Next Generation Costing - Approaches to the Regulatory Costing of - PowerPoint PPT Presentation

Next Generation Costing - Approaches to the Regulatory Costing of Next Generation Telecoms Access Networks Martin Duckworth (with Jayanthi Batchelor) 10 th INFRADAY Conference, Berlin, 08 Oct 2011

This presentation ● How should regulators cost the assets underlying telecommunications access networks during the roll out of fibre networks?

Agenda Next Current Context generation costing costing • How networks • How networks • Approaches and regulation have been to reflect are evolving costed to date changing objectives

● Context ● Current costing ● Next generation costing

Market developments drive regulation 1980s 1990s 2000s 2010s • Competition in • Vertically • Alternative • Alternative long distance integrated broadband broadband networks operators (e.g. suppliers suppliers mobile) • Competitors • Competitors • Duct access or require access • Competitors require access fibre access? to local require to copper telephone interconnection access network network … now at a crucial point in regulation

Current access regulation allows a range of access methods Resale of incumbent broadband service Bitstream service Local loop unbundling Sub loop unbundling Access to ducts … “ladder of investment” has delivered benefits

Move to fibre changes the available options Resale of incumbent broadband service Bitstream service Local loop unbundling Sub loop unbundling Access to ducts … raise challenges for competitors’ business models

Fibre roll out also challenging for regulators Large risky • Need to set the correct incentives for efficient investment investments Potential • Governments believe better broadband can bring wider economic benefits externalities Benefits of • Competition in broadband to date has brought clear customer benefits competition Co-existence • Regulated copper prices interact with fibre profitability with copper … need to review approach

Globally a range of options have been adopted Regulated access Forbearance Regulated access with public subsidy • Not regulating • Government • Apply existing access to fibre shares financial access regime, networks burden of roll out adapted to take but requires account of risk • Applied in the access US to new fibre • EU approach deployments • Applied in Singapore … reflecting competing objectives

● Context ● Current costing ● Next generation costing

Costing aims to set efficient access prices Allocative • Ensure maximum take up of services efficiency Dynamic • Ensure ongoing investment and innovation efficiency Productive • Minimise costs of delivering services across the industry efficiency … critical in contestable markets

Standard telecommunications costing approach developed in 1990s CCA LRIC Asset valuation + EPMU based on current Prices set costs to send according to Include mark up for correct build or buy incremental cost of fixed and common decisions to services costs to allow full competitors cost recovery • Allocative efficiency • Productive efficiency • Dynamic efficiency … assumes market is largely contestable

However CCA valuation of assets introduces uncertainty Benefits Disadvantages Introduction of CCA Incumbent prices can lead to holding reflect entrant costs gains or losses Enhances CCA valuations can productive efficiency introduce for replicable assets subjectivity … need to consider whether still appropriate

● Context ● Current costing ● Next generation costing

Objectives when reassessing asset valuation Encourage network • Stable regulatory environment roll out • Reward investors for risk Encourage service • Ensure affordability take up • Promote downstream competition Promote • Correct build or buy decisions for replicable assets competition • Ensure no margin squeeze Promote productive • Provide incentives for incumbents to minimise costs efficiency Practicality • Predictable, objective and harmonised approach … emphasis may vary

Costing approach should reflect nature of assets Increasing asset lives Active equipment Mix of technologies Copper Fibre cable New build Sunk legacy Duct Increasingly replicable Fixed and common cost … based on a range of factors including ‘replicability’

Helpful to look at approaches used in other regulated industries Economic HCA CCA depreciation Infrastructure Regulatory renewals asset value accounting

Duct valuation Potential Regulatory approach Nature of asset objectives Continuous Providing Renewals network investor accounting certainty on based Undefined future approach asset life investments Difficult to estimate replacement cost … requires determination of initial valuation

Copper cable Potential Regulatory approach Nature of asset objective Number of Ensuring Regulatory discrete appropriate asset value components use of sunk reflecting asset HCA Not the valuation modern Promoting an equivalent efficient asset transition to fibre … complex inter-relationship with fibre

Fibre Potential Regulatory approach Nature of asset objective Number of Providing Rolling discrete certainty for forwards components investors valuation based on Uncertainty Ensuring economic over future affordable depreciation usage prices for fibre product Unclear whether fibre is replicable … balance low prices with investment incentives

Active equipment (electronics) Potential Regulatory approach Nature of asset objective Number of Promoting Current Cost discrete efficient Accounting components competition Short asset lives Rapid technological evolution Assets are replicable … established regulatory approach is reasonable

Conclusion ● Telecommunications costing may move from ‘one size fits all’ to a more varied approach □ Subject to the Commission's current consultation

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