Contents of module
- Interconnection Part Five
- Interconnection index
- eLearning main Index
Cost Standards
Incumbent operators have the advantage of an embedded network and the customer connections that go with it. The costs of building many of the network elements, especially the local loop costs, have been amortized over the years. On the other hand, they may have a legacy problem and writing off or accelerating the depreciation of equipment can be costly. Introducing broadband service capabilities is a new cost, but leveraging the existing network, for example using the ducts that already exist, and selectively upgrading network elements, spreads the risk associated with the introduction of a new services. On the other hand, the scale of the operation is likely to be large, which adds to the short run business risk, but offers economies of scale in the long run.
New entrants have to build from scratch and face high business risk in trying to break into a market dominated by the incumbent. But they also have no legacy problems and can choose the latest technologies. They can also scale their operations to target particular market segments. Choosing an appropriate cost standard to address these different circumstances is not a straightforward task.
a) Historical, Current and Forward Looking Costs
Historical costs reflect costs already incurred. Current costs are those presently being paid to buy equipment and to operate and maintain the network. Replacement or forward-looking costs are the costs likely to be incurred in the future, which starts right now. For new entrants still building their networks forward-looking costs are clearly the most appropriate, and in terms of technology this normally implies lower costs tomorrow than today. In terms of labour and materials costs, such as oil and electricity costs, future prices can move either way. In terms of fixed and overhead costs, prices fluctuate. In Hong Kong, land prices are a major cost component and property values tend to move in cycles, but with a long run tendency upwards. This means that historical costs used for interconnection can under price in some cases, for example if land prices have risen, and over price in others, for example by factoring in network elements that have been largely paid for already or could be replaced at much lower cost.
Forward looking costs are generally preferred because they better reflect market conditions, but there may be some difficulties in determining them in which case OFTA may use information from network operators on historical costs and adjust them for known inflation or price escalation.
b) Cost of Capital
OFTA can adjust the market cost of capital for risk. For example, where the use of technologies which are subject to rapid technological obsolescence is involved the risk factor is greater, and less for other types of equipment and investments, for example the cost of ducting. Identify precisely which network elements are essentially broadband only and which are part of overall network design supporting a range of services can be problematic, but OFTA takes the view that all shared network elements should be included in the LRAIC calculations to fairly compensate investment in broadband.
c) Traffic Sensitive and Non-Traffic Sensitive Costs
OFTA takes the view that usage costs, which are traffic sensitive, are problematic because the “always-on” and shared capacity properties of broadband makes it difficult to apply traditional narrowband measures such as time or volume-based charging. This is subject to ongoing study. But the establishment costs, the non-traffic sensitive costs of setting up the points of interconnection, should be charged to the requesting interconnecting party on an incremental basis.