SLIDE 1 This document was prepared by Axon Consulting for the use of the client to whom it is addressed. No part of it may be copied or made available in any way to third parties without our prior written consent.
Presentation of the 2nd draft model
Development of the Danish LRAIC model for fixed networks
May 2020
SLIDE 2 CONFIDENTIAL
- 1. Outcomes of the 1st consultation process
- 3. Next steps
- 2. Overview of the results of the 2nd draft model
Contents
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SLIDE 3 CONFIDENTIAL
- 1. Outcomes of the 1st consultation process
- 3. Next steps
- 2. Overview of the results of the 2nd draft model
Contents
3
SLIDE 4
CONFIDENTIAL
Five stakeholders* participated in the 1st consultation, providing +300 comments and uncovering clear areas for improvement
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►“Demand for coax subscribers is too high” ►“Ports between the MSAN and the access routers should be modelled explicitly” ►“Calculations for the length of the drop cables should be reviewed” ►… ►“Due to DOCSIS 3.1, the speed of coax networks should be more similar to the one of fibre networks” ►“Algorithms for PON and PTP should allow a more clear identification of the resources” ►“Different parameters for fully depreciated assets should be considered for copper and coax networks” ►“Demand for coax subscribers should not decrease as rapidly over time” ►“The model should not result in higher costs than that of the real modelled operator” ►“Useful lives for civil infr. should be 40-50 years” ►… ►“The specific topology of each operator should be considered when modelling alternative operators” ►“Alternative where GRC is annualized within the “active” years of the copper network should be adopted” ►…
* Although Telia and Telenor submitted a joint response.
SLIDE 5
CONFIDENTIAL
Areas for improvement identified by the stakeholders have been addressed in the 2nd draft model and documentation
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All changes implemented into the model are presented in a change-log worksheet included in the 2nd draft model* # Change Description 1 Separate percentage for copper and for coax on fully depreciated assets. Added an additional option to the COVER sheet to allow the selection of different percentages of fully depreciated assets for copper and coax. 2 Consideration of NGA premium for fibre trenches. Included the NGA premium for the trenches and other civil infrastructure elements in the fibre access network. 3 Disaggregation of manholes and joint holes. We have disaggregated the resources for the manholes and joint holes for each access network separately, to achieve a more accurate allocation of these costs to services. … … …
* Additionally, changes to the R model and other files are detailed in the documentation.
SLIDE 6 CONFIDENTIAL
Additionally, we identified two main areas of discussion that we would like to clarify through this presentation
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Fibre roll-out algorithm
In the 1st draft model the algorithm was constrained by the level of
information available from the modelled operator.
The new algorithm utilises the new information provided by the
- perators to generate more accurate results.
Allocation of non-network
The methodology for the allocation of non-network overheads (G&A,
IT and wholesale/commercial costs) has been updated.
The new methodology considers that overheads should be distributed
based not just on their network costs, but also considering their revenues. Fully depreciated assets
The methodology adopted in the model to deal with fully depreciated
assets is aligned with the MRP.
This methodology was adopted to ensure the proper build or buy
signals are sent to the market for each access network.
DBA is reviewing the use of the Regulatory Asset Base approach.
* This aspect was not raised by stakeholders, but it is considered to be relevant enough to be included in this presentation.
SLIDE 7 CONFIDENTIAL
Fibre rollout algorithm. Based on the additional information provided by the operators, we have fine-tuned the fibre rollout algorithm
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Overview of the results Information reported Data to be estimated Adjustments performed to the data
TDC Norlys
Disaggregation of the regional
information at building level.
Actual buildings to be covered each year. Interpolation of the buildings to be
covered from 2019 to 2038.
Buildings covered by other operators are
excluded from the algorithm.
Only areas (COs) currently covered with
TDC fibre are considered.
The model aims to reach similar
coverage levels (%) in all the CO areas within the same region.
Relevant buildings are ordered based on
their distance to the corresponding CO. Buildings closer to the CO are covered first.
Nonetheless, the order considered is not
crucial due to the implementation of economic depreciation.
Number of buildings to be covered in
2030 on a regional basis.
Number of buildings to be covered each
year on a national basis.
Actual buildings (ids) covered in 2019
and to be covered in 2038.
Number of buildings to be covered each
year on a regional basis.
SLIDE 8 CONFIDENTIAL The deployment algorithm for TDC follows three
main steps:
- Step 1: Identify the buildings covered by
alternative operators (AO), and remove them from the algorithm.
- Step 2: Determine for each year and each CO
the number of homes to be covered, based on the number of buildings available (not covered by other operators) in the CO and the coverage
- bjectives for the region where the CO is
located.
- Step 3: Determine the buildings to cover each
year for each CO, by selecting the buildings closer to the CO and then moving to buildings further away.
Fibre rollout algorithm. The algorithm makes the most out of the reported information, completing gaps in the data reported
Illustrative fibre deployment algorithm (TDC)
Legend: AO … Current 2028
8
2020
SLIDE 9 CONFIDENTIAL The deployment algorithm for Norlys follows only
two simple steps:
- Step 1: Identifying buildings currently and
expected (“additional”) to be covered by Norlys, which has been directly supplied by the
- perator.
- Step 2: Determining the year in which each
building is covered, buildings are covered selecting the additional buildings closer to the CO and then moving away to buildings further
- away. The approach in this step is equivalent to
the one defined for TDC.
Fibre rollout algorithm. The algorithm is more straightforward for Norlys, due to the better data supplied by this operator
Illustrative fibre deployment algorithm (Norlys)
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Legend: … Current 2031 2020
SLIDE 10 CONFIDENTIAL
Fibre rollout algorithm. When compared with TDC, it may be argued that Norlys’ topology is less efficient under similar circumstances
The geographical analysis performed for Norlys and TDC
shows that the network topology adopted by Norlys, longer access loops, specially in rural areas, as shown in the exhibit.
This geographical analysis* involved a review of the average
meters of trenches per home passed for comparable set of COs between Norlys and TDC**.
As a large portion of the costs borne by operators in the
rollout of fibre networks come from distance-dependent assets (e.g. cables, trenches, ducts), a higher trench deployment implies a higher cost for the access-related services.
DBA considers that the additional costs resulting from this
type of deployment may not be considered as fully “efficient” and thus, we have included an adjustment in the cost model that accounts for this potential inefficiency. Average trenches per household
* Produced by the R model for an equivalent region (i.e. area covered by Norlys). Further details of this analysis are included in the Excel model manual ** TDC’s COs include copper and fibre COs, as they are equivalent from a civil infrastructure point of view.
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10 20 30 40 50 60 70 80 90 100 Rural regions Metres of trenches / homes passed TDC Norlys
x1,15
SLIDE 11 CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response Appropriateness of the adjustment for fully- depreciated assets for copper networks In DBA’s view, removing fully depreciated assets is key in order to: i) Provide the correct build or buy signals, as no other alternative operator would currently consider deploying a new copper access network from scratch. ii) Avoid allowing an over-recovery of costs by the modelled operator. iii) Keep consistency with the EC’s 2013 recommendation. So far, DBA considers that the approach followed is aligned with EU
- regulations. However, DBA understands the complexity of this issue and
has raised this issue to the EC to obtain further guidance. DBA will investigate it further to ensure the final approach and results are aligned with EU regulations and DBA’s policy objectives for markets 3a and 3b.
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SLIDE 12
CONFIDENTIAL
Fully depreciated assets. The original approach has been mostly maintained, however some aspects are still under consideration
Clarifications on fully depreciated assets aspects
Subject Response Appropriateness of the adjustment for fully- depreciated assets for coax networks The EC’s 2013 recommendation is not directed towards coax networks. Therefore, we have raised this issue to the Commission to understand their view. DBA will continue to investigate this aspect with the EC in order to ensure that the final model is aligned with EC’s regulations. Applicability of this adjustment to cable assets DBA acknowledges that different practices have been adopted by EU NRAs with regards to the application of this adjustment to cable assets, without being inferring a clear trend towards one option or the other. Independently of this, the DBA finds arguments i) and ii) above equivalently applicable to cable assets (as described in the MRP). However, DBA is also investigating this matter with the EC, to ensure that the appropriate methodology is followed in the model.
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SLIDE 13
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 Replacement of copper assets Passive copper assets are not replaced in the model as they are originally purchased in the first dimensioning year (2005) and, based on their useful life and the shrinking copper access trends, the model sees no technical need for their replacement. The model does, however, consider reinvestment in active copper equipment such as MSANs as long as they are required to provide the service. Consideration of different inflation datasets We have changed the historical source for inflation in the model by the World Bank (previously was OECD data). This has been done to keep consistency with the inflation data considered to index the FAR figures from the modelled operator. Inflation forecasts included in worksheet ‘1D INP NW EVO’ have been extracted from the EC, as this information is not available from the World Bank.
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SLIDE 14
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 The percentage considered for fully depreciated copper assets is too high/too low While the DBA calculated a value of 36,.8%, given the limitations of TDC’s dataset, it noted that this could bear little resemblance to reality. As such, it decided to consider a 50% factor as a figure more in line with expectations. DBA is welcomes additional views on this percentage. Figures should be different between copper and coax as shown by DBA’s calculations DBA’s calculations are likely to be highly influenced by the limitations of TDC’s dataset. As a result, even though the percentage obtained for copper assets was higher than for coax assets, this does not necessarily need to be the case. However, given the uncertainty surrounding these figures, DBA has agreed to separate these inputs in the model.
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SLIDE 15 CONFIDENTIAL The 1st draft model followed an EPMU allocation
for non-network costs. This is, non-network
- verheads were proportionally allocated to
services based on their network costs.
However, we acknowledge that this allocation rule
was inaccurate, as only a proportion of costs (network-related) were considered. Given the high relevance that other costs may have on some services (e.g. retail), this resulted in a suboptimal allocation
To fix this, the 2nd draft model considers an ‘index’
that modulates the allocation of these overheads to the different groups of services based on i) the retail prices from the modelled operator and ii) wholesale prices in Denmark.
Allocation of non-network overheads. The new methodology considers information from the operators for a more accurate allocation
Illustrative allocation of non-network overheads*
0,0 0,5 1,0 1,5 2,0 Access Broadband TV Non-network costs allocated Old methodology New methodology
* Example has been slightly simplified for the illustrative example. A detailed explanation of the methodology is included in the Excel model manual. ** Based on data extracted for the modelled operators.
Group of services Index** Access 257,8 Broadband 76,2 TV 509,0 Even allocation for all groups Allocation based on index (revenues)
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SLIDE 16 CONFIDENTIAL
- 1. Outcomes of the 1st consultation process
- 3. Next steps
- 2. Overview of the results of the 2nd draft model
Contents
16
SLIDE 17 CONFIDENTIAL
COPPER - The 2nd draft results for copper network (TDC) decrease due to a number of changes implemented in the model
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Copper unit costs (2020)*
875 972 1.028 1.109 915 993 1.149 1.199 835 899 1.028 1.073
400 600 800 1.000 1.200 1.400 Raw Copper Copper VULA Copper BSA - POI2 Copper BSA - POI3 DKK/line/year Price decision (2020) 1st draft model 2nd draft model
* Differences represent the change between the 2nd draft model compared to the 1st draft model
SLIDE 18 CONFIDENTIAL
+
- +
- +
- +
- COPPER - The modifications introduced have individually affected
TDC’s copper costs
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Explanation Impact
Adjustment on the costs of the trenches
► From the addition of road crossings, we
have decreased unit costs for trenches, which were previously an average. Implementation of road crossings
► We have included road-crossings,
which have a higher unit cost and thus increase the costs in the model. Unit costs for copper drop cables
► We have increased the unit costs for
copper drop cables to keep consistency with other cable configurations.
► We have disaggregated the manholes
and jointholes for each access network (copper, fibre and coax). Disaggregation of manholes and jointholes
* Due to the adjustment of unit costs for the copper drop cables and the implementation of road crossings.
+
- Allocation of non-network
- verheads
► The methodology for non-network
- verheads shifts costs away from
wholesale services.
SLIDE 19 CONFIDENTIAL
FIBRE – The adjustment of the PTP/PON cost allocation factors in the 2nd draft model has evened out TDC’s fibre unit costs
19
Fibre unit costs (2020)*
N/A 1.664 2.061 2.156 2.061 2.156 834 1.255 1.123 1.162 1.948 1.987 920 1.211 1.277 1.314 1.331 1.368 1.013
1.000 1.500 2.000 2.500 Raw Fibre (POI0) Raw Fibre (POI1) Fibre BSA (PON) - POI2 Fibre BSA (PON) - POI3 Fibre BSA (PTP)
Fibre BSA (PTP)
DKK/line/year Price decision (2020) 1st draft model 2nd draft model (TDC) +10% +14%
+13%
* Differences represent the change between the 2nd draft model compared to the 1st draft model
SLIDE 20 CONFIDENTIAL
+
- FIBRE – Multiple modifications introduced in the 2nd draft have
affected TDC’s fibre unit costs obtained in the 1st draft
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+
Location of the PON splitters In-building cabling and equipment for MDUs
Explanation
► We have located the splitters higher up
in the network, to ensure they aggregate the right amount of homes.
Impact
► We have reviewed the location of the
OLTs to ensure they are located at CO level, based on data reported by TDC.
► We have included in-building cabling
for MDU buildings, from the basement to the outside wall of the user. +
- +
- Demand migration from copper
shutdown
► Part of the demand from the coax
shutdown has been redefined to be migrated to a coax networks. Allocation of non-network
► The methodology for non-network
- verheads shifts costs away from
wholesale services. +
SLIDE 21 CONFIDENTIAL
FIBRE – Unit costs for Norlys are relatively higher compared to TDC due to differences in their network footprint
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Comparison of fibre unit costs (2020)
920 1.211 1.277 1.314 1.331 1.368 1.380 2.045 2.172 2.202 2.437 2.467
1.000 1.500 2.000 2.500 3.000 Raw Fibre (POI0) Raw Fibre (POI1) Fibre BSA (PON) - POI2 Fibre BSA (PON) - POI3 Fibre BSA (PTP)
Fibre BSA (PTP)
DKK/line/year 2nd draft model (TDC) 2nd draft model (Norlys) +50% +70% +83% +80% +68% +69%
SLIDE 22 CONFIDENTIAL
FIBRE – There are a number of key inputs that could have a large impact when comparing TDC & Norlys’ results in the model
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Norlys TDC Impact (all else equal) Footprint (coverage)
► Coverage is more rural,
and Norlys rural areas are more sparsely populated than TDC rural areas.
► Relatively more urban
and suburban coverage areas.
► The more rural footprint
implies a higher unit cost for Norlys, compared to TDC. See next slide Demand (Take-up)
► Forecasted take-up is
higher than TDC’s projections for TDC roll
► Slightly lower take-up
compared to Norlys.
► The higher take-up for
Norlys implies a lower cost for this operator. Unit costs
► Based on benchmark
due to lack of data from the operator.
► Mostly based on data
reported by TDC.
► The impact is low due to
the consideration of data from other Danish
benchmark. Network topology
► Existing central offices
deployed by Norlys, however efficiency adjusted (see slide 10).
► Topology following the
existing central offices deployed by TDC.
► Without efficiency
adjustment this would have lead to a higher cost for Norlys.
SLIDE 23 CONFIDENTIAL
FIBRE – The more rural footprint for Norlys implies a higher unit cost for fibre access compared to TDC
23 Both models consider a consistent methodology
to define the geotypes, to ensure comparability
One of the key differences is that Norlys
deployment is taking place in Jylland, whereas TDC’s is focused on Sjælland, with a higher density of population.
This implies an increase in the unit cost,
because it is more expensive to cover rural areas, due to the lower density in terms of buildings and homes.
This aspect alone explains most of the
differences in the results between TDC and Norlys. TDC/Norlys geotype distribution
66% 18% 24% 45% 9% 36%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Norlys TDC % of homes covered Rural Suburban Urban
SLIDE 24 CONFIDENTIAL
612 735 779 478 600 647
200 300 400 500 600 700 800 900 1.000 Coax BSA (access only) Coax BSA - POI2 Coax BSA - POI3 DKK/line/year 1st draft model 2nd draft model
COAX – There has been a noticeable reduction of coax unit costs (TDC) as a result of several changes included in the model
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Coax unit costs (2020)
SLIDE 25 CONFIDENTIAL
+
- COAX – Modifications in coax demand and the allocation of non-
network costs are responsible for the differences in TDC’s costs
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Fully depreciated assets Coax broadband historical demand Coax access demand trends
Explanation
► We have reviewed the trends for the
coax-based access lines and softened the decrease expected by TDC.
Impact
► We have corrected (reduced) the
historical demand for coax broadband lines.
► We have set as “zero” this percentage
for coax as DBA is still investigating whether RAB is relevant for coax. +
- Demand migration from copper
shutdown
► We have increased coax demand to
include the demand coming from the shutdown of copper networks. +
- Allocation of non-network
- verheads
► The methodology for non-network
- verheads shifts costs away from
wholesale services. +
SLIDE 26 CONFIDENTIAL
►This functionality allows users to identify the number of assets dimensioned in each access network (including PON and PTP separately). ►It is included in the worksheet ‘5D MAC KPI’ of the 2nd draft model. ►This functionality allows users to understand the breakdown of costs of the different services per resource (i.e. network asset). ►It is included in the worksheet ‘8B RESULTS PER RES’ of the 2nd draft model.
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We have included two new features into the 2nd draft model to ease its review by the stakeholders
Disaggregation of the unit cost of the access services per resource Identification of the assets dimensioned in each access network
Select year 2.020 Resources Access.Copper.Retail.Access Access coaxial.Coaxial cable (in-house).length
- Access copper.Copper Street Cabinet - 192 subscribers
0,1 Access copper.Copper Street Cabinet - 384 subscribers 1,5 Access copper.Copper drop cable.length 16,6 Access copper.Copper cable - 2 pairs.length 23,4 Access copper.Copper cable - 4 pairs.length 2,7 Access copper.Copper DP - 50 pairs.# of DPs 1,2 Access copper.Copper DP - 100 pairs.# of DPs 0,4 Access copper.Copper DP - 500 pairs.# of DPs 0,3 Access copper.Copper DP - 1000 pairs.# of DPs 0,0 Access copper.Copper DP - 2000 pairs.# of DPs 0,2 Overheads 150,3 TOTAL 992,8 KPI Units 2018 Fibre PON access networks - Fibre cable Km 31 Fibre PON access networks - Ducts Km 30 Fibre PON access networks - Trenches Km 31 Fibre PON access networks - DPs # of DPs 91 Fibre PON access networks - joints # of joints 426 Fibre PON access networks - splitters # of splitters 53 Fibre PON access networks - ODFs # of ODFs 1
- Fibre PTP access networks - Fibre cable
Km 577 Fibre PTP access networks - Ducts Km 318 Fibre PTP access networks - Trenches Km 328 Fibre PTP access networks - joints # of joints 6.664 Fibre PTP access networks - ODFs # of ODFs 26
SLIDE 27 CONFIDENTIAL
- 1. Outcomes of the 1st consultation process
- 3. Next steps
- 2. Overview of the results of the 2nd draft model
Contents
27
SLIDE 28 CONFIDENTIAL
As agreed with the industry, operators will have 3 weeks to respond to the second consultation
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Project timetable agreed with the industry in the Q&A meeting held in February 2020
Project activities May Jun Jul Aug
- 1. 2nd consultation round
- 2. Analysis of feedback to 2nd consultation
- 3. Preparation of 3rd consultation materials
- 4. 3rd consultation round
- 5. Analysis of feedback to 3rd consultation
- 6. Preparation of final materials for publication
- 7. Final workshop with the industry
This process represents the second out of the three public consultations on the LRAIC model. The industry will have 3 weeks to provide feedback, until Monday 25 May 2020. DBA will hold a meeting on 13 May 2020 to present the results and changes of the 2nd draft model.
Axon activities Operator’s activities Interaction DBA/Axon-Operators
SLIDE 29
CONFIDENTIAL
The current time plan involves the following dates
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Final workshop to present the results of the final model to the industry Tentative date: 27 August 2020 Final workshop with the industry Third consultation round on the model Start date: 19 June 2020 End date: 3 July 2020 3rd Consultation round Second consultation round on the model Start date: 4 May 2020 Workshop with the industry: 13 May 2020 End date: 25 May 2020 2nd Consultation round
SLIDE 30
CONFIDENTIAL
Stakeholders are kindly requested to respond to the questions included the 2nd consultation document
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Illustrative excerpt of the template to comment
Stakeholders are requested to disclose their position to each of the questions raised, together with their
comments and justifications.
Stakeholders shall respond to the questions stated in the consultation document.
SLIDE 31
CONFIDENTIAL
MADRID (HQ)
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Manager
gonzalo.arranz@axonpartnersgroup.com
Gonzalo Arranz Principal
alfons.oliver@axonpartnersgroup.com
Alfons Oliver
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