REPORT ON: CHARACTERISTICS OF THE TOP-DOWN AND BOTTOM- UP COST ANALYSES

Transcription

1 REPORT ON: CHARACTERISTICS OF THE TOP-DOWN AND BOTTOM- UP COST ANALYSES 15 March, 2002

2 Table of Contents PREFACE 1 PART A: REVIEW OF BOTTOM-UP MODEL...2 A.1 OVERVIEW OF MODEL...3 A.1.1 Structure...3 A.1.2 Key Results...3 A.1.3 Summary of the initial findings in the Bottom-up Model...4 A.1.4 Revising the Bottom-up Model...5 A.2 REVIEW OF ACCESS NETWORK...6 A.2.1 Overview of Approach...6 A.2.2 Justification for Approach Taken and Issues for Further Comments...8 A.3 REVIEW OF EXCHANGE STRUCTURE A.3.1 Overview of Approach A.3.2 Justification for Approach Taken and Issues for Further Comment A.4 REVIEW OF TRANSMISSION NETWORK AND INFRASTRUCTURE A.4.1 Overview of Approach A.4.2 Justification for Approach Taken and Issues for Further Comment A.5 REVIEW OF CO-LOCATION MODEL A.5.1 Overview of Approach A.5.2 Justification for Approach Taken and Issues for Further Comment A.6 COSTS IN THE BOTTOM-UP MODEL A.6.1 Approach and Assumptions to Estimate Replacement Costs A.6.2 Approach and Assumptions to Estimate Annualised Costs A.6.3 Approach and Assumptions to Estimate Operating Costs A.6.4 Approach and Assumptions to Estimate Indirect Costs A.6.5 Approach and Assumptions to Estimate Overheads Costs A.6.6 Approach and Assumptions to Estimate Working Capital Costs A.7 SENSITIVITIES IN THE BOTTOM-UP MODEL A.7.1 Sensitivities in the Access Network A.7.2 Sensitivities in the Core Network A.7.3 Sensitivities in Co-Location Model PART B: REVIEW OF TOP-DOWN MODEL B.1 INTRODUCTION B.1.1 The Top-down Cost Analyses B.1.2 Key Results B.2 OVERALL COMMENTS ON MODEL AND DOCUMENTATION B.2.1 Theoretical Modelling Approach to Capital Costs B.2.2 SAS model and GRC calculations B.2.3 Application of CVR to allocate fixed and variable costs B.2.4 Utilisation Ratios B.2.5 Building Costs B.2.6 Annualisation B.2.7 MEA Adjustments B.2.8 Operating Costs B.2.9 Co-location and Interconnection Specific Services B.2.10 Common and Shared Costs B.3 GROSS ASSET VALUATION B.3.1 General Comments on Dimensioning B.3.2 Overview of TDC s Network B.3.3 Access Network B.3.4 Exchanges B.3.5 Transmission B.4 ANNUALISATION ii

3 B.4.1 Economic Depreciation Model B.4.2 Conclusions B.5 WORKING CAPITAL B.5.1 Method B.5.2 Potential Problems B.5.3 Compliance with Criteria B.6 OPERATING COSTS B.7 ALLOCATION OF COSTS B.7.1 Treatment of other increments - shared and common costs B.7.2 Differences between Figures in Documentation and Model B.7.3 Access Costs B.7.4 Exchange Costs B.7.5 Transmission Costs B.7.6 Other Costs B.7.7 Summary/main issues B.8 CO-LOCATION AND RELATED SERVICES B.8.1 Methodology B.8.2 Potential Problems B.8.3 Compliance with Criteria s B.9 EFFICIENCY STUDY B.9.1 Total Reliance on DEA B.9.2 No adjustments made to place TDC and US LECs on a comparable basis B.9.3 No Sensitivity Analysis on Assumptions made by TDC B.9.4 No Weight Restrictions B.9.5 Excessive Reliance on the Output Main Switched Minutes B.9.6 Conclusion B.10 GENERAL COSTING ISSUES B.10.1 Volumes B.10.2 Margins for Growth B.10.3 Routing Factors iii

4 Preface This report discusses the characteristics of the bottom-up and top-down cost analyses with the aim of assessing the value of the two analyses undertaken by the LRAIC Forum and TDC, as a decision basis, cf. section 15(2) in the executive order on interconnection etc. The report has a companion report which reconciles the results in the two analyses. The parties have also been requested to provide responses focusing on the value of the two costs analyses as a basis for Telestyrelsen s decision making during the hybrid modelling. These responses are summarized and discussed in a separate hearing note. This hearing note refers to the relevant sections in the report. The views of Telestyrelsen expressed in this report should neither be seen as comprehensive nor definitive. In terms of the bottom-up model, the review of the model and the reconciliation exercise have revealed a number of areas where further investigation is needed. These include the lack of justification of some key inputs which have a significant impact of results and as to whether the bottom-up model both in access and core offers sufficient quality of service. The bottom-up model is discussed in Part A of this report. In terms of the top-down model, the review of the model and the reconciliation exercise have also revealed areas of some concern. These include the lack of transparency and the inconsistency of results in a number of areas. The reconciliation exercise has also thrown up a number of significant differences in a number of areas with the bottom-up model and these will need to be explored in detail with TDC. In addition, some data are outstanding from TDC as part of the review of the top-down model. The top-down model is discussed in Part B of this report. Telestyrelsen is very interested in the views of the two parties on the assumptions and methodologies behind the top-down and bottom-up model. These views will help Telestyrelsen to decide about the hybrid model. Certain key issues have been highlighted. However, the parties may provide comments on all aspects of the report. 1

5 PART A: REVIEW OF BOTTOM-UP MODEL 2

6 A.1 Overview of Model This section provides a very brief overview of the bottom-up models developed by the LRAIC Forum and summarises some of the main findings A.1.1 Structure The structure of the bottom-up models has been described by the LRAIC Forum in their documentation to Telestyrelsen and will not be explained in detail here. In short, the Forum has developed four models. Three of the models are directly connected to the services being modelled. These models are the core model, the access model, and the co-location model. The core model deals with PSTN switching, transmission services and equipment items that are driven by traffic. The access model deals with the calculation of the equipment and costs below the existing switch site (the cables and systems that connect the customers to the switch site). The co-location model deals with the costs associated with sharing facilities, such as buildings and exchange equipment. The forth model is the consolidation model which contains the generic values and shared outputs, such as annualisation estimates, common costs, and results. The model is flexible to a degree. Certain inputs can be changed and their impact on the results checked. Some changes such as large scale changes in the number and mix of nodes may become inconsistent with the overall network design. The complexity in the access model also makes some types of changes difficult. A.1.2 Key Results The results of the bottom-up model are presented at a number of different levels - cost categories, network components, network elements, and interconnection services. The table below shows the results of the major services that form part of the LRAIC process in Denmark. Table 1: Core results (Øre) Interconnection service per minute per call Average per minute Local interconnection Regional interconnection National interconnection Table 2: Access results (DKK) Interconnection service Annual cost per year 2 wire raw copper Dark fibre 2,

7 A.1.3 Summary of the initial findings in the Bottom-up Model Telestyrelsen believes that there are a number of areas where the assumptions of the bottom-up model needs to be further documented. Telestyrelsen will examine these areas when developing the hybrid model. Telestyrelsen specially notes that: Many key inputs are not estimated in a detailed and systematic way. For example, although the access model is quite detailed, the conversion factor which has a crucial bearing on the costs of the largest single network element in the access network is produced with little support. The same can be said for the trench sharing factors in the core network. The model appears to depart from common practice in some areas without providing sufficient justification as to why such a different approach has been taken. One example of this is the assumption made about utilisation in some parts of the access network (e.g. 100 per cent in some parts). The model lacks sufficient justification in many areas. Telestyrelsen has raised some of these with the Forum throughout the reconciliation phase. An example is in the area of quality of service where the documentation and subsequent papers provided by the Forum in Telestyrelsen s view not has been sufficient to support that the approach adopted is always robust. Telestyrelsen believes that further investigation in the hybrid model is needed to support that the core network modelled by the Forum is technically feasible. The local interconnection product, modelled by the LRAIC Forum is not readily comparable to the local interconnection product currently provided by TDC. Much of the unit cost information, particularly in the core model, does not appear to always correspond to the equipment model. The very large and very intelligent tandem exchanges appear to be costed using information that is not appropriate to the equipment in the model and it is not clear whether the additional functionality has been included in the costs assumed by the Forum. The modelled RCUs are also more intelligent than those used in other bottom-up models and in Telestyrelsen s view, RCUs have a functionality that in practice is equivalent to a local exchange (compare with definitions in LRAIC terminologi list). Telestyrelsen therefore believes that the Forums use of the word RCU in some instances is questionable. Some of the price trend information is, in some places, not sufficiently documented and leads to annualised results that are quite low. The co-location services modelled in the bottom-up do not always match up to those offered in Denmark at present. In addition, some of the modelled service costs in the co-location model are very sensitive to changes in demand. Although Telestyrelsen acknowledge, that there are very substantial differences in forecasted demand in the analysed years which will imply differences in service cost, the sensitivity analysis shows that the differences are of such a scale, that Telestyrelsen believes further documentation is needed to support the co-location model. The bottom-up model does not provide sufficient justification of how some one-off costs - such as changes to the numbering plan and the treatment of prefixes - have been modelled. 4

8 A.1.4 Revising the Bottom-up Model In the course of the reconciliation phase, a number of changes have been made to the bottom-up model. Some of these were in response to errors identified by Telestyrelsen during their initial review of the model. It is likely that Telestyrelsen will need to make further revision to the bottom-up model. These revisions will fall into two categories. One category relates to errors that continue to be found in the model. These are, in part, inevitable in complex models of these sorts and will be corrected by Telestyrelsen throughout the remainder of the process. The other category relates to more significant changes in the modelling approach such as changes in the way that an allowance for growth is made or in the way that routing factors are calculated. These changes will if needed be included in the hybrid model and will be explained by Telestyrelsen in full. 5

9 A.2 Review of Access Network The purpose of this chapter is to review the methodology followed by the LRAIC Forum to estimate the costs of the access network. The approach that the Forum has used has been presented in the model documentation provided to Telestyrelsen and in subsequent, and more detailed, papers providing further documentation and justification. This chapter will, therefore, not repeat the modelling methodology but rather focus on the main assumptions made, their importance, and present some issues for further comment. The access model works out capital requirements needed to provide access services in Denmark by network elements. 1 The network elements are trench, duct, mini-duct, copper, network terminating points, cabinet equipment, fibre, and line cards. (Line cards requirements are estimated in the core network and included as access costs in the Consolidation model). A.2.1 Overview of Approach This section provides an overview of the approach and assumptions used to model the capital requirements for the two most important network elements in access trench & duct and copper. A Trench and Duct The main methodological assumption that has been adopted in the bottom-up model in order to model trench requirements is that trenches in Denmark have a direct relationship with road paths. GIS maps have been used to classify all roads in Denmark in the sixteen road categories created and in the four given geo-types. For each of the sixteen types of road, a factor (ranging from 0 to 2) has been assumed to convert road length into trench length. These are referred to as conversion factors. Total trench requirements by different geo-types have been split into different types of terrain by assumption and by distinguishing between trench lying inside or outside the urban areas. The methodology used to model duct requirements relies on the modelled amount of trench. Total duct length has been obtained by subtracting the amount of cable, which is supposed to be buried, rather than in ducts, from the total trench length. Total duct length is then allocated into different duct sizes in order to obtain duct requirements (kilometres of duct) by duct size. Most of the duct is assumed to be 4 or 5 bore duct, but a very small proportion is assumed to be large duct. In addition, the bottom-up model estimates the amount of trench and duct that links the customer premises to the trenches and ducts. This is referred to as mini-duct and it only comes in one size. A Copper The methodology adopted to work out copper requirements is quite complex and relies on the results of a dimensioning exercise performed on a sample of twenty MDF areas (hereafter called the sample) selected by the Forum among TDC s 1,183 exchange areas. The methodology adopted to select the twenty sample zones can be described as follows. 1 The terminology used in the bottom-up model differs, in many respects, to the terminology used in the top-down model. The differences are clarified in the reconciliation report. 6

10 First, a number of zones were selected for each geo-type on the basis of the relative importance (as measured by number of lines, area covered etc) of that geo-type to the overall network. Within each geo-type, the particular zones on which the cost analysis was then performed have been selected in order to form a sample that is aimed to be representative and balanced in terms of teledensity, i.e. number of lines per square kilometre. Second, for each of these zones, the model works out the crow flight distances of the connections between the joints of the tree configuration assumed in the model, i.e. network termination point (NTP), exit from street duct (EFSD), secondary distribution point (SDP), primary distribution points (PDP) and remote concentrator unit (RCU). The methodology adopted to obtain the crow flight distance is quite complicated and relies on a number of assumptions. Conversion factors are then used to convert crow flight distances into actual distances. Third, the model works out the size of the cable for each of the segments connecting the customer to the concentrator at the demand level first. For each zone in the sample, cable from NTP to SDP is assumed to contain only one pair cable; the size of the cable from SDPs to PDPs is a model input, the size of the cable from PDPs to RCU is obtained by dividing the number of copper pairs served in each zone by the number of PDPs (an input of the model) assumed to serve that zone. Finally, the capital equipment needed to serve each zone is then multiplied by the weight given to it, in order to obtain access requirements for the whole network. The weight given to each of the selected areas is a number that should inform on how many zones, similar to the one that has been chosen, are assumed to be present in the network. Weights have been selected so that the total number of modelled lines, total number of modelled customer sites and total area covered - obtained by multiplying the values these variables take for the selected zones by the weights attached to each zone and then adding the twenty results together - match against the values these variable take for the whole network, taken as given in the model. A Cabinet Equipment The modelled cabinet equipment includes: SDP and PDP cabinets (and if necessary SDP and PDP circuit boards). The number and the size of modelled SDP and PDP cabinets depends on the number and the size of the modelled SDPs and PDPs for each of the twenty sample zones (the requirements for the whole network are worked out through the means of the weights attributed to each zone). The number of modelled SDPs per zone is worked out as the ratio between number of subscriber lines served in each zone and connected copper pairs per SDP, an input of the model. The number of modelled PDP per zone is an input of the model. Collocation of SDP equipment in PDP cabinets and of PDP equipment in the concentrator site is taken into account. The size of each cabinet, classified as small, medium and large, depends on the number of lines served by each cabinet. This is an input of the model for SDPs and the ratio between number of PDPs in the zone and total number of lines served in the zone, both inputs of the model, for PDPs. Margins for spare are also taken into account. SDP and PDP circuit boards, placed within the cabinets, are dimensioned to carry the average number of lines per cabinet. An optimal combination of different sizes for circuit boards is chosen. 7

11 A Other Network Elements The other network elements modelled in the bottom-up model make up a small proportion of the costs of access. The methodology will be summarised below and can be explored in more detail through the documentation and by reviewing the model. A.2.2 Justification for Approach Taken and Issues for Further Comments A Trench Lengths The methodology used in the bottom-up model to work out trench requirements, as discussed above, assumes that trenches in Denmark follow roads, with no additional trench being modelled. The Forum has provided some justification of this methodology in the January 2002 document, Model Changes and Clarifications, arguing that: We do not expect there to be a material number of customer sites that need to be connected to the Access network, that are not also adjacent to the road network. This assumes that we consider, say, a block of flats to be "adjacent" to the road network even though some of those flats are not directly adjacent to the road. From inspecting the maps we believe that this assumption is reasonable other than in two cases: - Inhabited islands; the cost of connecting these to the mainland (or to a larger island) is calculated in the Core model and passed from there to the Consolidation model - Opportunities to reduce the cost of the access network by using other wayleaves, e.g. following a rail route or power line rather than the road, to shorten the length of some connections and/or reduce the cost per km of such links. We believe that the benefits from this are likely to be modest and it seems reasonable to simply write them off against any additional non-road routes required in the Access network, if any should arise. Telestyrelsen has examined the methodology used by the Forum and believes that on the whole it is a sensible way to determine trench requirements in a bottom-up model. Due to the relative impact that trenching costs have on the price of the final service it is important that the inputs used by the Forum is well documented. Within the methodology adopted in the bottomup model, there are a number of inputs that may affect trench requirements and trench unit costs in a significant way. For example, the estimates of the relationship between road length and trench length may be subject to a considerable margin of inaccuracy in some cases. One problem is that the relationship may depend on more than the density of sites as assumed in the model. For example, a link between an MDF and an area of houses may pass through an area in which there are no sites. Some of these inputs have been derived from an analysis of GIS maps while others have been estimated by the LRAIC Forum. Bottom-up issue-i Telestyrelsen would welcome views from all parties on whether there is likely to be any significant trench that does not follow the road network and whether the conversion factors used by the Forum are appropriate. Any evidence from TDC s own network or from other actual networks would be helpful to Telestyrelsen when developing the hybrid model. A The Approach to Estimating Common Costs, Particularly Common Trench Common costs in the bottom-up model are driven by two factors - the length of trench (and duct) that is assumed to be used by more than one increment and the way that these common costs are allocated to different increments. 8

12 The LRAIC Forum has provided some supporting arguments for the assumptions that they have made, but little actual justifications. They have not, for example, provided any clear justification for the amount of trench and duct that is assumed to be common with cable TV or other increments nor any evidence from other countries. Also the LRAIC Forum has not documented that the time period implicitly assumed when estimating the scope for co-digging is consistent with the time horizon implicitly assumed when estimating equipment prices (the scope for discounts). Telestyrelsen acknowledge that it is very difficult to justify any amount of trench/duct that can be deemed to be efficiently and feasibly shared with other increments. One approach may be to review the experience in other countries and make adjustments to account for the fact that the network might not be rolled-out in a manner consistent with that assumed by the LRAIC Forum. In terms of allocating common costs to different increments, Telestyrelsen believe that a number of different options could have been explored. One such option may be to review the space taken by the different cables in the trenches and/or ducts. Bottom-up issue-ii Telestyrelsen would welcome 1) Evidence from parties about international experience in order to estimate the amount of trench/duct that is common between the core/access network and other increments. 2) The most appropriate way to allocate common costs in the access network A The Copper Requirements and Distributors The methodology that has been used by the LRAIC Forum to estimate copper requirements in the bottom-up model is complex. However, there are at least three assumptions that require deeper examination. First, the lengths of the local loops and in particular, the length of the SDP to NTP part of the loop. This appears to Telestyrelsen to be relatively long. Second, the assumptions about utilisation will need to be examined. The model accounts for utilisation in two ways: through an allowance for growth. An allowance of 20 per cent on cable size is assumed for cables from SDP to RCU. No allowance for growth or spares has been assumed for cables from NTP to SDP. through modularity. Cables are provided in modules and therefore more cables are put in place than the ones required by demand considerations. However, from NTP to SDP the model puts only in place 1 pair cable. Modularity, for this part of the network, does not allow for any spare. Thirdly, the model assumes that a separate cable is required for each link between a PDP and SDP. Telestyrelsen believes that there may be scope for sharing of cables in some cases. With regard to distribution points, the bottom-up model contains relatively large distributors and subsequently only as a few distribution points. Also the utilisation levels of these distributors are very high. While the costs associated with cabinet equipment are not significant compared to the cost estimates of other network elements, it is important that the bottom-up model accounts for 9

13 an appropriate number of primary and secondary cabinets. This is because the bottom-up model relies on these estimates to work out the number of links in each sample zone and, therefore, the estimated size and length of copper cables. Bottom-up issue-iii Telestyrelsen would welcome information about the utilisation levels in place in other countries for different parts of the access network. A The Assumptions Underlying the Access Routing Table In contrast to the core model where the routing table has been used to both dimension the network and allocate network costs to final services, the table that allocates access network costs to the final services does not enter the dimensioning phase of the model. This means that this allocation table is quite important and has a significant impact on the final service cost estimates. The access allocating table is used to allocate the costs of network elements to access services. For each network element, the numbers referring to each service should mirror the way each service causes the costs of that network element (cost causation principle). Although the allocation of some network elements to services seems obvious, others appear not to have been estimated in a systematic way. These figures are then weighted against the amount of the service that is currently provided, when the network costs are finally allocated. The Forum has responded to Telestyrelsens earlier questions about the routing table used in access. However, as many of the estimates used in the routing table are based on assumptions, it is important that Telestyrelsen has confidence in the assumptions that have been made. To date, the assumptions used in the bottom-up model have not been sufficiently documented and Telestyrelsen will need to review them carefully. Bottom-up issue-iv Telestyrelsen would appreciate comments about the assumptions in the access routing table. A Other Issues There are a number of other issues that arose following Telestyrelsen s review of the LRAIC Forum s access network. These are briefly described below: the cost of mini-duct. The unit costs that the bottom-up model uses for trench and duct in the mini duct part of the access network are considerably cheaper than the ones used elsewhere in the access network; customer connections. The bottom-up model assumes that every subscriber is directly connected to an SDP, with PDPs only serving the function of conveying copper cables coming from SDPs into bigger copper cables going into the concentrator and that connections from NTP to SDP are served solely by 1 pair cable. One issue that needs clarification whether the policy of direct connections allows sufficient flexibility, e.g. in terms of delivery times, in the event of a customer requiring a second connection. 10

14 A.3 Review of Exchange Structure The purpose of this chapter is to review the methodology followed by the LRAIC Forum to estimate the costs of the exchanges. The approach that the Forum has used has been presented in the model documentation provided to Telestyrelsen and in subsequent, and more detailed, papers providing further documentation and justification. This chapter will, therefore, not repeat the modelling methodology but rather focus on the main assumptions made, their importance, and present some issues for further comment. A.3.1 Overview of Approach This section provides an overview of the approach followed by the LRAIC Forum when modelling exchanges, particularly in the following areas: the network hierarchy; the approach taken to meet the scorched node assumption; quality of service; and demand and routing factors. A Exchange Hierarchy The main feature of the exchange structure modelled by the LRAIC Forum is that it is a two layer switch hierarchy. It contains a large number of remote concentrator units (RCUs) which serve as customer access switches and a small number of tandem or transit switches. The RCUs connect to the customers over the access network and are described as fully functional switches. That is, they can set-up calls and complete calls to other customers if the other customer is on the same switch. Calls from one RCU are routed to other RCUs via one or more tandem exchanges. RCUs can vary in size from small (less than 500 lines) to large (20,000 lines or more). Some RCUs are also used as a point of interconnection (POI). The interconnection to the RCU POI enables calls to/from any subscriber who connects to that RCU. Calls to non-poi RCUs must be routed via a tandem switch. The tandem switches route incoming calls from RCUs or other TSs and send the calls to other tandems or another RCU for call delivery. There are no customers directly connected to tandem switches. All TSs also serve as POIs. A The Scorched Node Assumption The Forum claims that the (total) number of RCUs and tandem switches has been determined by following the scorched node assumption. This means that they have placed at least one switch within each switching zone and that no sites have been removed. Technical houses have not been modelled; this will be discussed in greater detail below. The scorched node assumption used for this study allowed the mix of exchanges to be altered. The Forum appears to have chosen their optimal number of tandems and then allocated the remainder of nodes as RCUs. The number of tandem switches was chosen by assuming that at least one tandem switch was needed for each of the three main land masses in Denmark and that several TS sites were needed on each land mass for diversity. 11

15 A Quality of Service The LRAIC Forum claims that the service levels supplied by the network are equal to or greater than that expected by a telecoms national operator. There are three main ways that this is said to be achieved in the modelled network. First, by a GoS assumption which is used to calculate transmission circuit requirements. The Forum assumes a Grade of Service of 0.5 per cent is used to calculate transmission circuit requirements. They also suggest that since traffic demand is rounded up to the next 2Mbit/s level, this GoS is always met or exceeded. The allowance for growth also adds further headroom to ensure that the GoS is met according to the Forum, although this will only be the case in the initial years before the growth arrives. Second, by assuming that there are two logical paths from an RCU to the tandem switch. The Forum argue that this additional capacity in the transmission network can be used to cover the different QoS-related requirements in the core network. Exchange and transmission equipment capability corresponding to such a network management functionality is not consistently documented by the Forum. The question regarding a failure of a tandem switch is discussed below, while related transmission aspects are dealt with in chapter A4. Third, the SDH rings provide automatic re-routing of traffic via the other ring part in the case of ring disconnection. This will be discussed in more detail in A.4. A Demand and Routing Factors The LRAIC Forum s core model is driven by a routing table, which attributes volumes of traffic to different network elements. This table is used both for capacity calculations and to attribute the calculated costs of the core network back to each of the call products. A probability has been attached to each (or most) of the possible routes for each call type in order to determine the actual routing factor for each call type. The assumptions that have been used by the Forum are discussed in more detail below, but there are two important points to note at this stage. First, the routing table and the probabilities assume a two tiered network rather than TDC s existing three-tiered network. Second, some of the data used by the Forum has used Forum assumptions even in places where TDC data were available. A.3.2 Justification for Approach Taken and Issues for Further Comment There are a number of areas where Telestyrelsen has raised questions regarding the exchange network. The main concern was with the level of justification provided by the LRAIC Forum for their choice of the network design. In particular, Telestyrelsen requested further information on where such a network had been laid out in the past, how the optimal mix of exchanges was determined, the implications of changes in the mix, and the ability of the network to handle outages. The Forum responded to these concerns in a note entitled Network Design Justification in January This section provides a summary of the Forum s justification for the approach that they have taken, and Telestyrelsen s comments on the chosen approach. The areas that are discussed are: compliance with the scorched node assumption; 12

16 network design and quality of service issues; the lack of a local level interconnection product; and general concerns with the modelling approach and assumptions used. A Compliance with the Scorched Node Assumption The LRAIC Forum claims that their model is based on the scorched node approach and further that at least one switch is placed within each switching zone. In their initial model, the Forum modelled 1,224 RCUs included 41 island RCUs. The 10 tandems switches were assumed to be co-located with RCUs. On this point Telestyrelsen questioned whether the number of sites modelled by the Forum was correct or whether technical houses was to be captured within the scorched node definition. TDC have a number of technical houses in their network. Telestyrelsen understand that these are small, potentially mobile containers (lightweight constructions) that may in some cases house smaller concentrator units. Information provided by TDC indicate that technical houses on average serve 240 subscribers, less than 10% of the amount served by the average subscriber stage. They have no switching functionality. Information on the number and indeed location of these technical houses was provided by TDC to the LRAIC Forum. As Telestyrelsen has indicated in the hearing note, the agency finds that in these technical houses in principle is to be included as a consequence of the node definition in the MRP. However, the agency has not yet reached a final decision in this issue. To facilitate a more detailed assessment, there is a need for precise clarification on the technical houses, especially regarding their construction, the equipment contained within them and the number of connected subscribers. Telestyrelsen will need to understand how customers are actually connected to the core network via the technical houses. For example, if the customer s line card is in the technical house then it may be that it performs the function of a remote concentrator. If, on the other hand, these technical houses are simply intermediate stages for customers on route to an exchange, which houses the line card, then they would not normally be considered to fall within the definition of an exchange. It is therefore conceivable that there are cases where it is not readily possible to assess whether a technical house falls under the definition of a node. In its assessment, Telestyrelsen will therefore also need to consider the intention of the law and the international experience in relation to the scorched node assumption. It is worth noting that the scorched node assumption does not make any judgement about whether the node in question is necessary in an efficient network or not. 2 If the node falls within the definition of a scorched node as outlined in the model reference paper, then it has to be included in the modelled network. However, Telestyrelsen note that the inclusion of all types of technical houses may lead to a disproportionate large number of nodes in Denmark, compared with other countries and the implications of this will need to be closely examined. Given the above Telestyrelsen would like to have more documentation, enabling it to carry out an overall assessment, with the view of reaching a final decision on the issue. 2 Although in some countries, for instance, Australia, the scorched node assumption in the bottom-up model was based on Telstra s future mode of operation estimate of the number of nodes which Telstra itself considered to be efficient. This number was different to the number of nodes actually in their network at the time. 13

17 Bottom-up issue-v Telestyrelsen welcomes views from the parties on criteria for defining a minimum size of a technical house, seen in a scorched node context. A Network Design and Quality of Service Issues Another issue of concern to Telestyrelsen is the efficacy of the two tiered exchange network and its ability to deal with quality of service aspects, e.g. availability. The LRAIC Forum argued that as switching costs were considered to be a major cost element, it was important to reduce these as much as possible. They believed that larger switches had lower unit costs due to economies of scale. In particular, they argued that if one large switch replaced several smaller ones cost savings would accrue from reduced operational costs, less space requirement, and less duplication of common equipment. They also argued that if the costs of concentrators and fully functional switches were similar, the ease of operations and reduced network capacity could be introduced by using only the fully functional switches. The Forum recognise that a two tiered network requires longer high capacity links but they conclude in their January 2002 Network Design Justification document that: The reduction in switching system costs is clear from having fewer larger switches. The total costs are reduced, if the transmission costs are a small fraction of the total switch costs, and because larger capacity transmission systems provide economies of scale (double the size does not double the cost). The existing Denmark indirect access operators have indeed adopted a similar strategy. A low number of transit switches are in operation, with long distance SDH technology being used to collect traffic from existing LE interconnect points, or directly from their own RCU located on or near customer premises. These operators are all satisfied, and have no intentions of changing the network architecture to a three layer model. Over 30% of Danish telephony traffic is handled in this manner, indicating the underlying practicality of such a model. At this point Telestyrelsen have two comments on the important issue of quality and resilience issues. First, at this stage and based on current information, Telestyrelsen still questions whether the two network elements modelled by the Forum RCUs and tandem switches are, in fact, capable of performing the functions which they have been given. For example, the Forum states in the documentation, that an RCU is an fully functional switch including e.g. route analysis, SS7 signalling, charging and a capacity of connecting up to subscribers. It is the view of Telestyrelsen, that such a unit more consistently could be described as a local exchange (as opposed to the broadly used term concentrator describing a unit without switching, routing, charging and signalling capability. Also compare with the LRAIC Terminology List). Telestyrelsen note the fact, that the RCU in the BU-model which is a rather complex unit is theoretical and does not refer to an existing product. Given that, it is important that the Forum provide a detailed picture of the functionality of the RCU; in Telestyrelsen s view this has not been provided in the documentation to date. This, in turn, leads to difficulties in the assessment of the contribution from the RCU (and the transit exchange as well) to the overall network functionality, e.g. quality of service related aspects as network management. More specifically: Tandem exchanges typically do not direct calls to terminating RCUs, but rather shunt traffic from one tandem to another or to a local switch. The local switch then performs the relevant call look-up functions to find the customer. If the tandems were required to perform these functions, then they would need to be able to provide additional services. It is not clear whether this additional functionality has been included in the costs assumed by the Forum. 14

18 The RCUs in the Forum s model are also more intelligent than those used in other bottomup models including the adaptable bottom-up model developed by Europe Economics for the European Commission. The RCUs in the Forum s model appear (compared with the typical functionality of a concentrator) to need additional routing and subscriber management functions and, if they send traffic to other RCUs or own customers, will also need billing and other software functions. As with tandem exchanges above, it is not clear to which extent this additional functionality has been included in the costs assumed by the Forum. Bottom-up issue-vi In Telestyrelsen s view it has not to a sufficiently extent been documented that the switches can provide the quality necessary and the functionality stated. Telestyrelsen would welcome any views or information from the operators on this area. Second, Telestyrelsen raised questions to the Forum on whether the network design is secure and what would be the impact of a fault or outage on one of the 10 tandem switches. The Forum acknowledge that if one tandem switch were to fail then all of the traffic to and from the tandem switch would be interrupted. However, they also argue that the network design has a number of options that could be used to minimise the impact of such a fault and so avoid a large percentage of the traffic being interrupted. These options included re-routing the traffic to another tandem switch. 3 The LRAIC Forum also noted that statistically, a failure was not likely during the busy hour and that the practical experience showed that there had been no busy hour failure of a tandem switch operated by any member of the BU group in Denmark to date. Telestyrelsen believes that some of the Forum s assumptions may be too optimistic. In modern networks it is not only fault conditions that reduce the grade of service, but traffic overloads due, for example, to radio and television phone-in shows. Moreover, as software complexity increases with additional services, network integrity is reduced since most outages are software related. Also high operational costs may generally be expected based on the use of advanced network management functionality. In addition, Telestyrelsen notes that island RCUs are connected to the mainland network through a spur. An RCU with a spur would have no resilience against failure unless duplicate and separate transmission paths are provided. Telestyrelsen notes that the network design assumed in the bottom-up model is quite different from that in place in Denmark and that operated by other incumbent operators with networks of the size and coverage of TDC. Although the onus was always on the Forum to show that their network was technically feasible and secure, this onus is particularly greater when a very different hierarchy to that in place in Denmark has been modelled. The documentation and further analysis by the Forum does not so far suggest that a two-tiered network would necessarily produce the same or better quality than TDC s three-tiered network. Telestyrelsen therefore believes that it would be helpful to see a higher level of quality of service included in the model and would welcome views from participants about how best to achieve this. One key dimension of quality is the ability of the network to deal with fault situations. For instance, the bottom-up model reference paper referred to the need for the modelled exchanges 3 This would be possible as there are two logical paths from an RCU to the tandem switch (presupposed the necessary network management capability and the required additional equipment capacity in the transit exchanges to cater for redundant RCU-connections). There will, however, be some loss of quality of service as neither the back-up tandem nor the inter tandem switch transmission routes are dimensioned to carry the additional burden during the peak hour. 15

19 to have the ability to cope with the breakdown of one or more switches, and more generally the need to have enough switches to host all of the remote subscriber stages. One method which might achieve this goal is to place two tandems on one ring, either keeping the number of tandems constant (and increasing ports etc. on the tandems) or by doubling the number of tandems. 4 Another might be to create more sideways routing between the larger RCUs (perhaps, as a starting point, those that act of a point of interconnection) in order to relieve some of the pressure on tandems, particularly during periods of stress. This approach may have the effect of moving at least, in part, to a three-tiered network. Bottom-up issue-vii Telestyrelsen would welcome any views from operators about how to improve the level of quality of service in the network modelled by the LRAIC Forum. A The Lack of a Local Level Interconnection Product One of the main implications of the Forum s two tiered network is that there can be no local exchange interconnection product. At present, that is, in TDC s existing network, the local interconnection product allows access to a number of RCU sites in the local exchange region. (This product does not use any tandem switches and hence is the cheapest type of interconnect call). In the Forum s model, an equivalent interconnect product would require all of the RCUs to also be interconnection points. This is likely to be expensive and the Forum have stated that they do not expect any operators to consider this. The justification that the Forum have used to offer two rather than three interconnection products (that is, not local interconnection production) is based on cost efficiency. They argue that by upgrading the largest 100 (or so) RCU s to make them interconnection points, an operator can cover the vast majority of the Danish population. The rest of the country can be covered by using transit interconnection calls. They claim that this is economic because: Only a small percentage of traffic needs to use the TS interconnection route; The TS interconnection call is cheaper that today s TS call; The TS interconnection call is not much more expensive than today s LE interconnection calls; and The LE interconnect (RCU sites) that is used to cover most of the population is also cheaper than today s LE call. The Forum conclude that the overall cost for other operators to cover the entire country is therefore lower than today. The model reference papers made two comments about the types of interconnection products that need to be modelled. In the general model reference paper, Telestyrelsen stated that: The bottom-up model s choice of technology and optimisation is subject to the scorched node assumption and the requirement that the notional network as a minimum should offer the same quality of service required of the SMP operator, and be able to provide a functionality similar to that of the SMP operator s products. In the bottom-up mode reference paper, Telestyrelsen stated that: 4 If the former option is adopted, it will be necessary to show that the tandems have the necessary functionality to deal with the additional traffic they must be capable of handling. 16

20 The bottom-up model is not constrained to replicate a network structure with five regional interconnection areas. But provided the bottom-up model, developed as part of the LRAIC project, comes up with a switching hierarchy that includes at least two levels of exchanges, then it will be able to replicate the current interconnection products, with a corresponding identification of network elements. Telestyrelsen accepts that, in principle, the absence of a local interconnection product in the Forum s optimised model may not actually matter provided that it can be replicated using the mix of exchanges in the model. However, the question of whether it is more efficient depends on the actual costs of the network. Telestyrelsen does not believe that the arguments provided by the Forum are fully documented, but accepts that based on the Forum s current assumptions and costs, it may be more cost effective to cover the population with a mix of RCU interconnection and some tandem level interconnection. The relevant local interconnection product in the bottom-up model, must therefore include some single transit interconnection and some form of weighting will be necessary to create a new product that covers those areas reached by the existing local interconnection product offered by TDC. It is equally important to state that this may not be the case under a different set of assumptions, and perhaps for those assumptions used in the hybrid model. Telestyrelsen, therefore, accepts that the interconnection products offered in the bottom-up model do not need to replicate exactly those in TDC s existing network. However, the hybrid model may need to make adjustments to the model to ensure that the same functionality is required and that the Forum s assumptions hold when costs and assumptions change. Also, there should not be any external costs incurred that enable a similar product to be offered. Bottom-up issue-viii Telestyrelsen accepts in principle that a different set of interconnection products can be modelled in the bottom-up model and note that the services modelled in the top-down and bottom-up model are not equal. Telestyrelsen therefore invites comments from the two parties on how to make the local interconnect product in the bottom-up model correspond better to the local interconnect product actually provided by TDC. A General views on the Modelling Approach and Assumptions Used The LRAIC Forum have adopted an approach to the modelling of exchange costs (although not necessarily all the related costs) which is of more an apportionment exercise than a costing exercise. Essentially, the group starts from a total cost (for each size of switch), subtracts costs for known bits and then uses percentage apportionments to estimate the costs of the rest. Thus the model estimates port costs for TS as follows: (Unit Cost Processor) x Port % with a further adjustment to take account of BHEs carried by the average switch in a given size category. At times such calculations are done with inconsistent sources (the RCU Unit Cost allegedly comes from EE; the other RCU costs come from the Forum). This approach implies that the total cost of switches could be calculated by multiplying the number of switches in a given size category (an input) by the total cost of that category (an input). The only role of the rest of the exchange calculations is to allocate these total costs between access and core on the one hand and between set-up and duration within core, on the other. Therefore exchange costs are allocated indirectly in the bottom-up model. Bottom-up issue-ix 17