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European Mobile LRIC Modeling Advice

The Situation

European national regulatory authorities (NRAs) are currently implementing the EC's 2009 "Pure LRIC" Recommendation. This requires the construction of long-run incremental cost (LRIC) models in which the relevant increment of output is terminating services rather than the traditional "total service" increment, and hence common costs are excluded.

NERA's Role

NERA was retained by a European mobile operator and asked to provide input to a consultation process by critically reviewing the conceptual design of a mobile LRIC model to be built on behalf of the NRA.  This included analysis of the proposed methods for modeling:

  • The type and scale of operator;
  • Spectrum allocations and payments;
  • Efficient switching and transmission technology;
  • Network optimization (scorched earth/scorched node);
  • Network dimensioning;
  • The services to be included;
  • Traffic volume forecasts and migration from 2G to 3G;
  • Retail costs;
  • The relevant increment of output ("total service" or "Pure LRIC");
  • The rationale for using economic depreciation and its implementation; and
  • The weighted average cost of capital (WACC) to be used.

The Result

We identified a range of shortcomings in the proposed approach, including a series of assumptions that were not supported by economic logic and departed from international best practice.