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Local loop civil engineering prices and rate of return

Arcep publishes two draft decisions for consultation 

Paris, 11 May 2017

Today, Arcep is launching a public consultation on a draft decision defining the economic terms and conditions governing access to Orange civil engineering infrastructure. Notably in a bid to keep pace with the growing development of internet use, new superfast optical fibre to the home/building (FttH/B) network rollouts have been ongoing for close to ten years. The deployment of these new networks is being performed primarily using civil engineering that Orange built for its legacy copper network (underground ducts, overhead installations).

Having access to existing civil engineering infrastructure thus plays a central role in the economic and operational equation of superfast optical fibre networks rollouts, regardless of whether they are being performed by public contractors in sparsely populated areas or by private sector operators in more densely populated locations.

Pricing adapted to regulatory objectives: furthering fibre rollouts

The current rules governing civil engineering pricing were defined by Arcep in a decision adopted in 2010, based on two guiding principles that aimed to encourage the deployment of superfast broadband access nationwide:

- cost allocation between copper and fibre linking pricing to the increase in fibre's commercial adoption rates, to enable a smooth transition from broadband to superfast broadband;

- geographical balancing of costs in support of the country's more sparsely populated areas.

The tremendous increase in the use of Orange civil engineering for optical fibre network rollouts, and the experience of applying this decision led Arcep to hold a consultation on a technical review of said decision. Arcep held a first consultation from 9 February to 22 March of this year that set forth the different possible changes being explored. It received a large number of responses from market stakeholders, which Arcep examined and is today making public.

Simplification, stability and predictability for market players

Arcep thus confirms the two main principles listed above, and proposes maintaining cost allocation between copper and fibre based on the actual number of access lines and not the number planned. It proposes to simply the mechanism used to set prices and collect data from operators. For instance, it suggests doing away with the distinction between transport and distribution for the copper network (whose significance is obsolete when it comes to fibre networks and so makes the process of providing information more complex for market players, in addition to which the new measure allows for more predictable pricing), and allocating overhead civil engineering costs in the same way as civil engineering ducts.

Aware of the importance that civil engineering prices represent for the business plans of operators deploying superfast access networks, Arcep wants to help these players in their projections by enabling more detailed predictability and by increasing the amount of information at their disposal - two essential ingredients for stimulating long-term investments. Arcep is also publishing:

- an instructional memo explaining the mechanisms underlying the expected trajectory of prices as the copper to fibre transition progresses: "How will Orange civil engineering access prices evolve during the copper to fibre transition?"

- a past and provisional chronicle of Orange annual civil engineering costs, according to different scenarios;

- an Excel tool that allows market players to simulate civil engineering prices based on different hypotheses.

Rate of return: a single RoR for fixed and mobile networks

As a parallel measure, and to provide a global view, Arcep is also launching a consultation on a draft decision on the rate of return for regulated fixed and mobile activities for 2018 to 2020.

While, up until now, different rates of return had been defined for fixed and mobile regulated operations, and drawing in particular on available market data, Arcep believes that it is possible today to have a single rate for these two activities. Arcep has observed that the convergence of fixed and mobile networks that has been ongoing for several years now in French markets has gone hand in hand with a merging of financial risks, which has meant a gradual standardisation of fixed and mobile operators' financial characteristics.

In addition to this simplification of regulatory mechanisms, as it did during previous regulatory periods, Arcep is updating the values of the parameters used for calculating the weighted average cost of capital, one of the factors that determines the regulatory rate, to align with market realities as closely as possible.

In this public consultation, Arcep proposes decreasing the nominal pre-tax value of the regulatory rate of return, to take decreased interest rates into account and, to a lesser degree, the decrease in corporate tax rates.

Both of these public consultations will last one month.

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