NITAs mobile LRAIC model draft v2 cost model - · PDF fileModel Documentation NITAs mobile LRAIC model draft v2 cost model 17 December 2007 Our ref: 297-353 Analysys Consulting Limited

Model Documentation

NITA s mobile LRAIC

model draft v2 cost model

17 December 2007

Our ref: 297-353

Analysys Consulting Limited

St Giles Court, 24 Castle Street

Cambridge, CB3 0AJ, UK

Tel: +44 (0)1223 460600

Fax: +44 (0)1223 460866

[email protected]

www.analysys.com

http://www.analysys.com

NITA s mobile LRAIC model

draft v2 cost

model

Model Documentation

Contents

1 General introduction 1

2 Introduction to model documentation 2

3 Installing and running the model 5

3.1 Model workbooks 5

3.2 Running the model 8

4 Main inputs 9

5 Demand and network assumptions 11

5.1 Market demand 11

5.2 Market share 13

5.3 Traffic volumes 14

5.4 Demand drivers 14

5.5 Radio network deployment 17

5.6 Transmission and switching network deployment 28

6 Network design algorithms 33

6.1 Radio network: site coverage requirement 33

6.2 Radio network: site capacity requirement (GSM and UMTS) 37

6.3 Radio network: TRX requirements 45

6.4 Backhaul transmission 46

6.5 BSC deployment 48

6.6 3G NodeB deployment 52

6.7 3G channel kit and carriers deployment 52

Model Documentation

6.8 3G backhaul deployment 53

6.9 3G RNC deployment 53

6.10 2G MSC deployment 54

6.11 Calculation of length of backbone links 59

6.12 Transit layer deployment 59

6.13 3G MSS and MGW deployment 60

6.14 Deployment of other network elements 60

7 Expenditure calculations 65

7.1 Purchasing, replacement, and capex planning periods 65

7.2 Retirement algorithm 66

7.3 Equipment unit prices 67

8 Annualisation of expenditure 70

8.1 The rationale for using economic depreciation 70

8.2 Implementation of economic depreciation principles 71

8.3 Implementation details 73

9 Service cost calculations 74

10 Glossary of abbreviations used 76

Confidential annexes (provided as separate files)

A: Draft v2 cost model for TDC

B: Draft v2 cost model for Sonofon

C: Draft v2 cost model for Telia

D: Draft v2 cost model for Hi3G

Public annexes

E: Cost of capital

F: Model updates

1 General introduction

NITA plans to finish its long-run average incremental costing (LRAIC) model for mobile

termination at the end of May 2008. At that time, NITA will make its final decision on the

LRAIC-based termination prices that will come into force from 1 January 2009.

According to the Executive order no. 1078 from 31 October 2006, NITA is obliged to use

the efficiently incurred costs of the highest-cost company as the basis for setting LRAIC

prices. As such, the LRAIC model includes the network operators TDC, Sonofon, Telia

and Hi3G.

During the process, NITA has also considered how to treat the MVNOs, Tele2 and

Barablu, in the LRAIC model. Tele2 has been acquired by Telenor, who is also the owner

of Sonofon. At this point NITA believes that Tele2 and Telenor (including and hereafter

Sonofon) should be considered as one economic entity, and NITA s decision to treat

Sonofon and Tele2 as one economic entity also applies in the context of calculating

LRAIC-based costs.

With regard to the MVNO operator, Barablu, NITA is currently as a part of its

investigation of the competition on mobile termination markets (Market 16) in the process

of performing a market analysis for Barablu. If this analysis subsequently should conclude

that Barablu has SMP and should be subject to price regulation, NITA will then consider

the configuration of this price regulation. Should it be decided to price regulate Barablu

according to the LRAIC method, this could be based on the following options:

The mobile termination rate of its host operator

The MVNO s own cost of termination plus its commercially agreed access charge

The MVNO s own cost of termination plus a calculation of the access charge on an

LRAIC basis.

It is the view of NITA, that the second and third of these approaches would be consistent

with the legislation. Because of the highest cost principle, however, the second approach

could give rise to incentives for the host operators to increase the commercially agreed

access charge. Therefore, NITA believes that the results of the third approach should be

used as a ceiling for the results from the second approach.


draft v2 cost model | 2

2 Introduction to model documentation

This document accompanies the draft v2 reconciled bottom-up demand, network and cost

model for long-run average incremental costing (LRAIC) distributed to Danish industry

parties on 17 December 2007.

The draft v2 bottom-up model specifies in detail the demand, network and unit cost parts of

each individual operator. A roadmap of the model is shown in Exhibit 1 below.



Collating market demand - voiceOperator data on historic voice usage

Collating market demand - dataOperator data on historic non-voice usage

Market scenario subs_####Historic and forecast subscribers by operator

Market scenario voice_####Historic and forecast voice traffic per sub by operator

Market scenario data_####Historic and forecast data traffic per sub by operator

Market scenario selectHistoric and forecast voice and data traffic by operator

Operator selectDemand data for selected operator

NwDes.SelectedNetwork design parameters for selected operator

NwDes.OperatorsNetwork design parameters by operator

Lifetime.InAccounting and economic asset lifetime data

Untilisation.InUtilisation inputs for operators' assets

DemCalcBusy hour demand calculations

NwDesNetwork design algorithm

FullNwOutput of network elements required by demand

NwDeployNetwork deployment schedule, retirement and purchasing algorithms

Dem.InTransposed service demand array

NwEle.OutNetwork element output (routed demand volumes)

RouFacsNetwork routing factors

CostTrendsCapex and opex unit cost trends

Unit CapexUnit capex over time

Unit OpexUnit opex over time

Costscenario.basecaseBasecase unit cost inputs

TotCapexTotal capex incurred over time

TotOpexTotal opex incurred over time

EconDepEconomic Depreciation algorithm

Com.incrCommon and incremental cost calculations

Results

Cov&Dem.InOutdoor coverage and demand calculations - normalisation of traffic by geotype

Exhibit 1: Model schematic [Source: Analysys]



In this draft v2 model, the demand and network aspects have been updated in response to

the operators hearing submissions and new information provided since 3 September 2007.

The costing module has been populated with a realistic set of values for costs, price trends

and the weighted average cost of capital (WACC). The bottom-up model has also been

reconciled with the top-down information submitted by each mobile operator.

This documentation covers the whole model:

Section2 introduces the model documentation

Section 3 explains how to install and run the model.

Section 4 provides a quick reference to the main inputs of the draft model.

Section 5 describes the assumptions and structure of the demand module.

Section 6 details the network design algorithms of the network module.

Section 7 describes the expenditure calculations.

Section 8 explains the cost annualisation calculations.

Section 9 details the service costing calculations

Section 10 provides a glossary of terms.

This document also provides annexes for:

Annex A: Demand and network model for TDC

Annex B: Demand and network model for Sonofon

Annex C: Demand and network model for Telia

Annex D: Demand and network model for Hi3G

Annex E: Cost of capital.



3 Installing and running the model

This section presents the basic operation of the model.

3.1 Model workbooks

The model is presented in an Excel workbook, called LRIC_model_NITA_draft_v2.xls,

which can be stored in a local directory and opened as a single file. There are no external

links and no macros. The model has been developed using Microsoft Excel 2000, though it

should be compatible with later versions of Excel. The structure of the Excel workbook is

detailed in Exhibit 2:

Exhibit 2: Sheet-by-sheet description of the model [Source: NITA draft demand network and

demand model, Analysys]

Sheet name Description and details of spreadsheet calculations

Input summary Summary of model inputs by operator

Roadmap Flow diagram of model calculations with hyperlinks

Con Contents description

V.H Version history

Style Style guide

Lists Definition of lists commonly used in the model

Categorisation table Operator asset, capex and opex categories

Control.Panel Selection of operator and scenarios

Collating market demand-voice

Collation and processing of voice demand for each operator

Collating market demand-data

Collation and processing of data demand for each operator

Market_scenario_ subs_static

Subscriber history and static forecast of market share

Rows 7-20: mobile penetration

Rows 23-40: market share and subscribers by operator

Rows 41-139: 2G and 3G subscribers

Rows 140-154: non-personal SIMs

Rows 156-173: GPRS subscribers.

Market_scenario_subs_evolving

Subscriber history and indicative forecast of evolution of market share

Row structure as in static subscriber sheet




Market_scenario_subs_converged

Subscriber history and indicative forecast of converging market share

Row structure as in static subscriber sheet

Barablu Set-up sheet for Barablu scenario

Market_scenario_subs_barablu

Subscriber history and indicative forecast of market share for Barablu

Market_ scenario_ voice_medium

Medium growth scenario for voice demand forecast (see note below)

Market_ scenario_ data_medium

Medium growth scenario for data demand forecast (see note below)

Market_ scenario_ select

Market and demand scenario subscribers and traffic for the selected market scenario

Rows 6-265: parameters from selected scenarios

Rows 266-595: calculation of volumes by service.

Operator_ select Demand parameters for the selected operator

Lifetime_In Asset lifetimes and planning periods

Cov&Dem_In Calculation of coverage area and demand per geotype

Rows 11-52: distribution of 2G demand by geotype over time

Rows 54-89: distribution of 3G demand by geotype over time.

DemCalc Conversion of service demand into cost drivers

Rows 7-56: demand volumes linked in

Rows 59-99: call duration volumes linked in

Rows 101-141: calculation of successful calls per year

Rows 143-436: calculation of busy hour load by service

Rows 439-483: input of service routeing factors

Rows 485-1113: calculation of busy hour load for each part of the network

UtilisationIn Maximum equipment utilisation, including scorched node calibration factors

NwDes.Operators Network design parameters, including spectrum allocation and asset capacities for all of the mobile operators

Rows 5-9: geotype definition

Rows 10-71: spectrum

Rows 73-100: cell radii and scorched-node outdoor coverage coefficients

Rows 102-134: blocking probabilities

Rows 137-308: area coverage

Rows 310-392: coverage and capacity deployment factors

Rows 394-512: traffic parameters

Rows 514-849: network design parameters.

Rows 851-858: 3G Licence payment sequence




NwDes.Selected Network design parameters, including spectrum allocation and assets capacity for the selected mobile operator

NwDes Network design calculation

Rows 6-510: 2G coverage and capacity sites

Rows 512-630: 2G transceivers

Rows 632-715: 2G backhaul

Rows 716-783: BSC layer.

Rows 786-940: 3G coverage and capacity sites

Rows 941-1017: 3G channel kit

Rows 1020-1103: 3G backhaul

Rows 1105-1145: RNC layer

Rows 1147-1253: 2G main switching layer and transmission

Rows 1256-1380: 3G main switching layer and transmission

Rows 1384-1464: other network elements.

Full_Nw Network requirements in each year

NwDeploy Purchasing and retirement algorithms expenditure schedule as a function of network requirements

Dem_In Transposes service demand

RouFac Routeing factors for network elements for average incremental cost allocation

NwEle_Out Element output routed service demand

DiscFacs WACC and discount factors for present value (PV) calculations

Costscenario.basecase

Unit capex and opex cost inputs

CostTrends Real-terms cost trends and output weighted by cost trends

UnitCapex Unit capex over time

TotCapex Total capital expenditures

UnitOpex Unit opex over time

TotOpex Total operating expenditures

EconDep Cost annualisation economic depreciation algorithm

Rows 7-158: Capex cost per unit output

Rows 162-312: Opex cost per unit output

Rows 313-465: Total cost per unit output

Rows 467-507: Fully allocated economic cost per service unit (not used elsewhere in the model)

Rows 509-670: Total economic cost recovery.

Com_incr Input of common assets by category and the incremental and common costing calculation

Rows 3-309: Total and per-unit economic costs

Rows 311-771: Input and calculation of proportion of network elements that are common




Rows 773-1079: Calculation of common and incremental costs by network element

Rows 1082-1426: Calculation of incremental costs per service unit and common cost mark-ups

Rows 1428-1470: Check of total cost recovery post-mark-up.

Results Marked- up costs per unit of service demand

Real.to.nominal Conversion of investment and expenditure from real into nominal terms, as required for Historic Cost Accounting (HCA) costing

HCA Cost annualisation HCA algorithm

HCA.nom.to.real Conversion of HCA result from nominal into real terms

HCA.service_cost Calculation of HCA costs per service unit

Tilted_annity Calculation of 2006 tilted annuity based costs per network element.

Erlang.table Reference table: for a given a number of TRXs or channels in a sector and a blocking probability, this table provides the capacity of the sector in Erlangs

Note: The forecast of usage per subscriber can be projected in the Market_scenario_voice_#### and Market_scenario_data_####

sheets, and selected using the model control panel. In the draft model, indicative medium growth scenarios are presented for

information only.

3.2 Running the model

In order to run the model, simply press the F9 (re-calculate) key. On some versions of

Excel, a full recalculation (CTRL + ALT + F9) may be required. The model has run and

calculated when calculate is no longer displayed in the Excel status bar. The model may

take around ten seconds to fully calculate, particularly if run on an older computer.



4 Main inputs

The model uses a number of input parameters, and is designed so that these can easily be

changed. The table below provides a brief description of the main inputs and their location

in the workbook.

Exhibit 3: Input parameters and their location in the model [Source: Source: NITA draft

demand network and demand model, Analysys]

Input parameter Location in the model and brief description of the input

Control panel Selection of options or scenarios to be applied to the model

Subscriber traffic forecasts

Location: Market_scenario_voice_#### and Market_scenario_data_#### worksheets

The forecast per year-average subscriber of voice and data traffic volumes per month

Market share of subscribers

Location: Market_scenario_subs_#### worksheet

The evolution of subscribers and market share from 1 January 2007.

Network roll out Location: NwDes.Operators worksheet, rows 180-308

This controls the proportion of area covered by the coverage network in each year.

Network design parameters

Location: NwDes.Operators worksheet

These parameters control all the operator specific aspects of the network design, and most of them can be modified by the user as required:

spectrum allocation

blocking probabilities

cell radii

coverage inputs

traffic assumptions (call durations, busy hour, call attempts, traffic by geotype)

maximum frequency reuse pattern

site sectorisation

site type deployment (own, third party sites)

BTS capacity

repeater/tunnel deployments

backhaul: split between microwave and leased lines

BSC capacities and remote percentage

RNC capacities and remote percentage

BSC-MSC link capacity



Input parameter Location in the model and brief description of the input

MSC capacities

proportions of traffic traversing the backbone network

HLR, SMSC, PCU and GSN capacities and minimum deployments.

Asset lifetimes Location: Lifetime_in

Input of asset lifetimes, planning and retirement periods.

Demand driver parameters

Location: DemCalc

This sheet contains further inputs which are require to convert demand volumes into network drivers:

SMS channel parameters

GPRS traffic parameters

UMTS channel parameters

Subscriber and PDP context registration in GSNs

Routeing factors for Radio and Transmission parts of the network

MSC processor, SMSC and GSN loading parameters.

Equipment costs Location: UnitCapex and UnitOpex

Capital and operating cost per unit of equipment, expressed in real 2006 DKK.

Equipment price trends

Location: CostTrends

Annual real-terms price trend for capital and operating cost components.

Cost of capital Location: DiscFacs

Real, pre-tax WACC and inflation.



5 Demand and network assumptions

5.1 Market demand

Market demand is modelled for each mobile operator for historical years, based on data

provided by NITA s statistics and information provided by the mobile operators in

response to the data request. For future years, a forecast for market subscribers and traffic

is presented.

Subscribers

The number of active subscribers in the market is calculated, with a projection of future

population and assumed level of penetration of digital mobile services. The penetration is

assumed to reach 120% by the end of the period, following a saturation formula (see

Exhibit 4).

0%

20%

40%

60%

80%

100%

120%

140%

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Act

ive

SIM

s in

mar

ket

Exhibit 4:

Modelled mobile

penetration, in

terms of active

SIMs [Source:

Analysys]



Traffic

Information on historical traffic levels, up to 2006, is sourced from operator data. The

forecast traffic demand for each mobile operator is determined by a projection of traffic per

subscriber, multiplied by projected subscriber numbers. Traffic per subscriber is projected

for each operator using simple annual growth rates, specified in the traffic scenario sheet (Sheet Market_scenario_voice_medium, Rows 6, 14, 22 etc). The following 2G and 3G traffic services have been

modelled, split according to the information supplied by each operator:

2G and 3G Voice (incoming, outgoing off-net and on-net).

2G and 3G SMS (incoming, outgoing off-net and on-net).

2G PS data traffic.

3G PS data traffic (Release 99).

2G and 3G Incoming to VMS deposit.

2G and 3G On-net to VMS deposit.

2G and 3G On-net to VMS retrieval.

2G and 3G Technical SMS.

3G Video minutes (split by incoming, outgoing off-net and on-net).

ON 2G NR incoming, outgoing (applicable to TDC and Sonofon).

OFF 2G NR incoming, outgoing (applicable to Telia and MVNOs).

ON 3G NR incoming, outgoing (applicable to Sonofon).

OFF 3G NR incoming, outgoing (applicable to Hi3G and MVNOs).

OFF 2G MVNO SMS outgoing (applicable to MVNOs).

OFF 3G MVNO SMS outgoing (applicable to MVNOs).

The table below indicates how the various services interact with the network:



Radio Transmission Switch

processing

Service TRX or

CK

BSC or

RNC to

core

Inter-

connect

Inter-

switch

to VMS MSC SMSC SGSN

and

GGSN

HLR

Voice traffic

SMS traffic (1)

Voice to/from VMS (2)

Packet switched traffic (3)

Video traffic

Subscriber numbers

NR on network

NR off network (4)

Notes: (1): SMS traffic is assumed to be carried in signalling channel reservation

(2): calls which are deposited on the voicemail system do not utilise the radio network for call conveyance, although an

allocation for ringing time is included

(3): 2G PS traffic is assumed to be carried in data channel reservation; 3G packet switched data is added to the voice

Erlang load

(4): NR off the network is counted as NR on network for the corresponding other operator

Exhibit 5: Indicative interactions between network elements [Source: Analysys]

5.2 Market share

The market share of each operator can be projected in the Market_scenario_subs_####

sheets, and then selected as the subscriber scenario using the model control panel. In the

draft model, scenarios are presented for information only, rather than the definitive basis on

which costs will be calculated.

The draft model presents a slow evolution to equality of market share between the four

network operators in the long term (according to the introduction, Tele2 is expected to be

included with Sonofon for this purpose), which has been forecast using simple straight-line

trends.



0%

10%

20%

30%

40%

50%

60%

70%

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

Mar

ket s

hare

of s

ubsc

riber

s

TDC Sonofon Telia Hi3G Tele2

Exhibit 6: Market shares in a slow evolution scenario [Source: Analysys]

5.3 Traffic volumes

The forecast of usage per subscriber can be projected in the Market_scenario_voice_####

and Market_scenario_data_#### sheets, and selected using the model control panel. In the

draft model, indicative medium growth scenarios are presented for information only.

5.4 Demand drivers

The total service volumes for the selected operator are converted into the main demand

drivers which are used to dimension the various network elements.

Voice services

The number of voice minutes is converted into a year-average busy-hour Erlang (BHE)

load (Sheet DemCalc, Rows 143-190) using the following inputs:



Proportion of annual traffic during 250 normal weekdays.

Proportion of weekday traffic occurring in the normal busy hour.

The number of voice BHE is converted into a further measure, the number of busy hour

call attempts (BHCA) (Sheet DemCalc, Rows 192-274) using inputs of:

Average call duration.

Number of call attempts per successful call (e.g. due to unanswered calls).

60d

wd

B

PPficannualtrafBHE

Where Pd = Proportion of daily traffic in the busy hour

Pw = Proportion of annual traffic in the busy week days

Bd = Number of busy (week) days

aveD

CBHEBHCA

Where C = call attempts per successful call

Dave = average duration of a successful call.

Ringing time

Voice services explicitly include the additional Erlang load presented by the ringing time

associated with calling. Ringing time occurs for calls to a B-subscriber where there is

network occupancy until the call is answered, diverted or not answered. An estimated

ringing time of 10 seconds for calls to an end user, and 5 seconds for calls to/from the

VMS, is applied to the various call types. An estimate of 5 seconds is applied to VMS calls

because some diversions are a result of a mobile ringing but not being answered, and some

diversions are immediate.

For each service, the model calculates:



This ringing time per minute is added to the per-minute routeing factors for radio and

transmission elements in the DemCalc routeing factor table.

SMS services

The volume of SMS messages carried in the year is converted into a messages-per-busy-

hour rate using similar inputs as the voice calculation. A throughput in messages per

second is also calculated

this is equal to messages per hour divided by 3600. A

conversion factor between SMS messages and equivalent voice minutes is also calculated,

using estimates of the average SMS length (40 bytes) and the channel rate that SMS is

carried by (assumed to be 8 SDCCH per TCH) (Sheet DemCalc, Rows 276-312).

Packet data services

Demand for data services is converted into a Mbit/s demand driver and an equivalent voice

Erlang load using assumptions of:

The proportion of traffic occurring in the downlink vs. uplink direction.

The amount of additional IP overheads to user data that is required.

The channel rate at which the data is carried (13.4kbit/s CS2 for GPRS and 16kbit/s for

UMTS).

The model also calculates the number of connected and active packet data users (to

dimension the SGSN and GGSN network elements which service the packet data demand)

using estimates of the proportions of GPRS and UMTS subscriptions which are

active/connected (Sheet DemCalc, Rows 314-351).

lDurationcessfulCalAverageSuc

ssfulCalltsPerSucceCallAttempeRingingTimeveyedMinututesPerConRingingMin



Video services

A relatively small volume of video traffic is included in the model. This is converted into

BHE and BHCA in exactly the same way as voice traffic, although the model assumes that

4 channels are required per Erlang when video is included in the dimensioning of radio

network elements (Sheet DemCalc, Rows 333-337).

Routeing factors

An input table of routeing factors determines the factor applied to each service volume

when calculating the load on the various parts of the network (Sheet DemCalc, Rows 439-482, 485-1113).

5.5 Radio network deployment

The main assumptions and choices about network design are documented below.

Geotypes

The model considers four geotypes: dense urban, urban, suburban and rural. These

geotypes have been defined using the data submitted by the mobile operators. The rural

geotype can be matched closely to the various rural geotypes defined by the operators

(e.g. open, woodland, etc.). However, the definitions of non-rural areas differed between

the operators. As a result, operator-specific assumptions have been made when

transforming information such as traffic proportions from the operator-defined geotypes

into the modelled non-rural geotypes.

The proportion of area within each of the defined geotypes is shown below in Exhibit 7:



Geotype Proportion of area Cumulative proportion

Dense urban 0.08% 0.08%

Urban 0.83% 0.91%

Suburban 3.34% 4.25%

Rural 95.75% 100%

Exhibit 7: Split of

area between

geotypes [Source:

Analysys]

In order to better understand the distribution of the geotypes across Denmark, a MapInfo

dataset of Danish postcode areas has been used to assign each postcode to a geotype. This

was done by sorting postcode areas in descending order by population density and

allocating them to geotypes based on the cumulative proportion of area in the sorted list.

The geotypes are distributed across Denmark as shown in Exhibit 8.

Dense urban

Urban

Suburban

Rural

Dense urban

Urban

Suburban

Rural

Exhibit 8:

Denmark geotypes

by postcode areas

for the purpose of

the LRAIC model

[Source: Analysys]

Each operator has supplied data for traffic split by geotype, with is used to populate the

relevant traffic distribution percentage input in the model.



The definition of the geotypes can be found on the NwDes_operators worksheet (for

geographical parameters) and Cov&Dem_In (for traffic distribution calculations).

Coverage

The outdoor coverage networks for each technology (primary GSM, secondary GSM and

UMTS) are calculated separately within the model. Any in-building coverage area

provided by this deployment (where the signal strength is high enough to penetrate

buildings) will be commensurately lower, though not used to drive network deployment or

traffic calculations in the model.

In order to inform this outdoor coverage profile, NITA s mast database was used. This

database provides information about the number of active GSM/UMTS BTSs installed in

the radio networks of each operator over time. It includes information on:

Technology of the BTS (GSM900, GSM1800, or UMTS).

Location of the BTS, specified in Danish co-ordinates.

Activation date of the site that houses the BTS.

The location coordinates allow each BTS to be assigned to a geotype. At any one time, the

database can only provide a snapshot of the deployment at the time: it cannot be used to

accurately build up a time series, since the activation dates refer to the site, rather than the

BTS on that site. The two dates will only coincide when a BTS is deployed on a new site.

BTSs using more recent technologies are often deployed on existing sites, so their

associated dates in the database will be earlier than the actual date of installation of the

BTS. For example, 2G/3G operators have many UMTS BTSs with dates in the database

preceding 2000, since they were deployed on sites originally built for GSM and/or NMT.

The limitations in the database for each operator and technology are displayed below in

Exhibit 9.



Operator GSM900 GSM1800 UMTS

TDC Limitations: overlays of all three technologies on NMT sites, UMTS overlays on GSM sites, GSM1800 overlays on GSM900 sites

Sonofon Can assume no limitations: primary spectrum

Limitations: secondary spectrum many overlays

on pre-existing sites

Limitations: UMTS overlays on GSM sites

Telia Limitations: secondary spectrum many overlays

on pre-existing sites

Can assume no limitations: primary spectrum

Limitations: UMTS overlays on GSM sites

Hi3G n/a n/a Can assume no limitations: primary spectrum

Exhibit 9: Limitations of the mast database in calculating BTS deployments over time

[Source: Analysys]

NITA was able to provide several versions of the mast database, providing snapshots at

various points in the years 2004 07. Consistency checks were carried out on these data

sets, and a number of additions and removals of data were made where appropriate, to

ensure that

Forecasted (but not yet built) BTSs were removed.

BTSs with severe information gaps (such as technology and location) were removed if

the missing information could not be provided using other versions of the database.

BTSs in earlier versions of the data persisted through to the later versions in a

consistent way (sometimes BTSs would appear in the data intermittently).

After establishing a reasonable level of consistency, a detailed treatment of the BTS

deployments for the period 2003 06 was undertaken. Specifically, the number of BTSs

was calculated for the mid-year and year-end, broken down by operator, technology and

geotype. For the cases where no limitations in the data sets can be assumed (as described in

Exhibit 9), an understanding of deployments back to 1992 has also been possible. For the

remaining cases, using the date point in the database would result in an over-estimation of

the number of BTSs over time.

Some operators provided additional databases of their BTSs, which have allowed better

historical understanding of their BTS deployments over time. The mast database

information was combined with operator-supplied data in order to define the BTS locations



by geotype over time. This was in turn combined with cell radii estimates to calculate the

coverage profiles over time for each operator. These profiles were checked against

operator-supplied coverage estimates.

The databases also contained partial information on site identification, allowing BTSs to be

grouped together by their site. Where this information was unavailable, the co-ordinates of

the BTS was used to ascertain whether the BTS was an overlay or not. Two or more BTSs

(from the same operator) are assumed to be co-sited if their coordinates are within 15m of

each other. This buffer zone is used to account for

Small discrepancies in the BTS location data across the various databases.

The fact that BTSs may be listed with slightly different locations, given that they are

likely to be separately positioned on the site.

For the period covered by the databases (2003 06), the number of sites by operator,

technology and geotype has been calculated for the following categories:

GSM900 only.

GSM1800 only.

GSM900 shared with GSM1800.

UMTS only.

UMTS shared with GSM900.

UMTS shared with GSM1800.

UMTS shared with both GSM900 and GSM1800.

The definition of outdoor coverage by geotype can be found on the NwDes_operators

worksheet for each spectrum band. The same sheet also contains the definition of cell radii,

as described below.

Cell radii

Two different types of cell radii are used within the model: theoretical cell radii and

effective cell radii. Effective radii are derived from theoretical radii using the process

described below.



Theoretical cell radii

These radii apply to the hexagonal coverage area that it is estimated a BTS of a particular type,

considered in isolation, would have. Operators were able to provide some information on the

values that these cell radii would take. The model uses a set of theoretical cell radii values

which vary by geotype and technology, but not by operator

this is because theoretical cell

radii differences are considered to be due to differences in radio frequency and geotype

(clutter). These were derived by an iterative process, shown below in Exhibit 10.

Cell radii data from operators

BTS locations by operator

Area coverage data from operators (operator, time)

Cell radii estimations (technology, geotype)

BTS locations (operator, time)

Area coverage (operator, time)

Calibrated cell radii (technology, geotype)

comparison

refin

emen

t

Area coverage (operator, geotype, technology, time)

Geotype areas

Cell radii data from operators

BTS locations by operator

Area coverage data from operators (operator, time)

Cell radii estimations (technology, geotype)

BTS locations (operator, time)

Area coverage (operator, time)

Calibrated cell radii (technology, geotype)

comparison

refin

emen

t

Area coverage (operator, geotype, technology, time)

Geotype areas

Exhibit 10:

Process for

calibrating the cell

radii and deriving

area coverage over

time [Source:

Analysys]

Each operator was able to provide several values for its total geographic coverage for a

particular technology at a particular point in time. Using the databases described above, the

location of all BTSs for that particular network at that point in time was identified.

In order to derive the total geographic coverage of the network, MapInfo was used to

construct hexagonal zones of the relevant cell radius (depending on the technology of the

BTS and the geotype that it was located in) around each BTS in the network at that time.

These hexagonal zones were then grouped together and the total area of this shape was



calculated using MapInfo. Importantly, areas of overlap between hexagonal cells were only

counted once. An example of such a coverage map is given below in Exhibit 11, with areas

of network coverage shown in red.

Exhibit 11:

Example of a

network coverage

map generated by

MapInfo for a single

network at a

particular point in

time [Source:

Analysys]

This process was repeated until a set of cell radii were found that gave the closest values

for geographic coverage compared with the data provided by the mobile operators.

MapInfo was then used again as the central calculation engine to derive the geographic

coverage of each network by geotype and over time.

Effective cell radii

When calculating the number of BTSs required, the LRAIC model does not know the exact

location of each BTS across the geotypes. Assuming that BTSs have hexagonal coverage

areas means that they can in theory tessellate perfectly (fit together with no overlaps).

However, in reality some BTSs are not located optimally with the result that there may be

considerable overlap between their individual coverage areas. This concept is demonstrated

below in Exhibit 12.



Optimal locations of BTS Sub-optimal locations of BTS occurring in reality

Optimal locations of BTS Sub-optimal locations of BTS occurring in reality

Exhibit 12:

Illustration of

optimal versus sub-

optimal BTS

locations [Source:

Analysys]

The reasons for being unable to locate BTS optimally include:

obstructions (woodland, rivers, buildings),

a lack of permissible sites to house BTSs in the vicinity, and

the site already being occupied by another operator.

As a result, once a network has reached coverage in a certain geotype, the cell radii derived

using the method described above will be larger than they would be in a real-world

network. This can be seen in Exhibit 12, since sites that are sub-optimally located (on the

right of the diagram) have less total coverage than would be assumed by a more simplistic

model (on the left).

In order to explicitly account for this overlapping effect, the model weights the theoretical

cell radii by a percentage factor to give effective cell radii. In other words, the model

assumes a sub-optimal but realistic placing of BTSs. The factor that is applied is a

consequence of the scorched-node methodology used in the model, and is therefore

referred to as a scorched-node outdoor coverage coefficient (SNOCC). The value of this

coefficient can vary by operator, technology and geotype, but is always less than 1.

Effective coverage per site = SNOCC Theoretical coverage per site

2.6

Re2 = SNOCC 2.6

Rt2



Where 2.6 is the

for a hexagon, Re = effective hexagonal radius, and Rt = theoretical

hexagonal radius.

The variation of this factor by operator is particularly important, since earlier market

entrants usually get first choice of the sites, and later entrants often have to use site

locations that are less optimal for their network (e.g. because it is at a different frequency).

Operators may also choose the degree to which they fill-in any gaps in outdoor coverage

and achieve a more contiguous coverage network. Variation by geotype is also of

relevance, since the effect of sub-optimality can be expected to be greater in more urban

areas, where

BTSs need to be more concentrated due to the smaller cell radii,

the higher density of buildings can create greater obstructions,

support structures (buildings, chimneys and rooftops) cannot be moved, and

the demand for sites is higher.

In order to estimate values for the scorched-node coverage coefficient, the model uses the

calculations shown in Exhibit 13.



Theoretical cell radii (geotype, technology)

Geographic coverage (operator, geotype, technology, time)

Geographic coverage in year of interest

(operator, geotype, technology)

Effective cell radii(operator, geotype,

technology)

Ratio of effective radius to theoretical

radius (operator, geotype, technology)

Year of interest (operator, geotype,

technology)

BTS locations (operator, geotype, technology, time)

Number of BTSs(operator, geotype, technology, time)

Exhibit 13:

Derivation of

scorched-node

coverage

coefficient [Source:

Analysys]

In order to calculate the effective cell radii, the principles that have been used are that:

a geotype can only be covered by a BTS lying within that geotype,

the year of interest is determined on the basis that if a network has

achieved full coverage of a geotype: then the year of interest is taken to be the

earliest year in which coverage is achieved,

not achieved full coverage of a geotype, but has reached a steady maximal value:

then the year of interest is taken to be the first year where that value is reached.

This situation could occur because an operator may not fully deploy to a geotype

with a particular frequency (especially secondary spectrum),

neither achieved full coverage of a geotype nor reached a steady maximal value:

then the latest year (2006) is used.

Special sites

The model considers two types of special sites: indoor sites and tunnel repeaters. Data on

these site numbers has been supplied by each operator, and they are modelled on a logical



deployment basis. A small proportion of total traffic is assumed to be carried by these sites.

These roll-outs are defined in the NwDes.Operators worksheet.

Sectorisation and overlay of sites with secondary GSM spectrum

Mobile operators in Denmark are subject to coverage requirements for both the

GSM900MHz and DCS1800MHz spectrum. However, when determining site numbers, the

secondary spectrum may be overlaid upon the primary spectrum site. The proportion of

secondary spectrum BTSs which are overlaid upon primary spectrum sites is calculated

from operator information in the mast database (see the Coverage subsection above).

Macro site types

Operators utilise a mix of owned and third-party sites for deploying macro site BTSs and

NodeB equipment. Data from the operators indicates that these can be broadly grouped into

the following categories:

Owned tower sites.

Owned monopole sites.

Third-party tower sites.

Third-party roof-top or other sites.

The model considers the proportion of these four types of site deployment in order to

capture the different costs associated with site acquisition, civil works and ancillary

equipment. These site types are shown in Exhibit 14.

Own tower site Third party tower site Third party roof-top site

(blue shading denotes own equipment; grey shading denotes third-party assets)

Own monopole siteOwn tower site Third party tower site Third party roof-top site

(blue shading denotes own equipment; grey shading denotes third-party assets)

Own monopole site

Exhibit 14:

Site types [Source:

Analysys]



The proportions of sites falling into these different categories can be found in the

NwDes.Operators worksheet.

5.6 Transmission and switching network deployment

2G and 3G backhaul configuration

The backhaul configuration is modelled on the basis of the percentage of sites in each

geotype which use microwave backhaul (8Mbit/s links which can be filled with up to four

2Mbit/s E1s) or leased-line backhaul (2Mbit/s E1 links). This backhaul configuration is

shown in Exhibit 15:

9 x E1

BSC

8Mbit/s microwave (n E1 part

filled)

AN

Indoor/Tunnel sites

n E1 leased lines per site on average

E1

E1 E1

Up to 9 BTS per AN

Fibre backbone

1 x E1

9 x E1

BSC

8Mbit/s microwave (n E1 part

filled)

AN

Indoor/Tunnel sites

n E1 leased lines per site on average

E1

E1E1 E1E1

Up to 9 BTS per AN

Fibre backbone

1 x E1

Exhibit 15:

Backhaul

configuration

(AN = access node)

[Source: Analysys]

In addition to the last mile transmission to sites by microwave or leased links, a

proportion of sites are connected to access points on the operator s national transmission

network. The proportion of sites that are also connected by an access node is estimated

from operator data, and assumed to occur primarily in rural areas (where sites may be

approximately 20km away from the nearest BSC or RNC). Access nodes are dimensioned

according to a ratio of 9 BTS per node.



These assumptions can be found on the NwDes_operators worksheet.

In order to capture the specifics of the Danish networks, a series of fibre transmission rings

are modelled across the three main parts of Denmark (Zealand, Funen and Jutland). These

fibre rings, illustrated in Exhibit 16 below, carry:

Backhaul traffic from the access nodes to the BSC/RNC

traffic from remotely sited BSC/RNCs to the main switching sites (MSC/MGW)

inter-switch traffic between the main switching sites.

Jutland fibre ring

Fyn fibre ring

Sjaelland fibre ring

Jutland fibre ring

Fyn fibre ring

Sealand fibre ring

Exhibit 16:

Diagram of fibre

ring deployment in

Denmark [Source:

Analysys] The red

rings indicate the

location of the fibre

rings

BSC deployment

The number of BSCs is driven by the number of transceivers (TRXs) in the network, using

a BSC capacity as supplied by each operator. The inputs associated with this deployment

can be found in the NwDes.Operators worksheet.



Remote BSCs and associated BSC MSC links

The model includes a certain proportion of BSCs that are deployed remotely from an MSC.

This proportion is based on operator data. The traffic transiting through these BSCs is

backhauled to the MSC using E1 links provisioned over the fibre network.

RNC deployment

The number of RNCs is driven by the number of NodeBs or the total traffic which is

handled by the network. The model is based upon data for RNC capacity as supplied by

each operator, in terms of number of NodeBs and traffic capacity. The inputs associated

with this deployment can be found in the NwDes.Operators worksheet.

MSC/VLR deployment

2G MSCs are dimensioned on the basis of the processing load handled. This load is

assessed based on the number of calls, SMSs and location updates of each type that need to

be switched. This determines the number of MSC CPUs required. See Section 6.10 for

further details.

A reference table based on the Danish mobile network structures is used to determine the

number of main switching sites (MSC locations) and TSCs based on the number of MSCs

deployed in a particular operator s network. The number of MSC locations determines the

number of logical and physical links required in the network for inter-switch transmission.

Transmission requirements determine the number of E1 port cards required to support

transmission to and from the MSCs. Four types of MSC ports are calculated, based on the

associated busy hour Erlang loads carried on the respective parts of the network:

BSC-facing ports.

Interconnection ports.

Inter-switch ports.

Voicemail server ports.



3G MSCs are modelled as two units

an MSC Server (MSS), and a Media Gateway

Switch (MGW). The MSS is dimensioned on the basis of the processing load handled, and

this is assessed based on the number of calls, SMSs and location updates of each type that

need to be switched. The MGW is dimensioned on the basis of port demand, which is

calculated using a similar methodology to the calculation of 2G MSC port numbers. See

Section 6.10 for further details.

Transit layer

The number of required transit switches (TSCs) is calculated on the basis of the MSC

reference table. Transit switches are assumed to be required (efficient) once the diversity of

the switching network reaches the point that fully-meshing ten MSCs across six MSC sites

becomes overly complicated. See Section 6.10 for further details.

Backbone network

As discussed in the subsection on 2G and 3G backhaul, a configuration of three fibre

backbone rings is modelled. These rings are dimensioned according to the inter-switch

traffic plus the additional traffic associated with the radio sites and remote BSC/MSCs that

are connected directly to the fibre ring.

The backbone links are assumed to be deployed in STM-1 increments, based on the

number of E1 subunits required by the various transmission types. The length of the rings

is estimated on the basis of the Danish geography.

Other network elements

Also included is an explicit calculation of the remaining significant network element

deployments: HLR, network management systems, various IN servers, billing system,

VMS, GPRS and SMS infrastructure.



Non-network elements

The model has been populated with elements representing the major non-network activities

of wholesale support services, business overhead services and licence fees.



6 Network design algorithms

This section details the algorithms used to build up the network.

6.1 Radio network: site coverage requirement

The coverage networks for each technology (primary GSM, secondary GSM and UMTS)

are calculated separately within the model.

GSM

In Denmark, both 900MHz and 1800MHz spectrum are used for coverage purposes by the

GSM operators (TDC, Sonofon and Telia). To satisfy the coverage requirements, the

number of macro sites deployed has to be able to provide coverage for a certain area

defined for each geotype, which has been calculated for the period 1992 2006 using the

data provided by the mobile operators.

The inputs to the coverage site calculations, based on the chosen GSM operator, are as

follows:

Primary and secondary spectrum,

total area covered by the mobile operator by technology, geotype and time,

cell radii for coverage, by geotype and technology,

scorched node coefficients by geotype and technology, to convert between theoretical

and effective cell radii, and

proportion of primary spectrum sites available for overlay, by geotype.

The model allows for additional future coverage to be modelled. Exhibit 17 below outlines

the model algorithm for the calculation of GSM macro sites deployed.



Tunnel sites (t)

Indoor sites (t)

Land area km2 (G)% area to be covered by primary spectrum

(G, t)

Coverage area km2

(G, t)

Primary spectrum effective coverage

cell radius (G)

Coverage BTS area km2 (G)

Hexagonal factorNumber of primary

BTS for coverage (G, t)

% of secondary spectrum BTS deployed

on primary site (G)

Number of primary sites for coverage (G,

t)

Land area km2 (G)% area to be covered

by secondary spectrum (G, t)

Coverage area km2

(G, t)


Hexagonal factorNumber of secondary BTS for coverage (G,

t)

Number of primary sites available for

overlay (G, t)

Number of separate secondary sites required (G, t)

Total coverage sites

(G, t)

Number of secondary sectors for coverage

(G, t)Sectors per BTS (G)

Sectors per BTS (G)

Number of primary sectors for coverage

(G, t)

Scorched-node outdoor coverage

coefficient (G)

Primary spectrum coverage cell radius

(G)

Secondary spectrum effective coverage

cell radius (G)


coefficient (G)

Secondary spectrum coverage cell radius

(G)

Tunnel sites (t)

Indoor sites (t)

Land area km2 (G)% area to be covered by primary spectrum

(G, t)

Coverage area km2

(G, t)

Primary spectrum effective coverage

cell radius (G)


Hexagonal factorNumber of primary

BTS for coverage (G, t)

% of secondary spectrum BTS deployed

on primary site (G)

Number of primary sites for coverage (G,

t)

Land area km2 (G)% area to be covered

by secondary spectrum (G, t)

Coverage area km2

(G, t)


Hexagonal factorNumber of secondary BTS for coverage (G,

t)

Number of primary sites available for

overlay (G, t)

Number of separate secondary sites required (G, t)

Total coverage sites

(G, t)

Number of secondary sectors for coverage

(G, t)Sectors per BTS (G)

Sectors per BTS (G)

Number of primary sectors for coverage

(G, t)


coefficient (G)

Primary spectrum coverage cell radius

(G)

Secondary spectrum effective coverage

cell radius (G)


coefficient (G)

Secondary spectrum coverage cell radius

(G)

(G) = by geotype. (t) = by time

Exhibit 17: GSM coverage algorithm for the selected operator [Source: Analysys]



The coverage sites for the primary spectrum are calculated first (Sheet NwDes, Rows 9-37). The area

covered by a BTS in a particular geotype is calculated using the effective BTS radius. The

total area covered in the geotype is divided by this BTS area to determine the number of

primary coverage BTSs required (and therefore sites) (Sheet NwDes, Rows 19-29). The number of

secondary coverage BTSs are calculated in the same manner as for the primary spectrum (Sheet NwDes, Rows 39-60), but the calculation of the number of sites includes an assumption

regarding the proportion of secondary BTSs that are overlaid on the primary sites (Sheet NwDes,

Rows 62-86). The remaining secondary BTS require new sites (Sheet NwDes, Rows 76-80). The total

numbers of indoor BTSs and tunnel BTSs are modelled as explicit inputs using operator

data (Sheet NwDes, Rows 446-448).

All sites are assumed to be tri-sectored, except primary spectrum 900MHz coverage sites

which are assumed to be (on average) bi-sectored.

UMTS

The same methodology is used to derive the initial number of coverage NodeBs required

for UMTS (Sheet NwDes, Rows 787-802, 932-934). This is shown below in Exhibit 18. All UMTS

coverage NodeBs are assumed to be tri-sectored.

Land area km2 (G)% area to be covered (G, t)

Coverage area km2

(G, t)Effective coverage

cell radius (G)

Coverage NodeBarea km2 (G)

Hexagonal factor

Number of NodeBfor coverage (G, t)

Number of sites for coverage (G, t)

Sectors per NodeB(G)

Number of sectors for coverage (G, t)


coefficient (G)

Coverage cell radius for (G)

Land area km2 (G)% area to be covered (G, t)

Coverage area km2

(G, t)Effective coverage

cell radius (G)

Coverage NodeBarea km2 (G)

Hexagonal factor

Number of NodeBfor coverage (G, t)

Number of sites for coverage (G, t)

Sectors per NodeB(G)

Number of sectors for coverage (G, t)


coefficient (G)

Coverage cell radius for (G)


Exhibit 18: UMTS coverage NodeB dimensioning [Source: Analysys]



Within the UMTS network, however, the effect of cell breathing has been included. Cell

breathing takes places in a UMTS network in the situation where traffic loads increase and

the subsequent rise in the signal-to-noise ratio acts to curtail the range of the cell

usually

anticipated to be limited by the uplink communication. The coverage cell radii inputs to the

model are estimated (using operator data and a number of link-budget calculations) to be

applicable for up to a 50% load on the cells in the network. Beyond a 50% cell load, the

cell radius is estimated to decline using a polynomial approximation shown in Exhibit 19

below.

y = -2.3781x2 + 2.6013x + 0.2932

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0% 20% 40% 60% 80% 100%

Cell load

Rel

ativ

e ce

ll ra

dius

Radius Max (100%) load Poly. (Radius)

Exhibit 19:

Estimated cell

breathing effect

[Source: Analysys]

The cell load is calculated (by geotype) in the model according to the average number of

utilised carriers per sector (Sheet NwDes, Rows 1000-1003), which is then applied to the polynomial

approximation to give the relative cell radius factor. Since the cells are shrinking at the

edges, and the uncovered area cannot be uniquely covered by single additional sites in each

locality, the relative cell radius factor is squared once, to reflect the area per site, and then

squared again to reflect the degree of infill coverage required to cover the hexagonal

mesh of uncovered areas (Sheet NwDes, Rows 1014-1017). In order to avoid a complicated circularity

in the model, the cell radius post-cell-breathing is applied to the following year s coverage

roll-out calculation (Sheet NwDes, Rows 790-794).



6.2 Radio network: site capacity requirement (GSM and UMTS)

The capacity requirements for each technology (primary GSM, secondary GSM and

UMTS) are calculated separately within the model. In all cases, two steps are required,

which involve calculating

The capacity provided by the coverage sites (Sheet NwDes, Rows 186-215, 853-864).

The number of additional sites (including secondary spectrum overlays, if available)

required to fulfil capacity requirements (Sheet NwDes, Rows 217-271, 866-888).

However, the differences between GSM and UMTS technologies means that the

methodologies require slightly different inputs, as explained below.

GSM capacity requirements

Step 1: Capacity provided by the sectorised coverage sites

Denmark has coverage requirements for both its GSM900 and GSM1800 licences. Section 6.1

explains how the number of coverage BTSs has been derived for the three 2G operators, by

geotype, technology and over time. The calculation of the busy-hour Erlang (BHE) capacity

provided by the sites deployed for coverage purposes is shown in Exhibit 20.



Spectrum channels(t, 900MHz, 1800MHz)

Spectrum MHz (t, 900MHz, 1800MHz)

MHz per channel (900MHz,1800MHz)

Radio blocking probability (t, 900MHz, 1800MHz)

Maximum sector re-use (900MHz,1800MHz)

Spectral sector capacity (TRX) (t, 900MHz, 1800MHz)

Physical capacity of BTS in TRX (G)

Actual sector capacity (TRX) (G, t, 900MHz, 1800MHz)

Erlangs required for a given number of channels (G)

Actual sector capacity (Erlang) (G, t, 900MHz,

1800MHz)

Sectors required for coverage (G, 900MHz, 1800MHz)

Peak TRX utilisation

Coverage sector capacity (BHE) (G, t, 900MHz,

1800MHz)

Total coverage capacity (BHE) (G, t)

Peak macro BTS utilisation (900MHz,1800MHz)

Inputs are broken down by geotype (G), by time (t), or by frequency band

Exhibit 20: Calculation of the BHE capacity provided by the coverage network [Source:

Analysys]

For each GSM operator, the coverage capacity for each technology is calculated separately. For

a given technology, before the capacity requirements of the network are calculated, the Erlang

capacity for the allocated spectrum is determined.

The inputs to this calculation are:

Availability of spectrum,

spectrum re-use factor,

blocking probability, and

BTS capacity, in terms of TRXs.



The spectral capacity per sector is the number of transceivers that can be deployed per

sector given a certain maximum spectrum re-use factor. The lesser of the physical capacity

and the spectral capacity of a sector is the applied capacity (Sheet NwDes, Rows 124-168).

The sector capacity in Erlangs is obtained using the Erlang B conversion table

channel

reservations for signalling and GPRS are made in the Erlang B table according to the

information provided by the operators. In calculating the effective capacity of each sector

in the coverage network, allowance is made for the fact that BTSs and TRXs will in fact be

underutilised:

Underutilisation of BTSs occurs because it is not possible to deploy the full physical

TRX complement in every BTS, since BHE demand does not occur uniformly at a

small number of sites. Alternatively, an operator may specifically choose to provide

capacity using additional sites rather than additional TRXs.

Underutilisation of TRXs occurs because the peak loading of each cell at its busy hour

is greater than the network average busy hour. To take this into account, an average-to-

peak BHE-loading factor of 150% is used in the calculation of TRX utilisation,

accounting for the fact that the cell busy hour is 50% greater than the network busy

hour. Also, BHE demand does not uniformly occur in a certain number of sectors.

This sector capacity (in Erlangs) is then multiplied by the total number of sectors in the

coverage network to arrive at the total capacity of the network.

Step 2: Calculation of the number of additional sites required to fulfil capacity

requirements

It is assumed that all the GSM operators only deploy capacity BTSs on new sites, rather

than overlaying existing sites. This is based on comparison of the versions of the mast

database for the period 2003 06, which indicate that almost all of the incremental GSM

BTSs deployed were on completely new sites, either as single-technology sites or dual

sites. The reason for this is likely to be that (respectively):

TDC and Sonofon will not overlay on existing coverage sites because their 1800MHz

coverage is inside their 900MHz coverage, so they will already have overlaid those



sites for 1800MHz coverage reasons in the high-population areas where the new traffic

loads will be located.

Telia accommodates increasing capacity with 1800MHz and uses 900MHz to extend

rural coverage. For this reason, increasing demand is occurring in places (i.e.

population centres) where the operator already has 1800MHz sites.

Therefore, the additional sites required are calculated to fulfil capacity requirements after

the calculation of the capacity of the coverage networks, as shown below in Exhibit 21.

Radio BHE (G,t)

BHE carried over coverage network (BHE)

(G, t)

BHE requiring additional radio site capacity (G, t)


Peak macro BTS utilisation

TRX utilisation

Sectors per BTS (3 for full sectorisation)

Actual spectrum capacity (Erlang) (G, t)

Total effective capacity of fully overlaid site (G, t)

Proportion of additional sites (G)

Average capacity per additional site (G, t)

Additional sites required (G, t)

Total capacity BTS (G, t)

Radio BHE (G,t)

BHE carried over coverage network (BHE)

(G, t)

BHE requiring additional radio site capacity (G, t)


Peak macro BTS utilisation

TRX utilisation

Sectors per BTS (3 for full sectorisation)

Actual spectrum capacity (Erlang) (G, t)

Total effective capacity of fully overlaid site (G, t)

Proportion of additional sites (G)

Average capacity per additional site (G, t)

Additional sites required (G, t)

Total capacity BTS (G, t)


Exhibit 21: Calculation of the additional sites required to fulfil capacity requirements [Source:

Analysys]

Three types of GSM site are dimensioned according to the spectrum employed:

Primary-only sites.

Secondary-only sites.

Dual sites.

The total BHE demand is aggregated by element and then re-partitioned by geotype. GPRS

traffic is currently excluded, on the assumption that it is carried in a channel reservation.

Knowing the total capacity of the coverage network allows the determination of the BHE



demand that cannot be carried by the coverage network, broken down by geotype (Sheet NwDes,

Rows 219-222).

Assuming that all new sites are fully sectorised and that both BTSs and TRXs are not fully

utilised, the total effective capacity of a fully sectorised BTS for both primary and

secondary spectrum is calculated (Sheet NwDes, Rows 226-235). Then, for a selected operator, it is

assumed that new GSM sites will be deployed in specific proportions by site type (Sheet NwDes,

Rows 237-241). These parameters are used with the effective BTS capacities to calculate the

weighted average capacity per additional site by geotype. The total BHE demand not

accommodated by the coverage networks is then used, along with this weighted average

capacity and the split of new sites by site type, to calculate the number of additional sites

by site type and geotype required to accommodate this residual BHE (Sheet NwDes, Rows 250-271).

UMTS capacity requirements

Step 1: Capacity provided by the sectorised coverage sites

Exhibit 22 below demonstrates the methodology used to derive the capacity of the UMTS

network.



Available channel

elements per sector (t)

Percentage of channels reserved for

signalling/soft-handovers

16 channel elements per channel kit

5 channel kit per carrier per sector, 3 sectors per

NodeB

Channel elements required per sector (G)

Channels available per sector to carry voice/data

(G, t)

Erlang B Table

Erlang channels available per sector to carry voice/data (G, t)

Voice and guaranteed data (BHE)

Weighted average BHE channel load (t)

BHE traffic split (G)Voice BHE traffic (Erlangs) (G, t)

Capacity on coverage network (G, t)

UMTS coverage BTS (G, t)

BHE traffic supported by coverage network (G, t)

BHE traffic not supported by coverage network (G, t)

Radio network blocking probability (1%)

Channel kit utilisation

NodeB utilisation

Available channel elements per sector (t)

Percentage of channels reserved for

signalling/soft-handovers

16 channel elements per channel kit

5 channel kit per carrier per sector, 3 sectors per

NodeB

Channel elements required per sector (G)

Channels available per sector to carry voice/data

(G, t)

Erlang B Table

Erlang channels available per sector to carry voice/data (G, t)

Voice and guaranteed data (BHE)


BHE traffic split (G)Voice BHE traffic (Erlangs) (G, t)


UMTS coverage BTS (G, t)





NodeB utilisation


Exhibit 22: Calculation of the BHE capacity provided by the UMTS coverage network

[Source: Analysys]

The following assumptions about specific 3G modelling inputs have been made:

3 sectors per NodeB.

5MHz per UMTS carrier.

A maximum physical capacity of 5 channel kit per carrier per sector, across all

geotypes-

Channel elements are pooled at the NodeB.

16 channel elements per channel kit.

1 channel element required to carry a voice call; 4 to carry a video call.

30% of channel elements are reserved for signalling/soft-handover purposes.



The model ensures that all offered traffic

voice, data and video

is carried with a

guarantee of available bandwidth. This represents the situation where delivery of best-

effort data traffic is undertaken without compromise to the user s experience of the service

during the busy hour. The degree to which operators may allow degradation in packet data

service during the busy hour is highly uncertain at the current time, and HSDPA services

may be available to more efficiently deliver down-link traffic. Therefore, the model

includes the option to exclude 3G packet data from the radio dimensioning part (Sheet

Control.Panel, Row 23), or to specify the directionality of the capacity-limited 3G bearer (i.e. an

uplink or downlink percentage in the 3G PS data Erlang calculation) (Sheet Control.Panel, Row 24).

The sector capacity (in Erlangs) is then obtained using the Erlang B conversion table and,

using the 3G demand data in BHE calculated by the model, the average BHE channel load

is obtained. Operator data has also allowed the model to estimate 3G BHE split by geotype

(with indoor traffic calculated separately).

The number of UMTS coverage sites calculated earlier in the model is multiplied by the

average BHE channel load to derive the capacity in the coverage network by geotype (Sheet

NwDes, Rows 866-870). However, as when modelling GSM capacity requirements, allowance is

made for the fact that NodeB and channel kit capacity is less than 100% utilised:

Underutilisation of NodeBs occurs because it is not possible to deploy the full physical

complement of channel kit in every NodeB, since BHE demand does not uniformly

exist at a small number of sites. Alternatively, an operator may choose to satisfy

capacity load with additional NodeBs rather than additional channel kit for each

existing carrier.

Underutilisation of channel kit occurs because the peak loading of each cell in its busy

hour is greater than the network average busy hour. To take this into account, the same

average-to-peak BHE-loading factor of 150% is used in the calculation of the channel

kit utilisation, i.e. the cell busy hour is assumed to be 50% greater than the network

busy hour. Also, BHE demand does not uniformly occur in a certain number of NodeB

sectors.



Step 2: Calculation of the number of additional sites required to fulfil capacity

requirements

Having calculated both the 3G BHE and the capacity of the coverage network by geotype,

the BHE that cannot be accommodated by the coverage network by geotype is derived (Sheet

NwDes, Rows 872-876), and the number of additional sites calculated, as shown below in Exhibit 23.




BHE traffic that can be supported by additional carrier

on coverage sites (G, t)

Capacity on single-carrier coverage network (G, t)


Effective capacity of a site with a full overlay (t)

BHE traffic that cannot be supported by an additional

carrier on coverage sites (G, t)

Coverage sites which are overlaid (G, t)

Number of additional sites required (G, t)


NodeB utilisation




BHE traffic that can be supported by additional carrier

on coverage sites (G, t)

Capacity on single-carrier coverage network (G, t)


Effective capacity of a site with a full overlay (t)

BHE traffic that cannot be supported by an additional

carrier on coverage sites (G, t)

Coverage sites which are overlaid (G, t)

Number of additional sites required (G, t)


NodeB utilisation


Exhibit 23: Calculation of the additional sites required to fulfil capacity requirements [Source:

Analysys]

This calculation essentially uses a three-stage algorithm:

Stage 1: If the 3G BHE in a geotype can be accommodated by the coverage network

for that geotype, then no further carriers or sites are added to the network.



Stage 2: If the 3G BHE in a geotype cannot be accommodated by the coverage

network for that geotype, then another carrier is added to the BTS in that geotype so

that the residual 3G BHE can be accommodated.

Stage 3: If the proportion in Stage 2 reaches 100% (so every 3G coverage BTS in that

geotype has been overlaid with additional carriers) and there is still more 3G BHE in

that geotype, then the number of additional sites required in that geotype to

accommodate the residual BHE from Stage 1 and Stage 2 is calculated. These

additional sites are assumed to be deployed fully overlaid (with 2 carriers used) (Sheet

NwDes, Rows 878-894).

6.3 Radio network: TRX requirements

To calculate the total number of transceivers required, the inputs required are:

BHE traffic.

Number of GSM sectors, split between 900MHz and 1800MHz.

Transceiver utilisation.

Minimum number of TRXs per sector, which is assumed to be

2 in the urban geotypes

1 in the rural geotype

1 or 2 for special sites (indoor and tunnel sites) depending on operator-stated data

Blocking probability for the radio network.

Exhibit 24 below gives a flow diagram describing the calculation of transceivers required.



Total sectors (G, t,

1800MHz, 900MHz)BHE traffic (G, t, 1800MHz,

900MHz)

Average BHE traffic per sector (G, t, 1800MHz, 900MHz)

Radio network blocking probability

Minimum TRX per sector (G, 1800MHz, 900MHz)

Maximum utilisation of TRX erlang capacity

TRX per sector to meet traffic requirements (G, t, 1800MHz,

900MHz)

Total number of TRXs required (G, t, 1800MHz, 900MHz)

Total sectors (G, t, 1800MHz, 900MHz)

BHE traffic (G, t, 1800MHz, 900MHz)

Average BHE traffic per sector (G, t, 1800MHz, 900MHz)

Radio network blocking probability

Minimum TRX per sector (G, 1800MHz, 900MHz)

Maximum utilisation of TRX erlang capacity

TRX per sector to meet traffic requirements (G, t, 1800MHz,

900MHz)

Total number of TRXs required (G, t, 1800MHz, 900MHz)


Exhibit 24: Transceiver deployment [Source: Analysys]

The number of TRXs required in each sector to meet the demand is calculated taking into

consideration the TRX utilisation, and converting the Erlang demand per sector into a

channel requirement using the Erlang B table and the assumed blocking probability. The

TRXs for each sector are then calculated (being at least the minimum amount specified

above), and then the total number of TRXs required is obtained by multiplying the number

of sectors and the number of TRXs per sector (Sheet NwDes, Rows 512-631).

6.4 Backhaul transmission

The calculation of the number of backhaul links and the corresponding number of E1 ports

required is set out in Exhibit 25 below.



Circuits (G,t)

Total number of macro sites (G, t)

Special sites (t)

1 leased E1 per Special site

Proportion of sites using microwave (G)

Proportion of sites using leased lines (G)

E1 utilisation

E1s per site (G, t)

Number of sites using E1 links (G, t)

Number of microwave links (2Mbit/s) (G, t)

Total number of E1links (G, t)

Number of E1s occupied (G, t)

Proportion of sites directly linked to the fibre

ring (G) Number of E1 links connected into Fibre to

BSC links

E1s per site (G, t)

Total number of E1 links required for special sites

(t)

Circuits (G,t)

Total number of macro sites (G, t)

Special sites (t)

1 leased E1 per Special site

Proportion of sites using microwave (G)

Proportion of sites using leased lines (G)

E1 utilisation

E1s per site (G, t)

Number of sites using E1 links (G, t)

Number of microwave links (2Mbit/s) (G, t)

Total number of E1links (G, t)

Number of E1s occupied (G, t)

Proportion of sites directly linked to the fibre

ring (G) Number of E1 links connected into Fibre to

BSC links

E1s per site (G, t)

Total number of E1 links required for special sites

(t)


Exhibit 25: Backhaul calculation [Source: Analysys]

Step 1: Capacity requirements

The number of E1s required per macro site is calculated to fulfil the capacity requirements

for a backhaul link. There are eight channels per transceiver, which translates into eight

circuits in the backhaul since the backhaul is dimensioned to support all the TRX channels.

If an operator has deployed EDGE in its radio network, the relevant number of reserved

TRX channels are multiplied by a factor of four (representing the 4x coding gain achieved

with EDGE). Taking into consideration the co-location of primary and secondary BTSs on

the same site, the number of channels per site is calculated on the basis of the number of



channels per TRX multiplied by the number of 900MHz and 1800MHz TRXs. Given the

maximum capacity of an E1 link and considering the link utilisation, the effective capacity

per E1 link is calculated. The number of E1 links required per site is then obtained by

simply dividing the circuits per site by the actual capacity per E1 link (Sheet NwDes, Rows 653-668).

Step 2: Backhaul network design algorithms

There are two types of backhaul to be considered in the network: microwave (2Mbit/s

links) and leased line backhaul. The percentage of sites which have microwave backhaul is

an input into the model.

The number of microwave backhaul links (capacity of 8Mbit/s or four E1 equivalents) is

set to be a minimum of one per site. The model allows for more than one 2Mbit/s link to be

deployed in the microwave link (Sheet NwDes, Rows 670-682).

The number of sites using leased lines is calculated as the difference between the total sites

and the number of sites using microwaves. The number of E1 leased lines required is

obtained by multiplying the total number of macro sites using leased lines by the average

number of E1s required per site (from Step 1) (Sheet NwDes, Rows 684-696).

A defined proportion of sites are linked to the BSC via the fibre ring network. The capacity

of these links is dimensioned according to the average number of E1s per site (by geotype) (Sheet NwDes, Rows 701-709).

Special sites (indoor and tunnel sites) are assumed to use only E1 leased-line backhaul and

hence are added to the leased-line requirement of the macro layer (Sheet NwDes, Rows 698-699).

6.5 BSC deployment

The structure of the BSC deployment algorithm is set out below in Exhibit 26.



BSC capacity in TRX

Maximum utilisationTRX (G,t)

Number of BSC required (G,t)

Total number of BSC (G,t)

MSC-facing E1 ports per BSC (G,t)

BSC-MSC BHE (G,t)Total number of MSC-facing BSC E1 ports (t)

BSC capacity in TRX

Maximum utilisationTRX (G,t)

Number of BSC required (G,t)

Total number of BSC (G,t)

MSC-facing E1 ports per BSC (G,t)

BSC-MSC BHE (G,t)Total number of MSC-facing BSC E1 ports (t)

Exhibit 26:

BSC

deployment

[Source:

Analysys]


Calculation of BSC units

The number of BSC units deployed is dependent on the capacity of a BSC, its utilisation

and the total number of TRXs required. The number of BSC units deployed must be able to

accommodate the number of TRXs deployed (see Section 6.3). Given a maximum capacity

of the BSC in terms of TRXs, adjusted for maximum utilisation, the number of BSCs

required is calculated (Sheet NwDes, Rows 716-731).



Calculation of BSC MSC links

Remote BSCs (G,t)

BSC-MSC BHE (G,t)BSC-MSC BHE per remote BSC (G,t)

E1 capacity and utilisation

Number of E1 links (G,t)

Exhibit 27:

BSC MSC remote

transmission

[Source: Analysys]


A proportion of BSCs are designated remote (i.e. not co-located with an MSC), and

therefore require physical links to the MSC. The traffic transiting through these BSCs is

backhauled to the MSC using E1 leased lines (on the fibre ring network).

The total traffic handled by each remote BSC can be calculated using the total BHE

transceiver traffic. The average BHE traffic handled by each remote BSC is converted into

a channel requirement using the Erlang table. The number of E1 links is then calculated by

dividing this channel requirement by the capacity of an E1 link, adjusted for maximum

utilisation. It should be noted that the capacity of the BSC MSC transmission depends on

where the transcoder equipment is located. For remote BSCs, the transcoder is assumed to

be located in the MSC, and so, according to the GSM standard, has a capacity of 120

circuits. (Sheet NwDes, Rows 733-739, 751-761)

The number of E1 BSC MSC ports is determined on the basis of the number of BSC MSC

E1 links (Sheet NwDes, Row 765).



Total outgoing ports for co-located BSCs

Given the total number of co-located BSCs and BHE transceiver traffic, the total number of

outgoing ports for co-located BSCs is calculated (Sheet NwDes, Rows 767-779). The flow of

calculation for co-located BSC ports is similar to that shown in Exhibit 27, except that the

transcoder is assumed to be in the BSC (and therefore the E1 capacity is 30 channels) and

the co-located links are not modelled (because this is part of the in-building cat-5 or similar

wiring).

Incoming and outgoing ports

The incoming ports to the BSC are ports facing the BTS while the outgoing ports are ports

facing the MSC. The diagram below shows the constituents of the incoming and outgoing

ports.

Total E1 incoming ports

Number of E1 for remote BSC-MSC links

Incoming ports Outgoing ports

Number of occupied E1 units of 8Mbit/s backhaul

Number of leased line E1 links

Number of E1 for co-located BSC-MSC links

Total E1 outgoing portsTotal E1 incoming ports

Number of E1 for remote BSC-MSC links

Incoming ports Outgoing ports

Number of occupied E1 units of 8Mbit/s backhaul

Number of leased line E1 links

Number of E1 for co-located BSC-MSC links

Total E1 outgoing ports

Exhibit 28: Total incoming and outgoing ports for BSC [Source: Analysys]

The total number of E1 incoming ports into a BSC is the sum of the microwave and leased

line backhaul links, while the total outgoing ports is the sum of the total number of E1s for

both remote and co-located BSCs (Sheet NwDes, Rows 742-749).



6.6 3G NodeB deployment

The 3G NodeB deployment algorithm is outlined in Section 6.2.

6.7 3G channel kit and carriers deployment

The dimensioning of 3G channel kit is done in a similar manner to the calculation of 2G

TRXs (Sheet NwDes, Rows 941-1000), with the exception that an allowance is made for soft handover:

Total number of UMTS sites (G, t)

UMTS BHE traffic per geotype (G, t)

Average BHE traffic per site (G, t)


Minimum CK per site (G)

Maximum utilisation of CE erlang capacity

CK per site to meet traffic requirements including a soft-

handover allowance (G, t)

Total number of CK required (G, t)

Channel Elements per Channel Kit

Soft-handover allowance




CK per carrier per Node B

Minimum number of carriers per Node B

Number of carriers required per Node B


UMTS BHE traffic per geotype (G, t)

Average BHE traffic per site (G, t)


Minimum CK per site (G)

Maximum utilisation of CE erlang capacity



Total number of CK required (G, t)

Channel Elements per Channel Kit

Soft-handover allowance




CK per carrier per Node B

Minimum number of carriers per Node B

Number of carriers required per Node B


Exhibit 29: 3G channel kit and carrier dimensioning [Source: Analysys]



6.8 3G backhaul deployment

3G backhaul is dimensioned in the same way as 2G backhaul (Sheet NwDes, Rows 1020-1103). 3G

backhaul is assumed to be logically and physically separate from 2G backhaul from the site

to the switch.

6.9 3G RNC deployment

RNCs are dimensioned on the basis of the number of NodeBs per RNC, and the total traffic

in the radio network.

RNC capacity in NodeBs

Maximum utilisation

NodeBs (G,t)

Number of RNC required to support NodeBs (G,t)

Total number of RNC (G,t)

Minimum number of RNC

RNC traffic capacity

Traffic BHE

Utilisation factor

RNCs required for CS traffic


Exhibit 30: RNC dimensioning [Source: Analysys]

A minimum number of RNC units are modelled

this minimum deployment of 1 or 2

RNCs is based on operator data (Sheet NwDes, Rows 1105-1103).

The number of E1 ports into and out of RNCs is modelled in the same way as for BSC

switches (Sheet NwDes, Rows 1123-1145).



6.10 2G MSC deployment

Calculation of number of MSC units to support processing demand

To support processing demand, the number of MSC units required is calculated from the

CPU capacity, processor utilisation and the demand for MSC processor time. The flow

diagram below shows the sequence of the calculation.

MSC CPU CapacityMSC Processor

UtilisationTotal BHms Demand for

MSC (t)

Required number of processors for BHms

demand (t)

MSC Processor Capacity

MSC Units required to support processor BHms

demand (t)

(t) = by time

Exhibit 31: Calculation of MSC units to support processing demand [Source: Analysys]

Taking into account the MSC processor utilisation, the total number of processors required

to meet the demand can be calculated as the total number of busy-hour milliseconds

(BHms) divided by the effective MSC capacity (Sheet NwDes, Rows 1154-1163).

Calculation of TSCs, MSC locations, logical links and physical links

TSCs, MSC locations, logical links and physical links are all calculated by means of a

reference table based on the number of MSCs deployed in an operator s network. This

reference table

shown in Exhibit 32 below

is based directly on operator s submitted

data, and is specific to the Danish network topology (Sheet NwDes, Rows 1166-1181).

The number of MSC locations is obtained by averaging the deployment for all operators. A

transit layer of 2 TSC switches is assumed to be required when the number of MSCs

reaches 10 in order to reduce the complexity of the logical transmission layout.



# MSC 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

# MSC locations 0 1 2 3 3 4 5 6 6 6 6 6 6 7 8 9 10# TSC 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2# Logical E1 routes 0 0 2 3 3 6 10 15 15 15 12 12 12 16 20 25 30# Physical routes 0 6 6 6 6 6 7 8 8 8 8 8 8 9 10 11 12# Rings 0 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3Physical routes by ring Sjealland 0 2 2 2 2 2 3 3 3 3 3 3 3 4 4 5 5

Fyn 0 2 2 2 2 2 2 2 2 2 2 2 2 2 3 3 3Jutland 0 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 4

Distribution of E1 per ring Sjealland 0% 0% 0% 0% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%Fyn 0% 0% 100% 50% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%Jutland 0% 0% 0% 50% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%

Ring length (km) Sjealland 50Fyn 600Jutland 400

Exhibit 32: Core network reference table [Source: Analysys]



The calculation of the number of logical links that are required is based on the fully-meshed

formula n(n-1)/2 where n is the number of MSC locations. This is shown in Exhibit 33.

1

2

1

2

3

1

2

3

45

6

0 logical routes

2 logical routes

3 logical routes

6 logical routes

10 logical routes

15 logical routes

1

2

1

2

1

2

3

1

2

3

1

2

3

45

6

1

2

3

45

6

0 logical routes

2 logical routes

3 logical routes

6 logical routes

10 logical routes

15 logical routes

Exhibit 33:

Logical route

dimensioning of the

backbone [Source:

Analysys]

When dimensioning physical routes, a topology of three linking fibre rings is used, with

rings deployed on each of the three main parts of Denmark (see Exhibit 16 on page 29

above). The topology modelled is based on information sourced from each operator. The

model always deploys the three fibre rings, although there may be zero or one MSC MSC

route

in which case the fibre rings serve the sole purpose of backhauling site and

BSC/RNC traffic back to the main switching centre(s). Based on this three-ring

architecture, the number of physical links can be determined, as shown in Exhibit 34

below.



1

2

3

0 physical routes

2 physical routes

4 physical routes

6 physical routes

7 physical routes

8 physical routes

1

2

4

3

1

2

4

56

3

1

2

4

56

7

3

1

2

4

5

6

7

8

1

2

3

0 physical routes

2 physical routes

4 physical routes

6 physical routes

7 physical routes

8 physical routes

1

2

4

3

1

2

4

56

3

1

2

4

56

7

3

1

2

4

5

6

7

8

Exhibit 34

Physical route

dimensioning of the

backbone [Source:

Analysys]

Given that Copenhagen is on Zealand, the model assumes that a higher proportion of the

E1 inter-switch links are located on the Zealand fibre ring. The remaining E1 links are

divided equally between the Funen and Jutland fibre rings. This is shown in Exhibit 32

above.

Calculation of BSC-facing, interconnect-facing, VMS-facing and core-facing ports

Exhibit 35 below shows how the number of incoming and outgoing ports is obtained.



MSC locations (t)

Interconnection BHE traffic (t)

Interconnection traffic per MSC location

Erlang table channel calculation

Interconnection traffic per MSC location

(channels) (t)

Interconnection port utilisation

E1 capacity (circuits)

Interconnection ports per location (E1s) (t)

MSC locations (t)Number of

interconnection- facing E1 ports required (t)

Interconnect infrastructure VMS ports

Voicemail BHE traffic (t)

Erlang table channel calculation

Voicemail traffic (channels) (t)

Port utilisation

E1 capacity (circuits)

VMS ports (E1s) (t)

Incoming ports

Total number of outgoing E1 ports from BSCs (t)

Total number of incoming E1 ports from

BSCs (t)

(t) = by time

Exhibit 35: Calculation of BSC-facing, interconnect-facing and VMS-facing ports [Source:

Analysys]

The total number of incoming ports in the MSC is simply taken as the total number of E1

outgoing ports from the BSC (Sheet NwDes, Rows 1150-1152).

The total number of outgoing ports comprises the number of interconnect-facing ports

required, the number of VMS-facing ports required (both shown conceptually in Exhibit 35

above), plus the number of inter-switch ports required.

For the interconnection infrastructure, the total number of interconnect-facing ports

required to meet demand is obtained by dividing the interconnection BHE traffic at each

MSC location (as a channel requirement) by the actual E1 capacity of the port (Sheet NwDes,

Rows 1194-1202).

Inter-switch links are dimensioned on the basis of the BHE inter-switch traffic per logical

route (the number of which is determined according to the MSC reference table) (Sheet NwDes,

Rows 1212-1219).



6.11 Calculation of length of backbone links

The length of the backbone ring network is determined on the basis of the inter-switch

physical routes

refer to Exhibit 34 for the dimensioning of these routes on the basis of

MSC locations. As discussed previously, the model assumes that a higher proportion of the

E1 inter-switch links are on the Zealand fibre ring, with the remainder divided between the

Funen and Jutland fibre rings on the basis of the number of physical links dimensioned.

The backbone is dimensioned in terms of STM-1 links, where one STM-1 link contains 63 E1

links, subject to a maximum utilisation factor. An average route length per physical route is

calculated in order to determine the backbone link length required and the number of links (Sheet

NwDes, Rows 1221-1252).

6.12 Transit layer deployment

The deployment of a transit layer is determined according to the MSC reference table

outlined in Exhibit 32. Two TSC units are deployed when at least 10 MSCs (deployed in 6

MSC locations) are deployed in the network. By deploying a transit layer, the number of

logical links that are required is reduced compared to a fully-meshed network, e.g. the

network is split into two sets of fully-meshed linkages (linked through the TSCs). This is

shown in Exhibit 36 for the case of MSCs in seven locations with two TSCs.

MSC location

TSC

6 logical routes 10 logical routes

7 locations

mesh 1

mesh 2

Exhibit 36:

Two-mesh linking

for transit layer

[Source: Analysys]



6.13 3G MSS and MGW deployment

The 3G MSC is modelled as being composed of two separate components: the MSS, which

is dimensioned on the processing load, and the MGW, which is dimensioned on the basis

of ports. These separate calculations are built up in the same way as for the 2G MSC (Sheet

NwDes, Rows 1254-1380).

6.14 Deployment of other network elements

HLR

HLR units are deployed based on registered subscribers. The diagram below shows the

calculations used to obtain the number of HLR units required.

HLR Capacity

HLR Utilisation

Actual HLR Capacity

Registered subs (t)HLR required to support registered subscribers (t)

Minimum HLR requiredNumber of HLR units

required (t)

Exhibit 37:

HLR units calculation

[Source: Analysys]

(t) = by time

A minimum number of HLR units are deployed from the start of operations. HLR units

have an associated capacity

as provided by each operator

and a maximum utilisation (Sheet NwDes, Rows 1392-1404).



SMSC

The SMSC deployment is driven by SMS throughput demand. The diagram below shows

the calculation flow.

SMSC Throughput Capacity

SMSC Utilisation

Actual SMSC Capacity

SMS Throughput Demand (t)

SMSCs required to support thoughput

demand (t)

Minimum SMSC unitsNumber of SMSC units

required (t)

Exhibit 38:

Calculation of SMSC

units [Source:

Analysys]

(t) = by time

Dividing the SMS throughput demand by the actual SMSC capacity gives the number of

SMSCs required to support this throughput demand. The number of SMSC units deployed

is the higher of either the SMSCs required to support demand or the minimum SMSC units (Sheet NwDes, Rows 1407-1419).

GPRS/EDGE/UMTS packet data infrastructure

There are three packet data infrastructures deployed, namely PCU, SGSN and GGSN.

PCU units are added to the GSM BSCs to groom packet data to/from the radio

transmission. A certain number of PCUs are deployed per BSC. It is assumed that the

UMTS RNC intrinsically contains PCU functionality (Sheet NwDes, Rows 1424+).

The exhibit below shows the calculations for SGSN and GGSN deployment, supporting

connective and active packet data subscribers of both 2G and 3G networks.



SGSN/GGSN Capacity

SGSN/GGSN Utilisation

Actual SGSN/GGSN Capacity

Connected subscribers/active PDP

contexts in the busy hour (t)

SGSNs/GGSNs required to support BH connected

subs/PDP contexts (t)

Minimum SGSN/GGSN units

Number of SGSN/GGSN units required (t)

Exhibit 39:

SGSN and GGSN

units calculation

[Source: Analysys]

(t) = by time

The calculations for both SGSN and GGSN deployment are similar. SGSN deployment is

driven by the number of simultaneously connected subscribers in the busy hour (Sheet NwDes,

Rows 1431+), while GGSN deployment is driven by active PDP contexts made in the busy hour (Sheet NwDes, Rows 1442+). A minimum number of SGSNs and GGSNs must be deployed (one or

two, depending on operator data).

Network management centre

The network management centre is deployed at the start of operations (Sheet NwDes, Rows 1457).

Voicemail system, IN and billing system

These network elements are modelled as a single functional unit deployed at the

commencement of operations (Sheet NwDes, Rows 1460+).

Non-network elements

Major categories of non-network activities are also modelled:



Wholesale

overheads

The costs relating to the support of wholesale services is modelled

on the basis of the number of wholesale events carried by the

network. Wholesale events are considered to be the sum of:

incoming minutes from other networks

outgoing minutes from other networks

incoming SMS messages from other networks

outgoing SMS messages from other networks

national roaming minutes carried by own, or other networks.

Wholesale overheads are assumed to be operating expenditures

only.

Business overhead

activities

Business overhead activities include the head office, IT, personnel,

administrative support and executive management functions of the

business.

These activities may incur both capital and operating expenditures,

though the approach of each operator in capitalising or expensing its

business overhead expenditures varies according to how the

operator has chosen to deploy its mobile function in Denmark. As

such, the model allows for the following business overhead

expenditures:

one-off capital expenditure required to establish the head

office buildings and basic facilities

ongoing capital expenditure required to maintain and expand

the head office facilities, fixtures and fittings; modelled

approximately according to the number of subscribers supported

by the business

fixed annual operating expenditure of the fixed business

overhead functions of building rental and running costs,

business overhead staff salaries and executive management

costs

increasing annual operating expenditure of the expanding



business overhead support functions (facilities and salary

related costs); modelled approximately according to the number

of subscribers supported by the business.

2G licence fees Some operators specify 2G licence fees (annual operating

expenditures), which are modelled as a fixed annual expenditure.

3G licence fees The model includes the capital asset of the 3G licence fee; however,

its value is currently input as a notional DKK100. The expenditure

profile of this notional DKK100 is modelled as follows:

25% in year of purchase

7.5% per year for the following 10 years.



7 Expenditure calculations

Once the requirement for network assets over time has been calculated over time (Sheet

NwDeploy, Rows 9+), the model must compute the purchasing, replacement, retirement and

expenditures associated with these network elements.

7.1 Purchasing, replacement, and capex planning periods

The network design algorithms compute the network elements that are required to support

a given demand in each year (assessed at the year-average point). The network deployment

scheduled is smoothed with respect to demand up to the peak asset deployment number, to

remove any transient dips in the profile of assets needed over time (Sheet NwDeploy, Rows 315+).

In order for network elements to be operational when needed, they need to be purchased in

advance (Sheet NwDeploy, Rows 785+), in order to allow provisioning, installation, configuration and

testing before they are activated. This is modelled for each asset by inputting a planning

period of between zero (no planning required) and 24 months. This concept of a look-ahead

period is illustrated in Exhibit 40.

Time

Demand requirement (t)subject to max utilisation

Look-aheadperiod

Ord

erin

gP

urch

asin

gD

eplo

ymen

tT

estin

gA

ctiv

atio

n

Dep

loym

ent Purchase requirement

subject to look-ahead

Exhibit 40:

Look-ahead period

for asset purchase

[Source: Analysys]



In order to calculate the number of assets to be purchased in each year, the model computes

the number of additional assets that need to be installed to provide incremental capacity,

and also includes the amount of equipment that has reached the end of its lifetime and

needs to be replaced (Sheet NwDeploy, Rows 630+).

The average accounting lifetime of network elements has been calculated by taking into

consideration the information submitted by the mobile operators on the depreciation

periods applied to their network elements. In addition, an economic asset lifetime has been

estimated by Analysys and NITA, taking into account the expectations of asset replacement

under economic rather than accounting circumstances.

7.2 Retirement algorithm

When the demand for an asset is reduced, it can either be removed from the network, or

retained. An algorithm is used to model how particular assets are to be retired (Sheet NwDeploy,

Rows 469+). There will be a period of delay between the point at which the demand reduction

occurs, and the point at which the asset is decommissioned. This delay can vary from zero

(the asset is retired in the same year that the demand reduction occurs) up to 100 years (the

asset remains in the network until the end of the network s lifetime), as shown in the

following exhibits.

Retirement

delay period (yr)

Explanation

0 Asset numbers reduce directly in the year that demand reduction occurs

1 Asset reduction lags demand reduction by 1 year

2 Asset reduction lags demand reduction by 2 year

100 Assets are maintained in the network until the end of the network

Exhibit 41: Values

used for the

retirement delay

period [Source:

Analysys]



Time

Dep

loym

ent

Actual requirement according to

demand

t=1 t=2 t=100

Exhibit 42:

Retirement

algorithm options

[Source: Analysys]

The retirement algorithm is built into the model because there are various reasons why

assets may not be removed perfectly from the network with reducing demand

such as

uncertainty over migrating volumes, or requirements to maintain network quality for

remaining subscribers.

7.3 Equipment unit prices

The model includes a schedule of capital and operating expenditures for each network

element (Sheet CostScenario.Basecase), along with a price trend which reflects the price of modern

equivalent assets over time (Sheet CostTrends). This price evolution also provides an important

input into the economic depreciation calculation, as explained in Section 8.

Capital and operating expenditures relevant to each network element in the model are

derived from the input of unit price (in real 2006 DKK) and the price trend applying from

1992 onwards.

The input of unit price consists of a number of components, which can generally be

considered to be broadly similar (though not identical) for each network operator. Some

distinct inputs exist, for example, where detailed operator data is unavailable or there are

specific differences in the operators network architecture:

Direct capital

expenditure

The direct capital expenditure for a network element reflects the list

price to purchase and install one unit of equipment.



These inputs have been estimated from two main sources:

bottom-up price lists provided by a number of the mobile

operators (e.g. from internal budget planning, vendor estimates

or other internal bottom-up operator data)

Analysys estimates.

In addition, a small number of bottom-up equipment prices have

been estimated by direct comparisons with top-down data.

Indirect capital

expenditure

The indirect capital expenditure for each network element

represents the share of other capitalised costs associated with

network deployment: installation capital, tools, testing, vehicles,

network facilities, etc. The additional indirect capital expenditure

associated with each network element category is identified by

observing the discrepancies (if any) between actual top-down

expenditures and the sum of bottom-up direct capital

expenditures.

The indirect capital expenditure allowance is added as a percentage

to the direct expenditure.

Operating

expenditures for

certain (direct)

network elements

The operating expenditures associated with the direct costs of

certain network facilities are modelled as an input in DKK terms.

The specific network facilities considered in this manner are:

radio site rental

backhaul leased E1 transmission links

backbone leased/self-managed STM1 transmission kilometres

wholesale overhead cost per wholesale event

annual and per-subscriber business overhead expenditure

2G licence fees.

However, the majority of these direct cost inputs are derived from

the actual top-down operating expenditures of each network



operator.

Operating

expenditures as a

percentage of

capital

expenditure for

various (indirect)

assets

The remainder of the network element operating expenditures are

estimated from top-down data on the basis of a percentage of capital

expenditure per unit. This opex input is specified according to the

1992 capex values, although in subsequent years operating

expenditure per unit is calculated according to the opex price trend.



8 Annualisation of expenditure

This section describes the implementation of the economical depreciation algorithm used in

NITA s mobile cost model. It details both the economic rationale for using this algorithm

and the calculation steps. Further discussion of the appropriate mark-up mechanism can be

found in the model principles document.

8.1 The rationale for using economic depreciation

Economic depreciation is a method for determining a cost recovery that is economically

rational , in that it:

Reflects the underlying costs of production, and

reflects the output of network elements over their lifetime.

The first factor relates the cost recovery to that of a new entrant to the market, which would

be able to offer the services based on the current costs of production. The second factor

relates the cost recovery to the lifetime of a mobile business

in that investments and

other expenditures are in reality made throughout the life of the business (especially large,

up-front investments) on the basis of being able to recover them from all demand occurring

in the lifetime of the business. New entrants to the market would also be required to make

these large upfront investments, and recover costs over the lifetime in a similar fashion to

the existing operators. (This is based on the realistic assumption that new entrants to the

market face the same systemic barriers to entry as were faced by the existing operators, and

would not be able to instantaneously capture the entire market of an operator, i.e. the

market is less than fully contestable).

These two factors are not reflected in accounting-based depreciation, which simply

considers when an asset was bought, and over what period the investment costs of the asset

should be depreciated.

Fundamentally, the implementation of economic depreciation utilised in the model is based

on the principle that all (efficiently) incurred costs should be fully recovered, in an

economically rational way. An allowance for capital return earned over the lifetime of the



business, specified by the weighted average cost of capital (WACC), is also included in the

resulting costs.

8.2 Implementation of economic depreciation principles

The economic depreciation algorithm recovers all efficiently incurred costs in an

economically rational way by ensuring that the total of the revenues generated across the

lifetime of the business are equal to the efficiently incurred costs, including cost of capital,

in PV terms. More specifically, for every asset class, in every year, the algorithm recovers

the proportion of total cost (incurred across the lifetime of the business) that is equal to the

revenue generated in that year as a proportion of the total revenue generated (across the

lifetime of the business) in PV terms.

PV calculation

The calculation of the cost recovered through revenues generated needs to reflect the value

associated with the opportunity cost of deferring expenditure or revenue to a later period.

This is accounted for by the application of a discount factor on future cash flow, which is

equal to the WACC of the modelled operator.

The business is assumed to be operating in perpetuity, and investment decisions are made

on this basis. This means that it is not necessary to recover investments within a particular

time horizon, for example the lifetime of a particular asset, but rather throughout the

lifetime of the business. In the model, this situation is approximated by explicitly

modelling a period of 50 years. At the discount rate applied, the PV of one DKK in the last

year of the model is fractional and thus any perpetuity value beyond 50 years is regarded as

immaterial to the final result.



Cost recovery profile

The costs incurred over the lifetime of the network are recovered in line with the revenues

generated by the business. The revenues generated by an asset class are the product of the

demand (or output) supported by that asset class, and the price per unit demand.

In the modelled environment of a competitive market, the price that will be charged per

unit demand is a function of the lowest cost of supporting that unit of demand, and thus the

price will change in accordance with the costs of the factors of production. Put another

way, if a low-cost asset could support a particular service, then the price charged for the

same service supported by a more expensive asset would be reflective of the costs of the

lower-cost asset

if not, a competitor would supply the service using the lower-cost asset

in order to capture the associated supernormal profits.

The shape of the revenue line (or cost recovery profile) for each asset class is thus the

product of the demand supported (or output) of the asset, and the profile of replacement

cost (or modern equivalent asset price trend) for that asset class.

Capital and operating expenditure

The efficient expenditure of the operator comprises all the efficient cash outflows over the

lifetime of the business, meaning that capital and operating expenditures are not

differentiated for the purposes of cost recovery. As stated previously, the model considers

that the costs incurred across the lifetime of the business are recovered by revenues across

the same period. Applying this principle to capital and operating expenditure leads to the

conclusion that they should both be treated in the same way since they both contribute to

supporting the revenues generated across the lifetime of the operator. Price trends for

capital and operating components are likely to vary, however.

Technology-specific assets versus those with shared technology

A number of network assets are identified as specific to GSM or UMTS, and are assumed

to be incompatible with the network services provided using the other technology. For



example, TRXs cannot support W-CDMA radio signals. The total costs of this type of

assets are recovered from an output profile, which considers only the specific GSM or

UMTS network volumes.

Assets which are not technology-specific are assumed to serve the same purpose in the

GSM and UMTS networks

such as a switching site or backbone transmission. The total

costs of this type of assets, including all ongoing replacements, are recovered from a

profile of demand which sums up GSM and UMTS volumes according to the various

routeing factors applicable to each service.

8.3 Implementation details

The economic depreciation algorithm appears in the worksheet EconDep. The depreciation

method implemented in the model (Sheet EconDep, Rows 8+) has the following characteristics:

It explicitly calculates the recovery of all costs incurred across the specified time

horizon (50 years), in PV terms (Sheet EconDep, Row 3).

The cost recovery schedule is computed for each asset along the output profile of the asset.

Cost recovery is computed separately for capital (Sheet Com.Incr, Rows 8+) and operating

expenditures (Sheet Com.Incr, Rows 162+) (allowing for potentially different MEA price trends of

capex and opex).

Costs are calculated with reference to network element output

the annual sum of

service demand produced by the network element (weighted according to the routeing

factor) (Sheet NwEle.Out).



9 Service cost calculations

The model takes the total economic costs for each network asset, and applies a common

cost proportion to that asset class. The proportion of each asset class (cost) that is common

is calculated from the input of the number of common assets (Sheet Com.Incr, Rows 468+). Common

costs are summed across assets to calculate a total common cost amount (Sheet Com.Incr, Rows 775+

and Rows 1196-1220). Residual incremental costs per unit output are calculated for each asset class (Sheet Com.Incr, Rows 930+).

The assets are defined as being either 2G assets, 3G assets or shared assets; with common

and incremental components calculated for each (Sheet Com.Incr, Rows 1082-1191). Routeing factors

determine the amount of each element s output required to provide each service. In order to

calculate incremental service costs, incremental unit output costs are therefore multiplied

by the routeing factors according to the following equation:

),()(___cos)( kiassets

ik serviceassetctorRouteingFaassetoutputunitpertServiceCost

This disaggregation of total economic costs is show in Exhibit 43.

Dedicated 2G assets

Incremental

Applicable to 2G only services

Dedicated 2G assets - common

Dedicated 3G assets

Incremental

Applicable to 3G only services

Dedicated 3G assets - common

Shared assets

Incremental

Applicable to 2G and 3G services

Shared assets - common

Retail incremental and common costs

Business overhead common costs

Exhibit 43:

Economic cost

structure

[Source:

Analysys]

This cost structure gives rise to four equi-proportional mark-up calculations, applied

sequentially as shown in Exhibit 44 (Sheet Com.Incr, Rows 1222 to 1391).



2G 3G

shared

overheads

Exhibit 44:

Mark-up sequence

[Source: Analysys]

The addition of the mark-ups results in a total cost per unit of demand, for each service (Sheet

Com.Incr, Rows 1357+). The Results sheet of the model includes checks of the PV of cost

recovered (rows 7-13) to ensure that all incurred expenditures are flowing through to the

marked-up service costs. The mark-up for business overheads between network and retail

activities is estimated outside of the model to be 50% for network and 50% for retail

rather than encoding all the various retail costs in the model in order to endogenously

calculate the percentage allocation outcome.



10 Glossary of abbreviations used

2G second generation of mobile telephony

3G third generation of mobile telephony

AN access node

BHCA busy hour call attempts

BHE busy hour Erlangs

BSC base station controller

BTS base transmitter station or base station

CK channel kit

CPU central processing unit

E1 2Mbit/s unit of capacity

GGSN gateway GPRS serving node

GMSC GPRS MSC

GPRS general packet radio system

GSM global system for mobile communications

GSN gateway serving node

HCA historic cost accounting

HLR home location register

IN intelligent network

IP Internet protocol

LRAIC long-run average incremental costing

MGW media gateway switch

MSC mobile switching centre

NMS network management system

NR national roaming

PDP packet data protocol

PCU packet control unit

PV present value

RNC radio network controller

SDCCH stand-alone dedicated control channel

SGSN subscriber GPRS serving node

SIM subscriber interface module

SMS short message service

SMSC SMS centre

SNOCC scorched-node outdoor coverage coefficient

STM-1 155Mbit/s synchronous transport module

TCH traffic channel



TRX transceiver unit

TSC transit switch

UMTS universal mobile telecommunications systems

VMS voicemail system

WACC weighted average cost of capital

Annex A: Draft v2 cost model for TDC

See separate file

Annex B: Draft v2 cost model for Sonofon

See separate file

Annex C: Draft v2 cost model for Telia

See separate file

Annex D: Draft v2 cost model for Hi3G

See separate file

Annex E: Cost of capital

As described in the conceptual approach to the LRAIC model development, the CAPM and

WACC methods are used for the calculation of the cost of capital for the mobile operators.

The cost of capital is to be calculated under two different situations:

the cost of capital for an efficient supplier of mobile services in Denmark

the cost of capital for each actual operator in Denmark

reflecting any differing

characteristics from the first calculation.

In this annex, the parameters used in the calculation of the WACC are described.

E.1 Calculation

The cost model will require a cost of capital (WACC) to be specified. Pre-tax weighted

average cost of capital is calculated as follows:

ED

EC

ED

DCWACC ed

Where:

dC is the cost of debt

eC is the pre-tax cost of equity

D

is the value of the operator s debt

E

is the value of the operator s equity

Since these parameters, or estimates of them, are most readily available in nominal form,

we calculate the nominal pre-tax WACC and convert it to real1 pre-tax WACC, as follows:

)1(

tax -pre Nominaltax -pre Real

CPI

WACCWACC

1 We have found it more transparent to construct real-terms bottom-up mobile LRIC models. Either method requires a CPI to be

specified (either within the price trends, or the WACC).



In the calculation shown above, CPI is the rate of inflation as measured by the Consumer

Price Index.

In the following sub-sections we discuss the assumptions behind each of the parameters in

this calculation.

E.1.1 Cost of debt

)()1( Dfd RRTC

is the cost of debt, where Rf is the risk-free rate, RD is the

company s debt premium and T is the corporate tax rate.

The corporate tax rate is the rate that is applicable to the forward-looking business of the

mobile operators in Denmark. The debt premium that must be offered by a company

specifies the rate above the risk-free rate which debt providers of the company are offered

in return for debt funding. Typically, the debt premium varies with the gearing of the

company

for a higher proportion of debt funding, a greater debt premium must be

offered. This higher premium accounts for the greater financial risk borne by debt

providers and the requirement to fund interest payments out of cashflows.

E.1.2 Cost of equity

We calculate the cost of equity using the capital asset pricing model (CAPM) as follows:

efe RRC

Where:

fR is risk-free rate of return

eR is the equity risk premium

is a measure of how risky a particular company or sector is relative to the national

economy as a whole.

Each of these parameters is now discussed in turn.



Risk-free rate of return, fR

The risk-free rate of return is usually taken as that of a long-term government bond. In

NITA s prior work on WACC, a ten-year government bond has been used.

Equity risk premium, eR

Equity risk premium is the increase over the risk-free rate of return that investors demand

from equity. Usually, companies listed on the national stock market are taken as the sample

over which this average is calculated.

Beta for mobile operators,

An accurate empirical determination of requires very large amounts of historical data. It

is therefore an area of considerable subjectivity. Only in the US, and perhaps in a few other

countries with very large stock markets and long histories, have estimates of

been

practicable.

However, given that

represents the risk of a particular industry or company relative to

the market as a whole, one would expect the

of a particular type of company

in this

case a mobile phone company

to be similar across different countries. Comparing

in

this manner requires an un-levered (asset) rather than a levered (equity) :

asset = equity / (1+D/E)

The ERG report on WACC2 provides a European selection of asset ranging from 0.80 to

1.39.

2 http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf

http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf



E.1.3 Debt/equity (D/E) ratio

Finally, it is necessary to define a funding structure for the market player, based upon an

estimate of the (optimal) proportion of debt and equity in the business. NITA aims to

establish a target gearing for this part of the calculation.

E.2 Sensitivity of the cost of capital to varying the input parameters

In constructing a WACC calculation it is necessary to specify the gearing of the company

(its proportion of debt compared to equity funding) in order to weight the relative costs of

debt and equity. The gearing of the company then also influences the calculation of the

equity, which specifies the rate return required on the equity side, and the debt premium,

which specifies the rate of return on the debt side. Equity returns are provided post-tax and

debt returns are provided pre-tax, therefore in calculating the pre-tax weighted average cost

of capital of a typical mobile operator it can be shown that the cost of capital is broadly

insensitive to the gearing input:

With a higher gearing, a greater proportion of the cost of capital is due to debt

returns at a lower rate than equity returns. However, with a higher gearing the debt

premium and equity also increases. These increases broadly counteract the benefit

of sourcing a greater proportion of funding from (lower cost) debt, and this is

otherwise known as the Miller-Modiglani hypothesis.

As such, the level of the cost of capital is most strongly affected by the input of asset.

E.3 Application to Denmark

Risk-free rate of return, fR

The effective interest rate on a government bond with duration of ten years has been used

as an estimate for the forward-looking nominal risk-free interest. The effective interest rate

for the bond will be estimated as the average of the last 24 months. The current estimation



is however based on an average of 12 month average nominal rate of return for a ten-year

government bond for the period November 2006 to October 2007 of 4.20%.3

Equity risk premium, eR

As it is more risky to invest in stocks (equity) than invest in the risk-free government

bonds, investors demand a risk premium when investing in stocks. In 2002, NITA used an

equity risk premium of 3.75%.4 This choice was made by evaluating seven different studies

of the Danish risk premium

using forward-looking as well as historical approaches

that

applied arithmetical as well as geometrical averages based on time periods of 50 100

years.

The ERG report on WACC5 shows that European regulators use an equity risk premium

that is between 3.75% and 7.20%. The most recent study6 of investment returns over the

101 years from 1900 2000 shows that the equity risk premium for Denmark is 2.0%

(geometric mean) and 3.3% (arithmetic mean), and for the world it is 4.6% (geometric

mean) and 5.6% (arithmetic mean). Furthermore, the study estimates that the forward-

looking risk premium for the world is 3% (geometric mean) and a little below 4%

(arithmetic mean).

Furthermore, NITA has noted that, in 2005, the Danish Energy Regulatory Authority

(DERA) found it to be true and fair to use a premium of 3.75% as part of the regulation of

the gas transmission and distribution networks.7

3 Source: Statistics Denmark.

4 Source: NITA, Report on the Hybrid Model, August 2002.

5 http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf.

6 Dimson, Marsh and Staunton (2002): Triumph of the optimists: 101 years of investment returns , Princeton University Press,

Princeton, New Jersey and Oxford.

7 DERA s decission from 29 August 2005: Indtægtsrammeregulering af naturgasdistributionsselskaberne fastsættelsen af

forrentningssatser for 2005 samt udmelding af indtægtsrammer for 2005, http://www.energitilsynet.dk/afgoerelser-

mv/4/1/afgoerelser-gas/indtaegtsrammeregulering-af-naturgasdistributi-onsselskaber-godkendelse-af-regulatoriske-aab-

ningsbalancer-pr-1-januar-2005-godkendelse-af-omkostningsrammer-og-godkendelse-af-11-om-kostninger-for-2005/

http://www.erg.eu.int/doc/publications/erg_07_05_pib_s_on_wacc.pdf

http://www.energitilsynet.dk/afgoerelser-

mv/4/1/afgoerelser-gas/indtaegtsrammeregulering-af-naturgasdistributi-onsselskaber-godkendelse-af-regulatoriske-aab-

ningsbalancer-pr-1-januar-2005-godkendelse-af-omkostningsrammer-og-godkendelse-af-11-om-kostninger-for-2005/



NITA therefore considers it to be appropriate that the equity risk premium should remain at

3.75%.

Tax rate, T

The Danish corporate tax rate of 25% should be applied in the cost of capital calculation.

Gearing, ED

D

The gearing denotes loan capital as a proportion of the total financing needs of a company.

Generally, the demand for return on equity will be higher than the demand for return on

loan capital. An increasing gearing will lead to an increasing debt risk premium as creditors

demand a higher interest rate if there is less certainty in getting repaid.

Therefore, in financial theory it is assumed that an optimal financing structure, that

minimises the cost of capital, actually exists. This is called target gearing. In practice, this

optimal gearing is very difficult to determine and it will vary according to the type and

form of the company.

The debt proportion of mobile companies typically varies from 0% to around 30%. Mobile

operators generally have a lower reliance on debt than fixed operators because of the

greater variability in costs and returns compared with incumbent fixed line operations.

However, as discussed above, the final result is generally insensitive to this input. Often, a

cost of capital is estimated for a range of gearing rates (e.g. NITA s 2002 and 2005 reports

on the fixed network LRAIC modelling; PTS s assessment of the cost of capital for its

mobile LRIC model, 4 July 2004).

Debt premium, DR

The debt premium for a mobile operator increases with the rate of gearing. At 10% gearing,

the debt premium is approximately 1 2%. The debt premium increases to around 2 3% at a



gearing of 30%. These premium rates are consistent with NITA s previous cost of capital

determinations in the fixed network. In fixed networks, where costs are less variable, debt

funding generally represents a higher proportion with debt premiums for a given gearing.

They are 1 2% lower than in the mobile situation, where costs are generally more variable.

Asset beta, asset

When an agent invests in any given stock, two types of risks are assumed to exist

a

systematic and an unsystematic risk. The unsystematic risk is caused by the risk connected

to the specific stock. The investor may avoid this risk by spreading (diversifying) the

investment on a number of different assets. Obviously, a collection of assets (a portfolio)

will always exist, eliminating the unsystematic risk.

The systematic risk, related to the investment, is due to the fact that it is generally risky to

invest in the stock market. This risk is denoted by

and is measured as the covariance

between the return of the specific stock and the return of the market portfolio in relation to

the variance of the return on the market portfolio. For the investor, it is not possible to

avoid the systematic risk, which is why a risk premium will be demanded. The magnitude

of this will vary with the covariance of the specific stock and the overall market

fluctuations.

It is possible to estimate asset through a comparison of the fluctuations in a company s

stock relative to a broad market portfolio over a number of years. However, such

measurements will always be uncertain and will produce a wide range of values depending

on the methodology. Again, under such circumstances, regulators often have to estimate

the cost of capital for a broad range of asset values.

However, by reviewing the range of measurements carried out by third parties, it is

possible to provide some consistency to this range. Indeed, as noted above, the ERG

provides its own range to this relevant parameter. We find the following conclusions for

the reasonable range of asset:



0.8 1.0 for integrated Scandinavian fixed and mobile telecoms providers such as TDC,

Telenor or TeliaSonera, which may be disaggregated into separate

asset for the fixed

and mobile parts.

0.8 1.6 for mobile operators, depending on their degree of investment risk.8

Therefore, NITA estimates that the

asset applicable to the funding of the mobile operators

in Denmark varies quite widely, ranging from 0.9 1.5 depending on the operator.

E.4 Results

NITA considers that the cost of capital is generally insensitive to the debt proportion

applied to the weighting calculation, though it is likely that the Danish mobile operators

fall into two types of company from a funding risk perspective. Based on this NITA

considers the differences between these two groups to be uncertain and therefore finds it

most appropriate to choose a beta value of 1.1 for all companies. The WACCs calculated

with 0% gearing and an un-geared asset beta are as follows:

<--Range for TDC, Sonofon, Telia --->

<---------- Range for Hi3G ----------->

Efficient

operator

Low Beta Lower mid

Beta

High mid

Beta

High Beta

Risk-free rate, nominal 4.20% 4.20% 4.20% 4.20% 4.20%

Equity risk premium 3.75% 3.75% 3.75% 3.75% 3.75%

Asset beta 0.9 1.0 1.2 1.5 1.1

Tax rate 25% 25% 25% 25% 25%

Pre-tax cost of equity, nominal 10.1% 10.6% 11.6% 13.1% 11.1%

Inflation9 2.2% 2.2% 2.2% 2.2% 2.2%

Pre-tax cost of capital, real 7.7% 8.2% 9.2% 10.7% 8.7%

Exhibit E.1: Cost of capital [Source: Analysys]

8 Investment risk is characterised by the degree of operator maturity, market share, date of entry and technology prospects.

9 Average of inflation for the next ten years, Source: EIU.



For comparison, the WACC calculated at a 10% gearing with a 2% debt premium, and the

WACC at a 30% gearing with a 2.5% debt premium, are also shown below. As can be

seen, the level of WACC is not materially affected by the debt assumptions.

Pre-tax cost of capital, real Low Beta Lower mid

Beta

High mid

Beta

High Beta Efficient

operator

0% debt, 100% equity, 7.7% 8.2% 9.2% 10.7% 8.7%

10% debt, 2% debt premium 7.7% 8.2% 9.1% 10.5% 8.6%

30% debt, 2.5% debt premium 7.7% 8.2% 9.1% 10.4% 8.6%

Exhibit E.2: Effect of debt assumptions [Source: Analysys]

Annex F: Model updates

This annex summarises the updates made to the model in producing the draft v2 cost

model. The table added to the model files (sheet: Change Summary) lists the specific

application of model updates to each mobile operator.

Updates for draft v1 model Notes

PS data proportion Set to 75% based on NITA information

Soft-handover allowance Set to 30% based on Analysys estimates

Exhibit F.1: Draft v1 model updates [Source: Analysys]




Deployment of MMSC Commences with packet data services

Deployment of content platform Commences with packet data services

Routeing factor for 3G interconnect infrastructure Routeing factor added for national roaming incoming traffic

Inputs and calculations for Tele2 and Barablu Model expanded to accommodate MVNOs

Calculation of "BHCA per minute" for use in the cost allocation matrix

Calculation adjusted to be based on 2007 demand parameters because when based on 2006 services, some zeros for non-launched 3G services flow through to give zero cost allocation to 3G services

New services added to complete the set of national roaming services for 3G

Model expanded to accommodate more services, though not all operators utilise/carry 3G national roaming

Added calculation of book value of fully depreciated assets

Only used for one operator's reconciliation

BTS, BSC and MSC utilisation input changed to a time series

To improve calibration aspects of historic evolution

Reconciliation files created for each operator To show reconciliation comparisons

Categorisation of capital and operating expenditures for each operator

Operator-specific categorisation of costs set up to assist in reconciliation comparisons

Ringing time added to the radio routeing factors of each voice conveyance service

In response to operator comments

Various changes to data inputs as listed in hearing note

Various see hearing notes

Signalling channels per TRX Extended to be operator-specific input

Maximum utilisation of a BTS Revised algorithm so that maximum utilisation applies to the physical capacity of the BTS, rather than both the physical and spectral capacity. This is because the reasons for under-utilising the capacity of BTSs on average relate to the physical domain (i.e. to cause deployment of more sites for "quality") rather than the specific constraint which may arise in the situation of (very) limited spectrum

Erlang table functions Revised formula to look one row further (see TDC hearing response)

Cell breathing quadratic approximation added See Public Annex D

Price trend inputs populated from operator information and estimates

Same underlying trends applied to all operators

Unit equipment prices added Operator-specific inputs based on bottom-up unit prices and top-down reconciliation

A matrix of 0s and 1s has been applied to the unit cost result matrices

To not show unit costs when services do not exist

Revised TSC series of MSC look-up table To improve TSC calibration




Switching site retirement period set to two years Since these are particularly large and (slow-reacting) network elements

Revised GSN active PDP and connected subscriber percentages

To achieve more accurate calibration of GSN deployments

Refined scenario where "no migration to 3G" is selected

So that no 3G assets are deployed at all

Added cost elements for overhead elements n/a

Added cost elements for licence fees n/a

Set licence and business overhead elements to be 100% common, therefore flow through EMPU

n/a

Added input for proportion of business overhead costs recovered from network

n/a

OFF NR calls: outgoing calls are completed by the operator carrying the national roaming traffic, rather than handed back to the donor operator

Though national roaming does not apply to all operators

Calculation of data service load for GPRS corrected to include downlink proportion

Added downlink percentage to calculation

Calculation of data service load for 3G packet data corrected to include downlink proportion

Added downlink percentage to calculation

Revised topology of BTS-Fibre links connecting through the access node network element

Operator-specific input

Revised topology of BTS-Fibre links connecting through the access node network element-access node capacity

Operator-specific input

Fixed the formula for calculating capex unit price of equipment over time from the 1992 input

n/a

Fixed the formula for calculating opex unit price of equipment over time from the 1992 input

n/a

Added switch for applying the uplink data traffic to the 3G packet data radio dimensioning calculation

In case that the uplink is the limiting CE calculation then the required CE can be calculated on the uplink data

Added scenario for WACC inputs n/a

Exhibit F.2: Draft v2 model updates [Source: Analysys]

Documents

NITAs mobile LRAIC model draft v2 cost model - · PDF fileModel Documentation NITAs mobile LRAIC model draft v2 cost model 17 December 2007 Our ref: 297-353 Analysys Consulting Limited