Conclusiones

8.2.4.1. Consequences arising as a result of any removal of the obligation

Facing a market where: (i) there is no effective competition, (ii) there are relevant barriers to entry, (iii) the development of competition is not expected and (iv) in which the operator with SMP can act independently from other agents of the market, it is expected that this operator has every incentive to set prices for wholesale offers at a level significantly higher than the costs incurred through the provision of the services.

In this sense, the removal of the obligation of price control and cost accounting would result in higher (excessive) prices for this essential input for the competition which could prevent the development of sustainable competition and simultaneously incentivise both the SMP operator and the operators who are granted access to the network to make inappropriate and inefficient infrastructure investments.

In the absence of the obligation of price control and cost accounting, the NRA will have significant difficulty in verifying whether wholesale prices are set in line with the costs incurred by the SMP operator. The difficulty will arise with respect to the appropriateness of the pricing level defined as well with respect to the structure and composition of wholesale pricing.

This absence could also give rise to a lack of consistency in wholesale prices (between service classes or between the different models of the "ADSL PT Network" wholesale offer) which may result in some operators being put at a disadvantage in comparison to others, depending on the type services which they offer, with no real grounds for such a situation.

Without effective control of these issues it can also be expected that the SMP operator has no real incentive to achieve increases in efficiency and cost savings.

Furthermore, the existence of inconsistency and inefficiency in pricing at wholesale level prevents the operators providing retail services from developing truly competitive services, to the ultimately detriment of the interests of end users.

If it was decided to amend the obligation under analysis in a way that removed or significantly limited it, another major problem could arise: regardless of the level at which wholesale prices are set, there is always the possibility that the operator with SMP might engage in practices that result in the margins of alternative operators being squeezed, if no ex-ante control of these practices is performed by the NRA.

The existence of margin squeeze leads, ultimately, to the alternative operators eventually being forced out of the retail market, giving impetus to the transfer of the situation of SMP from the wholesale market to the retail market. Finally, over the long term, such a situation will harm the interests of end-users.

To sum up, any removal of the obligation of price control and cost accounting could lead to significantly damage to the markets for the supply of wholesale broadband access - in "areas NC" - and the associated retail markets, particularly in the retail market for broadband Internet access. Such damage would have a significant and widespread impact, affecting the alternative wholesale operators and end users and leading to incentives for inefficient and inappropriate investment.

8.2.4.2. Other arguments for maintaining the obligation

Article 74 of Law no 5/2004 allows the NRA to impose obligations of cost amortisation and price control172, where a potential lack of effective competition leads to the prices being maintained at an excessively high level or the application of margin squeeze to the detriment of end users.

It is noted that, as mentioned in the analysis conducted throughout this document, the access networks used for the provision of broadband services are characterised, with respect to the market under review, by a lack of effective competition, while the existence of high entry barriers indicate that there is little likelihood of future competition. In the absence of effective competition, the SMP company has little incentive to reduce costs and operate efficiently, since through excessive prices these high costs can be passed on to the wholesale customers and ultimately to consumers who have no alternative choice.

In light of Law no 5/2004, ICP-ANACOM is charged with ensuring that the mechanisms of cost amortisation or the methodologies used for setting prices promote efficiency and sustainable competition, maximising benefits for the consumer. At the same, in this respect, the prices available in comparable competitive markets may also be taken into account.

In this regard it is noted that, given the lack of current and prospective competition, the objective of price regulation should be to provide competing companies with network access for the provision of retail broadband at prices that would be charged were the market in fact competitive, while allowing the company with SMP to obtain a reasonable rate of return on investments.

172_{Including the obligation of cost orientation of prices and the obligation to adopt cost accounting systems, for the puposes of} providing specific types of access or interconnection.

ICP-ANACOM has regulated the price of the "Rede ADSL PT" offer with reference to a rule of "retail-minus" whose methodology has been updated and clarified by determination of 3 October 2007173. The adoption of this measure has led to a reduction in the prices of individual offers (retail and wholesale), with obvious advantages in terms of competition and end-users. Obviously, these reductions in prices have occurred because of pressure exerted on the companies of Grupo PT, initially, by the retail offers of broadband access based on the OLL - and, to a lesser extent (geographical) by retail offers of broadband access from the cable distribution network operators - and, later following the conclusion of the spin-off of ZON Multimédia, also due to pressure exerted by the offers of broadband launched by ZON Multimédia in the meantime.

These offers, of course, are mainly available in "areas C". The question that arises in the implementation of a "retail-minus" rule in "areas NC" is whether it will have the same degree of effectiveness in terms of reducing wholesale and retail prices, given the fact that PTC faces only limited competition from operators based on the OLL and cable distribution network operators. In fact, the companies of Grupo PT apply uniform pricing throughout the national territory. Therefore, provided that this practice is maintained and in the light of the competition faced by the companies of Grupo PT in "areas C", in the event that these companies decide to reduce the price, the reduction will be to an equal amount in "areas C" and in remaining areas. This means that end-users residing in "areas NC" can also benefit from the existence of competition in "areas C".

In terms of the "Rede ADSL PT" offer and without prejudice to the conclusions of the market analysis and the obligations with respect to "areas C", in "areas NC" the price of this wholesale offer has also fallen, in view of the defined margin.

However, PTC may on its own initiative and taking into account the business strategy most suitable to its circumstances, set retail price lower in areas where it faces greater competition ("areas C") while keeping prices higher in those areas where competition is lower ("areas NC"). That is, in "areas NC" PTC could raise retail prices and increase the price of the "Rede ADSL PT" offer, while remaining in compliance with the "retail-minus" rule. The threat of new operators entering the market, by investing in OLL, may not be credible in parts of these areas, since the population density and household income cannot justify the investment either by cable distribution network operators or by beneficiary operators of the OLL. This situation would raise issues of social cohesion that could be addressed through the establishment of a rule that prohibits increases in the price of the "Rede ADSL PT" offer, with reference, in particular, to the prices of the offer in previous years or through intervention along other lines. Notwithstanding, it is evident that, if appropriate and necessary, it remains possible to intervene in the setting of prices of the "Rede ADSL PT" wholesale offer in the event that the premises explained are not realised and end users in these geographic areas do not obtain the maximum benefit in terms of choice, price and quality.

It is noted that in case of the "Naked DSL", in view of the importance that this offer can have in the development of offers that are appealing to end users who are located in more remote and less developed areas or prospectively where there is less likelihood that competition supported by higher levels of the value chain will develop, the setting of wholesale prices will be based on the principle cost orientation of prices.

The complexity of operating the "retail-minus" rule could increase, especially following the

provision of bundled services174, whereby ICP-ANACOM will monitor this issue and may

update the defined "retail-minus" rule at a future date.

Regarding the verification of the possibility of alternative operators suffering margin squeeze, it should be stated, as referred to above, that the grounds for this specific aspect of the obligation of price control and cost accounting and the detail thereof has already been duly explained in various determinations of ICP-ANACOM175.

Finally, ICP-ANACOM is of the position that the access price of the "Rede ADSL PT" offer shall remain consistent with the price of shared access, with respect to non-discrimination and cost orientation. It is also important to maintain the existence of internal coherence in the "Rede ADSL PT" wholesale offer, while retaining reasonable margin between the costs incurred by operators with respect to the various options of that offer (i.e., the offer with ATM aggregation, the offer with IP aggregation and the provision of "Naked DSL") and a justified price difference between the various classes of local access (especially in the case of IP aggregation176.

This possibility is, moreover, also advocated by the ERG, which asserts that "as a consequence of economies of scope and scale, cost-based bitstream pricing may give rise to an eviction price in respect of the upstream (unbundled loop and shared access) services. Consequently, NRAs may need to impose additional controls to ensure the maintenance of a margin sufficient to avoid this. In principle, such controls could be imposed as a remedy to SMP in either market”

177_.

Accordingly, ICP-ANACOM will also closely monitor the issue of the margin between the prices of the "Rede ADSL PT" service and prices of the OLL and may still intervene where there are grounds.

8.2.4.3. Conclusions

It is considered that the obligation of price control and cost accounting is objectively justified in that it allows prices to set based on costs, avoiding situations of excessive pricing and margin squeeze, and allowing the development of competition, while promoting, ceteris paribus, the

174 _{Or even aggregated with other products / services not related to electronic communications market.} 175 _{See determinations of ICP-ANACOM of 3.10.2007, 31.10.2007, 7.02.2008 on this subject at:}

http://www.anacom.pt/template31.jsp?categoryId=268122&languageId=1.

176 _{This position was expressed and substantiated in the determination of ICP-ANACOM of 13.10.2005 on amendments to the} "Rede ADSL PT" offer introduced by PT Comunicações on 23 August 2005.

application of prices available in comparable competitive markets, thereby helping to protect the consumer interest.

This obligation is a proportional response to the dimension of competition in the relevant market, as it allows the competitors of Grupo PT to purchase broadband access services at prices which allow them to develop competitive retail services to the benefit of consumers. Additionally, this condition allows Grupo PT to derive a rate of return approaching that available in a competitively efficient market.

It should also be noted that since the geographic scope of the market in question is limited compared to the scope of the market for supply of wholesale broadband access defined in 2005, the impact of the obligation of price control and cost accounting is also limited.