Brussels, 21 October 2010
Digital Agenda: Commission endorses general model of Italian regulator to calculate wholesale access prices; asks it to recalculate maintenance and commercial costs
In a letter sent to the Italian telecoms regulator (AGCOM), the European Commission agrees with AGCOM`s general approach to base wholesale prices for access to Telecom Italia`s network on a costing model which mimics costs incurred by an efficient operator managing a newly built copper network in a competitive market - i.e. Bottom Up Long Run Incremental Costs, BU-LRIC. However, the Commission has expressed its concerns that AGCOM has not consistently applied this model to calculate the prices which alternative operators would be charged for accessing Telecom Italia's network. AGCOM plans to increase certain access prices, in particular for local loop unbundling (LLU) services. In the Commission's view the prices proposed by AGCOM do not sufficiently reflect the maintenance and commercial costs of an efficient operator managing a newly-built copper network. This creates a risk that alternative operators would have to pay prices higher than those which they should normally pay for high quality access to a modern network. The Commission requests AGCOM to re-examine its cost calculation using data of an efficient company managing a newly-built copper network. The resulting prices would give the correct investment signals to both access-seeker and access-provider and ensure that consumers pay fair prices for high-speed Internet access. AGCOM is required under EU telecoms rules to “take utmost account” of the Commission’s comments.
Neelie Kroes, Vice President of the European Commission for the Digital Agenda, said: “It is crucial that dominant telecoms operators in all EU Member States charge competitors a fair price for access to their copper networks. Fair access enhances competition in consumer services and provides the right investment signals. I recommend that AGCOM should review its calculation of Telecom Italia's access prices, applying in a consistent way its model to establish maintenance and commercial costs."
The Commission has responded to the Italian regulator's plans to increase prices for Telecom Italia's local loop unbundling (LLU) services, wholesale bitstream access (WBA) and wholesale line rental (WLR). These wholesale access services allow competitors to provide broadband and fixed telephony services to consumers, in competition with Telecom Italia, either via local loops rented from the incumbent (LLU) or by fully employing the incumbent's infrastructure (WBA and WLR). The planned price increases are conditional on Telecom Italia fulfilling specific quality requirements set by the regulator.
The overall wholesale price for the key access product in Italy, i.e. LLU, comprises network, maintenance and commercial costs. The Commission endorses AGCOM's plan to apply the "Bottom Up Long Run Incremental Costs", (BU-LRIC) costing methodology which mimics costs incurred by an efficient operator managing a newly-built copper network in a competitive market. The Commission does not question the way AGCOM applied such methodology to establish the network costs (which constitute around 70% of the total access costs).
However, AGCOM's approach to assessing the maintenance and commercial costs appears to be inconsistent with this methodology, as AGCOM does not seem to use data of an efficient company managing a newly-built copper network. The Commission therefore invites AGCOM to re-examine the data used to establish maintenance and commercial costs. The Commission also invites AGCOM to reassess its regulatory approach with regard to wholesale broadband access (WBA) and wholesale line rental (WLR) which are not cost oriented. Moreover, as regards the quality requirements to be fulfilled by Telecom Italia prior to a price rise, the Commission invites AGCOM to spell out exactly what is required of Telecom Italia in order to ensure regulatory certainty for all market players.
The Commission’s comments in this case stress that where regulators apply the "Bottom Up Long Run Incremental Costs" model they must consistently implement it to accurately mimic the costs which would be incurred if telecoms services were efficiently provided through a newly-built copper network in a competitive environment. Such models, if correctly implemented, send the right signals to all potential investors in network infrastructure (dominant operators or alternative operators) and help to meet the Digital Agenda for Europe target to give every European access to basic broadband by 2013 and fast and ultra fast broadband by 2020 (see IP/10/581, MEMO/10/199 and MEMO/10/200).
Incremental cost models, which calculate the additional (incremental) costs of an operator providing a given service, compared to a situation where that service is not provided, are used by a majority of national regulators across Europe. Such models can be based either on the costing data of an existing operator with significant market power (top-down LRIC) or on the costs that would be incurred by a hypothetical efficient operator managing a newly built network (bottom-up LRIC). Bottom-up LRIC methodologies permit the recovery of (only) the efficient costs necessary to supply the relevant service, thus sending the correct investment signals to operators. BU-LRIC can therefore be considered to reflect a competitive access market, in line with the objectives of regulatory intervention under EU telecoms rules.
The Commission's letter was sent under the "Article 7" procedure contained in the Framework Directive of the EU Telecoms rules (see MEMO/08/620). This procedure leaves considerable scope for national telecoms regulators to achieve effective competition, but requires them to notify the Commission of their regulatory measures to ensure consistency of telecoms regulation in the single market. When these measures concern market definitions and analyses of significant market power (when one or more players is dominant), the Commission can ask the national regulator to withdraw the measure. When the measures concern regulatory remedies (as in the present case), the Commission may make comments of which the national telecoms regulator must take utmost account.
The Commission letter sent on 21 October 2010 is available, as of 27 October 2010, at: