Price control principles for current generation wholesale broadband products
The report develops the pricing framework from first principles, assessing the rationale for different types of price controls applicable for wholesale broadband products. The relative merits of cost orientation, on the one hand, and a margin squeeze test, on the other, are examined, as well as the specific methodological assumptions embedded in the price controls.
Since there is evidence that retail pricing constraints are increasingly prevalent in the LEAs, the report concludes that it is reasonable to regulate wholesale access prices on the basis of an ex ante margin squeeze test, which is ComReg’s current practice throughout Ireland. Outside the LEAs, there is no reason to suggest that eircom’s wholesale prices would be at a competitive level in the absence of regulation and, therefore, the imposition of a cost orientation obligation seems appropriate.
In addition to discussing and recommending pricing principles, Oxera’s report proposes a practical approach to regulating WBA going forward. The report recommends an approach whereby the WBA pricing of eircom, the incumbent telecoms operator, would be constrained in all areas by its national costs. Insofar as eircom is under-recovering its costs overall due to the WBA prices being low relative to the costs in rural areas (ie, outside the LEAs), eircom would be allowed to increase its prices in rural areas to break even overall. It is considered that this approach strikes the right balance between practicality and granularity, and is applicable, given the regulations imposed on adjacent market segments (in particular, next generation access and bundles). The proposed approach would not jeopardise eircom’s cost recovery (and therefore investments), nor its ability to meet competition inside the LEAs.