regulatory) results: creation of two types of network operators • City-carrier: Subscriber network operators entered the market, with their own local infrastructure predominantly between the copper loops of Deutsche Telekom. • ‘inter-exchange network operator’: Service provider, which offer no subscription but national and international calls, come into the market and eroded former price levels by up to 90 %, because of almost no infrastructure requirements. • RegTP decided that service provider can operate, if they have at least one switch and three trunk lines (PoI).

8. Flensburg Greifswald Rostock Kiel Lübeck Bremerhaven Schwerin Neubrandenburg Hamburg Leer Oldenburg Bremen Berlin Frankfurt/O Lingen Hannover Osnabrück Brandenburg Braunschweig Magdeburg Münster Bielefeld Wesel Essen Cottbus Paderborn Dortmund Leipzig Duisburg Halle/S Göttingen Bautzen Bochum Krefeld Düsseldorf Wuppertal Kassel Meschede Dresden Siegen Köln Aachen Gießen Chemnitz Fulda Erfurt Gera Bonn Koblenz Hof Frankfurt/M Bayreuth Mainz Würzburg Trier NL ZID Darmstadt Nürnberg Saarbrücken Kaiserslautern Mannheim Heilbronn Regensburg Karlsruhe Stuttgart Passau Ulm Offenburg Augsburg München Rottweil Konstanz Kempten Traunstein Freiburg/ Bsg Carrier pre-selection in GermanyCalls for less than interconnect rates What is the Market situation like in 2003? Altogether 875 telecommunication licensees exist, more than 40 alternative city-carriers and almost 200 PSTN-service providers. • Competitive Market for all calls: • National/International calls: collapse of prices to 1/10 of the initial level in 1998 • 4,5 Mio. Preselection-customer, • 10 Mio. Call-by-call customer; • since April 2003 call-by-call for local calls with prices less than 1 ct. per min. • Interconnect regime set by RegTP in 2001: • 475 local PoI (10 carrier with nation wide presence: Arcor(Vodafone), BT, MCI Worldcom, Telefonica, tele2, 01051telecom...) • 23 regional PoI

9. Market situation in the local fixed networks: More than 77 % of all customers can choose between Telekom- or alternative line subscription, i.e. city-carriers are connected to 77 % of all Telekom-MDFs. But regional differentiated market development: Beside the concentration of activity in big cities and for business customer, city-carrier in the north west of Germany hold a significant market share and have according to recent business reports positive operating : PSTN-channels of competitors: Hamburg: 12 %, Cologne: 21 %, Oldenburg: 23 % Same picture about the DSL-access market: national: 6 % Oldenburg: 15 % Hamburg: 34 % ULL in GermanyA story of success? (Source: RegTP, End of 2002; Deutsche Telekom, End of 2002)

10. quarterly growth Number of ULLs total number ULL development Unique situation: Significant market appeal... ...with progressive growth rates 1.200.000 1.048.217 1.000.000 800.000 600.000 400.000 200.000 103.255 89.558 80.232 81.858 74.457 57.780 52.937 35.194 26.247 33.195 0 II/01 II/02 I/03 II/00 II/99 IV/00 IV/01 IV/98 IV/02 IV/99 Source: Deutsche Telekom

11. ULL succeeded in Germany despite the fact that tariffs are not the lowest in Europe… • 1998: 10,56€ per month • 1999: 12,99€ per month • 2001: 12,48€ per month • 2003: 11,81 € per month COM(2002)695 final: Telecommunications Regulatory Package - VIII Implementation Report – Annex I – Corrigendum, March 2003, chart 65

12. …Instead ULL succeeded by the possibility of compensatory pricing One form of compensation belongs to the variety of access and options: Another form of compensation resulted from the exclusive provision of local calls  Revenue per subscription line Options 18 ISDN 16 TelAs 14 Calls ULL 12 10 8 6 4 2 0 1999 2000 2001 May 02

13. Conclusion • Both in Europe and the US politicians, regulators and academics agree that only alternative network facilities will bring about sustainable competition. • The phasing out of sector specific regulation in telecommunication markets therefore depends on real alternative infrastructure. • The question is how to achieve it. In our opinion the German experience supports the new FCC ruling. At the threshold of next generation telecommunications a framework for competition is needed that creates technological progress. EU approach: Service competition sets incentives for investment Access Origination Conveyance Services FCC approach: Only investment enables real differentiated services