Pricing Capital Under Mandatory Unbundling and Facilities Sharing

The regulation of telecommunications, railroads, and other network industries has been based on mandatory unbundling and facilities sharing - entrants have the option to lease part or all of incumbents' facilities if and when they desire, at rates determined by regulators. This flexibility is of great value to entrants, but because investments are largely irreversible, it is costly to supply by incumbents. However, pricing formulas used by regulators to set lease rates for capital do not compensate incumbents for this flexibility, so that incumbents are effectively forced to subsidized entrants, discouraging further investments. This paper shows how pricing formulas used to set lease rates can be adjusted to account for the transfer of option value from incumbents to entrants, and estimates the average size of the adjustment for land-based local voice telecommunications in the U.S.

An Economist's Guide to Local Loop Unbundling

This guide provides a critical review of the economics literature on the desirability and the effects of unbundling the local loop. Firstly, we discuss recent contributions, which aim to quantify the effect of unbundling regulations on the development of broadband services. Secondly, we review the literature on the potential impact of unbundling on investment and innovation incentives. Finally, we conclude this paper by offering some suggestions for further research.Unbundling; broadband diffusion; investment and innovation

An Economist's Guide to Local Loop Unbundling

This guide provides a critical review of the economics literature on the desirability and the effects of unbundling the local loop. Firstly, we discuss recent contributions, which aim to quantify the effect of unbundling regulations on the development of broadband services. Secondly, we review the literature on the potential impact of unbundling on investment and innovation incentives. Finally, we conclude this paper by offering some suggestions for further research.Unbundling; broadband diffusion; investment and innovation

Better safe than sorry? Reliability policy in network industries

This report develops a roadmap for reliability policy in network industries. Based on economic theory, we analyse the relationship between reliability and various types of government policy: privatisation, liberalisation, regulation, unbundling, and 'commitment policy'. We let government policy depend on (1) the feasibility of competition between networks, (2) contractibility of reliability, and (3) the relation between profit maximisation and public interests. We test this roadmap on the basis of the empirical literature and case studies on electricity, natural gas, drinking water, wastewater, and railways.

The illusions of competition in the water sector: a response to the OFWAT/Cave consultations on introducing competition in the water sector in England and Wales

The paper provides a critical review of the role of liberalisation and competition in the water sector, based on empirical evidence from the UK and internationally. The paper is submitted as evidence to the official reviews of competition in water sector in England and Wales

Pricing Capital under Mandatory Unbundling and Facilities Sharing

The regulation of telecommunications, railroads, and other network industries has been based on mandatory unbundling and facilities sharing entrants have the option to lease part or all of incumbents' facilities if and when they desire, at rates determined by regulators. This flexibility is of great value to entrants, but because investments are largely irreversible, it is costly to supply by incumbents. However, pricing formulas used by regulators to set lease rates for capital do not compensate incumbents for this flexibility, so that incumbents are effectively forced to subsidize entrants, discouraging further investments. This paper shows how pricing formulas used to set lease rates can be adjusted to account for the transfer of option value from incumbents to entrants, and estimates the average size of the adjustment for land-based local voice telecommunications in the U.S.

Real Options and the Regulation of Brazilian Fixed-Line Telephone Operators: The Mark-up on the Cost of Capital

This study argues in favour of the real option methodology to calculate the access price for Brazilian fixed-line phone operators. The new cost-oriented regulatory framework for interconnection of telecommunication networks established in 2005 poses questions regarding the adequate remuneration of investments. By investing in a fixed-line telephone network while giving access to new entrants the incumbent is actually providing an option to access its infrastructure. Since options aren't costless to properly compensate the investment an effort to estimate the option premium is justified. We suggest a pragmatic approach where the real options rationality appears as a mark-up over the sector's cost of capital. Failing to consider the real option granted by incumbents discourages investment in infrastructure in the sector and hinders the intertemporal maximization of social welfare

Price Effects of Regulation: Telecommunications, Air Passenger Transport and Electricity Supply

Price Effects of Regulation draws on research undertaken at the OECD to quantify the effects of domestic regulatory regimes on prices in up to 50 economies for 3 sectors — international air passenger transport, telecommunications and electricity supply. The study finds wide variations in regulatory regimes across economies for each sector. The results suggest a positive relationship between the stringency of regulatory regimes and higher prices in each sector. For example, the bilateral system of restrictions on the number of air passenger flights between countries and the conditions under which they operate are estimated to collectively increase airfares by between 3 and 22 per cent.regulation - price effects - telecommunications - air transport - airlines - electricity - trade restrictions

Broadband in rural and remote areas: the impact of Scottish policy initiatives

The ability to participate in the Internet-based economy that is emerging requires access to broadband. However, in many countries, 'digital divides' occur, with those in geographically remote and rural areas being particularly disadvantaged. Through focusing on rural and remote Scotland, the paper identifies three different categories of policy initiatives that have been adopted and their interaction with broader UK and industry wide developments. Whilst these initiatives have encouraged the adoption of broadband, it is argued that UK initiatives are creating a new series of challenges to the adoption of broadband