BDUK recently published its Gigabit infrastructure subsidy guidance on wholesale access and pricing, setting out guidance for suppliers and other stakeholders on the interaction between broadband subsidies and the subsidy control rules.
Subsidy control rules
In particular, the guidance notes that GIS-supported projects will need to demonstrate that they have incorporated a mechanism to benchmark and control prices of products offered by the subsidised supplier. This is to avoid suppliers of gigabit-capable services being able to exploit their subsidised position to undercut other providers. This will be considered by reference to relevant benchmarks for wholesale access products, including both broadband and non-broadband products. The guidance sets out an approach to how relevant benchmarks should be determined by supported suppliers.
This is designed to ensure that Project Gigabit meets the requirements of UK subsidy control rules – see our latest update on those – as part of BDUK's role as national competence centre for coordinating subsidy control compliance. In particular, the scheme includes a number of features designed to ensure that it is consistent with subsidy control rules:
- Different categories of "black" areas (with multiple suppliers available), "grey" areas (with a single existing or planned supplier) and "white" areas (with no existing or planned connections) have been mapped and prioritised;
- Competitive selection processes and multiple intervention models, including investment gap funding and concession models;
- Technological neutrality and encouragement for the use of existing infrastructure (the supplier's own, or that of third parties such as BT Openreach);
- A requirement that wholesale access be provided on "fair, reasonable and non-discriminatory" ("FRAND") terms;
- Wholesale access pricing rules including benchmarking (as set out in more detail in BDUK's new guidance); and
- Monitoring and clawback mechanisms, to ensure amongst other things no cross-subsidy or "leakage" from Project Gigabit funded activities to purely commercial activities (including to prevent funding for "white" or "grey" premises leaking to pricing for "black" premises).
Businesses that are involved in Project Gigabit should also be alert to potential competition law issues. In particular, because Project Gigabit contracts are awarded with the aim of introducing gigabit-capable broadband infrastructure into an area which does not currently have it, the supported supplier will – at least initially – almost certainly be dominant in the market for supply of access to Project Gigabit infrastructure in that area. That creates competition risk because dominant companies are subject to particular obligations, including obligations to provide third party access to essential infrastructure (often on FRAND terms), and obligations in relation to pricing on downstream (retail) markets. Dominant businesses are also prohibited from tying or bundling different products together.
Cross-subsidisation – i.e. using the profits from local market "A" where the supported business is dominant into market "B" where it is not dominant – may be an abuse of dominance if it facilitates pricing in market B that would be predatory if the business was dominant in market B. Put another way, there may be an abuse if the business's pricing in non-dominant market B is only viable because of the subsidy it receives in relation to dominant market A. This sort of leveraging of dominance in one market to gain a leg up in another is what has led to the likes of Google receiving record-breaking fines.
It is therefore important for integrated broadband providers to be alert to the relationship between the infrastructure and retail parts of their business. If cross subsidies by the supported infrastructure business allow the retail business to price below average variable cost (i.e. at a level where every sale generates a loss even before attributing any share of fixed costs), that cross-subsidy may be vulnerable to abuse of dominance arguments. Supported businesses should therefore ensure that the prices charged to retail customers (setting aside temporary promotional discounts and the like) are in general at least sufficient to cover the incremental costs of providing the service to each customer, including for example individual installation and device costs.
Although subsidy control law and competition law are two separate regimes, and affect suppliers from different directions, they are essentially aimed at the same outcome: ensuring as far as possible that there is a level playing field allowing the maximum number of businesses to compete for customers at every level of a supply chain, to maximise innovation and quality and minimise cost.
What that requires from supported businesses will vary according to the circumstances, but as a general rule will require arm's length relationships between the wholesale and retail parts of a business. Supported businesses – or those that aspire to Project Gigabit contracts – should ensure they have the right corporate structures in place to allow that, and that they are alert to their obligations both under Project Gigabit's subsidy control requirements and under competition law.
Brodies has extensive experience advising operators on bidding for Project Gigabit opportunities and public infrastructure funding for telecoms, including advising on structuring of operations and wholesale contract terms. If you would like to discuss how we can assist, please get in touch.