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

In the case of the established operator, we consider four alternative regulatory
regimes: 1) Forbearance (absence of regulation); 2) Permanent regulation; 3) Sunset
clause (regulation only in the initial period of the project, so as to incentive investment in
alternative infrastructures); 4) Regulatory holiday (absence of regulation in the initial
period of the project, when uncertainty on the returns is particularly high). The intervention
by the regulator is modelled as a decrease in the annual net cash flow of the established
operator by 27.5%. This reduction corresponds to a halving of the cost savings and the
extra profits of NGNs.

The outcomes of the simulations suggest that investment is carried out immediately
under forbearance (as expected) and regulatory holiday regimes; it is delayed by around
two years in the other cases. As far as the timing of the investment is concerned, the
regulatory holiday appears superior to the other regulatory options.

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