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COLUMN: TELECOM ECONOMICS - Next Generation Regulation?
Next generation access ("NGA") networks are slowly being rolled out in a range of European,
American and Asia-Pacific countries. Even BT, that had until recently been reluctant to commit to NGA investments, announced a five year £1.5 billion plan to roll out fibre based NGA infrastructure to replace parts of the legacy copper network. The target architecture chosen will initially deliver services with speeds of between 40 Mb/s (for existing lines) and 100 Mb/s (some new builds) with the potential for speeds up to 1,000 Mb/s in the future. It is anticipated that the NGA will be rolled out to 10 million UK households by 2012. Similar plans have been announced in a number of other European countries.
Most operators, however, have stated, like BT, that such investment plans were conditional on a "supportive and enduring regulatory environment". What does this mean? What are the regulatory options available? To what extent will these impact the competitive dynamics of the market and end users?
The regulation of NGA investment raises a number of important regulatory issues. While not regulating wholesale access to these new infrastructures may have a positive impact on investment it would also creates significant barriers to entry for third party providers and may therefore result in a less competitive environment. Existing operators using unbundled copper loops may, for example, see their investments stranded as new fibre based networks are being rolled out. This could translate into less choice and higher prices for end users. At the other end of the spectrum an aggressive regulatory regime mandating cost based wholesale access to all may stifle investment and result in suboptimal outcomes for all stakeholders.
Operators, regulators and Governments worldwide are currently grappling with these questions. Regulatory measures that are being considered include:
Permanent and temporary forbearance - this entails placing no regulatory requirement on NGA operators, either for a period of time or permanently. The US approach is to forbear from regulation of fibre access and this seems to have stimulated NGA investment from operators such as Verizon. The German Government proposed a regulatory holiday for Deutsche Telekom along the same lines as the US, but was subsequently criticised by the EC and had to withdraw its proposals following the threat of legal action.
Cost based access - the regulator determines access prices for NGA based on the cost of providing access. A number of cost modelling approaches could be used for this including long run incremental cost ("LRIC") commonly used in the telecommunication sector or the Regulatory Asset Base ("RAB") approach often used for the regulation of utilities.
Retail minus - the regulator determines the access prices on the basis of the retail price charged by the incumbent operator less the costs avoided by not having to retail the service. This can be thought of as a "no margin squeeze" rule, which prevents a discrepancy between the wholesale access charge from the integrated company to competing service providers and the retail broadband price from the integrated company.
Anchor product regulation - in addition to providing access to all wholesale products on a retail minus and equivalent basis, the wholesale operator also provides an "anchor" product, a service they already provide, which they then continue to supply at the same price. For example, if the current copper network is capable of providing a 5 Mb/s broadband service, then the anchor NGA product would also be a 5 Mb/s broadband service and the integrated company would be required to provide it at the current service price.
Geographic market regulation - this is a variant on the forbearance approach. The regulator may forbear from regulating acces where there are competing NGA operators.
Each approach has its own advantages and disadvantages that will need to be considered carefully in the context of domestic market characteristics.
Another major difficulty, from a regulatory viewpoint, is the specification of the NGA products that should be regulated. Traditional solutions such as the leasing of the copper pair to third parties (a process known as "unbundling") are often difficult to implement -for both technical and economic reasons- with fibre networks. Regulators may therefore want to regulate other products such as access to unused fibre, or even ducts to ensure that competition is not harmed.
The challenge for regulators will be to develop a regulatory approach that provides incentives for efficient and timely investment in NGA as well as regulatory visibility for stakeholders.
Benoit Reillier is a Director and European head of the telecommunications and media practice of global economics advisory firm LECG. The views expressed in this column are his own.
breillier@lecg.com
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