(12)

The obligation of non-discrimination, set out in Article 70 of Directive (EU) 2018/1972, is one of the key remedies that can be imposed on SMP operators to promote effective competition in a relevant market. That obligation also serves as a safeguard mechanism in those cases in which there is still an SMP operator but competition is developing to a point where pricing flexibility is applied by the NRA.

(13)

The NRAs’ experience in imposing non-discrimination obligations under Article 10 of Directive 2002/19/EC of the European Parliament and of the Council (9) and, currently, under Article 70 of Directive (EU) 2018/1972, indicates that regulatory approaches still vary across the Union. Nevertheless, there is a broad agreement that the non-discrimination obligation is an essential tool of ex ante regulation to foster competition in the presence of a vertically integrated SMP operator. On the other hand, where the SMP operator is a wholesale-only operator meeting the conditions set out in Article 80(1) of Directive (EU) 2018/1972, it would in principle have no incentive to discriminate between downstream providers. As a consequence, NRAs should in principle refrain from imposing non-discrimination obligations on wholesale-only operators, unless the NRAs can establish that there are specific circumstances that justify imposing such obligations.

(14)

The advantages of equivalence of input (EoI) over equivalence of output (EoO) can vary considerably from one wholesale access product to the next. Where the NRA finds that EoI would not be proportionate for a given product or process, a well-crafted EoO regime, with appropriate monitoring and suitable key performance indicators (KPIs)/service level agreements (SLAs)/service level guarantees (SLGs), can in many cases be sufficient and contribute to the further development of competition. For both EoO and EoI, the effectiveness of the non-discrimination obligation is heavily dependent on the quality of the reference offer; the degree to which KPIs, SLAs and SLGs are comprehensive, effective, and reflect the real needs of alternative operators; and the effectiveness of monitoring and enforcement of non-discrimination obligations on the part of the NRA.

(15)

NRAs should duly take into account the commitments of the SMP operator(s) offered under Article 79 of Directive (EU) 2018/1972 with a view to ensuring the effective and efficient application of the non-discrimination obligation. NRAs should assess the costs and benefits of imposing the provision of regulated wholesale inputs on an EoI basis, compared to other forms of non-discrimination obligations, in particular EoO. While providing regulated EoI is likely to trigger higher compliance costs than other forms of non-discrimination, the cost-benefit analysis should also factor in the long-term monitoring costs of NRAs. Those long-term monitoring costs might be higher for EoO and in some instances outweigh the implementation costs in the long term. A case-by-case assessment of the proportionality of EoI versus EoO should therefore be undertaken. In practice, NRAs need to take into account a number of factors when determining if the obligation of EoI is likely to be effectively implemented, as it depends on the wholesale products in question. Those factors include: (i) a quantitative cost/benefit analysis, including implementation costs for both the SMP operator and the access seeker; and (ii) a qualitative estimation of the need to ensure ‘stricter’ non-discrimination for the wholesale access products in question. In particular, NRAs might consider that the provision of wholesale inputs over new systems on an EoI basis is more likely to create sufficient net benefits, and thus be proportionate, given the comparatively lower incremental compliance costs to ensure that newly built systems are EoI-compliant. On the other hand, NRAs should also consider whether obligations are proportionate for the undertakings affected, for example, by taking into account implementation costs and weighing up possible disincentives to deploying new systems, relative to more incremental upgrades, in the event that the deployment of new systems would be subject to more restrictive regulatory obligations. In Member States with many small-scale undertakings designated as having SMP, the imposition of EoI on each of those undertakings can be disproportionate. In general, it is assumed that a wholesale product is built up from various inputs (such as assets, IT processes, etc.). In practice, the boundary between EoI and EoO at product level will not be clear-cut and EoI is unlikely to be implemented across all of the inputs to wholesale products.

(16)

When imposing a non-discrimination obligation under Article 70 of Directive (EU) 2018/1972, and in order to ensure its effective application, NRAs should require the SMP operator to implement: (i) KPIs; (ii) corresponding SLAs alongside KPIs; and (iii) corresponding SLGs, if there is a breach of the SLAs. A mechanism should be put in place to update the KPIs, SLAs and SLGs whenever needed. When necessary, NRAs should require the SMP operator to include the KPIs, SLAs and SLGs in the reference offer.

(17)

KPIs play a key role in ensuring effective monitoring of non-discrimination. The process of monitoring KPIs should be fully transparent. NRAs should make public any reports or decisions to remedy non-compliance. Indeed, almost all NRAs require KPIs to be available to all authorised operators (systematically or on request). Aggregated values can also be made available and operators can compare KPIs to the industry average (10). In addition, penalties related to KPIs should be proportional, but should be large enough to be dissuasive. In assessing whether the level of wholesale penalties is sufficiently dissuasive, the NRA should bear in mind that a breach of wholesale obligations on the part of the SMP operator may have the side effect of the alternative operator that uses the wholesale access product being subject to compensation damages imposed by the same NRA for problems at the retail level. The wholesale penalty should therefore be large enough to cover the retail indemnity.

(18)

Effective access to civil-engineering infrastructure is of prime importance for the deployment of VHCNs. In addition to symmetric or asymmetric regulation imposed under Directive (EU) 2018/1972, providers of electronic communications networks can require access, on fair and reasonable terms, to the existing physical infrastructure of network operators including those operating in sectors other than the electronic communications sector, pursuant to the provisions of Directive 2014/61/EU of the European Parliament and of the Council (11). Pursuant to Article 67(2) of Directive (EU) 2018/1972, when carrying out market analyses NRAs are to take into account the impact of other relevant types of regulation or measures imposed, as well as of other obligations resulting, for instance, from Directive 2014/61/EU, and NRAs are to assess the outcomes of those measures on the relevant markets. However, where the operator with SMP controls a well-developed civil-engineering infrastructure that can be reused for deployment of VHCNs, and to which no equivalent alternative exists, obligations resulting from Directive 2014/61/EU would generally not be sufficient to appropriately address the competition problems identified in the market analysis.

(19)

Whenever an asset is subject to an access obligation as a result of an SMP regulation under Directive (EU) 2018/1972, that should prevail over any access obligation resulting from Directive 2014/61/EU. Directive (EU) 2018/1972 allows for more stringent and detailed access regulation, superseding access obligations underpinned on other, more general legislation. That means that the regulatory access obligation concerning the civil-engineering infrastructure of an operator with SMP takes precedence over access requirements resulting from Directive 2014/61/EU.

(20)

In accordance with Article 73(2) of Directive (EU) 2018/1972, before imposing any access obligation on networks the NRAs are to assess whether imposing access to civil-engineering infrastructure alone would be proportionate to promote competition and the interests of end-users. That is likely to be the case where access to the civil-engineering infrastructure controlled by the SMP operator enables the development of end-to-end infrastructure-based competition. Moreover, under certain market conditions (12), NRAs may decide on a separate market for civil-engineering infrastructure.

(21)

In some Member States, regulated access to ducts has played a key role in the deployment of VHCNs. Because deployment of VHCNs first occurs in urban areas and gradually moves towards more rural areas, regulated access to poles will make it more necessary to deploy VHCNs, especially outside urban areas. Furthermore, Article 72 of Directive (EU) 2018/1972 allows for extensive access to civil-engineering infrastructure, going beyond the assets strictly corresponding to the downstream product market.

(22)

To create a level playing field among other market participants and the SMP operator, it is important that access to the civil-engineering infrastructure of the SMP operator is provided on a strictly equivalent basis. Reference offers, KPIs, SLAs and SLGs are instrumental in ensuring a proper application of the principle of equivalence. Conversely, it is important that any asymmetric knowledge the SMP operator possesses on the rollout plans of third-party access seekers is not used by the SMP operator itself to gain any commercial advantage.

(23)

To help achieve the connectivity targets set out by the Decision (EU) 2022/2481, conditions for access to the civil-engineering infrastructure of the SMP operator should enable all access seekers that deploy VHCNs to roll out those networks on a large scale across the territory. For that reason, NRAs should ensure thatthe SMP operator provides pre-set request forms for access to its civil-engineering infrastructure. The SMP operator should also provide documents and information in a standard format and should use automated tools to deal with access requests. Likewise, NRAs should ensure that the SMP operator: (i) approves access requests for multiple locations simultaneously; (ii) responds to such requests at short notice; and (iii) enables the full exchange of necessary data with access seekers via electronic means.

(24)

The effectiveness of regulated access to the civil-engineering infrastructure of the SMP operator is highly reliant on the availability of information to access seekers about the location, spare capacity, and availability of that infrastructure. Where the relevant information is contained in an internal database of the SMP operator, all access seekers, including the SMP operator’s retail arm, should be provided with equal access to that database. Access by alternative operators to the SMP operator’s database should not be denied on grounds of information confidentiality. Depending on national circumstances, the SMP operator could be required to fulfil its regulatory obligation to make available information on its civil-engineering infrastructure via a single information point (SIP), as provided for by Directive 2014/61/EU. The SMP operator could in that way reduce its compliance costs, as it might not need to maintain a separate database or web portal for regulatory purposes. Access seekers paying for access to the SMP operator’s data base or web portal might also reduce their costs, as access to the SIP is free of charge in general. Access seekers could also have efficiency gains, as the SIP would contain information not only on the SMP operator’s civil-engineering infrastructure, but also on the existing physical infrastructure of other network operators and public sector bodies.

(25)

NRAs that consider imposing price control obligations with respect to VHCNs should carefully assess the appropriateness and proportionality of such obligations, taking into account in particular their possible impact on incentives to invest in VHCNs, and the need to protect competition. In conducting that assessment, NRAs should take into consideration market initiatives, in particular binding commitments proposed by SMP operators under Article 79 of Directive (EU) 2018/1972, that allow parties to diversify the investment risk while enabling sustainable competition in the downstream markets. The implementation of functional or voluntary separation in accordance with Article 78 of Directive (EU) 2018/1972 should be duly taken into account in the assessment of the appropriateness of not imposing price regulation on VHCN wholesale access inputs.

(26)

Where there are uncertainties regarding the rate of materialisation of demand for the provision of very high capacity services, it is important, in order to promote connectivity and access to, as well as take-up of, VHCNs, to allow those operators investing in VHCNs a certain degree of pricing flexibility where sufficient competition safeguards are present, as mentioned in recital 193 of Directive (EU) 2018/1972. Such pricing flexibility is necessary to enable SMP operators to test price points and conduct appropriate penetration pricing. It also allows SMP operators and access seekers to share some of the investment risk by differentiating wholesale access prices according to access seekers’ chosen level of commitment. That could result in lower prices for long-term agreements with volume guarantees, which could reflect the fact that access seekers are taking on some of the risks associated with uncertain demand. In addition, pricing flexibility at wholesale level may be a suitable way to allow both the access seeker and the SMP operator’s retail business to introduce price differentiation onto the retail broadband market to better address consumer preferences and improve the penetration of very high-speed broadband services. Given that competition, and in particular infrastructure competition, has significantly progressed in many markets and areas across the Union since the adoption of Commission Recommendation 2013/466/EU (13), there could be room, depending on the circumstances, to apply pricing flexibility on a significantly larger scale than has been the case so far.

(27)

With respect to VHCNs, NRAs should consider not imposing or lifting price control obligations pursuant to Article 74 of Directive (EU) 2018/1972, provided that specific conditions are met, in particular that sufficient competitive safeguards are in place. Such competitive safeguards are necessary to prevent such pricing flexibility leading to excessive prices in markets where SMP has been found, or to practices undermining competition, or both.

(28)

In particular, a demonstrable retail price constraint resulting from infrastructure competition or a price anchor stemming from other regulated access products, or both, should be present. If an operator would still have SMP, such a demonstrable retail price constraint would not be sufficiently strong to justify a conclusion that the relevant wholesale market is effectively competitive. However, that retail price constraint should prevent the operator that has SMP at the wholesale level from setting excessive retail prices. Moreover, pricing flexibility should be accompanied by additional safeguards to protect competition. To that end, effective non-discrimination obligations should be complemented by guaranteed economic replicability of downstream products.

(29)

Furthermore, a demonstrable retail price constraint can also result from a price anchor that stems from other regulated access products which are subject to cost orientation. Where copper-based products (including virtual unbundled local access products provided over an upgraded copper network) are still able to exert a demonstrable retail price constraint over VHCNs on a forward-looking basis, those products should be defined as the regulated anchor. Where the product offered by the SMP operator on the legacy access network is no longer able to exercise a demonstrable retail price constraint on the VHCN wholesale product (for example in the event of a copper switch-off, or where the NRA finds that retail products provided over copper are not substitutable with those provided over VHCNs), it could be replaced by a VHCN-based product, such as an entry-level fibre product. Where the NRA concludes that the definition of a copper-based product or an entry-level fibre product could be insufficient to exert an effective price constraint on the SMP, the NRA should have the possibility to define an effective anchor. This could be a combination of anchors (copper and VHCN) or the NRA could define as an anchor a portfolio of regulated products that is sufficiently representative of the consumer demand and network architecture.The technical performances of that regulated product should be limited to what is required to exert a demonstrable retail price constraint. The NRA should therefore identify the technical characteristics of the virtual or active anchor product or products with a view to ensuring that pricing flexibility is preserved for other VHCN-based products that provide higher levels of performance.

(30)

To establish whether access seekers can economically replicate a downstream offer provided by the SMP operator using the regulated wholesale input available, in cases where wholesale price regulation is not imposed the NRA should carry out an economic replicability test. Such a test does not affect ex post margin squeeze tests applied under competition law by the Commission or national competent authorities, or both.

(31)

In addition, NRAs may also apply an ex ante margin squeeze test to regulated wholesale inputs where necessary, in particular: (i) in the context of long-term pricing and volume discounts; or (ii) to ensure sufficient economic space between different regulated wholesale inputs. NRAs should specify in advance the methodology they will follow to conduct those tests. The guidance provided in this Recommendation on the economic replicability test should not apply to such cases.

(32)

The purpose of the economic replicability test is to ensure, in combination with other competition safeguards, that SMP operators do not abuse pricing flexibility to exclude actual and potential competitors from the market.

(33)

NRAs should ensure that the margin between the retail price offered by the SMP operator and the price of the VHCN wholesale input covers the incremental downstream costs and a reasonable percentage of common costs. Where wholesale price regulation for VHCN wholesale inputs is not imposed on the SMP operator and additional safeguards are implemented in accordance with this Recommendation, a lack of economic replicability can be demonstrated by showing that the SMP operator’s own downstream retail arm could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the SMP operator (‘equally efficient operator’ (EEO) test). The use of the EEO standard enables NRAs to support the SMP operator’s investments in VHCNs and provides incentives for innovation in VHCN-based services.

(34)

The possibility to apply a scale adjustment to the economic replicability test should be used where justified by specific market circumstances. That could especially be the case where market entry or expansion has been frustrated in the past or where very significant imbalances in terms of economies of scale and scope exist between the SMP operator and its competitors. In such cases, NRAs should determine the scaling factor with care in order to ensure that efficient competitive entry and economic replicability are a realistic prospect.

(35)

Following a market analysis, the NRA should set out and make public in advance in its decision establishing remedies the procedure and parameters it will apply when carrying out the ex ante economic replicability test. The NRA may carry out that test before the launch of a new retail offer by the SMP operator, for instance if the NRA considers it appropriate to align the timing of the economic replicability test with the technical replicability test if it is also carried out before the launch. The NRA does not need to carry out the test for each and every new retail offer, but only for those flagship products which it identifies. An NRA may carry out the test: (i) on its own initiative, for example in the initial stages of the implementation of a measure that allows pricing flexibility on VHCNs (particularly where regulated wholesale access prices were imposed in the past); or (ii) to respond to changes in the structure of the market, for example as a result of technological developments.

(36)

The economic replicability test can be applied either to: (i) individual products, which can be either bundled offers (which can also include non-regulated products) or stand-alone offers, for instance an internet-only offer; or (ii) to a portfolio of products, which is a set of individual products. A portfolio approach provides the SMP operator with more flexibility in the pricing of individual products and may better reflect market realities, for example in Member States with contestable VHCN markets and in which competition in the relevant segments of the product market mainly concerns a specific set of retail products in each segment. However, in Member States with less contestable VHCN markets and which are characterised by a high degree of concentration or a very high degree of market power of the SMP operator, or both, the portfolio approach may not be appropriate. In any event, NRAs should discuss with the operators concerned the scope and nature of an ex ante economic replicability test and, based on national circumstances, whether the operators should consider conducting the test before the actual launch of the retail product(s).

(37)

The economic replicability test set out in advance by the NRA should be sufficiently detailed and should include, at a minimum, a set of relevant parameters to ensure predictability and the necessary transparency for operators. NRAs should apply a long-run incremental cost plus (LRIC+) model, while taking into account the SMP operator’s audited downstream costs. NRAs should also assess the margin on the most relevant retail products including broadband services (flagship products) as compared to the regulated VHCN access input most used, or identified. They should do this, under a forward-looking approach, as the most suitable approach for delivering the retail products for the market review period in question. The design of the test, applying to the SMP operator’s audited downstream costs and only for flagship products, should aim to ensure that VHCN investments and the effect of the recommended pricing flexibility are not hindered by this safeguard. In order to prevent cross-subsidisation between different products in a bundle or portfolio, NRAs may conduct not only a single-level test, namely between the retail services and the most relevant VHC access input for access seekers (for example fibre access at the cabinet or virtual unbundling), but NRAs should also have the possibility to submit each relevant wholesale input to an economic replicability test; accordingly, there could be several single level tests between one retail product and different relevant wholesale inputs. However, a new VHCN access input can over time become more relevant (for example fibre unbundling at the optical distribution frame). In that case, the economic replicability test should be conducted with reference to the new input instead of with reference to the input initially most used. If national competitive circumstances show a difference between geographic areas in terms of the VHCN access input used (for example in rural and densely populated areas), NRAs should vary the test based on specific inputs identified as the most relevant. In that case, the economic replicability test should seek to ensure that prices for flagship retail services leave enough economic space for competitors, relative to the price or prices of the main SMP wholesale access products that could be used to produce them in each geographically differentiated area.

(38)

NRAs might not be able to find the competitive safeguards referred to in recital 27 of this Recommendation across the entire defined market. Where the NRA cannot conclude that the different competitive conditions are stable over time, and also cannot conclude that the different competitive conditions are such that they could justify a decision that those are subnational markets, NRAs should nevertheless consider responding to those diverging competitive conditions by applying differentiated remedies. Such differentiated remedies could include the lifting of wholesale price regulation only in those areas where the necessary competition safeguards apply. Where an NRA considers that competitive and regulatory conditions are such that the SMP operator is sufficiently constrained in its price setting, the NRA may refrain from imposing price regulation with respect to wholesale VHCN products.

(39)

Where the conditions for pricing flexibility are not met and where the imposition of regulated wholesale access prices is warranted, NRAs should ensure that the costing methodology provides a clear incentive for investment through predictable and stable regulated prices.

(40)

Cost recovery is a key principle, ensuring that operators can both recover the costs that are efficiently incurred and receive an appropriate return on capital invested.

(41)

A costing methodology that provides the appropriate ‘build-or-buy’ signal strikes an appropriate balance between static efficiency and dynamic efficiency. Static efficiency means ensuring efficient entry. Dynamic efficiency means ensuring sufficient incentives to invest and, in particular, deploy VHCNs and hence ensure sufficient incentives to deliver new, faster and better quality broadband services.

(42)

The recommended costing methodology should ensure transparency and consistency across the Union while reflecting specific national circumstances. In that regard, the guidance on costing methodology provided in Recommendation 2013/466/EU has been largely followed by NRAs, and the main principles of that methodology remain relevant, including making it possible to properly take account of prevailing and foreseeable specific economic conditions. The guidance should therefore be adjusted, in particular to reflect the progressive shift towards VHCNs.

(43)

The bottom-up, long-run, incremental, cost-plus (BU LRIC+) costing methodology best meets that objective when setting prices for wholesale-access services in the markets in question. That methodology models the incremental capital (including sunk costs) and operating costs borne by a hypothetically efficient operator providing all access services, and adds a markup for a strict recovery of common costs. The BU LRIC+ methodology therefore allows for the recovery of the total efficiently incurred costs.

(44)

The BU LRIC+ methodology calculates the current costs on a forward-looking basis (namely, based on up-to-date technologies, expected demand, etc.) that an efficient network operator would incur to build a modern VHCN today, and which is able to provide all such services. Therefore, the BU LRIC+ methodology provides for efficient and reliable signals for entry.

(45)

Where cable, fibre (fibre to the home (‘FTTH’) or fibre to the building (‘FTTB’)) and, to a lesser extent, wireless networks are competing against copper networks, SMP operators typically react by progressively replacing their copper with VHCNs. Therefore, since operators would not build a copper network today, the BU LRIC+ methodology calculates the current costs of deploying a modern and efficient VHCN.

(46)

Such an efficient VHCN would be capable of delivering the targets set out in Decision (EU) 2022/2481. In practice, a modern and efficient VHCN would generally be an FTTH network.

(47)

Valuation of the assets of such a VHCN based on current costs best reflects the underlying competitive process and, in particular, the replicability of those assets.

(48)

In contrast to assets such as technical equipment and the transmission medium (e.g. fibre), civil-engineering assets (namely, ducts, trenches and poles) are assets that are unlikely to be replicated. Technological change and the level of competition and retail demand are not expected to be such as to allow alternative operators to deploy a parallel civil-engineering infrastructure, at least where the legacy civil-engineering infrastructure assets can be reused to deploy a VHCN.

(49)

The regulatory asset base (‘RAB’) corresponding to the civil-engineering assets should not be valued at the replacement cost but at the cost recorded in the SMP operator’s audited regulatory accounts, net of depreciation. The costs considered should be well documented and clearly related to expenditure in civil-engineering assets. That would take into account the elapsed useful lifetime of the assets and thus the costs already recovered by the regulated SMP operator. That approach sends efficient market-entry signals for build-or-buy decisions while avoiding the risk of over-recovering, especially for reusable legacy civil-engineering infrastructure. The excessive recovery of costs would not be justified to ensure efficient entry and preserve the incentives to invest because the build option would not be economically feasible for that asset category.

(50)

The indexation method should be applied to calculate such depreciated costs. The preference for such a method is due to its practicability, robustness and transparency. It would rely on: (i) historical data on expenditure, accumulated depreciation and asset disposal, all of which are available from the regulated SMP operator’s statutory and regulatory accounts and financial reports; and (ii) a price index, such as the retail price index (‘RPI’), which is publicly available.

(51)

Therefore, the RAB corresponding to the civil-engineering assets should be set at the regulatory accounting value, net of the accumulated depreciation at the time of calculation, indexed by an appropriate price index, such as the RPI. For new civil-engineering assets both the net depreciation and the RPI will be zero or close to zero because no or little time has passed since their roll-out.

(52)

The initial RAB should be further locked in and rolled forward from one regulatory period to the next to ensure that once a civil-engineering asset is fully depreciated, that asset is no longer part of the initial RAB and therefore it no longer represents a cost for the access seeker, in the same way as it is no longer a cost for the SMP operator. That approach would further ensure sufficient remuneration for the SMP operator and simultaneously provide regulatory certainty to both the SMP operator and access seekers over time.

(53)

An alternative approach could be used in situations where the NRA has established that the indexation method would be inappropriate, in particular where the historical records of the SMP operator are unreliable. In such cases, the RAB corresponding to the reusable legacy civil-engineering assets may be valued on the basis of current costs adjusted for depreciation over the lifetime of the assets. The NRA should ensure that the asset-valuation method employed is such that civil-engineering infrastructure assets would, in general, not be replicated.

(54)

The pricing of access to newly built civil-engineering infrastructure of the SMP operator for VHCN deployment by alternative operators could have an impact on the SMP operator’s incentives to build new civil-engineering infrastructure with sufficient capacity to host alternative networks. Where the new civil-engineering infrastructure of the SMP operator has been deployed within the geographic scope of the market or within the clearly delineated areas within the geographic scope of the market, and where it co-exists with the legacy civil-engineering infrastructure, NRAs should set individual prices for access to the newly built civil-engineering infrastructure assets, applicable within the area concerned. In principle, civil-engineering infrastructures which are merely repaired, renovated or maintained should not be considered as newly built. The price for access to the newly built civil-engineering infrastructure should reflect current market conditions and should be based on the full actual costs incurred by the SMP operator, as long as strict non-discrimination is ensured in the terms and conditions of access to such infrastructure. Such an approach would provide the right incentives for investing in new civil-engineering infrastructure. Moreover, depending on market circumstances, building significant new civil-engineering infrastructure may represent for the SMP operator a risk-investment profile higher than the risk profile associated with the reuse of legacy civil-engineering infrastructure. That risk profile would involve risks in terms of incurred costs and in terms of expected revenues. NRAs should carefully assess the relevant market circumstances and, when applicable, reward the higher and quantifiable risk-investment profile by way of a (higher) risk premium.

(55)

Active copper lines are decreasing as customers migrate to cable, fibre or mobile networks. Modelling a single, efficient VHCN for copper and VHCN access products would neutralise the inflationary volume effect that arises when, modelling a copper network, fixed network costs must be distributed over a decreasing number of active copper lines. It is possible to progressively transfer the traffic from copper to VHCNs by deploying – and switching to – VHCNs. Only traffic moving to other infrastructures (e.g. cable, mobile) would result in a rise in unit costs.

(56)

In light of both the principle of technological neutrality and different national circumstances, NRAs require sufficient flexibility to model this type of efficient VHCN. The VHCN could therefore be based on any of the various access technologies and network topologies available to operators for rolling out a VHCN.

(57)

An FTTH or FTTB network could be considered to be the typical form of a modern and efficient VHCN. Under that approach, the cost calculated for the VHCN should be adjusted to reflect the different features of a copper network where it is necessary to determine the wholesale access price to the copper network. For that purpose, the NRAs should estimate the cost difference between an access product based on a VHCN and an access product based on copper by making the relevant network-engineering adjustments in the VHCN model.

(58)

If the topology of the VHCN to be modelled is different from the copper network to the extent that adjustment within the VHCN engineering model is not feasible, NRAs could obtain the copper cost by modelling an overlay network, where two parallel networks (copper and fibre) share to an extent the same network for civil-engineering infrastructure. Under that approach, the inflationary volume effect would be neutralised for civil-engineering assets because the modelled copper and fibre networks would share the use of those assets, and therefore the unit costs of those assets would remain stable. However, except for civil-engineering assets, the modelling of two parallel networks (copper and fibre) could still lead to an inflationary volume effect for copper assets because of the declining traffic on the copper network.

(59)

Volume discounts and long-term access-pricing agreements can be important tools to foster VHCN investment, in particular where take-up by consumers is still low. NRAs may accept volume discounts and long-term access-pricing agreements by SMP operators on their own downstream businesses if they do not foreclose market entry for efficient competitors (including infrastructure competition) and do not undermine the existing market position of efficient competitors. That is the case where the volume discounts and long-term access-pricing agreements offered by an SMP operator to its retail arm do not exceed the discount, or where the agreements are no better than those offered in good faith to third party access seekers.

(60)

The weighted average cost of capital (‘WACC’) employed should reflect the current market situation. If the applicable WACC does not sufficiently take into account the current economic conditions, it could be relevant to update the applicable WACC, thus ensuring the relevant macroeconomic parameters for the applicable WACC.

(61)

The return on capital allowed ex ante for investment into VHCNs should strike a balance between providing sufficient incentives for operators to invest on the one hand (implying a sufficiently high rate of return) and promoting allocative efficiency, sustainable competition and maximum consumer benefits on the other (implying a rate of return that is not excessive).

(62)

If there are price-control obligations with respect to VHCN wholesale access products on a specific market, the regulated return allowed should adequately reflect both the cost of deploying the network and the risk taken by the SMP operator at the time of the investment. If the additional and quantifiable risk of investing in new VHCNs is not adequately reflected, the investor will hold back investments to the detriment of end-users and overall connectivity in society.

(63)

The deployment of VHCNs, in particular in rural and sparsely populated areas, involves committing to significant capital investments, with expected payoffs extending far into the future, thus increasing exposure to demand-side risks. Demand for advanced services such as those enabled by VHCNs is also likely to be more sensitive to changes in household incomes. As a result, investments in VHCNs are likely to expose operators to higher risks compared to their investments in legacy infrastructures.

(64)

SMP operators investing in separate VHCN projects may face a wide range of possible risks. Those risks may vary significantly between types of projects and geographical areas. Accounting for that, NRAs should acknowledge the additional risk for each project undertaken by the SMP operator. In principle, such considerations may result in multiple risk premiums being applicable, namely a premium for each specific VHCN project or, if the projects are sufficiently similar, one common risk premium. It would be for the NRA to decide whether a single common risk premium sufficiently covers the differences in each area or if several risk premiums should apply at the same time. Regardless of the approach taken, adding the project-specific risk premium to the applicable WACC results in the project-specific WACC.

(65)

The risk premium should be applied, where appropriate, on top of the applicable WACC to ensure maximum transparency. That approach is to emphasise that the risk premium only encompasses and rewards the specific additional and quantifiable risk in the situation for which it is intended.

(66)

A project-specific WACC should be evaluated at the time of the investment and should provide stability and consistency for the SMP operator. Risks and uncertainties change over time and may therefore change the NRA’s perception of the risk premium allowed for the specific project.

(67)

To ensure that investors are rewarded for the risk taken at the time of the investment, NRAs should allow for a stable risk premium for the specific project over a sufficiently long period of time.

(68)

This Recommendation also aims at providing guidance to NRAs on the application of Article 81 of Directive (EU) 2018/1972 in situations where the entire legacy copper loop is decommissioned and end-users are migrated to a VHCN. Incremental upgrades of copper networks are not included in the scope of this Recommendation.

(69)

Directive (EU) 2018/1972 introduced the objective of promoting connectivity and access to, as well as take-up of, VHCNs and stated that unjustified delays to migration to VHCNs should be avoided. Therefore, Article 81 of Directive (EU) 2018/1972 provides for the possibility of withdrawing access obligations on the copper network to enable its switch-off. That Article should be applied in a way that makes the migration and copper switch-off process as smooth and fast as possible, while preserving effective competition.

(70)

Once the conditions in Article 81(2) of Directive (EU) 2018/1972 are fulfilled and a relevant notice period is complied with, access obligations on the copper network may be lifted to allow for switch-off. Moreover, to encourage migration, some regulatory obligations may already be relaxed before the full lifting of access obligations. A prerequisite for the relaxation of certain access obligations is that the end-users and access seekers on which the relaxation will have an impact should have effective access to products on VHCNs that constitute appropriate alternatives to products delivered over the legacy network, in accordance with Article 81(2) of Directive (EU) 2018/1972. Once such access is effectively established, migration should be encouraged and switch-off should be authorised within a reasonable timeframe. The 5-year duration recommended in Commission Recommendation 2010/572/EU (14) no longer corresponds to the pace of both VHCN roll-out and migration from copper to VHCNs. It should therefore be reduced to the period between 2 and 3 years, and in some situations, based on national circumstance, to an even shorter period.

(71)

NRAs should ensure the availability of alternative products provided over the VHCN of at least comparable quality to those that were provided over the legacy network on the basis of Article 73 of Directive (EU) 2018/1972. Depending on their characteristics and on the conditions under which they are offered, wholesale access products provided over a VHCN on a commercial basis, or by a different operator than the SMP operator, may be considered a relevant alternative to wholesale access products provided over the legacy network.

(72)

As part of the gradual relaxation of regulatory obligations before the lifting of all obligations, a commercial closure of the legacy network encourages migration and can constitute a relevant intermediary step towards full switch-off.

(73)

Predictability is a key factor in ensuring a favourable framework for investment in VHCN roll-out. The recommended costing methodology contributes to that aim by neutralising, in whole or in part, the inflationary effect on copper wholesale access prices of end-user migration from legacy networks to VHCNs.

(74)

Once a decommissioning plan has been notified by the SMP operator of the legacy network in accordance with Article 81(1) of Directive (EU) 2018/1972, and where the conditions set in accordance with Article 81(2) of that Directive are met in a given area, the existence of a transparent timetable and conditions for the decommissioning process will ensure predictability for all stakeholders. As part of the gradual relaxation of regulatory obligations before the total withdrawal of those obligations in the context of the decommissioning of the copper network, NRAs may take into account the inflationary effect on the costs of the copper network of the migration of customers from copper to VHCNs. NRAs may do that by allowing the SMP operator to increase the prices of copper wholesale access products in areas where the wholesale and retail customers present on the copper network effectively have the possibility to migrate to a VHCN. That would make it possible to take into account the economic inefficiencies resulting from maintaining two networks in parallel, in order to incentivise the SMP operator of the legacy network to present a decommissioning plan and effectively proceed to decommissioning as soon as possible. By potentially bringing copper prices closer to VHCN prices, that would also incentivise end-users and access seekers to migrate to the VHCN before the switch-off of services on the legacy network.

(75)

That price increase should be a transitory measure, subject to a binding and enforceable commitment from the SMP operator to decommission its copper network, which would apply only in areas where the notice period for the copper switch-off has started. The NRA should ensure that the application of the price increase is not prolonged by any undue delay in the implementation of the switch-off plan. In order to ensure that, the NRA may consider, for example, penalties or a claw-back mechanism. Where such a measure is implemented, it should be accompanied by sufficient safeguards to preserve competition, as presented in point 81 of this Recommendation.

(76)

While promoting an attenuation or complete lifting of regulatory obligations when justified by market developments, NRAs should remain vigilant, monitor market developments and intervene when warranted to preserve competition, the internal market and the interests of end-users,

(77)

Recommendations 2010/572/EU and 2013/466/EU should no longer be given effect to, and this Recommendation should apply instead. This is due to the trends in market conditions observed since the adoption of those Recommendations, and due to the entry into force of Directive (EU) 2018/1972.

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This Recommendation is addressed to the Member States.