Commission comments on margin squeeze test in Italy

The European Commission has issued interesting comments to the Italian telecoms regulator Agcom over its proposed guidelines for ex-ante margin squeeze test for telecoms services involving regulated products such as wholesale broadband.

The Commission seems to recognize the reasonably efficient operator test as the best test in ex ante regulation and to reject the globalization of products

I copy the comments below:

On the basis of the present notification and the additional information provided by AGCOM, the Commission has the following comments:Consequences of non-compatibility of TI's offers with the proposed price test The Commission notes that AGCOM, in its proposed regulatory measure, indicates that in case a retail offer does not pass the margin squeeze test, it will immediately inform TI hereof and TI can provide further information to justify the proposed price setting. T

The proposed measure, however, does not indicate in which way AGCOM intends to intervene if after analysis of the additional information provided by TI there appears to be insufficient justification for the planned pricing. The Commission invites AGCOM to clearly indicate in its final measure that any retail offer of TI concerned by the proposed regulation must either receive a positive assessment from AGCOM before commercialisation or be withdrawn by TI.

Potential regulation of competitive retail broadband and calls markets The margin squeeze test guidelines proposed by AGCOM intend to prohibit TI's retail offers that are not replicable, according to the formula proposed, by alternative operators. This seems to potentially result in regulation of markets that are no longer susceptible to regulation in Italy, in particular the retail broadband and calls markets. The Commission therefore invites AGCOM to modify the final measure in a way that clarifies that AGCOM would, in such a case, normally request TI to modify the related wholesale prices.Price squeeze testThe methodology proposed by AGCOM applies a "production mix" (based on the availability of LLU) in order to estimate the cost incurred by an Equally Efficient Operator in the provision of a retail service.

To this end, AGCOM calculates the wholesale costs as a weighted average of the costs of LLU and the remaining relevant wholesale services that vary depending on the particular retail product. The Commission considers that, in the specific context of ex ante price controls aiming to maintain effective competition between operators not benefiting from the same economies of scale and scope and having different unit network costs, a reasonably efficient competitor test could be more appropriate. In this respect, the Commission invites AGCOM to ensure that the margin squeeze test guidelines are in line with the NGA Recommendation once adopted.With regard to AGCOM's use of certain weights (defined and periodically updated by AGCOM) of individual wholesale products (i.e. markets 4 and 5 where TI has SMP) to assess whether an alternative operator is able to enter the market profitably, the Commission notes that AGCOM does not analyse the margin between prices of the individual products included in markets where TI has SMP and the corresponding downstream products (e.g. between markets 4 and 5 and between market 5 and the corresponding retail market).

AGCOM only carries out a margin squeeze test on the production mix as a whole. As a result, it cannot be excluded that the incumbent's individual products are not offered with a sufficient margin in line with competition law principles.

The Commission also takes note of AGCOM's claim that in Italy, competition is mainly based on infrastructures and that recourse to WBA offers in areas open to unbundling is residual. However, the Commission nevertheless wishes to point out that alternative operators may, in certain areas and temporarily, depend on WBA even if LLU is available to reach sufficient customer density before actually investing in infrastructure access services in that particular area. In this respect, AGCOM's approach, i.e. to use TI's LLU costs in areas where physical infrastructure network access is available and TI's WBA costs in areas where LLU is not available, may fail to take sufficient account of alternative operators' financial leeway to climb up the ladder of investment throughout the national territory.

The Commission thus invites AGCOM to carefully identify where and to what extent LLU offers are effectively available/viable and to thereby estimate in the best possible way the optimal mix of wholesale products that would remedy any potential margin squeezes and give the appropriate incentive to alternative operators to offer retail broadband products in the whole territory.