Comments of Vodafone Albania on Regulation of Tariffs for the Wholesale Mobile Call Termination Market

Vodafone Albania Sh.a. upon receiving the Decision of AKEP no. 15, dated 22.02.2018 “On Regulation of SMP operators’ tariffs in the wholesale mobile call termination market – Public Consultation 2”, 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 benchmark tariffs of the EU and BEREC countries for termination to mobile networks and their update until July 2017 under section 3?
 
The Commission recommended to NRAs to ensure that termination rates are implemented at a cost efficient, symmetric level. In the context of wholesale call termination markets, and given in particular their characteristics and the associated competitive and distributional concerns, the cost efficient rate is normally the one resulting from a pure BU-LRIC methodology. This is because a BU-LRIC model both provides the correct cost signal to operators to increase efficiency and contributes to avoiding competitive distortions.

The Commission considers alternative methods such as benchmarking in exceptional circumstances to be a valid methodology, where a NRA is not in a position, in particular due to limited resources (which is obviously not the case of Albania), to finalize the recommended pure BU-LRIC cost model, and if the NRA is able to demonstrate that the chosen methodology results in outcomes consistent with the Termination Rates Recommendation and those in a competitive market. After July 2014 the NRA using benchmarking is supposed to demonstrate that the development of a proper cost model is objectively disproportionate.

AKEP has correctly reflected the tariffs as per the documents of BEREC and their update up to the latest report of July 2017. However, one more time Vodafone is expressing its concern regarding the method how these analyses are carried out. Instead of conducting a proper analysis and running a cost methodology process, as required by the regulatory framework, AKEP continues to apply an outdated and improper method (for MTRs and FTRs) as the benchmarking.
 
2. Do you agree with AKEP proposal for application of method for stipulation of maximal price using information on tariffs of other countries EU and BEREC), thus with benchmark tariffs?
 
No. As Vodafone has always stated, the only way to determine the termination tariffs is through a cost based analysis and development of the relevant methodology. Therefore, AKEP must conduct a cost based model according to the market features of the Albanian operators and the specific characteristics of the Albanian market. Benchmarking must be only a temporary and alternative method to the cost based methodology; instead, AKEP has turned benchmarking to be the only alternative and therefore a rule for any analysis. This is detrimental to the market and the competition, as in long term the operators must not charge based on economic models developed in other countries with different characteristics from the Albanian market and operators.

Vodafone believes that cost oriented termination tariffs, and obviously symmetric ones, will result in enhanced competition, removal of inefficiencies from the market, lower tariffs for the end users, and consequently avoiding the necessity to intervene with regulatory measures in the retail market such as on-net/off-net traffic. In any case, AKEP must always consider the impact of the tariffs and retain the balance between any reduction of such tariffs and strategic investments that guarantee better infrastructure, innovation and duration of development.

3. Do you agree that AKEP should continue to use as benchmark the average rate for termination to BEREC countries that have applied pure BULRIC?
 
No. As stated above and as the domestic and European Regulatory Framework - specifically European Commission Recommendation of May 7, 2009 - requires that by December 31, 2012:
- NRAs should set rates for voice call termination based on costs incurred by an efficient operator;
- MTRs should be symmetric;
- The evaluation of efficient costs should be based on current costs and the use of a bottom-up “pure” long-run incremental cost (BU-LRIC) model following the principles set out in the recommendation.
 
As the relevant cost standard for setting termination rates should be BU LRIC which reflects the cost of an efficient operator, there should in principle be no asymmetries between the rate of the established operator(s) and the rates of the later entrants to the market. This is broadly consistent with the ERG Common Position on symmetry which states that termination rates should normally be symmetric and that asymmetry requires adequate justification.

The same rationale is used by AKEP during the analysis, where especially in section 3 refers to the aforementioned requirements. However, inexplicably applies another method for determination of the MTRs, which in turn brings confusion and leaves room for arbitrary measures.

In addition, the Albanian law no. 9918/2008 has adopted the same approach, where in all the articles that regulate tariffs, specifies the cost orientation obligation. For instance article 45 requires the SMP operators to orient the tariffs towards costs for access and/or interconnection and when considering these measures, it must also take into account the investment made by the operator, allowing a reasonable range of profit over the capital, including the risk. Moreover, in article 53 it is required that the operators when determining the tariffs must orient them towards cost; this way avoiding abusive and anticompetitive tariffs. The purpose for regulating the tariffs is to prevent any anticompetitive behavior and discrimination of end users and market competitors that may result from actions of SMP operators. Also under article 55, AKEP, when regulating the tariffs, takes into account the protection of the interests of the operator, the tariffs of which are subject to regulation, in a way that the resulting tariffs from the decision of AKEP to be cost oriented. The same is highlighted in articles 56 and 57 and all this under the main principles provided by article 7 of the law where under the “Regulatory goals” heading it is stated that “AKEP exercises its
functions in compliance with the legitimacy principle, according to this law and other sublegal acts, as well as with national sectorial policies for the development of electronic communications and other international agreements in the field of electronic communications where Albania is a party. AKEP takes into consideration the relevant recommendations and decisions of the European Commission and BEREC. AKEP induces efficient competition for the provision of networks and electronic communications services, supporting facilities and other services, inter alia, in order to guarantee nondiscrimination and equality of treatment for the providers of electronic communications network and services.

Moreover, the explanatory note of the Recommendation of 2009 provides for the rationale for cost-based pricing. The note states that in the light of the ability and incentives of terminating operators to raise prices substantially above cost, cost orientation is the most appropriate intervention to address this concern over the medium term. Cost orientation addresses both productive – and allocative – efficiency concerns. From a productive – efficiency perspective, low termination rates facilitate low retail call charges and higher consumption. It is also important that the relevant price is based on the costs of an efficient operator. If the regulation of termination tariffs was based on the actual costs of the operator, this would not provide the right incentives for operators to innovate and increase efficiency, as their inefficiency would be covered by their competitors. This will also give rise to allocative-efficiency concerns as customers of other operators would ultimately bear the costs of the inefficient operators.

In other words, the model applied for so long by AKEP not only does not address the above concerns, but by applying a benchmark and arbitrarily introducing asymmetry, AKEP is endangering even well-established operators to cover for the inefficiencies of one operator and put them through hardships aiming to turn them into inefficient operators.

Allocative efficiency suggests that one group of customers should not subsidize another group of customers. Apart from the fixed-to-mobile cross subsidization that we outlined also on the fix market analysis, this is also relevant within markets (in this case the mobile markets).
 
4. Do you agree with the proposed level of MTR 1.11 Leke/min and which is the most reasonable deadline for start of application of the new tariff by each of the three mobile operators?
 
First, Vodafone is against the reduction of MTRs to the level of 1.22 Lek/min within 2018. Vodafone requires that such reduction from 1.48 to 1.22 Lek/min should start as of 1st of January 2019. The reduction of MTRs starting from 1st of January would be more natural and also in line with the average tariff level of BEREC countries that AKEP is using as reference. Vodafone has always been strongly against any steep reductions of termination tariffs (i.e. within 2018 for this case) as this constitutes real risks for the financial stability of the operators in the market and would negatively affect the level of investments.

Second, ‘glide path’ or otherwise gradual reduction of the tariffs is applied by the regulatory bodies so that the operators are allowed to adjust their business models, to regulate new price levels and also to guarantee that the operators do not undergo any “shock” because of sharp decrease of tariffs which might cause fluctuation of prices, of the income of the companies and therefore of their financial stability. ‘Glide paths’ also help regulatory bodies to balance short-term benefits of the consumers against protection of drivers for investment. In this aspect, many of the regulatory bodies are sensitive against the risk on investment (which are mainly planned on several years plans) due to drastic, immediate or even repeated reductions of regulated tariffs. That said, it would be irrational to ask operators to further carry out new investments, when obviously the incomes have decreased drastically, up to the level when profit results in negative figures; even more when we consider the fact that Vodafone is the largest investor. We remind AKEP that Vodafone has just invested for the acquisition of Plus Communication spectrum and it is also expected to further invest in its exploitation. Furthermore, AKEP has launched a public consultation on granting exploitation rights for the 800 MHz(790-862) frequency band, calling for all operators to show interest and to offer the relevant amount of investment they are willing to make. Therefore, this situation is surreal and any intervention to MTRs at this crucial moment (not even considering the asymmetry) would jeopardize the budget plan stability and go completely in the opposite direction of the foreseen investments.

In addition, beside the provisions of article 45 of the law no. 9918/2008 regarding the investment risk calculation to be carried out by AKEP, if the latter applies excessively low
MTRs without the proper analysis, it will dent Vodafone’s ability to undertake infrastructural and innovation investments in the future. Vodafone submits that such regulation runs counter to the intention of the European Commission where in Article 3(3) of the Framework Directive provides that an NRA should:

- “safeguard competition to the benefit of consumers and promote, where appropriate, infrastructure-based competition” and
- “promote efficient investment and innovation in new and enhanced infrastructures, including by ensuring that any access obligation takes appropriate account of the risk incurred by the investing undertakings and by permitting various cooperative arrangements between investors and parties seeking access to diversify the risk of investment, whilst ensuring that competition in the market and the principle of non-discrimination are preserved”.
 
In addition, Article 13(1) of the Access Directive3 states that national regulatory authorities shall take into account the investment made by the operator and allow him a reasonable rate of return on adequate capital employed, taking into account the risks involved.

3 Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities.

On the other hand, for the fixed telephony market analysis AKEP has a totally different approach and in contradiction with the one for the MTRs. Below some citations from the fix telephony market analysis:
“Reduction of FTR […] constitutes a non-proportional reduction and that does not serve promotion of investments in the infrastructure of fixed networks (telephony and broadband) in Albania, as well as the regulatory goals of the law no. 9918 […].”

“[…] constitutes a considerable reduction of this tariff (46%) from the current level for all operators of fixed networks and the specific conditions of Albania for the fixed networks (many fixed networks and with a very small size compared to the EU countries; thus, with a very limited economy of scale).”
Further, “[…] AKEP decides that first with issuance for public consultation of the document of market analysis that is approved with this decision, simultaneously decides to postpone
application of the reduction as was foreseen to be applicable as of 01.01.2018 for the termination tariffs (of all operators of fixed networks) and transit in Albtelecom, by continuing application of current tariffs until the term (and values) which will be determined in the relevant decisions of AKEP […]”
As per above, in addition to the concerns raised on the application of benchmark instead of the cost-based pricing, we request from AKEP to have the same approach regarding the Glide Path as for the fixed market in a non-discriminatory way also for the MTRs.

5. Do you agree with AKEP’s proposal for asymmetry of MTR for Albtelecom as compared to the two other operators?
 
No. Vodafone strongly opposes this proposal of AKEP and finds it completely not grounded and in contradiction with any good practice or regulatory framework that AKEP itself has used on the rationale of the analysis. The European Commission has requested to all member NRAs from 2009 to apply a certain type of cost methodology (BU LRIC4) to determine the termination rates5. Vodafone has always requested AKEP to apply this requirement as provided by the European Commission, but AKEP has never responded positively and instead continued to apply a benchmark method, which is against the European and domestic regulatory framework as it may leave room to inappropriate and disproportional regulatory measures on tariffs and, as it is the case, even to asymmetric ones.

Termination rates should normally be symmetric and asymmetry requires an adequate justification based on objective cost differences outside the control of the operators concerned6, otherwise asymmetric tariffs could be dangerous and could hinder competition and innovation. Such possible justifications could be objective network cost differences, for instance, because of cost differences between the operation of a GSM900 network and a DCS1800 network, or substantial differences in the date of market entry. A key argument
used to support authorization of temporary asymmetric rates in favor of an operator, is when the latter is a new entrant in the market. This is known as an entry assistance policy, which is aimed at promoting new entry with long-term competition effects. However, it is generally accepted that such policy may also attract inefficient entry. The European Commission has emphasized that the fact that an operator entered the market later and therefore has a smaller market share, can justify higher termination rates only for a limited transitory period, which should not exceed four years after market entry. The persistence of a higher termination rate would not be justified after a period long enough for the operator to adapt to market conditions and become efficient over time, and could even discourage smaller operators from seeking to expand their market share.

In addition, the ERG on its document on common position on symmetry of fixed and mobile termination calls rate, which AKEP uses as main reference supporting its rationale in the document for public consultation, provides specifically the exception to symmetry and their justification as follows:
1. Exception to symmetry justified by objective exogenous cost differences.
2. Exception to symmetry for a significantly late entrant on a transitory base.

Vodafone is well aware that sometimes it is argued that Operators that come late to the market are never able to gain sufficient market share without assistance of a higher MTR. This may be for a number of non-scale related reasons, such as lack of existing brand, lack of access to the “best” transmission sites, or subscriber switching costs. Most of these claims are subjective in nature, with no real evidence to support them; instead, they discourage later entrants from growing. We have quite a fresh precedent with Plus Communications that never managed to become an efficient operator.
In fact, it is accepted that asymmetric MTRs distort competition – indeed they are intended to do so in order to “compensate” for competitive disadvantages which later entrants are claimed to face. If asymmetric MTRs had no impact upon competition then it is hard to see why regulatory bodies would ever use them. However, it is also claimed that the benefits arising from these asymmetries – in the form of increased competition provided by new entrants who might exit the market – justify the interventions of the more efficient operators would be improperly increased. In parallel, the costs of the less efficient operators would be reduced by the lower termination charges of the more efficient operators. These differentials in costs would in turn impact on prices to subscribers. This would further distort the pattern of competition between mobile operators, creating a vicious circle. Not only would the less efficient operators be protected against their lower efficiency, they would actually gain relative to the other more efficient operators.
The asymmetric regulation of the larger networks, requiring them alone to reduce termination charges and inducing the smaller networks to set higher termination charges, therefore tends to distort the process of competition. No operator, ceteris paribus, will ever want to become bigger than the rivals; if by becoming big one ends up being penalized relative to the rivals. In a similar setting, competition for the market becomes muted, and prices to end users are higher10.
As per above, an important point must be drawn, from which the Albanian market has suffered for more than 8 years, where asymmetric MTRs do not actually encourage operators to compete for market share. Smaller operators risk losing their subsidy if they grow, whilst large operators are penalized by the regulatory body for their scale. This should be sufficient to make AKEP very skeptical of asymmetric MTRs as a remedy; because once they are introduced they are unlikely to change competitive conditions in such a way as to facilitate their removal. That is why the ERG Common Position has been used as a guideline in this regard.

The scale and the nature of the distortions created by asymmetric MTRs cause their advocates to recognize that some kind of “objective” justification must be advanced in their
support. The ERG document considers the factors that are commonly used to justify asymmetries. Some of these – such as the “later entry” of firms are clearly without foundation today.
Nevertheless, AKEP has come up with a solution that is neither reasonable, as not supported by any doctrine or practice in the sector (as outlined above), nor legal as it is against the law and the regulatory framework. By adopting this practice, AKEP is breaching the core of its mission stipulated in article 7 of the Law: AKEP induces efficient competition for the provision of networks and electronic communications services, supporting facilities and other services, inter alia, in order to guarantee nondiscrimination and equality of treatment for the providers of electronic communications network and services.

The applicable Mobile Termination Rates (MTRs) in the European Union show full compliance with the recommendation in all European markets, with most NRAs using cost models of bottom-up “pure” LRIC model based on current costs.
 
6. Do you agree with AKEP proposal for application of asymmetry also for Telekom Albania as compared to Vodafone Albania for a one-year period?
 
As stated above, the approach of AKEP towards introducing any regulatory measure without proper analysis, relevant guidelines and comprehensive market studies, leaves room for abusive measures and leads to absurd and dangerous situations for the sector and the Albanian economy in general. If AKEP does not follow the European guidelines and recommendations12, but instead orients our market towards abusive practices outside of the European market, then we are not only breaching our legal obligations and our
12 Article 7 of the law no. 9918, dated 19.05.2008, as amended, provides that AKEP takes into consideration the relevant recommendations and decisions of the European Commission and BEREC.
engagements as a European Candidate Member State, but also giving a very discouraging message to potential investors and causing the departure of the current ones.

The latest case of application of asymmetric rates has been ascertained in Slovakia where the Slovakian regulator, RU, proposed in November 2017 to decrease the MTR to 0.825 Eurocent/min as a result of the second review of its bottom up pure LRIC model.

RU also proposes to set an asymmetric MTR for Swan Mobile, a new entrant with 3.23% market share, at 0.908 Eurocent/min, which is 10% higher. Swan Mobile entered the Slovakian market in October 2015. Since then, it has voluntarily applied symmetric MTRs with the three other MNOs.
Asymmetry in MTRs is no longer common in the EU. Only Switzerland, Cyprus and Turkey have asymmetric MTRs as the above map explains. The European Commission Recommendation of May 2009 does allow NRAs to set a higher MTR for new entrants. In that case, the NRA has to show that the new entrant is operating below the minimum efficient scale and incurring higher incremental costs per unit than the modelled operator, and that the period of asymmetry should not exceed four years.
Both BEREC13 and the Commission found that RU failed to sufficiently and objectively justify why Swan Mobile has a higher unit cost than other operators. The Commission recommends RU to apply symmetric MTRs without delay. Moreover, the Commission concludes that unjustified asymmetric rates in favor of Swan Mobile would breach the principle of non-discrimination.

AKEP on the other hand, without any proper analysis and consequently with no ‘objective’ justification, is proposing to apply asymmetry (at the level of 118% compared to 10% of RU) for the other operators, where no one is a new entrant (Telekom has been in the market for even a longer period than Vodafone), no objective cost differences. Even if we would absurdly consider the market share justification, such a share is respectively at the levels of Vodafone 48%, Telekom 33% and Albtelecom 14% (way above the 3.2% of Swan). These measures have been introduced without even analyzing the new developments of the market after the exit of Plus Communication and the relevant allocation of its customers. Instead, AKEP in total confusion introduces these measures based on no proper evidence and with the sole justification of the the market share, while the European Commission has just refused such measures introduced by RU in favor of Swan Mobile, which is a new entrant and with 3% market share, because there is no proper justification supporting this extreme intervention.

In most of the cases the NRAs may apply the objective justification for significantly late entrants rather than market share as the consequences of differences in entry date, which are in most cases outside the control of the operators, are more objective than the market share and, under certain circumstances, may justify asymmetries on a transitory basis. Indeed, it is possible to observe differences in market shares between two operators even if there are no differences in market entry date (in our case Vodafone has entered even later compared to Telekom). In such cases, other factors, which are endogenous (i.e. within the control of the Operators), can explain these market share differences, for example because of differences on their efficiencies in running their network and business in general.

7. What is the most reasonable deadline for start of application of Phase I of new MTRs?
 
As stated above, Vodafone is against the reduction of MTRs to the level of 1.22 Lek/min within 2018. Vodafone requires that such reduction from 1.48 to 1.22 Lek/min should start as of 1st of January 2019 at symmetric level. The reduction of MTRs starting from 1st of January would be more natural and also in line with the average tariff level of BEREC countries that AKEP is using as reference. Vodafone has always been strongly against any steep reductions of termination tariffs (i.e. within 2018 for this case) as this constitutes real risks for the financial stability of the operators in the market and would negatively affect the level of investments.

At this part Vodafone will challenge the impact assessment made by AKEP, which is totally unrealistic. AKEP is claiming that the cost impact is really low with a small increase at the level of 0.10% lek/min, and even a reduction of 0.12% lek/min compared to the report of 2017.

While, from the financial analysis conducted by us, if we would maintain the same parameters as 2017 (distributing the traffic of Plus operator proportionally to the other 3 operators), the estimated impact is approximately 5 million Euros only for the first phase of the proposed glide path. In financial terms, Vodafone would suffer a drastic reduction in revenue of 2.4 million euros and increase of costs related to national interconnection of 2.6 million euros.

Regarding the above, the analysis on financial impact and the figures mentioned by AKEP in the document are incorrect. AKEP states that the cost of 2.43 leke/minute (according to first stage MTRs) is lower than the weighted average cost of Vodafone on-net and off-net calls of 2.55 leke/min according to the MTR implemented in 2017 (6.52 leke/minute for Plus and 1.48 lek/min for the other three operators), so the new MTR scheme decreases the cost of Vodafone calls with 0.12 leke/min. The rationale behind this logic followed by AKEP is inaccurate because not only there hasn’t been a proper market analysis after Plus exit and the related effects, but the figures presented are incorrect because the MTR applied to Plus has been 2.66 and not 6.52. Moreover, Vodafone has never accepted the application of asymmetry with Plus and this case has been subject of court proceedings, which have been settled through an agreement (“Settlement Agreement”).

Other comments:

Albania has ratified in 2006 the Stabilization and Association Agreement with the EU member states and in 2014 has obtained the candidate status. Therefore, Albania has taken official engagements to approximate its legal framework to the EU and to follow the latter’s best practice.

However, these actions of AKEP infringe crucial provisions of the Stabilization and Association Agreement, such as the provisions of article 71 on competition “any State aid which distorts or threatens to distort competition by favoring certain undertakings or certain products shall be incompatible with the proper functioning of this Agreement”. Moreover, article 104 on electronic communications provides that “the Parties shall, in particular, strengthen cooperation in the area of electronic communications networks and associated services, with the ultimate objective of the adoption by Albania of the Community acquis in
these sectors one year after the date of entry into force of this Agreement.” Article 50 of the SSA in paragraph 2 provides that “The Parties shall not adopt any new regulations or measures which would introduce discrimination as regards the establishment of Community or Albanian companies on their territory or in respect of their operation, once established, by comparison with their own companies.”
In conclusion, VA condemns such discriminatory treatment by AKEP, where the latter with a complete double-standard treatment compared to the fixed market analysis (but with the same goal to arbitrarily put in an advantageous position Albtelecom), reduces the MTRs and applies asymmetry without any cost based calculation and proper objective justification 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 as required by article 7 of the law. It is not acceptable for AKEP to apply double standards by favoring Albtelecom and discriminating the other players in both fixed and mobile markets, by openly violating the nondiscrimination and equal treatment principles between the operators as set out clearly under the applicable Albanian and EU legal framework.
In any case the eventual re-introduction of the asymmetry in favor of Albtelecom stands in clear contrast with European practice and EU legislation for a number of reasons:

a) Albtelecom is the only integrated operator in the telecommunications market taking advantage of the cross-subsidization between the two fixed and mobile markets in which it operates and for which AKEP does not show any particular interest even though Albtelecom is subject to accounting separation.
b) Albtelecom has a clear dominant position on the fixed telephony market with a percentage exceeding 71%
c) The combined revenue market share of Albtelecom is above 20%
d) Albtelecom has a very long presence in the Albanian market, longer than its competitors. A company that operates more than 20 years in the telecommunications market and for over 10 years in the mobile market cannot be treated by AKEP under no circumstances as a new entrant in the market.
Albtelecom has benefited from the asymmetry in the past, which obviously prevented it from becoming an effective operator, requesting once again for asymmetry to the detriment of consumers and its competitors in both fixed and mobile markets.

These unreasonable approaches towards both markets in favor 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 favor of one party qualifies as State aid and is prohibited by domestic and European legal framework.

VODAFONE ALBANIA