Ofcom Economist Pimps Menu Regulation to Boost UK Fibre Networks

David Henriques, a Senior Associate Economist at Ofcom and Visiting Fellow at the LSE, has appeared to suggest that menu regulation for fibre optic broadband networks may be a better approach for the United Kingdom to take than incentive orientated regulation.

At present a lot of telecoms regulators across Europe and elsewhere around the world adopt an approach of “incentive regulation” (aka – repeat regulation), which is where the regulator sets price caps that are often based on predicted (rather than actual) costs. This is actually a bit of an over-simplification of how Ofcom does things today (see further below) but such controls do still play a sizeable role.

Such price caps are usually targeted so as to encourage positive change in specific areas, although this can be a difficult balancing act and needs to be constantly monitored (usually every few years) because prices diverge from costs over time. In addition, heavily regulated operator’s like Openreach will always know much more about their costs and potential efficiency gains than the regulator ever can.

One possible option for moving away from this could be to do as the energy regulator, Ofgem, has already done and adopt an approach of “menu regulation“ for fibre networks. In fact Ofcom has also done something similar for mobile operators as part of their plans to auction off the 700MHz and 3.6-3.8GHz radio spectrum bands for 5G mobile (here); hence our over-simplification remark above (Ofcom works in a lot of mysterious different ways).

The aim of menu regulation, says David, is to encourage firms to behave in a certain way that fits with the regulator’s objectives, for example, to promote more investment in innovation. In the above example Ofcom proposed coverage obligations when auctioning airwaves for mobile services. “Effectively, network operators paid less for this spectrum, in return for committing to boosting mobile coverage,” said David.

In other words the operators’ are choosing how they are regulated. Some may argue that the 700MHz auction is a bad example in that the operators’ widely disliked the proposed approach, although it could also be argued that this is a good example because the industry then went on to propose their own alternative – a Shared Rural Network (here and here). A final decision on this has yet to be taken so the jury is still out.

Put another way, menu regulation provides incentives to companies to reveal their current and expected future costs by making choices on required future expenditure to meet mandated standards.

David Henriques said:

“Switching from copper to fibre-based broadband has raised challenges that are likely to persist in the years to come. To help resolve these, menu regulation for fibre networks is a potentially useful tool for regulators across the globe.

That’s especially true when regulated firms are being required to provide regulators with more detailed information on their expected costs and other business information. This, combined with new technologies such as artificial intelligence and other relevant data sources, can increase the information available to regulators and make incentive regulation more effective.

So, there should be an increasing appetite for menu regulation in future.”

Quite how this would be applied to the complex fibre market is likely to require a lot of careful consideration and it’s worth noting that David was not formally speaking on behalf of Ofcom (these are his views), although clearly the regulator is familiar with the menu approach and may already be looking at other areas where it could be used.