TSLRIC Price Review Determination for the Unbundled Copper Local Loop
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TSLRIC price review determination for the Unbundled Copper Local Loop and Unbundled Bitstream Access services: Modern Equivalent Assets and relevant scenarios Commerce Commission Ref: 2014-20-DB-The Commission-MEA TERA Consultants 39, rue d’Aboukir 75002 PARIS Tél. + 33 (0) 1 55 04 87 10 Fax. +33 (0) 1 53 40 85 15 www.teraconsultants.fr S.A.S. au capital de 200 000 € RCS Paris B 394 948 731 July 2014 TSLRIC price review determination for the Unbundled Copper Local Loop and Unbundled Bitstream Access services: Modern Equivalent Assets and relevant scenarios Table of content 1 Context and objective _______________________________________________ 4 2 High-level MEA considerations ________________________________________ 5 2.1 The concept of MEA __________________________________________________ 5 2.2 Why do we need to define the MEA? ____________________________________ 6 2.3 Consistency between MEAs for UCLL and UBA _____________________________ 7 2.4 MEA functionality ____________________________________________________ 7 2.5 Conclusion __________________________________________________________ 8 3 UCLL modelling elements_____________________________________________ 9 3.1 What is the MEA for UCLL? ____________________________________________ 9 3.1.1 Eligible technologies for UCLL MEA_____________________________________________ 9 3.1.2 Factors for choosing a UCLL MEA among eligible technologies ______________________ 10 3.1.3 Comparison of eligible technologies ___________________________________________ 10 3.1.3.1 Technological performance _____________________________________________ 10 3.1.3.2 Cost ________________________________________________________________ 25 3.1.3.3 Operator strategy _____________________________________________________ 31 3.1.3.4 Subscriber and retail price ______________________________________________ 33 3.1.1 Conclusion _______________________________________________________________ 36 3.2 Adjustments to the modelled UCLL MEA ________________________________ 40 3.2.1 Adjustment based on consumer preference ____________________________________ 41 3.2.2 Adjustment based on technological performances _______________________________ 42 3.2.3 Adjustment based on costs __________________________________________________ 42 3.2.4 Conclusion _______________________________________________________________ 43 3.3 Key modelling choices _______________________________________________ 49 3.3.1 Presentation of key choices __________________________________________________ 49 3.3.1.1 Cost standard: bottom-up vs top-down ____________________________________ 50 3.3.1.2 Demand _____________________________________________________________ 56 3.3.1.3 Depreciation methods _________________________________________________ 60 3.3.2 Conclusion _______________________________________________________________ 64 4 UBA modelling elements ____________________________________________ 67 4.1 What is the MEA for UBA? ____________________________________________ 67 4.1.1 Eligible technologies for UBA MEA ____________________________________________ 67 4.1.2 Choice of MEA among eligible technologies _____________________________________ 67 4.2 What UBA scenario? Size of the modelled operator and geographic scope _____ 68 4.3 What types of services supported by the modelled network? ________________ 72 Réf : 2014-20-DB-The Commission 2 TSLRIC price review determination for the Unbundled Copper Local Loop and Unbundled Bitstream Access services: Modern Equivalent Assets and relevant scenarios 5 Adjustments required where UCLL and UBA MEA’s are different ____________ 73 6 Acronyms and abbreviations _________________________________________ 75 7 Annex ___________________________________________________________ 76 7.1 A brief market overview _____________________________________________ 76 7.1.1 Main market players _______________________________________________________ 76 7.1.2 The ultra-fast broadband programme (UFB) ____________________________________ 77 7.1.3 The Rural Broadband Initiative (RBI) ___________________________________________ 77 7.2 What UBA scenario? Size of the modelled operator and geographic scope: detailed assessment ______________________________________________________________ 79 7.2.1 Scenario 1 – Chorus’s network size and nationwide network _______________________ 81 7.2.2 Scenario 2 – Chorus’s network size and costs of areas where UCLL is unlikely _________ 81 7.2.3 Scenario 3 – Alternative operator’s network size and costs of areas where UCLL is likely_ 82 7.2.4 Scenario 4 – Alternative operator’s network size and costs of the next exchange to unbundle _______________________________________________________________________ 83 Réf : 2014-20-DB-The Commission 3 TSLRIC price review determination for the Unbundled Copper Local Loop and Unbundled Bitstream Access services: Modern Equivalent Assets and relevant scenarios 1 Context and objective The Commerce Commission (the “Commission”) is issuing a paper which sets out, and seeks the view of interested parties, on its proposed regulatory framework for the UCLL and UBA TSLRIC cost modelling exercises and its preliminary views on a number of fundamental assumptions for the development of a TSLRIC cost model for the UCLL and UBA services. Having reviewed the Commerce Commission paper, the purpose of this report is for TERA Consultants to provide our views on some key methodological choices related to the calculation of TSLRIC. This report does not go into the details of the modelling approach it is not a model specification document. Section 2 deals with general Modern Equivalent Asset (MEA) considerations: 2.1 defines the concept of MEA, 2.2 explains the need for MEA in the cost modelling, 2.3 explains the issues of consistency between the MEA for UBA and the MEA for UCLL. Finally, Section 2.4 treats the issue of MEA functionality. Section 3 gives recommendations with respect to UCLL modelling elements. 3.1 defines technologies eligible for MEA and compares them in order to give recommendations on MEA for UCLL. 3.2 gives recommendations on methods used to adjust the modelled UCLL. 3.3 discusses other important modelling choices – cost standard, demand and depreciation – and makes final recommendations on UCLL modelling elements. Section 4 deals with UBA modelling elements. 4.1 makes recommendations on the choice of MEA for UBA. 4.2 compares different UBA modelling scenarios in terms of network size and geographic scope. 4.3 defines services that need to be supported by the modelled network. Section 5 discusses the issue of adjustments that are needed in order to avoid double recovery in the case the selected MEAs for UCLL and UBA are different. Réf : 2014-20-DB-The Commission 4 TSLRIC price review determination for the Unbundled Copper Local Loop and Unbundled Bitstream Access services: Modern Equivalent Assets and relevant scenarios 2 High-level MEA considerations 2.1 The concept of MEA MEA is a technology that would be selected to replace an existing technology. This is typically the technology which a new operator deploying a network today would choose. Identifying the MEA of Chorus’ access and core networks is therefore an essential step to determining forward-looking costs. This has been recognised by the Commission: “Forward-looking costs reflect the costs that a network operator would incur if it built a new network today using assets collectively referred to as the modern equivalent asset…The costs of these assets are the costs of currently available equipment as opposed to the costs of older equipment that may actually still be in use”.1 “Forward-looking costs are costs that will be incurred in the future in providing the service. This involves estimating costs on the basis of current and future prices of inputs and given the availability of modern technologies and assets. The aim is to estimate the cost of providing the services in the future rather than the past”.2 This suggests that on top of the analysis of whether the asset produces the same type of services as the existing asset at lowest cost, it is also necessary to look at operating costs and other performance characteristics in order to determine what the MEA is. Such an understanding is in line with MEA definitions available and enables the Commission to be consistent with European countries. Indeed, the European Regulators Group (ERG) (now the Body of European Regulators for Electronic Communications (BEREC)) stated in 2005: “Gross MEA value is what it would cost to replace an old asset with a technically up to date new one with the same service capability, allowing for any differences both in the quality of output and in operating costs. For the replacement cost valuation to be appropriate it is not necessary to expect that the asset will actually be replaced. The new technologies are usually superior in many aspects to the older technologies in terms of functionality and efficiency. However, since MEA values are required to reflect assets of equivalent capacity and functionality, it may be necessary to make adjustments to the current purchase price and also the related operating costs - for example, the new asset may require less 1 Commerce Commission, “Process and issues paper for determining a TSLRIC price for Chorus’ unbundled copper local loop service in accordance with the Final Pricing Principle”, 6 December 2013. 2 Commerce Commission “Application of a TSLRIC Pricing Methodology - Discussion Paper” 2 July 2002, paragraph 32. Réf : 2014-20-DB-The Commission 5 TSLRIC price review