Access Regulation, Financial Structure and Investment in Vertically Integrated Utilities:Evidence from EU Telecoms

We examine theoretically and empirically the relationship between access regulation, financial
structure and investment decisions in network industries, analyzing if financial variables can be
used as a strategic device to influence the regulator’s price setting decisions. Using a panel of
15 EU Public Telecommunication Operators (PTOs) over the period 1994-2005, we first
investigate the determinants of regulated prices (both wholesale and retail), firm financial
structure and investment, and then test the relationship between leverage, regulated charges and
firm’s investment. However, our model suggests that if leverage influences the regulated access
charges, then it will also impact competition in the downstream segment. Therefore, we also
investigate the impact of the PTO’s leverage on market competition. Our results show that
leverage positively affects regulated rates, as well as the PTOs’ investment rate, as predicted by
Spiegel and Spulber (1994). Moreover, higher leverage also leads to higher access charges and
an increase in leverage is followed by a decrease in the number of competitors and by an
increase of the incumbent’s market share. This suggests that the strategic use of debt to
discipline the regulator’s lack of commitment within a vertically integrated network industry
may somewhat impair or delay competition in the retail segment, but has a favorable
counterpart in mitigating the underinvestment problem.