Estimating the cost of a Wholesale Access Service on Bezeq ...

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

http://www.moc.gov.il/sip_storage/FILES/4/3454.pdf

4 August 2014


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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%


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


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%


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


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


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


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


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


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


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


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.


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


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.


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


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.


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


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);


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


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.


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


copper loop

32.74 32.31


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.

http://www.ibpt.be/en/operators/telecommunication/Markets/price-and-cost-monitoring/ngn-nga-cost-model

http://www.ibpt.be/en/operators/telecommunication/Markets/price-and-cost-monitoring/ngn-nga-cost-model

http://erhvervstyrelsen.dk/gaeldende-pris

http://www.arcep.fr/uploads/tx_gspublication/modele-couts-TA_Fixe-2013.zip

http://www.arcep.fr/uploads/tx_gspublication/modele-couts-TA_Fixe-2013.zip

http://www.npt.no/marked/markedsregulering-smp/kostnadsmodeller/lric-fastnett-kjerne

http://www.npt.no/marked/markedsregulering-smp/kostnadsmodeller/lric-fastnett-kjerne

http://www.npt.no/marked/markedsregulering-smp/kostnadsmodeller/lric-fastnett-aksess

http://www.npt.no/marked/markedsregulering-smp/kostnadsmodeller/lric-fastnett-aksess

http://telecos.cnmc.es/consultas-publicas/-/asset_publisher/f9RdqmDOXuDP/content/20130528_modeloscostes?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%26p_p_col_id%3Dcolumn-3%26p_p_col_count%3D1






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

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

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