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) 10th INFRADAY Conference, Berlin, 08 Oct 2011

This presentation

• How should regulators cost the assets underlying

telecommunications access networks during the roll

• ut of fibre networks?

Agenda

Context

• How networks

and regulation are evolving Current costing

• How networks

have been costed to date Next generation costing

• Approaches

to reflect changing

• bjectives

• Context
• Current costing
• Next generation

costing

Market developments drive regulation

1980s

• Competition in

long distance networks

• Competitors

require access to local telephone network 1990s

• Vertically

integrated

• perators (e.g.

mobile)

• Competitors

require interconnection 2000s

• Alternative

broadband suppliers

• Competitors

require access to copper access network 2010s

• Alternative

broadband suppliers

• Duct access or

fibre access?

… 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

• Need to set the correct incentives for

efficient investment

Large risky investments

• Governments believe better broadband

can bring wider economic benefits

Potential externalities

• Competition in broadband to date has

brought clear customer benefits

Benefits of competition

• Regulated copper prices interact with

fibre profitability

Co-existence with copper

… need to review approach

Globally a range of options have been adopted

Forbearance

• Not regulating

access to fibre networks

• Applied in the

US to new fibre deployments Regulated access with public subsidy

• Government

shares financial burden of roll out but requires access

• Applied in

Singapore Regulated access

• Apply existing

access regime, adapted to take account of risk

• EU approach

… reflecting competing objectives

• Context
• Current costing
• Next generation

costing

Costing aims to set efficient access prices

• Ensure maximum take up of

services

Allocative efficiency

• Ensure ongoing investment

and innovation

Dynamic efficiency

• Minimise costs of delivering

services across the industry

Productive efficiency

… critical in contestable markets

Standard telecommunications costing approach developed in 1990s

CCA

Asset valuation based on current costs to send correct build or buy decisions to competitors

• Productive efficiency

LRIC

Prices set according to incremental cost of services

• Allocative efficiency

+ EPMU

Include mark up for fixed and common costs to allow full cost recovery

• Dynamic efficiency

… assumes market is largely contestable

However CCA valuation of assets introduces uncertainty

Benefits

Incumbent prices reflect entrant costs Enhances productive efficiency for replicable assets

Disadvantages

Introduction of CCA can lead to holding gains or losses CCA valuations can introduce subjectivity

… need to consider whether still appropriate

• Context
• Current costing
• Next generation

costing

Objectives when reassessing asset valuation

• Stable regulatory environment
• Reward investors for risk

Encourage network roll out

• Ensure affordability
• Promote downstream competition

Encourage service take up

• Correct build or buy decisions for replicable assets
• Ensure no margin squeeze

Promote competition

• Provide incentives for incumbents to minimise costs

Promote productive efficiency

• Predictable, objective and harmonised approach

Practicality

… emphasis may vary

Costing approach should reflect nature of assets

Duct Copper cable Fibre Active equipment … based on a range of factors including ‘replicability’

Increasingly replicable Increasing asset lives New build Sunk legacy Fixed and common cost Mix of technologies

Helpful to look at approaches used in other regulated industries

HCA CCA Economic depreciation Infrastructure renewals accounting Regulatory asset value

Duct valuation

Renewals accounting based approach Potential approach Providing investor certainty on future investments Regulatory

• bjectives

Continuous network Undefined asset life Difficult to estimate replacement cost Nature of asset

… requires determination of initial valuation

Copper cable

Regulatory asset value reflecting HCA valuation Potential approach Ensuring appropriate use of sunk asset Promoting an efficient transition to fibre Regulatory

• bjective

Number of discrete components Not the modern equivalent asset Nature of asset

… complex inter-relationship with fibre

Fibre

Rolling forwards valuation based on economic depreciation Potential approach Providing certainty for investors Ensuring affordable prices for fibre product Regulatory

• bjective

Number of discrete components Uncertainty

• ver future

usage Unclear whether fibre is replicable Nature of asset

… balance low prices with investment incentives

Active equipment (electronics)

Current Cost Accounting Potential approach Promoting efficient competition Regulatory

• bjective

Number of discrete components Short asset lives Rapid technological evolution Assets are replicable Nature of asset

… 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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