Issue: 02/09

ECTA NGN Regulation

January 28, 2009

This week’s Opinion is a summary of the latest thinking on FTTN/P from the ECTA, INTUG and OECD conferences ATUG attended in December 2008 relevant to Australia’s NBN decision now underway with the Government.

The ECTA session on Next Generation Access Regulation focused on Fibre Access, Competition and Investment. In ATUG’s view, the discussion indicated that the debate in Europe about whether to provide access to fibre networks is over – access will be provided to what is seen as essential and non-replicable infrastructure.

The discussion is now focused on:

the best way to provide such access to ensure the continued development of effective competition
ensuring implementation of the policy intent through regulatory tools and decisions
updated consideration of risk – how to assess risk; how to assign risk; how to value risk; how to price risk and how to reflect this in access prices
how to encourage investment through certainty while maintaining policy commitment to competition as the strongest tool to ensure good consumer outcomes
when to introduce asymmetric regulation using market analysis

The following presentations gave a range of views – competitor, regulator, incumbent, economic analysis.

It was interesting to learn that Vodafone UK is now Europe’s 3rd largest supplier of fixed broadband services and that their view is that access to dark fibre should be a co-equal remedy to duct access, not a last resort. Mobile broadband is seen as an extremely important complement to fixed broadband access but not a substitute.

These discussions provide important indications for Australia’s NBN policy framework decisions which will be taken during the course of 2009. The Government is now considering the three proposals – Optus, Acacia and Axia and the comments and recommendations of the Expert Panel on the proposals and related Technical, Economic and Regulatory issues.

ATUG has 6 criteria for a successful NBN proposal:

The Policy objective for the NBN regulatory framework must remain the Long-term Interests of End Users.
Affordability is key to take-up.
Choice – network topology is central to competition and choice.
Equivalence in practice – can only be assured by a new and independent body, NBN Australia.
Customer Experience in the NBN environment must be managed for success from the initial migration on.
Ubiquity – all Australians must be connected to the NBN.

ECTA Presentations

Duct Access and pricing issues – tales of the two realities in Portugal
Presenter - Antonio Lobo Xavier – Member of the Board of Sonaecom (Portugese competitor telco)

The Portugese regulator, Anacom, reports “intensive use of LLU”, “great competition between copper and cable”, “regulated duct access offer”, “mobile market thriving in innovation and investment”.

IN fact, according to Sonaecom, while the wireline market has 4 significant players:

the incumbent’s presence is overwhelming,
LLU players cannot offer triple play to customers,
profitability in the SECTOR has increased but AT THE EXPENSE of the alternate operators,
throughout 2008 usage of regulated offers declined,
LLU market shares are declining due to inadequate SLA’s which do not provide incentives for deployment,
inadequate network information is provided to competitors,
duct access regulation has not been effectively implemented yet,
discriminatory processes are in place,

Regulators must act swiftly to correct operational details and ensure equivalence of access to ducts since in a fibre paradigm speed of deployment is of the essence.

The NGN brings a new big challenge for Alternative Operators:

There is a need for protection on ULL investment
There is a need for further investment and/or regulation wherever it is economically inefficient to duplicate infrastructures
Services competition should be promoted where infrastructure duplication is inefficient

The Economics of Next Generation Access
Presenter: Dr Karl-Heinz Neumann, WIK Consult

The WIK modeling approach is based on:

Generic, bottom-up cost modeling
Long-term considerations but no time dimension
Steady state, no migration
Advanced broadband market
FTTC (VDSL) and FTTH (PON and P2P) technologies are considered
Detailed modeling of access, reasonable assumptions for concentration and backbone network
Sensitivities on WACC, ARPU and Duct Prices

The model derives the ARPU needed and market share needed to derive break-even results with particular cost structures.

Investments of rolling out fibre networks are high:

1000-2000 Euro per household in densely populated areas
FTTH is five time higher than VDSL
P2P architecture is less than 10% more that PON

In no country is FTTC/FTTH roll-put profitable for all homes

25% FTTH viable in France
72% VDSL viable in Germany
Profitable investments in NGA require substantial market shares
Replication of infrastructure is rarely viable

The model outlines the impact of different regulatory measures on the market share needed for profitability for alternative operators in urban areas, using France as an example:

37% market share – PON own infrastructure using 80% duct access
15% market share – Fibre SLU with 20% dark fibre and duct access
6% market share - Fibre SLU with 80% dark fibre and duct access

Business Models to address the replicability problems:

Fibre ULL/SLU
Joint infrastructure/sharing
Separation of passive infrastructure combined with open access
Separation of business models:

Passive infrastructure provider
Network operator
Service provider

If the NGA specific risks are not properly dealt with by market players and regulators, NGA roll-out and/or the level of competition will be sub-optimal. A pure wholesale model for implementing NGA can be and probably is less risky than a retail model for NGA or a combined wholesale/retail model.

Using Germany as an example, a stand-alone operator acting as a first mover and realising the full potential of the NGA has to realize about 50% MORE in market share to reach profitability compared to the incumbent in each cluster. The model indicates replicability is possible only for a very small percentage of the population.

The full report is at: www.wik.org/content_e/ecta/ECTA%20NGA_masterfile_2008_09_15_V1.pdf

NGA Regulation : competition and investment, The French Experience
Presenter: Gabrielle Gauthey, Commissioner ARCEP

The regulation of broadband has encouraged investment by all operators through access to LLU and bitstream products.

Very high bandwidth opens a new investment cycle and the question under review is about the type of infrastructure competition in the Next Generation Access Network.

ARCEP’s objectives are to promote investment and to prevent regression of competition and irreversible foreclosure of the market.

ARCEP’s objective is to define a framework for the first years. The best operators are not on an equal footing for three reasons:
Customer base to convert
Investment capacity
Access to essential infrastructure – ducts

ARCEP’s approach is to

Mandate access, on the basis of essential infrastructure and market dominance, to France Telecom’s civil engineering (ducts) to allow all operators to invest
Access to buildings is necessary – the first operator installs the fibre into the building then gives other operators access to its network. Much detail is provided in the presentation on the implementation of this form of access, including ARCEP’s draft agreement for property owners and operators.
Assist Local Authorities which have an important role to play in the digital development of their regions – planning, duct access, building wiring approvals

Next Generation Broadband
Presenter: Tim Cowen, BT Global Services

The UK’s functional separation has not precluded a commitment to fibre investment

BT favours a “Mixed Economy” model – ADSL2+ and fibre to the home leading to widespread ADSL2+, increased backhaul investment and more fibre to the home moving towards 100Mbps

NGA Pricing and Risk
Presenter: James Allen, Analysys Mason

Wholesale access options:

None
Resale
Flexible wholesale bitstream
LLU equivalent/SLU equivalent/final drop equivalent
Access to duct

The access price needs to

Strike a balance between infrastructure investment and market structure/competition
Allow full recovery of costs (including ROCE)
Allow the opportunity to recover more from those receiving more value
Avoid early price rises for basic services

If cost orientation is chosen there are a number of significant issues:

The level of risk should reflect the roll-out plan:
Future demand influences cost over time
Cutover will affect the extent to which NGA gains a guaranteed market share of fixed access
Need to watch for asymmetrical treatment whereby gains are regulated away

Risk sharing models can vary:

Involved cf committed?
Pre-commitment to buy services
Co-build/exchange assets
Limits on the level of retail competition