development of the danish lraic model for fixed networks€¦ · information that operators wish to...

Development of the Danish LRAIC model

for fixed networks

Fixed LRAIC Model – 3rd Consultation Document

1 September 2020

Excellence in Business

2020© Axon Partners Group 1

Contents

Contents .............................................................................................................. 1

1. Introduction ................................................................................................... 2

2. The consultation process .................................................................................. 3

2.1. Description of the files submitted to consultation .......................................... 3

2.2. Procedure for clarifications ......................................................................... 4

2.3. Procedure to submit answers ...................................................................... 5

3. Key aspects relevant for the 3rd draft model ....................................................... 6

3.1. TDC’s model ............................................................................................. 6

3.1.1 Copper services ............................................................................................................... 6

3.1.2 Fibre services................................................................................................................... 9

3.1.3 Coax services ................................................................................................................. 12

3.2. Norlys’ model ......................................................................................... 14

3.2.1 Norlys’ fibre services ..................................................................................................... 14

3.2.2 Norlys’ coax services ..................................................................................................... 18

4. Questions for the 3rd consultation round ........................................................... 19


1. Introduction

Since 2003, the DBA has annually regulated the wholesale prices for several fixed-network

services through a Long Run Average Incremental Cost (LRAIC) model. As presented in

the Model Reference Paper (hereinafter, ‘the MRP’) from October 20191, the relevant

changes that occurred in the fixed Danish market since the last major update of the model

in 2013, merited a new update of the fixed LRAIC model (hereinafter, ‘the model’) to make

sure it is representative of the current situation and can fulfil DBA’s regulatory needs.

In 3 February 2020, DBA launched a 1st consultation round with the industry. This

consultation round aimed at providing stakeholders in the Danish fixed telecoms market

an opportunity to comment and advice on the draft version of the model developed by the

DBA with the support of Axon Partners Group (hereinafter, ‘Axon’), with the final objective

of maximising its representativeness and accuracy. With a similar objective, DBA launched

a 2nd consultation process in 4th May 2020.

The feedback from the industry for the 1st and 2nd consultations has been collected and

implemented into the 3rd draft model. DBA is now launching a final consultation round with

the industry with similar objectives - allowing stakeholders to review, comment and advice

on DBA’s model.

The 3rd draft model submitted to consultation builds upon the 2nd draft model, which was

developed following the methodological principles laid out in the MRP from October 2019.

DBA is specially interested in gathering feedback on the reasonability and

representativeness of the model’s inputs, calculations, and outcomes.

DBA invites stakeholders to participate in this consultation process following the indications

presented in the following section.

1 Link: https://erhvervsstyrelsen.dk/sites/default/files/2019-10/Final%20MRP.pdf

https://erhvervsstyrelsen.dk/sites/default/files/2019-10/Final%20MRP.pdf


2. The consultation process

This section describes the consultation process, including:

Description of the files submitted to consultation

Procedure to submit answers

2.1. Description of the files submitted to consultation

The following files are shared with stakeholders as part of this second consultation round:

Consultation Document (this document): After a description of the consultation

process and the main changes implemented in to the 3rd draft model, it presents the

questions that stakeholders are expected to answer.

• The file provided is named 'Fixed LRAIC model – 3rd consultation document.pdf'.

Annex 1 – LRAIC Excel Model: This excel file contains the cost model (including its

inputs, calculations, and outputs/results). This model is responsible for calculating the

network assets, the cost base and the service-level costs based on the inputs it has

been filled in with.

Similarly as in the 2nd consultation round, all stakeholders have been provided with the

anonymised versions of TDC’s and Norlys’ cost models:

• TDC’s anonymised cost model: File named ‘Fixed LRAIC model – 3rd draft LRAIC

Excel model (TDC – Public).xlsb’.

• Norlys’ anonymised cost model (including PON and PTP fibre access): File named

‘Fixed LRAIC model – 3rd draft LRAIC Excel model (Norlys – Public).xlsb’.

As in previous consultation processes, for the sake of preserving the confidentiality of

the data provided by the modelled operators, the confidential inputs have been

anonymised by multiplying them by a random factor between ±30% in these versions.

Anonymised inputs have been marked in a different colour in the model.

Additionally, TDC and Norlys have been provided the confidential version of their own

models, particularly:

• TDC’s confidential cost model (provided only to TDC): File named ‘Fixed LRAIC

model – 3rd draft LRAIC Excel model (TDC – Internal).xlsb’.


• Norlys’ confidential cost model (provided only to Norlys): File named ’Fixed LRAIC

model – 3rd draft LRAIC Excel model (Norlys – Internal).xlsb’.

Annex 2 – LRAIC R Model: The R model is responsible for extracting several KPIs

mainly related to the dimensioning of the fixed access networks for the modelled

operator. Given the highly confidential and complex nature of the information included

in the R model, DBA is sharing a sample of the actual LRAIC R model, including

anonymised information on two random areas of Denmark. All relevant algorithms are

preserved in this version of the R model to allow stakeholders to review it in full.

• The file provided is named 'Fixed LRAIC model – 3rd draft R model (Sample).zip'.

Additionally, as in the 2nd consultation round, TDC and Norlys have been provided the

confidential version of their own models, particularly:

• TDC’s confidential R model (provided only to TDC): File named ‘Fixed LRAIC model

– 3rd draft R model (TDC – Internal).zip’.

• Norlys’ confidential R model (provided only to Norlys): File named ‘Fixed LRAIC

model – 3rd draft R model (Norlys – Internal).zip’.

Annex 3 – Excel model manual: This document introduces the general structure of

the Excel model, providing guidance on how to operate it for the first time. The manual

also explains the technical structure of the Excel model, the definition of its key inputs,

and the algorithms implemented to dimension the network, calculate its costs, and

allocate them to the final services.

The file provided is named 'Fixed LRAIC model – 3rd draft Excel model manual.pdf'.

Annex 4 – R model manual: This manual explains how to operate the R model as

well as its structure, providing detailed indications on the scripts included in the model

and the geographical calculations performed.

The file provided is 'Fixed LRAIC model – 3rd draft R model manual.pdf'.

2.2. Procedure for clarifications

We strongly recommend stakeholders taking part in this consultation process to analyse

all the materials provided along with this document. We expect that several potential

questions may already be clarified by going through these documents.

However, if there are still any questions or doubts about any of the aspects related to the

topics included in this document, we encourage each stakeholder to send a single set of


questions to DBA through the email addresses provided in section ‘2.3 Procedure to submit

answers’. Questions may be submitted within the first two weeks of the consultation

process (before Wednesday the 16th of September 2020).

Similarly to the 1st and 2nd consultation, DBA will hold a series of meetings with the industry

to clarify any questions that may arise during the review of the 3rd draft model. These

meetings will take place during the week of 21 September 2020.

2.3. Procedure to submit answers

This public consultation is conducted by DBA within the framework of its competences from

the Act.

Stakeholders are invited to submit their comments in reply to the relevant questions issued

in section ‘4 - Questions for the 3rd consultation round’ of this document.

The public consultation is launched on Tuesday 1 September 2020 and will end

on Tuesday 6 October 2020. Responses should be submitted in English and in

electronic form before the end of the public consultation.

Information that operators wish to be included in the final model (to be

presented to the industry in November 2020), shall be included along the

responses within the 6 October 2020 deadline.

The consultation responses from the industry may be published in full and outlining the

corporate name of the respondent by DBA. In case the responses contain confidential

information that should not be published, operators are responsible of reporting a separate

version of the document removing any information that shall be considered confidential

for publication.

Responses and questions should be submitted to the following email addresses:

[email protected] and [email protected].

Respondents are encouraged to support their statements and comments with any relevant

justifications, as DBA cannot accommodate suggestions without enough reasoning.

DBA will assume that if a stakeholder does not answer a specific question, the stakeholder

is accepting the approach presented to such question under this document.


3. Key aspects relevant for the 3rd draft model

The industry provided feedback in the 2nd consultation round that required a number of

changes and adjustments in the 3rd draft model. In turn, these changes have had an

impact in the results calculated in the cost model. The new results can be analysed in

worksheet ‘8A RESULTS SERV’ of the cost model. In the case of the “public” models, the

results of the confidential versions of the model are included in worksheet ‘3RD DRAFT

RESULTS’.

In the following subsections we present the results for the key services extracted from the

3rd draft model for TDC and Norlys. We include a comparison of these results against the

2nd draft model’s results, as well as the current wholesale regulated prices. Furthermore,

we detail the main drivers associated to the changes in the results observed between the

2nd and 3rd draft model.

3.1. TDC’s model

The subsections below outline the key results obtained in TDC’s 3rd draft model.

3.1.1 Copper services

The following chart presents the evolution of the 3rd draft model’s results for TDC’s copper

services:


Exhibit 3.1: Results of the 3rd draft model – TDC’s copper services [Source: DBA]

As can be extracted, there is a moderate evolution in the costs of the services compared

to the results obtained in the 2nd draft model. The differences observed between the

models can be explained by a series of changes implemented in the 3rd drat model, which

are illustrated below2:

2 The illustration presents the impact for the service “Raw copper at POI0”

875

972

1.028

1.109

839

904

1.033

1.079

823

932

1.095

1.172

-

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) 2nd draft model 3rd draft model


Exhibit 3.2: Impact of the changes implemented in the model for copper services [Source: DBA]

A high-level overview of the key changes presented in the image above is presented below:

Adjustments to R and Excel dimensioning: We have implemented a number of changes

to the R and Excel dimensioning based on the feedback received as part of the 2nd

consultation process. A log of the changes implemented in the Excel model is presented

in worksheet “CHANGELOG” of the 3rd draft Excel model, while for the R model, the log

of the changes is presented in Annex D of the R model manual.

Allocation of non-network overheads: We have adjusted the allocation of the non-

network overheads to services to follow an EPMU approach, based on the feedback

received as part of the 2nd consultation. Additionally, the inputs included for non-

network overheads have also been adjusted in the cost model, following the data

reported by TDC.

Changes in the unit costs of the network elements: We have adjusted the unit costs

for some network elements based on the new information and clarifications reported

by TDC. Figures have been updated in the model as reported by TDC, as long as i)


sufficient evidences have been provided and i) the figures were found reasonable

compared to data reported by other Danish operators.

Sharing with utilities: We have adjusted the percentage of costs borne by TDC in the

trenches shared with utilities from 50% to 60%. This change has been performed to

reflect that when trenches are shared with utilities, they tend to be larger and, thus,

more expensive.

3.1.2 Fibre services

The following chart presents the evolution of the 3rd draft model’s results for TDC’s fibre

services:

Exhibit 3.3: Results of the 3rd draft model – TDC’s fibre services [Source: DBA]

As can be extracted, there is an increase in the costs of the services compared to the

results obtained in the 2nd draft model. The differences observed between the models can

924

1.099

337

-

200

400

600

800

1.000

1.200

1.400

1.600

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Raw fibre (POI0)

4

1.2161.331

401

1.664

1.013

-

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Raw fibre (POI1)

1.284

1.580

409

2.156

1.435

-

500

1.000

1.500

2.000

2.500

2nd draft model(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Fibre BSA PON (POI2)

1.337

1.665

395

2.156

1.435

-

500

1.000

1.500

2.000

2.500

2nd draft model(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Fibre BSA PTP (POI2)

Model results NGA Risk premium (if kept at current level)

Price decision (2020) - DONG Price decision (2020) – Rest of the country


be explained by a series of changes implemented in the 3rd drat model, which are

illustrated below3:

Exhibit 3.4: Impact of the changes implemented in the model for fibre services [Source: DBA]







Adjustment to the economic depreciation and demand: We have adjusted the

consideration of the trend of production factors and the treatment of OpEx outside of

3 The illustration presents the impact for the service “Raw fibre at POI1”


the modelling period, following the comments provided by the operators in the 2nd

consultation round:

• Production factors outside the modelling period (i.e. after 2038) are now scaled-

down following the same rate at which assets become fully depreciated.

• Assets generate OpEx costs outside the modelling period (i.e. after 2038), to

ensure that the economic depreciation has a comprehensive view of the entire

economic modelling period.

These considerations are explained in section regarding economic depreciation of the

2nd consultation report.

Furthermore, we have updated the demand for fibre services based on the new data

reported by TDC. The new demand has an impact on the patterns employed in the

economic depreciation to recover the costs of the network.



received as part of the 2nd consultation. The inputs included for non-network overheads

have also been adjusted in the cost model, following the data reported by TDC.


for some network elements based on the new data reported by TDC. Figures have been

updated in the model as reported by TDC, as long as i) sufficient evidences have been

provided and i) the figures were found reasonable compared to data reported by other

Danish operators.

Overlap with coax networks: We have adjusted the fibre rollout algorithm so that it

avoids covering i) homes that have fibre from alternative operators (feature existing

in the 2nd draft model) and ii) homes that have coax, from either TDC or other

alternative operators (new feature in the 3rd draft model). However, to ensure the

deployment remains efficient, the model considers that whenever a road section is dug

out for both, fibre and coax networks4, the same trench can be shared between fibre

and coax networks.

Installation costs: The model now considers that the NTP installation (including drilling)

are included in the recurrent fee of the fibre services. The inputs for the unit costs of

4 This adjustment is limited only to the part of the coax network that is deployed with fibre (i.e. between the

CMC and the CO).


this new network element have been extracted from the cost of the equivalent ancillary

service.




more expensive.

Regulated areas: The model now includes an option to extract the results measured

only in the regulated areas, according to the draft market analysis decision published

by DBA.

3.1.3 Coax services

The following chart presents the evolution of the 3rd draft model’s results for TDC’s coax

services:

Exhibit 3.5: Results of the 3rd draft model – TDC’s coax services [Source: DBA]

743

866

914

822

1.044

1.124

644

866

946

0

200

400

600

800

1.000

1.200

Coax BSA (access only) Coax BSA (POI2) Coax BSA (POI3)

DK

K /

lin

e /

mo

nth

2nd draft model 3rd draft model (national) 3rd draft model (regulated areas)





illustrated below5:

Exhibit 3.6: Impact of the changes implemented in the model for coax services [Source: DBA]







5 The illustration presents the impact for the service “Coax BSA at POI2 (excluding traffic costs)”


Adjustment to the economic depreciation: We have adjusted the consideration of the

trend of production factors and the treatment of OpEx outside of the modelling period,

following the comments provided by the operators in the 2nd consultation round:






These considerations are explained in section regarding economic depreciation

included in the 2nd consultation report.




have also been adjusted in the cost model, following the data reported by TDC.


for some network elements based on the new data reported by TDC. Figures have been

updated in the model as reported by TDC, as long as i) sufficient evidences have been

provided and i) the figures were found reasonable compared to data reported by other

Danish operators.




more expensive.

Allocation of ducts and cables: We have adjusted the allocation of some coax assets

(namely, ducts and coax cables) so that they are allocated to access services instead

of to broadband and TV services.

3.2. Norlys’ model

The subsections below outline the key results obtained in Norlys’ 3rd draft model.

3.2.1 Norlys’ fibre services

The following chart presents the evolution of the 3rd draft model’s results for Norlys’ fibre

services:


Exhibit 3.7: Results of the 3rd draft model – Norlys’ fibre services [Source: DBA]




illustrated below6:

6 The illustration presents the impact for the service “Raw fibre at POI1”

Model results

1.380 1.407

410

-

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Raw fibre (POI0)

8

2.0451.896

523

-

500

1.000

1.500

2.000

2.500

3.000

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Raw fibre (POI1)

2.172 2.137

508

-

500

1.000

1.500

2.000

2.500

3.000

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Fibre BSA PON (POI2)

2.437 2.405

528

-

500

1.000

1.500

2.000

2.500

3.000

3.500

2nd draft model

(inc. risk premium)

3rd draft model

DK

K/

lin

e/

year

Fibre BSA PTP (POI2)

NGA Risk premium (if kept at current levels)


Exhibit 3.8: Impact of the changes implemented in Norlys’ model for fibre services [Source: DBA]


Adjustments to R and Excel dimensioning, including coverage: We have implemented

a number of changes to the R and Excel dimensioning based on the feedback received

as part of the 2nd consultation process. A log of the changes implemented in the Excel

model is presented in worksheet “CHANGELOG” of the 3rd draft Excel model, while for

the R model, the log of the changes is presented in Annex D of the R model manual.

Adjustment to the economic depreciation and demand: We have adjusted the

consideration of the trend of production factors and the treatment of OpEx outside of

the modelling period, following the comments provided by the operators in the 2nd

consultation round:







These considerations are explained in section regarding economic depreciation

included in the 2nd consultation report.

Furthermore, we have updated the demand for fibre services, based on the updated

coverage figures utilized in the 3rd draft model, which has an impact on the patterns

employed in the economic depreciation to recover the costs of the network.




have also been adjusted in the cost model

Changes in the unit costs of the network elements: After careful analysis of the unit

cost data reported by Norlys as part of the different data request processes, we have

performed minor adjustments to the unit costs of some network elements in the model.

Installation costs: The model now considers that the NTP installation (including drilling)

are included in the recurrent fee of the fibre services. The inputs for the unit costs of

this new network element have been extracted from the cost of the equivalent ancillary

service.

Sharing with utilities: We have adjusted the percentage of costs borne by Norlys in the



more expensive. Furthermore, in the case of Norlys, we have adjusted the percentage

of trenches shared with utilities to 20%. This aspect is presented in the section related

to the sharing with utilities included in the 2nd consultation report.

Allocation of MSAN costs: Following the comments provided by the industry in the

consultation process, we have adjusted the allocation of the costs of the fibre MSAN

so that they are not allocated to raw fibre services.

Consideration of isolated homes: After a thorough review of the results of the topology

of Norlys’ network we identified that a relevant number of homes are located in very

isolated areas, especially in rural areas. Giving coverage to these isolated homes

involves that relevant deployments must be made by the operator for only a few

houses. Thus, in the 3rd draft model we have estimated that whenever these specific


deployments take place, the modelled operator would always aim to share the

deployment (digging costs) with the incumbent utility operator in the region.

Regulated areas: The model now includes an option to extract the results measured

only in the regulated areas, according to the draft market analysis decision published

by DBA.

3.2.2 Norlys’ coax services

One of the key changes for Norlys’ 3rd draft model is the modelling of coax networks. The

following chart presents the results obtained in the model for Norlys’ coax services:

Exhibit 3.9: Results of the 3rd draft model – Norlys’ coax services [Source: DBA]

1.025

1.377

1.559

1.159

1.511

1.693

-

200

400

600

800

1.000

1.200

1.400

1.600

1.800

Coax BSA (only access) Coax BSA (POI2) Coax BSA (POI3)

DK

K/

lin

e/

year

3rd draft model - National 3rd draft model - Regulated areas 10


4. Questions for the 3rd consultation round

This section provides a summary of the questions DBA expects stakeholders to answer.

They have been particularly tailored to each stakeholder, as the DBA acknowledges the

information available to them differs (i.e. some stakeholders have access to confidential

versions of the model and the others do not).

In the case that the stakeholder does not agree with the inputs, calculations or results

related to the questions presented, it shall justify its position providing supporting

information and references.

Modelled operators (TDC and Norlys)

Question 1: Do you agree with the demand considered in the Excel model?

Question 2: Do you agree with the coverage levels considered in the Excel model?

Question 3: Do you agree with the broadband traffic inputs considered to characterize

traffic requirements (i.e. broadband, multicast, etc.) in the Excel model?

Question 4: Do you agree with the results of the R model for the access networks and

their representativeness of your network KPIs?

Question 5: Do you agree with the fibre rollout algorithm implemented to determine the

coverage levels of the modelled operator?

Question 6: Do you agree with the results of the R model for the transmission networks

and their representativeness of your network KPIs?

Question 7: Do you agree with the unit costs and useful lives introduced in the worksheet

‘1F INP UNITARY COSTS’ of the Excel Model?

Question 8: Do you agree with the inputs and methodology followed for the treatment of

non-network overheads in the Excel model?

Question 9: Do you agree with the inputs considered for the sharing with utility networks

in the Excel model?

Question 10: Do you agree with the remaining inputs of the Excel model?


Question 11: Do you agree with the access and transmission network dimensioning

algorithms implemented in the Excel model?

Question 12: Do you agree that the number of network elements dimensioned by the

Excel model?

Question 13: Do you agree that the total cost base calculated by the Excel model?

Question 14: Do you agree with the routing factors matrix defined in the Excel model?

Question 15: Do you agree with the results of the wholesale access services produced by

the Excel model?

Question 16: Do you agree with the results of the wholesale bitstream services produced

by the Excel model?

Question 17: Do you agree with the results obtained for the ancillary services?

Other operators

Question 18: Do you agree, at a high level, with the inputs included in the Excel model?

Question 19: Do you agree with the methodology followed for the treatment of non-

network overheads in the Excel model?

Question 20: Do you agree with the access and transmission network dimensioning

algorithms implemented in the Excel model?

Question 21: Do you agree with the dimensioning algorithms/scripts implemented in the

R model?

Question 22: Do you agree with the routing factors matrix defined in the Excel model?

Question 23: Do you agree with the results of the wholesale access services produced by

the Excel model?

Question 24: Do you agree with the results of the wholesale bitstream services produced

by the Excel model?

Question 25: Do you agree with the results obtained for the ancillary services?

MADRID (HQ)

Sagasta, 18, 3

28004, Madrid

Tel: +34 91 310 2894

Tel: +34 91 310 2894

MEXICO CITY

Torre Mayor Piso 41,Paseo de la

Reforma 505,Cuauhtémoc

Ciudad de México, 06500

Tel: +52 55 68438659

ISTANBUL

Buyukdere Cad. No 255, Nurol

Plaza B 04 Maslak 34450

Tel: +90 212 277 70 47

https://es.linkedin.com/company/axon-partners-group

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