Albeit the sunset clause can be preferred on theoretical grounds, our simulation suggests
that investment in NGNs ends up being postponed by almost the same amount of time as in
the permanent regulation case. This is because it affects the investment return during the
period - the first six years - in which it matters most for the purpose of the investment
decision, as uncertainty is still high and it makes sense to wait before undertaking the
project.
The sensitivity analysis shows that the waiting time is typically either zero or around
two years. Only when volatility and the up-front cost take the highest values, then the
postponement overcomes three years. In all instances the waiting time in the susnset clause
is slightly lower than the corresponding time under permanent regulation.
Regulatory holiday. This is another intermediate solution between the regulatory
forbearance and the permanent regulation. The regulator should impose no regulatory
obligations on the investments implemented in the initial period of the project up to the
expiry date. The rationale is that, in a real option framework, it is the uncertainty on the
distribution of future cash flows, hence of the net present values, which causes the company
to put off the project. As we saw, such uncertainty is very high at the beginning, when the
value of the reversibility (or protection) component is at its zenith. Uncertainty, hence the
insurance element, tends to become smaller in the following periods. If the aim of the
regulator is to create an environment conducive to investments, then it may decide to scrap
all regulatory obligations until uncertainty becomes sufficiently small. After that date, the
regulator can impose obligations with an impact on cash flows.
The benefit of a multiphase regulation policy that adjusts its tightness to the expected
decrease of the risk over time is twofold: it would act as an effective incentive where it is
needed (i.e. when the protection value against downside potential would refrain
telecommunication operators from investing); when the circumstances will be such as to
justify fibre deployment irrespectively of the regulatory context, the major benefit of the
investment could be directly transferred to consumers through the promotion of a fiercer
service based competition at retail level.
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