Analytical Cost Model

Background

Telecoms regulation aims to promote competition and to guarantee defined levels of service across the country. Price regulation can therefore be an oligation for dominant companies. The price determinations themselves have to be made within a set of constraints anchored in the Telecommunications Act (TKG).

The benchmark usually is the costs of efficient service provision. These are derived from the long run incremental costs of providing the service plus an appropriate mark up for volume-neutral common costs - both inclusive of an appropriate return on capital employed - to the extent that these costs are required to provide the service.

Use of Analytical Cost Models

To determine the long run incremental costs of efficient service provision the BNetzA uses analytical cost models in addition to the cost statements of dominant companies and the comparable markets concept. Analytical cost models have been the subject of international debate for some time now, and have become a useful regulatory tool.

The Scientific Institute for Communication Services (Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste, or WIK) has drawn up analytical cost models for the BNetzA. The models take an element based approach and establishe the long run incremental costs of the network infrastructure. These make up by far the greatest part of the incremental costs for special network access offerings.

Development of the Model

The model establishes the costs of the network infrastructure with reference to the elements used. It breaks down the telecoms network into elements defined by their function, say switching or transmission.

In costing network access services, two assumptions are made. Either the individual services correspond directly to network elements, or the costs can be arrived at by adding the costs of the different elements used. This element based charging (EBC) allows the costs of the services to be linked transparently to the functionally defined elements required.

Provided the use of network elements by different services stems from the same cost driver, the incremental costs of the element can be allocated to the services in the same way. With EBC, fixed costs caused by indivisibilities, for instance the costs of an exchange's central processing units or the costs of trenches, are split among the services, following the principle of causation, as allocable costs of the element. The long run incremental costs of network elements here, then, are the "common" costs of the different services - but not volume-neutral common costs.

Public dialogue

Once a model is thought to be adequately stable, it is described in a consultative document. The consultation process is then launched by an announcement in the Official Gazette. The comments received are evaluated and then published, along with the evaluation itself. All modifications considered necessary as a result are implemented as quickly as possible with the more extensive modifications being incorporated in a subsequent version.

Analytical Cost Model - Local Loop

The subscriber line network was first modelled in early 1998. The model was published on 4 March 1998 as a consultative document entitled "An Analytical Cost Model for the Local Network", on which comments were invited. It was possible to include some of the modifications shown to be necessary in the CD-ROM software version 1.0 "Analytical Cost Model - Local Loop".

Meanwhile, WIK has given concrete shape to further modifications in the revised model. The result is the new consultative document, version 2.0 "Analytical Cost Model - Local Loop" of 8 November 2000. Comments were invited on the changes made. The responses and their evaluation are both available to download. The main points of the evaluation have been worked into the "Analytical Cost Model - Local Loop" version 2.0 and are outlined below:

In the local loop, spare capacity is required to satisfy future demand as well as for technical reasons. In order to make this distinction, the spare capacity factor in the model is subdivided into a demand-driven and a technically-based factor.
Following the model for the national core network, the structure of Deutsche Telekom AG's access areas can be used as the reference for the cost considerations. Alternatively, the access area boundaries can also be formed endogeneously, based on efficiency criteria.
The internal and external sharing factors used in the model have been made more precise to cover the different forms of sharing.
The site of the primary connection point is no longer determined iteratively. Instead, it is positioned at the building closest to the main distribution frame in the particular cluster.
A Geographic Information System has been introduced to facilitate automatic data collection for assessing line demand and to achieve a realistic depiction of routing in the distribution area.

Analytical Cost Model - National Core Network

One of the main results of the local loop consultation process in late 1998 was the decision to separate modelling of the access network from modelling of conveyance. This separation was put into practice in the consultative document "An Analytical Cost Model - National Core Network", and comments invited.

Evaluation of the responses led to structural modifications and refinements, set out in the updated 2.0 document and corresponding CD-ROM.

In future, interconnect charges will be based on the network elements used, and not on distance stages (up to 20, 50, 200, over 200 km). It is in this connection that comments were invited, and published, on DTAG's paper "Zone Model Element Based Charging" of 22 December 1999. In a second step, DTAG presented its modified "IC 2001 - EBC Model" on 2 May 2000 which it sent out to all those who had taken part in the initial consultation, requesting their views on the revised document. These supplementary comments have also been published.

The consultative document "Analytical Cost Model - National Core Network" version 2.0 is available free of charge. The software is priced at DM 1,000 and is available from the Ruling Chambers' Office for all companies taking part in the approval procedure.

Analytical Cost Model - Broadband Network

At the remit of the Regulatory Authority for Telecommunications and Posts, WIK-consult GmbH (WIK) has developed an analytical cost model for the broadband network and specified this model in a reference document titled

"Analytical Cost Model for the Broadband Network".

The cost model described is a bottom-up model deriving from the element-based approach. The extent of the cost model is primarily driven by the levels of the value added chain of xDSL-based access services and covers various network segments. These include the

high-bit-rate local loop
(ATM-based) concentrator network
ATM core network
IP core network.

The model is intended to document all relevant relationships between input and output parameters in a transparent manner.

The consultation is intended to initiate an open and critical dialogue with the market. The goal is to develop an acceptable methodology which can serve as a basis for future regulatory decisions.

The reference document is published under "Telecoms Regulation/Analytical Cost Model/ Documents".

The basic elements of the cost model were presented to the Regulatory Authority by wik-Consult GmbH during an informative event on 09.03.2005.

WIK Präsentationsfolien (pdf / 700 KB)

Date of modification: 2010.08.27

An­a­lyt­i­cal Cost Mod­el