In order to take care of the concerns by the EC, we should have introduced a different
objective function, based on the consumers’ welfare (or possibly the total welfare), to be
maximised. There are basically two ways to do so. One is to introduce the amount of
investment directly in the welfare function, as in Brandao and Sarmento (2007) and Kalmus
and Wiethaus (2006): the argument is that investment increases the quality of service,
hence benefits consumers directly. In the case of next generation networks, it can be argued
that new fibre infrastructures will indeed reduce the number of technical faults in the
network. However, in this case, the model would not include an obvious trade-off between
the degree of competition and the amount of investment. The second possibility is to
incorporate in the model the notion that, if forbearance leads to less competition in the
marketplace and therefore to an exit of alternative operators, then the established operator
which builds the NGNs may have to forego some extra revenues at the wholesale level.
These extensions are left for future work.
Permanent regulation. This measure is at the opposite extreme of the regulatory
spectrum than forbearance. The idea is that incumbent operators are forced by the regulator
to supply a wholesale service (bit-stream) based on NGN on request to alternative
operators. This option has been entertained by several European regulators, including the
Italian one. European established operators have usually retorted that the sale of wholesale
services based on NGN should take place under commercial freedom. Of course, one
crucial issue is the price of the wholesale service: Ofcom for instance has mentioned the
possibility to adjust the reference price of the NGN bit-stream in order to take into account
the risk of the investment.
In a permanent regulation scenario, national regulatory authorities cap returns both in the
volatile and in the steady phase. Permanent regulation is modelled by a 27.5% reduction of
PO, whose rate now becomes equal to 4%, and by a reduction of the NPV equivalent to a
27.5% of the cash flow over a period extended to 12 years, which is now equal to €1,291.
The lost payout, the expected NPV at the initial date and the NPV at expiry are all
reduced as a consequence: it becomes more convenient not to exercise the option than in
the forbearance case. As it can be seen in Table 4, the permanent regulation scenario
33