Investment in Next Generation Networks and the Role of Regulation: A Real Option Approach

other hand, by neglecting the competitive interplay between established operators and
competitors, a relevant factor in deciding the optimal timing of investment in NGNs might
be missed.

Regulatory forbearance. The regulatory forbearance consists of withdrawing sector-
specific ex ante regulation on next generation networks, i.e. mandated access to the
infrastructures and setting of the price at which access is imposed²⁷. In the regulatory
forbearance, the authority leaves returns uncapped in both the volatile and the steady phase.
The forbearance scenario is modelled by assigning to the NPV and PO their initial values
i.e. those included in Table 2.

Results (see Figure 10 for a summary and Table 4 for the whole set) are obtained by
setting the up-front investment equal to €440 and the volatility equal to 0.45: they are
shown in the highlighted 3x3 matrix of Table 4. In the forbearance scenario (bottom row;
right column), which corresponds to the highest payout rate and NPV, investment is
undertaken immediately.

Sensitivity analysis is conducted on the investment up-front cost (±14%) and on
volatility. In all cases, except when the up-front investment cost and volatility take both
their highest values, in which case fugit is equal to two years, forbearance leads to
immediate investment.

From the point of view of our model, the regulatory forbearance is the most effective
solution in order to enhance investments. In fact the company decision to invest is based on
expectations of unconstrained net cash flows (both NPV and payout are unconstrained).

Clearly, our framework is inadequate to examine the competition issues raised by the
regulatory forbearance, which are causing so much concern with the European Commission
and regulators everywhere in Europe. In fact our model is only concerned with the amount
and the timing of investments: hence a regulatory forbearance is a first best solution almost
by construction.

²⁷Regulatory forbearance on the roll-out of optical fibre has taken place in US following a petition by Verizon
to the Federal Commission for Communications.

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