NRAs in some of the largest European markets have permitted a rise in the amount that incumbent operators can charge for access to the local loop. We have witnessed this in at least three (UK, Italy, and Spain) of the “big five”. On the other hand, a recent review in Germany saw a very slight decrease in the cost of unbundling the local loop.
As Ovum’s recent Wholesale Broadband Access benchmark indicates, the downward trend that characterized LLU rates across EU countries last decade appears to have inverted in the last two years. This depends on factors such as inflation and a rise in the price of copper, alongside the constant decline in demand for fixed lines. While at first glance this might be considered harmful to competition, to an extent it could in fact provide an incentive for investment in next-generation access in that it shows that NRAs are committed to allowing network owners to recover costs and incentivize communication providers to migrate to fiber.
Rising prices could favor NGA uptake without harming competition
The price of unbundling the local loop has on the whole been falling across most European broadband markets over the past 10 years. However, as Ovum’s new benchmark dedicated to WBA shows, some of them have returned to an upward trajectory in the last year or two – for example, Italy and the UK as of 2009 – while most countries have stayed at the same level. Recent regulatory decisions in the EU5 illustrate this recent trend.
Inflation and the rising price of copper, alongside a falling demand for fixed lines at a retail level, go some way towards explaining this new tendency. In particular, the latter determines the necessity to recover a higher amount of the initial investment from every single line, in turn putting pressure on prices. Different cost methodologies adopted by national regulators don’t seem to significantly affect the outcome, given that NRAs using different models – e.g. Italy and Spain – have reached similar conclusions.
The main concern that might arise due to such an increase in price is the effect on competition in a market which has benefited from a downward trend in rates over the past 10 years. However, it seems premature to overstate such risks: countries in which prices have been stable, or have recently increased, haven’t shown obvious signs of a decrease in competition or a fall-off in demand at a retail level. Broadband uptake has kept growing, with alternative operators generally increasing their market shares. It is essential to ensure that any rise in price is solely justified by the underlying costs so as to protect the current level of competition. If price didn’t follow cost then incumbents could end up making a loss on each line unbundled. Requiring incumbents to offer access below cost could also have a negative effect on the demand for NGA, as it would widen the gap between the cost of “current-generation” broadband and that of fiber, hence hampering the “substitution effect” for alternative providers and retail customers.
All these elements would be detrimental to the investment that operators have already made, and in turn affect investment in fiber at a time when policy makers are pursuing the steady development of super-fast broadband. Regulators that have recently increased rates following their market analyses seem to have had this in mind.
The EU5 are leading the way in the new trend
The recent upward trend in LLU rates in Europe has mostly been evident in the five largest countries. In November 2010, Italy’s AGCOM adopted a new BU-LRIC cost model for access pricing, at the same time revising rates for 2010, 2011, and 2012 to €8.70, €9.02, and €9.28 respectively. This is to compensate the combined effect of higher costs sustained by Telecom Italia and of an estimated 1.5% reduction until 2012 in the number of active fixed lines.
The CMT in Spain followed a similar logic last month in raising the price of access to Telefonica’s local loop from €7.79 to €8.32 per month – a 6.8% rise. Following an analysis of Telefonica’s accounts for the year 2008, the regulator acknowledged that the operating costs were significantly higher than the regulated price. It also added that the 2009 accounts, still pending approval, seem to confirm a gap between costs and LLU rates, resulting in a loss for the incumbent. However, this is a temporary measure while the CMT awaits the adoption of a BU-LRIC cost model later this year.
An increase is also envisaged by UK regulator Ofcom for the next three years. A consultation was launched at the end of March, proposing a rise in the monthly rental for a fully unbundled local loop from €8.58 to a charge ceiling ranging between €8.61 and €8.86 per month (between RPI-1.2% and RPI-4.2% every year until 2014). While the result of the consultation is awaited, a “bridge charge” of €8.82 per month is in place following the expiry of the previous charge control. Behind Ofcom’s proposal lies the assumption that the demand for fixed lines will fall by 0.7 million over three years, alongside an increase in inflation (+3% on pay costs).
However, not all reviews of charge controls across the EU5 have resulted in rate increases. In February, French regulator ARCEP acknowledged the increase of fiscal pressure on the copper pair; however, an ongoing reduction in network costs has been deemed to balance this effect, on which grounds the price will stay at the previous level of €9.00 per month. Germany has gone against the trend, despite an explicit request from Deutsche Telekom to raise the rate by 25%. At the end of March, BNetzA published its proposal to reduce the charge to €10.08 from €10.20. This is because on the one hand the regulator found increases in the sunken costs, but on the other hand a fall in efficiency-oriented operating costs of other components acted as a counter-weight: hence the slight decrease, reflecting the contrasting impact of these factors. Similar to the UK, this decision is now undergoing a national consultation, the outcome of which is expected at the end of June.