EC105 - ETNO Expert Contribution – Cost accounting for key access products in the transition to NGA

ETNO made this proactive submission to the Directorate-General for Information Society & Media to raise the issue of pricing of key wholesale access product on copper-based broadband networks and its impact on investment in next generation access networks (NGA).

ETNO is making this proactive submission to the Directorate-General for Information Society & Media to raise the issue of pricing of key wholesale access product on copper-based broadband networks and its impact on investment in next generation access networks (NGA).
 
The main points of this paper are:

• Europe’s competitiveness in the 21st century knowledge-based economy crucially depends upon a wide and timely deployment of NGA;

• There are two related policy positions which could create disincentives for investment in the high-risk NGA business case:

o The claim by some industry players that allegedly “excessive” wholesale prices for copper unbundled local loops (ULL) are creating a disincentive to invest in NGA – and especially fibre –  and that reducing the regulated prices of ULL and related access products will create incentives for investment;
o The notion that divergent costing, or price-setting, methodologies and varying regulated access prices across the European Union (EU) are in themselves impediments to achieving a true single market in telecommunications, forwarded by the European Commission;

• The first view is based on flawed premises.  In reality, placing downward pressure on the regulated wholesale price of ULL – whether intentionally or unintentionally as the consequence of ill-conceived costing methodology reform – will have detrimental effects on the market and investment:

o If the wholesale price of copper decreases, competition will lead to a decrease of the retail price of copper-based broadband products. In turn, this will lower the end user’s willingness to pay for fibre and other NGA products, forcing operators to decrease the retail prices of their NGA-based access products to maintain their competitive position and making the investment case for private NGA roll-out even more difficult.
o If the retail price level, or average revenue per user (ARPU), in the broadband access market is significantly reduced, it will also reduce the earnings of all players and their financial capacity to invest in NGA;

• Regarding the second view, i.e., an appeal for harmonised prices in the single market, ETNO believes that additional Commission guidance to harmonise costing/price-setting methodologies is unnecessary given that:

o considerable guidance has been provided by the European Commission and the European Regulators’ Group (ERG), and the ERG’s successor, the Body of European Regulators for Electronic Communications (BEREC), is examining the issue;
o in the context of the existing guidance, common practice in regulatory accounting and costing methodologies has developed, as documented by BEREC’s latest “Regulatory Accounting in Practice” report  ;
o BEREC’s announced intention to further expand its yearly report,  already restructured in 2010 to develop a deeper analysis on four key wholesale markets;
o remaining divergence in regulated access prices across member states can often be directly attributed to national conditions – from population density to labour costs - rather than to divergences in costing methodologies;

• The transition to NGA requires great caution for price-setting of ‘legacy’ and current infrastructure as the methodology applied to these networks will affect both investment incentives and the methodology used for NGA;

• ETNO is thus appealing for the further development of sound regulatory practice by national regulatory authorities (NRA) which ensures cost-recovery and network investment for both copper networks and NGA - and the uncertain transition between them.