Karlskrona, 26 May 2003

Transcription

1 Post & Telestyrelsen Teleavdelningen Att: Viveca Norman Karlskrona, 26 May 2003 Commentary on Draft Final Mobile Specification This paper sets out Vodafone Sverige s AB ( Vodafone ) views on PTS s document Draft Final Mobile Specification dated 9 May The paper does not represent Vodafone s exhaustive views on the full detail of the model specification; Vodafone intends to comment fully and systematically once the models themselves are made available by PTS. Rather, this paper seeks to highlight a number of areas upon which, following review, Vodafone considers worthy of comment at this stage, either to highlight areas where Vodafone disagrees with proposed treatment or, alternatively, where Vodafone wishes to highlight further issues or points of consideration which are not addressed by PTS. In particular, Vodafone intends to comment at a later date upon: The rationale and working of PTS s proposed approach to economic depreciation: PTS has now published an example of its approach to calculating economic depreciation. However, given the importance of this calculation, Vodafone believes that a period in excess of 2 weeks is required for full review. It is also important that such calculations are viewed in the context of the overall modeling approach; accordingly, Vodafone intends to comment upon PTS s proposed approach when systematically reviewing PTS s draft model(s) when published in full; and The detailed engineering rules: as with the economic depreciation, Vodafone intends to review the engineering rules in context, and so proposes to consider the engineering rules as part of its systematic draft model review. In this context, Vodafone proposes that this paper represents a working document, in the sense that it forms a basis around which Vodafone may hold further discussions with PTS and its advisers.

2 Some comments on PTS s model specification Page 16: small issues add up In considering the necessary reconciliation between modelled and actual parameters, PTS states that it is important not to take undue effort to reconcile areas with have little impact on the final output. Vodafone is concerned with such a stance. Whilst items which have little impact on the final results may appear immaterial in isolation, the constructed models are characterised by detailed inputs and specification of complex inter-relationships. As a consequence, the small issues can quite conceivably add up to a collectively significant impact on the results. Furthermore, the detailed inter-relationships within the model will mean that, whilst a factor may appear insignificant when considered in isolation, it becomes important as other elements of the model are flexed and amended. Page 21: economic depreciation in top-down modelling Vodafone understands that PTS intends, for the purposes of reconciliation, to construct a top down model underpinned by economic depreciation schedules to annualise investment costs. Vodafone believes that such an approach detracts from the primary advantage of top-down modelling, i.e., that such models reflect the real world costs of doing business since they reflect the actual costs of operation. The proposed approach to top-down modelling will seek, as Vodafone understands it, to spread both capital and operating costs over the lifetime of assets in relation to, inter alia, the output profile of respective assets. Such an approach will not, therefore, allow for systematic reconciliation back to the accounts of operators. Vodafone believes a more reasonable approach is to use the accounting depreciation functionality within its bottom up models to reconcile to the actual costs (as recorded in the accounts of each operator), and then adopt economic depreciation schedules in order to consider economic costs looking forward. Page 21: data availability PTS anticipates that actual information will be available up to the end of Vodafone has explained that the availability of historic data, and the levels of granularity of such data, will be determined by Vodafone s historic data retention policies and the levels of detail contained in Vodafone s accounting ledgers. Vodafone is currently in the process of assessing the extent to which historic information is available in the form and structure specified by PTS and intends to report its findings as soon as is possible. Vodafone considers it inevitable, however, that the full historic data set will not be available in the formats and levels of granularity specified by PTS, and that significant gaps may well arise. Page 30: asset classes for the top down model Vodafone believes that the asset class list specified for top down modelling is missing some key elements. These include: microwave licence costs; a distinction between wholesale and retail billing costs; 2

3 network buildings; and indirect network costs, such as network vehicles, test equipment and network IT. Vodafone intends, once the model(s) are made available by PTS, to undertake a systematic model review. As part of this process, Vodafone will review PTS s proposed cost category definitions against its actual cost base, in order to assess the extend to which it is (i) complete and (ii) appropriately classified. The inclusion of such costs is necessary to construct complete and representative top down models. Vodafone also notes that the levels of detail with respect to BSCs differs between the top down and bottom up model specification, with the former including a clutter-type distinction whereas the later does not. Generally, Vodafone expects to see, to the extent that data avialability allows, consistency of asset and cost specification across the two model types, in order that reconciliation can be carried out in a systematic and detailed manner. Page 41: treatment of analogue equipment PTS states that theoretically, the analogue share of such investment and operating expenditure should not be considered in the LRIC model. Vodafone agrees that analogue technology should not be considered in a forward looking model. However, the appropriate treatment of such assets (and the associated costs) is not to exclude them but, rather, to determine the modern equivalent asset (MEA) and reflect the MEA through asset revaluation. PTS s suggestion that such costs should be excluded is to depart from standard forward-looking cost modelling and the associated process of recognising different marques of assets on a forward-looking basis with today s modern technology. Page 44: Efficiency analysis Vodafone refers PTS to its comments on the proposed efficiency analysis contained in its submission Commentary on Mobile LRIC Model Conceptual Design and dated 25 April 2003 (hereinafter Conceptual Design Submission). Specifically: Vodafone considers itself to be efficient; it believes that PTS should work with an a priori expectation that the operators in Sweden are efficient, and that efficiency adjustments should only be made to the extent that inefficiency can be unequivocally demonstrated; PTS s proposed efficiency analysis is crude and high-level, and certainly will not provide sufficient evidence to draw definitive conclusions about the relative efficiency of the model operators in the Swedish market. 3

4 Page 59: Calculation of routing factors The robust calculation of routing factors is a complex and detailed process, often requiring sampling exercises, simulation studies and, at times, input from equipment vendors. Whilst it is inevitable that, as network grow and change significantly in response to, inter alia, growth in volumes, average network routings will change, the calculation of routing factors for historic periods or the projection of changes in routing factors looking forward is a complex issue. Vodafone is keen to understand the extent to which PTS intends for its modelling to reflect routing factors which change over time and, furthermore, how such changes will be determined and justified. Page 73: Increment definition Vodafone refers PTS to its Conceptual Design Submission, Section 9, in respect of the appropriate coverage definition. Vodafone fundamentally disagrees with PTS s twoincrement approach: which will misrepresent the cost function of a mobile operator and, specifically, will mean that network fixed common costs are considered to be incremental to traffic services and, hence, inefficiently recovered. Page 83 and 92: Fixed common cost recovery: the mark-up Vodafone refers PTS to its Conceptual Design Submission, Section 10, in respect of the appropriate basis for recovering fixed common costs. A standard LRIC model, as specified, does not have the ability to calculate the appropriate mark-up for each service. Vodafone has explained that fixed common costs are appropriately recovered with reference to Ramsey principles. Furthermore, Vodafone has explained that there exist strong reasons for the adoption of an a priori assumption that the super-elasticities of services will differ, namely: 1. the own-price elasticities of (i) subscription, (ii) outbound calls and (iii) inbound calls will be different; and 2. there will undeniably exist a significant cross-price elasticity between subscription and inbound calls. As a consequence, any reliance whatsoever on an equi-proportional mark-up methodology will mean the mis-specification of appropriate pricing structures to the detriment of the development of the market and, ultimately, consumers. Page 99: in-building coverage In defining the minimum network required to meet coverage obligations, PTS should recognise that significant in-building coverage is provided by microcells and picocells. This is true, for example, in areas with significant clutter, and also in closed areas such as shopping centres and airports. 4

5 Page 101: Customer-driven costs Vodafone refers PTS to its Conceptual Design Submission, Section 7, in respect of the appropriate definition of subscription-related costs. The mobile market in Sweden is characterised by: 1. the existence of strong competition between vertically-integrated operators; and, consequently, 2. significant competition at both retail and network levels. Vodafone has explained that efficient prices are set with reference to the full costs of vertically-integrated operators and, specifically, that fixed common costs comprise both network and non-network fixed common costs (it is worthy of note that the UK Competition Commission has recognised that some contribution to non-network costs is appropriate when setting termination charges). Pages 101 and 103: location-related costs PTS explains that the costs associated with locating subscribers (such as HLR-related costs) are sensitive to customer volumes. Vodafone agrees that certain costs associated with providing location information are a function of the number of subscribers: as the number of subscribers grows, so the costs associated with generating, maintaining and updating location information increase. However, location information is only required in order to terminate calls. As a consequence, standard incremental costing principles would dictate that the costs of location are avoidable costs of calls which are terminated on the network in question, i.e., inbound and on-net calls. Such should therefore be recovered not from subscription but from charges for inbound and on-net calls. Page 105: Demand forecasts The adopted demand forecasts in the model will have a significant bearing on the unit costs of services for two reasons: 1. to the extent that there exist any scale economies, higher traffic volumes will mean lower unit costs; 2. the growth rates of services will, to the extent that networks are built to reflect future growth rates of services, impact the size and hence cost of dimensioned network which is recovered from today s services volumes. Vodafone is therefore concerned that PTS s view: that the critical element will therefore not be the method by which the demand parameters are obtained but rather the level of demand used The method of modelling will, quite naturally, determine the forecast levels of demand. Vodafone invests significant time and resource in undertaking its own demand forecasting, which is used as a core input to the development of the business and the deployment of the network. Vodafone is therefore keen to ensure that the importance of demand forecasting in determining unit costs is recognised by PTS, and that the modelling 5

6 process is undertaken on a robust and transparent basis such that operators can comment and contribute appropriately. Page 111: the importance of demand forecasting PTS states that the method by which [demand] forecast[s] will be obtained is not absolutely critical, though the resulting traffic forecast for GSM and UMTS is critical. Vodafone considers this statement to be clearly contradictory and refers PTS to its comments above: the robustness of the adopted method will clearly impact the quality and accuracy of the outputs. Vodafone is keen that PTS recognises the importance of demand forecasting in assessing the unit costs of, inter alia, call termination, and specifies an appropriate which is appropriate in this context. Pages 115 and 122: Busy hour demand The busy hour demand input is a key input to the modelling process since it is a key determinant of the size of the modelled network and, hence, the total and unit costs of the modelled services. Vodafone is therefore keen that busy hour demand is appropriately specified for each element of the network. It is typical within networks for: 1. busy hour demand to differ between, on the one hand, the radio network and, on the other, the core network; this is because different cells will tend to have busy hours at different times of the day and, hence, when aggregated at the core network layer, the network busy hour traffic is sub-additive with respect to radio busy hour traffic; and 2. different individual services are likely to exhibit different busy hours, such that the network business hour (whether radio or core) will be defined by proportions of traffic services different to their respective (individual service) busy hour volumes. Page 116: Forward-looking coverage obligations Vodafone refers PTS to its Conceptual Design Submission, Section 5, in respect of the coverage network obligations on a forward-looking basis. All three operators in Sweden have acquired UMTS licences which impose extremely stringent and costly coverage obligations, requiring coverage of 99.98% of the Swedish population. As a consequence, it is important to ensure that, in modelling the forward-looking costs of operators, the forwardlooking coverage obligations including those imposed by UMTS licences - are modelled. Vodafone recognises the practical difficulties with explicitly modelling UMTS technology, and proposes that GSM technology is recognised as the Modern Equivalent Asset (MEA) such that the bottom-up network is modelled in respect of GSM technology but reflecting the forward-looking coverage obligations of all three operators. Page 143: Coverage network definition PTS distinguishes between transceivers which, on the one hand, are required for coverage requirements and, on the other, are required to meet demand for capacity. This distinction is appropriate, and it is exactly for this reason that coverage costs should be separately 6

7 recognised and modelled. PTS s admission that, in the full network, there will be transceivers (and, implicitly, sites) which are deployed to meet coverage obligations and which are therefore in no way a function of the amount of traffic points very clearly to the need for an appropriately defined coverage increment and the recognition of such costs as fixed and common across conveyance services. Vodafone has described the appropriate definition and treatment of network fixed common costs in its Conceptual Design Submission (at Section 9). Page 172: Bottom up asset and cost disaggregation Vodafone considers it appropriate that the asset and cost classification be specified consistently, in the first instance, between the top down and bottom up methodologies. In this regard, Vodafone refers PTS to its comments above (re Page 30) concerning bottom up specification. Page 173: Network design parameter estimates In specifying the key network design parameters, PTS proposes to use publicly available information and Swedish / international industry experience. Vodafone is concerned that reliance upon international industry experience may preclude recognition of Swedish-specific factors and result in the specification of a hypothetical network which is unrepresentative of Swedish operators. Vodafone therefore expects PTS to rely heavily on information requested from the operators in populating its models. PTS also refers to tuning model parameters. Vodafone is keen to understand what this means in a practical context, and believes that tuning has no place in the appropriate specification and population of robust models. Page 175: Network element lifetimes Whilst Vodafone assumes that the average physical replacement lifetimes are illustrative, Vodafone is keen to point out that the lives set out at Page 175 for example, 20 years for BTS equipment and 50 years for sites are significantly longer than those Vodafone experiences. In addition, amortising the GSM licence over 50 years is inappropriate, since the licence period is much shorter. Page 177: Scorched-node approach Vodafone welcomes PTS s scorched node approach, in the sense that is attempts to recognise the true costs of doing business in the real world. On the basis that Vodafone considers itself to be efficient, Vodafone therefore expects that the models yield equipment quantities consistent with those Vodafone has deployed in respect of different levels of volumes. Such an approach will recognise that, in the real world, the gradual deployment of a network to meet changing levels and mixes of demand over time will mean that legacy decisions and deployments will be reflected in today s network configuration. This is not inefficiency but, rather, just an inevitable consequence of the need to meet changing levels of demand over time. 7

8 Page 186: Direct and indirect network expenditure PTS points to staffing expenditures and maintenance expenditures as being indirect costs of service provision. Vodafone disagrees: a significant portion of total expenditure is incurred in the direct support, maintenance and upgrade of network equipment. The distinction between direct and indirect network cost is important when distinguishing between those costs which are, on the one hand, incremental to services and those which are, on the other, fixed and common across two or more services. Page 192: Economic depreciation As explained in the introduction, Vodafone intends to comment upon PTS s proposed approach to calculating economic depreciation at a later date, and in the context of a complete and systematic model review once a working model is made available by PTS. Page 243: Cost of capital Vodafone understands that PTS intends to undertake a study to determine the appropriate cost of capital to be used in the modelling exercises. Given the importance of this input, Vodafone is keen that, in keeping with PTS s approach to date, such a study is undertaken on an open and transparent basis such that Vodafone, along with other interested stakeholders, can contribute appropriately to proceedings. Conclusion Vodafone intends to provide exhaustive comments upon PTS s model specification following disclosure by PTS of working draft model(s) and Vodafone s systematic review thereof. This note represents some high-level comments upon the written specification. In keeping with the open and collaborative process undertaken by PTS, Vodafone is keen to discuss these issues further with PTS and its advisers. VODAFONE SVERIGE AB Regulatory & Legal Affairs Peter Halonen Senior Legal Counsel 8