ECJ Advocate General opinion on local loop price controls

Opinion (about 24 pages) of ECJ Advocate General Poiares Maduro in a case referred from a German court about the meaning of the requirement that access prices to a telephone network's local loop be "cost-oriented".

The paper notes that:

30. Certain legal concepts promise much and appear to be very useful, but may, none the less, simply become words largely devoid of meaning and effect. There is a risk that the concept of cost-orientation ... may be one of those concepts.

It suggests that the ECJ give the following response to the German court's question about the basis on which assets are to be valued:

(3) The concept of cost-orientation ... must be interpreted as meaning that it requires a rates approval decision ... to be based on a balanced and proportionate compromise — depending on the circumstances prevailing at the time the decision is adopted — between the regulation's central aim of fostering competition on the local loop access market and the need to ensure the necessary level of investment in infrastructure. In the light of this, it will be for the national court to ascertain whether the rates approval decision at issue contains adequate justification for adopting the method of calculating the depreciation and the interest which the rates have to cover based exclusively on the current replacement value of the assets, expressed in terms of current daily prices at the time of valuation. In the absence of such justification, the Community concept of cost-orientation of charges requires that charges for access should be set at a figure below that obtained by applying such a method of calculating capital costs, in particular by deducting depreciation already made before the valuation date.

This leads to the following advice on the use of bottom-up cost models:

(4) If, in the light of the reply to the previous question, the national court concludes that the adoption of a method of calculating depreciation and interest based on the gross replacement cost of assets proves not to be justified, the national regulatory authority's use of a bottom-up theoretical cost model in place of the incomplete cost statements supplied by the notified operator in order to calculate that operator's depreciation and interest, must be regarded as incompatible with the principle of basing charges for local loop access on the notified operator's costs, where its local network is still operational and is already largely depreciated.

For further information or advice please contact Franck Latrémolière.

Filed under ECJ/CFI, Price controls.

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