development of the danish lraic model for fixed networks... · this document was prepared by axon...

This document was prepared by Axon Consulting for the use of the client to whom it is addressed. No part of it may be copied or made available in any way to third parties without our prior written consent.

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


3. Next steps


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



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



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



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


3. Next steps


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.


overheads



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.

+-


overheads



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





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


3. Next steps


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

[email protected]

Gonzalo Arranz

Principal

[email protected]

Alfons Oliver

Any questions? Please, contact:

development of the danish lraic model for fixed networks... · this document was prepared by axon...

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