Economic depreciation is relevant as it takes into account a much more dynamic development in output and demand.

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1 IT- og Telestyrelsen/ The National IT and Telecom Agency Sent by to: Rosenørns Allé 9 DK 1970 Frederiksberg C Tlf: Fax: de@danskenergi.dk Dok. ansvarlig: MOB Sekretær: MOB Sagsnr: 08/261 Doknr: Consultation of draft LRAIC-model The Danish Energy Association welcomes the opportunity to comment on the National IT and Telecom Agencys draft LRAIC-Model. The comments relate to the fibre network modelling. Depreciation methods The Danish Energy Association (DE) welcomes that NITA as a first step will include a separate calculation for economic depreciation in the next release of the LRAIC model. The Danish Energy Association strongly recommends that forward-looking depriciation methods, which take into account rapid changes in utillisation, is used as default due to, among other things, expected large increase in customer take-up on fibre. Economic depreciation is relevant as it takes into account a much more dynamic development in output and demand. Customer demand on fibre connections are increasing rapidly at the moment and is by many market observers and professional analysts expected to increase even more rapidly in the coming years. A high migration rate of customers needs to be taken into account. Gartner examined in 2009, on behalf of the High Speed Comitee, how the demand for bandwidth will develop by 2013 and 2020: x.htm Gartner predicts that a fundamental shift in broadband technologies will occur from due to a general shift in demand on high internet speeds over 50 Mbps. Gartner finds that this will stimulate a general migration from copper to fibre infrastructure. Gartner has in the recent years also looked at the development on

2 2 broadband in leading boroadband-countries such as Japan and South Korea, where fibre penetration already has exceeded DSL penetration. Gartner expects that the situation will be the same in Denmark within few years. The customer take-up on the fibre networks owned by the Danish utility companies confirms this migration-trend from copper based broadband to fibre, cf. the latest telecom statistics published by NITA, which shows an increase in the customer base on 26, 7 per cent from first half 2009 to first half The trend towards increasing bandwidth is unbroken. Due to the introduction of television via IP (IPTV) and other technically complex services such as video conferencing and cloud computing, network operators are under high pressure to provide increasingly higher bandwidth packages. Today, the end customer is already demanding HDTV- and the even more capacity-demanding 3D TV is next. This strongly supports the assumption of an increased customer take-up on fibre networks in the forthcoming years. Fibre is the technological foundation of next generation access networks, it has been and will be a superior technology in both core and access networks in many years to come. Costs regarding PON vs. Ethernet Point-to-Point network systems According to calculations in the framework of a national fibre network model, the monthly unit cost for a fibre access line on PtP in general seems to be twice as expensive as PON. DE questions these findings. As regards equipment it might be possible to reduce costs choosing a PON system instead of a PtP system. Also, PON needs substantially less fibre optics than if a dedicated fibre optic are provided for each customer, and less splicing is needed. But as opposed to PtP, it is necessary to insert passive splitters as extra components in the PON network. One splitter needs to be inserted for a certain amount of customers (typically 16 customers or more) in the PON network. Splitters only account for a very small fraction of the total costs of a system; however splitters may need to be exchanged if a network upgrade is carried out, and the costs regarding splitters related to a future network upgrade must not be underestimated. In general, the total investment in fibre infrastructure based upon either PtP or PON can in the long term not be expected to differ that much, as the vast majority of costs are channelled into digging, creating the fibre optic trays, distribution points etc. The fixed asset investment may be lower in building a PON network, but the costs concerning the digging and cable trays (up to 80 per cent of the total investment) are almost the same.

3 3 Estimate of investment risk In connection with the modelling of the fibre network the EU-Commission Recommendation of 20 September 2010 on regulated access to Next Generation Access Networks (NGA) needs to be taken into consideration. According to the recommendation an investment risk should be rewarded by means of a risk premium incorporated in the cost of capital. It follows that: NRAs should estimate investment risk, inter alia, by taking into account the following factors of uncertainty: (i) uncertainty relating to retail and wholesale demand; (ii) uncertainty relating to the costs of deployment, civil engineering works and managerial execution; (iii) uncertainty relating to technological progress; (iv) uncertainty relating to market dynamics and the evolving competitive situation, such as the degree of infrastructure-based and/or cable competition; and (v) macroeconomic uncertainty. These factors may change over time, in particular due to the progressive increase of retail and wholesale demand met. NRAs should therefore review the situation at regular intervals and adjust the risk premium over time, considering variations in the above factors. Criteria such as the existence of economies of scale (especially if the investment is undertaken in urban areas only), high retail market shares, control of essential infrastructures, OPEX savings, proceeds from the sale of real estate as well as privileged access to equity and debt markets are likely to mitigate the risk of NGA investment for the SMP operator. These aspects should also be periodically reassessed by NRAs when reviewing the risk premium. 1 DE finds it almost impossible to argue that TDC should be awarded a NGA-risk premium in the cost of capital as regards the existing fibre footprint since none of the mentioned factors of uncertainty seems to exist. For instance, there are no indications of future infrastructure-based and cable competition in the geographically defined footprint. There are no significant uncertainty relating to retail and wholesale demand. To a large extent TDC implicitly controls the demand side, as TDC controls both the copper network and the coax network and therefore also controls the possible migration of retail customers and wholesale customers on the different networks. As regards the market dynamics the trend goes towards a continuous increased demand for more bandwidth, which will be of benefit for the fibre network. As regards the criteria concerning the existence of economies of scale (especially if the investment is undertaken in urban areas only), high retail market shares, control of essential infrastructures and OPEX savings, it is the view of DE that there are substantial economies of scale, also because the investment is undertaken in primarily urban and suburban areas (also classified as geotypes 1-6). Furthermore, the retail market shares of TDC in both the broadband market and TV-market are 1 EU-Commission Recommendation of 20 September 2010 on regulated access to Next Generation Access Networks (NGA), ANNEX 1

4 4 exceptionally high more than 60 per cent. As regards the control of essential infrastructures, TDC controls both the cobber network and coax network within the geographically defined footprint. Also, the fibre network can be used as a feeder for the VDSL-and coax platforms. These synergies will give rise to substantial CAPEX and OPEX savings. TDC s existing fibre footprint (formerly Dong Energy fibre network) DE strongly recommend that the LRAIC prices on TDC s fibre network include specific prices for wholesale access to the existing fibre footprint in Greater Copenhagen and North Zealand (formerly Dong Energy fibre network) based on the specific conditions for the deployment of this network, including high population density, low linear distance between households and short length of drop cables. The existing fibre footprint covers approximately 200,000 potential households (homes passed), including 100,000 households in multi-tenant units. The formerly Dong Energy fibre network has been deployed through en extended use of trench sharing where overhead power lines are buried along with cables for streetlight and fibre tubes. DE estimates, that percent of the existing fibre footprint in Greater Copenhagen and North Zealand has been deployed through trench sharing with power cables and cables for streetlight based on a low fixed price per meter agreement. The extended use of trench sharing has reduced civil work costs significantly (e.g. digging, reestablishment of surface). DE is aware of that TDC has entered into an agreement with Dong Energy on trench sharing, allowing TDC to deploy fibre along with Dong Energy s replacement of the remaining overhead power lines in the region. Dong Energy will continue to bury overhead power cables in the region in the next couple of years. Detailed information about the digging activity is available on Dong Energy s web-site: VER_VI/Pages/hovedkort.aspx. Asset lifetimes on new drop cables DE finds that the asset lifetimes on new drop cables should be identical with the asset lifetimes suggested in the existing model, which is 40 years on trenching and ducts, 20 years on fibre cabling and 15 years on distribution points. Change of network termination point (nettermineringspunkt) TDC has announced that they will replace the current fibre box solution (CPE and 8 xrj 45) with a RJ45 wall jack (1x RJ 45). As a consequence of that, the service provider must now install and pay for the required CPE or router. In the network TDC acquired from DONG Energy, the network termination point was a CPE with certain technical QoS-properties and 8 x RJ45 sockets.

5 5 See also the illustrative figure below. Figure 1. Change of network termination point DE finds that the new network termination point should be considered as an integrated part of the fibre cabling of which the asset lifetime is 20 years. Med venlig hilsen Dansk Energi Morten Baadsgaard Trolle Christian Berg