EC Proposes Higher Wholesale Access Prices

European Commission telecom regulators apparently are circulating a draft proposal creating a new regulatory framework intended to spur faster investment in next generation fiber to the home networks. The general outlines appear consistent with approaches taken earlier by U.S. regulators that had to balance “investment” and “competition” incentives to encourage more investment in fiber to home facilities.

Among the key proposed changes is an increase in prices network owners can charge competitors who lease access circuits, network elements and infrastructure, as well as a suspension of mandatory wholesale price rules for the new fiber to home networks.

The rules would first raise revenue for the incumbents leasing capacity to rivals, and then allow setting of commercial rates for future access to the fiber to home facilities. Both moves would aim to bolster incumbent finances while creating clearer incentives for investing in fiber to home networks.

The plan illustrates once again how telecom regulators can directly affect competitor revenue and cost assumptions and business plans.

Under the new plan,, monthly rental access prices per customer would range between eight and 10 euros by the end of 2016. That would mean higher charges paid by competitive carriers  in 10 EU countries including the Netherlands, Austria, Poland, Hungary and Estonia, which currently offer rates below eight  euros.

On the other hand, Ireland, which currently has the highest monthly cost at 12.41 euros, Finland, Britain and Luxembourg would have to bring their prices down.

The EC has been looking at wholesale rates as part of a wider effort to create incentives for investment in faster fiber to home networks. The investment problem, up to this point, has been that incumbent carriers have seen little reason to invest heavily under circumstances where the fiber network rates are highly regulated.

Of particular concern are rules that set wholesale access rates too low, thereby reducing the revenue earned from selling competitors wholesale access to those new networks.

The very same argument occurred in the U.S.market, for precisely the same reasons, with essentially the same format adopted.

In the U.S. market, after a period of mandatory and significant wholesale discounts, wholesale access to copper and all fiber facilities was deregulated, allowing market rates to be set by contracts, rather than relying on mandatory price rules.

The issue in the U.S. market, as in the EC, was that incumbent carriers argued they could not upgrade to fiber facilities because the steep discounts did not allow them to earn a reasonable return on invested capital.

In North America and Europe, it increasingly seems as though regulators can have “more competition” or they can have “ more investment,” but not both, in the fixed network realm.

In order to reach the European Community’’s “Digital Agenda” goal of at least half of EC residents able to access broadband at 100Mbps or more by 2020, the EC has been looking at how the regulatory environment can support and stimulate investment in next-generation networks. The draft proposal is the result of that investigation.

Essentially, regulators have two fundamental choices: mandate aggressive wholesale rules to spur competition, or allow service providers to “keep” the potential revenue from investment in new facilities by relaxing wholesale obligations.

In the U.S. market, after an extensive experiment with mandatory wholesale access with hefty discounts, triggered by the Telecommunications Act of 1996, regulators had to make a choice.

The major facilities-based access providers essentially signaled that they were not going to make major investments in new optical infrastructure so long as mandatory access with hefty discounts remained policy, especially when a rival broadband network, already operated by a local cable operator, already was in business, without any mandatory access obligations at all.

Eventually, to the chagrin of competitors, the Federal Communications Commission reversed course, allowing incumbents to charge market-based rates, in return for heavier investment in new optical access.

Historically, European regulators, operating in markets where there had not been robust deployment of cable broadband, favored heavy use of wholesale access.

But in a significant “u turn,” European Community telecom commissioner Neelie Kroes backed off a plan to increase the discounts offered to third parties who buy wholesale access from incumbent European Union service providers.

Clearly, such a plan would have further reduced carrier incentives to invest in new fiber plant. For competitors, the new rules also would raise operating costs, making it harder to compete.

But that's the dilemma regulators face: encouraging competition by mandating lower wholesale rates also decreases incentives for facilities owners to invest in new optical plant.