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European Commission Proposes Higher Wholesale Access Rates, Unregulated Fiber

December 03, 2012

European Commission Proposes Higher Wholesale Access Rates, Unregulated Fiber

By Gary Kim
Contributing Editor

European Commission telecom regulators are apparently circulating a draft proposal creating a new regulatory framework intended to spur faster investment in next generation fiber to the home networks.

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. 

Since 1996, when the U.S. Telecommunications Act was passed, a number of key changes in the business have further eroded the potential financial return from investing in fixed telecom networks.

A key shift is the rise of Internet communications and therefore alternatives to service provider voice and messaging. At the same time, consumers have shifted to mobile networks. And there are new competitors in all the markets. All those trends have permanently altered the business models for fixed network service providers. 

Looking only at "competition," for example, where a telco once could expect to build a network and get 95 percent of locations passed as "customers," these days a telco might reasonably expect to get only 30 percent to 40 percent of locations passed as paying customers. 

That alone would dramatically change the business model expectations. At the same time, demand for the core voice and messaging services is also declining. So the business case for a new fiber to home network has to be built on high speed access and video, with declining contributions from voice. 

That's a tougher business case than was typical three decades ago. Regulators have started to recognize that fact.

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Edited by Brooke Neuman
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