New pricing rules for copper and fibre access, the modern equivalent asset approach

WIK Focus Workshop on 13 March 2013, Brussels

This workshop, attended by representatives from national regulators and carriers, focused on the currently highly debated topic of wholesale price setting of the copper based subscriber connection line. From economic perspective, there is a steadily decreasing demand for copper based subscriber lines in favor of a growing number of Fiber based subscriber lines.

In this context, all regulatory authorities are faced with the question of setting the correct price level for copper based subscriber lines. One could stick to the previous FL-LRIC costing standard or relate the price setting to the costs of fiber based connections, which are considered the Modern Equivalent Asset (MEA) of the copper based connections.

This regulation theme is, from a European policy perspective, driven by the Commissions’ draft Recommendation on "Non Discrimination obligations and costing methodologies", issued in December 2012. This Recommendation is being discussed thoroughly in Europe and in this context the workshop addressed the following topics:

  • What does economic theory tell us about access pricing in technological transition?
  • What are the pitfalls of further applying FL-LRIC to copper based ULL?
  • How have NRAs adopted copper pricing as a response to shrinking demand?
  • What are the new concepts of the Draft Commission Recommendation?
  • What are the impacts of various pricing concepts on the incentives to invest in fiber for incumbents and alternative network operators?

In the openings presentation, Stefan Kramer of the DG Connect introduced concept and content of the Commission’s Recommendation. He emphasized that the Commission’s focus was on a shared market, technology neutral incentives of NGA investments as well as legal certainty and predictability. The Commission’s approach provides for a Current Cost Valuation regarding network elements however for reusable assets for civil engineering index based historic costs should be applied. Orientation to FTTC as MEA for the copper subscriber line was discusses intensely. With regard to the proposed replication test, Mr. Kramer proposed that it should not be applied to all Products and variants but only for the so called ‘Flagship products’.

In his presentation on the underlying economic principles, Karl-Heinz Neumann von WIK characterized content of and consequences on the widespread regulatory costing standard FL-LRIC. He proposed in particular the economic conditions of applying this costing standard. In this context, he justified that FL-LRIC is no longer suitable for the copper subscriber line as 1) there is a decreased demand for the copper lines, which would lead to 2) higher costs in contrary to the competition standard and 3) copper based subscriber connections are no longer the MEA technology connection wise.

In this context, he proposed and reviewed in detail several alternatives for the price setting based on FL-LRIC. As conclusion, he referred to some NRA’s who responded already on this situation by changing their regulatory practices.

New approaches to pricing the copper loop were at the heart of the discussion at the second part of the workshop; Thomas Plückebaum of WIK started off with an overview regarding the impedingly changed regulation practices in Spain, Germany and Denmark.

Francesco Materia of the French regulatory authority ARCEP presented how France, since 2005, successfully switched from CCA to Historic costs valuation for the copper loop. Two allocation and valuation aspects in France are particularly interesting;

The allocation of duct costs between the copper- and fiber loops is done in France based on the real number of connected customers and not based on the occupied capacity. This leads to a (desired) subsidization of fiber based connections in the first years; later on this will be re-balanced.

As fiber technology changed the economic lifetime of network elements in the copper network, ARCEP shortened the depreciation time for copper loops from 25 to 13 years and increased it for ducts from 40 to 50 years.

Frank Vergouwen introduced how the Dutch regulator OPTA handled the decreased demand for copper loops and the transition from copper to fiber connection technology. Until 2011, copper based loops were (price) regulated based on the cost specifications of KPN. In 2012, OPTA decided that as no longer adequate due to the decreased demand, uncertainty and in particular, the possible negative impact on the transition process to FTTH. Therefore, OPTA decided to use a safety cap for the copper loop based on the last used price, which will be updated with a price index. This price is missing consciously further links to costs.

Bo Andersson, the Chief economist of the Swedish regulator PTS, explained that PTS has responded strongly on the technological changes in the access area. In Sweden, the fiber roll out and penetration of connected homes is quite advanced. PTS considers FTTH as the MEA for connections; wholesale prices for the copper loops are established based on FTTH costs, however without considering the different depreciation time. The resulting costs lead only to a limited price increase compared to the previous copper based costs.

According René Dönni Kuoni of swiss regulator Bakom, the process of redefining the copper based connection price is not yet finished in Schwitzerland. A new MEA-approach is discussed for establishing the price of a copper loop. Copper loop prices will be calculated based on the Fiber loops by deducting a performance delta, which will be derived from market prices.

Further discussions in the workshop demonstrated that different responses are possible to the changed economic conditions in the access area. These differences relate to the development path NGA takes in a specific country. BEREC’s position to the Commission’s Recommendation and the multiple change proposals suggest that the last word hasn’t been said on this topic.

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Peter Kroon
Phone: +49 2224 9225-58
Fax:      +49 2224 9225-68
p.kroon(at)wik.org