Development of the Danish LRAIC model for fixed networks... · This document was prepared by Axon...
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Presentation of the 2nd draft model
Development of the Danish LRAIC model for fixed networks
May 2020
CONFIDENTIAL
1. Outcomes of the 1st consultation process
3. Next steps
2. Overview of the results of the 2nd draft model
Contents
2
CONFIDENTIAL
1. Outcomes of the 1st consultation process
3. Next steps
2. Overview of the results of the 2nd draft model
Contents
3
CONFIDENTIAL
Five stakeholders* participated in the 1st consultation, providing +300 comments and uncovering clear areas for improvement
4
►“Demand for coax subscribers is too high”
►“Ports between the MSAN and the access routers
should be modelled explicitly”
►“Calculations for the length of the drop cables
should be reviewed”
►…
►“Due to DOCSIS 3.1, the speed of coax networks
should be more similar to the one of fibre networks”
►“Algorithms for PON and PTP should allow a more
clear identification of the resources”
►“Different parameters for fully depreciated assets
should be considered for copper and coax networks”
►“Demand for coax subscribers should not decrease
as rapidly over time”
►“The model should not result in higher costs than
that of the real modelled operator”
►“Useful lives for civil infr. should be 40-50 years”
►…
►“The specific topology of each operator should be
considered when modelling alternative operators”
►“Alternative where GRC is annualized within the
“active” years of the copper network should be
adopted”
►…
* Although Telia and Telenor submitted a joint response.
CONFIDENTIAL
Areas for improvement identified by the stakeholders have been addressed in the 2nd draft model and documentation
5
All changes implemented into the model are presented in a change-log worksheet included in the
2nd draft model*
# Change Description
1Separate percentage for copper and for
coax on fully depreciated assets.
Added an additional option to the COVER sheet to allow the
selection of different percentages of fully depreciated
assets for copper and coax.
2Consideration of NGA premium for fibre
trenches.
Included the NGA premium for the trenches and other civil
infrastructure elements in the fibre access network.
3Disaggregation of manholes and joint
holes.
We have disaggregated the resources for the manholes and
joint holes for each access network separately, to achieve a
more accurate allocation of these costs to services.
… … …
* Additionally, changes to the R model and other files are detailed in the documentation.
CONFIDENTIAL
Additionally, we identified two main areas of discussion that we would like to clarify through this presentation
6
Fibre roll-out
algorithm
In the 1st draft model the algorithm was constrained by the level of
information available from the modelled operator.
The new algorithm utilises the new information provided by the
operators to generate more accurate results.
Allocation of
non-network
overheads*
The methodology for the allocation of non-network overheads (G&A,
IT and wholesale/commercial costs) has been updated.
The new methodology considers that overheads should be distributed
based not just on their network costs, but also considering their
revenues.
Fully
depreciated
assets
The methodology adopted in the model to deal with fully depreciated
assets is aligned with the MRP.
This methodology was adopted to ensure the proper build or buy
signals are sent to the market for each access network.
DBA is reviewing the use of the Regulatory Asset Base approach.
* This aspect was not raised by stakeholders, but it is considered to be relevant enough to be included in this presentation.
CONFIDENTIAL
Fibre rollout algorithm. Based on the additional information provided by the operators, we have fine-tuned the fibre rollout algorithm
7
Overview of
the results
Information
reported
Data to be
estimated
Adjustments
performed to the
data
TDC Norlys
Disaggregation of the regional
information at building level.
Actual buildings to be covered each year.
Interpolation of the buildings to be
covered from 2019 to 2038.
Buildings covered by other operators are
excluded from the algorithm.
Only areas (COs) currently covered with
TDC fibre are considered.
The model aims to reach similar
coverage levels (%) in all the CO areas
within the same region.
Relevant buildings are ordered based on
their distance to the corresponding CO.
Buildings closer to the CO are covered
first.
Nonetheless, the order considered is not
crucial due to the implementation of
economic depreciation.
Number of buildings to be covered in
2030 on a regional basis.
Number of buildings to be covered each
year on a national basis.
Actual buildings (ids) covered in 2019
and to be covered in 2038.
Number of buildings to be covered each
year on a regional basis.
CONFIDENTIAL
The deployment algorithm for TDC follows three
main steps:
• Step 1: Identify the buildings covered by
alternative operators (AO), and remove them
from the algorithm.
• Step 2: Determine for each year and each CO
the number of homes to be covered, based on
the number of buildings available (not covered
by other operators) in the CO and the coverage
objectives for the region where the CO is
located.
• Step 3: Determine the buildings to cover each
year for each CO, by selecting the buildings
closer to the CO and then moving to buildings
further away.
Fibre rollout algorithm. The algorithm makes the most out of the reported information, completing gaps in the data reported
Illustrative fibre deployment algorithm (TDC)
Legend:
AO
…
Current
2028
8
2020
CONFIDENTIAL
The deployment algorithm for Norlys follows only
two simple steps:
• Step 1: Identifying buildings currently and
expected (“additional”) to be covered by
Norlys, which has been directly supplied by the
operator.
• Step 2: Determining the year in which each
building is covered, buildings are covered
selecting the additional buildings closer to the
CO and then moving away to buildings further
away. The approach in this step is equivalent to
the one defined for TDC.
Fibre rollout algorithm. The algorithm is more straightforward for Norlys, due to the better data supplied by this operator
Illustrative fibre deployment algorithm (Norlys)
9
Legend:
…
Current
2031
2020
CONFIDENTIAL
Fibre rollout algorithm. When compared with TDC, it may be argued that Norlys’ topology is less efficient under similar circumstances
The geographical analysis performed for Norlys and TDC
shows that the network topology adopted by Norlys, longer
access loops, specially in rural areas, as shown in the exhibit.
This geographical analysis* involved a review of the average
meters of trenches per home passed for comparable set of
COs between Norlys and TDC**.
As a large portion of the costs borne by operators in the
rollout of fibre networks come from distance-dependent
assets (e.g. cables, trenches, ducts), a higher trench
deployment implies a higher cost for the access-related
services.
DBA considers that the additional costs resulting from this
type of deployment may not be considered as fully “efficient”
and thus, we have included an adjustment in the cost model
that accounts for this potential inefficiency.
Average trenches per household
* Produced by the R model for an equivalent region (i.e. area covered by Norlys). Further details of this analysis are included in the Excel model manual** TDC’s COs include copper and fibre COs, as they are equivalent from a civil infrastructure point of view. 10
0
10
20
30
40
50
60
70
80
90
100
Rural regions
Metr
es o
f tr
en
ch
es /
ho
mes p
assed
TDC Norlys
x1,15
CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response
Appropriateness of the
adjustment for fully-
depreciated assets for
copper networks
In DBA’s view, removing fully depreciated assets is key in order to:
i) Provide the correct build or buy signals, as no other alternative operator
would currently consider deploying a new copper access network from
scratch.
ii) Avoid allowing an over-recovery of costs by the modelled operator.
iii) Keep consistency with the EC’s 2013 recommendation.
So far, DBA considers that the approach followed is aligned with EU
regulations. However, DBA understands the complexity of this issue and
has raised this issue to the EC to obtain further guidance. DBA will
investigate it further to ensure the final approach and results are aligned
with EU regulations and DBA’s policy objectives for markets 3a and 3b.
11
CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response
Appropriateness of the
adjustment for fully-
depreciated assets for
coax networks
The EC’s 2013 recommendation is not directed towards coax networks.
Therefore, we have raised this issue to the Commission to understand their
view.
DBA will continue to investigate this aspect with the EC in order to ensure
that the final model is aligned with EC’s regulations.
Applicability of this
adjustment to cable
assets
DBA acknowledges that different practices have been adopted by EU NRAs
with regards to the application of this adjustment to cable assets, without
being inferring a clear trend towards one option or the other.
Independently of this, the DBA finds arguments i) and ii) above
equivalently applicable to cable assets (as described in the MRP).
However, DBA is also investigating this matter with the EC, to ensure that
the appropriate methodology is followed in the model.
12
CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response
Replacement of copper
assets
Passive copper assets are not replaced in the model as they are originally
purchased in the first dimensioning year (2005) and, based on their useful
life and the shrinking copper access trends, the model sees no technical
need for their replacement. The model does, however, consider
reinvestment in active copper equipment such as MSANs as long as they
are required to provide the service.
Consideration of
different inflation
datasets
We have changed the historical source for inflation in the model by the
World Bank (previously was OECD data). This has been done to keep
consistency with the inflation data considered to index the FAR figures from
the modelled operator.
Inflation forecasts included in worksheet ‘1D INP NW EVO’ have been
extracted from the EC, as this information is not available from the World
Bank.
13
CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response
The percentage
considered for fully
depreciated copper
assets is too high/too
low
While the DBA calculated a value of 36,.8%, given the limitations of TDC’s
dataset, it noted that this could bear little resemblance to reality. As such,
it decided to consider a 50% factor as a figure more in line with
expectations.
DBA is welcomes additional views on this percentage.
Figures should be
different between
copper and coax as
shown by DBA’s
calculations
DBA’s calculations are likely to be highly influenced by the limitations of
TDC’s dataset. As a result, even though the percentage obtained for copper
assets was higher than for coax assets, this does not necessarily need to
be the case. However, given the uncertainty surrounding these figures,
DBA has agreed to separate these inputs in the model.
14
CONFIDENTIAL
The 1st draft model followed an EPMU allocation
for non-network costs. This is, non-network
overheads were proportionally allocated to
services based on their network costs.
However, we acknowledge that this allocation rule
was inaccurate, as only a proportion of costs
(network-related) were considered. Given the high
relevance that other costs may have on some
services (e.g. retail), this resulted in a suboptimal
allocation
To fix this, the 2nd draft model considers an ‘index’
that modulates the allocation of these overheads
to the different groups of services based on i) the
retail prices from the modelled operator and ii)
wholesale prices in Denmark.
Allocation of non-network overheads. The new methodology considers information from the operators for a more accurate allocation
Illustrative allocation of non-network overheads*
0,0
0,5
1,0
1,5
2,0
Access Broadband TV
No
n-n
etw
ork c
osts
all
ocate
d
Old methodology New methodology
* Example has been slightly simplified for the illustrative example. A detailed explanation of the methodology is included in the Excel model manual.** Based on data extracted for the modelled operators.
Group of services Index**
Access 257,8
Broadband 76,2
TV 509,0
Even allocation for all groups
Allocation based on index (revenues)
15
CONFIDENTIAL
1. Outcomes of the 1st consultation process
3. Next steps
2. Overview of the results of the 2nd draft model
Contents
16
CONFIDENTIAL
COPPER - The 2nd draft results for copper network (TDC) decrease due to a number of changes implemented in the model
17
Copper unit costs (2020)*
875
9721.028
1.109
915
993
1.1491.199
835
899
1.0281.073
-
200
400
600
800
1.000
1.200
1.400
Raw Copper Copper VULA Copper BSA - POI2 Copper BSA - POI3
DK
K/
lin
e/
year
Price decision (2020) 1st draft model 2nd draft model
-9%-9%
-11%-10%
* Differences represent the change between the 2nd draft model compared to the 1st draft model
CONFIDENTIAL
+-
+-
+-
+-
COPPER - The modifications introduced have individually affected TDC’s copper costs
18
ExplanationImpact
Adjustment on the costs of the
trenches
► From the addition of road crossings, we
have decreased unit costs for trenches,
which were previously an average.
Implementation of road
crossings
► We have included road-crossings,
which have a higher unit cost and thus
increase the costs in the model.
Unit costs for copper drop
cables
► We have increased the unit costs for
copper drop cables to keep consistency
with other cable configurations.
► We have disaggregated the manholes
and jointholes for each access network
(copper, fibre and coax).
Disaggregation of manholes
and jointholes
* Due to the adjustment of unit costs for the copper drop cables and the implementation of road crossings.
+-
Allocation of non-network
overheads
► The methodology for non-network
overheads shifts costs away from
wholesale services.
CONFIDENTIAL
FIBRE – The adjustment of the PTP/PON cost allocation factors in the 2nd draft model has evened out TDC’s fibre unit costs
19
Fibre unit costs (2020)*
N/A
1.664
2.0612.156
2.0612.156
834
1.255
1.123 1.162
1.948 1.987
920
1.2111.277 1.314 1.331
1.368
1.013
-
500
1.000
1.500
2.000
2.500
Raw Fibre(POI0)
Raw Fibre(POI1)
Fibre BSA(PON) - POI2
Fibre BSA(PON) - POI3
Fibre BSA (PTP)- POI2
Fibre BSA (PTP)- POI3
DK
K/
lin
e/
year
Price decision (2020) 1st draft model 2nd draft model (TDC)
+10%
+14%
-32% -31%
+13%-4%
* Differences represent the change between the 2nd draft model compared to the 1st draft model
CONFIDENTIAL
+-
FIBRE – Multiple modifications introduced in the 2nd draft have affected TDC’s fibre unit costs obtained in the 1st draft
20
+-
Location of the OLTs
Location of the PON splitters
In-building cabling and
equipment for MDUs
Explanation
► We have located the splitters higher up
in the network, to ensure they
aggregate the right amount of homes.
Impact
► We have reviewed the location of the
OLTs to ensure they are located at CO
level, based on data reported by TDC.
► We have included in-building cabling
for MDU buildings, from the basement
to the outside wall of the user.
+-
+-
Demand migration from copper
shutdown
► Part of the demand from the coax
shutdown has been redefined to be
migrated to a coax networks.
Allocation of non-network
overheads
► The methodology for non-network
overheads shifts costs away from
wholesale services.
+-
CONFIDENTIAL
FIBRE – Unit costs for Norlys are relatively higher compared to TDC due to differences in their network footprint
21
Comparison of fibre unit costs (2020)
920
1.2111.277 1.314 1.331 1.3681.380
2.0452.172 2.202
2.437 2.467
-
500
1.000
1.500
2.000
2.500
3.000
Raw Fibre
(POI0)
Raw Fibre
(POI1)
Fibre BSA
(PON) - POI2
Fibre BSA
(PON) - POI3
Fibre BSA (PTP)
- POI2
Fibre BSA (PTP)
- POI3
DK
K/
lin
e/
year
2nd draft model (TDC) 2nd draft model (Norlys)
+50%
+70%+83% +80%
+68%
+69%
CONFIDENTIAL
FIBRE – There are a number of key inputs that could have a large impact when comparing TDC & Norlys’ results in the model
22
NorlysTDC Impact (all else equal)
Footprint
(coverage)
► Coverage is more rural, and Norlys rural areas are more sparsely populated than TDC rural areas.
► Relatively more urban and suburban coverage areas.
► The more rural footprint implies a higher unit cost for Norlys, compared to TDC.
See next slide
Demand (Take-up)
► Forecasted take-up is higher than TDC’s projections for TDC roll out.
► Slightly lower take-up compared to Norlys.
► The higher take-up for Norlys implies a lower cost for this operator.
Unit costs► Based on benchmark
due to lack of data from the operator.
► Mostly based on data reported by TDC.
► The impact is low due to the consideration of data from other Danish operators in the benchmark.
Network topology
► Existing central offices deployed by Norlys, however efficiency adjusted (see slide 10).
► Topology following the existing central offices deployed by TDC.
► Without efficiency adjustment this would have lead to a higher cost for Norlys.
CONFIDENTIAL
FIBRE – The more rural footprint for Norlys implies a higher unit cost for fibre access compared to TDC
23
Both models consider a consistent methodology
to define the geotypes, to ensure comparability
of the results.
One of the key differences is that Norlys
deployment is taking place in Jylland, whereas
TDC’s is focused on Sjælland, with a higher
density of population.
This implies an increase in the unit cost,
because it is more expensive to cover rural
areas, due to the lower density in terms of
buildings and homes.
This aspect alone explains most of the
differences in the results between TDC and
Norlys.
TDC/Norlys geotype distribution
66%
18%
24%
45%
9%
36%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Norlys TDC
% o
fh
om
es
co
vered
Rural Suburban Urban
CONFIDENTIAL
612
735779
478
600
647
-
100
200
300
400
500
600
700
800
900
1.000
Coax BSA (access only) Coax BSA - POI2 Coax BSA - POI3
DK
K/
lin
e/
year
1st draft model 2nd draft model
COAX – There has been a noticeable reduction of coax unit costs (TDC) as a result of several changes included in the model
24
Coax unit costs (2020)
-22%
-18%-17%
CONFIDENTIAL
+-
COAX – Modifications in coax demand and the allocation of non-network costs are responsible for the differences in TDC’s costs
25
Fully depreciated assets
Coax broadband historical
demand
Coax access demand trends
Explanation
► We have reviewed the trends for the
coax-based access lines and softened
the decrease expected by TDC.
Impact
► We have corrected (reduced) the
historical demand for coax broadband
lines.
► We have set as “zero” this percentage
for coax as DBA is still investigating
whether RAB is relevant for coax.
+-
Demand migration from copper
shutdown
► We have increased coax demand to
include the demand coming from the
shutdown of copper networks.
+-
Allocation of non-network
overheads
► The methodology for non-network
overheads shifts costs away from
wholesale services.
+-
+-
CONFIDENTIAL
►This functionality allows users to identify the
number of assets dimensioned in each access
network (including PON and PTP separately).
► It is included in the worksheet ‘5D MAC KPI’ of
the 2nd draft model.
►This functionality allows users to understand the
breakdown of costs of the different services per
resource (i.e. network asset).
► It is included in the worksheet ‘8B RESULTS PER
RES’ of the 2nd draft model.
26
We have included two new features into the 2nd draft model to ease its review by the stakeholders
Disaggregation of the unit cost of the access services per resource
Identification of the assets dimensioned in each access network
Select year 2.020
Resources Access.Copper.Retail.Access
Access coaxial.Coaxial cable (in-house).length -
Access copper.Copper Street Cabinet - 192 subscribers.# of cabinets 0,1
Access copper.Copper Street Cabinet - 384 subscribers.# of cabinets 1,5
Access copper.Copper drop cable.length 16,6
Access copper.Copper cable - 2 pairs.length 23,4
Access copper.Copper cable - 4 pairs.length 2,7
Access copper.Copper DP - 50 pairs.# of DPs 1,2
Access copper.Copper DP - 100 pairs.# of DPs 0,4
Access copper.Copper DP - 500 pairs.# of DPs 0,3
Access copper.Copper DP - 1000 pairs.# of DPs 0,0
Access copper.Copper DP - 2000 pairs.# of DPs 0,2
Overheads 150,3
TOTAL 992,8
KPI Units 2018
Fibre PON access networks - Fibre cable Km 31
Fibre PON access networks - Ducts Km 30
Fibre PON access networks - Trenches Km 31
Fibre PON access networks - DPs # of DPs 91
Fibre PON access networks - joints # of joints 426
Fibre PON access networks - splitters # of splitters 53
Fibre PON access networks - ODFs # of ODFs 1
- -
Fibre PTP access networks - Fibre cable Km 577
Fibre PTP access networks - Ducts Km 318
Fibre PTP access networks - Trenches Km 328
Fibre PTP access networks - joints # of joints 6.664
Fibre PTP access networks - ODFs # of ODFs 26
CONFIDENTIAL
1. Outcomes of the 1st consultation process
3. Next steps
2. Overview of the results of the 2nd draft model
Contents
27
CONFIDENTIAL
As agreed with the industry, operators will have 3 weeks to respond to the second consultation
28
Project timetable agreed with the industry in the Q&A meeting held in February 2020
Project activities May Jun Jul Aug
1. 2nd consultation round
2. Analysis of feedback to 2nd consultation
3. Preparation of 3rd consultation materials
4. 3rd consultation round
5. Analysis of feedback to 3rd consultation
6. Preparation of final materials for publication
7. Final workshop with the industry
This process represents the second out of the three public consultations on the LRAIC model.
The industry will have 3 weeks to provide feedback, until Monday 25 May 2020.
DBA will hold a meeting on 13 May 2020 to present the results and changes of the 2nd draft model.
Axon activities Operator’s activities Interaction DBA/Axon-Operators
CONFIDENTIAL
The current time plan involves the following dates
29
Final workshop to present the results of the final model to
the industry
Tentative date: 27 August 2020
Final workshop with the industry
Third consultation round on the model
Start date: 19 June 2020
End date: 3 July 2020
3rd Consultation round
Second consultation round on the model
Start date: 4 May 2020
Workshop with the industry: 13 May 2020
End date: 25 May 2020
2nd Consultation round
CONFIDENTIAL
Stakeholders are kindly requested to respond to the questions included the 2nd consultation document
30
Illustrative excerpt of the template to comment
Stakeholders are requested to disclose their position to each of the questions raised, together with their
comments and justifications.
Stakeholders shall respond to the questions stated in the consultation document.
CONFIDENTIAL
MADRID (HQ)Sagasta, 1828004, MadridSpain
Tel: +34 91 310 2894
MEXICO CITYTorre Mayor, Paseo de la Reforma 505-41, CDMX 06500, Mexico
Tel: +52 55 68438659
ISTANBULBuyukdere Cad. No. 255 NurolPlaza B.04 34450 MaslakIstanbul, Turkey
Tel: +90 212 277 70 47
31
Manager
Gonzalo Arranz
Principal
Alfons Oliver
Any questions? Please, contact: