Report on consultation regarding a revision of the LRAIC pricing method

Transcription

1 Memorandum Report on consultation regarding a revision of the LRAIC pricing method By its letter dated 14 November 2007, the National IT and Telecom Agency asked the IT industry to comment on a revision of the LRAIC method. Underlying the consultation is the National IT and Telecom Agency's obligation to assess every third year, and currently not later than 2008, whether there is a need to modify the existing LRAIC pricing methods, cf. section 5 of the Executive Order on LRAIC. In its consultation document, the National IT and Telecom Agency had pointed out that - in light of the significant technological developments in the market - there are a number of factors that speak in favour of undertaking a more extensive revision of the existing LRAIC model. Before expiry of the consultation deadline on 3 December 2007, the Agency had received responses from the LRAIC Working Group (A+, Cybercity, Fullrate, Global Connect, and Telia), 3 and TDC, while the Consumer Council and barablu mobile both advised that they had no comments in connection with the consultation. In the present report, the consultation responses are discussed under the following headings: 1. GENERAL ASPECTS ACCESS NETWORK Access to backhaul of traffic from remote subscriber stages CORE NETWORK CO-LOCATION AND OTHER SERVICES OPERATING COSTS NEED FOR SPECIFICALLY DEFINED STANDARD SERVICES PROCEDURAL ASPECTS december 2007 Markedskontoret Sagsbehandler Dan Asbjørn Smitt Telefon E-post das@itst.dk

2 1. General aspects In its consultation response, the LRAIC Working Group has expressed its appreciation that the Agency, on its own initiative, is considering a review the model and because, not least, the Agency has chosen to involve the industry at an early stage of the process. Since the first LRAIC model was developed in , major developments have taken place both on the technology side and the market side. In the intervening period - primarily in 2005 and attempts have been made to address a number of these issues via modelling of various offshoots in addition to the existing model. Although each of these offshoots has resulted in substantial improvements, it is clear that the usability of such a strategy has now been stretched to its limit. As regards the transmission network, this means that the fully integrated multiservice network of the future stands in glaring contrast to the present modelling, with its focus on service grouping, and while the LRAIC Working Group estimates that the copper will continue to be the dominating "last mile" mode of access for several years yet, it is to be expected, all the same, that the future will see very substantial changes in the access network (shorter copper sections), which cannot be handled by the model in its present form. Side 2 The LRAIC Working Group therefore agrees that a fundamental revision of the present LRAIC model is called for, based on modern technology and the future structure of the access network. In its consultation response, the mobile company 3 has pointed out that TDC's declining number of fixed-network customers should not be subsidised or covered by competitors by raising TDC's prices, including LRAIC prices for the company's termination of traffic in TDC's network. In addition, the company draws attention to the upward and downward fluctuations seen in LRAIC prices for termination in recent years. In its response, TDC has pointed out that the company does not believe that there is any immediate need for a major update of the hybrid model for modelling forwardlooking services. The introduction of BSA in 2006 covers the most significant aspects in terms of modelling techniques. However, the basic modelling of BSA as implemented in the model might advantageously be refined to take account of aspects such as cost allocation in relation to different quality requirements for services in the packet-switched network. TDC has noted that the PSTN service is experiencing increasing unit costs as a result of the declining volume in the model. Thus the modelling is correct, resulting in correct build-or-buy signals to operators in relation to convergence to VoIP. VoIP may be produced on BSA, which has already been implemented in the model. However, TDC can agree to specifying costs in relation to types of BSA services (best effort, streaming, delay, multicast etc.). But this does not alter the fact that a major group of subscribers will continue to use PSTN - also after Initially, the National IT and Telecom Agency would refer to the fact that the LRAIC pricing method is to reflect the costs of providing interconnection products

3 in an effectively operated company with an optimally structured telecommunications infrastructure, taking account of new and optimal types of technological equipment and infrastructure elements, thus avoiding costs due to inefficiency and outdated technological solutions. In its letter to the industry, the Agency therefore mentioned that - in light of the significant technological developments in the market - there are a number of issues that should be taken up for closer examination together with the industry in connection with the forthcoming revision of the LRAIC model to ensure that the model will still be based on forward-looking technical solutions in the network. In relation to the core network, a technology shift from circuit-switched to packetswitched traffic in the modelled network has been taken up for consideration at regular intervals since LRAIC regulation was initially introduced in Denmark, but without an actual shift being made to a packet-switched network in the LRAIC modelling. However, the necessity of such shift is being supported increasingly by developments in the market. For instance, calculations 1 in 2007 show that the Danes' interest in using the Internet has nearly exploded in recent years. This makes it probable that, in a few years, data traffic will grow to represent per cent of the total traffic on a network that was originally designed to transmit plain and ordinary telephone calls. Side 3 So the National IT and Telecom Agency can agree to the LRAIC Working Group's comment that the fully integrated multi-service network of the future stands in contrast to the present modelling of the transmission network, with its focus on grouping into services. Even if PSTN subscriptions will represent a significant element also after 2010, and certain traffic routes in TDC's network will still be based on circuit-switched solutions, a continued application of circuit-switched technology will not be in accordance with the defined scope of the LRAIC regulation. The underlying trend in the market is towards falling prices for traffic. The use of circuit-switched technology in the model means that LRAIC prices will increase in consequence of the declining volume of traditional telephony traffic. This illustrates the necessity of a technology shift. In view of this, the National IT and Telecom Agency believes that it is essential to undertake a general shift of the modelled network in the LRAIC model to packetswitched traffic. In the Agency's assessment, such updating should be made to take effect for price regulation according to the LRAIC method from 1 January But at the same time the Agency is aware that solutions need to be found as to how circuit-switched products where an obligation of price control according to the LRAIC method has been imposed on TDC (e.g. local interconnection) can be handled in practice. Below is a brief summary of the specific areas in which the consultation responses indicate a need for changes in the coming revision of the model. In this connection, the LRAIC Working Group has emphasised that the Group's initial listing of issues 1 "Broadband has overtaken the Phone", article 13 September 2007 on TDC's website.

4 cannot of course be considered exhaustive, so the LRAIC Working Group reserves the right to make further comments in consultations at a later stage of the process Access network In its consultation response, the LRAIC Working Group has stated that the access network will see massive changes in the years to come. For one thing, TDC will accelerate the already initiated process of establishing a large number of additional remote subscriber stages for the purpose of shortening its copper sections, and, for another, the rollout of fibre access will continue. These changes in the access infrastructure seem to indicate that there is a general case for undertaking a revision of the existing access model, which has not been revised in reality since In particular, a number of the central parameters/samples on which the modelling is based should be examined more closely. Being the only access option currently regulated, copper access should have particular focus in the model revision. However, since fibre is likely to replace copper at some stage as the most common access infrastructure, it might be relevant already now to give closer consideration to the ensuing implications. Side 4 TDC has stated that the cost of sub-loops of raw copper was calculated simultaneously with the modelling of BSA. There is still a very modest demand by operators for this product, which enables operators to get copper access at primary distribution points (PDPs), and TDC finds that a potential offering of 10,400 PDPs will provide sufficient connection capability for quite a long time ahead. In relation to fibre access, TDC states that this is not currently covered by market 11. Should fibre access come within the market decisions in future, it is doubtful whether TDC will be held to possess SMP in view of the very strong deployment undertaken by power companies. Power companies will be the most likely candidates to be identified as regional monopolies, and any LRAIC regulation of these will fit badly into the nationwide hybrid model. Specific LRAIC models will therefore have to be developed for these. TDC also mentions that the company will replace copper on sections between the subscriber stage and the PDP when TDC establishes remote DSLAMs in street cabinets. This means that there will be ongoing fibre laying in the copper network concurrently with TDC's deployment, and this tendency is accommodated by the present hybrid model. The National IT and Telecom Agency is of opinion that the modelling of sub-loops made in the model in 2006 provides an excellent basis for pricing in the next few years. It will be recalled here that access is obtained via the first modelled distribution point in the access network. However, the development towards introducing "next generation" access, involving shorter and shorter copper sections to subscribers and the use of fibre for backhaul, must be expected to generate increased demand for sub-loops, while at the same time the currently defined access point (PDP) will not necessarily continue to be representative of where access is in practice established in future. In this connection

5 it should be emphasised that the access model was developed during the period , and that the establishment of additional remote subscriber stages for the purpose of further shortening of copper sections must be expected. As a result, there will be a need to examine more closely a number of the central parameters/samples on which the modelling is based. In connection with the coming analyses of the markets for unbundled access and broadband connections, the National IT and Telecom Agency will assess whether fibre access is to be included, and it will also be necessary to determine if specific power companies should be included and be appointed as providers with significant market power in a defined geographic market. In case these providers should ultimately be subjected to price control according to the LRAIC method, separate models will have to be developed as indicated by TDC. To the extent that an obligation of fibre access might be imposed on TDC, it will be possible to handle this within the scope of the ongoing model revision, seeing that dark fibre in the access network is currently modelled in the access model Access to backhaul of traffic from remote subscriber stages Side 5 In relation to the establishment of new remote subscriber stages, the LRAIC Working Group has pointed out that in case access to remote subscriber stages is to have any noticeable effect in practice, it is crucial that access to backhaul of traffic from there should also be allowed on regulated terms. If an alternative provider establishes itself on a remote subscriber stage, real alternatives to leasing backhaul transmission capacity from TDC are not likely to exist apart from a few exceptional cases. In case the associated terms are not regulated, this will obviously mean that regulated access to remote positions has no real value in the vast majority of cases. In practice, the overall "package" will thus be negotiated on purely commercial terms, and experience shows that such commercial negotiations are likely to meet with failure in case the alternative provider has ambitions about running a profitable business. In the LRAIC Working Group's opinion, regulated terms for backhaul from remote subscriber stages should be incorporated in the LRAIC model for the following services: - access to "empty" ducts from remote subscriber stages up to the nearest exchange - access to non-equipped fibre from remote subscriber stages up to the nearest exchange or "breakout" point - access to equipped fibre from remote subscriber stages up to the nearest exchange The National IT and Telecom Agency has taken note of the LRAIC Working Group's wish that there should also be access to backhaul of traffic from there on regulated terms, and that regulated terms should be incorporated in the LRAIC model, using for instance the three backhaul traffic options mentioned by the Working Group. In this connection it should also be mentioned that the Agency intends to initiate analyses of the markets for unbundled access and broadband connections in accordance with the EU Commission's new recommendation (markets 4 and 5). If any need is identified, these analyses might result in obligations being imposed to allow access to one or more of the services desired by the LRAIC Working Group.

6 As the market analyses are expected to be completed in 2008, it will be possible to ensure that the activities to revise the LRAIC model are coordinated to a relevant extent with the results of the market analyses Core network In its consultation response, the LRAIC Working Group has called attention to the coming decision in the wholesale market for transport services, where deregulation is now proposed, but also to the fact that a number of services will continue to be regulated which are today modelled in the present core model. Among these may be mentioned: - provision of local interconnection - access to BSA equipment (DSLAM etc.) - access to BSA transmission In relation to BSA transmission, the Working Group finds it particularly important that the core modelling should be revised to ensure an integrated processing of all traffic flows in one IP-based network instead of the present modelling, where PSTN traffic is carried on a TDM/SDH-based network; BSA traffic is carried on an Ethernet; and other data traffic is handled in a non-transparent way. Side 6 In this context, it should be an integral part of the exercise to arrange for LRAIC pricing of special transmission services such as multicasting and multichannel, which are fundamental to provision of IP TV and VoIP on BSA, respectively. In the case of multicasting, it will also be important to ensure that the service is priced in unbundled form, thus allowing the alternative provider to deliver the multicast stream itself. As for the forward-looking provision of local interconnection, it should be analysed in more detail whether the interest in modelling an optimal network implies that all elements in the circuit-switched model should be replaced with packet-switched technology. Such analysis is to ensure that the model will be based on the most cost effective technology. In conclusion, the LRAIC Working Group finds that in case full changeover to a packet-switched model is to be realised, further discussions of these issues are needed. In its consultation response, TDC observes that, as far as PSTN is concerned, the market 10 decision implies that no LRAIC pricing is to be made from local exchanges and onwards into the network (market 10 definition). With regard to data services, there is no LRAIC regulation on the ATM or IP network, but only on the Layer 2 network. TDC sees the Layer 2 network as part of NGN. In consequence, TDC sees no reason why changes should be considered in the core network. In addition, TDC has noted that an explicit modelling of services has an impact on the cost allocation for DSLAM and Layer 2 switches, but the company does not find that such implementation justifies a major model revision or remodelling. For example, there will be no need to involve additional types of network elements,

7 although it might be relevant to update the costs for existing network elements in order to reflect the necessary functionality. However, as far as the core network is concerned, TDC is still of opinion that this should not be modelled. TDC has also observed that the company does not find it necessary, for reasons of resource economy, to remove the existing core network in the hybrid model even if this is no longer used for LRAIC pricing. But a number of inputs in the annual updating can be omitted. Initially, the National IT and Telecom Agency would observe that the Agency, as mentioned above, finds it essential that the LRAIC model should continue to reflect an optimal network using the newest technology. The present circuit-switched technology in the model should therefore be replaced with packet-switched, "next generation network", IP technology. In this connection, it will hardly be appropriate in the LRAIC context to continue using circuit-switched technology, seeing that a newly established optimal provider will not have this technology. In the light of this, the Agency believes that the logical consequence will be to adopt integrated processing of all traffic flows in one all-ip based network. In this connection, products supporting triple play, such as multicast and multichannel, will have to be modelled explicitly. Side 7 This IP-based network will basically have to include the entire Ethernet, and hence also the core network between Layer 3 routers up to the ISP. As a consequence, it must be considered whether also this part of the Ethernet is to be subject to price control according to the LRAIC method. As for the modelling of services that have so far been based on circuit-switched technology (e.g. local interconnection), and where an obligation of price control according to the LRAIC method has been imposed on TDC, the relevant modelling will have to be considered more closely, see above Co-location and other services In relation to the establishment of new remote subscriber stages, the LRAIC Working Group has called attention to issues bearing on access to subscriber stages on LRAIC regulated terms, including the situation arising when TDC chooses to move forward a subscriber stage, in which case the competitors will very often in practice be "forced" to move along as well if they wish to be able to continue delivering quality services to the customers. The principles currently used by TDC in preparing its price offers - that are backed up by no other specific documentation - are discriminatory towards alternative providers, seeing that the provider is basically required to cover the overall costs associated with the establishment equally with TDC. This is despite the fact that the alternative provider might only need 1/10 of the number of connections used by TDC, and that TDC retains full ownership of the network extension. Moreover, it is quite conceivable that other providers will also request access to the same subscriber stage at a later date. The LRAIC Working Group finds it important to ensure transparent and nondiscriminatory terms for access to remote subscriber stages covering all constituent

8 services. The LRAIC Working Group would prefer LRAIC-based price regulation to be used in this connection. The LRAIC Working Group has also mentioned that there is a need, in relation to co-location services, for more precise definitions and for extending the list of LRAIC regulated services (e.g. other fuse ratings for power outlets). In relation to other services, it is also the LRAIC Working Group's experience that TDC, since the last model revision in 2005, has again invented a number of new fees that water down already existing services and/or have obviously been priced without taking account of the underlying costs. The fees for fault repair and certification in connection with non-guided access are merely two examples, which are recommended to be included in the LRAIC model on a forward-looking basis. However, there are other examples, and before modelling starts up in 2008, a number of other fees will most likely have been added. Furthermore, the LRAIC Working Group has pointed to the need of giving the parties the opportunity, during the revision process, to make specific proposals for new services that should be included in the LRAIC model. Side 8 In relation to remote subscriber stages, the National IT and Telecom Agency has noted the LRAIC Working Group's comments about ensuring transparent and nondiscriminatory terms for access to remote subscriber stages covering all constituent services, and using LRAIC-based price regulation in this respect. The comments will be incorporated in the forthcoming LRAIC revision. However, for the sake of clarity the National IT and Telecom Agency would call the Group's attention to a memorandum issued by the Agency on 26 June 2007 about the duty to offer co-location in street cabinets, transmission equipment cabins etc., which includes the following: "This means that several street cabinets which must be regarded as serving the same connection point should be dealt with as one single co-location facility. This implies that the total costs of establishing and operating one co-location facility are made up of the total costs of establishing all street cabinets. According to the content of the obligation imposed in respect of price control, these total costs will subsequently have to be included in the calculation of the interconnection price, which should then, in accordance with the obligation of non-discrimination, be allocated proportionally between all the providers that use the co-location facility. As a result, all providers under the co-location facility will pay the same prices, depending on the amount of space requested, which may be accomplished in practice either by calculating individual prices per co-location facility or by setting a price calculated on the basis of all co-location facilities in the country." In addition, the National IT and Telecom Agency has taken note of the LRAIC Working Group's comments that there may be a need for more precise definitions in respect of co-location services, and that there should be an extension to the list of LRAIC regulated services, for which the parties may also contribute proposals during the actual revision of the model.

9 In the light of this, and as an element in the LRAIC revision, the National IT and Telecom Agency will start efforts to prepare an updated list describing the individual LRAIC-regulated services Operating costs In its consultation response, the LRAIC Working Group has pointed out that modelling of operating costs, currently undertaken in the consolidation sheet, is of course very decisive for the final pricing of services in the LRAIC model. At the same time, this is an area of the model that must rather be seen as a black box to parties other than TDC. The LRAIC Working Group hopes and expects that the new setup of business segmented accounts etc. will enable a process more transparent than has been the case so far. Furthermore, the LRAIC Working Group points out that special attention is called for in relation to calculating operating costs for the raw copper and calculating interconnection-specific costs. Side 9 In relation to operating costs for the raw copper, more attention should thus be given to the fact that a large number of costs are covered separately via invoicing of wholesale customers, end-users or third parties (insurance claims etc.). What remains will therefore typically be current fault repairs. However, since TDC has also introduced a separate payment for this, both from wholesale customers and end-users, these costs should also be relatively limited. In relation to interconnection-specific costs, the National IT and Telecom Agency indicated already in 2006 that the way in which these are calculated is not satisfactory. The more reason is there to be surprised that the Agency does not seem to find it problematic that an examination of this aspect is postponed so that possible changes cannot take effect until 2010 at the earliest. In relation to the service "local interconnection", for instance, the interconnection-specific costs for billing, contract negotiations and "other" represent about 40 per cent of the total costs. This makes it clearly the largest individual cost item. This does not give true and fair view at all, and at the same time it can even be seen that TDC, for instance when pricing resold subscriptions, has begun writing out new bills on a million scale, claimed to include coverage of special costs for billing of interconnection. In the National IT and Telecom Agency's opinion, it is a significant part of the work on revising the LRAIC model that it should be thoroughly considered if the operating costs of the model - including interconnection-specific costs - reflect a new efficient provider in the market. It is still the Agency's view that a closer analysis of TDC's operating costs for 2007 will provide a significant contribution to assessing the correct cost level in the model. But in addition it will be possible to involve other sources, e.g. other similar LRAIC models or operating costs of other companies with IP networks in Denmark. The LRAIC Working Group will be able to contribute information about the latter.

10 The National IT and Telecom Agency has taken note of the LRAIC Working Group's wish to ensure a more transparent process in connection with the use of TDC's operating costs. However, the Agency would emphasise that this will be subject to the rules of the Open Administration Act on exemption from the right of access to documents. In this context, the Agency can agree that interconnection-specific costs, in particular, need to be examined in more detail so as to ensure that these costs are not covered several times and are allocated correctly Need for specifically defined standard services In its consultation response, the LRAIC Working Group has pointed to the area of co-location and other services where, in the Group's view, there is an ongoing degrading of some of the LRAIC regulated services. One example is when TDC chooses to introduce a special fee for a service element previously included in the main service (e.g. fault repair). Another example is when the copper quality is being degraded as a result of TDC's rollout of new transmission equipment cabins, and failure to maintain the connections in which TDC no longer has an interest itself. Side 10 In both cases, the reason for the problem is that the price for a service is calculated in the LRAIC model without the other terms for provision of the product being included in sufficient detail at the same time. These opportunities for increased earnings at the expense of competitors may of course be very difficult to resist in practice for TDC, and it has also turned out that the National IT and Telecom Agency has not been able subsequently to put a stop to it in practice. In the LRAIC Working Group's assessment, the only durable solution is to make an effort, on a forward-looking basis, to specify detailed standard delivery and service terms for all services covered by LRAIC pricing. This does not of course exclude the possibility that these standard terms can be varied over time and that TDC might offer alternative terms from time to time. However, in case TDC might wish to downgrade the terms, this will require the change to be implemented transparently in connection with updating of the model, or a sufficient compensation to be provided, so it will be in both parties' interest to conclude a new agreement to take account of this. If required, the LRAIC Working Group is prepared to provide extensive assistance to the National IT and Telecom Agency in formulating such standard terms. The National IT and Telecom Agency has taken note of the LRAIC Working Group's wish to see more closely defined standard services. The Agency will also arrange for this to be included in the work to provide an updated list of LRAIC regulated services, as described under "Co-location and other services" above. But at the same time the Agency believes that specification of basic delivery and service terms (Service Level Agreements, SLAs) should be made in connection with

11 the conclusion of specific interconnection agreements or in connection with the Agency's supervision of TDC's relevant reference offers. The National IT and Telecom Agency looks forward to input from the relevant parties. 2. Procedural aspects In its consultation response, the LRAIC Working Group notes that the National IT and Telecom Agency's letter refers to the fact that the legislative basis for updating the LRAIC method provides scope for choosing procedural methods other than those applied in connection with the initial preparation in In this connection, specific mention is made of the possibility of requiring TDC to prepare a top-down model. In this context, the Working Group calls for a more precise definition of what the Agency understands by proposals for "procedural methods". In particular, it is not clear whether the National IT and Telecom Agency is proposing significant changes in the use of the method, or if the changes are only concerned with fine tuning. Side 11 The LRAIC Working Group finds that there is a need to implement a separate consultation procedure for clarification of these more general aspects. As for preparing a top-down model, the LRAIC Working Group basically believes that this can contribute to ensuring further transparency in the process. However, this will require that the top-down model in itself should be structured in a transparent fashion, and that in other respects the model should live up to a number of criteria determined in advance subject to involvement of the industry. The LRAIC Working Group is clearly interested in being involved in the revision process to the greatest possible extent. And the LRAIC Working Group is also sympathetic to the idea that the Group might itself be in charge of preparing a new/revised bottom-up model. To enable this to be realised in practice, it will be necessary, however, that the National IT and Telecom Agency can ensure the LRAIC Working Group timely access to a wide range of detailed network information from TDC. So also in this respect the LRAIC Working Group finds that clarification is needed on a number of key issues before it can be determined how to arrange the process in the most expedient manner. In its consultation response, TDC has stated, in relation to the required top-down model, that this requirement is an unnecessary burden on the regulated operator. Instead, TDC finds that the operator, as in the mobile LRAIC process, should be offered the possibility of submitting a top-down model. The submission would thus be on a voluntary basis. No matter how the coming process will be structured, TDC is positive about the possibility of contributing input - which may be in the form of a top-down-model. TDC finds that such cost data can advantageously be based on the ongoing activities in the FO area.

12 TDC has also stated that a coming updating should be based on the existing hybrid model, seeing that this is substantially future-proof. Thus there is no need to develop a new bottom-up model etc. TDC recommends a process corresponding to the updating in 2005 and the updating in 2006 with BSA. However, considering that service quality requirements will be in focus during the updating, the process should be so arranged that service quality and quality driven costs need to be documented to a significantly higher degree than has been the case in previous processes. The Explanatory Notes to section 51f(11) of the Telecommunications Act, under which the Minister is authorised to lay down specific rules for the fixing and calculation of prices by the National IT and Telecom Agency according to the LRAIC pricing method, state that: "The procedural rules that the Minister may lay down under the Bill according to subsection (11) will have to be adjusted to the market situation for the relevant submarket in which the LRAIC pricing method may be used if adopted. The authority under subsection (11) is intended to be used for setting specific rules on how the LRAIC pricing method is to be developed and used, including the obligations and rights of industry players in respect of their involvement in, and contributions to, development of the method, rules on consultation, transparency, and subsequent updating and modification of an LRAIC model. Side 12 Among other things, such authority might be used for authorising the National IT and Telecom Agency to determine timescales for developing the LRAIC pricing method and set binding time limits for any industry players to develop cost analyses and make other contributions, and to set specific time limits for submission of factual information by providers obliged to provide interconnection. Furthermore, an Executive Order will be issued, specifying the procedure to be used for developing the calculation model. ( ) Pursuant to the proposed provision in subsection (11) the Minister will be able to lay down specific procedural rules for the National IT and Telecom Agency's updating of the existing LRAIC pricing method. Also here, unlike the process adopted for developing the existing LRAIC model, it might prove appropriate to choose other procedural methods. For instance, it will be possible to use a process under which the companies subjected to an obligation of price control for the interconnection products in question are required to prepare a top-down analysis which will then be used by the National IT and Telecom Agency, following extensive consultation processes within the industry, for checking and modifying the existing LRAIC hybrid model." The specific rules are laid down in Executive Order No of 31 October 2006 on the LRAIC Pricing Method. It appears from section 8(1) of the Executive Order that: "8.-(1) For the purpose of the National IT and Telecom Agency's modifications of the LRAIC pricing method in relation to the interconnection products mentioned in

13 section 3(1), nos. 1-7, or subelements thereof, the Agency may request providers of public electronic communications networks or services on whom an obligation of price control according to the LRAIC pricing method may be imposed under section 51(3), no. 5, cf. section 51f(5), no. 4, of the Act on Competitive Conditions and Consumer Interests in the Telecommunications Market, to carry out a cost analysis starting from the provider's existing costs, but with certain forward-looking adjustments where outdated solutions are replaced with optimal technology (topdown analysis)." The National IT and Telecom Agency has taken note of the comments by TDC and the LRAIC Working Group. In the light of this, the Agency is of opinion that it may prove time-consuming and, like the initial development of the LRAIC model, pose a number of practical challenges to make the necessary data available for the LRAIC Working Group's possible development of a bottom-up model. At the same time, it is the Agency's assessment that there is also a need to prepare an LRAIC top-down model - partly to ensure consistency in the operating costs that might have to be used in the model (both in terms of technology and true and fair cost allocation), and partly to ensure that no significant cost items have been left out in the revised LRAIC hybrid model. Side 13 In relation to TDC's comment that this requirement will be an unnecessary burden on the regulated operator, it should be mentioned that TDC, by virtue of the fact that the company is also subject to an obligation of accounting separation and an obligation of price control according to the LRAIC pricing method, is required under section 6(2) of Executive Order No. 374 of 27 April 2006 on Accounting Rules for Certain Providers of Public Electronic Communications Networks or Services, to prepare product accounts according to the LRAIC pricing method. This will be done for the first time for the accounting year Thus TDC is already required to prepare cost calculations based on the LRAIC method, for which reason the requirement for a systematic top-down model as such will hardly be an onerous one. In view of this, the National IT and Telecom Agency believes that revision of the LRAIC fixed-network model can basically be accomplished in the most expedient way as outlined in the Explanatory Notes to the Telecommunications Act, which means that TDC, pursuant to section 8(1) of the Executive Order on LRAIC, will carry out a top-down analysis, which will then be used by the National IT and Telecom Agency, following extensive consultation processes within the industry, for checking and modifying the LRAIC hybrid model. To ensure that the process is arranged in the most expedient way, it will be necessary for the Agency, in parallel with TDC's work on its top-down model, to undertake an independent updating of the LRAIC hybrid model. In the National IT and Telecom Agency's assessment, the procedural method outlined above can be accommodated within the framework of the existing Executive Order on LRAIC.