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Estimating the cost of a Wholesale
Access Service on Bezeq’s network MODEL DOCUMENTATION
August 2014
Redacted version - […] denotes a redaction
August 2014 i
Contents
Estimating the cost of a Wholesale Access
Service on Bezeq’s network
1 Introduction and summary 3
2 Forecasting service demand 7
2.1 Service demand covered in the model ....................................... 7
3 Core network dimensioning and costing 15
3.1 Capacity requirement ............................................................... 15
3.2 Network structure ..................................................................... 16
3.3 Network dimensioning .............................................................. 18
3.4 Core network costing ............................................................... 23
4 Access network dimensioning and costing 31
4.1 Access network dimensioning .................................................. 31
4.2 Access network costing............................................................ 33
5 Service costing and model results 39
5.1 Cost allocation ......................................................................... 39
5.2 Wholesale service costing ........................................................ 40
Annex: benchmark model references 44
ii August 2014
Tables & Figures
Estimating the cost of a Wholesale Access
Service on Bezeq’s network
Figure 1. Households in Israel ............................................................. 8
Figure 2. Broadband and voice penetration ......................................... 8
Figure 3. Market shares of fixed voice and broadband services .......... 9
Figure 4. Total annual voice traffic (bn minutes) ................................ 10
Figure 5. Core network capacity per broadband subscribers (Mbps) . 11
Figure 6. Core network capacity of other data traffic (Gbps).............. 12
Table 1. Summary of estimated costs (2014) 6
Table 2. Equipment links 17
Table 3. Data and assumptions* considered for core infrastructure
dimensioning 20
Table 4. Network length between different layer of the network 22
Table 5. Allocation of duct and trench to network segments 22
Table 6. Share of trench segment attributable to core 23
Table 7. Fiber cable length and allocation 23
Table 8. Network equipment unit and installation cost (NIS, 2014) 25
Table 9. Price trends for network elements and infrastructure (real) 27
Table 10. Operating costs mark-ups and resource requirements 28
Table 11: Volumes and lengths and per unit costs in the access
network (2014) 35
Table 12. Bitstream costs by core Network Element per Mbps (NIS,
2014, excluding service specific costs) 41
Table 13. Bitstream access costs per Subscriber (NIS, 2014, excluding
service specific costs) 41
Table 14. Summary of estimated costs (2014) 43
August 2014 3
Introduction and summary
1 Introduction and summary
We have been retained by the Ministry of Communications (MOC) to develop a
model for calculating the cost of wholesale broadband, fixed voice termination
and infrastructure of an operator given the network technology and services on
Bezeq’s network. We refer to this as the fixed network, i.e. contrary to a cable
network of the technology and services on HOT’s network. These costs form
part of the information considered by the MOC in its current process for
determining regulated prices for wholesale services, following the
recommendations of the Gronau and Hayek Committees.
On 14/01/2014, the MOC published a consultation on proposed tariffs for
wholesale services on Bezeq’s network1 (wholesale services consultation),
supported by a model developed by Frontier Economics in consultation with
MOC. During this consultation, comments were received both from
infrastructure owners (Bezeq and HOT Telecom), as well as service providers.
These comments were accompanied by expert reports on behalf of the various
stakeholders, and included critiques of the proposed methodology, various
parameters of the model, and the resulting tariffs. We should point out that while
the stakeholders provided significant information on international benchmarks,
methodological practices, etc., relatively little new data about networks in Israel
was provided during the consultation, either by infrastructure owners, or other
stakeholders. New information and data which was forthcoming was carefully
considered, and when appropriate, changes to the model have been made.
This report focuses explicitly on the costs of the following services in the fixed
network:
bitstream access and line rental;
bitstream transport; and
multicast transport cost, which has been added in the current version of
the model.
In addition, the model estimates costs of fiber and duct infrastructure as a basis
for pricing passive infrastructure access services.
The model documented in this report also reflects the determination of fixed
termination rates and the first consultation on Bitstream and infrastructure
service costs.
1 http://www.moc.gov.il/sip_storage/FILES/4/3454.pdf
4 August 2014
Introduction and summary
Basis of the model development
On October 28th, 2013, the Ministry of Communications published its decision
on the tariff for call termination on fixed networks. This decision was based, inter
alia, on a detailed cost model, as specified in the document ‘Estimating the Cost
of Bezeq’s Call Termination Services – Model Documentation’, dated December
2012 (FTR documentation). This document described the methodology used to
forecast voice traffic in detail and also described the methodology used to
forecast other traffic using the core network in order to determine allocations of
costs for voice services as opposed to other services. In addition, the document
described the methodology used to determine the capacity requirement, the
network structure and dimensioning of network equipment. Further, the
document outlined the methodology used to allocate costs between different
services and to determine the wholesale cost of voice services. An annex to the
document outlined the methodology used to determine the cost of capital used in
the model.
Where relevant, this report refers to the documentation provided as part of that
FTR consultation, referencing the relevant chapters in the FTR documentation.
In addition, this report refers to the response made in relation to the comments
received on the FTR consultation as outlined in ‘Estimating the Cost of fixed call
termination on Bezeq’s network – A Report on the Consultation’, dated
November 2013 (FTR consultation response).
The model is based on a bottom-up LRAIC (long run average incremental cost –
also known as TSLRIC) methodology. A LRAIC approach was chosen to
adequately cover the incremental costs incurred for providing individual services
over the network but to also ensure the recovery of fixed and common costs an
efficient operator incurs. This approach has been widely used in regulatory
proceedings for calculating the cost of regulated wholesale services, such as local
loop unbundling (LLU). A number of countries have or are in the process of
using an alternative measure, known as a pure-LRIC2 approach for setting the
termination rate for fixed (and mobile) voice services, but not for other services.
A LRAIC approach differs from pure-LRIC in that it enables the fixed
incumbent operator to recover from regulated wholesale services some of the
common fixed costs incurred.
The model is forward looking in that it considers NGN/NGA technology for all
services for which costs are estimated and provides cost estimates for the period
2012 to 2018. The approach also takes into account some legacy equipment and
2 A pure LRIC approach measures the marginal costs of a service. i.e. the additional cost an operator
incurs from providing a service compared to the total cost it incurs when not providing that service.
August 2014 5
Introduction and summary
infrastructure as well as the general structure of the network that Bezeq has
currently in place. This is detailed in chapter 5.
Modeling changes since the Ministry’s consultations on Bitstream
services
Changes to the model since the consultation on Bitstream services fall into the
following categories:
Changes to prices, asset lifetimes and price trends;
Updates to subscriber and traffic inputs and corresponding projections;
Changes to the approach for estimating the length of the access and
core infrastructure; and
Changes to the dimensioning and costing of core network equipment.
The parameters in the current version of the model have been modified since the
consultation regarding wholesale services. The modifications were made to
ensure that the current version of the model is based, as far as possible, on Israel
specific information and appropriately takes into account the comments that
were received in response to the publication of the Excel model and initial
documentation.
The following sections of this report describe in more detail the principles
applied and assumptions made in the current version of the model, highlighting
key changes compared to the previous version of the model.
Service costs estimates
This document discusses the functionality of those parts of the model which are
relevant for estimating the cost of wholesale bitstream and passive infrastructure
access and shows the costs calculated in the model. The costs of the services
depend on a number of assumptions that were determined after consultation
with MOC. These relate to capital and operating cost data used in the model and
also to service demand forecasts. The model further takes into account
comments received in response to the Bitstream consultation and the public
hearing. In addition, the model references information received after the FTR
decision, specifically responses to MOC’s requests for equipment cost
information.
In summary, based on the calculations described in this document, the model
calculates the following cost estimates:
6 August 2014
Introduction and summary
Table 1. Summary of estimated costs (2014)
Unit Cost
Bitstream access including
loop and voice3
NIS/subscriber/month 39.93
Bitstream transport NIS/Mbps/month 32.04
Multicast transport4 NIS/Mbps/month 18,548
Duct costs5 NIS/km/month 396
Duct and fiber costs6 NIS/km/month 448
Incremental fiber costs7 NIS/km/month 3.41
The remainder of this document provides a summary of the approach used to
estimate the cost of these services and is structured as follows:
Section 2 describes how the demand forecast has changed since the
consultation on wholesale services;
Section 3 describes how the model determines the cost of core network
infrastructure and equipment with a particular focus on the costs of
wholesale broadband services;
Section 4 describes how the model determines the cost of the access
network infrastructure and equipment; and
Section 5 presents the results of the model.
3 Further variants, including standalone broadband and shared access are provided in section 5.2.
4 Providing access to 1,000 MSANs.
5 A usage ratio of 3.5 operators (including Bezeq) is applied to the average cost of the duct and trench
network measured on a per trench km basis. The usage ratio is based on a policy decision by MOC
and is discussed in the accompanying MOC document.
6 A usage ratio of 3.5 operators (including Bezeq) is applied to the sum of the average cost of duct
and trench and the average cost of fibre measured on a per trench km basis. As for trench and duct
costs, the usage ratio is based on a policy decision by MOC and is discussed in the accompanying
MOC document.
7 This represents the incremental cost of additional fiber cables without further allocation of the costs
of duct and trench, after an access seeker obtains access to duct and fiber as outlined in the previous
row.
August 2014 7
Forecasting service demand
2 Forecasting service demand
Service demand is forecast according to the following three steps:
forecasting population, households and service penetration;
forecasting the fixed network market share; and
forecasting voice traffic and data capacity per subscriber.
This section provides a brief overview of the demand covered in the model and a
summary of the changes applied, as a result of comments received in response to
the consultation on wholesale services. Demand forecasts were discussed in
detail in the FTR procedure. The detailed description on which this section is
based is provided in section 4 of the FTR documentation. Further details of the
adjustments made after the FTR consultation are provided in the FTR
consultation response.
2.1 Service demand covered in the model
Voice, broadband, leased line and business data services are covered for the
purpose of fully reflecting the capacity on the core network. This is necessary
because communication networks typically have positive returns to scale and
scope and not covering all services increases the risk of overestimating the costs
of services.
In addition, the traffic and routing of Multicast services is also included in the
model.
For each service, the model estimates the amount of capacity or volume of traffic
generated per subscriber. For this, the model first estimates the total number of
subscribers in the market and then the market shares of the fixed network
operator.
The following section outlines the forecast of voice and broadband subscribers
while the subsequent sections set out the forecasts of the capacity and traffic for
individual services.
Voice and broadband subscribers
The forecast of voice and broadband subscribers is based on the long term trend
of these subscribers in relation to the number of households in Israel. For that
the model estimates the growth of the population and applies an estimate of the
size of households to forecast the total number of households. Figure 1 outlines
the historic development and forecast of the number of households in Israel.
8 August 2014
Forecasting service demand
Figure 1. Households in Israel
Source: Projection based on CBS data
The forecast is based on a linear projection of the households and population.
The population is based on CBS data up to 2013. The number of households is
based on CBS data up to 2012 (the last year for which household data is
available) and the forecast is based on the average size of households in 2007 to
2012 (at 3.55 persons per household). This is applied to the 2013 population and
the 2014 – 2018 population projection to derive the household forecast.
The number of subscribers of voice and broadband services is then measured as
the level of penetration relative to the number of households. The forecast is
based on applying a linear trend to the historic development of voice and
broadband subscriptions.
Figure 2. Broadband and voice penetration
Source: Projections based on TeleGeography and CBS data
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Households - Historic and forecast
0%
20%
40%
60%
80%
100%
120%
140%
160%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Broadband penetration - Historic and forecast
Voice line penetration - Historic and forecast
August 2014 9
Forecasting service demand
The final step in the determination of fixed operator volumes is the projection of
market shares. Our estimates are based on the development of the market shares
for voice and broadband services of Bezeq and HOT. Figure 3 shows the
historic market shares and projections used for modelling the fixed network.
The forecast does not take into account the potential roll-out of a third network
operator in Israel. This is because the timing and extent of a roll-out are still too
uncertain to reliably determine a corresponding market share. However, we
suggest that the MOC revisit the model in two years in light of significant
changes in market shares.
Figure 3. Market shares of fixed voice and broadband services
Source: Projections based on TeleGeography data
Market shares for fixed broadband services have been stable since 2007 at around
60%. This is also reflected in the projection to 2018 which is based on the
average market share between 2007 and 2013. Market shares of fixed voice
services have decreased. This has been projected using the average rate of
decline over the period 2007 to 2013.
Voice services
The voice services covered in the model include all types of calls, disaggregated
into the following categories:
On-net fixed calls;
Calls to and from other fixed and mobile numbers;
International calls (incoming and outgoing); and
Other calls.
0%
20%
40%
60%
80%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fixed line market share voice - historic and forecast (% of total)
Fixed line market share broadband - historic and forecast (% of total)
10 August 2014
Forecasting service demand
Historically, demand for calls on Bezeq’s network has developed differently for
each type of call. This is both because competition for these services has
developed differently (especially for international calls) and because mobile
services have grown in importance.
Changes in traffic volumes can occur for two reasons. Firstly, total traffic
changes because the number of customers changes. And secondly, changes in
traffic occur due to changes in customer behavior. To effectively isolate these
two effects, we forecast the traffic for different types of calls on a per subscriber
basis. The total voice traffic in any given year is then given by the forecast traffic
per subscriber multiplied with the forecasted number of voice subscribers.
The detailed description of the forecast for voice traffic is covered in Section 4.2
of the FTR documentation.
As part of its comments to the FTR consultation, Bezeq pointed out that there
had been significant decreases in customer voice traffic which were greater than
had been shown in that documentation. These decreases were incorporated into
the model during the FTR decision as a one-off drop in traffic volumes.
Forecasts are still based on a long term trend of decreasing voice traffic, as
described in Section 4.2 of the FTR documentation. Figure 4 shows the total
voice traffic for the modeled period.
Figure 4. Total annual voice traffic (in minutes)
Source: Projections based on Bezeq traffic
Broadband services
Broadband services in Israel primarily consist of DSL based services from Bezeq
and Cable based services from HOT. The network dimensioning of the fixed
network therefore depends on the number and capacity of DSL services it
provides. These services are offered with different upload and download speeds
0.0
5.0
10.0
15.0
20.0
25.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Bill
ion
s
August 2014 11
Forecasting service demand
and the speed of a service will typically impact the capacity required for that
service on the core network.
The forecast of broadband traffic in the wholesale service consultation was based
on data from Bezeq setting out the nominal and effective capacity of broadband
subscribers for two years. This has been replaced with effective interconnection
capacity provided by ISP’s in Israel. Due to the structure of the market with
network operators and ISP’s as different entities, this data provides a longer,
more consistent trend of the effective capacity required on the network.
Additionally, it captures the actual usage of network capacity, rather than
extrapolating based on nominal broadband speeds. Despite higher growth rates
observed in the past, the most recent observation of 31% growth in capacity
between 2012 and 2013 was used as a basis for forecasting capacity. This was
considered reasonable since it is consistent with an international benchmark of
broadband capacity growth of approximately 30% per annum, as submitted by a
stakeholder during the consultation of the bitstream model. The corresponding
forecast is shown in Figure 5 below.
Figure 5. Core network capacity per broadband subscribers (Mbps)
Source: Projections based on level and growth of ISP interconnect capacity and international benchmark of
broadband capacity growth
Other data services
Other data services are taken into account for estimating the share of network
capacity and costs attributable to these services. The forecast of these services is
based on Bezeq’s information regarding the number of these services and
assumptions regarding their average capacity on the network. Details of this are
provided in Section 4.4 of the documentation in relation to the FTR
consultation.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
2012 2013 2014 2015 2016 2017 2018
12 August 2014
Forecasting service demand
Based on additional information received from stakeholders after the FTR
consultation, this has been updated in the model to correspond to a capacity of
approximately 40Gbps in 2013 for 1 and 2 ended leased lines. In addition, Bezeq
has a large number of leased lines which only use the transmission network and
otherwise operate using legacy equipment. The capacity of these has been
estimated at approximately 36Gbps in 2012 and is estimated to increase to almost
58Gbps by 2018.
In contrast with the version of the model in the wholesale service consultation,
this capacity has now been added to traffic running on the NGN. This is more
appropriate and consistent with modelling an efficient forward looking operator
that would not have any legacy transmission equipment but would offer similar
services on the modern equivalent network. The corresponding capacity for
these other services and covering the modeled period is outlined in Figure 6
below.
Figure 6. Core network capacity of other data traffic (Gbps)
Source: Projections based on Bezeq capacity of other NGN and non-NGN data services
Multicast traffic
A multicast service has been added to the model since the consultation on
wholesale services. This is in accordance with a policy decision by the MOC
which is detailed in the accompanying MOC document. The model therefore
also estimates the cost of wholesale multicast traffic on the assumption that this
consists of 4 standard definition TV channels each of which has a capacity of
2.6Mbps. These channels are initially assumed to cover 1,000 of the 7,750
modelled MSANs. This is based on an expectation that the implementation of
such a service would be phased in to test the demand for channels on the
network and the potential extent to which customers value such a service. The
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2012 2013 2014 2015 2016 2017 2018
August 2014 13
Forecasting service demand
model assumptions and corresponding costs of the service may be revised in
response to any significant uptake or desire for further roll-out of the service.
August 2014 15
Core network dimensioning and costing
3 Core network dimensioning and costing
This section describes how the fixed core network was dimensioned and costed
within the model.
The process involved the following steps:
first, service demand was converted into core network capacity
requirements;
second, a core network structure was specified, based on service
demand and broadly based on the current structure of the fixed network
in Israel (i.e. the number of nodes for different elements of the
network);
third, the optimal specification of network equipment was dimensioned
according to the assumed structure and capacity requirement; and finally
the cost of the network was determined on the basis of the
dimensioning of network equipment and unit cost assumptions.
The following sections describe the calculations, inputs and outputs of each of
these steps.
3.1 Capacity requirement
The conversion of demand to capacity requirements remains consistent with the
requirements presented in the wholesale service. Key changes only relate to the
service demand itself which has been updated according to the details provided
in section 2 of this document.
Demand for the multicast service is taken into account based on multiplying the
capacity per channel with the number of channels. However, in contrast with
unicast traffic, a different set of routing factors is applied to multicast traffic to
reflect the way in which this traffic is distributed throughout the network:
a routing factor of 1,000 is applied to MSANs and uplinks from MSANs
to the aggregation switch;
the routing factor applied to the aggregation equipment and uplinks
reflects the ratio of MSANs to aggregation switches, taking account of
the resilience assumptions8;
8 Based on the dimensioning of the aggregation equipment, this is estimated using the formula 1,000 /
[…] x 122 x 2
16 August 2014
Core network dimensioning and costing
routing factors for IP edge and IP core and corresponding links reflect
the total volume of equipment in these network layers, based on the
assumptions that the multicast traffic would need to be carried by all
relevant equipment in order to be transmitted to the assumed number
of MSANs.
3.2 Network structure
The model derives a network structure of an NGN operator given current and
future service demand. The structure of the current fixed NGN implementation
is used as a template for that network. In particular, we have taken the number
of network nodes largely as given.9 However, we have applied different
principles to the aggregation layer, compared both to the model in the wholesale
consultation and the structure of the fixed network as we understand it is
currently implemented:
the aggregation equipment considered for the first layer of the
previously modelled network does not support multicast;
the model therefore considers the MSAN to be connected to the same
equipment previously considered at the second level of aggregation;
this implies a reduced number of units of that aggregation equipment
due to the larger capacity and increased number of ports;
no requirement for a second aggregation layer between the first and the
IP Edge; and
the switch to a larger number of higher capacity aggregation switches
also reflects the greater capacity of services forecasted on the network.
Another element affecting the cost of a network is the way in which different
layers of the network are connected. Here we have largely followed what we
understand to be the principles of the established fixed network in Israel and the
principles of linking the different layers of the network. An overview of the
nodes and how they are linked together is shown in Table 2.
9 This mostly resembles a “scorched node” approach. The network topology is defined as the
established network as “anchor asset”. That is, it will not be feasible in the medium term to reduce
the number of sites. The equipment located at each node is optimized to minimize the cost of the
network.
August 2014 17
Core network dimensioning and costing
Table 2. Equipment links
Equipment Links
MSANs Each linked to two aggregation switches
Aggregation Switch Each linked to two edge routers
IP Edge Edge routers are linked to two IP core routers
IP Core Core routers are meshed
Each link is dimensioned to carry all the traffic between the equipment. This
configuration, which we understand to be similar to the one used in the Bezeq’s
network10, is efficient in the sense that the individual layers are needed to
concentrate traffic and the equipment employed at each layer is not excessive.
Further the network provides both diverse routing and capacity resilience - both
features of an efficient and reliable network.
The model assumes that in total […] MSAN sites are required, each consisting of
one MSAN. These sites have been exclusively modelled as outdoor cabinets.11
For resilience and diverse routing purposes, we model that each MSAN is linked
to two aggregation switches. Each of the aggregation switches is again linked to
two IP Edge routers.
The model considers […] edge router sites, based on the structure of the current
fixed network in Israel. As before, we have allowed for sufficient resilience in the
edge router links. For example, each of the edge-routers links to two core routers
at separate sites. Again based on Bezeq’s network structure, the model assumes
three sites for core routers.
In addition, the network also includes soft-switches and media gateways.
However, this equipment is not relevant for the calculation of data service related
costs and is not further discussed in the current document.
10 We are aware of one difference with Bezeq’s network. Namely, Bezeq claims to use separate edge
routers for voice and non-voice traffic. However, Bezeq has been unable to provide a convincing
rationale for this network configuration and it is not a configuration used in other bottom-up
models using modern NGN equipment.
11 This is different from the previous model implementation where […] MSANs where modelled in
legacy RCU sites. However, responses to the first consultation suggested that such sites no longer
existed. We also conclude that modelling outdoor sites exclusively is more consistent with the
concept of building an efficient network operator rolling out a fixed network in Israel.
18 August 2014
Core network dimensioning and costing
3.3 Network dimensioning
The volume of each type of network equipment included in the model is typically
determined by the number of nodes in the network, capacity demand and
assumptions for equipment modularity, utilization, resilience and redundancy.
The model determines the network element requirements for any given year
given these demand requirements and assumptions. However, the model also
takes into account that the network equipment is not just brought in service
instantaneously when demand is required. We therefore take account of build-
ahead requirements, i.e. investments are carried out a year prior to the network
being required to meet the respective demand.
3.3.1 MSAN
MSANs are used to connect subscriber access lines to the core network. The
number of units required at a specific site depends on the number of subscribers
who need to be connected to the network.
In the absence of reliable information from the current fixed network on the
number of customers at each node, we modeled three types of MSAN sites,
small, medium and large. The size and number of nodes of each type has been
calibrated based on the total number of sites in the current fixed network ([…])
the current number of subscribers, the type of equipment used in the network
and information that all sites consist of a single unit of MSAN equipment. The
corresponding distribution of small, medium and large sites is 70%, 25% and 5%
respectively. The numbers of subscribers at small and large sites are 80% and
115% of the average respectively.
Based on the modularity of an MSAN and the number of lines, the model derives
the number of port cards for voice and data services. The model further takes
into account vectoring equipment at the sites; dependent on the number of
broadband customers. The modelled chassis have two uplink ports and the
number of uplinks is therefore not explicitly modelled, although the type of
uplinks (1GE or 10GE) is, in accordance with the capacity required. Further to
comments received during consultation, cards for voice and data are modelled
separately. This has also allowed MOC to disaggregate the access product into
separate voice and data elements, and a “broadband only” access product has
accordingly been added, as detailed in section 5.2.
3.3.2 Aggregation switches
Aggregation switches are used to aggregate the traffic from the MSAN
equipment and direct the traffic towards the center of the core network. The
required dimensioning of these switches is driven by the amount of traffic
processed through them and the number of uplinks (to the core network) and
downlinks to MSANs connected to them.
August 2014 19
Core network dimensioning and costing
The number of switches is based on the number of 1GE and 10GE12 ports
required as uplinks and downlinks to either side of the switches. The port
requirements determine the number of port cards, switch modules and hence
number of chassis required. Port cards and switch modules are determined
assuming a reasonable maximum utilization. The number of port cards is based
on an assumption that a proportion of ports remains available (i.e., that a
minimum number need to be kept available for redundancy). In total, the model
estimates […] aggregation switches which are each assumed to be located at
different sites.
3.3.3 IP routers
IP routers are responsible for service provisioning and more “intelligent”
handling of traffic as well as interconnection with ISPs and other operators.
The bottom-up model includes both core and edge routers. The model takes
into account the current number of nodes in the fixed network in Israel,
allocating traffic and uplinks from the lower hierarchies of the network broadly
equally to edge and core IP nodes.
Edge routers: The model dimensions the edge routers (i.e. the chassis and
ports) to be able to handle the traffic and ports of the links from the
aggregation layer and to the core IP routers. Based on the revised structure
of the network (i.e. including only a single aggregation layer) and […] sites,
the model estimates […] edge router per site.
Core routers: The model considers […] core router sites based on the
current fixed network in Israel. The model dimensions the total equipment
at each site according to the number of uplinks from edge routers and the
amount of traffic to be carried between core routers and to ISPs. In total,
the model estimates […] core router chassis. 13
3.3.4 Infrastructure
The model must also include the costs of infrastructure connecting the various
nodes in the core network. For this, Bezeq submitted information about the
current network showing the overall length of cables employed in its core
network. However, Bezeq was unable to provide detailed information on where
in the network this infrastructure is being used (i.e. core, access or shared, or the
12 1GE = Ethernet of 1Gbps capacity, 10GE = Ethernet of 10 Gbps capacity
13 The model previously released for consultation also considered route resilience assuming that each
individual link would also be doubled for extra resilience. However, given the number of links
between core router sites, this appears excessive and unnecessary given the level of overall resilience
in the network.
20 August 2014
Core network dimensioning and costing
amount of infrastructure attributable to links between specific types of
equipment), or on the length of duct and trench in each part of the network. In
addition, it is unclear whether Bezeq’s network, as currently implemented,
represents the network that an efficient, forward-looking operator would deploy.
The model in the consultation was therefore based on a randomised node
distribution across the area of Israel and a minimum spanning tree across these
nodes. Further to comments received from stakeholders regarding the
applicability of this model, MOC decided to consult with experts on Israeli
geography and mapping. Therefore, the Survey of Israel was retained to develop a
model of the network according to the geographical and mapping expertise of
that agency, accordingly to telecommunications network planning principles laid
down by MOC.
The revised model therefore derives the length and allocation of infrastructure
based on the infrastructure estimation provided by the Survey of Israel.14 The data
provided covers the following elements which were considered in the estimation
of the core infrastructure:
Table 3. Data and assumptions* considered for core infrastructure dimensioning
Parameter Value
Length of the primary network (major roads between municipalities) 3,711 km
Length of the secondary network (links from the primary roads to known MSANs) 4,205 km
Known MSAN locations considered by the Survey of Israel 6,016
*Degree of sharing between access and primary network 5%
*Degree of sharing between access and secondary network 100%
*Degree of sharing between primary and secondary network 0%
Number of municipalities covered in the study 927
Source: Survey of Israel, Modeling assumptions
The assumptions about sharing have been determined in the following way:
According to the Survey of Israel, the primary trench network connects
the 927 municipalities through intercity roads. The network leads
through the municipalities, therefore covering also some of the roads
that require an access network trench. However, the large majority of
14 “An Estimation of the Length of the Infrastructure of the “Bezeq” Company, Based on a
Geographical Information System (GIS) Analysis”, Survey of Israel, June 2014.
August 2014 21
Core network dimensioning and costing
the trench would be located between municipalities without any sharing
with the access network. We have therefore assumed that only 5% of
the primary network is shared with the access network.
The secondary trench network connects the primary trench to the
MSAN location. As such, the trench is likely to be fully located in an
inhabited area (i.e. given that the primary trench already leads through
the municipalities) suggesting that 100% of the secondary trench would
be shared with Access.
Due to the principles applied when constructing the overall network
(the Survey of Israel first measured the primary trench, then the
secondary trench incrementally to reach the MSAN location) there is no
sharing between the primary and secondary trench network.
The trench data has been adjusted to take into account that the Survey of Israel
did not have available all MSAN locations. The secondary trench has been
adjusted in the following way:
The distance derived by the Survey of Israel for the secondary trench
network, 4,205 km, was divided by the number of MSANs considered
when measuring the secondary trench ([…]);
The corresponding distance per known MSAN, (around ~0.7 km), was
then multiplied with the total number of MSANs considered in the
model ([…]);
The model then takes into account a revised length of the secondary
network for all modelled MSANs of 5,417 km; and
The difference between 5,417 and 4,205 km (i.e. 1,212 km) was
subtracted from the net length of the access network but is still being
taken into account as infrastructure that is shared between access and
core.
This results in a total distance of 9,128km for the core network, approximately
2,000km less than the distance estimated in the model in the consultation.
These distances and information on the number of nodes in the network are then
used to attribute the costs of the network to different segments of the core
network (i.e. the link between MSAN and aggregation switch, aggregation switch
and IP edge, IP edge and IP core and between IP cores). The model calibrates a
function and parameter for calculating the trench distance between different
elements of the network based on the total distance between municipalities
(3,711 km for 927 locations) and the total distance for all MSANs (9,128 km for
[…] locations. The corresponding distances between nodes are set out in Table
4.
22 August 2014
Core network dimensioning and costing
Table 4. Network length between different layer of the network
Network segment Length of the network covering the nodes
MSANs 9,128 km
Municipalities 3,711 km
Aggregation switches 1,571 km
IP Edges 646 km
IP Cores 327 km
Source: Survey of Israel, Model assumptions
These distances provide the basis for allocating the total network distance of
9,128 km of core trench and corresponding duct to the individual network
segments. This takes into account that different functions of the network
overlap. The corresponding allocations are outlined in Table 5 below.
Table 5. Allocation of duct and trench to network segments
Network segment Length of the network covering the nodes
MSANs to Aggregation 90%
Aggregation to IP Edge 7%
IP Edge to IP Core 2%
IP Core to IP Core 1%
Source: Survey of Israel, Model assumptions
Further adjustments are made to take account of the allocation of trench to
HOT, based on the fact that some of the infrastructure is shared with equipment
provisioned for the cable network.15 While we assume that sharing with HOT
does not occur in trench which is specific to the core network, it does have an
impact on the core network because the sharing between core and access implies
that some trench is shared between access, core and HOT. The extent to which
this is applied to the different segments of the core network is set out in Table 6
below.
15 This is different from the previous approach where the revenue from the HOT infrastructure rental
was deducted from the costs.
August 2014 23
Core network dimensioning and costing
Table 6. Share of trench segment attributable to core
Network segment Share of trench segment attributable to
core
MSANs to Aggregation 63%
Aggregation to IP Edge 96%
IP Edge to IP Core 94%
IP Core to IP Core 94%
Source: Survey of Israel, Model assumptions
The share of costs not being attributed to the core network at this point is
attributed to access and HOT.
Finally, fiber cable lengths are estimated based on the number of uplinks and
downlinks from each network segment and the number of nodes of individual
network equipment. The model then takes into account how the different uplink
and downlink requirements overlap to estimate the total thickness of cables.
Again, this is also based on the length of roads between different segments
outlined in Table 4 above. The corresponding lengths and distribution of cables
to network segments is outlined in Table 7.
Table 7. Fiber cable length and allocation
Cable size Cable
length (km)
MSAN to
AS
AS to IP
Edge
IP Edge to
IP Core
IP Core to
IP Core
24 5,525 100% 0% 0% 0%
48 2,183 100% 0% 0% 0%
96 943 40% 60% 0% 0%
192 992 13% 20% 53% 14%
3.4 Core network costing
In the next step, the equipment and infrastructure quantities, described above,
were multiplied by associated costs to calculate the total gross replacement cost
of the network (GRC).
24 August 2014
Core network dimensioning and costing
The model then calculates:
the annual capital expenses based on the GRC and assumptions on the
useful economic lifetime of the assets;
the operating expenditures (OPEX) associated with each network
element based on OPEX / GRC ratios and/or based on operational
characteristics16 at a given unit cost, as appropriate; and
adjustments to annual capital and operating expenditures, given build
ahead and past equipment requirements.
These steps are further outlined below.
The equipment and infrastructure prices used in the model are based on the most
recent data provided by telecoms operator in Israel, data that was provided to
MOC both before and during the wholesale service consultation.
In the case of operating costs, Bezeq was unable to provide most information on
costs for individual network elements, both before the wholesale services
consultation and during the said consultation, and benchmarks17 were used
instead. These benchmarks include those from Israel and from other
jurisdictions (UK, Denmark and Sweden). Cost for accommodation of network
equipment is based on information on costs per square meters for the current
fixed network in Israel and assumptions for the footprint required to house
network equipment is also based on equipment from that network.
Total equipment costs
The prices for most network elements are disaggregated by component (i.e. the
cost for different chassis types and cards). Table 8 provides a summary of the
average equipment costs in the model, combining chassis, port and processor
costs according to how the model dimensioned the equipment.
Installation costs are taken into account in the form of mark-ups on equipment
cost, with the range for the mark-up based on recent vendor contracts, both with
information from Israeli operators and with operators in other jurisdictions
where appropriate. The mark-ups for different types of equipment are also
provided in Table 8. The costs are included in the GRC and hence treated as
asset costs when converted into annual capital costs.18
16 Such as kwh or sq. m.
17 The sources of benchmark models referred to in this document are listed in the Annex.
18 These mark-ups have been revised since the version of the model published for consultation. Mark-
ups from models in other jurisdictions have often been adjusted upward to reflect the lower capital
cost of equipment in Israel, which would have otherwise implied proportionally lower installation
costs.
August 2014 25
Core network dimensioning and costing
Table 8. Network equipment unit and installation cost (NIS, 2014)
The average unit cost for core trench (also including duct) takes into account that
a proportion of the trench is shared between the access network and
infrastructure used by HOT. The full cost together with a breakdown of the
costs is provided in the model.
Annualized capital costs of network elements
In setting regulated prices, investment costs need to be recovered over the period
the assets generate revenues for the company, rather than in the year the cost was
incurred. We applied “annuity” and “price tilted annuity” formulae to establish
the cost of assets in one year.
The standard annuity formula is applied to passive infrastructure assets reflecting
their importance as bottle-neck assets.
The annuity formulae are used to set a general path for returns (R) on an
investment (I) over the life of the investment (N years). Overall, the initial
investment must be equal to the Net Present Value (NPV – the left hand side of
the equation) of returns over time:
∑
For active network equipment (such as switches and routers) a ‘tilt’ is applied at
the rate of equipment price changes. This takes into account that such
equipment costs will typically decrease over time.
26 August 2014
Core network dimensioning and costing
An annuity with a tilt therefore provides the same NPV over the life of the assets
but with the profile of that compensation falling over the life of the asset. The
formula for the price tilted annuity applied in the model is as follows:
(
)
where r is the cost of capital19 and trend the equipment specific price trend and V
the gross replacement costs of the assets.
A price tilted annuity formula was used to ensure an equal spread of costs of
equipment across years with a focus on recovering costs in earlier years if the
price of that asset is expected to decrease and in later years if the price of the
asset is expected to increase. This reflects the competitive pressure an operator
would face if alternative operators entered the market at any given point of the
modeled period, purchasing equipment at prices expected for that period
The model has been revised to exclude the price and output tilted annuity. This
is because the formula is likely to result in under or over-recovery of costs where
there are fixed costs (as here) and volumes are growing (falling).
For the equipment employed in the fixed network, we assume the following price
trends as outlined in Table 9. The information provided by Bezeq during the
consultation suggested that the price of many classes of equipment, such as
routers, would not change over time. We do not find the assumption of constant
equipment prices given constant equipment characteristics convincing. Price
trends are commonly applied in similar models in other jurisdictions and typically
suggest significant falls in the unit costs of equipment over time. We have
further observed for operators in other jurisdictions that prices for the same
equipment have declined over time or that the characteristics of equipment have
improved (e.g. greater capacity) at constant prices. However, compared to the
model released for consultation, we have revised the price trend assuming that
prices would not reduce as much as previously considered. This is based on a
comparison of equipment prices in Israel and other jurisdictions (such as
Denmark and Sweden) which suggests that prices in Israel are already
comparatively low and that further price changes may not be as significant as
they used to be in earlier years when models in other jurisdictions were
developed.
19 The determination of the cost of capital (WACC) is set out in the FTR consultation and FTR
documentation.
August 2014 27
Core network dimensioning and costing
Table 9. Price trends for network elements and infrastructure (real)20
The model then multiplies the combined equipment and installation cost for each
network element by the price tilted annuity for that element to determine its
annualized capital costs.
Equipment specific operating costs
The next stage of the model involves the calculation of the operating expenditure
associated with network equipment. Operating costs were categorized under the
following headings:
maintenance;
power requirement;
accommodation; and
air conditioning requirement.
As previously described, Bezeq was unable to provide sufficient information
prior and during the consultation to be able to populate the model accordingly.
We therefore use a mix of international benchmarks, including the models for
Denmark, Sweden, France, Norway and the UK, for operating cost mark-ups
and resource consumption of network equipment. Maintenance is based on
these international benchmarks as well, while the amount of accommodation
required is estimated based on space needed to house equipment, including
power, air conditioning and back-up power and with an allowance for walk-way
20 The price trend for trench and cable is set to 0 following the principle of constant input prices and
standard annuity depreciation for passive infrastructure.
Price trend
-2.56%
-2.56%
Edge Router -2.56%
Core Router -2.56%
-5.00%
Media Gatew ay controller -5.00%
Media Gatew ays -5.00%
-2.56%
0.00%
Network Elements
Infrastructure
IP equipment
Soft switches
Site common costs
Aggregation switches
MSAN
Other equipment
28 August 2014
Core network dimensioning and costing
access, and the cost per meter of accommodation based on Israel-specific data.
Power and air conditioning consumption is based on costs per kWh in Israel.
The assumptions used in the model are outlined in Table 10 below.
Table 10. Operating costs mark-ups and resource requirements
Once calculated using the assumptions outlined above, operating costs are
allocated to services in the same way as capital expenditures.
Where international benchmarks where used, the majority of information is
sourced from publicly available fixed bottom-up models particularly those in
Denmark, Sweden, France, Norway and the UK. A benchmarking approach was
used because Bezeq was unable to provide information on operating to capital
costs by individual equipment type, including during the consultation, and also
because other stakeholders did not provide information at this level of
granularity. It should be noted that while the operating cost to capital cost ratios
do vary between models, in many models the ratio for active equipment, such as
MSANs and routers is around 20% and in some cases less.
However, in examining these benchmarks it was noted that capital equipment
prices differ significantly between these models and that for many classes of
equipment, such as MSANs, prices are cheaper in Israel than in other
jurisdictions. This implies that the straightforward application of opex/capex
ratios from other countries could result in an underestimate of the level of
efficient operating costs for Israel, in some cases. Hence, the benchmarks in the
model have been adjusted to take account of differences in capital equipment
price for MSANs, aggregation switches and edge routers where large differences
in capital equipment prices were noted.
FTE Main-
tenance
Accom-
modation
(sqm) - for
equipment
itself
Power
reqm't -
kWh
Air con
reqm't -
max watts
per square
metre
Large MSAN chassis (equiped w ith POTS, VDSL and Vectoring cards) 50.0% N/A 5,606 853
Aggregation sw itch (equiped w ith 1GE dow nlinks and 10GE uplinks) 40.0% 1.00 13,140 1,500
Edge Router 40.0% 1.00 13,140 1,500
Core Router 20.0% 1.50 13,140 1,000
20.0% 4.50 65,700 1,667
Media Gatew ay controller 20.0% 0.75 13,140 2,000
Media Gatew ays 20.0% 0.75 13,140 2,000
MSAN (cabinet) 8.0% 0.00 0 0
Aggregation sw itch 10.0% 0.01 5,000 50
Edge Router 10.0% 0.01 5,000 50
Core Router 10.0% 0.01 5,000 50
Core trench (per Core netw ork km) 1.0% N/A N/A N/A
Core f ibre cable (per Core netw ork km) 5.0% N/A N/A N/A
Network Elements
Infrastructure
Other equipment
Site common costs
MSAN
Aggregation switches
IP equipment
Soft switches
August 2014 29
Core network dimensioning and costing
All models adopt broadly similar approaches in order to calculate operating costs
and identify a range of different classes of operating costs:
Network Costs – further segmented by part of network and between
maintenance, planning and management;
Non-Network Costs – further segmented by major categories
(corporate overheads, human resources, finance, support systems and
administration);
Interconnection specific costs; and
Other costs, such as running costs of power and air conditioning.
As noted above, two of the benchmarks used were the Danish and Swedish
models. The treatment of network costs in both these models is quite detailed
and the documentation to these models provides some information on the
approach adopted. In both cases, wage levels (including overheads) are shown
by function (academic, technical, administrative) and the number of people of
each type and for each function is shown in the model. In addition, outsourced
costs and non-labor costs are also shown. While a broad description of the
approach used to determine efficient staff levels is provided (based on the
incumbent’s top-down model and inputs received during the consultation
process), the description does not go into detail (e.g. on how the figures for the
SMP operator were modified to take account of other efficiency factors).
Given that the operating cost to capital cost ratios do vary between these models,
as do the unit capital costs, other benchmarks were also examined, as described
above. Given the lack of corresponding data from the current fixed network in
Israel, we consider that this benchmark information provides a reasonable basis
for the calculation of operating expenditures relative to the level of capital
investment in Israel. The model also includes common and indirect operating
expenses. These are described in Section 5.
Access network dimensioning and costing
4 Access network dimensioning and costing
This section describes the approach to dimensioning the fixed access network.
The dimensioning of the network is based on the analysis by the Survey of Israel
(already mentioned in the previous section) using GIS data of roads and
buildings and locations of most of the MSANs in the current fixed network in
Israel. Section 3.3.4 has explained how the distance for the primary and
secondary network in the core network was calculated.
This survey was also used to dimension the access network. After estimating the
length of the network connecting all MSAN, the analysis measures the distance
of the access network required for connecting relevant premises in all
municipalities of Israel (i.e. not just those covered by the current fixed network).
Unfortunately, the information provided by Bezeq, both before and during the
consultation, was insufficient for the purposes of costing the access network.
While Bezeq provide some cost data on duct and trench, the information did not
provide the required level of detail to be directly used as a basis for calculating
the gross replacement cost of the access network. Also, operating costs
attributable to different elements of the access network (or the access network as
a whole) was not forthcoming from Bezeq. For these reasons, most information
relating to the costs of the access network was based on costs provided by other
Israeli operators and, where such information was not available or not
comparable, international benchmarks, as described below.
4.1 Access network dimensioning
The access network represents the links between subscribers and the MSAN (as
the first level of active equipment in the fixed network).
The Survey of Israel measured the access network as the additional trench
required to connect the MSAN location to premises not already covered by the
primary or secondary network trench.21 This implies that some of the trench
considered by the Survey of Israel as secondary or primary trench is also used as
access trench. This sharing is taken into account when considering the total
length and cost of the access network and core networks. This is done in the
following way:
The degree of sharing is assumed at 100% and 5% for the secondary
and primary networks respectively for the reasons set out in
section 3.3.4.
21 The principles of that approach are outlined in the Survey of Israel report, as detailed in footnote 14.
32 August 2014
Access network dimensioning and costing
The corresponding distance of the primary and secondary network is
added to the gross length of the access network measured by the Survey
of Israel.
Based on the information provided by the Survey of Israel, the gross length of
the access trench considered in the model is 28,279km. However, this has been
adjusted to take account of the fact that some of this trench can be replaced by
overhead cable. The length that can be replaced by overhead cable is based on
information received from Bezeq regarding the current fixed network in Israel,
and is approximately […] km. The estimated trench length was reduced by that
amount plus an additional share representing drop trench and trench for street
crossings that are not required when overhead lines are used.22 The final gross
length of access infrastructure considered is […] km of overhead and […] km of
underground infrastructure, giving 27,627km in total. This is slightly shorter
(approx. 400km) compared to the approach used in the model in the consultation
based on a road length measurement in a sample of municipalities in Israel. The
survey of Israel covers all municipalities while the previous approach covered
98% of the population.
The model then estimates the overlap of Core and Access networks and on that
basis the requirements for ducts and cables. One aspect considered in the
dimensioning and cost allocation of the ducts and trench is the provision of
infrastructure for HOT. The current fixed network provides some infrastructure
for HOT which is considered to be placed exclusively in the Access network.
The total length of trench shared with HOT is approximately […] km. The
model considers three ducts for that part of the trench that is shared between
Access and HOT. The trench that is shared between Access and HOT and / or
core is considered to have four ducts. The assumptions are based on the
requirements to include in the model additional cables and empty ducts for
infrastructure access services. Further elements of the access network are
estimated in the following ways:
The requirements for copper cable in the network are based on the
gross length of the access network and the distribution of copper cables
in the current fixed network. The model applies a ratio of copper cable
to gross infrastructure length considered in the Norwegian access model
and one confidential model. We use the average ratio of 1.30 multiplied
with the length of the trench and overhead infrastructure to estimate the
22 This adjustment was calculated by using additional information provided by the Survey of Israel on
the length of street crossings and drop trenches, estimated at 1,483km. Multiplying that distance
with the ratio of overhead to estimated gross access trench length results in 652km which is further
subtracted from the access trench length.
Access network dimensioning and costing
length of the copper cables23. This calculates the copper length of the
fixed network based on the ratio between trench and cables in other
jurisdictions. This is reasonable since the copper cable length is likely to
exceed the length of trench length due to parallel deployments of drops
cables e.g. cables going to different buildings, use of more than one
cable on certain routes for logistical reasons and because some degree
of overlap between different cables at distribution points. To this we
apply the distribution of copper cable thicknesses in the current fixed
network for underground and overhead cable to estimate the
distribution of cable types considered in the model.
The model further considers distribution points at the final junctions of
the access network, i.e. the point of cross and drop trenches estimated
by the Survey of Israel. We consider that distribution points would be
placed for every 4 buildings. This is based on the fact that, on average, 4
buildings would share a drop trench and crossing. This is a reasonable
assumption as some areas of the country will have less than 4 buildings
connected per drop trench and crossing as a result of only one side of
the road being built up or larger buildings being connected. In other
areas, especially those connected through overhead, more than 4
buildings can be connected to a single distribution point.
4.2 Access network costing
The model estimates the total costs of the underground and overhead cable,
wooden poles, the distribution trench, duct and distribution points used in the
access network. This is based on assumptions of unit asset costs and operating
costs. The latter include installation and maintenance costs. For these
calculations, the model uses data from the current fixed network in Israel where
possible and compliments this with data from other sources where necessary.
The main steps of this exercise are as follows:
estimating the GRC for underground and overhead cable for the access
network;
estimating the GRC of wooden poles, the distribution trench and duct
as well as copper cabinets used in the access network;
23 We have also examined the ratio between access cable and trench length in other models. In the
case of the Belgian model cable lengths exceed trench length by an implausibly small margin (3-4%).
In the case of the Danish model, trench and cable length are determined using different
methodologies. This means, for example, that copper cable length falls short of trench length in
some parts of the network and results in implausibly large differences between cable and trench
length between different geotypes. Similar issues arise in relation to the fibre based Swedish model.
34 August 2014
Access network dimensioning and costing
estimating the installation and maintenance costs for all of the above;
and
annualizing the GRC to spread costs over the life of the assets.
4.2.1 Estimating the cable costs
In light of the difference between cost data from the current fixed network and
cost data from other jurisdictions, we have used benchmarks from Denmark,
Norway and Spain to populate the unit cost data required in the model.24 This
also appears reasonable based on information received during the consultation
that indicates that supply of copper cable is limited in Israel due to insufficient
demand. Benchmarks from other models are therefore likely to better reflect the
cost of copper in the event of a large scale roll-out. We further consider it
reasonable to use the benchmark investment costs given the fact that the current
fixed network deployed by Bezeq largely uses copper cable that was deployed
many years ago and the limited extent to which these copper cables are likely to
be replaced with new copper cables. The model further takes into account a
scrap value of 5% that the hypothetical operator would be able to obtain at the
end of the useful economic life of the assets. This is consistent with the ability of
Bezeq to sell some of its copper cable. This is evident from a number of annual
financial statements. This treatment is also consistent with costing principles in
other jurisdictions. While not taking salvage values into account in the
depreciable value of the copper plant, BT’s separated accounts (which are the
basis for some costs of regulated services, such as LLU access) take account of
the current revenue received from salvaged copper when estimating the net cost
of the copper plant.
4.2.2 Estimating other equipment costs
This stage involved the estimation of the costs of wooden poles, distribution
trench, duct and copper cabinets used in the access network.
The overhead cable length ([…] km) is used to calculate the number of
wooden poles. Costs for poles and the distance between poles are
based on models in Sweden, Norway and Spain. The numbers of poles
per km vary between 20 and 25 in those models and an average of these
figures has been used in the model.
The access trench length is estimated using the calculations described in
Section 4.1. The costs are based on information from operators and
24 The Spanish access model is also used in this context to increase the number of benchmarks
available. The model used for consultation did not include information taken from the Spanish
model.
Access network dimensioning and costing
public providers of civil works in Israel (such as the PWD) taking
account of special requirements, such as horizontal drilling for junctions
and road crossings.
The costs of distribution points are based on information from the
current fixed network. However, this information was adjusted to
better match the actual requirements. This is because the equipment
and corresponding cost information provided by Bezeq appears over-
dimensioned for the requirements in the modelled network.
Table 11 presents an overview of estimated lengths and unit costs.
Table 11: Volumes and lengths and per unit costs in the access network (2014)
36 August 2014
Access network dimensioning and costing
The total GRC is then calculated based on multiplying these unit costs with the
estimated infrastructure volumes. Contrary to the costs of network equipment,
the unit cost of infrastructure is expected to increase with general inflation. This
implies that while the infrastructure itself is assumed to remain unchanged, the
implied nominal GRC increases year-on-year.
4.2.3 Estimating costs for maintenance and installation
Maintenance costs were estimated using international benchmarks, as well as data
from Israel. The main benchmarks data used were the Danish and Swedish
models as many bottom-up models only cover the core network. Further to
comments received during the consultation, the updated model also takes into
account information from the models in Spain and Norway.25 This international
precedent is relevant for Israel as Western countries of similar economic
characteristics were considered, plus direct evidence from Israeli operators
received during the consultation. Most models consider a general single
assumption of opex/capex mark-ups for all network elements in the access
network, typically around 3%. While this overall level based on the other
jurisdictions appears reasonable, a considerably higher percentage was used for
cable and distribution points (where faults are more likely) than for duct, trench
and poles. Installation costs are often included in the corresponding equipment
costs. The assumptions for individual equipment are as follows:
Duct and trench: 1% maintenance;
Poles: 3% maintenance costs / Equipment costs include the costs of
installation;
Copper: 7.5% maintenance costs / Equipment costs include the costs
of installation;
Distribution points: 15% maintenance costs / Installation costs as a
function of fixed costs plus variable rate per line based on current fixed
operator information.26
The operating costs resulting from these estimates also appear more reasonable
than the allocation of operating expenditures between access and core of the
current fixed network presented by Bezeq. This allocation was already presented
by Bezeq during the consultation on the fixed termination cost modelling, and
continues to be Bezeq’s position. We believe that this reflects an unreasonably
25 Again, the additional models were taken into account to increase the number of benchmark
countries considered in the model.
26 Corresponding details are provided in the model.
Access network dimensioning and costing
large attribution of costs to the core network. We note that this was our position
during the FTR consultation as well. .
Annualizing capital costs and estimating operating expenditures
The process for estimating gross replacement costs, annualized capital costs and
operating expenditures is equivalent to that outlined for the core network. A
slight variation was implemented to take account of the value of copper cable at
the end of the useful asset life. That is 5% of the investment costs have been
taken into account as scrap value and the calculation of the annualized costs was
adjusted accordingly by adding a residual discounted value of the copper, as
discussed above27.
27 While we are not aware of other bottom-up models taking account of scrap value the potential value
of selling copper assets at the end of their active life is significant and the 5% scrap value assumed in
the model may be conservative.
Service costing and model results
5 Service costing and model results
The previous sections show how the bottom up model calculates the GRC of
network equipment and the annualized (direct) operating and capital cost for the
core and access network. The final step in the process is to allocate total
annualized equipment and infrastructure costs to services. This section outlines
the steps involved in this calculation.
5.1 Cost allocation
In cases where a particular type of equipment is solely used to provide a single
service, its costs can be directly attributed to this service. However, in
telecommunications networks, equipment and infrastructure is used to provide a
range of different services. Hence, the cost of this equipment needs to be
attributed between these different services. The model attributes these costs
according to the intensity with which a particular class of equipment is used by
different services.
For example, core routers are used to provide routing for all voice and data
services. Therefore, the costs for routers are allocated to voice and data services
relative to their utilization of the router.
The costs of the routers are allocated between broadband, leased line and
voice services based on the relative share of capacity of each service at this
level of the network;
In the model, the routing and use of different equipment is applied through
routing factors which are set for all combinations of service and equipment
pairs, forming a routing matrix.
To recover common costs which have no clear relationship with particular
services, a general mark-up of 10% is applied to the direct annualized costs. This
mark-up is based on the average in the models in Sweden, Denmark, Norway
and France. This provides a reasonably broad sample of mark-ups as an
alternative basis for estimating overhead costs in the absence of appropriate data
from operators in Israel.
As previously stated, the allocation of costs is much more straightforward in the
access network. Specifically total annualized costs are divided by the number of
Bezeq subscribers plus leased line ends. The same 10% mark-up is then applied
to take account of common costs.
40 August 2014
Service costing and model results
5.2 Wholesale service costing
The model estimates the costs of the following services, service segments and
network elements:
Copper loop rental,
Copper loop rental and voice / broadband access and shared broadband
access;
Bitstream transport;
Multicast transport;
Duct access costs;
Fiber access costs; and
Incremental fiber costs.
The cost estimate for the copper loop includes the passive infrastructure between
the MSAN and the customers measured on a per subscriber basis. Further line
rental options include the cost for voice and data by including the costs of the
MSAN chassis and voice and data line cards, and data only access as well as a
data access costs on a shared local loop. This would cover chassis and data card
costs with and without the copper loop.
The cost estimate for the wholesale broadband transport service includes the
costs of the core network after the MSAN chassis, equipment and infrastructure
of the aggregation network and equipment and infrastructure of the core IP
network up to the points of interconnection in the core IP network. These
points of interconnection can be based on those currently in place with ISPs or
dedicated POI’s designed and specified in collaboration between the incumbent
and access seekers. The cost is estimated on a per Mbps basis.
The approach used to determine the cost of the above services involves the
following steps:
First, the total annualized cost of each network element is calculated, i.e.
the sum of annualized capital costs and operating costs;
Where network elements are used by both voice and data services, their
costs are allocated on the basis of % capacity usage in the busy hour;
Capacity related network costs of an element are divided by the number
of Mbps capacity provided over this element (capacity x routing
factors);
Service costing and model results
The network element cost per Mbps or per minute is multiplied by the
routing factor for 1 Mbps or 1 minute of the wholesale transport or
voice origination services respectively.
Separately, the costs of infrastructure are based on the length of the underlying
trench km.
The costs for wholesale broadband transport are shown below. It can be noted
that in the case of the MSAN, in addition to voice related costs, a very large
proportion of costs are related to POTS and broadband line cards.
Table 12. Bitstream costs by core Network Element per Mbps (NIS, 2014, excluding
service specific costs)
The wholesale access cost is derived by dividing the total costs attributed to
customer access (as outlined above) by the expected number of subscribers. The
relevant information is shown in the following table.
Table 13. Bitstream access costs per Subscriber (NIS, 2014, excluding service
specific costs)
Infrastructure access costs are derived for duct and fiber access. The cost of duct
access is estimated on the basis of the total duct and trench in the access and
Network Elements
Total
Annualised
Cost (NIS)
Core Data
Related
Annualised
Cost
Broadband
Related
Annualised
Cost
Cost per
Component
per Mbps
Data Cost
per Mbps per
month
Aggregation Sw itches 8,009,411 7,770,753 6,243,042 15.72 1.31
Edge Router 4,187,804 4,117,986 3,308,986 8.33 0.69
Core Router 9,707,021 9,546,739 7,674,070 19.32 1.61
Trench 109,171,573 105,883,242 83,745,668 210.82 17.57
Cable 20,110,919 19,536,064 15,513,953 39.06 3.25
Site Costs 40,318,663 35,545,551 28,575,931 71.94 5.99
Total 191,505,391 182,400,336 145,061,650 365.18 30.43
Network Elements
Total
Annualised
Cost (NIS)
Number of
Subscribers
Cost per
Subscriber
per Annum
Monthly
Cost per
Subscriber
Copper Cable - buried 91,128,442 2,243,668 41 3.38
Copper Cable - overhead 43,377,471 2,243,668 19 1.61
Wood Poles 74,014,623 2,243,668 33 2.75
Trench and Duct 211,810,201 2,243,668 94 7.87
Distribution points 60,224,218 2,243,668 27 2.24
Line Card (POTS share+chassis) 179,236,819 2,136,258 84 6.99
Line Card (VDSL share +chassis) 209,307,866 1,245,967 168 14.00
Total 869,099,641 466 38.84
42 August 2014
Service costing and model results
core network calculating an average monthly cost per trench km. The fiber cost
is based on the average cost of the total core fiber calculating a cost per core
trench km and adding this estimate to the average cost of trench and duct. Both
estimates are then divided by an operator usage ratio determined in the
accompanying MOC policy decision. As infrastructure access is yet to be
implemented in Israel and take-up is uncertain, we recommend that MOC
monitors the take-up and usage of the services and revises the cost estimates to
appropriately reflect the impact on the cost attributable to other services and the
cost recovery of the overall network updating the model if necessary.
Finally, service specific non-network costs are applied to the costs outlined
above. The following mark-ups are used:
a mark-up of 5.3% is applied to calculated transport costs; and
a mark-up of 2.8% is applied to access and infrastructure costs.
These values are based on the corresponding mark-ups in other models that also
estimate wholesale transport and infrastructure access products (Sweden and
Denmark)28. We have looked at other bottom-up models but have been unable
to find comparable information. A benchmarking approach is necessary as
corresponding data is not yet available for Israel, since the corresponding
wholesale services are yet to be established. These assumptions may be revised
in a future review to reflect Israel specific data. The corresponding costs in 2014
and 2018 are outlined in Table 14 below.
28 In the case of Sweden, only a small proportion of the access network is subject to price regulation.
The ratio for the access network is calculated as a weighted average of the access specific mark-up
and the non-regulated service mark-up. Since the proportion of non-regulated services accounted
for by bitstream is likely to be low, the same mark-up has been used for bitstream.
Service costing and model results
Table 14. Summary of estimated costs (2014)
Unit 2014 2018
Access Copper loop
NIS/access
/month
18.35 20.79
Bitstream access
excluding copper loop
14.39 11.52
Bitstream access including
copper loop
32.74 32.31
Bitstream access including
copper loop and voice
39.93 39.67
Bitstream transport NIS/Mbps/
month
32.04 11.70
Multicast transport29
NIS/Mbps/
month
18,548 6,609
Duct costs30
NIS/km/
month
396
Duct and fiber costs31
NIS/km/
month
448 449
Incremental fiber costs32
NIS/km/
month
3.41 2.97
29 Providing access to 1,000 MSANs.
30 Based on a usage ratio of 3.5 operators (including Bezeq); this is based on a policy decision by MOC
and is discussed in the accompanying MOC document.
31 Idem.
32 This represents the incremental cost of additional fiber cables without further allocation of the costs
of duct and trench, after an access seeker obtains access to duct and fiber as outlined in the previous
row.
44 August 2014
Annex: benchmark model references
Annex: benchmark model references
This annex lists the sources of models used as benchmarks in the development of
the fixed bottom-up model in Israel:
Belgium:
http://www.ibpt.be/en/operators/telecommunication/Markets/price-
and-cost-monitoring/ngn-nga-cost-model
Denmark:
http://erhvervstyrelsen.dk/gaeldende-pris
Version 4.23 of the models (core, access, co-location and consolidation)
can be accessed by going to ‘LRAIC fastnet’, followed by ‘Gaeldende
prisagorelse for 2014’ followed by ‘Modeller (zip)’.
France:
http://www.arcep.fr/uploads/tx_gspublication/modele-couts-
TA_Fixe-2013.zip
Norway:
http://www.npt.no/marked/markedsregulering-
smp/kostnadsmodeller/lric-fastnett-kjerne
http://www.npt.no/marked/markedsregulering-
smp/kostnadsmodeller/lric-fastnett-aksess
Spain:
http://telecos.cnmc.es/consultas-publicas/-
/asset_publisher/f9RdqmDOXuDP/content/20130528_modeloscoste
s?redirect=http%3A%2F%2Ftelecos.cnmc.es%2Fconsultas-
publicas%3Fp_p_id%3D101_INSTANCE_f9RdqmDOXuDP%26p_p
_lifecycle%3D0%26p_p_state%3Dnormal%26p_p_mode%3Dview%2
6p_p_col_id%3Dcolumn-3%26p_p_col_count%3D1
Sweden:
http://www.pts.se/sv/Bransch/Telefoni/SMP---
Prisreglering/Kalkylarbete-fasta-natet/Gallande-prisreglering/
The core, access, co-location and consolidation models (Version 10) can
be accessed using the Hybridmodell link.
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