DATE
OUR REFERENCE
30 July 2003
YOUR DATE
YOUR REFERENCE
Time schedule
Reconciliation, hybrid modelling and price setting
Introduction and background
In May 2002, PTS published the overall time schedule for the LRIC process,
structured in four main phases:
1.
2.
3.
4.
Structuring the process
Modelling
Reconciliation and hybrid modelling
Final price setting
On 27 June 2003, the final bottom-up model was published and on 1 July, PTS
received the top-down model from TeliaSonera. The top-down model is currently
being reviewed by PTS to verify whether it meets the Criteria and Guidelines set
out in the Model Reference Paper (MRP). Following this review, TeliaSonera may
be requested to revise the model. This will complete the second phase of the
LRIC project.
This note provides a more detailed description and time schedule for the
remaining part of the LRIC project, which will include reconciliation, hybrid
modelling and final price setting.
Reconciliation of bottom-up and top-down model
Reconciling the bottom-up model with Telia’s top-down model plays an
important part in the process of establishing confidence in the bottom-up model
and potentially in the setting of access and interconnection charges. The
reconciliation will involve a detailed analysis and comparison of the
methodologies and assumptions behind the two models.
When PTS has finalised the review of the top-down model (and received a revised
version of the top-down model if required), PTS will identify, and as far as
possible quantify, the differences between the two models.
Differences in costs may arise due to differences in
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Technology and network structure
Equipment prices
Annualisation methodologies
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Allocation of annualised costs
Operating costs
Treatment of overhead costs
Volumes
PTS will then seek to explain and understand these differences. This will require a
comparison of the two models at a sufficiently detailed level. Differences will
need to be assessed both at the level of services, network elements and network
components/equipment.
A reconciliation report will be sent into consultation in order to seek opinions
from the industry. The report will identify, quantify and where possible explain
the differences between the two models. PTS is aware that the other operators
may be put to disadvantage compared to TeliaSonera as they will not have access
to the top-down model or the top-down documentation. PTS will therefore
attempt to make the reconciliation report as transparent as possible in order to
give the other operators a chance to comments on the differences between the
two models. Some of the data from the top-down model may still need to be
camouflaged. Only business confidential information will be camouflaged. More
aggregated cost data and service costs should not be business confidential.
The next step will be to focus on an analysis of the reasonableness of the
assumptions used in order to establish a balanced view based on the two models.
This exercise will be part of the hybrid modelling.
The role of the parties during the reconciliation phase
PTS will be responsible for reconciling the two models. The operators may be
requested to
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clarify and further justify the approach used in the two models
provide additional documentation for the various input data/parameters
assist PTS quantifying the differences between the models
conduct sensitivity analyses (only relevant for the top-down model, where
PTS is not able to conduct such analyses on its own as PTS does not have
access to the model).
comment on the reconciliation report
Hybrid modelling
Based on the results of the reconciliation, PTS will make decisions on which the
final prices can be based. Prices will be set on the basis of a so-called hybrid
model, which PTS will develop and which in practice will be a revised version of
the bottom-up model. To the extent that the reconciliation phase proves some of
the assumptions of the bottom-up to be inappropriate, these assumptions will be
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modified. These changes may include both structural changes to the model as well
as changes to the adopted parameters.
When making decisions on the most appropriate methodology to use in the
hybrid model, PTS will consider the following key factors:
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The overall intentions of the new electronic communications legislation
(2003:389)
Practical and technical feasibility of the modelled network
Criteria and guidelines of the MRP, which are not specific to the bottomup or top-down model.
Internal experience with LRIC modelling
Transparency of the hybrid model
The hybrid model and the associated model documentation will be subject to an
industry consultation.
It may be necessary to include confidential data in the hybrid model. In this case,
the confidential data will be camouflaged as it was done in the bottom-up model.
However, PTS considers that the amount of confidential data should be kept to a
minimum in order to keep the hybrid model as transparent as possible and avoid
too large an information asymmetry between TeliaSonera and the other operators.
The role of the parties during the hybrid modelling phase
PTS will be responsible for developing the hybrid model. During the hybrid
modelling phase the role of the operators will be to comment on the draft hybrid
model and provide PTS with additional data. PTS may also decide to hold
meetings with the different operators to discuss different network designs. Finally,
TeliaSonera will be requested to provide PTS with updated figures on traffic
volumes for the first half of 2003.
Final price setting
The purpose of both the bottom-up and the top-down model is to estimate the
costs of access and interconnection services. To what extent the final price setting
will be based on these models will depend on the validity and robustness of the
models.
In order to transform costs into prices, it will also be necessary to make a number
of decisions regarding inter alia: split between peak and off-peak charges,
geographically averaging or de-averaging and split between one-off charges and
usage charges. As the models will estimate LRIC for 2002, whereas the prices are
to be applied from 2004, it will also be necessary to update the input data in the
hybrid model. Volumes will updated using data from 2002 and the first half of
2003. Equipment prices will be updated on the basis of 2002 figures adjusted with
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the adopted price trends. Finally, PTS may develop a specific pricing model to
allow for a gradual move towards prices based on LRIC.
A report on PTS’s proposed pricing methodology will be sent into public
consultation. Final prices will be applied from 1 January 2004.
Time schedule
5 September
Publication of draft reconciliation report
24 September
Deadline for submission of industry comments
10 October
Publication of final reconciliation report
31 October
Publication of draft hybrid model
7 November
Publication of draft pricing methodology
19 November
Deadline for submission of industry comments
(hybrid model and pricing methodology)
12 December
Publication of final hybrid model and consultation response
19 December
Publication of final prices