9.68 To date we have adopted a mixed approach to access regulation (i.e. using both active and passive remedies). For example, following the 2005 TSR, we promoted the use of LLU (a passive remedy). We also continued the availability of an active product (wholesale broadband access) which was progressively deregulated. 9.69 A mixedapproach gives providers the flexibility to build business models using a
variety of wholesale remedies and allows for different levels of investment. For this reason it may result in a larger number of providers competing in the market and enable providers to target particular customer needs or niches.
9.70 The potential disadvantages of this approach is it may not actively encourage investment in alternative networks since third party providers may choose to rely more on the (potentially lower risk) active products. We observe that where passive remedies have been successful, the regulator has usually made them a primary focus of regulation. There is also a risk that intervention at multiple levels in the value chain creates a risk of inconsistency (e.g. in pricing of different access products) or increases the complexity of regulation.
9.71 In principle, this potential disadvantage could be mitigated by setting access prices that provide ‘build/buy’ signals consistent with efficient investment i.e. investment is incentivised when the benefits (in terms of potential for competition and innovation) exceed the costs (due to duplication of assets which increases total industry costs). In practice, however, this is challenging due to the need to take account of
differences in local conditions.
9.72 We can also provide investment incentives for regulated firms by adopting an approach that allows the access provider to earn a fair return on investment (including compensation for risk). Our regulatory approach in relation to NGA (requiring wholesale access, but allowing BT pricing flexibility) has led to a situation where BT took a commercial decision to roll out a superfast network to two thirds of UK premises.
Summary
9.73 Figure 27 below compares the three access remedy approaches above, summarising at a high level the main points under our assessment framework headings.
Figure 27: Comparison of access remedy approaches
Criteria Focus on passive
remedies
Mixed approach – active and passive remedies
Focus on active remedies Promotes static
efficiency
Exposes more of the value chain to
competition compared to other access remedy approaches
Exposes more of value chain to competition compared to focus on active remedies alone
Exposes less of value chain to competition compared to other access remedy
May result in duplication of assets (active elements only) May result in duplication active network elements where passive remedies are used
approaches Less risk of duplication of assets compared to other access remedy approaches Promotes dynamic efficiency
Allows more significant scope for
innovation/differentiation compared to other access remedy approaches Encourages investment in active network elements Possibly lower incentives to invest in own end-to- end networks (including civils)
Providers have flexibility to build business model using a wider range of
remedies compared to other access remedy approaches. Potential for a larger number of providers in the market Availability of passive remedies provides scope for product innovation and network investment.
Does not actively encourage investment in alternative networks since third party providers may choose to rely more on the (potentially lower risk) active products
Lower scope for innovation and investment
compared to other access remedy approaches. All access seekers have similar underlying economics and a common wholesale product Market/consumer user disruption
Possible disruption for CPs that currently use active access products. May create a risk of stranded assets and lead to exit of some CPs May result in rebalancing of the charges that consumers pay creating winners and losers
Minimum disruption as maintains status quo
Possible disruption for CPs that currently use passive access products. May create a risk of stranded assets and lead to exit of some CPs
Risk of
regulatory failure
Could result in poor outcomes for consumers if passive access is not sustainable model of competition
Risk that intervention at multiple levels in the value chain results in arbitrage opportunities due to inconsistent pricing
Remedies at multiple levels in value chain increases complexity of regulation
Setting low prices could deter investment in network elements where this would have been efficient
9.74 We have a numbers of objectives to consider when we regulate, based on our duties to further the interests of consumers and business - these include effective
approaches to access regulation will meet these objectives to different degrees and there are certain trade-offs.
9.75 Our approach in the past has been to consider the appropriate remedies on a case by case basis for each market review i.e. we weigh up the costs and benefits of each model of competition for each market review taking into account the circumstances and market context. However we would be interested to hear from stakeholders as to whether we should consider adopting a strategic focus on passive remedies with an objective of reducing the points in the value chain where regulation is imposed.
Q7: Do you think that some form of access regulation is likely to continue to be needed in the future? If so, do you think we should continue to assess the
appropriate form on a case by case basis or is it possible to set out a clear strategic preference for a particular approach (for example, a focus on passive remedies)?