09 February, 2016

ETNO Think Digital blog post: Revising the regulatory framework for electronic communications

David Lewin, consulting director at Plum: “These proposals focus regulation on the right regulatory objective – the long-term interests of end-users.” #ThinkDigital

European institutions are now in the middle of deciding how best to revise the regulatory framework for electronic communications – a framework which sets out how NRAs should regulate the telecommunications sector at the member state level. At the core of this thinking is a debate on how to regulate fixed broadband access. Ensuring that everyone has access to high-speed broadband at affordable prices underpins the whole of the EU’s strategy for a Digital Single Market.

There is a major problem here: When compared with other developed countries, the member states of the EU invest significantly less per fixed line on average. For example EU51  investment per line in fixed networks is less than half of that in the US and the gap is growing. This gap needs to be closed if the EU is to come close to meeting the targets set by the Digital Agenda for Europe for 2020.

Regulation has contributed significantly to creating this investment gap: 

  • Reputable econometric studies indicate that regulation which supports service-based competition, the historic approach used in the EU but not in the US, reduces infrastructure investment
  • The relatively low level of regulated prices for unbundled copper loops in the EU has suppressed retail prices for both basic and high-speed broadband. This has meant lower fixed service revenues and lower levels of investment in fixed infrastructure
  • The investment returns to regulated access providers - which make most of the investments in fixed telecommunications in Europe - are significantly lower than the returns to unregulated operators. 

Given this investment challenge, how should the EU’s regulatory framework change so as to promote fixed access infrastructure investment and competition whilst preserving efficient service-based competition?  Based on the findings of a recent study  I would like to make the following proposals to answer this question.

Firstly, give NRAs a single overall objective – to maximise the long-term interest of end-users. When applying economic regulation to broadband access this means maximising economic welfare as a whole. In 2001 it made good sense for regulators to focus on measures which maximised gains in allocative efficiency by enabling service-based competitive entry and lowering prices for existing services. 15 years later this is no longer the case. The big opportunity for economic gains now comes from gains in productive and dynamic efficiency by investing in new network technologies which offer major improvements in service functionality and order of magnitude reductions in unit costs. Here the focus is on measures which maximise investment and infrastructure-based competition. Unfortunately many NRAs continue to focus on maximising allocative efficiency and the current framework, with its three independent objectives for NRAs, allows them to do this. Our proposal would help correct this behaviour.

Secondly, preserve the principle of technology neutrality when implementing regulation. Market players are better placed to make efficient investment decisions than NRAs or governments. They have far more information on both the incremental costs of deploying new technologies and the incremental revenues which might flow from investing. If instead regulators tried to favour a particular technology, this would be counter-productive. Regulation cannot promote investment by market players in Technology A. But it can inhibit investment in Technology B. This does not mean that a market player will then invest in Technology A. More likely it will lead to investment in other industry sectors and world regions and less overall investment in EU fixed communications infrastructure.

Thirdly, focus on defining and assessing competition conditions in retail markets before developing wholesale remedies to deal with the problems identified. This proposal focuses regulation on the right regulatory objective – the long-term interests of end-users. At the moment many regulators continue to focus on assessing wholesale market competition from which they exclude wholesale supply by cable operators.  This logically leads to an outcome where, even if the ex-incumbent operator had (say) 20% of the retail market and rival cable operator the remaining 80%, the former would be regulated while the latter would not.  

As part of the process of defining and assessing competitive conditions in retail markets it will be important for NRAs to consider the geographic scope of retail markets for broadband access. Infrastructure-based competition, especially from cable operators, is now substantial and growing steadily. But high levels of infrastructure-based competition, which result in effective competition in a retail market, only exist in around 50% of typical member states. By defining sub-national geographic retail markets it should be possible to lift regulation in those markets where infrastructure base competition is strong and focus regulation on those where it is weak or non-existent.

Fourthly, give regulated access providers the maximum regulatory freedom - which is consistent with our first proposal. Where retail markets are not effectively competitive NRAs should develop wholesale remedies which:

  • Are as simple as possible. Regulation at multiple wholesale levels is complex, and discourages investment and innovation.  We therefore propose that the revised regulatory framework should require an NRA to impose a single wholesale remedy to deal with the competition problem identified 
  • Move away from cost orientated price regulation to give access providers greater pricing freedom at the wholesale level, and hence strengthen the case for infrastructure investment  
  • Are justified by a cost benefit test. Do the incremental benefits of intervention clearly exceed the incremental costs?  We note here that regulation will have costs in terms of foregone flexibility, reduced investment and the risk of regulatory error.

Fifthly, recognise and encourage use of voluntary commercial agreements in place of ex-ante regulation. As infrastructure-based competition grows there is increasing alignment between the interests of regulated access providers and access seekers. This has led to voluntary agreements which offer greater investment certainty and stronger investment incentives than ex-ante regulation. They also guarantee that the regulated access provider will not foreclose on access seekers.

Finally, we propose that network operators should have the option, but not the obligation, to close legacy services and networks at short notice provided that end-users and access seekers can obtain a broadly similar service level at a similar price on the new technology network.  This proposal would lower overall sector costs and promote investment by access providers. In particular it would give greater incentives for infrastructure-based players to upgrade their networks so as to replace expensive legacy technologies with modern technologies which offer lower unit costs and higher levels of functionality to end users.

Taken separately these six proposals are incremental changes to the current framework. Taken together I believe they represent a fundamental and necessary change to stimulate investment and infrastructure-based competition in the supply of fixed broadband.

By David Lewin for ETNO #ThinkDigital, 9 February 2016

Read the study "Fostering investment and competition in the broadband access markets of Europe", Plum for ETNO, February 2016


David Lewin, Consulting Director, Plum

David Lewin has advised clients around the world on telecommunications policy and regulation for the past 25 years. In particular he was centrally involved in advising the Commission on the original EU regulatory framework of 2003, in advising clients on the review of the framework in 2009, on the development of the Commission’s recommendation on non-discrimination and costing methodologies of 2013, and on revising the recommendation on relevant markets in 2014.

1. EU5: France, Germany, Italy, Spain and the UK

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