Position Paper on Regulatory WACC

Evidence from across EU countries consistently shows that the cost of capital set by regulators is materially below the levels observed in financial markets and used by investors and companies themselves. This gap is not occasional or marginal, but persistent and widespread, and it has widened since the implementation of the 2019 European Commission methodology. As a result, regulatory signals no longer reflect the true risks and financing conditions faced by telecom operators, undermining the credibility and effectiveness of the current framework.

The narrative that European telecom operators are sufficiently profitable is inaccurate because it relies on simplified averages that conceal important structural differences between markets. While some analyses suggest that operators generate returns above their cost of capital, this conclusion depends heavily on aggregated indicators that mask underperformance in less concentrated markets. When examined at a more granular level, a significant share of operators fails to cover their actual cost of capital, especially in fragmented markets with intense competition. In addition, certain methodological choices—such as excluding goodwill from capital employed—artificially inflate profitability indicators, further distorting the picture.

The gap between regulatory WACC and market-based valuations is both substantial and well documented across multiple countries, illustrating the systemic nature of the problem. Comparisons with financial analysts’ estimates and internal company calculations show differences of several percentage points, with regulatory values consistently lagging behind market expectations. These discrepancies are observed in large markets such as France, Spain, and Germany, and persist over time, indicating that they are not the result of temporary market fluctuations but of structural deficiencies in the methodology. The cumulative effect is a sustained underestimation of the regulatory WACC, which directly impacts investment decisions.

The root cause of this misalignment lies in the design and implementation of the current regulatory methodology, which is overly rigid and backward-looking. The use of long historical averages, particularly the standard five-year reference period, was appropriate in a stable economic environment but has become increasingly irrelevant in a context marked by rapid changes in interest rates, inflation, and geopolitical uncertainty. By relying on outdated data, the methodology fails to capture recent developments and future expectations, which are central to investment decisions. Moreover, the uniform application of this approach across different national contexts limits the ability of regulators to account for country-specific risks and market conditions.

The regulatory process itself further exacerbates the problem by producing values that are already outdated at the time of their application. Due to the length and complexity of the decision-making process, regulatory WACC calculations are based on data that can be up to a year old, ignoring recent market developments that are highly relevant for investors. At the same time, the lack of effective feedback mechanisms prevents the system from correcting itself when discrepancies with market reality emerge

The consequences of systematically underestimating the regulatory WACC are immediate and significant for telecom operators, as they directly affect investment incentives and financial performance. When the allowed return on capital is set below market expectations, investment projects become less attractive, particularly those involving regulated assets with long payback periods. This reduces operators’ capacity to finance infrastructure development, either through internal cash flows or external funding. In addition, lower expected returns negatively impact company valuations, further constraining access to capital and weakening the sector’s overall financial position.

The broader impact of this situation is a structural decline in the profitability of the European telecom sector, which undermines its ability to support the continent’s digital ambitions. Over the past decade, returns on invested capital have fallen significantly, and in many cases no longer cover the true cost of capital. This trend reflects a combination of competitive pressures, regulatory constraints, and insufficient remuneration of investment risk. As a result, the sector faces increasing difficulty in sustaining the high levels of investment required for next-generation networks. The misalignment between regulatory WACC and market reality is particularly problematic in light of the European Union’s strategic objectives, which rely heavily on large-scale telecom investments. However, these ambitions are difficult to reconcile with a regulatory framework that systematically undervalues the cost of capital and discourages investment. This creates a fundamental contradiction between policy goals and regulatory practice, weakening the effectiveness of the EU’s digital strategy.

Addressing this issue requires a fundamental revision of the current approach, rather than incremental adjustments to the existing methodology. The 2019 framework is no longer fit for purpose and should be replaced with a system that better reflects market conditions and investor expectations. In particular, a shift away from purely model-based calculations towards approaches that directly incorporate market evidence is required, thereby reducing the risk of systematic bias. Such market-based, forward-looking approach to WACC calculation offers a practical and effective solution to the identified shortcomings. By relying on financial analysts’ estimates or benchmarking against observed market data, regulators can ensure that WACC values remain aligned with actual financing conditions. Such an approach would improve the accuracy of regulatory signals, enhance transparency, and provide greater flexibility in adapting to changing economic environments. It would also better reflect the risks faced by investors, thereby supporting more efficient allocation of capital.

Aligning regulatory WACC with market expectations is essential to restore investment incentives and support the long-term development of telecom infrastructure in Europe. A framework that accurately reflects the cost of capital would enable operators to undertake the necessary investments in fibre, 5G, and future technologies, while maintaining financial sustainability. Conversely, maintaining the current methodology would continue to distort investment decisions and risk widening the gap between Europe and other regions in digital development. Reforming the WACC methodology is therefore both an economic necessity and a strategic priority for the European Union. By adopting a more flexible, market-oriented approach, regulators can ensure that the regulatory framework supports, rather than hinders, the achievement of the EU’s digital and economic objectives. The urgency of this reform reflects not only the scale of the current misalignment but also the critical role of telecom investment in driving innovation, productivity, and competitiveness in the European economy.