1

2

Bridging The ICT Divide Bridging The ICT Divide

• Istanbul Action Plan: Istanbul Action Plan: i.i. Access to ICT facilities is an imperative to Access to ICT facilities is an imperative to

Socio-econ growth, particularly in developing Socio-econ growth, particularly in developing countries. countries.

ii.ii. Access to ICT services is highly contingent on Access to ICT services is highly contingent on telecommunication networks that deliver telecommunication networks that deliver services at prices that are equitable, affordable services at prices that are equitable, affordable and cost oriented. and cost oriented.

iii.iii. These are fundamental pricing principles.These are fundamental pricing principles.

3

Interconnection & The Digital Interconnection & The Digital Divide Divide

• A range of physical, logical and commercial A range of physical, logical and commercial interface required to complete a call on a interface required to complete a call on a network on which the call did not originate. network on which the call did not originate.

• Indeed interconnection is essential to Indeed interconnection is essential to facilitate seamless communication between facilitate seamless communication between end users subscribing to different service end users subscribing to different service providers.providers.

• It is,Therefore, a critical node to ensure that It is,Therefore, a critical node to ensure that end users are exposed to a matrix of choices end users are exposed to a matrix of choices in accessing ICT services. in accessing ICT services.

4

Interconnection Triangle Interconnection Triangle

• RegulatorRegulator

Service ProvidersService Providers

ConsumersConsumers

5

Conceptual Battleground.Conceptual Battleground.

• FDC vs ICFDC vs IC

• Historical vs Current Cost Historical vs Current Cost

6

FDC vs IC FDC vs IC

• Developed countries favoured IC while Developed countries favoured IC while developing countries favoured FDC developing countries favoured FDC

• Developing countries operators claim that FDC Developing countries operators claim that FDC permit cost recovery while IC does not necessarily permit cost recovery while IC does not necessarily guarantee such.guarantee such.

• Developed countries operators complain that FDC Developed countries operators complain that FDC is inefficient pricing and would consider FDC is inefficient pricing and would consider FDC only if certain efficiency criteria are met only if certain efficiency criteria are met including: including:

• Cost allocation based on causality, ABC;Cost allocation based on causality, ABC;• Valuation of assets at current prices; Valuation of assets at current prices;

7

The Triangle &ITU/WTO The Triangle &ITU/WTO Interconnect Imperatives?Interconnect Imperatives?

• Applicability: Network technical standards. Applicability: Network technical standards. (legislation/Regulation) (legislation/Regulation)

• Compulsory Interconnection: access to ROAs at Compulsory Interconnection: access to ROAs at any technical feasible point on incumbent’s any technical feasible point on incumbent’s network to duly authorized competitor.network to duly authorized competitor.(Legislation/Regulation) (Legislation/Regulation)

• Network Unbundling: Separation of network Network Unbundling: Separation of network elements according to usage/demand. elements according to usage/demand. (Legislation/Regulation) (Legislation/Regulation)

• Non-Discrimination: No most-favoured Non-Discrimination: No most-favoured interconnect pricing between an ROA and its interconnect pricing between an ROA and its subsidiary. (Legislation).subsidiary. (Legislation).

8

ContinuedContinued

Transparency: An overarching clause. Transparency: An overarching clause. (Legislation/Regulation)(Legislation/Regulation)

Cost-Oriented Prices: interconnect rates should Cost-Oriented Prices: interconnect rates should be based on the cost of the components used to be based on the cost of the components used to deliver the service. (Legislation/Regulation deliver the service. (Legislation/Regulation supported by appropriate costing supported by appropriate costing methodology/model to estimate cost) methodology/model to estimate cost)

Cost estimates are necessary to determine cost Cost estimates are necessary to determine cost oriented pricing for providing service.oriented pricing for providing service.

9

Fundamental Costing PrinciplesFundamental Costing Principles

• TransparencyTransparency: “Open availability of : “Open availability of information used in cost derivation in order information used in cost derivation in order to allow comprehension of the final from to allow comprehension of the final from the vintage point of an external analyst”the vintage point of an external analyst”

• This principle is critical for verification of This principle is critical for verification of cost and advancement of the process of cost and advancement of the process of competition. competition.

10

ContinuedContinued

• PracticabilityPracticability: “the ability to implement a costing : “the ability to implement a costing methodology with reasonable demands being methodology with reasonable demands being placed on data availability and data processing in placed on data availability and data processing in order to keep the costing exercise economical, yet order to keep the costing exercise economical, yet still useful.”still useful.”

• The complexity of cost models must take into The complexity of cost models must take into account the trade off between limitations in account the trade off between limitations in available human resource, timeliness of available human resource, timeliness of information, cost of implementation of information, cost of implementation of methodology and and in-house resources to methodology and and in-house resources to monitor and revise methodology. monitor and revise methodology.

11

ContinuedContinued

• EfficiencyEfficiency: “The provision of forecasts of cost : “The provision of forecasts of cost reduction that results from a more efficient reduction that results from a more efficient combination of resources.”combination of resources.”

• This is the most nebulous principle since there is This is the most nebulous principle since there is no common barometer for stipulating efficiency. no common barometer for stipulating efficiency. Even within the ITU models different models have Even within the ITU models different models have different benchmarks for measuring/extrapolating different benchmarks for measuring/extrapolating efficiency.efficiency.

12

Network Pricing RevolutionNetwork Pricing Revolution

• Unbundled Costs: Unbundled Costs:

(i)(i) Access Network Access Network

(ii)(ii) Conveyance Network Conveyance Network

Unbundled Conveyance Network to provide Unbundled Conveyance Network to provide interconnection at: interconnection at:

• Local switchLocal switch

• Single tandem Single tandem

• Double tandem.Double tandem.

13

PSTNPSTN

Point of Interconnection 2(Single Transit)

Tandem Switch

Local Switch

Remote Concentrator

Point of Interconnection 1

(Local Lev el)

LS-TSTransmission

RCU-LSTransmission

Point of Interconnection 3(double Transit)

Tandem Switch

Conveyance

Main Access1

1Some access will be direct to local switches

SSP Service Switching PointSTP Signal Transfer PointSCP Switching Control Point

EO End Of SwitchingTDM Tandem SwitchingIP/SN Intelligent Peripheral / Service Node

Diagram 1

TS-TS

,.

14

Simplified Component Usage Simplified Component Usage RE: Call Path RE: Call Path

• Number dialed on originating network Number dialed on originating network to subscriber on another network.to subscriber on another network.

• Signal sent from equipment to Signal sent from equipment to originating switch. originating switch.

• Originating switch examines called Originating switch examines called digits, recognizing that digits are in digits, recognizing that digits are in another local exchange activates and another local exchange activates and routes a query trigger to the STP.routes a query trigger to the STP.

15

Continued Continued • The STP performs the translation and routes the The STP performs the translation and routes the

query to an appropriate SCP.query to an appropriate SCP.• SCP matches the location of routing number SCP matches the location of routing number

associated with dialed number.associated with dialed number.• SCP response containing location routing number is SCP response containing location routing number is

sent back to the originating switch by the STP.sent back to the originating switch by the STP.• Originating switch receives message and routes call Originating switch receives message and routes call

to recipient switch based on location routing to recipient switch based on location routing number.number.

• Recipient switch continues the switching (including Recipient switch continues the switching (including signaling and transmission until call reaches signaling and transmission until call reaches destinationdestination.

16

Invariably Call Path Utilizes Invariably Call Path Utilizes Components Of:Components Of:

• Switching network (including signaling network),Switching network (including signaling network),• Transmission Network andTransmission Network and• Access network (if included)Access network (if included) Since the first two are used invariably wheneverinterconnection is required, the objective is to find an estimator which derives the most efficient componentCosts, subject to market peculiarities. This is the objective of the TAL model for Caribbean and Latin American countries.

17

Objectives Cluster Objectives Cluster

Incumbent: Needs the

Best rate for use of Network facilities.

Efficient Rates to encourage

Investment.

Need the most costCompetitors:

Consumers:Need affordable

Prices

RegulatorRegulator : Ensure market price Encourage consumer Demand and network

Investment

18

Economics of TAL ModelEconomics of TAL Model

• Long Run Efficiency CostingLong Run Efficiency Costing

19

Formula Formula

• General LREC formula: General LREC formula:

• C = A(1-C = A(1-ß)ß)/M/Moo

• Where:Where:

• C= per minute cost of traffic C= per minute cost of traffic

• A= total cost (direct, indirect and common) A= total cost (direct, indirect and common)

• ß = Efficiency factor ß = Efficiency factor

• MMo o = traffic throughput= traffic throughput.

20

Efficiency ConstraintsEfficiency Constraints

• Diseconomies of scale Diseconomies of scale • Relatively high Relatively high

financial costs financial costs • Geographical Geographical

impediments impediments • Procurement Procurement

disadvantages disadvantages • EtcEtc

• Long Run Economic- Long Run Economic- Efficiency Costing Efficiency Costing (LEC) (LEC)

• Incremental Incremental Economic-Efficiency Economic-Efficiency Costing (IEC) Costing (IEC)

• Note that they are both Note that they are both long run concepts.long run concepts.

21

LEC & IECLEC & IEC

• EEC = AEEC = Aåå/M/M11

• AAå å = total cost adjusted = total cost adjusted for unavoidable dis- for unavoidable dis- economies of scale economies of scale (inefficiency).(inefficiency).

• MM11= total traffic = total traffic (current + expected)(current + expected)

• IEC= AIEC= A@@/M/M-1-1

• AA@ @ = cost of additional = cost of additional components to deliver components to deliver interconnect traffic, interconnect traffic, subject to adjustment subject to adjustment for inefficiencyfor inefficiency

• MM-1-1= interconnect = interconnect traffictraffic

22

Accounting ModalitiesAccounting ModalitiesDirect CostsDirect Costs : Annualized equipment costs : Annualized equipment costs

(depreciation) + annualized cost of capital(depreciation) + annualized cost of capital

(interest on loans and reasonable return to(interest on loans and reasonable return to

equity) + acquisition and installation costs +equity) + acquisition and installation costs +

proportion equipment which cannot as yet beproportion equipment which cannot as yet be

depreciated + annualized operational, repairdepreciated + annualized operational, repair

and maintenance costs (OPEX) where appropriateand maintenance costs (OPEX) where appropriate

R&D costs; plusR&D costs; plus

23

Accounting ModalitiesAccounting Modalities

Indirect Costs: Indirect Costs:

Shared expenses attributed to more Shared expenses attributed to more

than but not all activities i.e. site, trenches,than but not all activities i.e. site, trenches,

ducts, electricity, network managementducts, electricity, network management

systems etc. Plus systems etc. Plus

Common CostCommon Cost:: General administration, Other General administration, Other

R&D, bad debt expenses, taxes not included in direct R&D, bad debt expenses, taxes not included in direct

or indirect expenses.or indirect expenses.

24

ContinuedContinued

Generally incurred in the provision of Generally incurred in the provision of

All services that do not have specific All services that do not have specific

And therefore traceable causal relationship toAnd therefore traceable causal relationship to

any one i.e. general administration,(including: any one i.e. general administration,(including:

over heads, head office expenses, training),over heads, head office expenses, training),

accounting systems, taxes, bad debts, etc. accounting systems, taxes, bad debts, etc.

25

Modeling Equipment CostModeling Equipment Cost

• Equipment Cost: estimated on the basis of Equipment Cost: estimated on the basis of current cost.current cost.

• Historical costs tend to favour the Historical costs tend to favour the incumbent at the expense of the competitor incumbent at the expense of the competitor and consumers welfare.and consumers welfare.

• However, there may be need for adjustment However, there may be need for adjustment to account for diseconomies of scale.to account for diseconomies of scale.

26

TAF/BDT ModelTAF/BDT Model• Objective : Assess the cost of resources used in the Objective : Assess the cost of resources used in the

delivery of telephone service.delivery of telephone service.• Cost concept: ITU –T Recommendation D 600R Cost concept: ITU –T Recommendation D 600R

Enhanced Fully Distributed Cost (EDFC) Enhanced Fully Distributed Cost (EDFC) • Adopting the principles of ABC unit cost of Adopting the principles of ABC unit cost of

service = total cost/traffic volume service = total cost/traffic volume • Adjusted historical cost: use the accounts of the Adjusted historical cost: use the accounts of the

network operator, amortization is adjusted to network operator, amortization is adjusted to correspond with current replacement cost.correspond with current replacement cost.

• Demand side of the equation is modified to deduct Demand side of the equation is modified to deduct non-voice traffic and the cost side is modified non-voice traffic and the cost side is modified accordingly.accordingly.

27

TAF Adjustment to Current CostTAF Adjustment to Current Cost

• Example: Purchase price of equipment in Example: Purchase price of equipment in year 0 = $10 Million year 0 = $10 Million

• Manufacturer’s amortization schedule 10yrs Manufacturer’s amortization schedule 10yrs • Market price of equipment falls by 8% per Market price of equipment falls by 8% per

annum annum • Depreciation allowance in year 2 Depreciation allowance in year 2

= 10 000000x (1-0.08)= 10 000000x (1-0.08)22/10 = 846, 400 /10 = 846, 400 instead of 1 000 000.instead of 1 000 000.

28

DepreciationDepreciation A very sore bone of contentionA very sore bone of contention Methods:Methods: • Straight line Straight line • Adjusted straight line Adjusted straight line • Front loaded or back loaded sum of digitsFront loaded or back loaded sum of digits• AnnuityAnnuity• Applicability Applicability • Likely movement of real price of asset over its life Likely movement of real price of asset over its life

span taking into consideration productivity, span taking into consideration productivity, revenue earning capability over asset life and revenue earning capability over asset life and obsolescenceobsolescence

29

Modeling Other CostsModeling Other Costs

• Cost of capitalCost of capital: Should reflect opportunity cost of : Should reflect opportunity cost of investment. Rate of return should be determined investment. Rate of return should be determined by the capital market. Note that the rate should by the capital market. Note that the rate should cover investment costs, including equity and debt cover investment costs, including equity and debt costs. costs.

• OPEXOPEX: Proxy mid-range/best practice values : Proxy mid-range/best practice values should be used given that the Latin America & should be used given that the Latin America & Caribbean region has relatively high OPEX costs.Caribbean region has relatively high OPEX costs.

• Ancillary costs:Ancillary costs: May be estimated by allowing a May be estimated by allowing a mark up based on best practice bench marks.mark up based on best practice bench marks.

30

Technology Modalities Re: Technology Modalities Re: EfficiencyEfficiency

• Core network is circuit switched;Core network is circuit switched;• Complete digital switching; Complete digital switching; • A two tier switching system: tandem A two tier switching system: tandem

switching, local switching supported by switching, local switching supported by remote switching; remote switching;

• Extensive usage of fibre in urban areas; and Extensive usage of fibre in urban areas; and • Application of relatively modern Application of relatively modern

transmission technology.transmission technology.

31

Estimating Unbundled Switching Estimating Unbundled Switching CostsCosts

• Objective is to estimate the LEC and Objective is to estimate the LEC and IEC of switching traffic over different IEC of switching traffic over different switching elements on the network switching elements on the network including: including:

• Tandem Switch Tandem Switch • Local Switch Local Switch • Remote SwitchRemote Switch

32

Partial Core NetworkPartial Core Network

Switch Block

Processor

DLTU

DLTU

DLTU

SLTU

SLTU

SLTU

Subscriber Line Termination Units Digital LIne Termination Units

2 Mbit/sOutputPorts

Traffic Routes to other Exchanges

Customer Premises

Switching Network

33

Switching Network ContinuedSwitching Network Continued Local Switching:Local Switching:Line side facilities: (including but not limited to) Line side facilities: (including but not limited to)

connection to local loop at MDF and Line connection to local loop at MDF and Line cards;cards;

Trunk side facilities: Connections between Trunk side facilities: Connections between trunk-side termination at trunk-side cross trunk-side termination at trunk-side cross connect panel and trunk cards connect panel and trunk cards

Other facilities that connect lines to lines, lines Other facilities that connect lines to lines, lines to trunk, trunk to trunk and features such as to trunk, trunk to trunk and features such as telephone numbers, dial tone, local area telephone numbers, dial tone, local area signaling, customer calling, Routing functions signaling, customer calling, Routing functions etcetc

34

ContinuedContinued Tandem Switching:Tandem Switching:Facilities that afford connection between trunk Facilities that afford connection between trunk termination at cross connect panel and trunktermination at cross connect panel and trunkcards;cards;Facilities that provide trunk to trunk switching; Facilities that provide trunk to trunk switching; Facilities that provide other functions including:Facilities that provide other functions including:call recording, call routing to operator services call recording, call routing to operator services and signaling conversion features. and signaling conversion features. Signaling Network: includes signaling links andSignaling Network: includes signaling links andsignaling control and transfer points.signaling control and transfer points.

35

Cost EstimationCost Estimation

• 1. Component Identification 1. Component Identification • 2. Data collection (2. Data collection (See table 1.p13)See table 1.p13) • 3. Undertake cost estimates : unit & total investment 3. Undertake cost estimates : unit & total investment

costs costs (appendix I), (appendix I), Depreciation, annualized (OPEX, Depreciation, annualized (OPEX, indirect costs and common costs that are traffic indirect costs and common costs that are traffic sensitive).sensitive).

• Calculate total cost per switching component sum: Calculate total cost per switching component sum: annualized direct, indirect and common costs.(annualized direct, indirect and common costs.(appendix appendix II) )

• Calculate interconnect component costs Calculate interconnect component costs

36

Estimating DemandEstimating Demand

• Definition: number of calls or number of minutes Definition: number of calls or number of minutes switched. switched.

• Current demand, calls = number of successful & Current demand, calls = number of successful & unsuccessful call attempts that engage the switch unsuccessful call attempts that engage the switch

• Current demand, minutes= minutes of switched Current demand, minutes= minutes of switched traffic plus holding time.traffic plus holding time.

• Expected demand Calls /minutes) = current Expected demand Calls /minutes) = current demand + growth factor. demand + growth factor.

• Traffic per switching component is determined by Traffic per switching component is determined by traffic routing. Routing factors have to be traffic routing. Routing factors have to be accessed or computed.accessed or computed.

37

Primary LEC &IECPrimary LEC &IEC

• LEC = total cost /total demand. LEC = total cost /total demand.

• IEC = Incremental cost/incremental IEC = Incremental cost/incremental demand.demand.

• Crude calculations that do not take into Crude calculations that do not take into account market distortions and such do not account market distortions and such do not address issues of efficiency. address issues of efficiency.

38

Network Dimension & Efficiency

• Network is normally dimensioned to facilitate peak loads as denominated in busy hour call attempts and busy hour erlangs.

• Efficient dimensioning of the switching network to equate required capacity to handle busy hour traffic (call attempts and erlangs, including growth factor) with installed switching capacity.

• If not the network is inefficient either in terms of excess or under capacity.

• The key concern for the regulator is excess capacity.

39

Efficiency AdjustmentEfficiency Adjustment Key efficiency adjustment questions:Key efficiency adjustment questions:1.1. Is excess switching capacity avoidable? If soIs excess switching capacity avoidable? If sowhat is the economic cost of the excess? E.g. If what is the economic cost of the excess? E.g. If computed consistent busy hour traffic demand for a computed consistent busy hour traffic demand for a particular switch is Q but closest manufacturing particular switch is Q but closest manufacturing

specification for that switch is of capacity Qspecification for that switch is of capacity Q11where Qwhere Q11

> Q, the excess capacity Q> Q, the excess capacity Q1- 1- Q is unavoidable.Q is unavoidable.

2. If the operator elects to install a switch with 2. If the operator elects to install a switch with

capacity Qcapacity Q22, where Q, where Q22 > Q > Q11, there is a gap Q, there is a gap Q22 - Q - Q1. 1. IfIf

pQpQ22 > pQ > pQ11 the efficiency gap is negative and the efficiency gap is negative and

avoidable and requires an efficiency adjustment avoidable and requires an efficiency adjustment factor. factor.

40

Evaluating Economic CostEvaluating Economic Cost • Negative efficiency gap in terms of excess Negative efficiency gap in terms of excess

capacity is Qcapacity is Q11/Q/Q22 = = ßß

• Then ß is the adjustment factor that should Then ß is the adjustment factor that should be applied to reduce LEC or IEC switching be applied to reduce LEC or IEC switching cost estimated earlier.cost estimated earlier.

41

Modeling TransmissionModeling Transmission PSTN transmission involves narrow band andPSTN transmission involves narrow band and

leased line services.leased line services.

Objective is to derive the unbundled cost of Objective is to derive the unbundled cost of

narrow band services.narrow band services.

Such services do not include Fax and voice Such services do not include Fax and voice

via ISDN lines. via ISDN lines.

Linkages modeled: Linkages modeled:

RAU-LS LS-LS RAU-LS LS-LS

LS-TS TS-TS LS-TS TS-TS

42

Transmission NetworkTransmission Network Transmission electronics Multiplexers, digital cross Transmission electronics Multiplexers, digital cross

connectors,regenerators etc connectors,regenerators etc

Infrastructure: ducts, trenches, poles, cable & fibre etc.Infrastructure: ducts, trenches, poles, cable & fibre etc.

Network UnbundlingNetwork Unbundling

Interconnection at: (See relevant diagram above)Interconnection at: (See relevant diagram above)

i)i) Local switch: purchase restricted to transmission linkage Local switch: purchase restricted to transmission linkage between remote and local switches.between remote and local switches.

ii) Single tandem : purchase restricted to those at (i) plus linkage ii) Single tandem : purchase restricted to those at (i) plus linkage between local and tandem switches. between local and tandem switches.

iii) Double tandem: purchase of transmission link between tandem iii) Double tandem: purchase of transmission link between tandem switches plus purchases indicated at (ii) above. switches plus purchases indicated at (ii) above.

43

Costing ProcedureCosting Procedure • Similar to that employed for switching:Similar to that employed for switching:• Data collection on transmission equipment and Data collection on transmission equipment and

infrastructure (pp 22- 24) infrastructure (pp 22- 24) • Critical to make appropriate assumptions as to the Critical to make appropriate assumptions as to the

minimum levels of transmission technology. (pp 24-minimum levels of transmission technology. (pp 24-26) 26)

• Access and study blue print of transmission network. Access and study blue print of transmission network. • Estimate the cost of the transmission links on actual Estimate the cost of the transmission links on actual

network (Appendix V) network (Appendix V) • OPEX and Ancillary cost may be estimated using OPEX and Ancillary cost may be estimated using

benchmarks. (optional)benchmarks. (optional)

44

Accounting for Leased linesAccounting for Leased lines • Collect data re: number of 2 Mbits links dedicated Collect data re: number of 2 Mbits links dedicated

to: to: • Retail carriers Retail carriers • Mobile carriers Mobile carriers • Other services Other services • Estimate the proportion of the PSTN dedicated to Estimate the proportion of the PSTN dedicated to

leased line traffic.leased line traffic.• Based on dedicated capacity calculate leased line Based on dedicated capacity calculate leased line

traffic in Mbits (Eq 23. P.32) and subtract from traffic in Mbits (Eq 23. P.32) and subtract from total traffic.total traffic.

• Subtract that from total transmission cost leased Subtract that from total transmission cost leased line cost line cost

45

Estimate Re: LEC & IECEstimate Re: LEC & IEC

• Subject to routing profile: Subject to routing profile: • LEC per transmission link = TcLEC per transmission link = Tcii/V/Vii

• IEC per transmission link = IIEC per transmission link = Icici/V/Vnini

• Where TcWhere Tcii = total cost of transmission facilities used for = total cost of transmission facilities used for voice traffic including interconnect traffic. voice traffic including interconnect traffic.

• VVi i = total mbits of voice traffic.= total mbits of voice traffic.• IIci ci = additional cost of facilities for interconnect traffic.= additional cost of facilities for interconnect traffic.• VVni ni = Mbits of interconnect traffic.= Mbits of interconnect traffic.•

46

Actually Incurred Cost vs Cost of Actually Incurred Cost vs Cost of Efficient Service Provision Efficient Service Provision

• General agreement that every service provider General agreement that every service provider should strive for provision of “optimal”cost should strive for provision of “optimal”cost efficient services.efficient services.

• This concept should form the basis for cost This concept should form the basis for cost derivation and therefore cost oriented pricing. derivation and therefore cost oriented pricing.

• This concept proposes costing based on up-to-date This concept proposes costing based on up-to-date technology supported by efficient operation. technology supported by efficient operation.

• Developing countries argued that: because of Developing countries argued that: because of difference in economies of scale efficiency criteria difference in economies of scale efficiency criteria are different on relatively smaller networks given are different on relatively smaller networks given that network dimensioning do not favour even the that network dimensioning do not favour even the largest operators in developing countries. largest operators in developing countries.

47

Critical Efficiency IndicatorsCritical Efficiency Indicators

• Capacity reserves built into installation to Capacity reserves built into installation to accommodate future traffic since cost based accommodate future traffic since cost based on this capacity would not truly reflect the on this capacity would not truly reflect the cost of current operation. cost of current operation.

• Depreciation rates based on economic life of Depreciation rates based on economic life of assets. assets.

• Cost of capital Cost of capital • The relationship between OPEX and The relationship between OPEX and

equipment costs. equipment costs. • Cost of universal service. Cost of universal service.

48

EfficiencyEfficiency

• Maxim: “Operators must verify that idle Maxim: “Operators must verify that idle capacity is not the result of inefficient use capacity is not the result of inefficient use of resources. They must ensure that all of resources. They must ensure that all available capacity is used within a period available capacity is used within a period compatible with good replenishment compatible with good replenishment practices “practices “

• KK1 1 = Max {0,= Max {0,∆K-K∆K-K0 0 *[(1+*[(1+λ)λ)n n – 1]}– 1]}Where:Where:

λ is the compounded growth rate; λ is the compounded growth rate;

49

Continued Continued • KK0 0 is current capacity;is current capacity;

• N is appropriate replenishment period;N is appropriate replenishment period;

• K is spare capacity; and K is spare capacity; and

• KK11 is inefficient capacity. is inefficient capacity.

• If KIf K1 1 is positive, investment cost should be is positive, investment cost should be reduced by Kreduced by K11/(K/(K0 0 + + ∆K).∆K).

• Example: Example:

• Assume KAssume K0 0 = 200= 200

50

ContinueContinued

• Current Demand = 150, is forecast to Current Demand = 150, is forecast to increase by 15% per annum;increase by 15% per annum;

• Period for capacity maturity i.e long run Period for capacity maturity i.e long run period is 3 yrs period is 3 yrs

• Them KThem K11 = {0; 50- 150* [(1+0.15) = {0; 50- 150* [(1+0.15)3 3 – 1]}=0 – 1]}=0 • If actual growth in demand is 5% then: If actual growth in demand is 5% then: • KK1 1 = 26.36 in which case cost would have to = 26.36 in which case cost would have to

be reduced by 26.36/200 = 13.8%. be reduced by 26.36/200 = 13.8%.

51

Primary EfficiencyPrimary Efficiency

• Again the question of Efficiency refers to capacity Again the question of Efficiency refers to capacity utilization: utilization:

• Assuming that estimated traffic throughput on a Assuming that estimated traffic throughput on a transmission linkage is Ej Mbits,transmission linkage is Ej Mbits,

• Installed transmission capacity on the link is WInstalled transmission capacity on the link is W (j+1)(j+1) Mbits, andMbits, and

• Ej/ WEj/ W(j+1) (j+1) = w= wjj = <1 = <1 • Then there is a primary inefficiency gap of 1- wThen there is a primary inefficiency gap of 1- w j wj w

• Which prompts the question, is the gap avoidableWhich prompts the question, is the gap avoidable.

52

Secondary EfficiencySecondary Efficiency

• Assuming optimal transmission network for Assuming optimal transmission network for relevant traffic throughput is wrelevant traffic throughput is w(j+q)(j+q) and and

• ww(j+q)(j+q)/ W/ W(j+1) (j+1) = = ŵ = > 1 ŵ = > 1 • Avoidable excess capacity = ŵ – 1= @Avoidable excess capacity = ŵ – 1= @• Which is the factor to be used to adjust the Which is the factor to be used to adjust the

LEC.LEC.• A similar procedure is used to derive the A similar procedure is used to derive the

adjustment factor for IEC.adjustment factor for IEC.

53

Unbundled LECUnbundled LECCore Core NetworkNetwork

Total Cost Total Cost

AdjustedAdjusted

Total Total Routed Routed TrafficTraffic

Unit Cost Unit Cost

TSTS KK(i)(i) VV(I)(I) KK(i) (i) /V/V(i)(i)

LSLS KK(ii)(ii) VV(ii)(ii) KK(ii) (ii) /V/V(ii)(ii)

RAURAU KK(iii)(iii) VV(iii)(iii) KK(iii) (iii) /V/V(iii)(iii)

TS-TS TS-TS KK(iv)(iv) VV(iv)(iv) KK(iv) (iv) /V/V(iv)(iv)

TS-LSTS-LS KK(v)(v) VV(v)(v) KK(v) (v) /V/V(v)(v)

LS-LSLS-LS KK(vi)(vi) VV(vi)(vi) KK(vi) (vi) /V/V(vi)(vi)

LS-RSULS-RSU KK(vii)(vii) VV(vii)(vii) KK(vii) (vii) /V/V(vii)(vii)

54

Unbundled IECUnbundled IECCore Core NetworkNetwork

Total Cost Total Cost

AdjustedAdjusted

Incremental Incremental Routed Routed TrafficTraffic

Incremental Incremental Cost Cost

TSTS II(I)(I) VV(n-i)(n-i) II(i) (i) /V/V(n-i)(n-i)

LSLS II(ii)(ii) VV(n-ii)(n-ii) II(ii) (ii) /V/V(n-ii)(n-ii)

RAURAU II(iii)(iii) VV(n-iii)(n-iii) II(iii) (iii) /V/V(n-iii)(n-iii)

TS-TS TS-TS II(iv)(iv) VV(n-iv)(n-iv) II(iv) (iv) /V/V(n-iv)(n-iv)

TS-LSTS-LS II(v)(v) VV(n-v)(n-v) II(v) (v) /V/V(n-v)(n-v)

LS-LSLS-LS II(vi)(vi) VV(n-vi)(n-vi) II(vi) (vi) /V/V(n-vi)(n-vi)

LS-RSULS-RSU II(vii)(vii) VV(n-vii)(n-vii) II(vii) (vii) /V/V(n-vii)(n-vii)