Development of the Danish LRAIC model for fixed networks Presentation of the 2nd draft model May 2020 This document was prepared by Axon Consulting for the use of the client to whom it is addressed. No part of it may be copied or made available in any way to third parties without our prior written consent.
Contents 1. Outcomes of the 1 st consultation process 2. Overview of the results of the 2 nd draft model 3. Next steps 2 CONFIDENTIAL
Contents 1. Outcomes of the 1 st consultation process 2. Overview of the results of the 2 nd draft model 3. Next steps 3 CONFIDENTIAL
Five stakeholders* participated in the 1 st consultation, providing +300 comments and uncovering clear areas for improvement ► “Demand for coax subscribers is too high” ► “The specific topology of each operator should be ► “Ports between the MSAN and the access routers considered when modelling alternative operators” should be modelled explicitly” ► “Alternative where GRC is annualized within the ► “Calculations for the length of the drop cables “active” years of the copper network should be should be reviewed” adopted” ► … ► … ► “Due to DOCSIS 3.1, the speed of coax networks ► “Demand for coax subscribers should not decrease should be more similar to the one of fibre networks” as rapidly over time” ► “Algorithms for PON and PTP should allow a more ► “The model should not result in higher costs than clear identification of the resources” that of the real modelled operator” ► “Different parameters for fully depreciated assets ► “Useful lives for civil infr. should be 40- 50 years” should be considered for copper and coax networks” ► … * Although Telia and Telenor submitted a joint response. 4 CONFIDENTIAL
Areas for improvement identified by the stakeholders have been addressed in the 2nd draft model and documentation All changes implemented into the model are presented in a change-log worksheet included in the 2 nd draft model* # Change Description Added an additional option to the COVER sheet to allow the Separate percentage for copper and for 1 selection of different percentages of fully depreciated coax on fully depreciated assets. assets for copper and coax. Consideration of NGA premium for fibre Included the NGA premium for the trenches and other civil 2 trenches. infrastructure elements in the fibre access network. We have disaggregated the resources for the manholes and Disaggregation of manholes and joint 3 joint holes for each access network separately, to achieve a holes. more accurate allocation of these costs to services. … … … * Additionally, changes to the R model and other files are detailed in the documentation. 5 CONFIDENTIAL
Additionally, we identified two main areas of discussion that we would like to clarify through this presentation In the 1 st draft model the algorithm was constrained by the level of Fibre roll-out information available from the modelled operator. algorithm The new algorithm utilises the new information provided by the operators to generate more accurate results. The methodology adopted in the model to deal with fully depreciated assets is aligned with the MRP. Fully depreciated This methodology was adopted to ensure the proper build or buy assets signals are sent to the market for each access network. DBA is reviewing the use of the Regulatory Asset Base approach. The methodology for the allocation of non-network overheads (G&A, IT and wholesale/commercial costs) has been updated. Allocation of non-network The new methodology considers that overheads should be distributed overheads* based not just on their network costs, but also considering their revenues. * This aspect was not raised by stakeholders, but it is considered to be relevant enough to be included in this presentation. 6 CONFIDENTIAL
Fibre rollout algorithm. Based on the additional information provided by the operators, we have fine-tuned the fibre rollout algorithm TDC Norlys Number of buildings to be covered in Actual buildings (ids) covered in 2019 Overview of 2030 on a regional basis. and to be covered in 2038. Information the results reported Number of buildings to be covered each Number of buildings to be covered each year on a national basis. year on a regional basis. Disaggregation of the regional Interpolation of the buildings to be Data to be information at building level. covered from 2019 to 2038. estimated Actual buildings to be covered each year. Buildings covered by other operators are Relevant buildings are ordered based on excluded from the algorithm. their distance to the corresponding CO. Buildings closer to the CO are covered Adjustments Only areas (COs) currently covered with first. performed to the TDC fibre are considered. data Nonetheless, the order considered is not The model aims to reach similar crucial due to the implementation of coverage levels (%) in all the CO areas economic depreciation. within the same region. 7 CONFIDENTIAL
Fibre rollout algorithm. The algorithm makes the most out of the reported information, completing gaps in the data reported Illustrative fibre deployment algorithm (TDC) The deployment algorithm for TDC follows three main steps: Step 1 : Identify the buildings covered by • alternative operators (AO), and remove them from the algorithm. Step 2 : Determine for each year and each CO • the number of homes to be covered, based on the number of buildings available (not covered by other operators) in the CO and the coverage objectives for the region where the CO is located. Legend: Current Step 3: Determine the buildings to cover each • 2020 … year for each CO, by selecting the buildings 2028 closer to the CO and then moving to buildings AO further away. 8 CONFIDENTIAL
Fibre rollout algorithm. The algorithm is more straightforward for Norlys, due to the better data supplied by this operator Illustrative fibre deployment algorithm (Norlys) The deployment algorithm for Norlys follows only two simple steps: Step 1 : Identifying buildings currently and • expected (“additional”) to be covered by Norlys, which has been directly supplied by the operator. Step 2 : Determining the year in which each • building is covered, buildings are covered selecting the additional buildings closer to the CO and then moving away to buildings further away. The approach in this step is equivalent to the one defined for TDC. Legend: Current 2020 … 2031 9 CONFIDENTIAL
Fibre rollout algorithm. When compared with TDC, it may be argued that Norlys ’ topology is less efficient under similar circumstances Average trenches per household The geographical analysis performed for Norlys and TDC 100 shows that the network topology adopted by Norlys, longer Metres of trenches / homes passed access loops, specially in rural areas, as shown in the exhibit. 90 x1,15 80 This geographical analysis* involved a review of the average meters of trenches per home passed for comparable set of 70 COs between Norlys and TDC**. 60 As a large portion of the costs borne by operators in the 50 rollout of fibre networks come from distance-dependent 40 assets (e.g. cables, trenches, ducts), a higher trench 30 deployment implies a higher cost for the access-related 20 services. 10 DBA considers that the additional costs resulting from this 0 type of deployment may not be considered as fully “efficient” Rural regions and thus, we have included an adjustment in the cost model TDC Norlys that accounts for this potential inefficiency. * Produced by the R model for an equivalent region (i.e. area covered by Norlys). Further details of this analysis are included in the Excel model manual ** TDC’s COs include copper and fibre COs, as they are equivalent from a civil infrastructure point of view. 10 CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration Clarifications on fully depreciated assets aspects Subject Response In DBA’s view, removing fully depreciated assets is key in order to: i) Provide the correct build or buy signals, as no other alternative operator would currently consider deploying a new copper access network from scratch. Appropriateness of the ii) Avoid allowing an over-recovery of costs by the modelled operator. adjustment for fully- iii) Keep consistency with the EC’s 2013 recommendation. depreciated assets for copper networks So far, DBA considers that the approach followed is aligned with EU regulations. However, DBA understands the complexity of this issue and has raised this issue to the EC to obtain further guidance. DBA will investigate it further to ensure the final approach and results are aligned with EU regulations and DBA’s policy objectives for markets 3a and 3b. 11 CONFIDENTIAL
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