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Economic replicability tests: an “out-of-the-box” implementation

Abstract

Regulation of Next Generation Access Networks (NGANs) has been one of the most debated topics throughout the European Union (EU). Now it seems to be seeking to strike a new balance, between promoting NGANs investments and, simultaneously, preserving the current level of competition. This much-sought reconciliation was attempted with the release of European Commission (EC)‘s Recommendation 2013/466/EU on consistent non-discrimination obligations and costing methodologies for the promotion of competition and the enhancement of the broadband investment environment. The Recommendation, among others, defines the use of Economic Replicability Tests (ERTs), on the basis of a Discounted Cash Flow (DCF) approach, as the proper methodological tool to determine whether the dominant firm (i.e., incumbent operator) engages in a discriminatory behavior. The aim of this paper is twofold; first to investigate the impact of long-term access pricing agreements on ERT conduct as defined in Recommendation 2013/466/EU; second, in the light of the review of the aforementioned Recommendation, to attempt a non-conventional implementation of the test. The latter manifests itself via the potential use of Real Options Theory (ROT) within the ERT formulation on top of DCF results. The main objective is to investigate whether the fixed part of the wholesale access price - if the latter is seen as a two-part tariff - can actually be included in the calculation process to the contrary of what Jaunaux and Lebourges [39] suggest.

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Notes

  1. Equivalence of input: The operator with significant market power provides a particular wholesale access product/service to third party access seekers on the same terms, conditions (e.g., price, quality) and timescales by the same systems and processes as to those offered to its retail arm, whereas all information regarding that particular wholesale access product/service must be treated on equal terms for ‘internal’ (i.e., incumbent’s retail arm) and ‘external’ customers (i.e., competitors).

  2. Significant market power.

  3. National Regulatory Authorities.

  4. A financial option gives its holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset (e.g., a stock) on a certain date in the future (maturity date) for a certain strike price ([38]).

  5. https://digital-strategy.ec.europa.eu/en/access-recommendations-factual-summary-report-targeted-consultation-proposed-revision

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Correspondence to Dimitris Varoutas.

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Appendix 1

Appendix 1

Table of Acronyms

Acronym Term
ACL Average Customer Lifetime
ARPU Average Revenue Per User
BEREC Body of European Regulators for Electronic Communications
CapEx Capital Expenditure(s)
CRA Charles River Associates
DAE Digital Agenda for Europe
DCF Discounted Cash Flow
EC European Commission
ECPR Efficient Component Pricing Rule
EECC European Electronic Communications Code
EEO Equally Efficient Operator
ERT Economic Replicability Test
ETNO European Telecommunications Network Operators
EU European Union
FCC Federal Communications Commission
FCF(s) Free Cash Flow(s)
FttH Fiber-to-the-Home
GDP Gross Domestic Product
ICT Information and Communications Technology
NGANs Next Generation Access Networks
NN Net Neutrality
NPV Net Present Value
NRA(s) National Regulatory Authority(−ies)
ODTR Option to Delay Pricing Rule
OpEx Operational Expenditure(s)
OTD Option to Defer
RGO Real Growth Option
ROs Real Options
ROA Real Options Analysis
ROT Real Option Theory
RRO Real Regulatory Option
TELRIC Total Element Long-Run Incremental Cost
TV Terminal Value
WACC Weighted Average Cost of Capital

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Charalampopoulos, G., Katsianis, D. & Varoutas, D. Economic replicability tests: an “out-of-the-box” implementation. Netnomics (2022). https://doi.org/10.1007/s11066-021-09150-2

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  • DOI: https://doi.org/10.1007/s11066-021-09150-2

Keywords

  • Discounted cash flow analysis
  • Economic replicability tests
  • Real options
  • Recommendation 2013/466/EU