The Need for a New Approach to Regulating Fixed Networks

Wolfgang Briglauer, Ingo Vogelsang

Publication: Working/Discussion PaperWU Working Paper

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Abstract

The increasingly observable excess capacity in the fixed networks calls into question the established long-standing pricing standards for wholesale services based on forward-looking long-run incremental costs (FL-LRAIC). The FL-LRAIC standard has worked quite well in expanding markets, although even there price-squeeze problems have appeared. In contracting markets the price-squeeze issue, however, becomes paramount and lower prices both at the wholesale and retail levels would be efficient. This would favor a retail-minus approach (RM) under long-term contraction. Because both expansion and contraction could be relevant in the future, we propose an optional approach based on the wholesale price formula p = min(FL-LRAIC, RM). This will generally protect alternative competitors against price-squeeze while at the same time allowing the fixed-network incumbent full downward price flexibility. It also protects alternative competitors and end users against excessively high prices. Hence, implementing this option successfully at wholesale level would eliminate the need to regulate retail markets. The combination of RM and FL-LRAIC seems to be most realistic, because it is relatively simple and internationally partly tested already. We show that this option is superior to FL-LRAIC or RM alone and to other approaches, such as short-run marginal costs. We also consider a possible combination with capacity-based charging, which may have particular merits for converged services in next generation networks (NGNs).

Publication series

SeriesWorking Papers / Research Institute for Regulatory Economics
Number2009,1

WU Working Paper Series

  • Working Papers / Research Institute for Regulatory Economics

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