Copper Switch-off Strategy Essential for Achieving European Broadband Targets, Study

High charges for copper telephone networks are deterring the roll-out of fiber across Europe, according to a study commissioned by the European Competitive Telecommunications Association (ECTA).
By allowing incumbents to reap high profits from their legacy assets without the need to invest in replacing the lines, current pricing structures for telecoms are likely to delay the move to 100Mbit/s broadband speeds, a target set by the European Commission in its EU2020 strategy in March last year.
Currently, on average European regulators set the wholesale charge to rent the incumbent’s copper lines at EUR8.55 per month. However, this charge is usually based on the cost of building a brand new copper network, which no-one would do today. Such costs can be double the amount it actually cost to install the lines decades ago.
The study, conducted by WIK, suggests that, due to the high profits that the current access charges allow, copper charges could need to be cut substantially to make it more profitable for incumbents to renew their networks towards fiber. Incumbents have been pressing for higher copper access charges across Europe, but model results show that this would lead to disincentives for fiber investment.
Another key finding is that it is nearly never profitable to run copper and fiber networks side by side. The authors therefore recommend that incumbents should be allowed to switch off their copper networks and transfer all customers onto the new fast networks as soon as they build fiber networks which are effectively open and allow fair competition.
WIK calculates – for a representative European country – that cost-based charges for the new fiber network should not be set more than a few euros higher than the current copper access charges in Europe. This would provide incumbents with a fair return on their investments whilst ensuring that competition flourishes and retail prices are affordable for ordinary consumers.
Ingo Vogelsang, one of the authors of the study, said,

“Commercial decisions about network investments are driven by profit considerations. Incumbents will only invest in fiber if this is more profitable than staying with copper. If regulators signal that copper access prices will be cut, but that incumbents can switch the copper off if they invest in open fiber, that should provide the incentives we need to kick-start the move to high-speed broadband. Consumers will receive faster and better services quickly and at little additional cost.”

Because the business case for fiber depends on transferring all the copper customers onto fiber, the study also concludes that an alternative operator investing in a separate fiber network would face very high hurdles to make the economics work, and would need special advantages in the areas they cover to enable it to outplay the incumbent.
The European Commission has announced that it will be issuing guidance on how regulators calculate wholesale charges. The study suggests that “forward looking” methods to calculate charges remain appropriate for growing markets such as fiber but are no longer the relevant benchmark for declining markets such as copper. Instead, regulators should set a cap on charges, but also make sure that the prices do not allow a margin squeeze.
Key conclusions of the study are as follows:

• In the study’s basic scenario fiber wholesale costs are estimated at EUR11.65 per month in a representative European country, if the incumbent can make use of available ducts (“Brownfield”). If wholesale charges are set at this level, customers would pay EUR36 on average for faster fiber-based services – only a little more than they pay today for standard broadband. However, incumbents would not invest in fiber at these charges unless copper prices are drastically cut – to around EUR4 per month.
• In a Greenfield scenario where no ducts can be reused the costs are estimated at EUR13.92 per month. If wholesale charges are set at Greenfield cost then customers would pay about EUR38 per month for fiber based service. In this scenario copper access charges at EUR6 or below would induce fiber investment.
• At the current European national average copper access charge of EUR8.55, incumbents are unlikely to invest at a large scale because a fiber wholesale access charge of EUR19.49 (significantly above the cost-based rate) would be needed to make fiber more profitable for an incumbent than continue their existing copper networks. At these high wholesale rates for fiber, customers would pay on average EUR42 for their telecoms services, significantly more than they pay today. Competition and consumer welfare would be reduced.
• It is not cost-effective to run fiber and copper in parallel. This situation is possible only with copper and fiber access charges that are so high that they generate monopoly profits for both networks and keep entrants virtually out. This would lead to high retail prices, low competition and low consumer surplus. A forced migration strategy from copper to fiber is therefore economically rational and desirable from a welfare perspective.
• To avoid a “rate shock” whereby customers face a large gap between the charges for the copper network and fiber network, regulators could “signal” that they will bring down copper charges sharply, but allow the incumbent to switch-off the copper network and transfer customers swiftly if they install open fiber networks. This strategy is likely to lead to investment before copper charges actually come down. Customers would pay only a little more than today for telecoms services, but immediately benefit from the higher fiber capacities provided in a competitive market.
• An investor other than the incumbent would require special cost savings or other advantages in order to out-compete the copper incumbent and may face the threat of the incumbent preempting its investment thereby rendering it unprofitable. The model shows that only with very high access charges would it be viable for an independent investor to install fiber alongside the existing copper network in large parts of the country. Viability at lower access charges is assured only in cases with special advantages in certain cities.
• The study does not recommend that regulators continue setting copper charges on a forward-looking basis at a time when copper is no longer the modern technology. If regulators continue to pursue this approach, copper charges are likely to rise, increasing retail prices for telecoms, undermining competition and thereby weakening incentives for incumbents to invest in fiber. Instead, regulators should set a cap on copper wholesale charges at the last relevant price before volumes started to decline, and carry out a margin squeeze test to identify the appropriate level.
• While the numerical results stem from representative country data and parameters of the WIK models, the main conclusions are independent of these particular numerical results and only relate to the relative rankings and orders of magnitudes conveyed by the results.
• Despite a high degree of harmonization between European price control methods in principle, costing methodologies in detail however, vary significantly. As a consequence the range of ULL prices is rather large in Europe (EUR6 – 16 per month). The majority of regulators have not yet adjusted their approaches to value copper as a legacy technology. Some regulators have even increased, or proposed to increase copper charges at a time when such an approach is questionable.

(Source: INTUG)