The costs of regulated wholesale access in legacy and next-generation broadband fixed access networks

The costing of fixed access networks is becoming more important to the development of superfast broadband and the achievement of the Digital Agenda for Europe. However, national regulatory authorities (NRAs) face conflicting priorities here, as they seek to maintain proper incentives for operators to invest in next-generation access (NGA) as well as ensure low end-user prices.

Alternative and incumbent operators must assess the business case for rolling out NGA – either extending fibre optics deeper into the network (e.g. FTTC) or going all the way to the home with FTTH. But the investments needed to roll out NGA are high, and two factors in the business case decision are the price of the existing unbundled copper local loop (LLU) and the price of the future wholesale NGA access product. It is therefore critical for NRAs to correctly understand the cost of the copper line and the appropriate relationship between these prices.

The European Commission (EC) recently closed its consultation on "costing methodologies for key wholesale access prices in electronic communications."¹ This consultation has discussed the various wholesale access services that could be included in a new Recommendation, the transition from copper to fibre, and included consideration of alternative costing methodologies for these wholesale products, including copper LLU.

The costing methodologies used by NRAs include different asset valuation methods (such as replacement or historical cost) and vary in their approach to cost recovery over time (e.g. accounting depreciation, economic costing).

However, there are some relevant considerations for commonly used costing methodologies:

• Replacement cost methodologies imply that regulated prices recover the cost of maintaining and replacing the existing network. In this context, they raise the question of the relevant replacement asset. This could be copper (which has risen dramatically in price since 2000) or fibre (which supports significantly greater end-user bandwidth and new services).
• Single-year or short-term cost recovery methodologies (such as tilted annuities) can suffer when the number of active copper lines is forecast to decline, because costs per line may start to rise as demand falls.
• Economic depreciation can be used to avoid some of the drawbacks of other methods, but requires complex calculations which are reliant on forecasts.

Subsequent to the development of the costing methodology is the requirement for NRAs to set prices. These may be 'cost oriented' (itself covering a wide range of possible prices) and might also have glide paths or (according to the EC, but disputed by BEREC) include linkages to other factors (such as roll-out commitments).

In recent work Analysys Mason has developed a specific form of access network asset valuation and depreciation, in which the total (efficient) costs of copper access are recovered over the long lifetime of the technology (technology lifetime cost recovery: TL-CR). We have developed a model that includes both the transition from historical cost accounting (in the early years of (often state-owned) copper access incumbents), through current costs as (current) asset prices evolve, to the forward-looking economic costs of legacy copper and NGA (applicable as competitive services emerge). The forward-looking economic cost of copper is calculated using remaining asset book values and remaining asset lifetimes. This approach is illustrated in Figure 1.

Figure 1: Illustration of technology lifetime cost recovery (TL-CR) method [Source: Analysys Mason, 2012]

The features of this type of valuation and depreciation method are being considered by some parties in Europe; in 2008, ARCEP (the NRA in France) set out similar features in its 'coûts courants économiques' (CCE) method.²

This method can help NRAs and operators to understand the true cost of legacy copper lines and separately make as robust an estimate as possible of future NGA costs. This provides an understanding of the underlying legacy and future costs which must be supported during a long-term wholesale pricing regime for fixed access, and makes the issue of costing versus pricing more transparent.

1 See https://ec.europa.eu/information_society/policy/ecomm/doc/library/public_consult/cost_accounting/
costing_methods_questionnaire.pdf

2 For example, see La lettre de l'Autorité, no. 59, https://www.arcep.fr/uploads/tx_gspublication/lettre59.pdf