COST AND NETWORK MODELS AND THEIR APPLICATION IN TELECOM REGULATION ISSUES by Florentín González López*, Klaus Hackbarth**, Gabriele. Kulenkampff*, José Antonio Portilla** (*)WIK Wissenschaftliches Institut für Kommunikationsdienste GmbH Rathausplatz 2-4 53604 Bad Honnef Germany Tel. +49 2224 922549 Fax. +49 2224 922566
[email protected] [email protected]
(**)Communication Engineering Department University of Cantabria Av. de los Castros s/n 39005 Santander Spain Tel. +34 942 201494 Fax. +34 942 201488
[email protected] [email protected]
JEL : FL-LRAIC, cost orientation, bottom-up models, top-down models ABSTRACT Telecommunication regulation is still an emerging field of interest for economics and engineers. WIK and the Communication Engineering Department of the University of Cantabria (Spain) are developing bottom-up cost models to give National Regulatory Authorities a valuable instrument to check cost data provided by the incumbent and to set charges for specific services according to the forward-looking long run average incremental costs (FL-LRAIC). In most European countries the telecommunication markets are liberalised and alternative network providers are competing with the historic incumbents. As it is economically unfeasible to reproduce the entire existing network of the incumbent, the regulatory framework has to
provide a settlement where Other Network Operators (ONO) can use parts of the incumbents network at “fair” prices. The definition of this price is very important for the market development and competition. To ensure competition, the cost standard for wholesale regulation has be one, which reflects the costs in a competitive environment. This cost standard is based on forward looking long run average incremental costs. Efficient service provision means that the incumbent would offer the same services with the most appropriate technology. Traditionally, the historic costs of the incumbent don’t reflect those cost which would have incurred under an efficient service provision. Thus, for regulatory purposes it is inappropriate to base rate regulation on the historic costs of the incumbent operator. The aim of this paper is to discuss the characteristics and the applicability of bottom-up cost models for telecommunications services. Telecommunications operators offers a broad range of services, like mobile and fixed services. These services can also be subdivided into access and conveyance. We will analyse the definition of the relevant increment against the background of specific services, like FRIACO (Flat-Rate Internet Call access origination) or mobile call termination and the respective FL-LRAIC determination Our bottom-up approaches will be contrasted with top-down approaches. Bottom-up models build up the network structure to obtain the assets which would result from an efficient service provision. Starting with actual demand and current best available technology a network is build up to estimate the FL-LRAIC in providing a specific service. As bottom-up models simulate the production process of any network operator, often only public available data is needed. It will be outlined that the top-down methodology starts with the incumbent's actual asset portfolio which is needed to provide a specific service. The assets are evaluated with historic costs or with current costs. Of course, we will discuss the applicability of top-down approaches for regulatory purposes. The paper” is structured as follows. First, we outline the necessity for cost oriented wholesale regulation. Then, we define the cost concept of forward looking long run incremental cost and why this concept reflects best the cost orientation required by the EU-Commission. The terms “long run” and “incremental” are deeply investigated as they are essential to understand the cost
concept. Then the different methodologies to calculate FL-LRAIC are presented. We will show why a bottom-up methodology should be preferred rather than a top-down methodology. Furthermore, we will show how bottom-up models are developed taken into account network optimisation techniques. We show how the FL-LRAIC can be calculated for different services, like access, fixed interconnection or mobile interconnection services. For this purpose we show the requirements from an engineering point of view, where network models are traditionally divided into functional and partition models. Finally, some practical examples from software programmes and their design will be shown.
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