a regulatory perspective on fttx deployments
DESCRIPTION
A regulatory perspective on FTTx deployments. Chinyelu Onwurah, Head of Telecoms Technology, Ofcom 19 th June 2007 FTTx Summit. The UK is witnessing significant private sector investment in faster broadband access. 2,210,000 local loops unbundled UK DSL allows 2Mbps to up to 97% of homes - PowerPoint PPT PresentationTRANSCRIPT
Title of document (Arial 36pt bold Purple)Chinyelu Onwurah, Head of
Telecoms Technology, Ofcom
19th June 2007
FTTx Summit
Now I realise I’m standing between you and lunch – which is not a good position for a regulator to be in – we don’t have enough friends as it is.
So I’m going to take you quickly through the regulatory issues raised by fibre deployments
It will be from a UK perspective
But across Europe and the world similar issues are raised
Though they may be addressed in different ways
And I’ll preview to you our initial view of our options
Ofcom is
©Ofcom
The UK is witnessing significant private sector investment in faster broadband access
2,210,000 local loops unbundled
UK DSL allows 2Mbps to up to 97% of homes
UK LLU operators are launching services up to 24 Mbps
Cable rolling out 10 Mbps services
BT launched nationwide 8Mbps ADSL Max service - 6Mbps to ~60% of homes
Current DSL and cable deployments are meeting consumer bandwidth demands
Source: Ofcom research February 2007
Awareness of Connection Speed
Where are we today?
©Ofcom
London
Base: All adults 15+/all SMEs Source: Ofcom research 2006
Broadband availability
Cable: 46%
LLU: 67%
In significant parts of the country we have not only competiing providers but competing platforms and high rates of take up amongst SMEs and residential
We still have ‘not spots’. We know that the figure BT gives of 99.6% is not the experience of members
©Ofcom
Broadband lines by headline download speed
But given that, I hope you will agree that with reducing prices and increasing speeds the Broadband market is in good shape - today
©Ofcom
Less than 1Mbit/s
The question is, where do we go from here.
Broadband speeds are increasing, but this map indicates the likely maximum speeds across the UK and Northern Ireland
It seems to be meeting current demand, but will this be enough in the future?
Are the perceived benefits of nga going to drive evolution in the access?
Whilst wireless technologies may well be complementary to fixed line access,
That evolution, as this indicates, would probably see movement from
From DSL to ADSL2 to fibre to the cabinet and eventually perhaps fibre to the home?
©Ofcom
Next generation core and access network investment is gaining speed within Europe
KPN proposes FTTC
BT, C&W,
Thus NGN core
NGN core
If we look at NGN investment we see there is much predicted activity.
Many operators across Europe have announced strategies to deploy either next generation core or access networks, in Germany, France and Belgium for example
The UK is at the forefront on deployment of core NGNs With BT’s planned £10 billion 21CN deployment, and deployments by C&W, ntl and Thus.
Whilst, deployment of fibre in the UK access network to date has been slower than in other countries, although there is increasing interest in deploying fibre to the home for greenfield new build premises. We’ll look at why this might be the case
But why should the situation be different in different countries? Does that mean the UK is falling behind?
©Ofcom
Drivers for access NGN deployment
End to end infrastructure competition
Limited opportunities for DSL evolution
Pay TV opportunities
UK loop lengths are shorter than those in the US
Source: Analysys, various
The picture is not consistent across Europe for many good reasons..the economics of NGN and NGA deployments differ.
Business rationale for core NGNs is cost reduction - Deployment of core NGNs is dependent on operators being able to achieve cost savings, and are more attractive to those operators who see limited opportunity for top-line revenue growth
NGA networks offer opportunities to for telcos to launch new services These upgrades may be desirable where:
There’s significant infrastructure competition e.g. US telcos are investing to match the cable cos service propositions
Existing access networks cannot support higher bandwidth DSL e.g. long loop lengths in the US
No access for competitors to incumbent’s existing access network (e.g. Fastweb in Italy)
An underdeveloped pay TV market offers telcos an opportunity to create new revenues e.g. Germany
Government policy directly incentivises NGA deployment (e.g. Korea, Japan)
Many of these factors do not apply in the UK:
Shorter average loop lengths allow higher bandwidth and IPTV services over DSL
Wholesale access products are available from BT
multi-channel pay TV in the UK is one of Europe’s most developed
UK government and Ofcom do not favour intervention which distort competition, absent demonstrable market failure
So the absence of major announcements for NGA in the UK today does not mean the UK is falling behind
But that the demand for deployment in the UK is not yet in place
But that may well change within the medium term
As regulators, we must give as much regulatory clarity as possible about our approach
So how should we respond?
©Ofcom
Regulatory principles
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
We go back to the regulatory principles we established in the Telecoms Review
[let them read]
Our current thinking is no reason to change the principles as we move to NGA
But we do need to give quite a bit of thought to how best to apply these principles to new NGA networks
©Ofcom
Questions for this session
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
…and two principles in particular
what is the deepest level… i.e how close to the customer?
how can we provide fair access to bottlenecks while at the same time providing the right incentives for efficient investment?
©Ofcom
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
©Ofcom
Competition at the deepest level where it will be effective and sustainable
1,600 unbundled exchanges
Service innovation
Altnet
BT
By effective we mean mainly that there is enough competition to give users choice, and by sustainable that competitors can survive in the market by making appropriate returns.
Thinking about current generation broadband, in many areas LLU has been the deepest level. In fact 72% of the population live in areas covered by unbundled exchanges
That’s why Ofcom has put considerable effort into making LLU a success. And it is developing into quite a success story:
now over the 1.5m lines threshold that we set in late 2005
1600 exchanges have at least one unbundler – many of them several unbundlers
LLU also a very good example of why it was that we thought competition based as much as poss on own infrastructure was a good idea:
not only allows fierce price competition
but critically also allows competition based on innovation. So first unbundlers offered faster speeds than you could get elsewhere. Different contention ratios. IPTV services offered by unbundlers.
©Ofcom
be technically feasible
be practically feasible
maximise scope for innovation
bitstream access
….and others too
Question is: where is that point in next generation access? Where is the deepest level in the network (i.e. closest to the customer) where competition is likely to be effective and sustainable?
A number of criteria in making that choice [see slide]
Levels in the network depend very much on technology chosen. There are a number of different possibilities, but here are the main ones
Might be useful to look briefly at each one in turn.
©Ofcom
very significant practical challenges
But…
This is quite an old picture; don’t think telecoms engineers wear berets like that any more.
But quite appropriate to use an old picture here:
firstly because this is an old idea. In principle it’s very seductive to regulators. That’s because if you’re deploying an access network, two thirds or three quarters of the cost is in the civils. So if you can avoid that cost, maybe it won’t be a bottleneck any more.
but second reason to use an old photo is that many ducts, certainly BT’s ducts, are very old. Some of them aren’t ducts, they’re ditches. Some of them are full, because it’s been cheaper to leave old cabling in than to take it out. And not well mapped.
May be the case that there’s not much scope for innovation in the fibre – one looks like another. Having said that, might provide the opportunity to put in fibre where there currently isn’t any
Oftel looked at duct sharing five years ago. At the time, concluded that despite benefits, operationally very difficult, and little appetite from industry.
We think it’s right to ask whether we need to look at this again. And note that guy in the picture is wearing a beret. That’s appropriate too, because a variation on this approach, using municipal networks is a much bigger deal in France. So one question for today is: is there any appetite to share ducts – either just new ducts, or existing ducts too?
©Ofcom
is it practical to have competing infrastructure at this level?
is effective competition likely to be sustainable?
But…
Another point in the network at which could have competition is at the cabinet
Only works if there is a cabinet – so say electronics in the cabinet and fibre back to the exchange. Doesn’t work for every technology choice.
This is very attractive option for regulators for NGA, for all the reasons that LLU is:
everyone gets access to the same bit of copper between cabinet and customer – very ‘dumb’ piece of the network
maximum scope for innovation, in electronics at the cabinet and back in network
But question is:
is it likely to be economic to compete at this level? Average cabinet has far fewer lines than average exchange
is it practical? … multiple cabinets, power supply, jumpering at cabinet
what would you need in terms of a backhaul product for this kind of solution
…and industrialising a product at this point likely to be a huge effort – much bigger than LLU
So a second question for this session is: how should we gauge whether there is likely to be interest in a solution like this?
©Ofcom
Fibre unbundling
possible for point-to-point fibre
would not need to be at the exchange
But…
ODF
OLU
Altnet
network
Altnet
BT
Here’s another possibility.
If you had fibre all the way to the home, might be able to treat it just like copper
each connect their own customer’s fibre to own equipment
wouldn’t even need to be at the exchange – signals travel over fibre for much further, so could be back in network
But for some shared architectures, this doesn’t work.
not one fibre for each customer, but one fibre serving multiple customers.
if that’s case, need to look for a different solution
©Ofcom
technically and practically straightforward
But…
Here’s the last one I’m going to mention.
Could have a bitstream access product. Different ways it could work. But essentially:
both wire or fibre from customer, and electronics at the end of it belong to bottleneck operator
bottleneck operator offers a stream of bits to the competing operator
interconnection could be at a variety of places in the network: at the exchange, or further towards the core of the network
It’s a product that could look a bit like a next generation DataStream, for example
It’s a simple option: a less complex wholesale product.
And, depending on how it was structured, it could allow competitive innovation in applications, and in service control. But it might also be less effective at creating innovation in the transmission layer:
how could different ISPs offer different speeds..
…or have various kinds of innovation, say innovative peer-to-peer solutions, that we don’t yet know about…
if they’re relying on the bottleneck provider’s transmission equipment?
©Ofcom
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
Here again are the principles we established in the Telecoms Review.
The second one I wanted to talk about was creating a favourable climate for investment.
©Ofcom
How may regulation promote a favourable climate for efficient and timely investment in next generation infrastructure?
Main role of regulator is provision of regulatory certainty, possibly through
Ex ante regulatory forbearance
Risk adjusted returns
Whatever approach is adopted, it must not distort market conditions such that:
inefficient investments are incentivised
Regulatory policy can distort investment decisions in either direction
NPV of NGA investments
Regulation deters efficient investment
Pre-regulation NPV
Impact of regulation
Post regulation NPV
So, how can regulators enable the creation of an environment that is conducive to next generation infrastructure investment?
Investment in next generation infrastructure will be affected by regulatory uncertainty, including the extent of future regulatory intervention and the potential impact on expected returns
Regulators have an important role in reducing these regulatory risks in order to promote a favourable climate for efficient and timely investment in NGNs.
Mechanisms to achieve this include:
ex ante regulatory forbearance
risk adjusted returns for next generation investments
Forbearance is an appropriate mechanism to promote investment in those markets with significant prospects of end to end infrastructure competition
BUT, without such prospects, forbearance would be likely to cause a rapid decline in competition at other points in the telecoms value chain and loss of consumer benefits from competition (choice, lower prices and rapid innovation).
Sunset clauses are raised by some operators as one solution to regulatory uncertainty, aiming to provide a clear timetable for the removal of sector specific ex ante regulation
BUT it may be difficult to set defined dates independent of competition developments, and contingent triggers removal of regulation is very similar to Ofcom’s stated strategy to deregulate markets once existing regulation is no longer required
Risk adjusted returns could be used to provide operators with a return commensurate with the risk at the time of investment
BUT regulation should ensure prospects for competitive investment are not limited and consumers are protected from excessive charges for services
Whatever approach is adopted, it should not result in distortions to competitive market conditions that result in either
Encouraging inefficient investments – negative NPV investments turn positive due to regulation
Deterring efficient investments – disproportionate regulation reduces NPV from previously attractive investments
©Ofcom
cost of capital specific to next generation access
returns adjusted for a ‘fair bet’
‘anchor’ product regulation
Various solutions, including…
Here are some of the options we set out in our discussion document.
Don’t want to get technical, but it’s an important subject.
First of all we could say: “we’re not going to set a price for access to NGA bottlenecks, we’re just going to require access to be given, on equal terms”. Question there is how do you avoid a margin squeeze?
Or we could say, it’s cost-plus, but we’re going to use a higher cost of capital for this particular investment. Question then is: how do you calculate that cost of capital?
And we could also say, for whatever cost of capital we’re using, we’re going to adjust it upwards to reflect the fact that there’s an asymmetry in that you’re not allowed to earn more than that cost of capital, but you might well earn less.
So, a complex question to end on which we are definitely not going to get near the bottom of today, but I raise it because it’s going to be absolutely critical to providing the right incentives for efficient investment.
I’ve deliberately set out to ask questions, and I should make it clear that we’re not expecting to get answers out of today. But we would like to hear people’s initial reactions, and perhaps assemble the considerations on either side. On that note, I’ll hand over to our two LLU operators on the platform for their reflections on these issues.
©Ofcom
Providing incentives for efficient and timely investment
Ensuring wide scale availability of high speed data services
Minimising uncertainty on:
future regulatory intervention
Consult on
Public policy issues and challenges related to NGA - is there a need for NGA services? How should any need be met?
regulatory strategy: what, if anything, should be done to secure investment in NGA? Once NGA is deployed, how should Ofcom promote competition to achieve consumer and citizen benefit?
what options are there for new regulatory remedies and approaches e.g. duct sharing?
what are the specific regulatory challenges posed by NGA?
©Ofcom
Questions?
[email protected]
19th June 2007
FTTx Summit
Now I realise I’m standing between you and lunch – which is not a good position for a regulator to be in – we don’t have enough friends as it is.
So I’m going to take you quickly through the regulatory issues raised by fibre deployments
It will be from a UK perspective
But across Europe and the world similar issues are raised
Though they may be addressed in different ways
And I’ll preview to you our initial view of our options
Ofcom is
©Ofcom
The UK is witnessing significant private sector investment in faster broadband access
2,210,000 local loops unbundled
UK DSL allows 2Mbps to up to 97% of homes
UK LLU operators are launching services up to 24 Mbps
Cable rolling out 10 Mbps services
BT launched nationwide 8Mbps ADSL Max service - 6Mbps to ~60% of homes
Current DSL and cable deployments are meeting consumer bandwidth demands
Source: Ofcom research February 2007
Awareness of Connection Speed
Where are we today?
©Ofcom
London
Base: All adults 15+/all SMEs Source: Ofcom research 2006
Broadband availability
Cable: 46%
LLU: 67%
In significant parts of the country we have not only competiing providers but competing platforms and high rates of take up amongst SMEs and residential
We still have ‘not spots’. We know that the figure BT gives of 99.6% is not the experience of members
©Ofcom
Broadband lines by headline download speed
But given that, I hope you will agree that with reducing prices and increasing speeds the Broadband market is in good shape - today
©Ofcom
Less than 1Mbit/s
The question is, where do we go from here.
Broadband speeds are increasing, but this map indicates the likely maximum speeds across the UK and Northern Ireland
It seems to be meeting current demand, but will this be enough in the future?
Are the perceived benefits of nga going to drive evolution in the access?
Whilst wireless technologies may well be complementary to fixed line access,
That evolution, as this indicates, would probably see movement from
From DSL to ADSL2 to fibre to the cabinet and eventually perhaps fibre to the home?
©Ofcom
Next generation core and access network investment is gaining speed within Europe
KPN proposes FTTC
BT, C&W,
Thus NGN core
NGN core
If we look at NGN investment we see there is much predicted activity.
Many operators across Europe have announced strategies to deploy either next generation core or access networks, in Germany, France and Belgium for example
The UK is at the forefront on deployment of core NGNs With BT’s planned £10 billion 21CN deployment, and deployments by C&W, ntl and Thus.
Whilst, deployment of fibre in the UK access network to date has been slower than in other countries, although there is increasing interest in deploying fibre to the home for greenfield new build premises. We’ll look at why this might be the case
But why should the situation be different in different countries? Does that mean the UK is falling behind?
©Ofcom
Drivers for access NGN deployment
End to end infrastructure competition
Limited opportunities for DSL evolution
Pay TV opportunities
UK loop lengths are shorter than those in the US
Source: Analysys, various
The picture is not consistent across Europe for many good reasons..the economics of NGN and NGA deployments differ.
Business rationale for core NGNs is cost reduction - Deployment of core NGNs is dependent on operators being able to achieve cost savings, and are more attractive to those operators who see limited opportunity for top-line revenue growth
NGA networks offer opportunities to for telcos to launch new services These upgrades may be desirable where:
There’s significant infrastructure competition e.g. US telcos are investing to match the cable cos service propositions
Existing access networks cannot support higher bandwidth DSL e.g. long loop lengths in the US
No access for competitors to incumbent’s existing access network (e.g. Fastweb in Italy)
An underdeveloped pay TV market offers telcos an opportunity to create new revenues e.g. Germany
Government policy directly incentivises NGA deployment (e.g. Korea, Japan)
Many of these factors do not apply in the UK:
Shorter average loop lengths allow higher bandwidth and IPTV services over DSL
Wholesale access products are available from BT
multi-channel pay TV in the UK is one of Europe’s most developed
UK government and Ofcom do not favour intervention which distort competition, absent demonstrable market failure
So the absence of major announcements for NGA in the UK today does not mean the UK is falling behind
But that the demand for deployment in the UK is not yet in place
But that may well change within the medium term
As regulators, we must give as much regulatory clarity as possible about our approach
So how should we respond?
©Ofcom
Regulatory principles
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
We go back to the regulatory principles we established in the Telecoms Review
[let them read]
Our current thinking is no reason to change the principles as we move to NGA
But we do need to give quite a bit of thought to how best to apply these principles to new NGA networks
©Ofcom
Questions for this session
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
…and two principles in particular
what is the deepest level… i.e how close to the customer?
how can we provide fair access to bottlenecks while at the same time providing the right incentives for efficient investment?
©Ofcom
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
©Ofcom
Competition at the deepest level where it will be effective and sustainable
1,600 unbundled exchanges
Service innovation
Altnet
BT
By effective we mean mainly that there is enough competition to give users choice, and by sustainable that competitors can survive in the market by making appropriate returns.
Thinking about current generation broadband, in many areas LLU has been the deepest level. In fact 72% of the population live in areas covered by unbundled exchanges
That’s why Ofcom has put considerable effort into making LLU a success. And it is developing into quite a success story:
now over the 1.5m lines threshold that we set in late 2005
1600 exchanges have at least one unbundler – many of them several unbundlers
LLU also a very good example of why it was that we thought competition based as much as poss on own infrastructure was a good idea:
not only allows fierce price competition
but critically also allows competition based on innovation. So first unbundlers offered faster speeds than you could get elsewhere. Different contention ratios. IPTV services offered by unbundlers.
©Ofcom
be technically feasible
be practically feasible
maximise scope for innovation
bitstream access
….and others too
Question is: where is that point in next generation access? Where is the deepest level in the network (i.e. closest to the customer) where competition is likely to be effective and sustainable?
A number of criteria in making that choice [see slide]
Levels in the network depend very much on technology chosen. There are a number of different possibilities, but here are the main ones
Might be useful to look briefly at each one in turn.
©Ofcom
very significant practical challenges
But…
This is quite an old picture; don’t think telecoms engineers wear berets like that any more.
But quite appropriate to use an old picture here:
firstly because this is an old idea. In principle it’s very seductive to regulators. That’s because if you’re deploying an access network, two thirds or three quarters of the cost is in the civils. So if you can avoid that cost, maybe it won’t be a bottleneck any more.
but second reason to use an old photo is that many ducts, certainly BT’s ducts, are very old. Some of them aren’t ducts, they’re ditches. Some of them are full, because it’s been cheaper to leave old cabling in than to take it out. And not well mapped.
May be the case that there’s not much scope for innovation in the fibre – one looks like another. Having said that, might provide the opportunity to put in fibre where there currently isn’t any
Oftel looked at duct sharing five years ago. At the time, concluded that despite benefits, operationally very difficult, and little appetite from industry.
We think it’s right to ask whether we need to look at this again. And note that guy in the picture is wearing a beret. That’s appropriate too, because a variation on this approach, using municipal networks is a much bigger deal in France. So one question for today is: is there any appetite to share ducts – either just new ducts, or existing ducts too?
©Ofcom
is it practical to have competing infrastructure at this level?
is effective competition likely to be sustainable?
But…
Another point in the network at which could have competition is at the cabinet
Only works if there is a cabinet – so say electronics in the cabinet and fibre back to the exchange. Doesn’t work for every technology choice.
This is very attractive option for regulators for NGA, for all the reasons that LLU is:
everyone gets access to the same bit of copper between cabinet and customer – very ‘dumb’ piece of the network
maximum scope for innovation, in electronics at the cabinet and back in network
But question is:
is it likely to be economic to compete at this level? Average cabinet has far fewer lines than average exchange
is it practical? … multiple cabinets, power supply, jumpering at cabinet
what would you need in terms of a backhaul product for this kind of solution
…and industrialising a product at this point likely to be a huge effort – much bigger than LLU
So a second question for this session is: how should we gauge whether there is likely to be interest in a solution like this?
©Ofcom
Fibre unbundling
possible for point-to-point fibre
would not need to be at the exchange
But…
ODF
OLU
Altnet
network
Altnet
BT
Here’s another possibility.
If you had fibre all the way to the home, might be able to treat it just like copper
each connect their own customer’s fibre to own equipment
wouldn’t even need to be at the exchange – signals travel over fibre for much further, so could be back in network
But for some shared architectures, this doesn’t work.
not one fibre for each customer, but one fibre serving multiple customers.
if that’s case, need to look for a different solution
©Ofcom
technically and practically straightforward
But…
Here’s the last one I’m going to mention.
Could have a bitstream access product. Different ways it could work. But essentially:
both wire or fibre from customer, and electronics at the end of it belong to bottleneck operator
bottleneck operator offers a stream of bits to the competing operator
interconnection could be at a variety of places in the network: at the exchange, or further towards the core of the network
It’s a product that could look a bit like a next generation DataStream, for example
It’s a simple option: a less complex wholesale product.
And, depending on how it was structured, it could allow competitive innovation in applications, and in service control. But it might also be less effective at creating innovation in the transmission layer:
how could different ISPs offer different speeds..
…or have various kinds of innovation, say innovative peer-to-peer solutions, that we don’t yet know about…
if they’re relying on the bottleneck provider’s transmission equipment?
©Ofcom
Promote competition at deepest level where it will be effective and sustainable
Deliver equality of access beyond those levels
Withdraw regulation at other levels
Promote a favourable climate for efficient investment
Varying regulatory solutions for different products and geographies
Create scope for market entry
Light touch regulation elsewhere in communications value chain
Here again are the principles we established in the Telecoms Review.
The second one I wanted to talk about was creating a favourable climate for investment.
©Ofcom
How may regulation promote a favourable climate for efficient and timely investment in next generation infrastructure?
Main role of regulator is provision of regulatory certainty, possibly through
Ex ante regulatory forbearance
Risk adjusted returns
Whatever approach is adopted, it must not distort market conditions such that:
inefficient investments are incentivised
Regulatory policy can distort investment decisions in either direction
NPV of NGA investments
Regulation deters efficient investment
Pre-regulation NPV
Impact of regulation
Post regulation NPV
So, how can regulators enable the creation of an environment that is conducive to next generation infrastructure investment?
Investment in next generation infrastructure will be affected by regulatory uncertainty, including the extent of future regulatory intervention and the potential impact on expected returns
Regulators have an important role in reducing these regulatory risks in order to promote a favourable climate for efficient and timely investment in NGNs.
Mechanisms to achieve this include:
ex ante regulatory forbearance
risk adjusted returns for next generation investments
Forbearance is an appropriate mechanism to promote investment in those markets with significant prospects of end to end infrastructure competition
BUT, without such prospects, forbearance would be likely to cause a rapid decline in competition at other points in the telecoms value chain and loss of consumer benefits from competition (choice, lower prices and rapid innovation).
Sunset clauses are raised by some operators as one solution to regulatory uncertainty, aiming to provide a clear timetable for the removal of sector specific ex ante regulation
BUT it may be difficult to set defined dates independent of competition developments, and contingent triggers removal of regulation is very similar to Ofcom’s stated strategy to deregulate markets once existing regulation is no longer required
Risk adjusted returns could be used to provide operators with a return commensurate with the risk at the time of investment
BUT regulation should ensure prospects for competitive investment are not limited and consumers are protected from excessive charges for services
Whatever approach is adopted, it should not result in distortions to competitive market conditions that result in either
Encouraging inefficient investments – negative NPV investments turn positive due to regulation
Deterring efficient investments – disproportionate regulation reduces NPV from previously attractive investments
©Ofcom
cost of capital specific to next generation access
returns adjusted for a ‘fair bet’
‘anchor’ product regulation
Various solutions, including…
Here are some of the options we set out in our discussion document.
Don’t want to get technical, but it’s an important subject.
First of all we could say: “we’re not going to set a price for access to NGA bottlenecks, we’re just going to require access to be given, on equal terms”. Question there is how do you avoid a margin squeeze?
Or we could say, it’s cost-plus, but we’re going to use a higher cost of capital for this particular investment. Question then is: how do you calculate that cost of capital?
And we could also say, for whatever cost of capital we’re using, we’re going to adjust it upwards to reflect the fact that there’s an asymmetry in that you’re not allowed to earn more than that cost of capital, but you might well earn less.
So, a complex question to end on which we are definitely not going to get near the bottom of today, but I raise it because it’s going to be absolutely critical to providing the right incentives for efficient investment.
I’ve deliberately set out to ask questions, and I should make it clear that we’re not expecting to get answers out of today. But we would like to hear people’s initial reactions, and perhaps assemble the considerations on either side. On that note, I’ll hand over to our two LLU operators on the platform for their reflections on these issues.
©Ofcom
Providing incentives for efficient and timely investment
Ensuring wide scale availability of high speed data services
Minimising uncertainty on:
future regulatory intervention
Consult on
Public policy issues and challenges related to NGA - is there a need for NGA services? How should any need be met?
regulatory strategy: what, if anything, should be done to secure investment in NGA? Once NGA is deployed, how should Ofcom promote competition to achieve consumer and citizen benefit?
what options are there for new regulatory remedies and approaches e.g. duct sharing?
what are the specific regulatory challenges posed by NGA?
©Ofcom
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