Regulatory holidays all WACC'd out?

How can national regulatory authorities (NRAs) promote investment in next generation access networks (NGAs) ?  It’s a common question, to which some would reply that “not interfering” would be an appropriate answer.  In other words, let those who are willing to risk investment in these uncertain times exploit their investment unregulated by NRAs – let them have a “regulatory holiday” (see, for example, the explanation from our friends at Ofcomwatch).

In previous blogs we have suggested that we think regulatory holidays are a bad idea.  We cannot see that regulation and investment are mutually incompatible.  We believe that it is highly likely that investment in NGAs will introduce new economic bottlenecks. Where an NGA is deployed, no effective and sustainable infrastructure competition will be possible in the short or medium term.  NRAs will therefore find that there will be at least some form of dominance in wholesale access to super-fast broadband.  The remedy for the dominance will be the requirement to provide access at a cost-orientated price, with an allowable regulated mark-up, the old favourite Weighted Average Cost of Capital.

We consider that those who protest that investment is impossible in super-fast broadband should explain to simple regulatory lawyers such as ourselves what is wrong with the old model of wholesale access at cost + WACC?  Doesn’t WACC include an assessment of risk? (See, for example, Ofcom’s statement on its approach to risk in the assessment of the cost of capital).

Our bags are packed; we're ready to go…

We reported over a week ago on the possibility of regulatory holidays sneaking into the Telecoms Package (We’re all going on a [regulatory] holiday…).   Last week (6 May 2009), the European Parliament did its best to get the last word on the Telecoms Package – see the outcome of the second reading. This has given us the first look at the Common Position adopted by the Council.

Don’t try doing a word/phrase search for “regulatory holiday”; nothing as blatant as that has been inserted into the Common Position.  However, have a look at the draft of the amended Article 8(5)(d) of the Framework Directive 2002/21/EC that is proposed:

5.  The national regulatory authorities shall …. apply objective, transparent, non-discriminatory and proportionate regulatory principles by, inter alia:

…

d) promoting efficient investment and innovation in new and enhanced infrastructures, including by ensuring that any access obligation takes appropriate account of the risk incurred by the investing undertakings and by permitting various cooperative arrangements between investors and parties seeking access to diversify the risk of investment, whilst ensuring that competition in the market and the principle of non-discrimination are preserved;

[bold italic text inserted by the Council.]

Anyone care to explain?  Is this the back door to regulatory holidays? It’s a typical example of European late night compromise drafting, so that the article appears to mean whatever you want it to mean (i.e. incumbents will argue that a degree of regulatory holiday is necessary to “diversify the risk of investment” whilst new market entrants will say that access to new non-replicable infrastructure is essential for “ensuring that competition in the market” are preserved).

The Telecoms Package has not been vetoed by the European Parliament, as reported by some commentators.  The Common Position, as amended by the European Parliament, now goes back to the Commission and the Council.  If subsequent trilogues do not lead to an agreed text, the amended Common Position will go to the Conciliation Committee.

We're all going on a [regulatory] holiday…

As is often the case, the devil is in the detail.  Alistair Darling’s Budget speech did not mention Ofcom at any point.  Why would it?  However, there is an interesting statement of intent buried in one of the Budget reports.  Particularly, in paragraph 4.41 of Chapter 4, it states:

In advance of the Digital Britain final report, the Government will review the powers and duties of Ofcom to ensure it can strike the right balance between delivering competition and encouraging investment in the communications infrastructure.

What does this mean?  Does this imply that Ofcom will be pressured to accept that BT be given a regulatory holiday for any broadband roll out?  That is certainly what some sources appear to be suggesting to the Financial Times.

We have also heard rumours that the Council of Ministers may also have included similar wording into the draft revised electronic communications regulatory framework currently going through the EU co-decision procedure. We will have to see what appears in the EU Parliament at Second Reading.

If this means that regulatory holidays are alive and well and living in Europe, then this is a monstrous victory by incumbents, which will arguably put back the liberalisation and development of open competition in the electronics communications sector in the EU by at least three years.  The position in the UK will also be reversed.  No longer will Ofcom’s position as a leading regulator be maintained, and it will destroy the equivalence of access principles developed by Ofcom in its settlement with BT that are considered in many circles to be best international regulatory practice.

Or maybe we are just being too cynical?