Report for the Danish Telecommunication Authority

2011/2012 upgraded cost model draft version

Reconciliation paper for the calculation of actual operator costs 14 December 2011
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Contents
1 2 3 3.1 3.2 3.3 3.4 3.5 4 5 5.1 5.2 Introduction Model calibration Model reconciliation Unit capital costs of equipment Asset price trends Asset lifetimes Top-down capex Top-down opex Cost optimisation Updates to calibration and reconciliation of the cost model Updates related to calibration Updates related to reconciliation 1 3 5 7 8 9 10 11 12 14 14 15

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Copyright 2011. Analysys Mason Limited has produced the information contained herein for the Danish Telecommunication Authority. The ownership, use and disclosure of this information are subject to the Commercial Terms contained in the contract between Analysys Mason Limited and the Danish Telecommunication Authority.

Analysys Mason Limited St Giles Court 24 Castle Street Cambridge CB3 0AJ UK Tel: +44 (0)845 600 5244 Fax: +44 (0)1223 460866 cambridge@analysysmason.com www.analysysmason.com Registered in England No. 5177472

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1 Introduction
In early 2011 the Danish Telecommunication Authority contracted Analysys Mason Limited (Analysys Mason) to undertake a significant upgrade of the original mobile long -run average incremental cost (LRAIC) model (hereinafter referred to as the original mobile LRAIC model or the v4 model) used by the Danish Telecommunication Authority to set the prices for mobile termination in Denmark between June 2008 and November 2011. The mobile LRAIC model was originally constructed in 2007/2008 and version four of the model was released for consultation in June 2008. The Danish Telecommunication Authority has since updated the original mobile LRAIC model on an annual basis. The most recent upgrade of the cost model (hereinafter referred to as the upgraded cost model or the 5.0vD model) was completed in November 2011.1 On 14 December 2011 the Danish Telecommunication Authority issued the draft version of the upgraded cost model to the Danish mobile operators for consultation. The upgraded cost model contains calculations of the network drivers and deployments, and reasonably reflects the level of the Danish operators actual network deployments over the period to the end of 2010. It also includes a network costing calculation for a generic operator.2] The 5.0vD model used the inputs and calculations from the Danish Telecommunication Authoritys 2011 pricing decisions on the market for voice call termination on individual mobile networks (Market 7) as a starting point.3 At the same time, the Danish Telecommunication Authority received top-down information from the four mobile operators in Denmark (TDC, Telenor, Telia and Hi3G) covering their actual network and expenditures to the end of 2010. This document describes the calibration and reconciliation of the actual operator calculations for TDC, Telenor, Telia and Hi3G for the years 20072010: calibration has been undertaken to ensure the network design algorithm was capable of reflecting the actual network deployment of the mobile operators reconciliation was undertaken to examine the expenditure levels, identify differences and resolve discrepancies between top-down and bottom-up costing approaches (where cost information existed for both bottom-up and top-down models).

1 2 3

http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/lraic-1/lraic-priser/mobil/2011. This calculation is described in Section 4.2 of the model documentation. Available at http://www.itst.dk/tele-og-internetregulering/smp-regulering/engrospriser/lraic-1/lraic-priser.

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For details of the calibration and reconciliation of the model undertaken for the years prior to 2007, please refer to the reconciliation paper4 released with the v4 model on 16 June 2008. As far as possible, the calibration and reconciliation exercises undertaken to arrive at the 5.0vD model have only been designed to affect the years after 2006. This document includes references to confidential information. In the public release of this document, confidential information has been replaced by the scissor symbol (). In order to undertake the reconciliation, the 5.0vD model is calculated using different settings to those used when calculating the proposed cost result. Figure 1.1 below outlines how certain parameters must be set up. These are selectable from the CTRL worksheet in the 5.0vD model.
Parameter 3G coverage cell effective radii implemented Cost of working capital Include 3G licence fees? Cost optimisation (Sheet ) Figure 1.1: Parameter set-up configurations for reconciliation and for the production of a cost result [Source: Analysys Mason] For reconciliation Linked operator number Reconciled costing (no working capital) No Reconciled For the proposed cost result Linked operator number Including working capital allowance Yes Optimised
5

The 5.0vD model is set up with a different choice of parameters since the working capital allowance does not appear in the actual operational expenditure (opex) of the mobile operators, and also because reconciliation of the 3G licence fees is unnecessary. The remainder of this document is laid out as follows: Section 2 describes the model calibration process Section 3 describes the model reconciliation process Section 4 describes the cost optimisation applied to Section 5 describes key changes to the reconciliation since the original mobile LRAIC model reconciliation.

The public version of the previous reconciliation paper was released on 16 June 2008 http://www.itst.dk/tele-oginternetregulering/smp-regulering/engrospriser/filarkiv-engrospriser/lraic/lraic-processer/lraic-mobil/endelig-modelog-prisafgorelser/Reconciliation%20paper%20Public_160608.pdf Full details are given in Section 3.5 of the model documentation.

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2 Model calibration
All four mobile network operators in Denmark supplied a reasonably detailed set of network deployment data with which to calibrate network deployments in the bottom-up calculations within the upgraded cost model. In addition, all the network deployment data from the original calibration is still available and so was also used. In some cases, the data was available over a range of time periods with the majority of data having at least 2006 and 2010 data points. This helps to provide a further cross-check on the suitability of the model algorithms in reflecting the dynamic effects occurring in the mobile networks.
Item Sites Base transceiver station (BTS) NodeB Transceiver (TRX) Backhaul links Base station controller (BSC) or radio network controller (RNC) Mobile switching centre (MSC) Backbone BSC/RNC or MSC ports Home location register (HLR) Switching sites Figure 2.1: Scope of top-down network deployment data provided by the mobile operators for years 20062010 [Source: Operator data] TDC Telenor Telia Hi3G

Note that exact calibration (i.e. no divergence from supplied operator data in all years) was not undertaken. This is because such an exercise would be unduly complicated, would result in a vastly expanded model for very little increase in understanding, and it would only affect the model results negligibly. It is also worth noting that the calibration of the upgraded cost model was undertaken to minimise changes to modelled years before 2007, and so to not significantly affect the calibration of the original mobile LRAIC model. The 5.0vD model reflects the status of network deployment reasonably accurately for each mobile network operator as of 2010, as shown below in Figure 2.2.

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TDC Topdown data Bottomup model

Telenor Topdown data Bottomup model Topdown data

Telia Bottomup model Topdown data

Hi3G Bottomup model

Sites BTS NodeB TRX BSC RNC 2G MSC 3G MSC-S MGW Figure 2.2: Asset calibration for the modelled year 2010 [Source: 5.0vD model, operator data]

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3 Model reconciliation
Reconciliation of the bottom-up calculations within the upgraded cost model, as distinct from calibration, is the process of comparing bottom-up expenditures of the model with top-down (actual) expenditures submitted by the mobile operators. This reconciliation process can take into account the breadth of expenditure information in the upgraded cost model: unit capital prices of equipment price trends asset lifetimes top-down capital expenditures (capex) top-down opex WACC.

The range of information provided in response to the data request issued to the Danish mobile operators in June 2011 is presented below in Figure 3.1.6
Item Unit capital prices Price trends Asset lifetimes Capex Opex Figure 3.1: Yes Yes Yes Yes Yes Yes Yes Yes TDC Telenor Telia Hi3G

Provision of reconciliation data [Source: Analysys Mason]

Accordingly, Analysys Masons approach to reconciling the cost model utilised different methods in each of these areas, as described below: Unit capital prices of equipment The existing unit capital prices were in most cases kept unchanged from the original mobile LRAIC model. The costs of equipment supplied by were used as the basis of a check on the assumed capital prices for the period 20072010. The two exceptions were the costs of owned site acquisition and third-party site acquisition. In the original mobile LRAIC model, for some (but not all) operators the costs of these two types of site were set to be equal. In the 5.0vD model, the cost of owned site acquisition has now been set higher than that for third-party site acquisition in all cases. Where new assets have been added to the 5.0vD model, the equipment prices submitted by and international benchmarks (e.g. the unit costs in PTSs (the Swedish regulator) mobile LRIC model)7 have been used as the basis of the direct equipment price for all operators.
6

During the development of the original mobile LRAIC model, operators provided top-down data up to the end of 2006. As part of the development of the 5.0vD model, data was requested for the period 2007 2011. This data was then used in conjunction with the data prior to 2006, in order to extend the reconciliation from 2006 to 2010. http://www.pts.se/sv/Bransch/Telefoni/SMP---Prisreglering/Kalkylarbete-mobilnat/Gallande-prisreglering/.

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Where operators, or benchmarks, have not provided necessary equipment prices, Analysys Mason has developed its own estimates. In most cases, these estimates were cross-checked (in aggregate) with the resulting topdown cost data to ensure validity for the Danish context. In addition to direct equipment prices, mobile operators undertake a wide range of indirect capital investments incremental upgrades, tools, facilities, ancillary equipment, civil works, etc. These indirect costs do not have a standard list price per unit, and therefore are usually only identifiable from detailed asset register manipulation, business plan/budgets or through top-down comparison. We have left the indirect mark-ups used for the assets unchanged from the v4 model. For the new assets (Ethernet backhaul, high-speed packet access (HSPA) upgrades etc.), we have primarily used the cost model recently developed by PTS in Sweden as a benchmark. None of these assets has a mark-up for indirect costs in the PTS model and no data was provided by operators to allow estimation of indirect mark-ups for these assets. Therefore, in the 5.0vD model, the indirect mark-ups are assumed to be zero. We note that no operators provided unit prices for the operating costs of assets. Asset price trends The information on asset price trends supplied by operators concerned capital equipment prices. To validate the existing annual price trends in the model, the information provided by the mobile operators along with Analysys Masons estimates from other public mobile long-run incremental cost (LRIC) models were compared. Following this, a top-down comparison of capex and opex was undertaken, applying cost trends between 20062010 to ensure that the 2006 unit prices had reach appropriate levels by 2010, based on the information provided by . Asset lifetimes The model uses economic lifetimes to drive the replacement of network assets. The economic lifetimes in the original mobile LRAIC model were based upon a number of information points:

typical mortgage durations in Denmark economic lifetimes applied by the mobile cost model Analysys Masons estimates of the economic lifetime of network elements in the absence of replacement, driven by accounting rules, technology upgrade or service enhancement.

Although the model contains accounting lifetimes for reference, both the reconciliation and the proposed cost result use economic lifetimes.

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In this way, assets are only replaced after their estimated useful life, rather than after their average accounting lifetime. For the 5.0vD model, no existing assets had their lifetimes revised. For the new assets added to the model, economic lifetimes consistent with similar existing assets were used. Top-down capex We have been able to compare capex calculated by the model directly (in nominal terms) with the data provided by all four operators. This was performed at an aggregate and sub-category level in order to compare the capital investments associated with each operators business. Due to the lack of bottom-up information on opex per network element from the mobile operators, we have checked the total opex levels in the model for each operator according to reconciliation with the categorised top-down data.

Top-down opex

Each of these areas is discussed in greater detail below.

3.1 Unit capital costs of equipment

The capital equipment cost for each network element was initially set in the reconciliation of the original mobile LRAIC model, with values derived according to: direct equipment prices from the price list information submitted by the mobile operators the identification of additional indirect capital investments from the top-down accounting information.

However, the 5.0vD model contains a number of entirely new assets in the asset list. To derive unit costs for the entirely new assets, a similar process was undertaken as in generating the original asset costs. Both the direct equipment prices from and international benchmarks (e.g. prices in PTSs mobile LRIC model)8 were used as the basis for equipment prices. Figure 3.2 below shows those assets in the upgraded cost model that have either been modified or are entirely new. A color-coding system is used to illustrate the sources of information used to calculate them.
Figure 3.2: Direct equipment prices [Source: 5.0vD model]

http://www.pts.se/sv/Bransch/Telefoni/SMP---Prisreglering/Kalkylarbete-mobilnat/Gallande-prisreglering/.

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The colour-coding system used in Figure 3.2 is explained below.

Colour Description Calculated from the bottom-up costs supplied by the 9 operator Based on bottom-up costs supplied by another operator Derived from international benchmarks Derived from actual top-down expenditures Unit cost not required for that case Figure 3.3: Colour scheme used in cost base inputs [Source: Analysys Mason]

3.2 Asset price trends

In reconciling the asset price trends in the upgraded cost model, it was decided to consider the trends after 2006 in two separate parts, namely the trends from 20062010 and the trends in the long term. We describe these considerations separately below. 3.2.1 Price trends between 20062010 The price trends in the upgraded cost model are designed to capture real-world reductions (or increases) in the costs of network equipment. supplied unit capital cost information for 2008-2010. Therefore, it was possible to derive a compound annual growth rate (CAGR) between the modelled 2006 asset costs and the 2010 asset costs provided by (in 2006 real terms DKK). These CAGR values are shown below in Figure 3.4, compared with the cost trends assumed in the v4 model for 2006-2010.

Sites BTS TRX Carriers BSC RNC 20062010 v4 model capex cost trends 1% -6% to -5% -8% -7% -6% -5% CAGR Figure 3.4: Comparison of the 20062010 capex cost trends to CAGRs derived using s modelled 2006 costs and s 2010 data [Source: 5.0vD model, operator data]

As can be seen above, the operator data indicated several instances where a more aggressive decrease in unit costs had been experienced than was forecast in the v4 model. In addition to this bottom-up mapping of unit costs, a top-down reconciliation with each operator was also undertaken. In this exercise, capex and opex trends were adjusted to generate appropriate levels of annual expenditures in the period 2007-2010, as discussed further in Sections 3.4 and 3.5 below. In order to minimise changes to the modelled expenditures prior to 2006, as far as possible only price trends from 2006 onwards were adjusted.

Some of the bottom-up costs have also been blended with benchmarks from other models, where available.

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3.2.2 Long-term cost trends Both submitted information on the price trends applying to capital equipment. This data was used in combination with the long-term price trends from the v4 model to inform an updated longterm trend, as shown in Figure 3.5.
Real-term long-term, real-term average real-term average from the v4 model costs changes (2001 costs changes (2008 (19932010) 2007) 2010) Sites Towers BTS NodeB TRX Channel kit (CK) BSC RNC Figure 3.5: 1.1% 2.1% 5.7% to 5% 2.1% 7.8% 6.1% 6.1% 5.1% Bottom-up, real-term long-term, forecast (2010 and after) 0.75% 2.1% 8.0% 5.5% 7.0% 5.5% 8.5% 7.0%

Comparison of real annual average price trends [Source: 5.0vD model, operator data]

In comparing the data on price trends submitted by the operators to that in the bottom-up model, it can be observed that: The historical price trends from the v4 model are generally less negative than both trends, with the difference to being highlighted in the original reconciliation, whilst the data was not available at the time. This difference may be one of the reasons for necessity of the larger cost trends observed from 2007 to 2011. The price trends in the upgraded cost model are likely to apply identically to all mobile operators. This is because it is assumed that all Danish mobile operators are under the influence of the same real-term changes in equipment (hardware, software, etc.) and local (wage, site acquisition, etc.) costs.

The basis for revising a long-term trend in the model using the data provided was to use the average of the original value and the values derived from data provided by . The values used in the 5.0vD model are shown in the grey column in Figure 3.5 above.

3.3 Asset lifetimes

Each operator submitted accounting lifetimes for network assets. Analysys Masons manipulations to arrive at average accounting lifetimes were provided to the mobile operators as part of the development of the original mobile LRAIC model. Economic asset lifetimes were also originally calculated for each network element. This economic lifetime was assessed as the replacement lifetime of assets in a steady-state environment, i.e. one in which services, network asset releases and equipment replacements are predictable and stable in the long term. They were based on

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characteristics of the Danish market (e.g. typical mortgage durations) and the economic lifetimes used by Ofcom (UK) and PTS (Sweden). Additionally, in the original mobile LRAIC model, economic lifetimes were limited to a maximum of 20 years to reflect a conservative view of long-lived assets. This principle has been maintained in the 5.0vD model. When determining the lifetimes for the new assets added to the 5.0vD model, values from existing equivalent assets have been used, or benchmarks from other mobile cost models where this was not possible.

3.4 Top-down capex

All four operators submitted categorised top-down capex. These actual data points were used to assess the degree to which the direct bottom-up equipment prices managed to capture the levels of expenditure actually accumulated by the mobile businesses. The majority of new data received from operators was given in the format as outlined in the operator data request. These categories where mapped to the existing broad capex categories, as shown in Figure 3.6, so as to expand the previous reconciliations to 2010.
Data request Radio network Last-mile backhaul BSCs/RNCs Transmission, excl. backbone Switching Backbone transmission Other core infrastructure Indirect network costs Non-network costs Business overheads Figure 3.6: Broad capex categories; note that the number of categories provided varies by operator [Source: Analysys Mason] TDC Telenor Telia Hi3G

The aggregated direct bottom-up equipment prices, including both direct and indirect costs, have been reconciled against the actual top-down expenditures given by operators. The cumulative

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capex was compared as this removes possible timing effects from the expenditures. Figure 3.7 below shows a comparison of the modelled cumulative capex versus the actual cumulative capex for each operator.
Topdown Cumulative capex to end 2006 % difference Cumulative capex to end 2010 % difference Figure 3.7: Cumulative capex comparison for modelled direct and indirect expenditures (nominal DKK million) [Source: 5.0vD model, operator data] TDC Bottomup Telenor Topdown Bottomup Telia Topdown
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Hi3G Topdown Bottomup

Bottomup

3.5 Top-down opex

Given the limited availability of bottom-up unit opex applicable to the Danish mobile network operators, the level of opex in the upgraded cost model has been set according to the available topdown data. A comparison of total opex for the four mobile operators for both 2006 and 2010 is shown below in Figure 3.8.

Topdown Total opex, 2006 % difference Total opex, 2010 % difference Figure 3.8: Comparison of total opex (nominal 2006 DKK million) [Source: 5.0vD model, operator data] TDC Bottomup Telenor Topdown Bottomup Topdown Telia Bottomup Topdown Hi3G Bottomup

As is the case with capex, there have been no revisions made to the indirect opex mark-ups. Similarly, there have been no indirect mark-ups derived for the new assets, due to lack of available data. Instead, the direct cost is assumed to capture all associated operating costs for the asset.

10

In the development of the original mobile LRAIC model, did not provide a full-time series of in-year investments for its historical investments. As an alternative, the present value of capex was calculated instead for the purposes of reconciliation instead.

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4 Cost optimisation
In this section we revisit the cost optimisation previously applied to . We have compared the costs calculated across in order to ascertain where network and costing differences exist. Figure 4.1 shows the components of total cumulative economic costs (sum of capex and opex over time) calculated with the unit costs applicable to each mobile operator. In this comparison it is important to observe that the inventory of assets being considered in each case is identical; the only difference is the unit capex and opex assumed.
Figure 4.1: Network costs under different unit cost situations [Source: 5.0vD model]

We note that this comparison still raises questions about the expenditure allocation provided by , since: The last-mile access backhaul layer of the network exhibits a significant and material difference when compared to costs calculated according to the cost bases of the other operators The proportion of capex, and hence termination costs, contributed by the appears high compared to Analysys Masons experience of this part of the cost base in similar cost models, and is significantly higher than for the other Danish mobile operators.

fully reconciled expenditures are calculated using the following unit prices: unit capex (1992) = direct capex (1992) plus indirect costs unit opex (1992) = unit capex (1992). Based on our comparison between the mobile operators, we consider that costs in the 5.0vD model should still be reduced by an indirect cost multiplier and a unit opex multiplier. This level of unit costs for can therefore be considered fully optimal for the purpose of wholesale mobile termination regulation in the Danish context. We note that Figure 4.1 also shows a significant change in the economic cost within other core infrastructure and backbone transmission when using the cost base of Operator 1 ( ). The reason for the difference in backbone transmission is that the unit opex for the National site-site circuit switched backbone distance (SDH STM1) is almost an order of magnitude higher for than the other operators. We have reduced this level in the 5.0vD model, producing closer agreement for this category, as shown below in Figure 4.1. This is also accounted for in the opex reconciliation in Figure 3.8, and does not significantly affect the opex reconciliation for .
Figure 4.2: Network costs under different unit cost situations, with revised unit costs [Source: 5.0vD model]

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The reason for the difference in other core infrastructure is primarily the higher costs assumed in the cost base for the voicemail server and the billing system, compared with the other operators. We have not revised these inputs in the calculation in the model, although this can be investigated further.

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5 Updates to calibration and reconciliation of the cost model

This section describes some of the key changes to the 5.0vD model as a result of the calibration and reconciliation of the actual operator calculations for TDC, Telenor, Telia and Hi3G for the years 20072010. Section 5.1 describes updates made related to the calibration of modelled assets Section 5.2 describes updates made related to the reconciliation of modelled expenditures.

5.1 Updates related to calibration

Choice of 3G cell radii used for calibration In the original reconciliation, the effective cell radii implemented for 3G coverage was assumed to be Draft v2 voice, outdoor. When either calculating a cost result, or undertaking calibration/reconciliation, this input is now set to Linked operator number. The reason for using Draft v2 voice, outdoor radii in the v4 model was that urban indoor cell radii, as used in the cost result at the time, caused a rapid deployment of sites, with the look-ahead effect in the model leading to 3G costs being incurred in 2006 and 2007. In addition, 3G coverage was too limited in order to adequately calibrate the 3G coverage inputs by operator in the model. In 2011, following four more years of evolution in the 3G networks in Denmark, these 3G coverage inputs can now be more accurately calibrated. This means that it can now be considered reasonable to use these radii during calibration/reconciliation, thus aligning the 3G methodology with that used for 2G. Updated traffic measures The various proportions of daily traffic in the busy hour were updated with more recent data for each operator. Although this affects the model results prior to 2007, none of the parameters had changed significantly, meaning that any differences to the calibration prior to 2006 were not substantial. In addition, operator information was used to populate the 5.0vD model busy-hour parameters for both Release 99 and HSPA. Updated site splits The split of sites by owned tower, third-party tower and third-party rooftop sites was updated for 2010 and 2011 using operator data. The number of 2G/3G indoor sites and repeaters in tunnels were also updated for each operator.

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Updated BSC/RNC capacities

To update the BSC and RNC capacities in a similar fashion as described by operators in their data submissions, a BSC and RNC upgrade path was defined. This functionality is intended to represent the fact that both BSCs and RNCs are available in a range of step-wise capacities, with operators tending to deploy a mixture of capacities. Therefore, the capacity used in the model each year becomes a weighted average of the capacity options. In addition to updating the BSC and RNC capacities, other assets capacities were revised only where necessary. Examples of such revision are the HLR capacity for and the capacity of the SMS centre (SMSC) throughput for . During the calibration, some of the operators utilisation factors were updated. This was mostly related to 3G assets. Where utilisation factors varied over time, such as that for the BSC, they were updated for the years 2007-2010. In addition to the above, various smaller updates were made: To capture a roll-out of HSPA across the network, the minimum speed deployment for high-speed downlink packet access (HSDPA) for each geotype was calibrated with operator data. Minimum speeds were usually set so that the urban geotypes had equal speeds to, or faster than, the suburban geotypes, which in turn had equal speeds to, or faster than, the rural geotypes. The HSUPA grade deployed was then that corresponding to the ladder of HSDPA speed deployed. The percentage of pre-existing 2G sites available for 3G upgrade was adjusted to match the data submitted by the mobile operators. Call attempts per successful call and average call durations were checked against the new operator information and adjusted where appropriate.

Updated other asset capacities

Updated some utilisation factors

Other updates

5.2 Updates related to reconciliation

Choice of 3G cell radii used for reconciliation Used economic lifetimes rather than accounting lifetimes for reconciliation This change, as described above, is also used to reconcile expenditures.

We believe this is reasonable since we are modelling replacement capex in the upgraded cost model, which should reflect the lifetimes of assets enduring in the network, rather than when they are fully depreciated.

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Revised unit capex for existing assets

In response to s data submission that the type of sites being purchased change in value over time, site assets were further split down by geotype to allow for their unit costs to vary by geotype. For the 5.0vD model, the unit cost of a site is assumed to be the same in all four geotypes, which is consistent with the v4 model. The unit capex for owned sites and third-party sites has also been updated so that the former has a higher unit cost than the latter for all operators (in the original v4 model, these were set as equal for some operators). Following the investigations in Section 4, s unit opex for the National site-site circuit switched backbone distance (SDH STM1) asset was reduced to a level closer to that of the other operators.

Added unit costs for New assets were added to the upgraded cost model including HSPA, new assets Ethernet backhaul, and an Ethernet backbone. The unit costs for these new assets were calculated using a blend of benchmarking from other cost models and cost data submitted by . Revised 20062010 capex trends The cost trends between 2006 and 2010 were revised, as described in Section 3.2.1. To capture operator unit cost changes over this time, significant negative cost trends had to be applied to many assets. While the cost trends are more negative than usual, it is felt that in this instance they are appropriate as they are only applied for a small number of years. They are also indicated as appropriate in order to get closer top-down reconciliation with actual opex. The long-term trend is more conservative than these short-term reductions. In addition, both the mobile cost models developed by Ofcom (in the UK) and ARCEP (in France) have precedents for large negative trends in this time period. Revised long-term capex trends Revised 20062010 opex trends The long-term capex trends were revised as is detailed in Section 3.2.2, using operator data from , as well as international benchmarks. The opex cost trends between 2006 and 2010 were revised during the topdown opex reconciliation to capture annual operator opex over this period. To achieve similar opex charges as seen in operator data, significant negative cost trends had to be applied to some of the asset classes, though as with the capex trends this is felt to be reasonable over the short time period. As is the case for capex, there are also precedents for negative price trends (in real terms) from the models developed by both Ofcom and ARCEP. The majority of long-term opex trends remained as in the original calibration. New cost trends were added for new assets according to benchmarks, or to be consistent with existing assets in the same asset class.

Revised long-term opex trends

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Adjustments to operator data

Data supplied by operators was adjusted prior to calibration to ensure the accuracy of the comparison. The key adjustments are listed below: s indirect network capex in 2010 was assumed to be the same as in 2009, as otherwise there was a significantly inflated capex in 2010 s network transmission opex in 2010 was assumed to be the same as in 2006 to take into account having internalised transmission costs interconnect, handsets and depreciation and amortisation opex values were excluded from s reconciliation data the 2009 and 2010 business overheads capex for was assumed to be the same as in 2008, to remove effects of non-network costs were excluded from s opex to better correspond to its previous submission; capitalised indirect network costs were included in the capex reconciliation.

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