development of the danish lraic model for fixed networks...presentation of the 1st draft model...

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Presentation of the 1st draft model

Development of the Danish LRAIC model for fixed networks

February 2020

CONFIDENTIAL

This presentation is aimed at achieving a common understanding on the model submitted to consultation to maximise the efficiency and relevance of this regulatory process

2

Procedures to respond to the 1st public consultation

Description of the consultation materials

Introduction to the model, its inputs and outputs

Presentation of the model’s associated documentation

Key differences with the current price decision

Q&A session to address stakeholders’ concerns

Improved alignment

between all parties involved

Easier reviewing process for

service providers

More accurate and relevant

feedback

Avoid misunderstandings

CONFIDENTIAL

1. Introduction to the Public Consultation

3. Overview of the main inputs of the Excel model

4. Key outcomes of the model

2. Introduction to the model’s structure and architecture

Contents

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Contents

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CONFIDENTIAL

In accordance with the original timetable of the Project, the DBA has launched the 1st consultation with the industry on 3 February

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1 Phase 5 Activity led by Axon/DBA 4 Activity with support from stakeholders

Project Activities and Tasks

Phase 1. Inception and development of the model's methodology

1.1 Development of the model's methodology

1.2. Public consultation on the model's methodology with the industry

Phase 2. Data collection

2.1 Development of the data collection templates

2.2. First data collection process with Service Providers

2.3. (Potential) Second data collection process (equivalent process as for the first one)

Phase 3. Development of the 1st draft model to be submitted for consultation

Phase 4. Yearly update of the cost model and public consultations

4.1. 1st Consultation with the industry

4.2. 2nd Consultation with the industry

2019 2020

A M J J A S O N J J AD J F M A M

Project timetable as presented in the kick-off meeting held in May 2019

The 1st consultation on the model and its associated documentation has been launched on 3 February, in

line with the timings set in the Project’s timetable presented to the stakeholders in May 2019.

The 1st consultation process has been scheduled for 5 weeks. This means that stakeholders’ feedback is

expected by no later than 6 March 2020.

CONFIDENTIAL

The fixed LRAIC model submitted to consultation needs to be understood in the light of the MRP published in 23 October

6

The 1st draft fixed LRAIC model has been developed following the guidelines stablished in the Model

Reference Paper (MRP) published by the DBA in 23 October.

The MRP was already consulted from 1 July to 30 August. This consultation starting on 3 February is

therefore solely focused on the draft model and not the MRP.

Illustrative excerpt of the MRP Illustrative excerpt of the position statement

CONFIDENTIAL

To answer to this 1st consultation process, stakeholders are invited to use the template included in the consultation document

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Illustrative excerpt of the template to comment

Service Providers are requested to disclose their position to each of the questions raised, together with their

comments and justifications.

DBA kindly requests that stakeholders state their position through the template provided.

# Category Question Position (Agree / Partially

Agree / Disagree) Comments and justifications

1 Inputs

Do you agree with the demand considered for the modelled operator?

If you don’t agree, please justify your position and provide supporting information and references.

2 Inputs

Do you agree with the coverage levels considered for copper, fibre and coax access networks? If you don’t agree, please justify your position and provide supporting information and references.

… … ...

CONFIDENTIAL

Some additional indications to the provision of feedback to the 1st

consultation process

8

All comments will have to be submitted by 6 March 2020.

• Each stakeholder has to provide only one filled-in template with its position to the questions raised.

• Comments should be as precise and brief as possible, while making sure they are justified.

• The comments and answers section of the position statement to be produced at the end of this 1st

consultation round will prioritize comments that are i) significant for the results of the model and ii)

have been thoroughly justified.

Meeting 26 February 2020, deadline for prioritized questions 19 February 2020

• A working session on the fixed LRAIC model will be conducted on 26 February 2020. After this session,

DBA will circulate its answers to all questions received.

• Questions from stakeholders received by DBA by 19 February 2020 will be prioritized at the meeting.

To provide you with the best answers (including relevant illustrations, examples etc), we urge you to

send in questions before this date.

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Contents

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CONFIDENTIAL

The implementation of the model has been performed over two different software platforms to fully exploit their advantages

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R model Excel Model

Powerful tool that allows us to work with high

volumes of data:

• >3,5 million homes

• >1,4 million roads

The R model is used for the geographical

analysis:

• Location of the network nodes

• Distance between nodes

• Access network elements

The results from the R model are seamlessly

loaded into the main excel model.

Network dimensioning and costing algorithms

are implemented in the Excel model.

The model is fed with inputs from the R

model as well as with other inputs that are

only relevant for the Excel model (e.g.

demand).

The Excel model is mainly responsible for

costing the network and allocating the costs

to the modelled services.

We expect most of the stakeholders’ review

efforts to be focused on the Excel model.

CONFIDENTIAL

The geographical model implemented in R calculates a set of key dimensioning indicators that are later used in the Excel model

The R model architecture is based on three main

blocks:

• Inputs: Information characterizing the

geographical conditions of Denmark (e.g.

addresses, routes) as well as TDC’s network

(e.g. nodes locations).

• Calculations: Algorithms to perform the

geographical analysis of the networks.

• Outputs: Generation of key dimensioning

indicators such as the average distance of the

local loop.

The R model can be controlled through a user-

friendly interface. The end-user does not need to

get involved into R programming.

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Architecture of the R model

Calculations

Inputs

Results*

1. Data cleaning

3. Definition of the routes between nodes

4. Calculation of network elements

2. Location of network nodes

5. Definition of the disaggregation levels

Address database

Route database

Coverage database

Nodes locations

Distribution of lines Coverage

Equipment inventory and disaggregation

Transmission characteristics

Note(*): The outputs of the R model are generated for each combination of geotype, region, regulation and dwelling type

CONFIDENTIAL

A complete version of the R Model with a sample dataset has been circulated with stakeholders as part of the 1st Public Consultation

While the sample R model shared with the

industry includes all algorithms employed, it has

been loaded with inputs from only two random

areas* in Denmark in order to:

• Preserve the confidentiality of the data of the

modelled operator.

• Shorten execution times, as the R model is

computationally intensive.

Stakeholders can analyse the algorithms in this

sample R model and assess the reasonability of

the results produced for these two sample areas.

The complete outcomes of the R model (although

with some degree of anonymization) are available

in the Excel model.

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Note(*): Locations of the access nodes included in this area have been randomised as well.

Areas included in the sample version of the R model

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The outputs from the R model can be easily exported into the Excel model

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1. Exporting R results 2. Filling the template 3. Importing to Excel

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The Excel model follows a classical Bottom-Up approach, with three distinct blocks, to calculate the service-level results

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Architecture of the Excel model

Geographical inputs

Location of network nodes

Routes between network nodes

Network footprint assessment

Aggregation of the results into levels

Results: Network costs of the services

Market and network inputs

Bottom-Up LRAICModel

architecture

Resources Costing (CAPEX & OPEX)

DIMENSIONING MODULE

Access network

Dimensioning drivers

Copper Fibre Coax

Transmission network

L3 Access

Aggregation

Distribution

Core

Inputs Calculations Outputs

The Excel model architecture is based

on three main blocks:

1. Inputs: Information required to

calculate the results. This includes

the demand of the services,

network information, among

others.

2. Calculations: Algorithms to

characterize the network and

calculate the costs of the network

elements involved.

3. Outputs: Allocation of the network

costs to services and presentation

of the services’ costs in different

levels of disaggregation.

CONFIDENTIAL

Inputs included in the Excel model have been anonymised to preserve confidentiality

The Excel model’s inputs which have been extracted

from the data provided by the modelled operator have

been anonymised to preserve their confidentiality.

To anonymise these inputs, they have been generally

multiplied by a random factor between ±30% (and up

to ±50% in some cases – e.g. demand forecasts –).

The inputs that have been anonymised are presented

in a red background so they are easily distinguishable.

The anonymisation of the inputs implies that the

results included in the model for consultation do not

represent the actual figures handled by DBA.

Some of the real outcomes produced by the model

have been included in this presentation and in the

consultation document.

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Illustrative example of anonymised inputs

Information about the chains in the aggregation network

Chain code # of nodes Route length (km) % of traffic

AGG-1 6 153 3,90%

AGG-2 3 110 2,73%

AGG-3 6 176 5,43%

AGG-4 9 360 5,55%

AGG-5 4 162 5,37%

AGG-6 3 153 4,74%

AGG-7 7 224 4,25%

AGG-8 6 173 4,08%

AGG-9 4 131 2,55%

AGG-10 4 172 5,00%

AGG-11 3 156 2,57%

AGG-12 1 309 1,02%

AGG-13 8 230 3,71%

AGG-14 4 135 2,35%

AGG-15 4 89 2,52%

AGG-16 3 71 3,73%

AGG-17 2 28 2,44%

AGG-18 4 84 3,49%

AGG-19 3 20 3,79%

AGG-20 3 10 9,07%

AGG-21 6 121 3,04%

blank - - -

blank - - -

blank - - -

blank - - -

TOTAL 93 3.067 81,35%

CONFIDENTIAL

The inputs considered play a key role in the determination of the model’s outcomes (unit costs per service)

The 1st draft model includes the inputs

that are representative of the modelled

operator at the moment (i.e. TDC).

However, if different inputs were used

(e.g. coverage, demand of another

operator) the outcomes delivered by

the model would differ.

The control panel of the model

(“COVER” worksheet) allows the users

to quickly select different sets of inputs

or scenarios to test their impact on the

results (note: the “RUN” button needs

to be pushed to assess how the new

inputs will impact the model’s outputs).

Overview of the COVER sheet of the model

LRAIC Model for Fixed Networks

Control panel

Execution mode Full execution

Execution time 03:22 1

Input scenarios

Demand scenario Base case

selected.demand.scenario

Copper shutdown year 2.030

selected.copper.shutdown GENERAL CHECK

Annualisation of copper shut-down costs GRC annualised within active years OKselection.annualisation.copper.shutdown

Remove fully depreciated assets? Yes

selection.fully.depreciated

Percentage of fully depreciated assets 50%

selection.fully.depreciated.percentage

Annualisation methodology Economic Depreciation

selection.annualisation.method

WACC 4,54%

input.wacc

Risk premium 2,00%

input.risk.premium

Consider productivity factor? Yes

selection.productivity.factor

RUN

UPDATE

KPIs

CONTENTS

MAP

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Contents

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CONFIDENTIAL

Inputs (and thus, the results) of the model have been prepared to be representative of the current modelled operator (TDC)

Therefore, the 1st draft model, including its inputs (see section 3 of this presentation) and outputs (see

section 4 of this presentation), are so far only representative of TDC.

However, this situation could change in the future, as captured in the MRP:

“Nevertheless, if any other operator is also designated to have SMP in markets 3a and 3b, the model

should be ready to assess its costs following the methodology described in this document.”

In such situation, while the structure and architecture of the Excel and R models would be preserved as

shown before in section 2 of this presentation, their inputs would be adjusted to reflect the operations of

the new SMP operator. A different set of inputs would be developed for each modelled operator based on

their actual data thus leading to different results for each SMP operator.

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MRP: “The modelled operator(s) should be, at all times, the SMP operator(s) in markets 3a and 3b. For the time being, this implies that TDC is going to be the only modelled operator.”

CONFIDENTIAL

The model relies on four main categories of inputs to calculate the final results at service level of the modelled operator (TDC)

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Input Description Main sources

► Operators (TDC)► Existing LRAIC model

Demand

Demand of the services

included in the cost model

for the 2005-2038 period.

Geographical inputs

Network volumes in the

different access networks

(copper, fibre and coax).

► Roads and buildings data► Network nodes (TDC)

Network inputsInputs related to network

parameters

► Industry constants► Configuration of TDC’s

network

Unit costs

Unit CapEx, OpEx trends and

useful lives of the network

elements.

► Operators (mostly TDC)► Existing LRAIC model► International benchmarks

CONFIDENTIAL

Demand

Unit costs

Geographical inputs

Network inputs

DisclaimerThe figures included in this section have been anonymised with a random factor to protect data confidentiality. They are shown as in the Excel model

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±50%

Input Anonymisation Factor

±30%

±30%

±30%

CONFIDENTIAL

-

0,5

1,0

1,5

2,0

2,5

3,0

Access l

ines (

MM

)

Copper Fibre Coax

We have defined the demand based on the data provided by TDC, distinguishing the lines to be supported by each access network

Service demand is one of the main

inputs of the cost model:

• Crucial to determine the

dimensioning of the transmission

network as well as the final drop

cabling.

• Basic input in the calculation of

the unit costs of the services.

As per the MRP, each access

network supports its own demand.

The demand of each service has

been anonymised independently of

the others.

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Access lines in each access network*

Expected shut down in 2030See next slide

Note(*): The number of lines included in this figure has been anonymised with a random factor to preserve the confidentiality of the data

CONFIDENTIAL

The model considers that, as a base case, the copper network could be switched-off in 2030

The exact year in which the copper

access network is going to be shut

down by the modelled operator is

unknown so far. As such, the copper

switch off year is an input of the

Excel model that can easily be

adjusted by the user.

As a base case, the model considers

the copper network to be switched off

in 2030. In all scenarios, we consider

a copper shut down timeframe of 5

years. Over this period, users are

progressively disconnected from the

copper network and switched to the

fibre access network.

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Access copper lines under different switch-off scenarios*

-

0,5

1,0

1,5

2,0

2,5

3,0

Access l

ines (

MM

)

Switch-off in 2030 No switch-off

Note(*): The number of lines included in this figure has been anonymised with a random factor to preserve the confidentiality of the data

CONFIDENTIAL

Data provided by the operators has been the main source to populate unit cost inputs

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Op

Ex

Cap

Ex

Type of cost Description Source

Unit CapEx► Acquisition and

installation costs (DKK per element)

► Based mostly on information from TDC► Crosschecked with data from other operators and

Axon’s international benchmark.

CapEx Trend► % of yearly change in

unit CapEx

► Operators did not provide this data.► Input based on data from the existing cost model

and Axon’s international benchmark.

Useful life► Time for asset

depreciation (years)

► Operators provided only financial (book) data.► Input based on data from the existing cost model

and Axon’s international benchmark.

Unit OpEx► Operational and

maintenance costs (% of unit CapEx)

► Operators provided limited data.► Input from the existing cost model, Axon’s

international benchmark and KPIs from TDC’s AS.

OpEx Trend► % of yearly change in

unit OpEx► Based on inflation data extracted from public

sources

Percentage of labour costs

► Costs related to man-work (% of OpEx)

► Input based on data reported by TDC (AS).► These percentages are used to calculate the

weight of the productivity factor.

CONFIDENTIAL

The unit prices of copper and coax civil infrastructure assets have been adjusted to remove fully depreciated assets (1/2)

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Based on the figures provided by TDC in its FAR, the percentage of fully depreciated civil infrastructure assets

in TDC’s copper access network has been estimated at around 36,8%*.

However, there are three main factors that could distort the representativeness of this figure:

1. The lack of visibility with regards to the assets purchased before 1995, as they do not appear in TDC’s

FAR, but may have been in use by TDC in 2005. This could lead to this percentage being underestimated.

2. The need to assume that the percentage of fully depreciated assets in 2005 was the same as in 2018 due

to the lack of any other information. This could probably lead to an overestimation of this percentage.

3. The uncertainty with regards to the optimal useful lives to be considered. Regulatory useful lives should

be preferred, but they were only used for regulatory purposes since the late 2000s. This means that TDC

probably recovered most of the access assets’ costs beforehand based on its financial useful lives. The

consideration of the regulatory useful lives, as proposed, may underestimate this percentage.

Taking all this into consideration, observations #1 and #3 would imply a higher percentage of fully

depreciated assets, while observation #2 would lower this percentage.

Note(*): Please see the main consultation document for further details on the calculation of this figure.

CONFIDENTIAL

The unit prices of copper and coax civil infrastructure assets have been adjusted to remove fully depreciated assets (2/2)

25

As a result of the uncertainty described in the previous slide, the model includes an option in the control

panel to define the percentage of fully depreciated assets. Alternatives included for this percentage are

30%, 40%, 50% and 60%. These alternatives have been defined in consistency with the BEREC’s

benchmark on this matter.

As per the observations presented in the previous slide, DBA has considered the percentage of fully

depreciated copper and coax civil infrastructure assets to be 50% as a base case in the 1st draft model. This

percentage has been considered when producing the results shown throughout this presentation.

However, we invite stakeholders to comment on (and justify) the percentage they consider to be more

representative for the modelled operator.

CONFIDENTIAL

Geographical inputs are used to calculate the passive infrastructure needs of the copper, coaxial, fibre and transmission networks

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►Addresses database.

►Routes database.

►Network nodes.

►Coverage (including

forecasts) for each

access network.

Step 1:Input assessment

Excel Model

►Determination of

routes between the

network nodes and

buildings.

►Calculation of the

location of distribution

points.

►Analysis of the

quantity of network

elements required.

Step 2:Geographical analysis

►Definition of the

existing geotypes.

►Assigning the

corresponding

geotype to each

building.

►Aggregation of the

network elements into

each geotype.

Step 3:Geotype aggregation

CONFIDENTIAL

Step 1: Input assessment. While addresses and routes’ databases are public, network nodes have been extracted from TDC’s data

27

Network nodesRoutesIdentification of Buildings

Extracted from the DBA’s addresses database

Extracted from the DBA’s routes database

Extracted from the nodes database provided by TDC

CONFIDENTIAL

Step 1: Input assessment. The coverage footprint is defined separately for each of the three access technologies and is one of the key inputs

28

Copper and coax

Input based on data from TDC.

Coverage levels are constant in the modelling

period.

However, in order to avoid inefficiencies in

copper, we consider no CapEx reinvestment or

OpEx continuity after the switch-off of a Central

Office (CO).

Fibre

Input based on data from TDC.

Coverage expected to increase over time.

Coverage of the three access networks*

-

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Ho

mes c

on

necte

d (

MM

)

Copper Fibre Coax

Note(*): The number of connected homes included in this figure have been anonymised with a random factor to preserve the confidentiality of the data

CONFIDENTIAL

Step 2: Geographical analysis. Based on these inputs, the R model calculates the volume of network elements needed in each access network

29

The final aim of the geographical analysis is to

calculate the number of passive network

elements.

The network elements constitute the resources

needed in order to reach the coverage footprint of

each access network in Denmark.

Examples of access network elements assessed in

the geographical analysis include cables, trenches

and manholes, joints, splitters… All this

information is calculated at building level.

The algorithms implemented in the R model are

thoroughly described in the descriptive manual

(section 4).

Outputs CalculationsInputs

If # of homes passed

Street Cabinet of 192 homes passed

Street Cabinet of 384 homes passed

Number of Street Cabinets of 384 homes passed

Nº of SCs = Homes passed /

Max.capacity of SC

Number of homes passed

per MDFSC sizes

< 192 homes passed > 384 homes passed

Between [192,384]

homes passed

Illustrative algorithm used in the R model

CONFIDENTIAL

Step 2: Geographical analysis. In addition, the R model calculates the required transmission network based on TDC’s data

The transmission network is divided into

four different layers:

• L3 Access: Represents the connection

between the access and transmission

networks (approx. 1000 nodes).

• Aggregation: Aggregates the traffic

from the different L3 Access chains

(approx. 90 nodes).

• Distribution: Conveys the traffic

towards the core network (approx. 12

nodes).

• Backbone: Highest layer which

enables full interconnection between all

core nodes (4 nodes).

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Architecture of the transmission network

L3

Access

Netw

ork

L3 Access NodeA

gg

. N

etw

ork

Dis

trib

uti

on

n

etw

ork

Co

re

netw

ork

L3 Access Node

Agg. Router Agg. Router

Dist. Router Dist. Router

Core Router Core Router

Access Network

Access Network

CONFIDENTIAL

Step 3: Geotype aggregation. Data at building level is aggregated based on the region, building type, regulatory status and geotype

While the classification of the homes based on region, type of building and regulatory status is direct, we

performed a clustering analysis to categorise each central office into URBAN, SUBURBAN and RURAL.

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Disaggregation of the central offices into geotypes

-

5

10

15

20

25

0 50 100 150 200

Bu

ild

ing

s c

overed

by C

O (

‘00

0)

Area covered by CO (km2)

Rural

Suburban

Urban

Region Urban Suburban Rural

Hovedstaden 12,0% 26,0% 62,0%

Midtjylland 0,9% 6,0% 93,1%

Nordjylland 0,5% 4,1% 95,5%

Sjælland 0,4% 4,8% 94,8%

Syddanmark 1,1% 3,6% 95,3%

CONFIDENTIAL

Finally, a set of inputs characterizing the network is introduced in the Excel model and mainly used for dimensioning purposes

A number of different inputs are relevant in

order to dimension the traffic-side of the

network.

These inputs include, among others:

• Broadband traffic, based on the average

yearly consumption of a typical user in each

access network

• Spectrum in coaxial networks and its

utilisation from each service (broadband,

VoD, TV).

• Traffic per user/channel in TV networks,

to properly account for multicast traffic.

These, along with other inputs, play a relevant

role in the calculations of the Excel model.

32

Broadband traffic per line in each access network*

-

1.000

2.000

3.000

4.000

5.000

6.000

7.000

GB

/acti

ve lin

e/

year

Copper Fibre Coax

Note(*): Figures included in this exhibit have been anonymised with a random factor to preserve the confidentiality of the data

CONFIDENTIAL





Contents

33

CONFIDENTIAL





Contents

34

4.1 Reconciliation of the number of assets and cost base

4.2 Service-level results

4.3 Comparability with the previous fixed LRAIC model

CONFIDENTIAL

We have successfully validated the reconciliation of the model’s results with TDC’s operational and financial data

35

Type of reconciliation Description Sources Conclusion

Resources

► The number of elements calculated by

the model is compared to the actual

number of elements reported by the

operator.

► Reconciliation target: ±10%

► Volumes

reported in

the Data

Request

► Existing

LRAIC

model

✓

Cost base

► The reconciliation of the cost base

compares the costs of the model with

those of the operator.

► Reconciliation target: ±10%

► Regulatory

accounts of

TDC ✓

CONFIDENTIAL

The reconciliation in terms of network elements is highly accurate compared to the figures reported by TDC

36

-50%

-30%

-10%

10%

30%

50%

Fibre Cable Trenches

(km)

OLT MSAN - PTP

% v

ari

ation

Copper networks* Fibre networks*

Coax networks* Transmission networks*

-50%

-30%

-10%

10%

30%

50%

Copper

cable

Trenches

(km)

MSAN MDF DP

% v

ari

ation

-50%

-30%

-10%

10%

30%

50%

Coax

cable

Coax

trenches

CMC TAP Coax

cabinet

% v

ari

ation

-50%

-30%

-10%

10%

30%

50%

TX fibre Core

router

L3 router Subm.

cable

Landing

stations

% v

ari

ation

Consistent with coverage

data

Migration towards the chain config.

Migration to DOCSIS 3.1

Note(*) References from TDC for the elements coloured in grey were not available. However, we compared the reasonability of these figures, when possible, with the results of DBA’s previous fixed LRAIC model.

CONFIDENTIAL

AS AS (exc. voice,

mobile, etc.)*

Cost base for

reconciliation

CapEx

To assess the reconciliation of the cost base with TDC’s data, we extracted its costs from an analysis of its AS information

TDC reported its Accounting Separation (AS)

results with a deep disaggregation for the year

2018.

This information included details on the OpEx

and CapEx from network elements associated

to the copper, fibre, coax and core and

transmission networks.

TDC already identified the voice costs that

should not be included in the reconciliation

analysis of the model.

In addition, TDC provided descriptions that

allowed us to discard elements that were not

relevant for the current modelling exercise

(e.g. customer equipment or installation).

37

Cost base from TDC’s AS

AS AS (exc. voice,

mobile, etc.)*

Cost base for

reconciliationO

pEx

Copper access Fibre access Coax access

Transmission Mobile Other

Note(*): Categorisation of voice, mobile and other costs not relevant for the LRAIC model was provided by TDC.

CONFIDENTIAL

TDC Model TDC Model

CapEx (Depreciation) OpExCost

(MM

DKK)

Copper Fibre Coax Transmission

The reconciliation of the cost base shows reasonable outcomes for each network section, both in terms of OpEx and CapEx

CapEx reconciliation

To calculate a depreciation from the model that is

comparable to the one from TDC, the following

adjustments have to be made in the model:

• WACC (and premium) is set to zero

• Cost trends are set to zero

• Non-network overheads are set to zero.

• Tilted annuities depreciation is selected

• Adjustment for fully depreciated assets

(without indexing) to all years of the model.

OpEx reconciliation

No adjustments are performed to the base OpEx

produced by the model for the reconciliation.

38

-1,8%

Reconciliation in terms of cost base

+3,9%

CONFIDENTIAL





Contents

39




CONFIDENTIAL

Five key methodological factors hamper the comparability of the results between the current and the previous model

40

Demand considered

Fully depreciated assets

Fibre access topology

Network footprint

Depreciation profile

The new model considers the actual network footprint of each access technology, including rollout forecasts, instead of a full network coverage of DK.

Each access technology handles only the lines they actually support. In the old model, the same total demand (sum of customers in TDC’s copper, coax and fibre networks) was considered in each network.

The actual mix between PTP/GPON from TDC is considered in the new model. The previous model considered either all PTP or all GPON.

A new functionality to exclude fully depreciated assets has been added for copper and coax access networks.

The current model adopts economic depreciation as a base case, while the previous one mainly relied on tilted annuities. However, the new model can calculate cost based on tilted annuities.

CONFIDENTIAL

-

20

40

60

80

100

120

140

160

Copper Fibre Coaxial

Ho

mes c

on

necte

d

(n

orm

ali

sed

)

The new model considers TDC’s actual footprint in each access network in terms of homes connected

41

0%100%

Impact at service level

► The results for each access network represent more accurately the costs borne by the modelled operator in

its deployment.

► In the case of fibre networks, the model calculates the costs of the areas where the operator has decided to

deploy its services. This leads to lower costs if the areas targeted are more urbanised than the average.

New modelPrevious model

Same footprint for all access

networks

-

20

40

60

80

100

120

140

160


Ho

mes c

on

necte

d

(n

orm

ali

sed

)

Footprint based on actual homes

connected in each network

CONFIDENTIAL

-

20

40

60

80

100

120

140

160


Dem

an

d (

no

rm

ali

sed

)

Similarly, the new model considers only TDC’s demand from each access network separately, instead of the same demand for all

42

0%100%


► Linked to the consideration of the actual footprint of each access network, the model considers the actual

demand of the SMP operator in each access network, thus maximising the representativeness of the results

obtained for each access network.


Same demand for all access

networks

-

20

40

60

80

100

120

140

160


Dem

an

d (

no

rm

alised

)

Demand based on actual

active lines in each network

CONFIDENTIAL

The new model considers the actual fibre topology deployed by the modelled operator in each area of Denmark

43

0%100%


► The model calculates different unit costs for PON and PTP fibre services considering the economics of the

specific areas where they are actually provided.


The model allowed two deployment alternatives:

• GPON national network

• PTP national network

As previously described, the model considers the

actual footprint of the SMP operator.

Further, the model considers that some areas

have been covered with a PTP topology and some

others with a GPON topology.

Finally, the model considers future deployments in

the basis reported by the modelled operator.

CONFIDENTIAL

The new model excludes the costs from the legacy passive assets in line with the requirements from the EC’s 2013 Recommendation

44

0%100%


► The model calculates the costs for copper and coax access services considering only the assets from the

modelled operator that are not fully depreciated.

► This consideration implies lower unit costs compared to a purely Current Cost Accounting approach.


The model did not consider any adjustment for

fully depreciated assets or any other adjustment

required by EC’s 2013 Recommendation* as the

methodology was developed before the

publication of these guidelines.

As described in the MRP, the model does not

consider any costs from the fully depreciated

assets located in the modelled operator’s copper

and coax access networks.

Due to the relative uncertainty in the share of

fully depreciated assets, the model includes

different percentages that can be selected by the

user to assess their impact on the results.

Note(*): 2013/466/EU Commission Recommendation of 11 September 2013 on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment are relevant.

CONFIDENTIAL

The consideration of Economic depreciation in the model ensures even costs through the modelling period*

45

0%100%


► The model considers an even cost throughout the modelling period, only affected by the unit cost trends.

► Compared to a tilted annuities approach, in the future, copper and coax unit costs should be higher (as

demand decreases) and fibre unit costs should be lower (as demand increases).

New model – Example for fibre networksPrevious model – Example for fibre networks

2018 2020 2022 2024 2026

Dem

an

d a

nd

un

it c

ost

Unit cost (tilted annuities) Demand

2018 2020 2022 2024 2026

Dem

an

d a

nd

un

it c

ost

Unit cost (econ. depr.) Demand

Demand based on actual

active lines in each network

Note(*): Only affected by the cost trends introduced for the unit prices of the assets. In this exemplification the cost trend is set to zero and the unit cost is constant (horizontal line).

CONFIDENTIAL





Contents

46




CONFIDENTIAL

The model presents results for two main sets of services

47

Recurring Services

Unit costs of the services are presented for the modelled period

(2005-2038). Results may be presented under any desired

combination of geotypes.

Consistently with the price scheme in DBA’s Price Decision, the

unit costs of the services are presented as DKK/service/year.

Non-RecurringServices

Non-Recurring services (also referred to as ancillary services) are

those that are often needed in the provision of recurring services

(e.g. installation for VULA services).

The results of the Non-Recurring services are presented for the

period modelled (2005-2038).

DISCLAIMER: The results presented in the next slides (real outcomes obtained by DBA) differ

from the outcomes of the Excel model as its inputs have been anonymised.

CONFIDENTIAL

The model calculates the results for recurring services from 2005 to 2038. These are presented in worksheet 8A of the model.

48

One of the main objectives of the model is to

calculate the costs of the recurring services.

Some of these services, such as VULA or LLU

are often the most relevant in the

development of fixed bottom-up models.

The results are presented in a tabular view

that shows the unit costs of the different

services for any desired combination of:

• Region

• Geotype

• Type of building

• Regulated or Non Regulated areas

Results of recurring services in the model*

Note(*): Results presented in this table are only illustrative as they have been anonymised.

Region All

Degree of urbanisation All

Type of building All

Regulated areas All

Service Units 2005 … 2017 2018 2019 2020 2021 2022 … 2038

Access.Copper.Wholesale.VULA

(POI0)DKK / Lines / Year 695 … 890 911 933 954 976 1.000 … -

Access.Copper.Wholesale.VULA

(POI1)DKK / Lines / Year 725 … 927 949 971 993 1.015 1.040 … -

… … - … - - - - - - … -

Access.Fibre.Wholesale.Raw

access (POI0)DKK / Lines / Year - … 796 806 819 834 857 870 … 1.164

Access.Fibre.Wholesale.Raw

access (POI1)DKK / Lines / Year - … 1.206 1.220 1.236 1.255 1.282 1.300 … 1.683

Access.Fibre.Wholesale.VULA

access (POI1)DKK / Lines / Year - … 985 993 1.003 1.016 1.037 1.048 … 1.317

… … - … - - - - - - … -

Access.Coaxial.Wholesale.BSA

Access (POI2/POI3)DKK / Lines / Year 524 … 586 593 602 612 622 632 … 935

… … - … - - - - - - … -

CONFIDENTIAL

ACCESS. Coaxial lines show the lowest unit cost for the line rental, fibre the highest, and copper lines fall in between

49

Dynamics in the footprint and

demand of the operator, as well as

the characteristics of coax access

networks, make the coax access

units costs be the lowest.

Both copper and coax unit costs

are affected by the removal of

fully depreciated assets, while

fibre unit costs are not.

The upward trend of the results is

linked to the expected increase in

the unit prices of the assets (price

trends). Costs for copper are

expected to raise faster due to the

higher cost trend for copper cable

compared to fibre and coax.

Unit costs of copper, coax and fibre access under real conditions*

-

200

400

600

800

1.000

1.200

1.400

1.600

1.800

DKK/l

ine/y

ear

Raw copper Raw fibre (POI1)

BSA coax (access only)

Expected shut down

Note(*): Figures are representative of the average of all geotypes

CONFIDENTIAL

ACCESS. The inputs of the model, especially in terms of take-up and footprint, lead to lower costs for coax compared to copper

50

Concept

Geographical

footprint

Customer

take-up

Copper

Nation-wide

network, reaching

most rural areas

Medium-level take-

up, but rapidly

decreasing over

time.

Fibre

New network,

reaching mostly

urban areas

Lowest take-up

compared to copper

and coax, but

increasing over time.

Coaxial

Network with

roughly half the

reach of copper.

Gap in rural areas

Highest take-up

compared to copper

and fibre, but

decreasing over time.

The diverging characteristics of each access network generate differences in their unit costs that go beyond

the economics of each technology. In particular, the key divergences are identified in the coverage of these

networks (nationwide copper, with fibre located in urban areas and a rural gap in coax) and their take-up.

If the same take-up and footprint was considered for all three networks, the highest unit costs would be

obtained for fibre, followed by coax and finally copper (which would be the cheapest option).

CONFIDENTIAL

-

1.664

875972

1.013

490

915993

1.255

612

834

-

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

Raw Copper VULA Copper (POI1) Raw Fibre Coax BSA (access only)

DK

K/

lin

e/

year

Price decision Model unit cost Model unit cost (PON fibre)

ACCESS. The draft results are similar to the 2020 regulated prices for copper, albeit visibly below for fibre

51

Model Results vs Price Decision 2020

+5%

-25%*

+25%

Note(*): Difference compared to a PTP-based service

Note(*): Figures for Coax BSA have been extracted from the old access model (considering only passive network elements), as they are not included in DBA’s price decision.

Price inside the DONG Area

Price in the rest of the country

+24%*

+2%

**

Model unit cost (PTP fibre)

CONFIDENTIAL

ACCESS. Copper - No significant differences are identified in the unit costs obtained compared to the 2020 Decision

52


Demand considered

Network footprint



Explanation

► As there is an almost nation-wide

coverage of copper, this factor only

generates a minor difference.

Impact

=► A slightly higher demand considered in

the previous model leads to higher unit

costs in the new model.

► This aspect does not apply to copper

networksN/A

► The removal of fully depreciated assets

lowers the overall cost base for copper

networks

► The Economic Depreciation leads to

lower costs than tilted annuities in the

year 2020.

CONFIDENTIAL

ACCESS. Fibre – The methodological changes between the new and old MRP explain most of the differences in FTTH unit costs

53


Demand considered

Network footprint



Explanation

► TDC’s fibre footprint does not include

remote (expensive) areas, lowering the

costs compared to the old model.

Impact

► Only demand for fibre is considered in

the new model, which leads to higher

unit costs compared to the old model.

► TDC’s deployment with fibre nodes

closer to the end user leads to lower

access unit costs in the new model.

► This does not apply as the fibre

network is modelled following a purely

CCA approach.N/A

► Economic depreciation leads to lower

costs than tilted annuities in 2020, but

higher unit costs in the following years.

CONFIDENTIAL

BITSTREAM. The diverging trend observed in the bitstream costs per access network is explained by their footprint

The unit costs obtained for copper

networks are higher than for its

coax and fibre counterparts.

This may be counter-intuitive, as

the traffic in fibre and coax

networks is higher than in copper

networks.

This situation is driven by the

different footprint of each

technology (for instance, there is

no fibre in remote areas, where

transmission costs are higher)

which, in turn, results in an

uneven allocation of transmission

costs.**

54

Unit costs of copper, coax and fibre bitstream lines*

-

50

100

150

200

250

300

350

DKK/l

ine/y

ear

Copper Fibre Coax

Note(*): In each year, the cost per line is calculated based on the average uncontended broadband speed for that year. Access costs are not includedNote (**): Additionally, the increasing share of copper and coax lines located in rural areas, explains the rising cost trend exhibited by these services (as the unit costs for these services are higher in rural areas than in urban areas).

Start of the copper

shutdown

CONFIDENTIAL

BITSTREAM. If the same footprint for all access network was considered, copper would become the cheapest option

In this case, the differences

between technologies is easily

explained by the average

consumption per line in each

access network.

The cost per uncontended Mbps

decreases rapidly as the network

is ready to handle more capacity.

As traffic consumption per line

tapers-out, cost per line becomes

relatively flatter over time.

Note that this does not represent

the actual scenario considered in

the model (the previous one is).

55

-

50

100

150

200

250

DKK/l

ine/y

ear

Copper Fibre Coax

Unit costs of copper, coax and fibre bitstream lines*

* In each year, the cost per line is calculated based on the average uncontended broadband speed for that year.

Start of the copper

shutdown

CONFIDENTIAL

BITSTREAM. The model’s results for bitstream are generally below the regulated prices for 2020, especially for fibre

56

Note(*): Difference compared to PTP-based bitstream

Note(**): The cost per line is calculated based on the average download consumption per user for that year based on the inputs presented in slide 29. Figures include access costs

1.0281.109

2.0612.156

1.149 1.199

1.948 1.987

1.123 1.162

-

500

1.000

1.500

2.000

2.500

3.000

3.500

Copper BSA (layer 2) Copper BSA (layer 3) Fibre BSA (layer 2) Fibre BSA (layer 3)

DK

K/

lin

e/

year

Price decision Model unit cost (Copper)

Model unit cost (PON Fibre) Model unit cost (PTP Fibre)

Model Results vs Price Decision 2020**

+12%+8%

-8%*-5%*

In fibre, differences are explained by the factors described in

previous slides

CONFIDENTIAL

The model also calculates the unit costs of non-recurring services from 2005 to 2038. These are available in worksheet 8B.

57

The non-recurring and supporting services

currently defined in DBA’s price decision are

included in the cost model.

The calculation of these services is relatively

straightforward, considering the staff costs,

the time required to perform each activity

and any additional CapEx involved.

The model considers trends for CapEx, the

salaries and a productivity gain.

The inputs have been mostly based on data

from the existing model, as TDC decided not

to update most of the parameters.

A proposed increase of +20% in technician

costs by TDC was rejected as no justification

was provided for this increase.

Results of non-recurring services in the model*

ServiceService

Identifier2005 … 2017 2018 2019 2020 2021 2022 2038

Migration Services.From

Raw/Shared Copper to

BSA/VULA

5.5.2.1

226

…

230 233 232 232 232 232

…

237


BSA/VULA (without PSTN) to

Raw Copper

5.5.2.2

266

…

270 273 272 272 272 273

…

277


BSA/VULA (without PSTN) to

Shared Copper

5.5.2.3

210

…

214 216 215 215 215 216

…

220

Migration Services.From BSA

(without PSTN) to BSA (with

PSTN)

5.5.2.4

72

…

73 74 73 73 73 73

…

74

… … … … … … … … … … … …

Installation.New installation

(unassisted) – eBSA5.6.2.4

463

…

471 476 474 474 474 475

…

484


(unassisted) – VULA5.6.2.5

429

…

435 440 439 438 439 440

…

447


(unassisted) – Raw Fibre5.6.2.6

389

…

395 400 398 398 398 399

…

406

… … … … … … … … … … … …

Note(*): Results presented in this table are only illustrative as they have been anonymised.

CONFIDENTIAL

198

668

534

692

211

712

569

692

-

100

200

300

400

500

600

700

800

900

1.000

Migration Services

(From Raw/Shared

Copper to BSA/VULA)

New installation (engineer assisted) –

Raw Copper

Visit by a technician Interconnection of fibre

pairs in optic distributor

between points

termination (backhaul)

DK

K/

lin

e/

year

Price decision Model unit cost

Absence of key changes in the inputs/calculations of non-recurring services causes results to be in line with the regulated tariffs

58

Model Results vs Price Decision 2020

+7%

+7%

+7%

-%

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

59

Manager

[email protected]

Gonzalo Arranz

Principal

[email protected]

Alfons Oliver

Any questions? Please, contact:

development of the danish lraic model for fixed networks...presentation of the 1st draft model...

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