A report released today by economists at The Brattle Group offers guidelines for EU-based National Regulatory Authorities (NRAs) to use when calculating an allowed rate of return—typically the weighted average cost of capital (WACC)—for electronic telecommunications operators with significant market power (SMP).
The report examines the current landscape and finds that NRAs use a variety of methodologies to estimate WACCs, which ultimately prompts pricing differences between Member States that do not reflect market fundamentals. These differences may affect investment decisions by market participants, dragging investment to jurisdictions with more generous WACCs, and away from those with less generous WACCs, which can distort the EU’s single digital market. To address this issue, the European Commission’s Directorate-General for Communications Networks, Content and Technology (DG Connect) engaged The Brattle Group to develop a harmonized WACC methodology to be used by the NRAs.
The report highlights areas where it would be appropriate to set single EU-wide parameter values for the WACC. Where a single value would not be appropriate, the authors either recommend a common methodology that NRAs can apply to estimate the parameter value or explain why it would be more appropriate to give NRAs freedom to determine that national parameter value. The result is a common set of procedures for NRAs to use when estimating WACCs in the EU telecommunications sector that ensures that price differences reflect economic fundamentals, and it more reliable and thus unlikely to be challenged by the European Commission. The guidelines, which touch on legacy networks as well as Next Generation Access (NGA) networks, will also help network users better understand how access tariffs are derived and may evolve.
“Our report attempts to strike a delicate balance between eliminating subjective differences between NRAs’ WACC estimates, without imposing undue change and uncertainty,” noted Dan Harris, Brattle Principal and co-author of the report. “We are very pleased that the European Commission has already received positive feedback about the guidelines from NRAs, and anticipate that these guidelines will positively impact the EU telecommunications sector.”
The report, “Review of approaches to estimate a reasonable rate of return for investments in telecoms networks in regulatory proceedings and options for EU harmonization,” was authored by Brattle Principals Dan Harris, Richard Caldwell, and Francesco Lo Passo, and Associate Lucia Bazzucchi. It is available for download below.