22 augusti 2007
Post- och telestyrelsen
Att: Torsten Löfvenholm, email@example.com
102 49 STOCKHOLM
KOMMENTARER TILL MRP (REV. B)
(07-3652, 13 juli 2007)
STOCKHOLM DEN 22 AUGUSTI 2007
TELENOR SVERIGE (TNS); (B2 BREDBAND AB 556575-7738, B2
BREDBAND HOLDING AB 556557-5825, TELENOR AB 556511-9822, OCH
ANDRA BERÖRDA TELENORBOLAG INOM TELENOR SVERIGE)
22 augusti 2007
With reference to PTS’ paper regarding revision of the LRIC model (MRP) from July 13 Telenor
Sweden (TNS) will in the capacity as a large operator with its own infrastructure provide
comments to the model
Sweden has historically been a forerunner in development of the broadband market. In 2001
Sweden had the highest EU broadband penetration (11%), the bandwidth early reached high
speeds relative to other EU countries (e.g., 10+ megabits/second), and, in areas with
infrastructure competition, the retail prices have fallen rapidly to among the lowest levels in the
Sweden is now, however, starting to lag significantly behind European peers. The current (Q4-
2006) broadband penetration of 51% is now around the western European average and, according
to Analysys, significantly below comparable countries like Denmark (66%), the Netherlands
(62%), Finland (57%) and Norway (57%). Furthermore, the percent of households with PCs that
also have broadband, according to Merrill Lynch, is more than 10%-points below the European
average (59% versus 70%).
To understand the dynamics behind the aggregate penetration numbers, one needs to understand
the large geographical differences that characterize the Swedish broadband market. Around 50%
of Swedish households are situated in areas with fierce competition among multiple broadband
providers and often technologies (e.g., Coax, LAN and DSL). These households have access to
the lowest broadband prices in Europe, rich product offering with VoIP, IPTV and/or Cable TV,
and naturally the broadband penetration is substantially above the national average (TNS’ market
research estimates that ~75% of all households with Internet connection have broadband).
The remaining 50% of households are located in areas with one or two broadband providers and
typically TeliaSonera (TS) is the only provider with its own infrastructure. These households pay
between 40 and 100% more for the broadband access than households situated in areas with
infrastructure competition, and the product offering is less rich in terms of VoIP and TV. As
expected, the penetration of broadband is lower in this market segment (TNS’ market research
estimates that ~60% of all households with Internet connection have broadband).
There is, in other words, a growing divide in terms of penetration, end user price and product
richness between households/businesses situated in areas with infrastructure competition and
households/businesses located in areas with monopolistic infrastructure supply. At an overall
level, households/businesses in areas with high population density have access to low prices and
rich products while households/businesses in less population dense areas must accept higher price
and less rich products. This is, however, not always the situation as local variations clearly exist.
The Swedish telecommunication market is also starting to lag in use of new services like VoIP. In
most European countries, VoIP is a driver of broadband penetration through consumer savings on
fixed voice. As remarked in a country report on Sweden by the European Regulators Group, this
is currently not the situation in Sweden mainly as TS’s retail price of POTS is below what Telia’s
competitors must pay TS for the raw copper to provide VoIP.
22 augusti 2007
As a leading provider of broadband, VoIP and IP-TV, TNS is concerned about the lagging
development of the Swedish broadband and VoIP market. TNS remains committed to developing
the market, but economic and technical boundaries are seriously limiting our ability to invest in
and subsequently grow the Swedish broadband and VoIP market. In the following sections, we
propose a set of changes to the hybrid LRIC model that can improve our ability to grow and
develop the Swedish broadband market.
3 Suggested changes to MRP (rev. B)
As a general note it is important that the boundaries of the model are clear to avoid double
counting of costs. Double counting of costs tend to happen eg as TS introduces new service and
allocates costs to this service that apparently already are accounted for in the hybrid model or sets
costs at levels that are above those in the hybrid model.
A method for mitigating this issue would be a constraint for TS to introduce new services – or
new price elements for existing services - on regulated markets without prior approval of PTS on
the costing of the service. It is clear to TNS that without such rather simple measures the purpose
of the model is at risk as TS can price at their own will by introducing new elements not
explicitly covered in the model.
TNS proposes the following 21 changes to the above MRP:
Line card costs should only be included in access products that use this service. LLUB and
Bitstream do not. Only LLUB was exempted in the text.
Common costs that already allocated to services should not be considered when new services are
introduced in between updates of the model. Otherwise such common costs will be allocated
several times. A transparent treatment of common costs where it is evident which common costs
are or are not included would greatly facilitate the correct cost calculation of services introduced
between updates of the model.
The models need to include not only standard PSTN/ISDN and Broadband services, but rather all
existing and likely services. As currently formulated bitstream is considered a standard service,
however existing services such as ADSL ATM, Backbone 2.0, backhaul, other leased lines, dark
fiber, GTA and naked DSL are not clearly included. These services are crucial to prevent TS
from establishing monopoly positions and need to be included. On backhaul fibre PTS has
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reached a final decision requiring TS to provide this service immediately (July 20th 2007, case
06-16366). We cannot quite follow why this service should not be included in the hybrid model.
In addition some new services need to be included. Allowing TS to launch, for instance, VDSL2
without upfront regulation would allow TS to create a DSL monopoly since a) VDSL2 is superior
to all existing DSL products and b) TS can not provide VDSL2 without regulated and fairly
priced access to TS infrastructure. This also implies that the “network hierarchy” in the model
has to allow for situation where fiber is deployed closer to the customer premises. The LRIC
model is intended to be forward looking. The volume assumptions for new services should
therefore not be based on historical data, but rather reflect expected market take-up rates.
3.4 CG 9
Given that is likely that dark fibre will be considered a leased line in the coming update of market
13 and 14, also this product should be included.
3.5 CG 12
TNS agrees on the proposed planning horizons and wants to comment that the CAGR used
during the planning horizons need to be based on the services that are forecasted to be provided.
See CG 8.
3.6 CG 15
A prerequisite for co-location is dark fibre backhaul and fibre cable connection into the
telestation. These items need to be included either in Co-location or elsewhere. Co-location
services should include all cost items that arise when realizing a co-location. Currently tender
costs and investigation costs are not included. Allowing necessary cost items to be excluded from
the services increases the regulatory risk involved for LLUB operators, please refer to comments
in the introduction of this chapter with regard to price elements not covered in the model. In
addition there is no working process for station adaptation, and this is quickly becoming a major
issue. It might be difficult to include station adaptation within an LRIC model due to the non-
predictable nature of such products, but PTS should carefully consider whether alternative price
regulations could be introduced within this area, e.g. pricing based upon historically fully
allocated costs, to be documented to PTS upon request. . During Q207 growth in LLUB in
Sweden was 9k subscribers and this is the lowest figure since TS starting reporting LLUB
subscribers in 2003.
22 augusti 2007
Is TeliaSonera refusal to provide dark fibre and co-location
is bringing the growth of LLUB in Sweden to a halt
New LLUB per
new rental of dark
45 44 fibre
Source: TeliaSonera Quarterly reports Time
From our view two main reasons for rapidly declining growth is:
• Lack of capacity in existing telestation
• Telestations (usually smaller) are not co-located as the co-location costs are deemed too
o Lack of fibre backhaul
o Lack of capacity in to be co-located telestation
As a consequence LLUB regulation in Sweden is coming to a halt. The largest LLUB operators
cover less than half the population and continued build out is slow.
Although the above issues are access related they could be accommodated through the hybrid
model. As we understand a related solution is in discussion in Italy. Current processes are also
inefficient as each telestation is treated in isolation leading to considerable administrative cost for
LLUB operators and TS.
Unless these issues are dealt with it is likely that the situation will deteriorate further leading to
even less capacity available for co-location. In such a situation Sweden will fail totally in
fulfilling the purpose of the access directive regarding LLUB.
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3.7 CG 17
The total annualized cost of a copper pair is not the same for PSTN, Bitstream and LLUB.
Variations come from:
1. Universal coverage. PSTN covers the whole universe whereas Bitstream are available at
telestations covering. 90-95% and LLUB 50-65% of the universe. This information is
available in the model forcasts.
2. At a specific telestation DSL is technically only possible up to 5-7 km cable length,
depending on copper quality etc. Also alternative access such as Mobile does not provide
for broadband delivery over LLUB. Therefore not all access networks and not all copper
cables are relevant in calculating copper cost for bitstream and LLUB.
TNS would recommend a differentiated costing for copper pairs according to the above
differences. In addition it should be taken into account that according to TS business rules the end
user finances the last part of the access network 1 . CG 17 will have to be adjusted accordingly.
3.8 CG 18
The cost of Bitstream access should be calculated for both shared and full access. The document
is unclear on this point. On the installation we do not fully understand the need for ADSL filter at
customer premises as this filter normally is included in the DSL modem that is provided by the
LLUB operator. The transport cost should be based on Ethernet-based backhaul and LRIC costs.
It would be useful to break down the cost of bitstream into different sub products such as
Bitstream household, Enterprise ADSL-ATM replacement, Backbone 2.0 (and other TS products
likely to be regulated under Bitstream). As Bitstream price is set on sub product and bandwidth it
is relevant to conduct also this type of break down.
3.9 TD 6 and 7
As described in the MRP costs for inefficient space should be excluded. This reference should be
included not only in TD 6 (capital costs), but also in TD 7 (operating costs). Part of the inefficient
space is also unused equipment or equipment with low density of end users, eg subscriber stages.
As a consequence power and cooling requirements should be adjusted downwards.
3.10 TD11 and 12
MEA is used if copper would be cheaper than fibre (TD11) or if copper would be cheaper than
radio (TD12). TNS cannot see a reason not to allow the opposite also to prevail, ie if fibre or
radio would be cheaper than copper than these technologies should be used.
3.11 TD 15
Example of this business rule for single houses. http://www.telia.se/files/fragor_svar_nat_070425.pdf
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ATM based backhaul is soon history. Main part of TS backhaul today is GigaEthernet based as
are all deployments by B2 since year 2000. It is of no relevance to maintain TD 15 as MEA is
clearly not ATM.
3.12 TD 18
Sharing of duct and trench can occur with many different type of applications, not only cable TV
networks. There is no reason to exclude other opportunities with utilities (energy, water etc) and
3.13 TD 31
Comment on the text. Pricing of broadband (Bitstream) does not reflect usage but rather provided
bandwidth. The Criterion text in bold can however remain unchanged
3.14 BU 1
The current LRIC model is based on a slightly modified scorched node assumption. TNS accepts
that a scorched earth assumption may be difficult, however at a minimum it should be clearly
stated in the MRP that:
• the most efficient access technology should be used as MEA (e.g., fiber, FWA, mobile
• the number of telestations is not fixed
This would align the model with TS’ current practice when establishing new premises and
connecting remote location and how an effective operator would act. As a result more efficient
access technology e.g., mobile systems, can replace of cost inefficient telestations in the model.
The model should assume packet-switched rather than circuit-switched technology. This is
already the case in the core network in Norway. On page 80 (12.2) in the MRP it is stated that the
model should use the most cost effective technology currently available and actually deployed in
large scale fixed networks, or likely to be deployed within the next years. We fully agree with
this view and would like it to be reflected in BU 2, ie the criterion should emphasize “most cost
effective technology” rather than “accepted industry standards”. Further it should be justified
why and how the choice is the most cost effective solution.
For the access network, packet-switched technology for voice is the future solution, although
currently less developed. At a minimum, the model should consider proportional migration to
packet switched voice in the access network to align with the forecasted growth of VoIP.
Furthermore canalization should not be the only option in the bottom-up model, but in more
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remote areas of the network, poles (as, for example, is the case in Norway), FWA, mobile
systems etc., should be included (CG16, TD1-2, 4, 10 and BU1-2,4, 8, 14, 24 therefore have to be
Access technology should not be constrained to the choices done by TS as this would directly be
in conflict with the ambition to model the most cost effective technology currently available and
actually deployed in large scale fixed networks, or likely to be deployed within the next years
(page 80, 12.2). Therefore the criterion should be changed into an access network modelled
according to the “most cost effective technology currently available” rather than according to
industry standards. Fiber access networks, street cabinet (VDSL2 provision), radio etc. must be
modelled to ensure the most cost effective technology currently available is used. This implies
that the usage of fiber access networks, street cabinet (VDSL2 provision), radio etc is likely to be
higher than currently deployed or forecasted to be deployed by TS during the planning period.
Any cases where a lower deployment level of these technologies is chosen it has to be justified
and documented why this lower deployment level is more cost effective.
3.18 BU 7-8
The model should include not only all the current traffic but also all the forecasted traffic.
Therefore is necessary to complement with VOIP and other services. Concerning Bitstream it
should be broken down into different sub products such as Bitstream household, Enterprise
ADSL-ATM replacement, Backbone 2.0 (and other TS products likely to be regulated under
Bitstream). As Bitstream price is set on sub product and bandwidth it is relevant to conduct also
this type of break down.
3.19 BU 13
The bottom-up model should not be constrained by choice of circuit switched technology or
hierarchical levels in the exchange structure. Rather it should be a requirement that the most cost
effective technology should be used (see also 3.13 and 3.14 above). If the trend is towards a
flatter switching structure it is difficult to understand why three levels should be assumed instead
of leaving opportunity for an optimised structure. The choice of technology and levels of
hierarchy should be justified and documented why it is the most cost effective solution.
3.20 BU 29
Overhead costs must be clearly defined to avoid double charges, eg when shared line is changed
to a full line TS claims overhead charges as this product change is currently not included in the
hybrid model. This serves as another example on the challenges described in the introduction of
this chapter with regard to price elements not covered in the model. For this example it would be
useful with a transparent handling of overheads to avoid discussion / dispute whether these
overheads have already been accounted for in the hybrid model. See also comment on CG4.
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3. 21 Other changes
• Utilization rates through the model should be clearly stated, and at least partially based on
benchmarking with competitive operators. These rates should correspond to the level of
an effective operator. On Co-location it is not logical to on the one side allow for a
utilisation rate and on the other hand require that all build out of capacity is co-financed
by other operators. More relevant would be to assume 100% utilisation of floorspace,
power, cooling, cross-connect etc. and to combine this with a process for co-financed
build-out. Much more relevant, however, would be to adjust the utilisation rate on
relevant parameters to reflect that TS provides co-location in all “reasonable” cases and
that in the remaining telestations no further build out for TS and other operators is
• Annual updates of the LRIC model. The LRIC model is a key driver of retail prices for
fixed products in Sweden. The model should therefore be updated annually with a full
revision every second year or in cases where assumptions around new technology being
rolled out have changed. This is required to secure that the consumers capture the benefit
of productivity improvements and new technology. Furthermore to simplify the planning
process of the operators the “cost results” should be made available by end of October,
with changes in full effect by calendar year end. (The pricing method therefore has to be
• The LRIC model’s cost output must consider ongoing productivity and technology
improvements as they are key characteristics of European telecom incumbents like TS.
The LRIC model must capture this by assuming productivity improvements. If not, TS
will generate profits at the expense of Swedish consumers. Virtually all European
incumbents, including TS, have run large productivity improvement programs over the
past several years, and technology innovation is constantly taking place. An independent
review should be conducted to verify if the functional area costs used are aligned with the
general principles of an efficient operator. Based on 2006 data a productivity
improvement of ~25% can be expected as TS has conducted major productivity
improvements since the last major revision of the LRIC model. This is fully transparent
from the annual reports 2003-2006 of TS:
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Operational costs (Net sales – EBITDA) for TeliaSonera Sweden fixed services:
2002: 20.216 MSEK
2003: 18.095 MSEK
2004: 16.788 MSEK
2005: 16.504 MSEK
2006: 15.233 MSEK
This implies a productivity improvement of ~25%
#FTE’s TeliaSonera Sweden:
This implies a reduction in the number of employees of ~17%. The development in the
number of employees confirms the productivity improvement shown above.
The functional area costs in the consolidated LRIC model therefore must be updated to
incorporate the actual development since the last major revision of the LRIC model. The
productivity parameter in the LRIC model therefore should be set to 25% or the
individual parameters adjusted so that the overall cost reduction is 25%. All other
elements of the LRIC model where improved productivity implies lower costs should also
be reduced accordingly.
The cost reductions seen to date are sustainable and should therefore be included in the
LRIC model. This sustainability is evidenced by Anders Igel (CEO TS): “We are right
now implementing an efficiency program in all of our home markets, particularly in
Sweden and Finland, to bring our costs to significantly lower levels. Our cost levels must
be on par with the best in Europe to be able to compete in the future. Our progress so far
with these efforts has been satisfactory.” (Telia annual report 2005). Furthermore, it is
stated in the 2006 annual report: “The restructuring programs initiated in 2005 in Sweden
(…) were continued. The yearly effect from cost savings measures implemented by the
end of 2006 total SEK 2.8 billion in Sweden (…). The goal is to have reduced the cost
levels by SEK 4–5 billion in Sweden (…) annually as of 2008 compared to 2004.” In
addition, “The restructuring program started in the beginning of 2005 was expected to
reduce annual gross costs by SEK 4–5 billion as of 2008, compared to the cost level of
2004. During 2006, the savings effect was SEK 2.3 billion (SEK 800 million in 2005),
and the restructuring measures already implemented to date are estimated to give an
annual gross savings effect of SEK 2.8 billion in 2007. Additional measures will be
implemented in 2007. The program was also expected to reduce the amount of personnel
by approximately 3,000 through early retirement and other measures. By the end of 2006,
a total of 1,209 employees had accepted the offer for early retirement and 468 employees
had been transferred to the re-deployment unit. Of these, a total of 1,512 had left the
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company by the end of 2006. In addition, hired personnel have decreased by
TS has committed themselves to further cost reductions in their annual report of 2006:
“Our work to cut costs and improve profitability continued. Still, this is not enough” and
“streamlining measures and utilization of economies of scale will therefore continue to be
a determining factor for TeliaSonera’s success”. This was repeated at the TS capital
market day 16/5-07 where Kim Ignatius (CFO TS) stated that they will continue their cost
improvements: “Restructuring measures to be implemented in Sweden during rest of 2007
are estimated to give an annual gross savings effect of approx. SEK 1.4 billion as of 2008
of which 0.9 will be conducted in the fixed line business”. In a forward-looking model
like the LRIC based on a cost efficient operator, these improvements must also be
TS clearly states in their 2005 annual report that cost improvements are conducted in all
parts of the Swedish organization, i.e., also related to the fixed network: “We are
implementing these measures at a high speed; it is important that the cost reductions occur
quickly and from Telia-Sonera’s current strong position. It is also important that costs are
reduced in all operations. The fall in prices that has characterized the market in recent
years has put pressure on TeliaSonera’s margins despite good results from implemented
market initiatives and savings initiatives. TeliaSonera’s cost levels must therefore be
lowered permanently and structurally to considerably lower levels than where they are
today”. In the same report it is also stated: “A part of these efforts is the continuous
benchmarking of our costs. Comparisons show that a number of our operations, for
example, NetCom in Norway and Omnitel in Lithuania, have overall very competitive
cost levels even if there are savings opportunities within certain areas. In the Swedish and
Finnish operations, there are opportunities for savings in all areas”.
There is no doubt from TS’ above statements that the cost efficiency measures have been,
and continue to be, conducted for all parts of the Swedish organization. Therefore, the
productivity improvements, both past and future, should be incorporated in the LRIC
model. The full consumer benefit of these improvements should be captured for 2006.
Since the new model is first released some months into 2008, and the new model’s basis
year is 2006 we need to adjust 2006 base year figures into 2008 year level. This is fairly
straightforward for items with a price trend. For other items such as functional costs and
overhead a productivity index should be used. In the following years it should be a
standard procedure to adjust cost levels to the year the model update/revision is intended
to be used. The cost savings referred might be partly covered by the network optimization
issues as described earlier. Nevertheless, it is suggested to conduct a review.
• TS compliance with LRIC results. The purpose of the LRIC model is to determine fair
and transparent prices for use of TS fixed network services. The LRIC model is thus a
cornerstone of the existing, regulatory regime. TNS supports the general purpose of the
LRIC model, but we see a major issue in that TS consistently has made a mockery of this
process by deliberately stalling any regulation that TS does not view as beneficial. Based
on long-term experience, we doubt that TS will change behavior. TNS is thus actively
promoting changes that speed up the processes that settle disagreements on regulatory
matters. This discriminating behavior is, as noted by ERG, not only related to non-
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compliance with LRIC cost results, but also to delivery time, co-location space, etc. In our
view the main challenge is not related to the purpose of the model, but to the
implementation of it. Therefore PTS should also address the implementation issue more
thoroughly in MRP as this is crucial for the success of the model. The implementation
process should involve among other items the following.
o Only yearly changes
o Changes defined through a specified process where all operators have equal
opportunity to give input and comment the model
o Fixed date of implementation of the model as January 1st
o Unavailability of information from TS gives PTS the right to set assumptions.
These assumptions are only changed on a yearly basis
o For the case of appealed PTS decision turning into a court case this
implementation description will prevent PTS from doing any changes to the model
apart form the yearly changes
We are willing to discuss the last item and the whole letter in more detail in a meeting with PTS
Telenor Fixed Products & Operations