5 October 2023
The EC’s Gigabit Infrastructure Act will pave the way for fibre to be deployed using the ducts and poles of utility companies; but the approach to set the price of duct/pole access is still to be determined. Graham Johnson, Partner at Aetha, explains why ‘cost avoidance’ may be a promising approach.
The European Commission’s proposed Gigabit Infrastructure Act (GIA) is in the news again. This time thanks to the European Parliament’s proposal to expand its scope. [1], [2]
The GIA’s main focus of facilitating the rollout of fibre will remain unchanged. One key measure is to make available to fibre builders the ducts and poles of any utility in which the state has an interest (including electric and water suppliers, street lighting, and traffic-light control). Any fibre builder will have the right to know where such ducts and poles are, and to make use of them at a reasonable price. However, the GIA does not specify which approach should be used to set the price.
As is often the case in telecoms regulation, multiple options are available. Below we discuss how three of them might be applied to utility ducts and poles – bottom-up cost modelling, replicability-based modelling and cost avoidance modelling.
In a ‘bottom-up’ approach, a cost model is developed of the utility’s duct or pole network, either on a Fully Allocated Cost (FAC) or Incremental approach. An Incremental approach considers only the additional costs incurred by the utility due to the fibre deployment. The FAC approach, which produces higher prices, also includes a portion of the utility’s costs of its own distribution network. It is therefore more complex. The FAC approach is more prevalent in America, whereas many European regulators have preferred an incremental version.
‘Replicability-based’ models start with the desired output prices that the fibre builder intends to offer its customers and then deduct costs not related to the use of the utility’s network. This option, in essence, employs the same underlying data-gathering and modelling approaches developed for the ‘economic replicability test’ (ERT) prescribed by the European Electronic Communications Code (EECC)[3] for broadband wholesale products.
Experience from the regulation of telecoms wholesale prices has shown that both ‘bottom up’ and ‘replicability-based’, models are time-consuming and data-intensive to produce.
The ‘cost-avoidance’ approach estimates the (hypothetical) costs to deploy and operate a fibre network by another means – i.e. to deploy its own ducts, poles, etc. Such a cost would be higher than using the utility’s poles and ducts, and the parties would ‘split the difference’ to arrive at the price The estimated cost can be complemented with ‘commercial value’ models estimating the additional value to the fibre builder, arising out of faster network deployment and hence shorter time-to-market. Both models use rather similar algorithms and data sources to a fibre-builder’s own strategic planning. So, there are synergies to be gained from piggy-backing on them.
When considering which approach to follow, it is important to acknowledge the complexities of modelling non-telecoms infrastructures. Analysts with experience of analysing telecoms networks face a learning curve when familiarising themselves with the cost data of utilities. The cost-avoidance approach focuses on telecoms data, so avoids some of that learning.
Given the pros and cons of the various approaches, in many (but not necessarily all) cases cost avoidance is often likely to be the best approach because the data required is more readily available, and it is data about telecoms networks, rather than about utility infrastructures.
As the implementation of the GIA gathers pace in Europe, it will be interesting to see which approach (or combination of approaches) turns out best suited to a typical European situation.
[1] Proceedings of the Committee of Industry, Research and Energy, 19 September 2023, Amendment 62.
[2] ECTA, ETNO, GIGAEurope and GSMA, ‘Joint telecom industry statement on the Gigabit Infrastructure Act’, September 2023.
[3] EC, ‘European Electronic Communications Code’, 11 December 2018. Article 74.
