Network Separation and Access Regulation – We make ICT strategies work

Introduction – Why now ?

The evolution of NGA requires a redefinition of technology neutral access regulation including products and processes, and it may involve separation and business models.

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– 2 –

With the evolution of regulation, network separation models and the related business cases have to be re-considered

Regulatory principles for access provisioning, e.g., Equivalence of Outputs or Pinputs (EoO or EoI)

Structural separation for NGA business units Related to the new regulatory realities, the optimal

response for operators might be different from the status quo, requiring to re-calculate the current business cases and re-adjust business models

Technology neutral access regulation is related to two meanings1. Evolve regulation with technology2. Regulate independent of technology

With NGA technology, options for access and unbundling obligations change

Bottleneck definition and rationale for regulatory intervention

Technology assessment

Wholesale product definition

– Local Loop Unbundling

– Bitstream access options / VULA

– Ducts and dark fiber

Technology neutrality involve further regulatory instruments and policies

Potential Obligations such as unbundling and bitstream but also multicast obligations

Benchmarks and recommendations

NGA technology neutral access regulation Network separation models and business cases

Overall Trend – Adjustment Areas

The adjustments in NGA regulation are related to regulated network access products, processes, conditions and business models.

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Strategic focusRe-Balancing weight and focus on retail versus wholesale, increased emphasis on partnering approaches

Pricing innovationNew tariff models (e.g., including risk sharing elements, QoSpricing)

Roll-out processes Coordination, rights of way, property rights in general

Retail processesProvisioning, but also servicing etc.

Wholesale processesProvisioning, but also servicing etc.

Joint retail and wholesale processes with regard to equivalence principles, i.e. Equivalence of Outputs/Inputs EoO/EoI

RetailFTTx and ultra-high speed DSL and coax technologies such as Vectoring VDSL and Hybrid Fiber-Coax (HFC)

WholesaleNew access and transport products reflecting retail service and technology evolution such as Virtual Unbundled Local Loop (VULA) as well as passive products

Regulated productsRevision of bottlenecks and rationale for regulatory intervention

Business models and structureTechnology & products Processes & conditions

Challenges – New Technology Trend Vectoring in Fixed Access

On example for new technology is Vectoring VDSL as the next evolution of VDSL2 pushing coverage and bandwidth of standard VDSL.

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Sub-loop unbundling with different systems needs to be prohibited in the respective roll-out area, otherwise the vectoring effect will be reduced to almost zero. Regulator will most likely allow only fist mover to roll-out VDSL in an Central Office area.

As an alternative the regulator will force the Vector VDSL operator to offer bitstream access. An agreement with other fixed line operators should be negotiated offering a V-VDSL wholesale product for a reasonable price to avoid the roll-out of competitive VDSL2 networks in operators’ central offices

Increased power consumption

Proposed vectoring solution Regulatory implications & risks

Vectoring improves VDSL maximum speed and enlarges the VDSL coverage by reducing the far-end and near-end crosstalk

Standardized by the ITU Standards Association as G.Vector

Vectoring improves possibilities for guaranteed bandwidth The CAPEX needed for a Vector VDSL roll-out is much lower than FTTH

roll-out; the upgrade of an existing VDSL Network needs only swap the DSL line cards and the CPE

Key benefits

Reach

Mbp

s

80

100 m 300 m

VDSL2

17 MHz-Profile

VDSL2 + Vectoring

50

1,000 m

27

16

500 m

VDSL50

VDSL25

VDSL50+

(VDSL80)

+ Coverage

(VDSL50)

+ Rate

(VDSL80)

Challenge and Solution

The regulatory solution to the current challenges with NGA evolution balances adjustments against continuation and extension of regulation.

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NGA technology neutral access regulation Network separation models and business cases

Adjust current regulation to incorporate new technologies while minimizing disruptive regulations

Relax physical unbundling obligations and introduce substitute options such as Virtual Unbundled Local Access (VULA), i.e. local bitstream access in addition to national and/or regional bistream access.

Ensure that new technologies are strictly regulated if new bottlenecks arise. With persistent problems introduce appropriate Equality Obligation to minimize need for structural separation as this approach only partially addresses competition issues.

Avoid new competition problems and reduce potential for anti-competitive behavior

Continue to safeguard competition by minimizing risk of stranded assets to ensure maximum investment certainty

Implementation of new regulations, e.g., with regard to roll-out priorities, rights of way, and exclusivity rules in a way that balances existing assets and the incentives to roll-out new technology.

Challenges – Regulatory Challenges of and Solutions for Vectoring VDSL

The regulatory changes from Vectoring VDSL include duct access, migration rules, investment and competition protection, and may be extended to cable networks.

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Vectoring VDSL challenges

Central office (CO) Street cabinet (SC) Customer premises

Distribution point (street)

DP

DA+VULA

LLU/SLUVDSLV-VDSL

ADSL CopperFibreCopperwiring loom

In order to realize the potential of V-VDSL, the complete wiring loom has to be driven by one vectoring DSLAM.

Line unbundling (LLU and SLU) rendered technically infeasible

Necessity to drive the complete wiring loom by one DSLAM means only one operator for whole loom

Investment and competition protection (stranded assets)

Regulatory challenges Substitution of Local Loop/Subloop

Unbundling (LLU/SLU) by Virtual Unbundled Local Access (VULA)

With VULA as substitute for SLU, duct access between CO and SC required

Vectoring register and compensation

Regulatory solutions Migration of existing LLU requires

adaption at access-takers, too First mover SC registration must be

carefully designed (incl. roll-out obligation) to avoid strategic reservation

Fair access to SCs for roll-out for equal chances for first mover effects

Side conditions

DA+SLU

App 1

App 2

VULA follows concept to mandate the provision of the highest-quality access product at the lowest possible level.The “Local Bitstream Access” approach provides a path to extend access regulation to Coax networks, too.

Challenge and Solution – Snapshot of Equivalence Concepts

Independent of the particular network type and technology of a given NGA network, any access regime has to consider some separation.

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EoO: The concept in which, in respect of a particular retail product or service, the wholesale input supplied to the incumbent’s own retail arm is equivalent to the comparable wholesale product or service supplied to other communications providers but not necessarily supplied in an identical manner.

EoI: The concept established by the BT/Openreach undertakings in which the incumbent provides, in respect of a particular retail product or service, the same wholesale product or service (input) to all communications providers (including its own retail arm) on the same timescales, terms and conditions (including price and service levels), and by means of the same systems and processes.

Source: Oxera based on Ellare

Challenge and Solution – Equivalence Concepts in Detail

With regard to the implementation complexity, the main step is between EoO and EoI, whereas the latter requires significant changes at the regulated entity.

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The Equivalence of Output principle implies a parallel usage of WS CRM for external wholesale customers and of a separated CRM for “internal” retail customers.

In Equivalence of input the WS CRM must be used by retail unit in the same way as by ISPS, i.e. the usage of WS CRM will not be parallel, but cascaded and used after the orders will come to RT CRM.

Requirement that same systems and processes shall be used for provision of identical products and services to external and internal customers.

Retail CRMRetail

EoO retail process

Ordering & provisioning

WholesaleCRM

WSgateway

EoO wholesale process

Comp. CRM

Ordering & provisioning

Compe-titors

WholesaleCRM

EoI processes

Ordering & provisioning

Compe-titors

Retail Retail CRM

Comp. CRM

WSgateway

EoO EoI

Challenge and Solution – Equivalence of Inputs Concept

With Equivalence of Inputs, the network unit shall provide exactly the same products and services to all operators (including own retail arm).

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EoI concept

Available to other operators:

Same…

products and services(including reliability & performance)

terms & conditions(including prices and timescales)systems

(including ordering, provisioning, fault clearance)

processes

information about products, services, systems, processes

The Equivalence of Input concept leads to far-reaching consequences and high cost and thus should only be applied where significant problems have been identified or where new access regimes are to be designed.

Equivalence of Inputs – Same Products, same Prices

EoI is suited to solve competition problems at the passive and active input product level simultaneously, and without the requirement of legal separation.

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A transfer pricing system might support transparency, however it might not be strictly required with margin squeeze testing.

* WS may receive share of one-off fees for handling as one option.

ULL and BSA serving as illustrations for all passive and active products.

Same products and services Same terms & conditions (prices & payments)

Access

Competitors

Aggregation

Retail

EoIEoIBSA

BSAULLULL

Access

Wholesale

Competitors

Aggregation

Retail

EoI

ULL BSA–ULL

*

„Classical“ Structural Separation – AccessCo Example

„Classical“ structural separation should be stricly separated from Equality principles, as separation variants focus network elements rather than products and processes.

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O DF

MDF

Metallic access Core

Fiber access

Aggregation

DSLAM

OLT

Core network

IC

BTS

BSC

Fixed

Mobile (only shared elements of relevance)

Radio access

CPE

CPE

*

*

Aggregationring(s)

CCC

PODP

NT

ONT

FTTx

Cu

Mobile

ST’s service

platforms

Services

Competitors service

platforms

Act. WS

Competitors

Duct access** ULL and SLU** TLL***

Dark fiber P2P, e.g., for mobile backhaul

VULA(BSA local)

NetCo products

NetCo(s) demarcation (Cu passive only)

Dark fiber P2P WS

Bitstream access (Eth., local)

Bitstream access (Ethernet and IP, national)

If BSA Multicast is introduced,

MC option has to be added to all

BSA products of NetCo and ServCo!

* CPE includes Splitter, Modems, HAGs etc.** Where feasible*** Termination Leased LinesSource: DTC project

„Classical“ Structural Separation vs. Equivalence of Inputs

Contrarily to EoI, with a separation in two entities, only one possible “problem level” is solved “really” structurally, while the other is solved through separation of accounts.

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Depending on the allocation of products to the separated entity, the stronger remedy is either on ULL or BSA related objections:

Objections and value chain Solution focus

Margin squeeze

%!

%

%Passive upstream products (“ULL”)

Active products (“BSA”)

Retail / resale competitorsRetail products

Vertically integrated Telco

=!

=!

Ret

ail

mar

ket

WS

infr

astr

uctu

re

acce

ss m

arke

tW

S br

oadb

and

acce

ss m

arke

t

End users

ULL

BSA

Competitors RT

=!

=~

Rem

. ris

k

%

%

%

Rem

. ris

k

ULL

BSA

Competitors RT

=!

=~

%

%

%

separated =!

=~ Softened:

Contract/transfer p.

Solved:Nondisc.supply

Explanations

Equivalence of Inputs – Same Products, same Prices

However, from a systems and processes perspective, the implementation of EoI might come very close to a separation scenario, as both, retail and wholesale are affected.

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Which systems have to be split/duplicated (partially)?

What would be the estimated cost and duration?

How would bundles affect the feasibility/complexity of such an approach?

What would be the information to be shared by WS with the competitors, and what impact would that have?

Should the implementation only focus the regulated products, or should this approach be a business architecture modification in general?

What organizational changes are required to implement the concept?

Same systems, processes and information* Questions

CRM

New 2nd “WS CRM”

Compe-titors

Network

Retail

Ordering + provisioning

Comp.CRM PGW**

Old (path)New (path)

xEoI

WS

serv

ice

prov

isio

nPa

ckag

ing

& d

istr

ibut

ion

* Illustrative – other systems to be adjusted, too.** Provisioning/partner gateway PGW might not necessarily be required.WS information available to retail arm has also be available to competitors.

Separation and Equivalence Approaches – Efficiency of Intervention

Accordingly, to ensure efficient regulation, (non-discrimination-) benefits and cost have to be balanced taking the actual shape of the cost curve into consideration.

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The cost to improve the assured level of non-discrimination (x-axis) increase massively with separation (expensiveness of the remedy; y-axis).

This is especially true, as cost are largely independent of operator and country size.

By the regulatory bodies it is assumed that different behavior of incumbents (x-axis) can directly be linked to different levels of separation (intrusiveness of the remedy; y-axis).*

Stylized (BEREC) view Actual cost curve

Discriminatorypractices are very likely

Level of non-discrimination

Leve

l of i

nter

vent

ion

Discriminatorypractices are very rare

Very intrusive

Leastintrusive

4 Functional separation +incentives/governance

5 Legal separation

6 Ownership separation

3 Functional separation

2 Virtual separation

1 Creation of a Wholesale Division

0 Accounting separation

Level of non-discrimination

Cos

t of i

nter

vent

ion

Very expensive

Leastexpensive

4 Functional separation +incentives/governance

5 Legal separation

6 Ownership separation

3 Functional separation 2 Equivalence of Inputs

(Virtual separation)

1 Creation of a Wholesale Division (andEquivalence of Output)0 Accounting separation

*Source: DT; based on BEREC Guidance on functional separation under Articles 13a and 13b of the revised Access Directive and national experiences, February 2011, p.7.

Implementation Cost Estimation – Cost Composition

IT CAPEX and FTE increases from necessary duplications are the main drivers of the implementation cost of Equivalence of Inputs as well as functional and legal separation.

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Implementation cost composition (cumulated payments, m EUR)

Functionalseparation*

2.0 3.0 0.0

40.0

200.0

140.0

3.0290.0

Access-to-aggregation

54.0

(NPV 160.0)

3.0

4.0

2.0

3.0

1.084.0

Functional-to-legal

35.0

6.0

General OPEXNT CAPEX Restructuring including FTE increasesIT OPEX* IT CAPEX

* The cost of implementation of Equivalence of Inputs comes very close to the implementation of Functional Separation.

Realistic example figures

Options and Solutions

A unified access regime such as requiring VULA for all networks would yield really technology-independent regulation which could then be SMP-dependent only.

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The European Commission accepted the introduction of Vectoring DSL in combination with VULA despite the fact that ULL then would be rendered technically infeasible.

As VULA comes very close to physical network element unbundling (with regard to the control over network parameters), it is a suitable substitute if offered at reasonable terms and conditions.

With the decision of the European Commission, a single access form now became available for two types of networks (xDSL and FTTx, especially PON).

Consequently, VULA would be a natural candidate for an obligation for HFC operators, as then FVNOs could source their inputs from the fastest available network in a given region.

Focus on Equivalence of Outputs or Inputs rather than on (partial) network separation

Focus on access products at lowest possible level (ULL, VULA) Especially VULA as local bitstream access would allow to require

symmetric access obligations independent of underlying network technology, i.e., VULA is possible for xDSL including Vectoring DSL, HFC and FTTx networks.

Solution International trend

EU members and European Commission

Why Detecon

Having Detecon as partner means optimizing NGA regulation tailored to the specific country conditions while avoiding mistakes made by other players.

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Client Benefit

HolisticTeam of expertsfrom all disciplines

PracticalReal-world solutions instead of “theory”

ImpactSolutions with lasting value

CustomizedInternational experience adapted

A dedicated project team brings together all regulatory, technical, commercial and financial expertise and experience related to NGA access regulation in accordance with Client’s business strategy

Based on sound regulatory strategy, Detecon’s solutions have been implemented in practice for many Clients worldwide

Tangible solutions ready for implementation

Integration of NGA regulatory strategy within Client’s overall regulatory strategy

Understanding of NGA challenges from NRA’s and operator’s perspective and staff involvement

Full understanding of Client’s reality of targets, business and local market challenges

Project team knows Client’s environment

Presence with a local office in Client’s region of operation

One experienced and competent partner regarding NGA regulation

Regulation of NGA is optimized in the light of Client’s policy imperatives

Benefit from hands-on strategic expertise while avoiding mistakes made by other regulatory authorities and operators worldwide

Coherence of regulatory approach to NGA with overall strategy

Ownership over regulatory solution

Regulatory solutions designed for NGA and tailored to the specific country are relevant to Client’s actual policy goals and business needs

Detecon Leverage

Regulatory experience & references

Since more than 30 years, Detecon successfully supports regulatory authorities, governments, operators and investors in regulatory affairs all over the world.

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References and clients of our regulatory projects worldwide

Sector liberalization and privatization Regulatory instruments Licensing and authorization regime Access and interconnection regulation Spectrum management & monitoring Interconnection regulation Price regulation (retail & wholesale) Market analysis, definition and SMP assessment Universal services & access Dispute resolution & consumers‘ complaint Regulatory enforcement Promoting broadband development …

Selected References

The Client leverages Detecon’s lessons learned from similar assignments in regulatory strategy for Next Generation Access and regulation.

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Slovak Republic

UAE

UAE

Slovak Republic

Turkey

European Commission Competition CaseElaboration and analysis of different regulatory options including network separation and equivalence of output and equivalence of input models. Economic assessment and quantification of options.

Development of FTTX cooperation modelsDetecon defined complimentary FTTx rollout strategies and developed regulation friendly cooperation models with competitors to facilitate CAPEX efficient rollout.

NGA BSA, ULL, dark fiber reference offerDetecon developed a successful, optimal and sustainable access regime that enabled the operator (“du) to grow its customer base while protecting its current revenues.

Development of Reference Bitstream Access OfferDefined wholesale reference broadband access portfolio and setup a regulatory negotiation strategy based on state of the art costing and pricing strategies

BSA, LLU regulatory scenarios for Turk TelekomBenchmarking of tariff regulation regime and regulatory decisions in selected EU member states. Recommendations for Turk Telecom on rebalancing and retail tariff regulation. In-house cabling strategy

Client Reference Case

Your Contact Persons

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Dr. Arnulf Heuermann

Phone: +49 221 91611550Mobile: +49 171 225 42 17Fax: +49 221 91614630

e-Mail: Arnulf.Heuermann@detecon.com

Dr. Olaf Nielinger

Phone: +49 221 91611512Mobile: +49 151 17456395Fax: +49 221 91614882

e-Mail: Olaf.Nielinger@detecon.com