Tuesday, July 08, 2008

EU telco regulation reform: not enough for FTTH

Monday night, two committees within the European Parliament approved, with amendments, the upcoming reform to EU telecoms regulation. The full EP is set to vote September 3, and the Council of Telecoms Ministers will have its say November 27. The main points are:
  • There will be a new pan-European body: BERT (Body of European Regulators in Telecom, basically an upgrade to the existing ERG), instead of the much more powerful EECMA as proposed by the EC. BERT (not the EC) will have veto power over NRAs.
  • NRAs will be able to enforce functional separation, but only if there is no other remedy, and on the condition of EC and BERT approval.
  • NGA: no monopolies and shared financial risk on the build-out through long-term leases (i.e. upfront payments from altnets) instead of regulated wholesale prices.
  • Striving for spectrum harmonisation across the EU, i.e. any technolgy and any service in any band (as long as the ITU and national policies allow it).
Good news then for FTTH aficionados: no monopolies. But this is not enough. Regulation needs more reform.
Time to see how recession-proof TMT markets and regulation are. A number of reports show that telcos (despite their utility-like nature) and B2B media (despite their must-have portfolios) are not immune. But regulation, particularly when it comes to FTTH, needs to take a look at the new reality too.
  • FTTH network construction: A valued reader tells me that pension funds, who take an interest in funding FTTH network build-outs, are typically looking for a 11-13% return (before inflation!). Viviane Reding has been hinting at proper returns for infrastructure builders (see below*). The other side of the equation (costs, let's say WACC) deserves some attention too. Unfortunately, regulators tend to look back trying to establish these numbers, when they really should be looking forward. And, they tend to look at services, instead of infrastructure. First of all, debt markets are in crisis and interest rates are significantly higher than they used to be. Second, the typical review cycle is 3-5 years, but fiber needs a much longer horizon of let's say 20 years (LLU gear may depreciate in 3-5 years, but not fiberoptic cables). What this effectively does, is create uncertainty for investors and infrastructure builders who are prepared to take a long-term (20 year) view.
  • Broadband internet service: The latest report from the Pew Internet & American Life Project shows that broadband penetration in the US grew from 54% in December 2007 to just 55% in April 2008.
  • B2B media: Reed Elsevier is trying to sell its RBI unit (valued at roughly GBP 1.25bn) but is hit by the credit crunch. The company may have to offer a GBP 100m loan to potential PE buyers. The Deal reports that "PE fundraising continues at breakneck pace", but "fundraising for traditional LBO funds fell off 20%".
* Recently Viviane Reding proposed a 15% 'risk premium' on top of wholesale prices for fiber networks (sources tell me she was really meant to be a little more careful by giving a 13-17% range because of local differences). I suppose this relates to the passive layer and the wholesale prices it charges to the active layer, but several things remain unclear: Can a vertically integrated operator charge a third-party active operator a 15% higher price than its own active operator unit? Does it include FTTN/VDSL-networks?

1 comment:

John said...

I understood the 15% to be the rough return figure, rather than a premium. The idea is that the copper return is supposed to be ~10%.