20080329 tdc hearing document - public version · of each service within the increment of all...

Notat

28. marts 2008

IT- og Telestyrelsen

Holsteinsgade 63

2100 København Ø

Telefon 3545 0000

Telefax 3545 0010

E-post [email protected]

Netsted www.itst.dk

Sagsbehandler

Michael Bøgh

Telefon 3545 0261

Telefax 3545 0010

E-post [email protected]

Sagsnr.

Dok nr. 468267

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Public Version

Høringsnotat for omkostningsmodellen - TDC

IT- og Telestyrelsen sendte den 17. december 2007 et udkast til efterspørgsels- og net model i høring hos branchen. TDC har inden høringsfristens udløb den 5. fe-bruar 2008 fremsendt sit høringssvar til IT- og Telestyrelsen.

I dette notat kommenteres bemærkningerne under følgende overskrifter:

List of contents:

1 1. General issues .........................................................................................3

1.1 Announced changes in the model......................................................3

1.2 Postponement of decisions until phase 4...........................................3

1.3 Phase 4 decision overview..................................................................3

1.4 Operator specific model ....................................................................3

1.5 MVNO modelling...............................................................................4

1.6 Signalling............................................................................................4

2 Comments on hearing note of December 2007 ...........................................6

2.1 Number of 3G sites ............................................................................6

2.2 Equipment lifetime ............................................................................6

2.3 Utilisation factors 2G vs. 3G .............................................................7

3 Comments regarding net modelling ............................................................8

3.1 Number of TRX s ..............................................................................8

3.2 Allocation of technical SMS ..............................................................8

3.3 Migration from 2G to 3G ..................................................................9

3.4 Transit switches .................................................................................9

3.5 Volumes ..............................................................................................9

3.6 Market scenario ...............................................................................10

4 Comments regarding cost modelling.........................................................12

4.1 Deviations to TDC operating expenses ...........................................12

http://www.itst.dk


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4.2 Modelling of driver for overhead costs...........................................12

4.3 Deviations to TDC capital expenses................................................12

4.4 Wholesale specific cost.....................................................................13

4.5 Working capital ...............................................................................14

4.6 Spare equipment ..............................................................................15

4.7 Route Factors for GPRS..................................................................15

4.8 Future price trends ..........................................................................16

4.9 Allocation of subscriber increment.................................................17

4.10 Network element mapping ..............................................................18

4.11 Economic depreciations...................................................................18

4.12 WACC ..............................................................................................21

5 Appendix 1.................................................................................................23

6 Appendix 2.................................................................................................23 1


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1. General issues

1.1 Announced changes in the model

1. Following the industry meeting January 10, TDC has January 30 received a letter from NITA describing changes to the model inspired by the operators meetings with NITA in January. Despite the late delivery in the consultation period, TDC has tried to incorporate NITA s changes in the present re-sponse. However, no model version with the changes implemented was submitted, whereby TDC reserves its right to comment on the changes in the next consultation.

NITA will be issuing a new version of the model for consultation on 31 March 2008 for TDC to comment on. This model will also reflect the changes that have been performed as a result of the industry meeting the 10th of January 2008.

1.2 Postponement of decisions until phase 4

2. The clarification of objections (including the quality of the 3G network and the retirement period of 3G equipment) made by TDC in its hearing response of October 29, 2007, has been postponed by NITA to phase 4. TDC finds this postponement of important decisions unsatisfactory.

NITA has noticed that TDC would have preferred if NITA had made decisions on a number of issues earlier. However NITA has according to the timetable for the project considered that these issues most naturally are dealt with in phase 4 of the project. NITA has now considered these issues and will be releasing a new ver-sion of the model and associated Phase 4 consultation decisions on 31 March 2008.

1.3 Phase 4 decision overview

3. TDC calls for an overview of issues to be clarified in phase 4. Appendix 1 contains a list of questions that TDC expects NITA to decide on during this phase, but TDC asks NITA to review the present list and draw up an exhaus-tive list.

NITA will present a full and complete draft v3 model and associated decision for the Phase 4 consultation including the issues listed by TDC.

1.4 Operator specific model

4. In NITA s hearing note of December 17, 2007, the reference to a generic model is used to reject changes to the model that would ensure a better fit to the operator specific network, e.g. number of transit switches over the years.


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TDC accepts the benefits of using a generic model in order to reduce the modelling complexity. However, according to the executive order, NITA is obliged to develop operator specific models. Thus, combining operator input in a generic model is only possible where the specificity is sustained.

NITA considers that the model developed is fully sufficient for identifying mate-rial operator specific differences. Therefore NITA believes that sufficient account of operator input has been taken, so the aim of modelling actual operators has been fulfilled.

NITA must in connection with this add that the executive order does not require that NITA models the operators exactly as they are the executive order only re-quires models covering each operator.

1.5 MVNO modelling

5. TDC has several times during the hearing process requested information and documentation regarding the general modelling of MVNO. TDC finds that the basic principles regarding network setup and routing factors etc. is non-confidential information and should be developed through an ordinary mod-elling process including consultations. NITA s letter of January 30 contains a list of MVNO services and network elements. TDC does, however, not find the sparse list sufficient to document a MVNO modelling. A routing factor model table, market share migration profile etc. are missed.

6. TDC therefore expects NITA to set up a consultation process before an MVNO is modelled.

The list of services and network elements details the scope of the MVNO model. These parts of the model are dimensioned and calculated in exactly the same way as for the MNO s and therefore TDC is already aware of the full calculation for an MVNO except for associated confidential demand and network parameters.

As TDC will be aware of, there currently only exists one independent MVNO operator in Denmark (Barablu). NITA is currently analysing the wholesale mar-ket for terminating calls in Barablu s network. If Barablu is appointed as an op-erator with a significant market position on this market, Barablu can be subject to price control.

One of the forms of price control would be LRAIC modelling. NITA has in the model documentation described how an MVNO could be LRAIC modelled. If an MVNO would be subject to price control according to the LRAIC method, NITA will issue a separate consultation of the market participants (including TDC) on the exact modelling in such a situation.

1.6 Signalling


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7. In early December TDC submitted a technical analysis of terminating voice traffic s use of the signalling system. TDC anticipates NITA s comments in their reply to the present response.

NITA has examined the signalling information supplied by TDC. In summary, whilst it is possible to allocate radio network costs according to signalling (and other) channelisation, NITA does not find this allocation method consistent with long-run average incremental costing where it aims to calculate the average cost of each service within the increment of all traffic. NITA considers that the infor-mation presented by TDC would be relevant and applied in an individual service incremental costing approach where the individual incremental cost of each ser-vice was calculated separately, rather than in average across all traffic types.

In its analysis, NITA also finds that when costs are allocated on the basis of channel reservations:

- the costs of SMS increase due to the SDCCH signalling channels allocated in the channel structure - the costs of location updates increase due to the inclusion of signalling channel cost allocations - the costs of GPRS increase due to the allocation of the reserved GPRS costs - the costs of voice traffic decrease because of the greater allocation of costs to the other services.

As such, the effect of a higher location update mark-up and a lower voice traffic cost approximately cancel each other out and the end result is unchanged.


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2 Comments on hearing note of December 2007

2.1 Number of 3G sites

8. NITA s modelling of a 3G network only supports voice and a small amount of data traffic. If this approach is adopted in the final model, only 3G voice traffic and a small amount of data traffic should be used in the forecast of 3G volumes in order to ensure consistency between model and volumes.

9. However, TDC requests NITA to model the operator specific 3G network with the appropriate reported number of sites in accordance with the execu-tive order. TDC finds the number of sites modelled significantly below TDC s roll out plan for the coming years. NITA s suggested modelling does not reflect TDC s present coverage quality, e.g. indoor coverage.

Table 1. 3G sites in the model and in TDC s roll out plan. Mid-year.

XXX

10. XXX

11. TDC thereby requests NITA to use TDC s number of predicted sites.

NITA has decided to adopt the Voice, Urban Indoor 3G coverage network quality as detailed in the note to mobile operators, 30 January 2008. XXX.

2.2 Equipment lifetime

12. NITA has received useable input on equipment lifetimes from three opera-tors. Based on this information, an average of each network element has been calculated and - according to NITA s model changes of January 30 - rounded to nearest integer. TDC, however, prefers the use of operator spe-cific data.

13. TDC requests NITA to use operator specific data.

Within the model, the asset lifetimes are used to determine how frequently each asset is required to be replaced (assuming the network has not been shut-down); the lifetime is not used as the period of depreciation because economic deprecia-tion considers all costs over the entire long-run period. Therefore, the lifetimes in the model do not necessary reflect the lifetime that might be applied for account-ing purposes.

NITA does not intend to utilise operator specific lifetime data.

Although there are variations in lifetime across all network element categories, NITA does not consider that implementing these variations has a material impact


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on efficient costs in the situation where each operator model is reconciled back to actual operator expenditure.

2.3 Utilisation factors 2G vs. 3G

14. NITA uses technical reasons to argue for better utilisation in a 3G network compared to 2G. However, the primary use of a 3G network comes from data traffic. This traffic evidently has a much more bursted pattern than voice traffic. In order to ensure low latency in the radio network, even dur-ing peak hours, 3G radio networks have to be planned with lower utilisation than 2G radio networks.

15. TDC requests NITA to use a dynamic utilisation in the 3G network that, over the years when the data load increases, reduces the utilisations to a level sig-nificantly below that of a 2G network. The lower utilisation should be ap-plied to the radio interface as well as the network elements up to and includ-ing the RNC-ports.

NITA does not consider that bursty data traffic in a 3G network implies lower utilisation. NITA finds a number of technical issues relevant:

- capacity in 2G is provided by two or three separate frequency bands (PGSM, EGSM, DCS) and therefore the traffic load cannot perfectly be loaded onto fre-quencies. This effect does not occur in 3G networks.

- packetised data traffic allows for better utilisation of the radio network because traffic for different users can be interleaved on the same channels with higher la-tency than for voice and with a varying effective data rate. This does not apply in voice 2G networks because of the (Erlang B) requirement to provision full chan-nels for the voice load.

- HSDPA traffic which may comprise the large majority of 3G data traffic does not require soft-handover, saving approximately 20% to 30% overheads com-pared to non-HSDPA services.

In summary, NITA finds that a 3G network should be equal or more effective than a 2G network for carrying mobile traffic. NITA would have serious con-cerns over a new technology if this were not the case.


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3 Comments regarding net modelling

3.1 Number of TRX s

16. NITA has increased the utilisation of TRX s in the present version of the model. This change reduces the number of TRX s to an even lower amount than applied in version 1. Table 2 compares the version 2 amount with TDC empirics.

Table 2. Comparison of number of TRX s XXX

17. The dimensioning in the model consists of several utilisation factors, which can be difficult to verify by empirical data. However, based on TDC s input a gross utilisation of app. XXX % can be derived for XXX (BHE measure divided by number of channels including channels for signalling and GRPS). In version 2 the gross utilisation has increased to more than XXX %.

18. According to NITA s model changes of January 30, the utilisation of TRX s etc. has been changed. TDC looks forward to evaluate the model changes in the next consultation, and expects the number of TRX in the model to be in line with TDC s empirics.

NITA has revisited TDC s TRX calibration for the Phase 4 consultation, which has brought the number of TRX s closer to TDC s figures.

3.2 Allocation of technical SMS

19. TDC notices that technical SMS s are modelled as an output service in the model. Technical SMSs are used for sending a non-chargeable SMS to the subscriber, when a message is received in the VMS ( SMS notification from voice mail , XXX % of the technical SMSs) or to send a SMS to a B-subscriber when the call was not answered ( Missed call SMS service , XXX % of the technical SMSs).

20. TDC requests that the costs of SMS notification from voice mail should be grouped with the costs of VMS calls and hence included in the weighted termination cost. The Missed call SMS service is a benefit to both the call-ing and the receiving part and should hence be allocated among originating and terminating services.

NITA recognises that there are various mechanisms by which the end user may be alerted to a missed incoming call. However, NITA finds that the incoming call termination service should not include onward alerting activities relating to a di-verted call since the incoming caller has no control over this part of the service during and after message has been recorded.


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In any case, NITA finds the inclusion of a technical SMS for incoming depos-ited/missed calls immaterial to the final weighted termination cost.

3.3 Migration from 2G to 3G

21. TDC finds NITA s proposed migration curve rather steep. TDC expects to keep voice traffic in the 2G network some years ahead in order to use the ex-isting capacity. Despite TDC s expectation of a steep migration curve of data traffic, the total bandwidth (measured in Mbps) is not migrated as fast as expected by NITA. TDC s expectations are compared to NITA s curve in figure 1.

Figure 1. Migration of bandwidth (Mbps) from 2G to 3G. XXX

22. TDC requests NITA to revise the migration curve in the model and align it with TDC s expectations.

NITA has examined the issue of migration and provides its conclusions in the model and the associated consultation material.

The draft v3 model documentation Annex H describes NITA s proposed migra-tion forecasts and its underlying justification. NITA proposes to calculate the costs of the GSM operators assuming full migration for voice and data services from 2G to 3G by the end of 2012.

3.4 Transit switches

23. In the first draft version of the model, NITA modelled XXX transit switches in TDC s network in the period XXX. Due to TDC s response, NITA mod-elled XXX transit switches in the period XXX in the second draft version.

24. However, according to TDC s original input, TDC s network contained XXX transit switches already from XXX onwards. TDC urges NITA to model TDC s actual network according to empirics submitted by TDC.

25. XXX

26. TDC thus requests NITA to allocate TDC XXX transit switches in the period XXX

NITA has taken a view on the retirement principles for each network asset

which will be communicated as part of the Phase 4 consultation and has ad-justed the model XXX

3.5 Volumes


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27. NITA has announced its intention of deciding finally on volume forecasts in phase 4. To broaden NITA s basis for decision, TDC finds it appropriate to comment on the preliminary volume forecasts in the present phase.

28. NITA sets forward a preliminary annual MoU growth rate of 4.0% for GSM 2007-2014 and UMTS 2007-2022. Growth rates for SMS use are estimated to be 25% in 2007, declining to 5% in 2014. Growth rate for GPRS MB is estimated to be 75% in 2007, declining to 5% in 2013.

29. TDC finds such levels of growth to be overestimated. First, data from the Swedish and Norwegian LRAIC models suggests lower or declining growth rates. Data from the version of the Swedish model available to TDC s in-spection suggests a declining MoU, stagnating until 2009. Data from the version of the Norwegian model available to TDC s inspection suggests a constant development. Second, given that the saturation of the market ex-ceeds 100% (120% penetration), it is doubtful that usage will continue to grow at the suggested rates. Third, telestatistics published by NITA shows declining growth rates for SMS and steady growth rates for data, but at far lower levels than suggested by the model.

30. TDC requests NITA to take this into consideration when deciding on the vol-ume forecast.

NITA does not consider growth rates published by PTS in 2003 or NPT in 2006 in other models relevant for its models developed for the Danish market in 2008 and onwards.

NITA has now considered the most recent market statistics for Denmark and pre-sents its volume growth projection as part of the Phase 4 consultation.

3.6 Market scenario

31. The possible inclusion of MVNO Barablu in the model is still unresolved.

32. If Barablu or any other MVNO is active on the market (no matter if the MVNO is LRAIC regulated/modelled or not) and if a scenario with some sort of convergence in market shares is chosen, TDC expects market shares of MVNO s to be equal to that of the other modelled operators . According to NITA (Annex A.2), the draft model assumes that each operator eventually achieves an equal share of market subscribers. The argument must be that when both full competition and scale effects are present, different market shares for operators are not possible in the long run. MVNO s would thus not be viable having a lower market share than operators.

33. TDC requests NITA to take this into consideration when deciding on the vol-ume forecast.

The treatment of Barablu s market share is described in the draft v3 model and accompanying Phase 4 consultation material. Currently, Barablu has such as


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market share that including Barablu would have no impact on the other operators. Effectively, the market excluding Barablu is calculated.

Furthermore, NITA believe that market shares will be equal in the long run re-garding the part of the value chain that consists of the four current radio based networks.


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4 Comments regarding cost modelling

4.1 Deviations to TDC operating expenses

34. TDC notes that overhead management is not included in the model, see figure 3 below. XXX TDC requests NITA to include network related overhead management costs in the model.

Figure 3. Operating expenses from NITA s TDC reconciliation file (from Analy-sys).

XXX 35. NITA s model changes of January 30 included changes in the overhead

costs. TDC looks forward to evaluate the model changes in the next consul-tation.

NITA has changed the draft v3 model to fully reflect all of TDC s mobile net-work allocated overheads.

4.2 Modelling of driver for overhead costs

36. TDC finds the modelling of overhead costs problematic. The overhead costs are converted to a per subscriber cost based on the total amount of subscrib-ers (2G + 3G). This means that the overhead cost is 100% variable to the number of subscribers and that almost no overhead costs exist in the begin-ning of the 2G life cycle when the subscriber base is modest. TDC does not find the assumption of a 100% subscriber related overhead cost to be correct. For other mobile network calculations, TDC uses an estimate of a XXX % fixed share of overhead costs.

37. TDC requests NITA to use XXX % of the overhead costs as a fixed cost in each year, letting the remaining XXX % be variable to the amount of sub-scribers.

NITA recognises this issue with the modelling of overhead costs.

For the Phase 4 consultation (draft v3 model) NITA has revised this part of the model to reflect greater fixed operating expenditures (approximately XXX % for TDC).

4.3 Deviations to TDC capital expenses

38. NITA has, subsequent to the submission of version 2 of the model December 17, submitted details on the assumptions made in utilising TDC's raw input data1.

1 Cf. Email from Michael Bøgh to TDC January 15, 2008.


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39. TDC has reviewed this input and has made some observations. First, regard-ing the consistency between data in the above spread sheet and in the model, there is a discrepancy between the unit costs for the following network ele-ments: 2G MSC software and Network software (annual release) which seem to be switched and GPRS/EDGE-PCU, GPRS/EDGE/UMTS-GGSN and GPRS/EDGE/UMTS-SGSN which seem to have a higher value in the model. Second, TDC does not recognise the hard typed raw data input con-cerning Owned macro site (acquisition, civil and ancillary equipment) in cells D5 and F5 in the Collation sheet in the submitted spread sheet.

40. In the calculation of unit costs for RNC base unit, a Per RNC PCU cost of DKK XXX is added (TDC data, cell J158). What is the origin of this hard typed amount?

41. A value of DKK XXX is assigned to Average 2G MSC software (TDC data, cell D116). What is the origin of this hard typed amount?

42. NITA is requested to explain the differences between model data and raw in-put and clarify the origin of the hard typed raw data pointed to.

Regarding 2G MSC software/Network software, NITA has taken the view that TDC is effectively paying an annual release software upgrade price of approxi-mately DKK XXX million per year, irrespective of the number of MSC s in its network over time. Therefore, TDC s software input appears as XXX per MSC and DKK XXX million total per year.

Regarding PCU, GGSN and SGSN, the higher value (approximately XXX % higher) in the model is set to include an estimate of associated indirect capex (all of the network elements below TSC in the list are assumed to have an inclusive direct plus indirect input value).

Regarding Owned macro sites, DKK XXX plus DKK XXX is obtained from Sheet TDC data cell D8 as the average Construction process, mast, with cabin plus Tuning for each owned macro site, excluding the estimated mast and tower costs which are accounted by the separate network element Owned Macro Sites, Mast and towers .

Regarding RNC PCU the source of this figure is (on average taking a XXX % deflator into account), cell V70 on the sheet Q118 +Q122-Q124.

Regarding DKK XXX million, this is an estimate of the annual software fee based on a linear trend from the actual fees paid in 1992-2005. It is used indi-rectly in the estimation of DKK XXX million per year.

4.4 Wholesale specific cost

43. XXX 44. XXX


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NITA has set TDC s wholesale specific costs to the higher amount which NITA has derived from other operator information: DKK XXX per minute.

4.5 Working capital

45. TDC finds the working capital mark-up of 30/360 on the yearly operating ex-penses to be too low. Operators use of termination minutes in TDC s net-work are computed on a quarterly basis. TDC processes the invoice in the following month after which the operator has one month notice of payment after the in-voice has been issued. In total, TDC has a delay of 90/2+30+30 = 105 debtor days between the time for average production and incoming cash flow cf. the current interconnect agreement shown below.

46. Afgifter for trafik betales kvartalsvis bagud på grundlag af afregningsperi-oder, der afsluttes ved midnat den sidste dag i et kalenderkvartal. Parterne skal udstede faktura inden udgangen af den følgende måned.

47. Vederlag for trafik forfalder til betaling 30 dage efter udløbet af den måned, hvori faktura udstedes.

48. From Aftale om udveksling af trafik mellem TDC Mobil A/S og XXX , pa-ge 11.

49. The production costs are based on yearly operating expenses as well as annu-alised capital expenses. TDC requests to use a mark-up of 105/360 on oper-ating expenses as well as annualised capital expenses. This approach will bring the calculation of debtor days in line with the calculation of debtor days in the fixed net hybrid LRAIC model (where slightly different payment conditions exist).

50. TDC requests NITA to change the number of debtor days in accordance with the terms in the interconnect agreement and to include annualised capital ex-penses in the calculation of working capital.

NITA has as noted by TDC allowed for a Working Capital uplift corresponding to one month s opex.

NITA considers it reasonable that end users of mobile termination services pay an uplift for working capital on operating expenditures equivalent to a 30 day pe-riod. NITA does not consider that any additional costs of the specific delays and durations chosen by commercial parties to settle their accounts should be borne by callers to the network. Furthermore NITA believes that network operators will experience a delay in payment for many of the inputs they use, among these ter-mination bought from other operators. These are not accounted for in the model.

Regarding capital expenses, the model already reflects the duration in time be-tween payment outflow and activation of network infrastructure and therefore in-cludes the costs of incurring capital expenditures prior to network output (This is captured by the planning period of network element capital expenditures, fol-lowed by discounting of expenditures and output in the economic depreciation


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calculation). NITA does not consider that further costs should be added to this al-ready reasonable allowance.

NITA therefore believes that this working capital uplift is sufficient given no supporting documentation of the actual working capital of the mobile network operators has been provided by TDC. If this documentation were provided, NITA would of course reconsider the size of this uplift in more detail.

4.6 Spare equipment

51. TDC finds that a certain amount of equipment should be in spare stock. TDC recommends to use the principles from the hybrid fixed net model, where an additional 1% of capital expenses are used for spare equipment (but 5% for ports).

52. TDC requests NITA to add 5% spare capital expenses for ports and TRX s and 1% spare capital expenses for the remaining assets.

Given that the model is calibrated to the actual network of each operator and rec-onciled to include each operator s actual expenditures, NITA considers the model already sufficiently accommodates the spare stock of each mobile operator.

4.7 Route Factors for GPRS

53. In the sheet RouFacs where costs are allocated from network elements to services, routing factors for 2G and 3G data transmission are calculated as minutes equivalents in terms of the number of voice minutes it takes to transmit a MB (e.g. 8.36 minute for one MB in 2G).

54. TDC would find this approach acceptable if the data transmission had the same service quality as voice minutes. This is however not the case. In 2G, MB is transmitted simultaneously on four channels if these are available, meaning not used for voice traffic at that particular time. As soon as a voice call is established, it gets priority to data transmission due to the fact that voice telephony is a real-time service contrary to basic data traffic. The available capacity for data transmission is thus reduced to three channels. In principle, all channels can be used for voice traffic leaving no throughput to data unless one or more channels are dedicated to data traffic.

55. The priority of voice calls has a particular impact in busy hour when the traf-fic peaks, and where only a minimal capacity can be expected to be available for data transmission besides the dedicated channels. Noting that the busy hour traffic is the primary cost driver in the network, the dedicated data ca-pacity should be used in the routing factor table. Given the average data res-ervation of XXX channels per sector in TDC s network, the number of chan-nels used by data traffic will in practice not exceed this capacity in busy


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hour2, and definitely not a capacity of 8.36 channels as expected in the cur-rent model version.

56. TDC requests NITA to use XXX as a routing factor for 2G data traffic. TDC can accept a similar value of XXX (instead of 7) used as a proxy for 3G data traffic.

By dedicating channels to GPRS traffic, TDC has implicitly given such channels the same priority as voice.

The factor of 8.36 however reflects the ratio of cost allocation per voice minute (x1) and per GRPS Mbyte (x8.36) for network elements which support both ser-vices (e.g. sites and BTS), and not the number of channels used to deliver GPRS traffic. NITA is aware that TDC dedicates on average XXX GPRS channels per sector (these channels are excluded from the voice busy hour network dimension-ing calculation), however NITA does not consider the busy hour channelisation to be the appropriate rule for cost allocation in the mobile LRAIC context. As explained in the conceptual approach (Increments recommendation), average traffic routeing factors reflect the average usage of the entire traffic load carried by the (radio) network for all services during the period (i.e. per year), rather than the specific service loading during the busy hour.

Therefore, the factor 8.36 reflects the number of channel minutes it takes to transmit 1 Mbyte of GPRS user data (using CS2 on average, 75% in the downlink direction, 12% IP overheads). The factor of 7 reflects the number of 3G voice channel minutes it takes to deliver 1 Mbyte of Release-99 3G data (based on the same criteria as above except 16kbit/s per 3G voice channel).

4.8 Future price trends

57. TDC finds the future price trends overly optimistic. As far as TDC can see, the future price trends are extrapolations of the historical price trends that to some extend have been derived from operator input. However, historical price development cannot be used to predict future prices in a changing mar-ket. The net-work suppliers experience tougher competition today compared to the nineties and suppliers prices do therefore not any longer contain over-normal profit that erodes when competition increases. Less reduction on network capex prices must therefore be expected in the future.

58. Regarding the operational expenditures for transmission, a yearly erosion of XXX % p.a. cannot be expected in the future, since the SDH network has matured and possible scale economy has been obtained.

2 This is actually a conservative approach, since each voice call occupies one channel in bu-sy hour in contrary to data traffic that shares XXX channels in busy hour (the routing factor of XXX for GPRS should be divided by the average number of simultaneous GPRS users in busy hour).


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59. TDC has submitted estimated price trends for operating expenses and capital expenses in appendix 2. NITA is requested to implement these in the model.

NITA notes that future equipment price trends are forecast assumptions, and considers that the historical price development is a reasonable basis on which to predict future prices. NITA is aware that tough vendor competition exists today and is expected to continue as new vendors such as ZTE and Huawei compete strongly with established European vendors for their GSM and 3G infrastructure contracts, using amongst other things, lower-cost production from Asia. NITA anticipates that the cost of GSM equipment will continue to be reduced as part of competition for combined 2G and 3G contracts.

In its price trend forecasts, NITA has forecast lower trends for 3G equipment compared to their 2G comparables, e.g.: - minus 5% for BTS, minus 2% for NodeB base - minus 8% for TRX, minus 6% for channel kit - minus 6% for BSC, minus 5% for RNC - minus 9% for MSC, minus 6% for MSS.

Therefore, as 3G equipment becomes a larger proportion of the expenditure base, NITA already predicts a reduction in the rate of equipment price decline.

Third party estimates of equipment price trends, provided by Credit Suisse in its report Mobile CAPEX 2007, forecast 2G and 3G equipment trends to continue at 10% nominal decline per annum until at least 2015. This trend is in excess of that applied by NITA for all major network elements purchased from 2007 onwards.

TDC does not state whether its appendix data is presented in real or nominal terms, or whether its price declines are based on its vendor contract. Comparison with the model is therefore unclear. Some of TDC s trends appear more negative (XXX) some more positive (XXX) and some broadly comparable (XXX).

4.9 Allocation of subscriber increment

60. TDC recognises that some costs are driven by the handset, independently of sending or receiving a call. It is however TDC's opinion that the majority of these costs are retail costs in terms of customer handling and billing. TDC finds the calculation of app. XXX DKK./year in subscriber cost for the tech-nical network too high compared to the limited amount of signalling re-quired.

61. The subscriber costs in the model can be perceived as the cost for 'availabil-ity': The availability for the subscriber to make a call, and the availability for other phone users to contact the subscriber. If these availability cost are not shared with phone users terminating calls, the subscriber has to carry the whole avail-ability cost - either through a subscription fee or through a mark-up on originating services in the retail pricing.


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62. It is TDC's opinion that letting the subscriber carry the full burden of the sub-scription cost does not make an optimal welfare gain. In this perspective it is relatively costly to obtain the availability to perform calls compared to other phone users gain of calling the subscriber. This results in too few people acquiring a mobile phone.

63. TDC requests NITA to revise the net cost of the subscriber increment and to allocate the identified cost between originating and terminating services in order to maximise the welfare gain.

NITA does not agree that approximately XXX DKK per subscriber year is costly .

This figure is broadly reflective of the MSC costs required to process the location of a mobile handset and update the VLR every 30-180 minutes for an entire year, and consistent with the typical levels of this cost calculated by Analysys in simi-lar studies in other European countries. However, consistent with the conceptual approach, this cost is finally marked-up to received services including mobile ter-mination on a per call or SMS basis.

4.10 Network element mapping

64. In the reconciliation file for TDC, the network elements Network Software (annual release) , Operations & Management center (HW+SW) and Software (Billing, MIS, IT) are removed during the calculation of fully

depreciated assets (sheet Model Capex , cells C201:G201). TDC requests an explanation of this.

65. Assuming the removal reflects that the book value of fully depreciated assets regarding software is considered to be zero, TDC requests an explanation of why the network element Operations & Management center (HW+SW) is removed when it, cf. Annex A - A.7, includes the network element Network management system (HW) from TDC s categories.

The transformations performed in the reconciliation file are high level approxi-mations of values removed from the estimate of fully depreciated assets to exam-ine the underlying network FDA estimation. The FDA estimation is only used in-directly to reconcile the model, which is primarily carried out using capital ex-penditures. NITA does not believe that the FDA transformations have a material impact on the cost calculation for TDC since their capital expenditures are in-cluded in the relevant lines in the model.

4.11 Economic depreciations

66. Cost of capital employed: When investigating the method implemented in the model, it is unclear whether the opportunity cost of capital invested3 is in-

3 The return on capital tied up in a given investment, had the capital been invested alterna-tively.


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cluded in the calculations. From TDC s point of view it seems that the in-vestment itself, and thus the depreciation of assets, are included. However, TDC has not been able to verify that the opportunity cost of capital invested is included.

67. TDC therefore requests NITA to explain how the cost of capital employed is re-covered in the model. TDC further requests NITA to provide model refer-ences in its answer.

If expenditures are incurred in one year, and recovered in the next, then it is nec-essary for the revenues to compensate the mobile operator for the delay in return-ing its investment the opportunity cost of capital, equal to the discounting of earned revenues by the cost of capital. Subsequent years of revenue recovery are increasing discounted, reflecting the ongoing costs of remaining capital em-ployed. Evidently, investment is included in the model, however the deprecia-tion of each network element class is, under the principle of economic deprecia-tion, analogous to service revenues earned from the network element.

If network expenditures are incurred in later years, then they are also discounted by the rate of discounting. This reflects, for example, the fact that expenditures incurred in the next year, are saved of the opportunity cost of capital that would have occurred this year if they had been expended earlier.

The present value (PV) of the total expenditure outflow represents the amount of expenditures which must be recovered by the revenue stream. The discounting of revenues in each future year reflects the fact that delaying cost recovery from one year to the next accumulates a further year of cost of capital employed. This leads to the fundamental of the economic depreciation calculation that is:

PV (expenditures) = PV (revenues)

68. Economic Depreciation equation: TDC has looked into the Economic Depre-ciation (ED) equation in order to interpret the different measures in the equa-tion. Unfortunately, it is unclear to TDC what the denominator in the ED equation represents. TDC therefore requests NITA to shed light on the fol-lowing two matters:

The production output in the denominator of the ED equation is discounted, see equations in EconDep , cells C8:AZ157. TDC requests NITA to explain the reasoning behind discounting pro-duction output, i.e. volumes.

In relation to the above mentioned matter, TDC requests NITA to explain the reasoning behind the indexation of production output by using the capital index, see equations in EconDep C8:AZ157 .

69. TDC would like NITA to explain what the term production output *capital index represents.


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The term production output * capital index is proportional to the revenues which the operator earns from the service in order to recover its capital expendi-tures plus the cost of capital employed. Production output is discounted because it reflects the (future) revenue stream from the network element. Any revenues recovered in the years after a network element is purchased must be discounted by an amount equal to the WACC in order that the cost of capital employed in the network element is also returned to the mobile operator. - production output is the service volume carried by the network element - capital index is the input capital price trend for the network element which thus proportionally determines the trend of the revenue that recovers the expendi-tures (effectively, the percentage change to the revenue tariff that would be charged to each unit of output over time).

There is a similar calculation for the recovery of operating expenditures, where the product of production output * opex index is proportional to the corre-sponding revenues for opex recovery (since opex is recovered, i.e. annualised, over time in the same way as capex).

This leads to the following general equations:

Revenues = (production output x price index) Revenues = constant x production output x price index

Using the relationship from the previous section:

PV (expenditures) = PV (constant x production output x price index)

70. Discounting yearly total costs: When the total costs for each year have been calculated based on the ED method, the total yearly costs are discounted us-ing the Real discount rate divider . The reasoning behind this final dis-counting is unclear to TDC. The total yearly costs are based on the yearly unit costs calculated by the ED equations. To TDC s knowledge, the yearly ED unit costs are an expression of an intertemporal average cost, adjusted for yearly MEA price trends:

71. Yearly Access price = intertemporal average cost * MEA price index,

72. Yearly total costs = Yearly Access price * yearly production output.

73. When the Yearly total costs are discounted, the intertemporal average cost is thus implicitly discounted. TDC does not understand the need for discount-ing the intertemporal average cost since this cost is based on yearly invest-ments and volumes which are already discounted to 1992 level.

74. TDC requests NITA to explain the reasoning behind this final discounting.

The intertemporal average cost in TDC s terminology is the not an average price over the period, or other type of average, but precisely the price which ap-plies in 1992. This is because the MEA price index is specifically based at 1.00 in


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1992, and therefore varies from 1.00 in other years according to the network ele-ment price trend.

More specifically, since:

PV (expenditures) = PV (constant x production output x price index)

then the constant is just a scalar which can be removed from the PV as follows:

PV (expenditures) = constant x PV (production output x price index)

Rearranging:

constant = PV (expenditures) / PV (production output x price index)

This constant is thus the unit price in 1992, and the intertemporal average cost referred to by TDC. The yearly access price over time is simply:

yearly access price over time = constant x price index

This yearly access price over time is calculated for the capital component in one step in line 8 and onwards of the EconDep sheet, and line 162 onwards for the opex component.

4.12 WACC

75. TDC has reviewed NITA s WACC estimation and requests that the following parameter values in the WACC formula should be changed and implemented in the model:

Capital structure weights

Cost of debt (credit spread)

76. Capital structure weights:

TDC requests NITA to use TDC s actual capital weights instead of the suggested 0 - 30% debt scenario showed in Exhibit E.2. Based on market values for both debt and equity, TDC is financed XXX by debt and XXX by equity. These capital weights have already been ap-proved by NITA in connection with the estimation of TDC s WACC in the cost documentation for leased lines.

77. TDC requests NITA to change the debt weight from 0%-30% to XXX %.

NITA believes that a WACC used for the purposes of a LRAIC model should be based on the cost of capital for an efficient operator. This means also taking a view over which parameters in the WACC calculation would be correct for each of the Danish operators given that these are efficient operators.


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On the issue of gearing, as explained in the model documentation, the debt pro-portion of mobile companies typically varies from 0% to 30%. Mobile operators generally have a lower reliance on debt than fixed line operations.

NITA does therefore not consider it appropriate to reflect TDC s actual capital structure in the calculation of an efficient operator gearing, which NITA consid-ers to be in the range 0% to 30%.

In connection with this, it should be noted that TDC s gearing of XXX is based on the total TDC company (fixed, mobile and other operations), and that these weights has not been approved by NITA, but are used as inputs by NITA when assessing the optimal gearing for a fixed network provider.

78. Cost of debt (credit spread):

XXX 79. TDC requests NITA to change the credit premium from XXX % to XXX %.

First of all, NITA must stress that above mentioned method for calculating the debt premium has not been approved by NITA. XXX

Furthermore, regarding the debt premium:

- In the fixed network LRAIC calculations, NITA has previously used a debt pre-mium of 1,0-1,5 % for a gearing between 35% to 50 %.

- In the IRG document Principles of Implementation and Best Practice for WACC calculation , February 20074 (page 10), it can be deducted that the Euro-pean regulators generally use a debt premium of 0,5% for a 10% gearing, and a debt premium of 1,75 % for a 50 % gearing.

- In NITA s strategisk eftersyn af telereguleringen, bilag 1: Teleselskabernes økonomiske forhold 5, figure 16, is calculated the relationship between gearing and debt premium in the Danish telecom sector 1996-2006. The figures show a debt premium of approximately 0 % for a gearing of 25 %, and a debt premium of 2 % for a 60% gearing.

For comparison, the mobile WACC calculations have used a debt premium of 2% for a 10 % gearing, and a debt premium of 2,5 % for a 30 % gearing.

NITA does therefore not consider TDC s stated debt premium reasonable.

4 http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf

5

http://www.itst.dk/filer/Publikationer/strategisk_eftersyn/pdf/Bilag_1._Teleselskabernes_oekonomiske_forhold.pdf

http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf

http://www.itst.dk/filer/Publikationer/strategisk_eftersyn/pdf/Bilag_1._Teleselskabernes_oe

konomiske_forhold.pdf


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5 Appendix 1

80. TDC expects NITA to decide on the following items in phase 4 in addition to items commented by TDC above.

Target year of regulation and possible slide

Target price. Will the outcome of the model consist of separate prices for 2G, 3G and VMS or a weighted average of one or more of these prices?

Price setting for more several years at a time.

Forecasted volumes

Market scenario

Modelling of MVNO(s)

Signalling

Migration scenario

Possible lag for migration from 2G to 3G and from 3G to 4G

Optimisation of operators

3G network quality

Retirement period for 3G equipment

81. TDC requests NITA to confirm the list and add possible items that also take place during phase 4.

NITA will provide its conclusions on these issues for the Phase 4 consultation.

6 Appendix 2

82. Estimated price trends

NITA has provided its comment to this issue above.

20080329 tdc hearing document - public version · of each service within the increment of all...

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