COMMENTS ON THE DRAFT ERG OPINION ON PROPOSED CHANGES TO THE COMMISSION RECOMMENDATION ON ACCOUNTING SEPARATION AND COST ACCOUNTING
1.- Introduction
Telefónica wishes to thank the ERG and the European Commission for the opportunity to participate in this consultation about the changes to the Recommendation.
It seems clear that the Recommendation needs to be reviewed, but it is necessary to highlight that the original Commission Recommendation from 1998 was the second part of a wider Recommendation. In the first part, it was specified what networks and services should be subject to the specific cost accounting and accounting separation obligations and was necessary to set the context for the second part.
As the current exercise only covers the review of the second part of the Recommendation, which mainly dealt with LRIC systems and accounting separation, it gives a special pre-eminence to these sort of regulatory measures, vs. others which can be equally valid for cost accounting obligations or price regulation in general.
Hence, it would be useful that the Recommendation includes some text to set the context, explaining that the obligation for cost orientation of prices and cost accounting is the most severe remedy that could be imposed to an undertaking and, in accordance to the principle of proportionality, commonly accepted in European legislation (less onerous remedy, and costs that are proportional to the objective being sought), other price control measures should generally prevail. The gradation of price control measures will be decided upon as result of the market analysis and will have to abide by the principles of suitability and proportionality based on the competition failures that have been detected in the market analysis.
Another issue arising from the review is that this proposed revision is very much based on the original 1998 Recommendation, which was designed for interconnection of voice services in fixed networks. This original focus is maintained in general terms, and makes its application difficult to other services, such as mobile services or other services in fixed networks.
2.- Answers to the specific questions of the consultation
1. Do you agree that the proposed changes to text of the Recommendation as set out in the draft ERG Opinion addresses correctly, in general, the issue of cost accounting and accounting separation obligations, or do you think that is there any part that should be expanded/reduced? If so, please provide details.
Whereas 7) of the draft Recommendation mentions that: "FL-LRIC is an appropriate approach, since it most accurately reflects that of a competitive market", and:
"when applying an LRIC-based price control to infrastructure where replication is feasible, the NRA may adjust a range of parameters to provide incentives for network competition."
As this is the only reference in the proposed body of the Recommendation to an accounting methodology and to the issue of investment incentives, it can be assumed that the only methodology foreseen is one based on FL-LRIC, and the complex issue of incentives to investment in infrastructures is solved by changing some parameters of this methodology.
This would mean that other methodologies for setting cost accounting obligations, and pricing obligations in general, are ignored.
From the point of view of a cost accounting Recommendation, Telefónica considers that it should not be focused only in a concrete methodology, but rather mention all or the main possibilities for cost accounting obligations and price regulations in general. For instance, one of the whereas should mention that cost orientation is one of the possibilities for price control, and there are different cost accounting methodologies for applying a cost orientation obligation, such as FDC or LRIC.
Regarding the final sentence, the best solution when infrastructure replication is feasible, is probably not a LRIC approach. Even more, in that situation, a cost orientation approach is probably not the best solution, and the proposed text seems to imply that the methodology is applicable for all situations.
Regarding the first point of the body of the Recommendation, the last paragraph, states that:
It is recommended that NRAs require from their notified operators the disaggregation of their operating costs, capital employed and revenues to the extent justified by the objective pursued and the nature of the problem identified by the market analysis referred to in point 1. The level of
disaggregation required should comply with the principles of proportionality, transparency and competitive requirements demanded by national or Community law.
Telefónica agrees with the statements of this paragraph and considers that they should be more faithfully observed in the Recommendation’s annex.
In this respect, the disaggregation of costs, in accordance with the principle of proportionality, means that this is carried out bearing in mind, on one hand, the costs of the regulated service, due to a dominant position by the operator, and, on the other hand, the other activities, whether they be retail or wholesale, which are not regulated.
Also, the proportionality to the failures detected implies that it should be requested only the minimum disaggregation of costs required to apply a specific regulatory measure and solve the problem identified.
In this way, Telefónica considers that the example outlined in the Recommendation’s annex on accounting separation for mobile networks (page 7) is generally not valid. The accounting disaggreation should rather cover, on one hand, the regulated service and, on the other, the non-regulated services that are considered necessary depending on which measure is imposed on the operator. Consequently, the accounting separation and its degree of disaggregation will depend on the market that is being regulated and the specific remedy that is about to be imposed.
It should be pointed out that the obligation of developing cost accounting is not an obligation that can be imposed by an NRA in an isolated manner. Rather it constitutes an additional obligation to a price control measure that can be imposed by the NRAs whenever it is required to verify compliance with this price control obligation. Its materialisation will have a lesser or greater degree of intervention based on the nature of the failure detected. In this sense, for example, the Remedies Paper recognised the different approach it should be taken by the ANR when applying an accounting method (under art. 13 AD) to a wholesale market or when applies to a retail market (under art.17 USD).
For this reason, the obligations that are being imposed on the SMP operator in relation to the presentation of accounting must be in proportion to the purpose that has caused this obligation and, to the competition failure that must be corrected. The disaggregation obligations on the cost accounting system should be the minimum absolutely necessary for guaranteeing or overseeing compliance with a specific obligation that the regulator has considered necessary to impose after having detected a market failure.
Regarding point 3 of the body of the Recommendation:
With regard to the derivation of interconnection and access pricing, NRAs may require efficiency factors to be applied in recognition of the fact that the use of CCA values for the network may not fully reflect the costs of an efficient operator. Efficiency factors may consist of evaluations of different network topology and architecture, of depreciation techniques, of technology used or planned for use in the network.
This sentence opens a lot the discretion of NRAs to include every type of efficiency factors, and leaves the whole exercise quite open. It is important to add to this point that any efficiency factors to be introduced have to lead to an outcome which is possible to accomplish in practice (i.e.: to an efficient operator which can exist in practice, and not to an artificial company that is impossible to exist in the real world), in order to give the right investment incentives for all operators present in the market.
Another issue that arises in the context of efficiency is the need to take into account all factors that influence the dimensioning and topology of the network. To provide a coherent approach to efficiency[1], the Recommendation should reflect that efficiency should be considered with a comprehensive view of all the issues that the regulated operator has to take into account in order to provide a desirable level of quality to its customers. Some of these issues imply additional investments and a specific network topology in order to provide the necessary capacity and quality to its customers.
For example, in the case of Spain, we can mention the issues of mobility and seasonal variation of traffic distribution, which imply network dimensioning able to cope with those types of traffic in fixed and mobile networks. Social, demographic and economic factors also imply different levels of investments in order to provide an optimum network[2]. Regulatory requirements to provide availability of services, such as regulated wholesale services, also imply additional investments.
Regarding point 5 of the body of the Recommendation, about provisioning of accounting information and publication, Telefónica strongly disagrees with it. The concerns are mainly related to the statements:
It is recommended that NRAs make relevant accounting information from
notified operators available on request to interested parties at a sufficient level
of detail to ensure that there has been no undue discrimination between the
provision of services internally and those provided externally,...
... publication by the notified operator of sufficiently detailed
cost statements showing the average cost of network components..
The aforementioned principles of proportionality, transparency and development of competition must also be considered in the NRA’s decision on which accounting costs information has to be made public.
In view of what is stipulated in Recital 13 and Article 5 of the framework Directive, while the NRAs need to compile information about the market players to efficiently carry out their assignment, requests for information should be proportional and not involve any excessive burden on companies. According to art. 5.4, the information gathered by the NRA may be available to the public, unless it is of a confidential nature (... subject to Community and national rules on business confidentiality),
It is up to the NRAs to declare the confidentiality of those documents that they are processing in their files, in order to comply with laws, which prohibit them from revealing any information covered by commercial and industrial secrecy.
For the purposes that concern us, the legislation in force recognises two rights on the same level of equality, i.e., the right of third operators to know the accounting of the competitor declared as dominant, and the latter’s right that the NRA declare and maintain the confidentiality of any data that is covered by commercial and industrial secrecy.
In this respect, we should take into account the European Communication dated January 23, 1997, regarding the rules of internal procedure for the processing of requests for access to the file in the cases of application of Articles 81 and 82 of the EC Treaty, of Articles 65 and 66 of the CECA Treaty and EEC Regulation nº 4064/89 of the Council; this Communication deals with the Commission’s practice on confidential information, which stipulates the following:
“The purpose of the non communicability of this information is to guarantee the protection of the legitimate interest of a company so that certain strategic information about its commercial interests and about the operation or development of its business are not known by third parties.”
And as laid down in previous doctrine and even in case law, there is no doubt that the data provided and referring to cost price structure and other related data involves data covered by commercial and industrial secrecy. The aforementioned Communication also attests to this and indicates that it is covered by commercial secrecy since it involves data of a strategic nature, amongst others, the methods for evaluating manufacturing and distribution costs and cost price structure.
And this could not be otherwise, as the declaration of confidentiality is an activity that is directly linked to the NRA’s role of safeguarding the conditions of effective competition on the market, since the operators’ knowledge of the competition, of any information that could affect the commercial strategy a company intends to pursue, could have an impact on the market not specifically promoting, but restricting the level of competition on the market.
Indeed, the revealing of data covered by commercial secrecy can bring about a distortion on the market, given the fact that by possessing strategic information, third-party competitors obtain a definite competitive advantage.
Therefore, the availability of the results of cost accounting systems to interested parties should meet two conditions:
1.- indispensable minimum level of disaggregation that allows the relationship between the interconnection prices offered and their associate costs to be known and
2.- guaranteeing at any moment the compatibility of availability with the confidentiality of the dominant operator’s commercial strategy.
Consequently, proportionality should have to be taken into consideration whenever the NRA specifies the information that must be published and the information which will be of a confidential nature. In this respect, Telefónica does not agree with what is stated on page 8 of the annex. It indicates that the publication of certain information on the average costs of network components of the required operator will increase the transparency and confidence of its competitors where crossed subsidies do not exist.
In this respect, it should be indicated that publication of network component costs is not necessary for the operators to know the relationship between the prices and the costs of providing the regulated services. Any information that, like the previous one, goes beyond the scope of obligation must be declared confidential.
To provide confidence and increase transparency, it is not necessary that competitors know in every detail each one of the items contained in the cost accounting of regulated operators. This is the task of the NRA, whose action should be the best guarantee that the required operator has properly implemented the cost accounting system. In this respect, Section 4 of Article 13 of the Access Directive stipulates that:
4. National regulatory authorities shall ensure that, where
implementation of a cost accounting system is mandated in
order to support price controls, a description of the cost
accounting system is made publicly available, showing at least
the main categories under which costs are grouped and the
rules used for the allocation of costs. Compliance with the cost