1. Post- och telestyrelsen Selected topics in market regulation - Regulation of non cost oriented wholesale prices - Retail minus and price squeeze calculation - Experience in regulating media distribution services - Is the “three criteria test” the only measure for SMP designation? - Should NRA push operators to offer wholesale services? Lars Erik Axelsson Expert Adviser National Post and Telecom Agency Sweden

2. Post- och telestyrelsen Why regulate wholesale prices? Dir. 2002/19/EC Article 13 A national regulatory authority may…..impose obligations relating to cost recovery and price controls……for the provision of specific types of interconnection and/or access, in situations where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze, to the detriment of end-users. 2

3. Post- och telestyrelsen Regulation of wholesale prices Cost orientation: calculation of price based on the production cost of the wholesale procuct Fully Distributed Cost, FDC, with Historical Cost Accounting, HCA, as asset valuation method Long Range Incremental Cost Accounting, LRIC, with Current Cost Accounting, CCA, as asset valuation method Retail minus: ”cost orientation” where the price of a wholesale product is based on the end-user price of a relevant product minus the relevant production costs at the retail level Normally FDC based on relevant company accounts Non-discriminatory pricing: pricing is free, but the regulated operator should apply the same price for external as well as internal customers. 3

4. Post- och telestyrelsen Non-cost oriented prices In case the regulator finds that it is unlikely that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze, to the detriment of end-users, cost oriented prices are not proportional to apply. In such a case, an obligation to apply non- discriminatory conditions may be more appropriate. Sweden 2005: European price study finds that TeliaSoneras prices for >2 Mbit/s leased lines are among the lowest in Europe. No previous complaints from wholesale customers. PTS decision on the Leased Lines market: Up to 2 Mbit/s cost oriented FDC/HCA, >2 Mbit/s non- discriminatory conditions. Since 2005, TeliaSonera has lowered its LL-prices. 4

5. Post- och telestyrelsen Price calculation methods 5

6. Post- och telestyrelsen Retail minus calculation Retail minus seems simple! Take the end-user price and subtract the relevant production costs at the retail level. Example: Wholesale Line Rental (WLR) Take the regulated operators subscription price for fixed telephone subscribtion Subtract the regulated operators relevant costs for administration, billing, customer service etc., and eventually overhead cost. and we have the wholesale price. The difficulty is to determine the relevant costs. 6

7. Post- och telestyrelsen Price squeeze calculation This also seems simple! Take the wholesale price and add the relevant production costs at the retail level. Example: Fixed telephone subscription Take the operators wholesale price WLR. Add the operators relevant costs for administration, billing, customer service etc., and eventually overhead cost. and we have the retail price without price squeeze. The difficulty is to determine the relevant costs. 7

8. Post- och telestyrelsen The Deutsche Telecom margin squeeze case DT argued that the regulated wholesale price for WLR should not be the basis for a price squeeze calculation, but DT:s actual costs, which were lower. The ECJ stated that the abuse of margin squeeze is concerned with the unfairness of the spread between two vertically related prices. Therefore, it is not necessary to establish, in addition, that either the wholesale or retail price is, independently of the claimed squeeze, excessive. Case C-280.08 P Deutsche Telekom Ag v European Commission, Judgement of 14 October 2010 8

9. Post- och telestyrelsen It gets trickier with broadband The retail prices of an operators single 2 Mbit/s or 8 Mbit/s subscriptions are easy to define. However, when the broadband subscriptions are bundled with ip-telephony and ip-TV, calculating the relevant retail price of a 2 Mbit/s broadband subscription becomes a more tricky issue. Hence, a retail minus calculation for bitstream access will be based on two uncertainties, the relevant retail price and the relevant costs at the retail level. Bitstream pricing in Sweden: 2004 – Retail minus2010 - LRIC 9

10. Post- och telestyrelsen The TeliaSonera margin squeeze case In 2003, the spread between the sale prices of TeliaSoneras non-regulated ADSL products intended for wholesale users, and the sale prices of services offered to end users, was not sufficient to cover the costs which TeliaSonera itself had to incur in order to distribute those services to the end users concerned. In 2011, The ECJ stated that unlawful margin squeeze takes place where competitors would need to offer services not only at a loss, but also at artificially reduced levels of profitability Case C-52/09 Konkurrensverket v. Teliasonera 10

11. Post- och telestyrelsen Experience in regulating media distribution services The 2003 recommendation on relevant product and service markets included market 18. - Broadcasting transmission services, to deliver broadcast content to end users. In Sweden 2005, the national broadcasting corporation Teracom was found to have SMP on the market for terrestrial digital TV, and the market for terrestrial analogue radio. In both cases, Teracom should apply cost oriented prices based on FDC/HCA. 11

12. Post- och telestyrelsen In the 2007 recommendation on relevant product and service markets, the Commission excluded the market for broadcasting services, as it was considered dynamic. However, in Sweden 2009 and 2010, Teracom was found to have SMP on the market for terrestrial free-TV, and on the market for terrestrial analogue radio. In both cases, Teracom should apply cost oriented prices based on FDC/HCA. Teracom has developed a cost model on which to base its prices. 12

13. Post- och telestyrelsen Is the “three criteria test” the only measure for SMP designation? Three cumulative criteria to identify which markets are susceptible to ex ante regulation: The first criterion is that a market is subject to high and non-transitory entry barriers. The second criterion is that a market has characteristics such that it will not tend over time towards effective competition. This criterion is a dynamic one and takes into account a number of structural and behavioural aspects. The third criterion considers the insufficiency of competition law by itself to deal with the market failure without ex ante regulation. COMMISSION STAFF WORKING DOCUMENT, EXPLANATORY NOTE, Brussels, 13/11/2007 13

14. Post- och telestyrelsen Criteria for SMP designation Most important, but not decisive: market share. In my opinion, the second most important factor is vertical integration. Some other important factors: — overall size of the undertaking, — control of infrastructure not easily duplicated, — absence of or low countervailing buying power, — economies of scale, — economies of scope, — absence of potential competition. In 2006, TeliaSonera had a market share of >65% on the market for trunk segments of leased lines. PTS found that TeliaSonera did not have SMP. 14

15. Post- och telestyrelsen Should NRA push operators to offer wholesale services? In my opinion, the role of the regulator is to: Remove obstacles for competition on the consumer and business markets Regulatory tools: Forcing SMP-operators to provide wholesale inputs to other operators. Non-SMP operators should only provide wholesale services if it is commercially viable (in fact many of them do). Exception in Sweden: Municipality owned networks should preferably concentrate on wholesale inputs, and leave the end-user markets to private enterprices. 15

16. Post- och telestyrelsen Thank you! E-mail: lars.erik.axelsson@pts.se 16