Sep. 20, 2011

Valuation and Investment Issues Relating to the Local Loop

By Martin Cave and Antoine Fournier

It is argued that ARCEP’s approach to the valuation of the copper loop and of civil works should take full account of the change in circumstances since ARCEP’s 2005 Decision. Copper is being phased out as a delivery mechanism to the majority of French fixed subscribers; it is better regarded as an obsolescent technology than a long term competitor. The civil works which house both copper and fibre are not subject to significant competition. This means that the pricing motive relating to promoting efficient competition between assets is no longer applicable as it was previously.

The motives of maintaining investment incentives and achieving fairness as between consumers and investors do survive. These are best achieved by ensuring cost recovery. In the case of copper this can be achieved by reverting (as Ofcom has done) to HCA accounting, and assuring cost recovery over the remaining life of the obsolescent asset, via a process of accelerated or tilted depreciation.

In the case of civil works, a reversion to historic cost accounting would have the same desirable feature of approximating more closely the target of cost recovery. But this alone would not accomplish this outcome, because the period since 2000 has seen revenues advanced. By the principles of financial capital maintenance, such overpayments should be recovered for consumers.

The article suggests that this can best be accomplished by reducing the regulated price of ducts – a policy which will both encourage infrastructure competition in accordance with the ‘ladder of investment’ framework and also further the desirable policy goal of hastening the transfer of subscribers from copper to fibre and reducing the period of dual network operation.

 Click here to read the article.

 

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