Ingo Vogelsang, Boston University 1... · Malta Almost 100% coverage and almost 0% penetration However, in U.S. the latest FCC report also found that òconsumers are moving to faster

ACCC/AER Regulatory Conference 2014

Brisbane, 7 August, 2014

Ingo Vogelsang, Boston University

0

I.V. August 7, 2014, Regulating for Efficient Infrastructure Outcomes

International Perspectives

Overview

Hot U.S. topics

Net neutrality

Incentive auctions for spectrum

Mergers

Incentivizing broadband investment and adoption

Electricity regulation, investment and the environment

Conclusions

1

I.V. August 7, 2014, Regulating for Efficient Infrastructure

Outcomes International Perspectives

Hot U.S. topics

Net neutrality:

Over 1 million comments in current proceeding!

Regulations that dictate how content is handled and networks are managed reduce the incentive to invest in next-generation networks and technologies and tie the hands of companies that wish to experiment with innovative offerings. (Rep. Greg Walden (R-OR), chairman of the Energy and Commerce Subcommittee on Communications and Technology, and Rep. Bob Latta (R-OH))

Incentive auctions for spectrum:

The most complicated auctions ever

Mergers:

AT&T – Direct TV

Comcast – Time Warner Cable

2 I.V. August 7, 2014, Regulating for Efficient Infrastructure Outcomes


Incentivizing broadband investment and adoption

Effect of objective function: Total surplus vs. consumer welfare approach

U.S. deregulatory approach

NGA coverage vs. consumer uptake

3



Effect of regulatory objective on dynamic efficiency High WACC for new investment: Total surplus approach

No doubt that high WACC is beneficial

I.V. August 7, 2014, Regulating for Efficient

Infrastructure Outcomes International Perspectives

High WACC 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑛𝑒𝑤 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

𝐷𝑛𝑒𝑤

𝐷𝑜𝑙𝑑

𝑞

4

𝑃𝑛𝑒𝑤

𝑃𝑜𝑙𝑑

DWL

Consumer gain from new product

= 𝐶𝑜𝑠𝑡𝑜𝑙𝑑 = 𝐶𝑜𝑠𝑡𝑛𝑒𝑤

Effect of regulatory objective on dynamic efficiency High WACC for new investment: Consumer welfare

approach Lots of doubts about high WACC



𝐻𝑖𝑔ℎ 𝑊𝐴𝐶𝐶 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑛𝑒𝑤 𝑝𝑟𝑜𝑑𝑢𝑐𝑡

𝐷𝑛𝑒𝑤

𝐷𝑜𝑙𝑑

𝑞

𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑙𝑜𝑠𝑠 = 𝑓𝑖𝑟𝑚 gain

5

𝑃𝑛𝑒𝑤

𝑃𝑜𝑙𝑑

DWL

= 𝐶𝑜𝑠𝑡𝑜𝑙𝑑 = 𝐶𝑜𝑠𝑡𝑛𝑒𝑤

Example from New Zealand (Oxera Report):

DWL from ΔWACC = $0.1-1.0 million

Consumer loss from ΔWACC = $105 million

U.S. deregulatory approach

In 2002-2005 the U.S. embarked on deregulation of wholesale broadband access and relied mostly on competition for broadband investment

Today, people on both sides of the Atlantic complain that there is too little broadband expansion,

in U.S. it is claimed to be due to too little regulation monopoly power and collusion,

in EU it is claimed to be due to too much regulation

However, new data by Yoo show the U.S. to be ahead of EU in NGA and LTE in terms of coverage.

6



U.S. NGA coverage per household as of the end of 2012

Sources: Fetzer and Yoo based on U.S. and European Commission mapping studies

Type of service U.S. Europe

NGA 82% 54%

Rural NGA 48% 12%

DOCSIS 3.0 81% 39%

FTTP 23% 12%

LTE 86% 27%


Infrastructure Outcomes International Perspectives 7

Explanations for the U.S. success in broadband build-out

U.S. success in NGA mostly due to cable: 81% coverage from cable vs. 82% from all sources

Verizon FIOS (GPON): Stalled after strong build-out

However: FTTH investment race Google vs. AT&T

Success of cable in NGA due to

95% coverage of cable overall: Result of old policies

Cable backbone build-out in the 1990s in order to support “500 channels”: Not related to broadband Internet access

Replacement effect from access deregulation of fixed networks

8



Path dependence of policies

Optimal investment policies depend on (sunk) legacy infrastructures

Duplicate NGA build-out justified (almost) only where duplicate legacy infrastructures: Only incremental investments count

Upgrade to DOCSIS 3.0 was cheap.

Upgrade to VDSL with vectoring is fairly cheap

GPON FTTH is fairly expensive (Verizon FIOS)

P2P FTTH is very expensive: requires high densities

All greenfield NGA networks are very expensive.

→Optimal regulatory policies depend on legacy infrastructures

EU: Monopoly outside areas with cable or outside cities → access regulation?

US: Danger of cable dominance in NGA in most of the country?

EU depends more than U.S. on LTE becoming a meaningful substitute for fixed NGA

9



Focus on the demand-side or the supply-side of the market of tools stimulating broadband-rollout?

Field of Dreams: If you build it they will come (?)

Striking difference between coverage and penetration: The case of Malta

Almost 100% coverage and almost 0% penetration

However, in U.S. the latest FCC report also found that “consumers are moving to faster speed tiers, continuing the trend we highlighted in the February 2013 Report and the July 2012 Report.” The average subscribed speed is now 21.2 Mbps, an average annualized speed increase of about 36% from the 15.6 Mbps average in 2012.

In the U.S. build-out and take-up seem to be fairly much in sync.

10




Investment vs. usage: Vogelsang, JRE 2001

Investment by transmission company

Independent system operator (ISO) calculates congestions prices.

Explicit use of two-part tariffs in wholesale price caps in order to induce balanced network expansion and network utilization

Renewables and grid investments

Transmission investments required to accommodate renewables are hard to carry through in the U.S. because of environmental concerns.

11




New proposed U.S. CO2 regulation for electric utilities

Envisages net climate and health benefits of $48-82 billion (at 3% discount rate)

Envisaged CO2 reduction of 30% of the power sector

EPA imposes CO2 limits on all states individually but lets them figure out how to meet the limits.

Long time frame until emission reductions start (2020) and until final limits are reached (2030)

12



Conclusions

Regulatory objectives can make a big difference for the optimal policy choice.

Telecommunications

U.S. deregulation policy probably worked

Network investment because of prior infrastructures

Electricity

Climate policy finally on the move

13



Backup 1: Hot U.S. topics - Net neutrality

How is net neutrality hot?

Current proceeding and discussions are about paid prioritization under tight conditions for “commercial reasonableness”

vs.

re-classifying Internet as telecommunication service vs.

doing nothing

How is net neutrality related to our topic?

Utilization and build-out of networks

Sources of investment financing

14 I.V. August 7, 2014, Regulating for Efficient Infrastructure Outcomes


Backup 2: Hot U.S. topics - Incentive auctions for spectrum

Additional spectrum is substitute for additional investment in wireless infrastructure (cell sites, fixed backbone networks)

U.S. Incentive auctions

Try to repurpose existing spectrum rights by encouraging existing broadcast television licensees to voluntarily give up spectrum in exchange for a share in the revenues generated from new licenses auctioned off for this spectrum

Value of spectrum per MHz-pop for mobile services: 1.28 $ vs. 0.11-015 $ for broadcasting

Complicated set of two types of auctions, one to relinquish spectrum (“reverse auction”), one to acquire spectrum (“forward auction”).

15



Backup 3: Hot U.S. topics - Incentive auctions for spectrum

16



U.S. Incentive auctions

Amount to be sold in forward auction depends on result of reverse auction: Flow

diagram from FCC Staff Summary: The Broadcast Television Spectrum Incentive

Auction

Auction design is being created but incentive auctions will be run in 2015

Backup 4: NGA broadband coverage in Europe (from Fetzer and Yoo)


Infrastructure Outcomes International Perspectives 17 Malta

Backup 5: NGA broadband penetration in Europe (from Fetzer and Yoo)

0%

5%

10%

15%

20%

25%

IT EL CY MT SI PL FR ES AT HU EE SK DE EU FI PT IE UK LU CZ DK BG RO SE LV LT NL BE

High-speed (at least 30 Mbps) broadband penetration, January 2012 - January 2013

Jan-12 Jan-13

Source: Digital Agenda Scoreboard 2013


Infrastructure Outcomes International Perspectives 18

Malta

Backup 6: Focus on the demand-side or the supply-side of the market of tools stimulating broadband-rollout?

Slow take-up could be the Achilles heal of fixed NGA

How much is lost under slow instead of fast NGA build-out?

Do the empirical results about the effects of broadband on economic growth extend to the delta resulting from a move to NGA?

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Backup 7: Two Part Tariff for Investment and Capacity Utilization

Vogelsang (2001) proposes the following approach:

1. The transmission company (Transco) should be allowed to price in

a way that capacity is best utilized

2. The Transco should rise enough money to invest

XiNFqp

NFqpwtwt

wtwt

111

p transmission price q transmission output

F fixed fee N number of consumers

i interest rate X regulatory X-factor

Documents

Ingo Vogelsang, Boston University 1... · Malta Almost 100% coverage and almost 0% penetration However, in U.S. the latest FCC report also found that òconsumers are moving to faster