Incentives and optimal time of investment in New Zealand’s building-blocks regulation of its FTTH open-access network

Abstract

Understanding the incentive structure and the effects on the timing of investment of any regulatory regime is of outmost importance to all stakeholders. A fundamental question in the literature on broadband investment and regulation, articulated in Cambini and Jiang (2009), asks: “what impacts regulation imposes on firms’ investment behavior in broadband communications, impetus or hindrance, and how regulatory regimes should be designed to foster the incentive to invest?”. New Zealand’s Part 6 of the amended New Zealand Telecommunications Act (2018 New Regulatory Framework) describes a new regulatory framework largely based on the Commerce Act of 1986 that applies to regulation of electricity lines, gas pipelines and airports. This is known as the Building Blocks Model (BBM) approach. Biggar (2004) defines the BBM approach to regulation as “a tool for spreading (or amortising) the expenditure of the regulated firm over time so as to ensure a path of revenue or prices which has the property that the present value of the firm’s allowed revenue is equal to the present value of the firm’s expenditure”. In New Zealand the Framework, and the BBM approach in particular, are aimed to regulate Fibre Fixed-Line Access Services or FFLAS. Regulation is to be achieved by using “price-quality paths” and “information disclosure determinations”, regulatory tools in use in the utility sector. The redetermination of the price-quality path is based on estimation of the price or revenue path that would provide the regulated entity with a normal return taking into account the forthcoming regulatory period and the expected future price-quality path in future periods. This paper will build upon and extend main results in Borrmann and Brunekreeft (2011), to investigate the optimal time of investment under some directive that follows the new regulatory norms. It also focuses on identifying the source of incentives in the determination of building blocks, following (Biggar, 2004). The leading role of New Zealand in the successful deployment of a national Fibre-to-the-home (FTTH) network and the consequential overhaul of the telecommunications market suggest the analysis of the new regulatory approach in terms of time of investment and incentives is not only timely but also quite relevant.