Discussion Papers

No. 417: Measures to avoid margin squeezes for NGA based services

(Full version only available in German)

Author: Peter Kroon

Summary

Margin squeeze tests (MST) or Economic replicability tests (ERT) verify whether an alternative operator can economically replicate the retail products of the operator with significant market power (SMP) while using wholesale products from the SMP operator. If the test fails, national regulatory authorities (NRAs) might oblige the SMP operator to lower its wholesale prices or increase its retail prices or a mixture.

The MST resembles modelling the business case for the alternative operator and hence certain principle and parameter choices need to be taken. This report describes which principle and parameter choices European NRAs have taken in regards to MST applied on next generation wholesale access (NGA) services like Bitstream and Virtual Unbundled Local Access (VULA).

Most common application of the MST is for an individual retail product before its commercial launch. Most of the European NRAs combine this so called ‘product test’ with a ‘portfolio test’, that is, a yearly test for a portfolio of retail services. The reason for the combined approach varies from ensuring that all common costs are covered (Denmark) to reviewing forecast data (Austria) or evaluating the impact of retail price promotions (Spain). However, for NGA, the Netherlands, Spain and in some instances Ireland, apply an isolated product test, while the UK applies solely a portfolio test for VULA.

Apart from the wholesale costs, the MST also considers other downstream costs such as common, network and retail costs. While determining these costs, the focus can be on the SMP operator (Equally Efficient Operator principle; EEO) or on the alternative operator (Reasonable Efficient Operator principle; REO). For NGA, the usual choice is EEO, but adjustments for scale are allowed to take account of lower scale of alternative operators (Austria, Ireland, and UK).

The ERT focuses on the most relevant NGA products. At the retail level, these are called flagship products. At the wholesale level, the most relevant NGA inputs are NGA bitstream and VDSL-VULA. While reviewing the costs, volume and long term discounts are considered.

The applied timeframe is usually the average customer lifetime related to the retail services, which ranges between 12 months (Austria) to 55 months (Germany). The tests are mostly applied on a multi period basis. Furthermore, application of the steady state approach and the discounted cash flow (DCF) method is equally distributed among NRAs.

To implement the test in a transparent manner, NRAs are communicating to the market their underlying principles, procedures and in some cases the applied tools and what happens when a squeeze is identified.

Discussion Paper is available for download.

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