The Hybrid Cost Proxy
Model: Portugal Edition
D. Mark Kennet
William W. Sharkey
Instituto das Comunicações de Portugal
16-17 November, 2000
Forward-looking economic cost

Represents the cost of a competitive new entrant
with newly constructed facilities if it:




Operates efficiently using modern technology
employed in efficient network configurations
Serves the total demand for costed item
Serves customers located in their current positions
connected by efficient network routing to efficient
switching machines
Earns a “normal” return appropriately adjusted for
risk
2
Definition of efficient network model


Most economically efficient technology
capable of providing stated level of service
Model should reflect substitution between
technologies as relative prices change
3
Implications of FLEC assumption

Embedded network is irrelevant




Except for scorched node wire center assumption
Assists consistency with record-keeping and
geographical constraints
Assumes use of only current best, least-cost
technologies
Costs must be those of a network that is efficient
for the desired purpose (e.g. voice grade network for universal
service; higher quality network design may be appropriate for interconnection
and unbundled element pricing)
4
Advantages of Proxy Model Approach

Proxy modeling:


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Minimizes data collection requirements and
administrative burdens on companies
Is the only methodology reasonably capable of needed
levels of disaggregation
Addresses consistently the costs of families of
interrelated network elements
Provides transparency and rigor to the costing process
5
HCPM Overview

Open data structure
 Input files can be easily verified and modified
by the user
 Alternative inputs can easily be
accommodated (both publicly available
Census data and geocoded customer location
information can be used)
 All source code is freely available
6
HCPM Overview (cont.)


Loop design module deploys plant to the specific
locations determined by customer location
module
Explicit optimization routines are used
 minimum cost spanning tree algorithms for
the design of feeder and distribution routes
 optimization over technology type: fiber,
HDSL, or analog
7
A Typical Wire Center
Exchange
Area
Boundary
Trunks to
Other Wirecenters
Wire
Center
Serving Area
Serving Area
SAI
Feeder Cable
(Copper or Fiber)
Serving Area
RT
SAI
SAI
Distribution Cable (Copper)
Terminal/Splice
RT
Drop or
Service Wire
NID
LEGEND
Serving Area
NID = Network Interface Device
RT = Remote Terminal
SAI = Serving Area Interface
Adapted from Engineering and Operations in the Bell System, 2nd Edition, 1983
8
Steps in Network Design




Use a clustering methodology to determine
serving areas (SA)
Overlay a grid structure on each cluster and
assign customer locations to micro-grid
cells
Design distribution plant for each SA
Design feeder plant to connect all serving
areas to the central office switch
9
The Clustering Algorithm

Divisive method

Maximal size serving areas are created subject to
 maximum copper distance constraint
 maximum line count constraint
10
Geocode and Surrogate Locations, Évora
service territory
Évora
11
Closer view of Évora locations

12
Clusters Created for Évora
13
Grid Overlay for Every Serving Area
(Cluster)
Microgrid
14
Distribution Plant in a Microgrid
Cable Junction Points
Drop Wire
Vertical Branching Cable
15
Connecting Microgrids to a
Remote Terminal
Cable Junction Point
Unpopulated Cell
Microgrid Boundary
SAI
Populated Cell
16
Distribution Network for Évora
Distribution routing calculated by HCPM
20
kilofeet, north-south
10
0
-10
-20
-28
-26
-24
-22
-20
-18
-16
-14
-12
-10
-8
-6
-4
kilofeet, east-west
17
Pinetree feeder
Feeder branches
Serving Area
Interfaces
Feeder backbone
Central office
18
“Optimized” feeder routing
Central office
Serving area
interfaces
19
The Feeder Algorithm

Minimum structure distance network
20
The Feeder Algorithm (cont.)

Minimum cable distance network
21
The Feeder Algorithm (cont.)

Balanced network
22
The Feeder Algorithm (cont.)

Balanced network with rectilinear distance
23
The Feeder Algorithm (cont.)

Balanced network with junction nodes
24
Feeder Network for Évora
Feeder Route Map Produced by HCPM
38.63
38.62
38.61
degrees latitude
38.60
38.59
38.58
38.57
38.56
38.55
38.54
38.53
-8.02
-8.00
-7.98
-7.96
-7.94
-7.92
-7.90
-7.88
-7.86
-7.84
degrees longitude
25
The Switching and Interoffice Network
Tandem Switch
Dedicated
Common
Common
IXC or CLEC
Interoffice
Trunks
End office
Switch
Point of Presence
End office
Switch
Direct
Wire
Center
Wire
Center
26
Switching Costs



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Line ports
Trunk ports
Common control call processing
Signaling network costs
27
Interoffice Networks
C
A
B
(a) Mesh-like Interoffice Network b
C
A
B
(b) Interoffice Ring Network
28
Expenses



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Cost of capital
Depreciation
Operating Expenses
Overhead Costs
29
Cost of capital




Very contentious issue – essentially two
broad choices
Base on historical rate of return; or
Assume that competition changes capital
market structure for firms
Should real option value be included?
30
Economic depreciation


Difficult to estimate “economic
depreciation since depreciation allowances
in telecommunications were determined
under “cost plus” regulation
International benchmarks may prove useful
31