STOCKHOLM -- On February 15 2007 the National Post and Telecom Agency, PTS, presented a proposal for the Broadband Strategy for Sweden. The full report is now available in English.

PTS considers that clear strategies are needed for the continued rollout of broadband infrastructure in order to increase accessibility to broadband products and to achieve competition in retail markets for broadband services that is sustainable over the long term.

Summary

Broadband plays an increasingly important role in our society. Several studies show that broadband, among other things, promotes economic growth by creating new services and opening up new investment and employment opportunities. However, a number of geographical areas in Sweden still lack access to an infrastructure with broadband transmission capacity. In other parts of the country, competition is restricted since households and businesses only have access to one broadband provider. PTS considers that clear strategies are needed for the continued rollout of broadband infrastructure in order to increase accessibility to broadband products and to achieve competition in retail markets for broadband services that is sustainable over the long term.

The broadband availability objective: 'Broadband for all by 2010'

According to Swedish and European IT policy, a Swedish strategy that aims to increase accessibility to an infrastructure with capacity for broadband transmission should be drawn up with the short-term objective of broadband for all households (permanent housing) and business and public operations no later than 2010. According to PTS, 'broadband' in this objective refers to connections that can be upgraded to a transmission rate downstream of at least 2 Mb per second.

Sweden has shown good progress in terms of satisfying this objective. However, approximately 136,000 households and businesses do not have access to an established or planned broadband infrastructure of this type. On the other hand, there are various types of broadband technologies that could together bridge this digital gap and possibly satisfy modern requirements for broadband access lines.

PTS has nevertheless noted barriers that currently prevent or at the very least seriously impede the continued establishment of broadband networks.

Several government initiatives are needed to achieve the broadband availability objective

PTS has proposed several measures aimed at overcoming these barriers. In the opinion of PTS, continued government support initiatives amounting to SEK 1 135m are needed for the rollout of broadband infrastructure, of which EU structural funds should be able to account for SEK 567.5m. Furthermore, PTS proposes that the Swedish Government should impose minimum requirements on infrastructure established with public funds; for example, as regards the transmission rate. The Government should also prescribe that broadband networks financed with central government support should be open to other service providers during the lifetime of the networks. In order to ensure compliance with the requirements, PTS should be granted powers to impose openness requirements in regulations and be given a mandate to follow up the requirements and to take all of the measures resulting from the Electronic Communications Act (EkomL).

Municipal authorities should be given a social planning responsibility to ensure access to broadband infrastructure as well as the right to collect data from relevant stakeholders concerning the broadband networks available in the municipalities and any existing rollout plans. The Government should also consider drafting legislation to give municipalities more freedom to conduct cross-municipal collaboration in the broadband sector. In the opinion of PTS, municipal authorities that currently own broadband operations in areas where the commercial rollout of future-proofed broadband infrastructure has been carried out or is possible should consider disposing of such operations, or alternatively, taking special measures to ensure that competition is not distorted.

The Government should also formulate a long-term objective (including preliminary objectives) for access to broadband infrastructure and strive for broadband to be perceived as a universal service when reviewing the USO Directive. The Government should also investigate whether there are reasons to change to a financing model for universal services based on the allocation of net service costs between the providers of electronic communications networks and communications services. Finally, the Government should rapidly investigate how to encourage the relevant parties to coordinate broadband lines with power lines, for example.

PTS's view is that the proposed measures are necessary if the objective of broadband for all is to be realised by 2010 and so that Sweden can also strengthen its position in the long term as a leading IT nation.

TeliaSonera's last mile networks: a key to enhanced broadband competition

Besides ensuring access to broadband services for residential and non-residential customers in the first place, the objective of the sector-specific regulatory framework that PTS must apply is that end users should also be given the greatest possible benefit in terms of both the supply of electronic communications services and their price and quality. The principal means of achieving this is to establish conditions for effective competition without any distortions or restrictions.

Broadband through xDSL technology in the nationwide metallic access network is the technology that currently has by far the most end users. Therefore, in order to achieve long-term sustainable competition in the broadband market, it is crucial that operators gain access to this last mile network on equal terms. TeliaSonera's own retail organisation may, for instance, not be improperly favoured owing to the company's role as network owner. An effective model that ensures the equal treatment of operators seeking access to the metallic access network is required to enable effective competition and to reduce the risk of competition becoming distorted.

A model for equal treatment should not only achieve effective and equal access to the network, but should also contribute to the reduction of inertia and increase the predictability of the market. This type of change would improve the conditions for market stakeholders to make effective investments and give rise to innovations. A model of this type should be of benefit to all market stakeholders, including those that are regulated, and thus provide considerable gains for consumers and society in general.

Empirical evidence from PTS's supervisory work nevertheless shows that the market for basic access to TeliaSonera's metallic access network (the market for local loop unbundling, LLU) is still characterised by significant problems as regards competition. These problems can take the form of discriminatory behaviour, for example. Thus the current situation cannot be described as a functioning marketplace where buyers and sellers meet on competition-neutral terms. This is a strong argument for considering a new and more effective model for equal treatment. There are also a number of other reasons for considering a revised model for equal treatment.

Models for equal treatment: functional separation within TeliaSonera

Several different models for equal treatment when being granted access to the metallic access network are conceivable in Sweden. For instance, there are different models for separating the incumbent company's wholesale organisation from its operation focussing on its own end users. Following an analysis of the advantages and disadvantages of various models, PTS is of the view that the most suitable model is one based on TeliaSonera being functional separated. This proposal is inspired by the British model for equal treatment which was introduced recently. For practical reasons, it is PTS's view that such separation should be based on the traditional divisions used at TeliaSonera, with TeliaSonera Network Sales as the part oriented towards other operators (i.e. wholesale) rather than end users. However, only persons who have the best interests of this organisation in mind should operate in the delimited wholesale organisation.

Therefore, a complete separation in terms of human resources is necessary between the wholesale organisation and the rest of the company. Here, a crucial component is that the management of the delimited organisation should have financial incentives based on the wholesale organisation's capacity to achieve set targets. These incentives should not be based on outcomes within other parts of the company. Another key component of the separation of TeliaSonera by function is that there should not be any exchange of information between the wholesale organisation and other parts of TeliaSonera that could benefit TeliaSonera at the expense of other market players. Comprehensive rules and guidelines should be drawn up to guarantee this.

The delimited wholesale organisation should provide all of the wholesale products provided by TeliaSonera and would, in accordance with PTS's proposal, be the unit at TeliaSonera utilising the fixed assets (e.g. copper pairs, optical fibre, etc.) associated with TeliaSonera's fixed networks in Sweden. It is proposed that the delimited wholesale organisation should not be allowed to focus on end users.

A minimum requirement is for the delimited wholesale organisation to provide the regulated products that are currently provided and to some extent are attributable to TeliaSonera's fixed networks (last mile networks and/or transmission networks). The wholesale organisation should also provide the products that will be encompassed by the future pro-competition ex ante regulation.

A revised model for equal treatment should include 'principles for equal treatment'. PTS suggests that these be based on the Equivalence of Input obligation formulated in the United Kingdom. British Telecom is required to provide competitors and its own retail operations with a number of wholesale products on equivalent terms as regards time, price and other conditions as well as through the same systems and processes. The principle of equal treatment should be a requirement for regulated products.

TeliaSonera should draw up clear internal guidelines for contacts between employees belonging to the wholesale organisation and the overall group. The wholesale organisation should report its financial outcomes and other statutory accounting to PTS annually and otherwise when requested. PTS should be assigned the task of monitoring the solution described above. A 'compliance board' should be set up including representatives from PTS, the wholesale organisation and the management of TeliaSonera. This should be the forum in which TeliaSonera's reports to PTS as well as the views of other market stakeholders (and any complaints) about the new model should be discussed.

PTS is positive towards a solution where TeliaSonera voluntarily implements a stronger legal separation than the existing one, including among other things qualified boundaries for exchange of information. This option should be an attractive model of implementation, based on the positive effects the new model for equal treatment is expected to bring about for TeliaSonera.

In terms of a legal analysis of the other possibilities of implementing the proposal of a revised model for equal treatment, PTS considers that there is limited scope under the current EkomL to impose any kind of separation as a sector-specific remedy. However, it cannot be ruled out that the upcoming revision of the directives that form the basis for EkomL will lead to possibilities for NRAs to impose functional separation as a remedy on operators with significant market power in a specific market. Such amendments would not be able to enter into force until around the period 2009-2010. Since the broadband market is under strong growth PTS considers that a revised model for equal treatment should be imposed before 2009-2010. PTS has observed, though, that there seems to be scope for imposing functional separation within Telecom Italia by means of national legislation in Italy. PTS is of the opinion that there may be reasons for the Swedish legislator to investigate the conditions for imposing a similar possibility in Swedish law; for example, in EkomL. This is especially valid if TeliaSonera does not voluntarily impose a stronger legal separation than the existing one.

The Swedish central government, as the main stakeholder in TeliaSonera, should also actively strive so that TeliaSonera voluntarily carries out a functional separation which fulfils the model for equal treatment proposed by PTS. Following an impact analysis of PTS's proposal to implement a revised model for equal treatment, it is the authority's overall assessment that the potential gains of such a model would exceed any costs that, mainly initially, might arise when implementing the model.

Open fibre networks may contribute to effective competition

Effective and competition-neutral access to the metallic access network is nevertheless not the only factor that may contribute to the objective of giving end users the greatest possible benefit in terms of the supply of electronic communications services as well as their price and quality. Optical fibre is in fact the medium that currently offers the greatest transmission capacity. Fibre may be a limited resource for reaching end users in addition to serving as an input good for the connection of access nodes; for example, MDFs and main distribution points for cable television. The importance of fibre networks will grow in pace with a continued rising demand for transmission capacity, particularly if the technical progress in other infrastructures does not allow for corresponding transmission rates. Access to fibre networks will thus play an increasingly important role for market stakeholders so that they can effectively compete in retail markets for broadband services and so that end users can be assured a range of services meeting their requirements.

However, in PTS's assessment, it will rarely be commercially feasible or socioeconomically desirable to install parallel fibre networks at an access line level. Infrastructure based competition at an access line level based on parallel fibre networks will probably only arise in exceptional cases. Under such conditions and if there is a lack of other broadband networks in the relevant areas, the objective of PTS's regulatory work must therefore be to enable the best possible service based competition (based on established fibre infrastructure). In this case, consideration should be given to ensure that the network owner receives sufficient incentives to maintain and upgrade its network. A lack of service competition in areas where there are no alternative broadband networks will jeopardise the objective of end users being given the greatest possible benefit in terms of the supply of electronic communications services as well as their price and quality.

However, a precondition for this type of service competition is for it to be possible for operators other than the operator controlling a fibre network to gain access to the network on non-discriminatory terms in order to offer broadband services to end users. In other words, fibre networks must be open at an infrastructural level.

PTS nevertheless considers that there are a relatively large number of owners of local fibre networks that only sell products to end users and thus do not allow other stakeholders access to the networks. These networks are often financed through broadband support in the form of funding from the central government or the European Union.

Subsequently, PTS considers that the lack of openness characterising local fibre networks jeopardises the objective of end users being given the greatest possible benefit in terms of the supply of electronic communications services as well as their price and quality. For this reason, PTS considers that measures must be taken in order to rectify the identified problems related to competition. PTS is very concerned about those cases where the described problems related to competition have arisen as a result of a lack of openness in networks set up with the help of central government or EU funding and/or are owned by municipal authorities. A publicly financed rollout that distorts or impedes competition clearly contravenes the overall IT policy objectives and acts against the best interests of society.

In order to rectify the described problems related to competition, PTS proposes that the Swedish Government should impose more stringent requirements on openness. These are to apply to new procurement processes for rollout financed by grants. The supervision of county administrative boards should be intensified for established networks, which should rectify a substantial number of existing problems. In cases where a local fibre network is controlled by a municipal authority, the municipality should exercise its ownership influence in order to ensure openness in the network. The Swedish Government should also consider whether specified requirements on openness in established municipal networks should be necessary in order to grant new central government funding for broadband rollout.

On the other hand, it is doubtful whether the Swedish Competition Authority is empowered under general competition law to take action against a local fibre operator limiting the possibilities for access to the network controlled by the operator. However, the Swedish Competition Authority will need to consider each case separately.

Even if it is not possible to apply general competition law to rectify the identified problems related to competition, it is hardly possible to utilise the regulations to promote competition found in EkomL in order to impose on local fibre operators the obligation to allow other operators access to their networks. In the future, if only fibre can meet end users' need for transmission capacity, PTS is of the view that alternative measures may be necessary to ensure the openness of networks.

National Post and Telecom Agency (PTS)