NL-2511 WB DEN HAAG ATT: Mr Chris A. Fonteijn Chairman of the Commission Fax: 0031-70-315 35 01

EUROPEAN COMMISSION

Brussels, 2.12.2005

SG-Greffe (2005) D/206587 Onafhankelijke Post en Telecommunicatie Autoriteit Zurichtoren

Muzenstraat 41

NL-2511 WB DEN HAAG ATT: Mr Chris A. Fonteijn Chairman of the Commission Fax: 0031-70-315 35 01

Dear Mr Fonteijn,

Subject: Case NL/2005/0280: Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services

Comments pursuant to Article 7(3) of Directive 2002/21/EC

I. PROCEDURE

The Commission received the present notification from the Dutch regulatory authority - the Onafhankelijke Post en Telecommunicatie Autoriteit (“OPTA”) on 4 November 2005.

The notification concerns wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services.

1 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services

(“the Framework Directive”).

2 In accordance with Article 7 of the Framework Directive.

3 Market number 11 in Commission Recommendation 2003/311/EC of 11 February 2003 on relevant

product and services markets within the electronic communications sector susceptible for ex ante

regulation in accordance with the Framework Directive (“The Recommendation”).

2

The national consultation was carried out in July-August 2005.

Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities (“NRAs”) and the Commission may make comments on notified draft measures to the NRA concerned.

II. DESCRIPTION OF THE DRAFT MEASURE

According to OPTA, wholesale access to cable networks, mobile networks, wireless networks or fibre-optic networks do not currently constitute sufficient substitutes to wholesale unbundled access to the local loop of the incumbent operator in the Netherlands – Koninklijke KPN N.V. (“KPN”). Similarly, other forms of access to the networks of KPN, i.e. wholesale broadband access, resale and the so-called KPN agency model

are insufficient substitutes to wholesale unbundled access to the local loop.

OPTA concludes that the relevant product market is the wholesale market for unbundled access (including shared access) to the metallic loops and sub-loops of KPN for the purpose of providing broadband and voice services.

The relevant geographic market for the notified market is national.

OPTA considers that this market definition corresponds to the market defined in the Recommendation. The National Competition Authority (“NMa”) of the Netherlands agrees with the market definition made by OPTA.

OPTA concludes that the notified market is not effectively competitive and intends to designate KPN as an operator with significant market power (“SMP”). KPN is monopolist in the wholesale market for unbundled access to the local loop. In addition to the monopoly position of the incumbent, OPTA considers KPN’s control of infrastructure which is difficult to duplicate, the vertical integration of the incumbent, the lack of potential competition and the lack of countervailing buyer power as further indications that KPN has SMP in the notified market.

NMa agrees with OPTA’s designation of KPN as an operator with SMP.

OPTA intends to impose the following remedies on KPN.

Access: KPN must meet all reasonable requests for unbundled access to the local loop of KPN. The access requirement comprises fully unbundled access as well as shared access both at distributor level and sub-loop level. Alternative operators must be given access to

4 In accordance with Article 6 of the Framework Directive.

5 According to OPTA, the service known as the KPN agency model is unique in Europe. This service is sold by KPN as ADSL. The DSL connection to the end-user is provided by KPN while an Internet Service Provider (“ISP”) provides the access to the internet. In this capacity, the ISP acts as an agent to KPN. The end-user receives two invoices, one from KPN for the DSL connection and one from the ISP for the internet connectivity.

6 In OPTA’s view, the absence of regulation in underlying wholesale markets or retail markets

(”greenfield analysis”) would not affect the market definition.

network elements and facilities which are necessary to gain access to the local loop.

KPN will be obliged to negotiate in good faith with parties seeking access.

Non-discrimination: KPN must provide unbundled access on non-discriminatory terms.

KPN must offer 3

parties the same conditions it offers itself, its subsidiaries or its partners.

Reference offer: KPN must publish a reference offer for unbundled access to the local loop within 30 days of the entry-into-force of OPTA’s decision. The reference offer must be updated on a regular basis. The reference offer must be published on the web-site of KPN.

Cost allocation: KPN will be obliged to adopt a cost allocation system to be approved by OPTA.

Costs will be allocated as current costs while applying the forward-looking principle. The cost standard applied will be embedded direct costs (“EDC”). When determining the cost-oriented price for the access service according to the EDC standard, only embedded direct costs are taken into account, i.e. only costs which have a direct causal relationship with the service provided.

Cost orientation: KPN must charge cost-oriented prices for unbundled access to the local loop. The prices charged may not exceed the maximum price determined according to the wholesale price cap system (“WPC system”). OPTA considers that a multi-year price cap regulation provides KPN with efficiency incentives and provides certainty for other operators. When determining the access price according to the WPC system, the underlying costs of KPN for the particular service (calculated according to the EDC standard) are combined with a so-called comparative efficiency analysis (“CEA”).

For every service included in the WPC-system, the price charged will reflect KPN’s

“efficient costs”. For the purposes of determining the price cap and the “efficient costs”, OPTA has devised four scenarios which reflect varying degrees of infrastructure competition. The underlying principle of these scenarios is that the higher the degree of infrastructure competition, the greater should be the freedom of KPN to determine its access prices. This freedom is regulated by the level of the price cap. With a lower price cap, KPN’s freedom is more restricted and vice versa. OPTA concludes that the 2

scenario – “prospect of development of infrastructure competition that should lead to durable competition after the term of the revision” – is presently the most pertinent.

Under the 1

scenario – “no prospect of infrastructure competition” – the price cap should be set at the “optimally efficient level”, whereas under the second scenario, the price cap should be set at a “less stringent” level (i.e. the price cap should be higher).

7 Co-location and other forms of shared facilities (e.g. paired cables, cable ducts, masts and buildings) as well as access to technical interfaces, protocols and other core technologies, operational support systems and software systems.

8 Within three months of the entry-into-force of OPTA’s decision, KPN must submit a report to OPTA which describes the cost allocation system and its application in the financial years 2004 to 2008. KPN will also be required to publish a description of its cost allocation system within three months.

9 Indirect costs and common costs are thus not taken into account. In this respect the embedded direct cost is similar to incremental cost.

10 The CEA is a benchmarking exercise whereby the efficiency of other telecommunications companies

is measured by means of empirical data, mainly from American companies.

4

Accounting separation: KPN must maintain an accounting system where revenues and costs for providing unbundled access to the local loop to KPN itself and to 3

parties are kept separate from other activities of KPN.

III. COMMENTS

The Commission has examined the notification and has the following comments.

(1) Determination of the price cap: OPTA has devised four scenarios which are intended to reflect varying degrees of infrastructure competition in the notified market. OPTA considers that the higher the degree of infrastructure competition, the greater should be the freedom of KPN to determine its own access prices. OPTA declares that the 2

scenario – “prospect of development of infrastructure competition that should lead to durable competition after the time of revision” – is the most relevant scenario in this case. However, OPTA does not justify in concrete terms why it considers the 2

scenario to be the most pertinent. In particular, OPTA states that wholesale access to cable networks, mobile networks, wireless networks or fibre-optic networks currently do not constitute substitutes to the local loop of KPN. In the light thereof, OPTA does not indicate why it believes that these infrastructures should lead to durable competition in the future. The Commission considers that OPTA should elaborate in its final measure its reasons for choosing the 2

scenario.

(2) Scope of accounting separation obligation: In its Comments letter concerning the market for low quality wholesale broadband access (“WBA”) (case NL/2005/0281), the Commission invited OPTA to carefully monitor developments in that market. In order to facilitate that monitoring and the application of competition law, OPTA should consider extending the scope of the accounting separation obligation proposed for the LLU-market to cover also the provision of low quality WBA

.

Pursuant to Article 7(5) of the Framework Directive, OPTA must take the utmost account of comments of other NRAs and the Commission and may adopt the resulting draft measure and, where it does so, shall communicate it to the Commission.

The Commission’s position on this particular notification is without prejudice to any position it may take vis-à-vis other notified draft measures.

Pursuant to Point 12 of Recommendation 2003/561/EC, the Commission will publish this document on its website.

The Commission does not consider the information contained herein to be confidential. You are invited to inform the Commission within three working

11 Pursuant to Article 7(3) of the Framework Directive.

12

Pursuant to Recital 5 of Commission Recommendation 2005/698/EC of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications, “when an obligation for accounting separation is imposed on a notified operator with SMP on one or more markets, the imposition of accounting separation may cover markets where the operator does not have SMP, e.g. to ensure the coherence of data.”

13 Commission Recommendation 2003/561/EC of 23 July 2003 on notifications, time limits and

consultations provided for in Article 7 of Directive 2002/21/EC, OJ L 190, 30.7.2003, p. 13.

days following receipt of the present letter whether you consider, in accordance with Community and national rules on business confidentiality, that this document contains confidential information which you wish to have deleted prior to such publication. You should give reasons for any such request.

Yours sincerely, For the Commission,

Neelie Kroes

Member of the Commission

14 Your request should be sent either by email: INFSO-COMP-ARTICLE7@cec.eu.int or by fax: +32-2-

298 87 82.