ARCEP publishes a cost model for the provision of alternative telephone services

Paris, 23 March 2006

Currently, to sell their own telephone communications offers, alternative operators are required to purchase wholesale offers from France Telecom. Effective competition cannot develop if the prices of these wholesale offers do not allow efficient operators to compete with the incumbent’s retail offers. So, ARCEP is applying a price control to some of France Telecom’s retail offers to ensure that they can be replicated by efficient alternative operators. This control is based on a cost model supported by efficient alternative operators to produce fixed telephone services. Following over six months of discussions with operators, ARCEP has updated this model, making it public today in order to increase the transparency of the price control and to give players greater visibility.


  • Definition of the pricing scissor effect


Alternative telephony operators’ networks are not as extensively deployed as France Telecom’s. Therefore, in order to propose their own retail offers, they are obliged to use the incumbent’s network by buying its wholesale offers. In order to provide carrier selection offers (pre-selection or call-by-call selection), they buy call origination and termination from France Telecom. In this way, these operators are both buyers of France Telecom’s wholesale offers and sellers of retail offers which compete with those of the incumbent.

Sometimes, the price levels of France Telecom’s wholesale and retail offers are such that they prevent alternative operators from being competitive on retail markets. This can happen when the difference in price between the wholesale and retail offers is not great enough to cover the costs of an efficient operator. The operators are therefore caught in a pricing scissor effect.


  • Price control, a "remedy" to insufficient competition on the fixed telephony market


In late September 2005, ARCEP published its analysis of the retail fixed telephony markets. In its analysis, it defined six relevant markets, and determined that France Telecom exercises significant market power on each of them. Therefore, obligations were imposed on the incumbent which aim to establish fair competition between operators. France Telecom is forbidden from practicing unfair bundling of services, discrimination, and excessive or predatory pricing.

In order to be able to monitor the effective application of these remedies, ARCEP also required that France Telecom inform it of the prices of its retail fixed telephony offers prior to their application. In practice, when creating or modifying one of these prices, France Telecom is required to submit a file to ARCEP showing that the offer does indeed respect its obligations. This file is called a pricing decision. It must be sent to ARCEP in its entirety at least three weeks before the planned launch date of the offer. ARCEP analyses each pricing decision, and may oppose the application of the planned price.


  • Predatory pricing and pricing scissor effects


When analysing a pricing decision (other than those under universal service), ARCEP ensures primarily that the prices are such that efficient third party operators can replicate France Telecom’s offers.

Since France Telecom is not permitted to practice predatory pricing, it may not market offers which would generate a pricing scissor effect. The ban on predatory pricing is one of the regulator’s essential tools for permitting the exercise of fair and effective competition. So, for each decision that it examines, ARCEP checks that an efficient alternative operator would be able to propose the same retail offer as France Telecom, at the same prices, and obtain a positive margin.


  • A pricing scissor effects model designed to harmonise price analyses


In order to systematise and homogenise these analyses, ARCEP has designed a pricing scissor effect model for telephony.

This model calculates the average revenue per minute generated by the retail offer France Telecom submits for approval, and the average cost per minute that an efficient alternative operator would bear to propose the same retail offer.

The model is published, with the inclusion of France Telecom’s base prices in calculating revenues

Nevertheless, when analysing one of France Telecom’s optional offers, the prices of this offer are entered in the model, in order to determine whether they lead to a pricing scissor effect. The costs issuing from the model are the same for all. The model distinguishes between the costs and revenues of different types of calls (local, national, etc.) and between the different customer segments (residential, professional, etc.).

This model was designed upon ARCEP’s creation in 1997, and has been modified many times since. In 2005, ARCEP submitted it to multilateral discussions with fixed telephony operators. The various hypotheses on which it is based were then brought in line with the reality of the market.

ARCEP has decided to make this model public in order to increase the visibility of regulation for the various market players.

The cost model