The Hybrid Cost Proxy Model: Portugal Edition

D. Mark Kennet

William W. Sharkey

Instituto das Comunicações de Portugal

16-17 November, 2000

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Forward-looking economic cost Represents the cost of a competitive new entrant

with newly constructed facilities if it: Operates efficiently using modern technology

employed in efficient network configurations Serves the total demand for costed item Serves customers located in their current positions

connected by efficient network routing to efficient switching machines

Earns a “normal” return appropriately adjusted for risk

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Definition of efficient network model Most economically efficient technology

capable of providing stated level of service Model should reflect substitution between

technologies as relative prices change

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Implications of FLEC assumption

Embedded network is irrelevant Except for scorched node wire center assumption Assists consistency with record-keeping and

geographical constraints Assumes use of only current best, least-cost

technologies Costs must be those of a network that is efficient

for the desired purpose (e.g. voice grade network for universal service; higher quality network design may be appropriate for interconnection and unbundled element pricing)

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Advantages of Proxy Model Approach

Proxy modeling: Minimizes data collection requirements and

administrative burdens on companies Is the only methodology reasonably capable of needed

levels of disaggregation Addresses consistently the costs of families of

interrelated network elements Provides transparency and rigor to the costing process

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HCPM Overview Open data structure

Input files can be easily verified and modified by the user

Alternative inputs can easily be accommodated (both publicly available Census data and geocoded customer location information can be used)

All source code is freely available

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HCPM Overview (cont.) Loop design module deploys plant to the specific

locations determined by customer location module

Explicit optimization routines are used minimum cost spanning tree algorithms for

the design of feeder and distribution routes optimization over technology type: fiber,

HDSL, or analog

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A Typical Wire Center

WireCenter

SAI RT

SAI

Serving Area

Trunks toOther Wirecenters

Serving Area

Serving Area

Serving Area

NID

Feeder Cable(Copper or Fiber)

Distribution Cable (Copper)

Drop orService Wire

Terminal/Splice

LEGENDNID = Network Interface DeviceRT = Remote TerminalSAI = Serving Area Interface

ExchangeArea

Boundary

RT SAI

Adapted from Engineering and Operations in the Bell System, 2nd Edition, 1983

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Steps in Network Design Use a clustering methodology to determine

serving areas (SA) Overlay a grid structure on each cluster and

assign customer locations to micro-grid cells

Design distribution plant for each SA Design feeder plant to connect all serving

areas to the central office switch

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The Clustering Algorithm Divisive method Maximal size serving areas are created subject to

maximum copper distance constraint maximum line count constraint

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Geocode and Surrogate Locations, Évora service territory

Évora

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Closer view of Évora locations

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Clusters Created for Évora

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Grid Overlay for Every Serving Area (Cluster)

Microgrid

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Distribution Plant in a Microgrid

Vertical Branching Cable

Cable Junction Points

Drop Wire

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Cable Junction Point

Microgrid Boundary

SAI

Populated Cell

Unpopulated Cell

Connecting Microgrids to a Remote Terminal

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Distribution Network for Évora

-28 -26 -24 -22 -20 -18 -16 -14 -12 -10 -8 -6 -4

kilofeet, east-west

-20

-10

0

10

20

kilo

fee

t, n

ort

h-s

ou

th

Distribution routing calculated by HCPM

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Pinetree feeder

Feeder backboneServing Area Interfaces

Central office

Feeder branches

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“Optimized” feeder routing

Central officeServing areainterfaces

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The Feeder Algorithm Minimum structure distance network

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The Feeder Algorithm (cont.) Minimum cable distance network

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The Feeder Algorithm (cont.) Balanced network

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The Feeder Algorithm (cont.) Balanced network with rectilinear distance

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The Feeder Algorithm (cont.) Balanced network with junction nodes

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Feeder Network for Évora

-8.02 -8.00 -7.98 -7.96 -7.94 -7.92 -7.90 -7.88 -7.86 -7.84

degrees longitude

38.53

38.54

38.55

38.56

38.57

38.58

38.59

38.60

38.61

38.62

38.63

de

gre

es la

titu

de

Feeder Route Map Produced by HCPM

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The Switching and Interoffice Network

Tandem Switch

InterofficeTrunks

IXC or CLEC

Wire

Center

Wire

Center

End office

Switch

End office

Switch

Dedicated

CommonCommon

Direct

Point of Presence

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Switching Costs Line ports Trunk ports Common control call processing Signaling network costs

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Interoffice Networks

(a) Mesh-like Interoffice Network

A B

b

C

(b) Interoffice Ring Network

C

BA

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Expenses

Cost of capital Depreciation Operating Expenses Overhead Costs

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Cost of capital Very contentious issue – essentially two

broad choices Base on historical rate of return; or Assume that competition changes capital

market structure for firms Should real option value be included?

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Economic depreciation Difficult to estimate “economic

depreciation since depreciation allowances in telecommunications were determined under “cost plus” regulation

International benchmarks may prove useful