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

(middle row, left column) implies in fact an expected postponement of the investment of
about two years²⁸. Sensitivity analysis suggests that the delay increases with the strike price
and the volatility, up to 3.48 years when both parameters take their maximum values in the
exercise.

Sunset clause. Sunset clauses are a regulatory tool which is more widespread in the US
than in Europe. Still, it could help to overcome some of the regulatory concerns raised by
the deployment of NGNs. The measure is that established operators which build new
networks are compelled to provide a wholesale permanent regulation bit-stream service
based on NGN, such as the one we discussed in the previous case, for a pre-determined
period of time. The rationale is that established operators can allegedly exploit the
advantage of having a larger market share to start with: hence, in principle, they need less
time to recoup the massive investment costs of NGNs. With a sunset close obligation,
alternative operators can make use of the established operator’s infrastructures, while they
build their own customer base and overcome the initial competitive disadvantage. After a
pre-defined number of years, the established operator is no longer obliged to rent the NGN
infrastructures at a cost and the alternative operators may either rent at commercial
conditions or build their own networks. The main rationale of the sunset clause is that it
creates the proper incentives for alternative operators to build their own infrastructures,
while at the same time reducing only partially the incentive for the established operator to
construct its own network.

The sunset clause scenario corresponds to a regulatory policy which intervenes in the
volatile phase, while it leaves returns uncapped in the steady phase of the project. In terms
of our model, the sunset clause scenario is modelled by subtracting to the initial value of
the NPV the 27.5 % of the net cash flow realised over a six year period (NPV is thus equal
to €1,388) and by reducing the initial PO by 27.5%, down to 4%. The sunset clause (middle
row centre column) results in a expected investment postponement of almost two years
(1.95).

²⁸ Again, our model is not suited to examine the consequence of such measures on the degree of competition
in the telecom markets.

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