PART III TERMS OF REFERENCE. 1) interconnection rates of mobile services (Valor de Remuneração de Uso de Rede do Serviço Móvel Pessoal VU-M);

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1 1/23 Invitation to Tender For the Provision of Consulting Services PART III TERMS OF REFERENCE 1. OBJECTIVE This document sets forth the Terms of Reference under which a consulting company (hereinafter referred as the Contractor ) will be contracted by the International Telecommunication Union (hereinafter referred to as ITU ) to support to the Brazilian National Telecommunication Agency (hereinafter referred to as Anatel ) in the development of cost modeling for telecommunication services (hereinafter referred to as the Work ). The Contractor shall provide Anatel with the knowledge and necessary models and applications or software solutions for the determination of costbased values as well as the reference values for the following services: 1) interconnection rates of mobile services (Valor de Remuneração de Uso de Rede do Serviço Móvel Pessoal VU-M); 2) operation of leased lines (Exploração Industrial de linha Dedicada EILD); 3) establishment of interconnection rates for the fixed services (Tarifa de Uso de Rede Local - TU-RL, Tarifa de Uso de Rede Interurbana Nível 1 - TU-RIU1 e Tarifa de Uso de Rede Interurbana Nível 2 - TU-RIU2). 2. BACKGROUND 2.1. The Presidential Decree nº , of 10 th June 2003, on telecommunication public policies in Brazil, established that rates and prices for interconnection and of availability of network elements will be set by the definition and adoption of a long run cost model. 1 Available at:

2 2.2. The Concession Contracts for the fixed telephony service provided that as from 1 January 2008 the establishment of the interconnection rates would be based on the long run cost model In this sense, Anatel Resolution nº 396/ approved the Regulation of Separation and Allocation of Accounts (RSAC) addressed to operators. This document defines the guidelines for the presentation and structuring of all necessary information for the process of establishing costoriented tariffs and prices In 2006, Anatel started receiving on an annual basis the historical cost data from the incumbents of fixed telephony, elaborated according to the Fully Allocated Costs Historical Costs Accounting (FAC-HCA) model. In 2008, the data resulting from the transformation of this historical cost basis to a current cost basis were received from the Fully Allocated Costs Current Costs Accounting (FAC-CCA) model and, in 2009, Anatel received the data calculated according to the Long Run Incremental Costs (LRIC) model applied by fixed operators The first data delivery regarding mobile telephony for the FAC-HCA model took place on 30 April 2008, and from this date will be carried out annually Operators must also present interconnection costs for fixed telephony incumbents (LRIC), interconnection costs for mobile operators (FAC-HCA) and the costs for leased lines (LRIC). The process of calculating these costs from the operators is commonly known as Top-down Modeling Additionally, Anatel must determine the interconnection tariffs and costs of leased lines, based on efficient operators model, which is known as Bottom-up Modeling In the long run it is expected, that models and information resulting from the Reconciliation process will allow Anatel to maintain and fine tune efficient business models that are increasingly compatible with real network operation specificities, so as to eventually have a bottom-up model based process to obtain tariffs and costs. 2/23 3. DEFINITIONS AND REFERENCES 3.1. Definitions For the purpose of these Terms of Reference the following definitions are being considered: ABC/ABM Activity Based Costing/Activity Based Management: Methodology for identifying costs in a organization and assigning these costs to products, services, consumers or any cost object and that allows the management of these activities. DSAC - Document for Separation and Allocation of Accounts: Document delivered by operators or groups of telecommunication services providers as stated in the Regulation for 2 Available at: ntopublicacao=resolución%20n. %20396&caminhoRel=Cidadao-Biblioteca-Acerv%20Documental

3 Separation and Allocation of Accounts, approved by Anatel Resolution nº 396/2005, which contains the necessary data for the verification of incurred costs of operators. DSAC data are contained in a database developed by Anatel containing financial and network physical information from each operator or group of operators (this system is the SDSAC). EILD 3 - Operation of Industrial Leased Lines - Value (price of leased lines): Amount owed to an operator, by other operator, for the supply of analog, telegraphic or digital signal transmission capacity between two fixed points national and international, by any means within the area of provided services. FAC - Fully Allocated Costs Model: Costing model defined in the Regulation of Separation and Allocation of Accounts, approved by Anatel Resolution nº 396/2005, in which all accountable costs of the operator, including capital costs, are distributed according to causal principles to all the products offered by the operator. Group: Individual Telecommunication services operator or a group of telecommunication services providers with a control relationship, as controllers, controlled or allied, applying the concepts on the Regulation for Control Assessment and Transfer of Control in telecommunication service providers, approved by Anatel Resolution nº 101/1999. LRIC - Long Run Incremental Costs Model: Costing model defined in the Regulation for Separation and Allocation of Accounts, approved by Anatel Resolution nº 396/2005, in which all long-run incremental costs are updated to current values considering an isolated offering of a certain service, including capital cost, are distributed to all products offered, according to causal principles and considering a long term perspective that allows fixed-costs to be considered as variables. OLAP - Online Analytical Processing: Methodology to provide end users with access to large amounts of data in an intuitive and in a variety of perspectives PMS - Significant Market Power: Position that allows an operator or a group of telecommunication services providers to significantly influence the relevant market conditions. SIGANATEL - Anatel s Geographic Information System: Geo-referenced interactive information system implemented by Anatel for research and analysis of data to support Anatel activities. STFC 4 : Serviço Telefônico Fixo Comutado: Telecommunication service that provides communication between two determined fixed points, by transmitting voice or other signals, using telephony processes. TU-RL: Amount owed to the fixed telephony service provider (PSTN, known in Brazil as STFC), in payment for the use of its local network by another operator in the framework of network interconnection. TU-RIU1: Amount owed to the fixed telephony provider (PSTN, known in Brazil as STFC) in payment for the use of its long distance network, with level 1 geographic coverage, in the framework of network interconnection. 3/23 3 Exploração Industrial de Linha Dedicada. See Anatel Resolution nº 402 of 27/04/2005 which approves the Regulation for Operation of Leased Lines REILD 4 See Anatel Resolution nº 426 of 09/12/2005.

4 TU-RIU2: Amount owed to the fixed telephony provider (PSTN, known in Brazil as STFC) in payment for the use of its long distance network, with level 2 geographic coverage, in the framework of network interconnection. VU-M: Amount owed to a mobile telephony provider (service denominated in Brazil as Serviço Móvel Pessoal SMP ) in payment for the use of its network by another operator, within the network interconnection Normative References (all references can be found at: Beyond the Brazilian legal and regulatory framework in respect to the telecommunication sector, the following decrees and resolutions are minimum references for the preparation of the technical offer and for the implementation of the Work: a) Decree nº of 15/05/1998 approves the General Plan of Universalisation Goals to be fulfilled by the Incumbents of fixed telephony by 31 December 2005; b) Decree nº of 10/06/2003 sets public telecommunication policies; c) Decree nº of 27/06/2003 approves the General plan of Universalisation Goals to be fulfilled by the Incumbents of telephony by 31/12/2011; d) Decree nº of 04/04/2008 modifies statements of the General Plan of Universalisation Goals; e) Decree nº of 20/11/2008 approves the General Licensing Plan for Telecommunication Services provided in the public regime. f) Anatel Resolution nº 101 of 04/02/1999 approves the Regulation for Control Assessment and Control Transfers in telecommunication service providers; g) Anatel Resolution nº 317 of 27/09/2002 approves the General Plan on Quality Goals for the SMP PGMQ SMP; h) Anatel Resolution nº 335 of 17/04/2003 approves the Indicators Regulation for Personal Mobile Service SMP; i) Anatel Resolution nº 373 of 03/06/2004 approves the Regulation on Local Areas for Fixed Telephony Service for the use of the general public STFC; j) Anatel Resolution nº 341 of 20/06/2003 approves the General Plan on Quality Goals for the Fixed Telephony Service PGMQ-STFC; k) Anatel Resolution nº 396 of 31/03/2005 approves the Regulation for Separation and Allocation of Accounts RSAC; l) Anatel Resolution nº 402 of 27/04/2005 approves the Regulation for Operation of Leased Lines REILD; m) Anatel Resolution nº 410 of 11/07/2005 approves the Interconnection General Regulation RGI; n) Anatel Resolution nº 417 of 17/10/2005 approves the Quality Indicators Regulation for Fixed Telephone Service RIQ-STFC; o) Anatel Resolution nº 419 of 24/11/2005 approves DSAC s STFC presentation deadline 4/23

5 by Incumbents; p) Anatel Resolution nº 426 of 09/12/2005 approves Fixed Telephony Service Regulation STFC; q) Anatel Resolution nº 437 of 08/06/2006 establishes the Groups with Significant Market Power (PMS) in the offer of EILD; r) Anatel Resolution nº 438 of 10/07/2006 approves the Network Use Remuneration Regulation for Personal Mobile Service Providers (SMP); s) Anatel Resolution nº 458 of 13/02/2007 approves the Network Remuneration Regulation for Fixed Telephony Service Providers; t) Anatel Resolution nº 464 of 27/04/2007 extends the presentation of Appendix B of Annex I and Annexes II and III of the DSAC; u) Anatel Resolution nº 477 of 07/08/2007 approves the Regulation of the Personal Mobile Service SMP; v) Anatel Resolution nº 480 of 14/08/2007 approves the deadline for presentation by the holders of Significant Market Power for offering of network interconnection of mobile services, of the DSAC; w) Anatel Resolution nº 483 of 24/10/2007 extends the deadline for presentation of the first DSAC by the holders of Significant Market Power for offering network interconnection for mobile services; x) Anatel Resolution nº 503 of 25/04/2008 extends the deadline for presentation of Appendix B of Annex I of the DSAC in regards to information of mobile operations; y) Anatel Resolution nº 535 of 21/10/2009 approves the Regulation to estimate the Weighted Average Capital Cost. 5/23 4. PRODUCTS 4.1. The Products to be delivered by the Contractor are grouped in seven implementation phases according to Table 1.

6 6/23 Table 1: Phases of the Work and Operators/Groups of Operators to be analyzed. Implementation Phases Operators/Groups of Operators to be analyzed Estimated execution time* PHASE I PHASE II PHASE III PHASE IV PHASE V PHASE VI PHASE VII Detailed Planning of all Phases of the Work to be executed by the Contractor. Processing of data presented by the Operators. FAC-HCA Cost Models (FAC- HCA Top-down Modeling) FAC-CCA Cost Models (Top-down FAC-CCA Modeling) LRIC Cost Models (Top-down LRIC Modeling) Development of Cost Models for Fixed and Mobile Efficient Companies (Bottom-up Modeling), using information technology applications Methodology for the establishment of interconnection rates and values of EILD Product I.1 Phase I 4 weeks All part of Anatel s database Phase II [Oi (Telemar and Brasil Product II.1 26 weeks Telecom), Telesp, CTBC, Product II.2 24 weeks Sercomtel, Embratel, Tim, Vivo, Claro, Telemig Celular, Product II.3 24 weeks Amazonia Celular]. Product II.4 4 weeks STFC and EILD Markets: All Phase III the STFC Incumbents [Oi (Telemar and Brasil Telecom), Product III.1 8 weeks Telesp, CTBC, Sercomtel, Embratel]. Product III.2 20 weeks Mobile Market: Tim Product III.3 4 weeks STFC and EILD markets: Telemar (Grupo Oi) STFC and EILD markets: Telemar (Grupo Oi) STFC and EILD markets: Telemar (Grupo Oi) Mobile Market: Tim Phase IV Product IV.1 10 weeks Product IV.2 20 weeks Product IV.3 4 weeks Phase V Product V.1 8 weeks Product V.2 20 weeks Product V.3 4 weeks Phase VI Product VI.1 64 weeks Product VI.2 64 weeks Product VI.3 64 weeks Product VI.4 64 weeks Product VI.5 64 weeks Product VI.6 64 weeks Product VI.7 64 weeks Product VI.8 4 weeks Phase VII Product VII.1 Product VII.2 (*) Estimation presented by Anatel for the execution of each product, to be used as reference by Bidders (see Annex 1). Bidders may present different proposals considering that overlapping in the development of Products will only be permitted for Products that are not directly dependent of other Products. 4 weeks 8 weeks

7 4.2. Phases III, IV, V and VI must be carried out for a specific group of operators only (see table above), those considered to be the most representative in the Brazilian Market and the Contractor shall provide case studies to ensure the transfer of specialized technical knowledge (know-how) to the Anatel If a Phase/Product depends on the conclusion of a previous Phase/Product, the Contractor shall not start its development prior to ITU/Anatel s approval of the previous Phase/Product Once the Contractor considers that the Product has been completed, the Contractor shall provide to the ITU and ANATEL, for their approval, a detailed Report duly documented, containing comprehensive description of the activities undertaken, the executed procedures and the results obtained under that Product. The Reports must be supported by graphs, tables, statistics and data, and contain copies of the studies, reports and publications consulted. The Report shall, in addition, include systems, spreadsheets, databases, electronic files, computer programs, technical descriptions and procedures, developed or used for loading, structuring, data analysis and costs modeling in the performance of the Product (see Annex 2 if IT development is present). 7/ PHASE I Planning of the Work to be executed by the Contractor Product I.1 Detailed Planning The Contractor shall provide a detailed Planning containing, at least, information related to the achievement of the objectives of the Contract, considering all Products to be delivered, including timelines (Gantt Chart), execution methodology, human and material resources, identification of critical points, actions required and proposed work procedures. The Planning will be the main source of information on how the Work will be implemented, monitored, controlled tested and finalized. It shall be used for the management and control of the Contract execution, serving as the basis for identifying, preparing, integrating and coordinating all other Products and implementation phases. During the execution of the Work this planning may be adjusted, in tripartite meetings, without affecting scope or time of execution of the contract PHASE II Processing of the data presented by the operators Product II.1 Validation of the DSAC Information and Report on executed work For the Validation of the DSAC Information the Contractor shall perform at least the following: Revision and evaluation of the data presented by operators in the DSAC in regards to its adequacy to the pertinent regulations; Revision and validation of the fullness and consistency of the data presented by the operators in the DSAC; Validation by means of cross-checking information with other reliable sources that allow the verification of consistency; The formulation of proposals as measures to update and complement the DSAC.

8 Product II.2 Consolidation of Information on the DSAC and Report on executed work For the Consolidation of the existing information on the DSAC the Contractor shall perform, at least, the following: Analysis, consolidation and standardization of the structure of lines of products and products offered by the Operators/Groups of Operators allowing an aggregated or a combination of ways to obtain consistent information; Analysis and standardization of the drivers used by operators in the allocation of revenues, costs, assets and liabilities allowing an aggregated or a combination of ways to obtain consistent costing information by service. Product II.3 Integration of DSAC s existing information into ABC/ABM application in the framework of Anatel s information technology environment and Report on executed work For the integration of DSAC s existing information into ABC/ABM application (see Annex 3) in the framework of Anatel s information technology environment the Contractor shall perform, at least, the following: Based on the consolidation of Information on the DSAC, the Contractor will develop the necessary procedures/applications to allow the integration/migration of DSAC data. These procedures/applications shall be integrated in an appropriate manner within the information technology environment used by Anatel. Verification of the consistency of the data contained in the ABC/ABM application in order to check and test if the data has been integrated/migrated in an appropriate manner. Product II.4 Training on Products II.1 to II.3 and Report on executed work The Contractor shall provide training to Anatel staff on Products II.1 to II.3, considering the following requirements: The training shall be delivered by the experts from the Contractor that developed the Products II.1 to II.3 for two groups: (i) 20 (twenty) users (e.g.: economists, accountants, technicians, engineers); and (ii) 5 (five) IT support and maintenance staff. This training shall have a minimum duration of 20 (twenty) hours. All training material to be used during the course including the detailed material of the instructor, as well as the material to be distributed to participants shall be previously approved by Anatel and ITU. The final version of all materials shall be delivered to Anatel at the end of the training in both hard copy and electronic versions. 8/ PHASE III Fully Allocated Historical Cost Models (FAC-HCA Top-down Modeling): Product III.1 Analysis of the FAC-HCA Top-down Models and Report on executed work For the analysis of the historical cost models (FAC-HCA) from each Operator/Groups of Operators, as contained in DSAC, the Contractor shall perform, at least the following: Analysis of the accounting methodology of historical costs (FAC-HCA) used by the operators and the resulting values for the interconnection rates of fixed and mobile

9 telephony and industrial operation of leased lines (TU-RL, TU-RIU1, TU-RIU2, VU-M and Values of EILD); Analysis of routing factors being used by operators, which represent the average use of network elements by service. Product III.2 Development and implementation of the FAC-HCA Top-down Model and Report on executed work The Contractor shall develop and implement a FAC-HCA cost model (FAC-HCA Top-down Modeling for fixed and mobile operators), as well as the necessary interfaces within Anatel s information technology environment for systematic data consultation on the information contained in the DSAC, including, at least, the following: Development and implementation of a FAC-HCA costs model application, using the information contained in the DSAC and in the ABC/ABM application (see Annex 3). This must allow comparisons between results presented by the Operators/Groups of Operators. Calculate the results for the reference cost-based values for network interconnection rates for fixed and mobile telephony and for the industrial operation of leased lines (TU-RL, TU-RIU1, TU-RIU2, VU-M and Value of EILD), for each Operator/Group of Operators, taking into account the information of the previous two years presented in the DSAC, and provide interpretation and analysis of results. The output of results must be in a format compatible with the output of results of cost model calculations of the other phases. Detailed description (manual/guide) of all procedures used to develop this product, in order to permit Anatel to independently repeat the same process for other operators/group of operators and time periods. Detailed documentation of the product implementation, testing and deployment according to the minimal required documentation described in Annex 2, section 4. Carry out the deployment, testing and initialization of the finished product within Anatel s information technology environment. Recommendations to Anatel on necessary improvements of the DSAC, as well as FAC- HCA Cost Models of Operators/Groups of Operators. Product III.3 Training on Products III.1 and III.2 and Report on executed work The Contractor shall provide training to Anatel staff on Products III.1 and III.2, considering the following requirements: The training shall be delivered by the experts from the Contractor that developed Products III.1 and III.2 for two groups: (i) 20 (twenty) users (e.g.: economists, accountants, technicians, engineers); and (ii) 5 (five) IT support and maintenance staff. This training shall have a minimum duration of 80 (eighty) hours. All training material to be used during the course including the detailed material of the instructor, as well as the material to be distributed to the participants shall be previously approved by Anatel and ITU. The final version of all materials shall be delivered to Anatel after the end of the training in hard and electronic version. 9/23

10 In addition to this material the Contractor shall include, whenever applicable, the technical specifications of the information technology application (software) including the source code and formula, user manual for its utilization (step-by-step guidelines and detailed process), user guide on data collection and verification for running this application (software). 10/ PHASE IV Fully Allocated Current Costs Models (FAC-CCA Top-down Modeling): Product IV.1 Analysis of the FAC-CCA Top-down Models and Report on executed work For the analysis of the cost models currently determined (FAC-CCA) for the respective Operator/Group of Operators the Contractor shall perform, at least, the following: Analysis of the methodology used for determination of current costs (FAC-CCA) and of the resulting values for the interconnection rates for operators of fixed telephony (TU-RL, TU-RIU1 and TU-RIU2) and industrial operation of leased lines (Values of EILD) for operators with Significant Market Power on the offer of EILD or incumbent operators (STFC); Analysis of the routing factors being used by operators, which represent the average use of network elements by services. Product IV.2 Development and implementation of the FAC-CCA Top-down Models and Report on executed work The Contractor shall develop and implement a FAC-CCA cost models (FAC-CCA Top-down Modeling for fixed operators), as well as the necessary interfaces within the information technology environment of Anatel for systematic data consultation on the information contained in the DSAC, including, at least, the following: Development and implementation of a fully allocated current costs model application (FAC-CCA Top-down Modeling), using the information contained in the DSAC. This must allow comparisons between the results presented by the Operators/Groups of Operators; Calculate the results for the reference cost-based values for network interconnection rates for fixed telephony and for the industrial operation of leased lines (TU-RL, TU-RIU1, TU-RIU2 and Value of EILD), for each Operator/Group of Operators, taking into account the information of the previous two years presented in the DSAC, and provide interpretation and analysis of results. The output of results must be in a format compatible with the output of results of cost model calculations of the other phases. Detailed description (manual/guide) of all procedures used to develop this product, in order to permit Anatel to repeat the same process in an independent manner for other operators/group of operators and time periods. Provide at least all documentation of the minimal required documentation described in Annex 2, section 4. Carry out the deployment, testing and initialization of the finished product within Anatel s information technology environment.

11 Recommendations to Anatel on necessary improvements of the DSAC, as well as the FAC-CCA Cost Models (FAC-CCA Top-down Modeling) of the Operators/Groups of Operators. Product IV.3 Training on Products IV.1 and IV.2 and Report on executed work The Contractor shall provide training for Anatel staff on Products IV.1 and IV.2, considering the following requirements: The training shall be delivered by the experts from the Contractor that developed the Products IV.1 and IV.2 for two groups: (i) 20 (twenty) users (e.g.: economists, accountants, technicians, engineers); and (ii) 5 (five) IT support and maintenance staff. This training shall have a minimum duration of 80 (eighty) hours. All training material to be used during the course including the detailed material of the instructor, as well as the material to be distributed to the participants shall be previously approved by Anatel and ITU. The final version of all materials shall be delivered to Anatel after the end of the training in hard and electronic version. In addition to this material the Contractor shall include, whenever applicable, the technical specifications of the information technology application (software) including the source code and formula, user s manual for its utilization (step-by-step guidelines and detailed process), user guide on data collection and verification for running this application (software) PHASE V Long Run Incremental Cost Models (LRIC Top-down Modeling): Product V.1 Analysis of the LRIC Top-down Models and Report on executed work The Contractor shall provide the analysis of the long run incremental costs (LRIC) model for the indicated group of operators, performing, at least, the following: Analysis and identification of the necessary modifications in the Cost Volume Relation (CVR) developed by the operators. Analysis of the used long run incremental cost methodology and of the resulting values for interconnection rates for the fixed telephony and industrial operation of leased lines (TU-RL, TU-RIU1, TU-RIU2 and Values of EILD). Product V.2 Development and implementation of the LRIC Top-down Models and Report on executed work The Contractor shall develop and implement LRIC cost model for fixed operator, as well as the necessary interfaces within Anatel s information technology environment for systematic data consultation on the information contained in the DSAC, including, at least, the following: Development and implementation of LRIC cost models, using the information contained in the DSAC. This must allow comparisons between the results presented by Operators/Groups of Operators. Calculate the results for the reference cost-based values for network interconnection rates for fixed telephony and for the industrial operation of leased lines (TU-RL, TU-RIU1, 11/23

12 TU-RIU2 and Value of EILD), for each Operator/Group of Operators, taking into account the information of the previous two years presented in the DSAC, and provide interpretation and analysis of results. The output of results must be in a format compatible with the output of results of cost model calculations of the other phases. Detailed description (manual/guide) of all procedures used to develop this product, in order to permit Anatel to repeat the same process in an independent manner for other operators/group of operators and time periods. Provide at least all documentation of the minimal required documentation described in Annex 2, section 4. Carry out the deployment, testing and initialization of the finished product within Anatel s information technology environment. Recommendations to Anatel on necessary improvements of the DSAC defined by the regulation, as well the LRIC cost models of the Operators/Groups of Operators. Product V.3 Training on Products V.1 and V.2 and Report on executed work The Contractor shall provide training for Anatel staff on Products IV.1 and IV.2, considering the following requirements: The training shall be delivered by the experts from the Contractor that developed the Products V.1 and V.2 for two groups: (i) 20 (twenty) users (e.g.: economists, accountants, technicians, engineers); and (ii) 5 (five) IT support and maintenance staff. This training shall have a minimum duration of 80 (eighty) hours. All training material to be used during the course including the detailed material of the instructor, as well as the material to be distributed to the participants shall be previously approved by Anatel and ITU. The final version of all materials shall be delivered to Anatel after the end of the training in hard and electronic versions. In addition to this material the Contractor shall include, whenever applicable, the technical specifications of the information technology application (software) including the source code and formula, user manual for its utilization (step-by-step guidelines and detailed process), user guide on data collection and verification for running this application (software) PHASE VI Development of separate cost models for fixed and mobile efficient companies (Bottom-up Modeling), including the development of the corresponding information technology applications: The building of Cost Models for Fixed and Mobile Efficient Companies (Bottom-up Modeling) shall, at least, consider the following: The Contractor shall construct at least five efficient network models for Brazil, according to item The cost models for fixed and mobile efficient companies must allow the determination of the cost-based values of services that a company would have when operating with the most efficient commercially available technologies and under optimal conditions. 12/23

13 For the estimation of the efficient costs shall be used the data presented by operators in the DSAC - or any other international available information duly supported - that can be used to estimate the current costs of operation and management of the companies (OPEX), their assets, disaggregated by stage and implementation, as well as those that demand service levels of the company in accordance with existing regulations, such as the coverage or service area, the number of users and the traffic for the different types of communication in the network. Likewise, universal service goals and current coverage in Brazil must be considered The models for fixed and mobile efficient companies shall be built in a modular manner. It must specify and justify all different methodologies required to implement and develop the different modules or the main components necessary for the building of a model of an efficient telecommunications company that offers both networks (fixed and mobile). Each module shall, at least, consider: A) Demand projections of telecommunications services traffic for fixed, mobile and long distance (national and international), considering the availability of connected lines and network users, and the types of internal traffic and those originated and terminated on interconnected networks and that allow a suitable characterization of user behavior and the different services offered. The Contractor shall calculate demand projections for services considering a horizon of no less than five years and build econometric models that can adequately explain the modification of its behavior. B) Network design and Required Investments For the development of this phase the Contractor shall consider the following: The network design of the efficient company must be developed from the estimation of users or subscribers demand and traffic (previous item) in order to determine the level of investment and expenses linked to the infrastructure once the required amounts of each component or element of the network are determined. 13/23 The result must be a network that provides services to the users, at the quality level required by the legislation in force, at the lowest possible costs and within the respective technical and economic restrictions, as for example, those related to spectrum availability or location for installation of core elements and those of available resources for investments. The communications network shall include the necessary infrastructure to provide telecommunications services. The network design of an efficient company shall be developed to determine the level of investment and expenditure related to the access to network infrastructure, transmission, switching, management of operations and maintenance, and required management systems for optimal offering of the services. The Contractor shall consider the requirements in the legislation/regulation in force, such as quality of service and universal service, once the required amounts for each component are determined.

14 14/23 All aspects related to the deployment of a telecommunication network that allows the establishment of an engineering-based methodology for the determination of the costs for each network element involved in the efficient company must be addressed during the analysis. The communication network topology to be adopted shall be based on the "scorched nodes" or "modified scorched nodes" approach and defined in accordance with Products I.1 and VI.2. o o In the scorched nodes approach, the current existing network is taken as a starting point for the costs that may be incurred by an efficient operator wishing to establish a network capable of satisfying current and future demand. The modified scorched nodes approach modifies the previous approach in order to produce a more efficient network topology than the existing one. It implies that the existing topology be adopted as a starting point, followed by an elimination of inefficiencies. For example, it may involve changing the number of types of network elements assigned to network nodes to simplify and reduce the switching hierarchy costs. To determine the building costs of different network topologies, the characteristics of each geographic area and/or network implementation used by Brazilian companies should be analyzed, depending on the type of technology (fixed or mobile). From this analysis, the Contractor shall propose an efficient technology, as well as profiles for network building, depending mainly on service demand density, geography, type of area (urban, semi-urban, rural, number of populated centers, etc.). The profiles described above shall allow the determination of costs to build different topologies using different network elements. A full description of the parameters and the sampling methodology shall be provided and ensure that the samples are highly representative of the situation considered. For the creation of the networks the Contractor shall consider existing agreements and obligations, including those related to universal service. C) Administrative investment Administrative investment shall be mainly associated with the preparation of facilities to accommodate commercial and administrative activities of the efficient company, and all necessary investments for the operation of the services provided and associated with the staff of the company. The net circulating capital required for the operation and functioning of the company shall also be part of these estimates. The analysis shall raise the methodologies required to estimate the level of administrative investment in its different items.

15 15/23 D) Human Resources The Contractor shall provide the organizational design and dimensioning of the optimal structure of human resources, as well as the tasks required for the provision of telecommunications services, including at least, the following: Analysis of the current organizational structure of Operators/Groups of Operators. Organizational efficiency parameters, preserving quality and suitable conditions for the provision of the services. Remuneration levels of employees of the efficient company, considering departments, duties and information, taking into account the local employment market. Estimation of the operational costs associated with the human resources of the efficient company, including commercial shops, customer care services, etc. E) Operational Expenses (OPEX) Module that includes, at least: Estimation of goods and services costs related to the provision of telecommunications services based on the different activities developed by the Operators/Groups of Operators. For the modeling and estimation of each operational cost item, the relevant cost function to each case should be implemented, specifying the parameters and variables that comprise it and indicating component suppliers in the related market to obtain the proposed prices and their respective proposals. The operational expense items should consider at least those costs reported in the DSAC and those costs relevant to the proper functioning of the efficient company. It is important to consider the information in the DSAC for the modeling of each of these costs to validate the associated costs and propose parameters and dimensioning standards to support the cost efficiency. F) Depreciation - Residual Value Module that includes, at least: Estimation of depreciation of assets considering in each investment calculation the economic life of the asset. Determination of the depreciation method to be implemented. Determination of the residual value of the investments made by the efficient company, based on years of economic life, and the accumulated depreciation of the asset.

16 16/23 Consideration of all methods and procedures used by the companies studied, as well as the parameters used to determine the useful economic life of the assets involved in accordance with the legislations of the local market. G) Allocation of costs among provided services Module that includes, at least: Allocation of the different cost estimation of provided services, based on the ratio that every network element and asset in general are used, and in particular, with respect to the allocation for the determination of values for TU-RL, TU-RIU1, TU-RIU2, VU-M and Values of EILD. Consideration of the principles and criteria described in the regulation for the preparation of the DSAC. Development of the related routing table showing the different allocation of provided services The Contractor shall propose the minimum geographic unit to be considered for the modeling of the efficient fixed and mobile companies. The minimum geographic unit defines the granularity of the model being the basis for the stratification of the territory to be modeled. Local Areas (Áreas Locais) or National Areas (Áreas de Numeração) are examples of minimum geographic units defined in the regulation. The number of profiles (urban, rural, road, etc.) to be modeled shall also be proposed by the Contractor. The definition of the geographic minimum unit and the number of profiles to be used in the modeling work shall be jointly defined with Anatel based on the proposition presented by the Contractor during the development of the work. The Contractor shall properly justify its proposition and at least consider the following aspect: Consistency with demographic, political-administrative, economic and social data used to estimate the demand of telecommunication services The Contractor shall build at least five efficient network models for Brazil, being two of fixed-line telephony for Regions I and II and three of mobile telephony for Regions I, II and III, as defined in the General Licensing Plan (PGO), approved by the Decree n.º 6.654, of November/20th/ These networks shall serve as reference for the determination of the costs incurred by an efficient operator, as well as the cost-based values of regulated interconnection prices and EILD (TU-RL, TU-RIU1, TU-RIU2, VU-M and Value of EILD) The building of the efficient company models shall be done observing the amount of incumbents providers of fixed telephony, as well as holders of Significant Market Power (PMS) in the following relevant markets: (1) fixed network interconnection; (2) mobile network interconnection and (3) Operation of Leased Lines (EILD) For the calculation of the results of the Model for fixed and mobile efficient company (Bottom-up), the contractor will take into consideration the Cost of Capital elements as

17 well as the Weighted Average Cost of Capital (WACC) as defined under the Brazilian Regulation. Product VI.1 Sizing of service demand and technologies definition to be adopted in the development of the Efficient Company Model and Report on executed work The Contractor shall provide sizing of service demand and technologies definition to be adopted in the development of the Efficient Company Model containing, at least: Service demand. Definition of the technologies to be used in each efficient company model. Detailed description of the methodology used by the Contractor. Product VI.2 Uploading of the hypothetical efficient company models into Anatel s Geographic Information System and Report on executed work The Contractor shall provide the uploading of information of the hypothetical efficient company models into the Anatel s information technology environment to enable the visualization of the models from a geo-referenced basis. The following minimum georeferenced information shall be provided: Identification and location of the minimum geographic unit described in item Identification and location of coverage or service areas for each network. Identification and location of the demand for telecommunication services. Identification, location and capacity of the networks main elements (Local Switching Centre, BTS, Switchers, controllers, Transmission Networks, among others). Product VI.3 Design and dimension of the efficient company models and Report on executed work The Contractor shall provide the design and dimension of each efficient company model, containing at least: Identification and location of the network elements. Dimension of the efficient hypothetical network capacity (core, access, transport and user network). Dimension of infrastructure for buildings, supporting equipment (power generator, air conditioning, etc.) and systems for technical operations services. Details on the adopted levels for Quality of Service (QoS), customer care and service availability. Calculation of routing factors that represent the average use of network elements by the services for each efficient network and development of the relevant routing tables. Suggestions for future cycles of network building design of the efficient company models. Product VI.4 Determination of the costs of the efficient company models and Report on executed work The Contractor shall detail and provide a determination of the costs parameters that composes each efficient company model, containing at least: 17/23

18 Determination of the investment required for building the efficient network, specifying calculation of the main assets (vendors prices, Top-down of providers, etc.); Dimension of the structures and administrative and marketing costs. Product VI.5 Application development of the Efficient Company Models and Report on executed work The Contractor shall develop the application/software considering at least the following: All the modules developed for the determination of the costs of telecommunication services provided by both networks (fixed and mobile), noting that: o The Contractor shall transfer the knowledge (know-how) as to allow Anatel to replicate in an independent manner, step by step, each estimation, projection and calculation, for operators/group of operators, time periods, and allow the modification of assumptions and parameters used to obtain new results. o The developed application/software shall allow the calculation of the values for EILD, TU-RL, TU-RIU1, TU-RIU2 and VU-M. The output of results must be in a format compatible with the output of results of cost model calculations of the other phases. o Carry out the deployment, testing and initialization of the finished product within Anatel s information technology environment. o Provide at least all documentation of the minimal required documentation described in Annex 2, section 4. Product VI.6 Sensitivity analysis of the efficient company models and Report on executed work The Contractor shall provide sensitivity analysis of the efficient company models considering at least the following variables: Weighted Average Capital Cost (WACC), as adopted by Anatel. Demand Estimation (number of subscribers and traffic). Level of costs of the main network elements. Depreciation Methods and residual value. Product VI.7 Calculation of costs by the created efficient company models and Report on executed work The Contractor shall calculate the respective costs determined for each Operator/Group of Operators as referred in Table 1, containing at least: Calculation of the annual costs including depreciation, capital, operational, administrative and commercial costs. Distribution of the costs according to the methodology described in the regulation (Annex I of the Regulation of Separation and Allocation of Accounts). Services cost calculation according to the current costs (CCA) methodology described in the regulation (Annex II of the Regulation of Separation and Allocation of Accounts). 18/23

19 Services cost calculation according to the long run incremental costs (LRIC) methodology described in the regulation (Annex III of the Regulation of Separation and Allocation of Accounts). Qualitative and quantitative evaluation of the methodology for the building of hypothetical efficient company and of the obtained results. Product VI.8 Training on Products VI.1 to VI.7 and Report on executed work The Contractor shall provide training for Anatel staff on Products VI.1 to VI.7, considering the following requirements: The training shall be delivered by the experts from the Contractor that developed the Products VI.1 to VI.7 for two groups: (i) 20 (twenty) users (e.g. economists, accountants, technicians, engineers); and (ii) 5 (five) IT support and maintenance staff. This training shall have a minimum duration of 80 (eighty) hours; All training material to be used during the course including the detailed material of the instructor, as well as the material to be distributed to the participants shall be previously approved by Anatel and ITU. The final version of all materials shall be delivered to Anatel after the end of the training in hard and electronic version. In addition to this material the Contractor shall include, whenever applicable, the technical specifications of the information technology application (software) including the source code and formula, user manual for its utilization (step-by-step guidelines and detailed process), user guide on data collection and verification for running this application (software) PHASE VII Methodology for the establishment of interconnection rates and values of EILD Product VII.1 Proposal of regulation containing the methodology for the establishment of the maximum interconnection and EILD rates to be submitted to Public Consultation The Contractor shall provide a regulation proposal containing the methodology and criteria for the establishment of a) maximum cost-based values for tariffs, b) telecommunication service providers interconnection and EILD rates obtained from the costs incurred based on the efficient company model and c) costs informed by the telecommunication service providers, containing at least: Proposal for interconnection rates for the fixed telephony (TU-RL, TU-RIU1 and TU- RIU2). Proposal of a reference interconnection rate for the mobile telephony (VU-M). Proposal of a reference value for EILD. The proposed methodology shall include the description of the respective subject and the estimation of deadlines for the contribution of the society in general and the analysis of these contributions by Anatel. The Contractor shall participate, during the Public Consultation period, in all Public Audiences to explain the proposal. 19/23

20 Product VII.2 Analysis of the contributions from the Public Consultation and Report on executed work The Contractor shall provide a detailed Analysis of the contributions from the public consultation on the proposed regulation containing the methodology for establishment of the reference interconnection and EILD rates, containing at least the following: Proposal of comments on contributions received during the Public Consultation about the proposed methodology referred to in Product VII.1, including the reasons for the adoption or non-adoption of each contribution. Comparative analysis emphasizing the incorporation of contributions to be adopted from the Public Consultation. Final proposed regulation containing the methodology for the establishment of maximum interconnection and EILD rates considering the contributions received from the Public Consultation. 20/23 5. METHODOLOGY 5.1. The procedural knowledge (knowledge transfer) for the development of operators cost modeling shall be transferred to Anatel (i) during the development of each Product through periodical meetings; (ii) through the training foreseen in these Terms of Reference and (iii) through the detailed reports to be delivered. This is to ensure that, after the termination of the contract, Anatel is able to carry out all the activities independently The methodology must consider, at least, the following: a. Measures that ensure legitimacy, transparency and minimize the risks of conflict with telecommunication service providers, economic agents and consumers. b. The harmonization of the DSACs presented by the operators/groups of operators as operators defined in the regulation, including any adjustments in the pertinent regulation. c. The Contractor will have to structure and upload the DSAC data from the operators in an integrated information technology solution based on cost management by activity (ABC/ABM), using Online Analytical Processing (OLAP) tool as part of the Business Intelligence to be developed by the Contractor. d. The use of information and features available in all existing systems and databases in Anatel. e. The use of the Weighted Average Cost of Capital (WACC) must follow the methodology and other criteria provided in the Regulation of Weighted Average Cost of Capital, approved by Anatel Resolution n.º 535/2009. f. For the Operators indicated by Anatel to be considered in the development of the work related to the calculation of the cost-based reference values, the Contractor shall take into consideration and analyze all data reported by the Group to which belongs the desired Operator For the purpose of the development of any product the Contractor shall consider the EILD offer in all commercially available ranges.