EJTN AD On-line Classroom on Electronic Communication Law - 25 June 2021 Incentives for the deployment of Very High Capacity Networks (VHCN) J ...
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EJTN AD On-line Classroom on
Electronic Communication Law
25 June 2021
Incentives for the deployment of
Very High Capacity Networks (VHCN)
J. Scott Marcus
With financial support from the Justice
Programme of the European Union
Incentives for the deployment
of VHCN
• Introduction
• Why full coverage with VHCN is difficult to achieve
• Broadband coverage / penetration in the EU today
• Regulatory instruments
• Pricing flexibility and price controls
• Non-discrimination
• SMP Civil Engineering Infrastructure
• Concluding observations
➢Portions are based on a 9 June 2021 public
workshop for an ongoing study for DG CONNECT.
2
"Well, in our country," said Alice, still panting a little, "you'd generally get to
somewhere else—if you run very fast for a long time, as we've been doing."
"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the
running you can do, to keep in the same place. If you want to get somewhere
else, you must run at least twice as fast as that!
- from Through the Looking Glass
3
Underlying concepts
4Market realities and regulation:
Cause? Effect?
• When the EU Regulatory Framework for Electronic
Communications was first enacted in 2002:
• There were 15 Member States, not 27.
• Member states had near-complete copper coverage.
• Limited cable coverage except NL/BE/MT.
• National monopoly PTTs in most Member States.
• Ten new Member States join in 2004, many in the east.
• Historic under-investment in telecoms in the east.
• Blessing and curse – a chance to deploy fibre and cable.
• Cable rolls out in some new Member States (PL, HU).
• Wholesale access enables competitive entry.
• Local loop unbundling, bitstream, now VULA, also ducts.
5The expansion of the EU in
2004
6Historic evolution of EU electronic
communications regulation
• The initial RFEC sought to liberalise the sector and to open
it up to competition.
• This was effective – in most EU Member States, the majority
of lines are provided by competitors.
• Investment and innovation were explicit goals, but there
were few explicit regulatory measures to promote them.
• In an era of copper-based narrowband networks, this
worked well enough, but it did not anticipate broadband
needs.
• Deployment of high speed broadband good but not great.
• Multiple revisions in subsequent years sought to re-balance
the system so as to do more to better promote investment.
7Historic evolution of EU electronic
communications regulation
• A succession of regulatory instruments have
sought to strike a progressively more pro-
investment balance.
• The Regulatory Framework for Electronic
Communications (RFEC) (2002)
• NGA Recommendation (2010)
• Nondiscrimination and Costing Methodology (NDCM)
Recommendation (2013)
• Broadband Cost Reduction Directive (BCRD) (2014)
• European Electronic Communications Code (EECC)
(2018)
• Also an increasing focus on access to civil
engineering (ducts and poles), and on cooperative
arrangements.
8Competition? Investment?
Both?
• Art. 3 EECC (2018) establishes a series of general objectives, but
without establishing a relative priority among them.
• Two that are especially relevant here are:
• to promote connectivity and access to, and take-up of, very high capacity
networks, including fixed, mobile and wireless networks, by all citizens and
businesses of the Union;
• to promote competition in the provision of electronic communications networks
and associated facilities, including efficient infrastructure-based competition,
and in the provision of electronic communications services and associated
services; …
• Both are important, but there is tension between these two general
objectives.
• A sole focus on retail level competition would imply setting
wholesale prices as low as possible, i.e. at (LRIC) cost.
• Promoting investment implies setting prices higher.
9Why full coverage with
high quality broadband is
difficult to achieve
10The cost of last mile dominates • The human body is said to contain about 100,000 kilometres of arteries, veins and capillaries. • The vast majority of this length is in the capillaries. • For building a new network, or upgrading an existing network from copper-based to fibre- based, civil works costs associated with the last mile likewise tend to represent the bulk of the total cost.
Population density and
dispersion
• Population density is not
the only driver of
deployment costs, but it
is a large driver.
• The choice and cost of
technology is also
influenced by the labour
costs, cost / availability of
ducts and poles,
deployed infrastructure
(copper subloop lengths),
and presence of cable.
Source: Source: Center for International Earth Science Information Network (CIESIN).
12Population density and
dispersion
• Cost and ARPU per customer per month
for FTTH P2P Ethernet
(Germany, 70% penetration)
Source: WIK (2012), studies for German BMWi and LGI.
13Population density and
dispersion
• Investment subsidy per customer required
for FTTH P2P Ethernet (Germany)
Source: WIK (2012), studies for German BMWi and LGI.
14EU broadband
coverage / penetration
15Broadband in the EU
• It is important to distinguish among:
• Coverage (deployment),
• Adoption (take-up), and
• Usage.
• Regulation of electronic communications deals almost
exclusively with deployment, i.e. with the supply side.
• A number of research results suggest that, once deployment
is sufficiently widespread, demand side measures can be
more effective than supply side in promoting usage.
➢The EU is doing well by many measures, but concern
remains that we are not doing as well as we need to relative
to some global competitors.
16Broadband coverage in the EU
• Next Generation Access (NGA)
technologies (% of households)
• VDSL incl. VDSL2 Vectoring
• FTTP/FTTH
• Cable DOCSIS 3.0 / 3.1
• Very High Capacity Networks
(VHCN)
• Any network providing a fixed-line
connection with fibre roll out at least
up to the multi-dwelling building;
• Any network providing a wireless
connection with fibre roll out up to the
base station;
• Other fixed and wireless networks
subject to the quality delivered.
- BEREC Guidelines
Source: Broadband Coverage in Europe 2019
Mapping progress towards the coverage objectives of the Digital Agenda
17Broadband coverage in the EU
(% of households)
Source: Broadband Coverage in Europe 2019
Mapping progress towards the coverage objectives of the Digital Agenda
18Rural broadband coverage in
the EU
(% of households)
Source: Broadband Coverage in Europe 2019
Mapping progress towards the coverage objectives of the Digital Agenda
19EU broadband penetration
in international perspective
OECD Fixed broadband subscriptions per 100 inhabitants,
by technology, June 2020
DSL Cable Fibre Satellite Fixed wireless Other
Per 100 inhabitants
50
45
40
35
30
25
20
15
10
5
0
Source: OECD Broadband statistics [http://www.oecd.org/sti/broadband/broadband-statistics]
20Questions up to this
point?
21Regulatory tools
22Regulatory tools in the
Access Recommendations
• Price control and pricing flexibility
• Price control and pricing flexibility
• Price control and pricing flexibility
• Nondiscrimination
• Access to SMP operator Civil Engineering
Infrastructure (CEI)
• Geographic differentiation
• Cooperative arrangements
• Migration from copper-based to fibre-based networks
➢How much can be done with regulatory tools alone?
23Pricing flexibility
24Pricing flexibility
• If a lack of effective competition means that the undertaking
concerned may sustain prices at an excessively high level, or may
apply a price squeeze, to the detriment of end-users, price control
obligations must be imposed;
• however, where (1) a demonstrable retail price constraint is
present, and (2) obligations imposed including any Economic
Replicability Test (ERT) ensure effective and non-discriminatory
access, then the default approach should be pricing flexibility (no
price control obligations) combined with nondiscrimination
obligations.
Art. 74(1) EECC
➢ Today, price control is about fixed network wholesale services.
➢ These provisions are used, but could be used even more.
25The Economic Replicability Test
(ERT)
• The NDCM encourages the use Retail price
of pricing flexibility where
suitable conditions are met. Retail gross margin
• Art. 74 EECC codifies core Wholesale price
elements subject to there Possible additional
being “a demonstrable retail wholesale profit
price constraint” and where an
“economic replicability test …
ensures effective and non-
discriminatory access”.
• The ERT is a form of ex ante Presumed cost for
Margin Squeeze Test (MST). wholesale service
including WACC
• For competitive entry to be
possible, there has to be space
between the wholesale price
charged and the feasible retail
price. NGA / VHCN
26Price controls
27Price controls
• “Where the national regulatory authorities
consider price control obligations to be
appropriate, they shall allow the undertaking a
reasonable rate of return on adequate capital
employed, taking into account any risks
specific to a particular new investment network
project.” (Art. 74 EECC)
• For regulatory purposes, the costs are
generally estimated using bottom-up long run
incremental cost (BU-LRIC) models.
28The NGA risk premium
• The NGA Recommendation recognises (point 23) that “costs of
capital of the SMP operator for the purpose of setting access prices
should reflect the higher risk of investment relative to investment
into current networks based on copper.”
• The WACC is the weighted average cost of capital.
Cost of the
Cost due to wholesale product
WACC and
Cost of the extra risk
wholesale product Cost due to
WACC
Cost for
Cost for wholesale
wholesale service
service
Legacy NGA / VHCN
29How high a risk premium?
• The literature suggests (notably Bourreau, Cambini, Hoernig, and
Vogelsang, 2020) that the higher the NGA risk premium, the greater
the expected investment in NGA deployment.
• One might argue on this basis for an arbitrarily large NGA risk
premium; however, there are obvious problems in doing so.
• There is no obvious objective basis on which to base the size of such a premium.
• The approach potentially generates windfall profits for the SMP operator, to the
detriment of competitors and consumers.
• This is not the only way to promote more widespread deployment –
there is also state aid, coverage obligations …
• These considerations suggest that when estimating the cost of
capital, NRAs should include an NGA risk premium that is high
enough to compensate for all project-specific systematic risk, but
no higher.
30The risk premium:
Are all relevant risks properly reflected?
• Two aspects of systematic NGA/VHCN project-specific risk
are rarely addressed in current EU regulatory practice.
• The first seeks to enable investors to achieve an appropriate
expected rate of return, taking into account both good and
bad scenarios. Price caps limit the upside potential of the
investment, while at the same time leaving investors fully
exposed to the downside risks. Relatedly, there is the regulatory
risk that the NGA risk premium is adjusted downward as soon as
the project has succeeded. These asymmetries can deter
investment if they imply that the expected returns at the outset
of a seemingly profitable investment do not cover the
expected cost of capital.
• The second relates to the “option value” to the SMP operator
of delaying the investment due to the expectation that
uncertainties will to some extent be resolved in the future,
allowing the investment to achieve a higher profitability.
31The risk premium: Is the value of relinquishing
the option to wait and see properly reflected?
• Investments in NGA, FTTH or FTTC networks are characterised by
irreversibility, uncertainty, and an implicit option to delay the
investment until more information becomes available.
• The option to “wait and see” might be worthless if the SMP
operator is under substantial competitive pressure to deploy; in
other cases, it might represent a meaningful cost for which risk is
directly relevant.
• Ofcom in the UK conducted a public consultation in 2005 that
dealt with these aspects, and found them to be valid and relevant;
however, they did not adopt, mainly because computation is
challenging.
• In Italy, AGCOM has been using Real Options since 2015.
• The incremental cost can be quantified using Real Options
methods such as Black-Scholes, binomial lattice methods or Monte
Carlo methods.
32A floor on wholesale prices?
• The logic of the original RFEC was to enable
retail service-based competition.
• This implies the need for low prices for SMP
wholesale access products.
• Today, facilities-based competitors offer
wholesale products in some Member States.
➢This might possibly imply a need for higher
prices for SMP wholesale access products!
33Non-discrimination
34EoI versus EoO
• In the EECC, “equivalence of inputs (EoI) is in principle
the surest way of achieving effective protection from
discrimination”.
• It is not always proportional – for an existing service,
switching from EoO to EoI imposes costs on all.
• A well-crafted EoO regime (with good enforcement and
suitable KPIs/SLAs/SLGs) might in principle be nearly as
effective at protecting competition as an EoI regime.
• The NDCM relies on EoI as a precondition for pricing
flexibility.
• The EECC calls for “strict non-discrimination obligations”.
35KPIs, SLAs and SLGs
• KPIs, SLAs and SLGs play a crucial role in
implementing non-discrimination.
• How they are set matters – in some Member
States, a collaborative system overseen by the
NRA involves both access seekers and the
SMP operator.
• In some Member States, penalties are too
small to be dissuasive, or processes can drag
on for years.
36SMP Civil Engineering
Infrastructure (CEI)
37CEI is used less than it might
be
• Lack of availability: Some Member States have large
numbers of ducts that are potentially usable by
competitors, others have few or none.
• Lack of quality: In many of the Member States, the
quality of ducts has deteriorated.
• Poor or lacking online directories (despite the fact the
current Recommendation and the BCRD require
them).
• Segment-by-segment ordering processes.
• Costly ancillary obligations, such as for SMP operator
technicians to be present for installations or repairs.
38SMP Civil Engineering
Infrastructure (CEI)
• In some Member States, SMP operators refuse
CEI access to providers of non-FTTP VHCN
(for instance, cable operators).
• Some Member States require the SMP
operator to designate firms qualified to deploy
CEI on behalf of competitors.
• In many Member States, database quality and
ordering processes leave much to be desired.
39Concluding
observations
40Concluding observations
• Broadband policy: Revision of the broadband
regulatory instruments (NGA Recommendation, Non-
discrimination and Costing Methodology
Recommendation (NDCM) in process.
• Revision of the Broadband Cost Reduction Directive
(BCRD) is likewise in process.
• Some refinement should be expected, including fine
tuning the balance between investment incentives
versus competition.
• There are, however, limits to what can be done
• solely on the supply side,
• solely with regulatory measures as distinct from industrial
policy measures,
• after 20 years of fine tuning have already been done.
41Thank you!
With financial support from the Justice
Programme of the European Union
42References
• J. Scott Marcus, Christian Hocepied et al. (2021, forthcoming), Study on Regulatory Incentives
for the Deployment of Very High Capacity Networks in the Context of the Revision of the
Commission’s Access Recommendations.
• J. Scott Marcus (2020, forthcoming), “Broadband Policy and Technology Developments:
Review of the 2004 OECD Recommendation”, study for the OECD.
• Francesco Caio, J. Scott Marcus and Gérard Pogorel (2014), “Achieving the Objectives of the
Digital Agenda for Europe (DAE) in Italy: Prospects and Challenges”, a study for Prime Minister
Letta.
• J. Scott Marcus, Ilsa Godlovitch, et al. (2013), “Entertainment x.0 to boost Broadband
Deployment”, study on behalf of the European Parliament's Committee on Industry, Research
and Energy; October 2013, available at:
http://www.europarl.europa.eu/committees/en/imco/studies.html#menuzone.
43Backup slides
Legal underpinnings of the system:
Draws on competition law concepts
• Opening up market to competition was key in the
RFEC
• Telecoms regulation ex ante
• Competition law (antitrust) ex post
• Key asymmetric regulatory mechanisms in the
RFEC
• Each NRA identifies market susceptible to ex ante
regulation, following a Commission Recommendation.
• Each NRA identifies network operators that have
Significant Market Power (SMP) on one of the markets.
• Each NRA imposes proportionate remedies on any SMP
network operators (accounting separation, wholesale
access, price controls, …).Definitions of NGA and VHCN
• Next generation access (NGA) networks
• … are “wired access networks which consist wholly or in part
of optical elements and which are capable of delivering
broadband access services with enhanced characteristics
(such as higher throughput) as compared to those provided
over already existing copper networks.”
• They generally provide speeds greater than 30 Mbps
- NGA Recommendation, 2010
• Very high capacity networks
• Any network providing a fixed-line connection with fibre roll out
at least up to the multi-dwelling building;
• Any network providing a wireless connection with fibre roll out
up to the base station;
• Other fixed and wireless networks of comparable quality.
BEREC Guidelines, 2020Asymmetric Remedies • Unbundled local loop (ULL): a form of wholesale access where competitors can purchase access to the SMP operator’s copper or fibre circuit from the Main Distribution Frame to the customer premises. • Sub-Loop Unbundling (SLU): similar to LLU, but only the portion of the local loop from street cabinet to the customer premises is unbundled. • VULA: A virtual equivalent to ULL • Bitstream access: a virtual wholesale access product, generally delivered using ADSL over the copper network.
Capital expense for FTTCab/VDSL is
favourable with short sub-loop lengths
Cluster FTTH/P2P FTTCab Vectoring Delta in %
• FTTcab/VDSL2 with vectoring 1 1,440 € 320 € 78%
can cost considerably less per 2 1,650 € 350 € 79%
household than FTTH, since it 3 1,740 € 370 € 79%
4 1,780 € 370 € 79%
uses existing copper. 5 1,840 € 370 € 80%
6 1,940 € 380 € 80%
• The exact difference depends 7 2,010 € 410 € 80%
on population density. 8 2,180 € 420 € 81%
9 2,230 € 440 € 80%
• This estimate shows the cost 10 2,410 € 480 € 80%
11 2,440 € 500 € 80%
per home connected for 12 2,480 € 520 € 79%
Germany at 70% penetration 13 2,560 € 560 € 78%
in geotypes of progressively 14 2,640 € 600 € 77%
15 2,650 € 590 € 78%
lower population density. 16 2,710 € 640 € 76%
17 2,670 € 680 € 75%
18 3,030 € 830 € 73%
19 3,410 € 1,020 € 70%
20 4,310 € 1,390 € 68%
Total 2,410 € 560 € 77%
Source: Karl-Heinz Neumann et al. (2014),
„VDSL Vectoring reduziert Investitionsvolumen für Breitbandausbau deutlich“,
in info (2014)You can also read
