Regulating NGN Access Networks in Germany (Detecon Executive Briefing)

www.detecon.com

Dr. Arnulf Heuermann [email protected]

Regulating NGN Access Networks in Germany For a decade the German regulatory system focused on service competition, in particular reducing retail prices and opening the existing copper based local loop infrastructure to competitors. The transition to a next generation network, however, will require an upgrade or replacement of the access networks by fiber with high infrastructure investments. The regulatory focus of the future therefore needs to be on incentives for investment by Deutsche Telekom and its competitors into such a new infrastructure and on ensuring that such services are universally available. It is questionable whether the existing instruments will be sufficient in this respect.

The author’s opinion and conclusions expressed in this paper are not official positions of Deutsche Telekom.

> Executive Briefing

Detecon International GmbH 03/2008 2 www.detecon.com


Regulating NGN Access Networks in Germany

Reg

ulat

ing

NG

N A

cces

s

Introduction

Ten years after the complete opening of the German telecommunications markets to competition the regulatory system needs to change. For a decade the regulatory focus was on service competition, namely reducing the monopolistic or significant market power of the incumbent. This was done by opening it’s infrastructure to competitors, improving service variety, preventing predatory or excessive pricing, and reducing the retail price level for consumers. Infrastructure investment by new competitors concentrated on long distance networks. As the local telephone access network was in good shape and connected virtually every building, new providers offered services via interconnection and local loop unbundling or resale rather than building new local loops. Efforts to use wireless technologies as a competing infrastructure have failed so far, and nor have the CATV network providers in Germany managed to offer an alternative on a significant scale.

Now the market environment is changing: Broadband access services have shown tremendous growth and could be handled by the copper access networks at bandwidth requirements well below 12 Mbit/s. Bandwidth demand is growing exponentially, in particular through video elements in virtual reality games, IPTV or HDTV services as part of a “triple play” offer. In a next generation network the access lines will therefore need to be upgraded or replaced by fiber to achieve very high data rates of 50 Mbit/s and beyond.

Broadband Access Strategies

Most experts agree that in the long run fixed access networks will be based on a Fiber-to-the-Home (GPON) technology capable of offering downlink speeds of more than 100 Mbit/s. It is also common sense that for some years to come a lower bandwidth would be sufficient for the majority of users. An immediate replacement of the existing copper networks by Fiber-to-the-Home would not generate positive returns on investment. Most European carriers have therefore decided to upgrade parts of the access networks first and offer VDSL services with a downlink speed of up to 50 Mbit/s. Deutsche Telekom for example started to invest in an overlay strategy for Fiber-to-the-Curb (FTTC) in the 10 largest German cities in 2006 and work is now in progress for the 40 next largest cities.

In this context Fiber-to-the-Curb and VDSL investment are just an interim step to a fully fiber based NGN access network. Substituting the “2nd mile” of the copper local loop with fiber optic cables while leaving the “1st mile” with copper cables is a roll-out strategy that is only profitable under certain conditions. Figure 1 shows the CAPEX requirements of different fiber roll-out situations.




Reg

ulat

ing

NG

N A

cces

s

CAPEX Index for different FTTx Solutions

Source: Detecon projects, Alcatel-Lucent – CAPEX including CPE

8

100FTTH new

75

50

42

AccessHardware

Fibre & trenching

DSLAM in Cabinet

FTTH inexisting ducts

FTTH aereal 58

33 17

17

1783

FTTC 17 17

Figure 1: CAPEX for Fiber to the Home and Fiber to the Cabinet

Deutsche Telekom for example has chosen the FTTC solution as most primary pair cables are not buried in ducts in the country’s old telephone network. It therefore appears more economical to make an interim investment in new DSLAMs in the 300.000 cabinets in Germany, rather than to dig up the streets to reach 40 million homes and completely replace the old copper network. Civil works typically count for two-thirds of total CAPEX.

In other countries FTTH may already be a viable option:

In the United Arab Emirates, for example, Etisalat is directly investing into a FTTH network, as the existing primary cables are also buried in ducts. Replacement with fiber is therefore relatively cheap, additional CAPEX compared to FTTC is small.

For similar reasons NTT in Japan is investing directly in FTTH. Here primary cables can be connected to homes via aerial loops.

France Télécom is also starting with FTTH pilot projects in Paris. Their decision against a FTTC overlay solution is based on the fact that their old copper access networks have a much longer average cable length between the cabinet and the end user.

Recent Federal Network Agency (FNA) Decisions on VDSL Regulation

Following a fierce debate on whether VDSL investments would create a new market in line with the new § 9a of the German Telecommunications Law, and could thus be excluded from ex-ante regulation, the FNA made two major decisions.




Reg

ulat

ing

NG

N A

cces

s

In June 2007 FNA adopted its final decision on the wholesale market for unbundled local loop, or Market 11. It designated Deutsche Telekom as having significant market power due to its high market share, high barriers to entry, vertical integration, lack of actual and potential competition, and lack of countervailing buying power.

Deutsche Telekom was obliged to grant access and collocation, non-discrimination and ex ante price control for its wholesale services. A reference unbundling offer is to be published. Currently competitors have co-location facilities in about 2000 of the 8000 Main Distribution Frames (MDFs).

In addition Deutsche Telekom is obliged to grant access to ducts between the MDFs and the street cabinets. In cases where there is no free capacity available it also has to offer access to dark fiber.

FNA has also drafted a first round decision for Market 12. This is the market for “IP bitstream access at the IP layer 3 at different points of access in network hierarchy including high frequency broadband access”. This market would be an alternative way for competitors to achieve broadband access to the customers. According to the draft Deutsche Telekom has been designated as having significant market power in this market too and will be obliged to offer bitstream access products for xDSL connections, grant access and collocation and will be subject to ex-ante price control for its wholesale services. A reference bitstream access offer has to be published.

In summary the FNA has subsumed VDSL as part of the existing markets 11 and 12, refused to define it as a “new market”, and thus made it subject to ex ante regulation. Competitors wishing to provide customers with an alternative broadband access offer may then choose to invest in:

their own complete access network, like NetCologne, who are establishing a Fiber to the Building network in and around Cologne,

an access network up to the street cabinets, and then use Deutsche Telekom’s last copper loop,

a small access network, co-locate at the MDF, and then use Deutsche Telekom’s complete local loop, or

just a backbone network, and get bitstream access at Deutsche Telekom’s BB-PoPs.

The first solution requires the highest CAPEX and minimizes wholesale costs, the last option minimizes CAPEX and has the highest wholesale cost. In addition the bitstream access solution offers least opportunity to differentiate products in terms of quality of service.




Reg

ulat

ing

NG

N A

cces

s

Deutsche Telekom’s competitors’ decision as to whether to build their own FTTH infrastructure or simply use the existing DT platform will therefore mainly depend on the Federal Network Agency’s (FNA) decision, at which level the ex-ante price regulation will be fixed. In this context it is problematic that unlike most other European Regulatory Agencies the German Regulator decided to introduce “ex ante price control based on costs of efficient service provision”. This concept is widely used to regulate wholesale prices in legacy markets. For innovative markets, however, regulatory decisions should simulate competitive results of an investment into a risky, innovative infrastructure, where the investor has to earn a risk premium. Otherwise investments into VDSL and FTTH from incumbent and competitors may be delayed or reduced.

Deutsche Telekom recently announced that it plans to reduce its VDSL roll-out, fearing that wholesale prices might be calculated on traditionally long-run-incremental cost basis for competitors and therefore pressing retail prices below a level that would be sufficient to re-capture the infrastructure investment.

The high cost of building new duct systems is the major barrier to investment in FTTH for both the incumbent and new carriers.

A policy that would open all existing duct infrastructures could effectively boost real infrastructure competition between DT and other operators offering FTTx solutions. If infrastructure competition really starts, ex ante regulation could be replaced by ex post regulation - the original idea of “regulatory holidays”.




Rec

omm

enda

tion

Conclusion & Recommendations The regulation of NGN access networks currently focuses on the traditional approach of opening the incumbent infrastructure to competitors. This approach may not be appropriate to create incentives for efficient new infrastructure competition in the local loop:

Incentives to invest in VDSL may be decreased for DT if the margins for regulated wholesale prices are too low. Regulated wholesale prices for access to new infrastructures (e.g. dark fiber) therefore have to include a market conform risk premium.

Alternative operators must also have incentives to serve customers with their own FTTx solutions.

VDSL is an element in the transformation of the legacy platforms to NGN. In the NGN the existing business model of local loop unbundling with access at the MDF will be largely phased out. Incumbents may benefit from sales of obsolete property at the MDF level and from lower OPEX spending. This has to be weighed up against the new competitors’ current LLU business. Regulators should concentrate on preventing anti-competitive behavior in this transition process, while not blocking the most economic solutions.

The FNA is currently opening a new market for sub-loop unbundling, which will only be a transitory market until the final development step from VDSL (FTTC) to FTTH is done. Regulators should encourage the Bitstream Access or alternative own access network business models, as these are both viable in the long term.

Economies of scale speak against a duplication of VDSL fiber optic networks in a single area as this increases total costs for the economy as a whole. Efficient infrastructure competition either means competitive investment in areas other than those covered by the incumbent or in other technical solutions, e.g. FTTB, FTTH or wireless access. In both cases, however, access to DT infrastructure is of limited value. Regulators should encourage a cross industry approach for access to usable duct systems, the major bottleneck for fixed line access. This would include obligations to open municipal duct systems, waste water systems, empty electricity ducts etc. to fiber cables.

Regulating NGN Access Networks in Germany (Detecon Executive Briefing)

Documents

Transcript of Regulating NGN Access Networks in Germany (Detecon Executive Briefing)