Comments of Vodafone Albania On the Public Consultation Document for the Fixed Telephony Market Analysis
Vodafone Albania Sh.a. upon receiving the Decision of AKEP no. 28, dated 27.12.2017 On “Approval for public consultation of the document: Fixed telephony market analysis: wholesale markets of termination and transit calls in fixed public telephonic networks – Public Consultation”, has submitted as below, its position and comments for the purpose of a better and efficient functioning of the relevant market based on fair competition.1. Has AKEP rightly reflected developments in the retail market of fixed telephony services?
VA does not agree with the conclusions of AKEP, which gives the impression that the fixed telephony market has undergone significant improvement at competition level, whereas figures indicate otherwise. Albtelecom continues to openly dominate as a monopoly in the fixed telephony subscribers market at the level of 71% and in the telephony calls market at 87%. Consequently, the incumbent operator dominates even in terms of revenues, while for other operators it is impossible to overcome its hegemony.
VA believes that the success of the retail market is, among others, dependent on regulatory intervention in the wholesale market, in a manner both to incentivize investment and ensure interoperability in order to de-risk business cases. Therefore, a vibrant retail market is underpinned by a well-functioning, regulated where necessary, wholesale market. Ex-ante regulation imposed at the wholesale level should be sufficient to tackle potential competition problems on the related downstream market. However, in case the wholesale interventions have been unsuccessful, then the three criteria test should be applied.
2. What do you think of AKEP's conclusion that it is not necessary for retail fixed telephony markets to be subject to ex-ante regulation?
VA deems that in principle retail markets should not be subject to regulatory interference.
As mentioned above, and required by the European Commission Recommendation 2014/710/EU, a retail market should be indirectly affected through regulation of the relevant wholesale market. Thus, if the retail market concerned is not effectively competitive from a forward-looking perspective in the absence of ex-ante regulation, the corresponding wholesale market susceptible to ex-ante regulation in line with the EU Directive 2002/21/EC. On the other hand, if the retail market concerned is effectively competitive from a forward-looking perspective in the absence of ex-ante wholesale
regulation on the corresponding relevant market, this should lead the national authority to conclude that regulation is no longer needed at wholesale level. In such a case, the corresponding relevant wholesale market should be assessed with a view to withdrawing ex-ante regulation.
Notwithstanding the above, AKEP is considering in the market analysis of mobile services whether the retail mobile services market meets the three criteria test (we find this to be absurd as the retail mobile services market is highly competitive and not listed as a susceptible market for ex-ante regulation neither in the Recommendation of the European Commission nor in the Regulation of AKEP), while in the retail fixed telephony market AKEP is not considering the three criteria test.
As provided by the 2014/710/EU Recommendation, should AKEP find that the wholesale interventions have been unsuccessful; the relevant retail market may be susceptible to ex-ante regulation provided that the three criteria test has been met. In the current situation of the retail market with no effective competition as there is insignificant market dynamics and absence of change in the shares for the incumbent operator, VA believes that the three criteria test is met.
Such conclusion is supported by the fact that first the barriers to entry the market are evident and so far no other player has ever entered it, and there is not a single agreement showing that a player (current or potential) is considering entering such market. The main reason that high and non-transitory entry barriers still persist is that physical infrastructure cannot be easily duplicated and there are high sunk costs associated with the market entry. The ex-ante obligations to be imposed on Albtelecom would ensure that alternative operators can access the incumbent's network and offer fixed telephony services using alternative business models. These business options enable new entrants to avoid the high sunk costs associated with the deployment of fixed networks. Second, as aforementioned there is no effective competition as the figures and the market structure show. And third, it is also obvious that the competition law and the competition authority, regardless of its interventions, are insufficient to adequately address the failure of the retail market to have an effective competition.
3. What do you think of the evolution of Albtelecom's market shares?
As sated above, Albtelecom continues to openly dominate as a monopoly in the fixed telephony subscribers’ market at the level of 71%, as well as in the telephony calls market at 87%. It is true that revenues from fixed network services have fallen by 15%, but this fall is not based on competition but on external factors, such as the significant reduction in termination and transition of international incoming calls.
4. Do you agree with AKEP's conclusions regarding definition of the relevant market for calls termination in the individual fixed network?
Yes. The incumbent operator just like any other fixed telephony operator is dominant in calls termination on its network. This is also the clear attitude of the EC Recommendation of 2003, 2007 and 2014, of all the practices of European countries and countries of the region, as well as the attitude of AKEP expressed in the Regulation on Market Analysis.
5. Do you think that all active public fixed telephony network operators meet the criteria for SMP in calls termination on their individual networks?
Yes. Every fixed telephony operator is a monopoly in provisions of calls termination to its subscribers. In the conditions of lack of interchangeability, neither on the demand side nor on the supply side of calls termination on a specific network, each network constitutes a relevant market and each network operator holds a monopoly position in the market for calls termination on its network.
6. What do you think about regulatory measures for termination to fixed networks?
VA agrees with AKEP's stance regarding the market analysis of calls termination to the incumbent operator's network, its designation as SMP and the regulatory measures proposed by AKEP for it.
In addition, VA asks AKEP to monitor the account separations obligation for the mobile and fixed products required for the incumbent by the Competition Authority as this lack of monitoring gives Albetelecom the opportunity to apply cross-subsidy. In addition, an account separation regulatory measure must be imposed for the upstream and downstream markets, as the incumbent will conduct a margin squeeze or even predatory prices practices. VA believes that the only way to monitor this behavior is by imposing ex-ante measures such as requiring approval of AKEP before launching any product.
7. What is your opinion on the new FTR reduction scheme for all fixed and calls transiting networks in Albtelecom’s network?
In principle, VA considers that the strong and abrupt reductions of the termination rate do not serve the purpose of regulation and constitute a risk to the financial sustainability; thus, adversely impacting the level of investments. This approach should always be applied to analysis reviewing termination rates, and VA has based it both on the mobile termination market and the fixed market. That said, the glide-path proposed by AKEP should correctly and fairly reflect the reality offered by European practices, the costs incurred by fixed operators versus mobile networks and thus guarantee non-discrimination as compared to the benchmark applied to mobile operators. This is ensured by following European practices and directives on the methodologies applied by EU Member States for calculation of termination rates. As already provided in the report of December 7, 2017 BoR (17) 227 of BEREC and according to European Commission Recommendation 2009/396/EC of 7 May 2009 "On the Fixed and Mobile Termination Rate Regulatory Treatment in EU Member States" ("the Recommendation"), regulatory entities should set termination rates based on the costs that an efficient operator has. According to this report, only 6 of the reporting entities use benchmarking in rates setting (i.e. according to the recommendation), but 5 of them use benchmarking based on Pure BULRIC and only Albania uses the benchmark reference only1. Additionally, the latest Cullen International report "Fixed Termination Rates and Cost Models - Incumbent Operators" provides that for Member States using the Pure LRIC, average FTR is 0.09 Eurocent/min, while the simple arithmetic average of 27 member states (excluding Finland) is 0.13 Eurocent/min.
In this sense, the level of the FTRs remains still considerably high compared to the costs of an efficient operator according to the pure LRIC methodology and compared to the calls termination rates on mobile networks, which are oriented to the costs of an efficient operator according to the pure LRIC methodology; this in turn is in contradiction with the practice of EU countries, as mentioned above, where the FTR/MTR ratio is at an average level of 1:5 in favor of MTR.
As we have already and repeatedly informed you, from EU statistics it results that MTR levels are everywhere significantly higher than the FTR levels, at an average of 5 times. More specifically, the below chart reflects the differences between FTR and MTR for EU countries, based on information provided by Cullen International (FTR is calculated for an average local call, with a rate per call referring to a 3-minute call). Based on this reference, VA deems that the FTR level proposed by AKEP still remains very high compared to MTR, which AKEP is leading to cost according to the benchmark model pure LRIC and a significantly sharp glide path. In this context, VA suggests that FTR should aim for a swift alignment to the average of FTR benchmark according to pure LRIC, the same as with MTR.
Additionally, VA takes the opportunity to express its concern regarding AKEP's approach to both market analyses (fixed and mobile termination) and respectively to regulation of FTR and MTR rates, where favoritism for Albtelecom is clearly visible, in contradiction with all good practices and the European regulatory framework. Moreover, in the wholesale market of calls termination in mobile networks, AKEP in an absurd approach is considering application of asymmetry for MTR supported by a market share rationale among the operators (market share – an unforeseeable excuse in any directive or regulatory act for the application of asymmetry), whereas in the termination market in fixed networks where Albtelecom always owns more than 70% of subscribers and over 85% of calls, not only fails to consider application of symmetry, but also favours Albtelecom even more, further pushing the application of the glide path for discounts of FTR at EU levels, with no proper calculation based on the cost of an efficient operator. Vodafone sticks to the opinion that symmetry of termination rates should be the rule, whereas application of asymmetry in exceptional cases is an exceptionally extreme measure and should be based on an adequate justification on objective cost differences outside the control of operators under examination. Otherwise, asymmetric rates could be very dangerous and hinder free competition and innovation.
VA strongly disagrees with AKEP's evaluation that keeping FTRs at higher levels will help increase market competition and that it suits Albanian market characteristics and the costs incurred by fixed telephony operators as compared to mobiles - network costs are always higher for mobile operators since they are closely linked to the access network, which results from the huge difference in the cost structure between fixed and mobile networks as reflected also by EU practice.
In the case of a landline network it is the copper wire network. In the case of mobile telephony it is the base station network. Copper wires are dedicated to special users and are not included in the costs of voice services. Baseline stations constitute infrastructure built for a large number of users and are included in the costs for voice services. The most appropriate way to explain the above is by analogy: if all landline telephony subscribers duplicate the number of calls/minutes they use, there will be no additional investment in copper wire. And the contrary, if all mobile telephony subscribers will double the number of incoming calls/minutes, the number of base stations will increase significantly. On the other hand, the widespread use of mobile telephony in a market with 3 network operators is not necessarily translated into cost reductions for mobile operators, as the advantages of economies of scale do not apply as in the cases of markets with low-cost entry.
This clearly indicates that base station costs are related with cause-effect relation to the provision of voice services. This is also the fundamental reason why cost-oriented termination tariff regimes always result in FTRs that are significantly lower than the MTR, and never the other way around.
This is also underlined in the European Commission's proposals for review of the regulatory framework in electronic communications (including the drafting of a Directive on the Electronic Communications Code (EEC), which is expected to be fully enforceable by mid-2019), where the Commission plans to set the below ceiling rates for termination:
- 0.14 Eurocent/min for fixed termination; and
- 1.23 Eurocent/min for mobile termination
The European Commission in its 2009 Recommendation further provides in Article 2 that the recommended (appropriate) methodology for determining the cost of an efficient operator should be based on current costs and the BULRIC model. Following, in article 4 it is states that the cost model should be based on efficient technology available while the model is being evaluated. For this purpose, the central part of the fixed and mobile network should be basically based on Next Generation-Network (NGN).
Based also on the above, since the central part of the fixed network of Albtelecom is now fully based on NGN, i.e. operates with an efficient technology, VA estimates that the conditions are met for conduct of an FTR cost methodology analysis according to costs of an efficient operator for fixed telephony operators. In absence of such analysis, VA deems that AKEP must use the benchmarking approach, aiming for access to EU countries that have applied the pure LRIC model, as in the case of MTR.
The Framework Directive 2002/21/EC (Framework Directive) provides in Article 16/1 that 'the national regulatory authority shall, as soon as possible after adopting a recommendation or updating it, undertake an analysis of the relevant markets by putting the best efforts for implementation of these recommendations'. Law 9918 of 19.05.2008 "On Electronic Communications in the Republic of Albania" as amended, clearly states in Article 7 that AKEP takes into account relevant recommendations and decisions of the European Commission and BEREC.
AKEP must ground its measures on the regulatory framework and practice of EU countries and guarantee non-discriminatory treatment and the same MTR standard against FTR. On the other hand, as practice and economic theory have shown, FTR alignment with costs of an efficient operator will result in increased competition, elimination of inefficiencies in the market, thus encouraging operators in the market to be more innovative and efficient, which in turn would be reflected in lower subscribers rates.
In conclusion, VA condemns such biased approach of AKEP, where the latter with a complete double-standard treatment compared to the mobile market analysis (but with the same goal to arbitrarily put in an advantageous position Albtelecom – monopoly operator in the fixed network infrastructure at national level), revises the glide-path and postpones the reduction of FTR to another year without any cost based calculation according to the European Commission Recommendation. We cannot stress enough, that AKEP, as the regulatory body, must be unbiased in its approach and treatment to all players in the market, and its goal must be to promote fair competition in the electronic communications market. It is not acceptable for AKEP to apply double standards by favouring Albtelecom and discriminating the other players in both fixed and mobile markets, by openly violating the non-discrimination and equal treatment principles between the operators as set out clearly under the applicable Albanian and EU legal framework.
These unreasonable approaches towards both markets in favour of Albtelecom, infringe crucial legal obligations and are considered as discriminatory and threaten competition, rather than helping it; and by applying these measures clearly in favour of one party qualifies as State aid and is prohibited by domestic and European legal framework.
VODAFONE ALBANIA