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Telecom Economic
Cost Model

Telecom Economic Cost Model

The Telecom Economic Cost Model estimates the forward-looking, long-run economic costs of local telephone networks. It can be used to estimate the costs of unbundled network elements like access lines (local loops) and switches as well as the costs of major services like local exchange service and switched access.

This is a picture of the Telecom Cost Model logo.

The Telecom Model has unmatched versatility. With more than 1700 user-modifiable inputs, it can use any loop technology or combination to estimate costs of any size carrier--from a monopolist serving 100% of the customers down to a niche marketer skimming the cream of a few narrowly targeted markets. It can readily perform multiple tasks (e.g. identifying high cost areas for a Universal Service Fund, pricing unbundled network elements, designing retail tariffs and verifying the reasonableness of individual contract service arrangements), providing greater efficiency and more complete consistency of assumptions and procedures.

What's more, the Telecom Model can estimate numerous different types of cost--e.g., total, incremental, marginal and stand-alone-- allowing the user to estimate the specific type of cost which is most relevant to the task at hand, or to view a single issue from multiple perspectives. And it can analyze the costs of serving as many as 30 distinct categories of business, residence and special access customers.

The Telecom Model can summarize results at various levels of detail--encompassing an entire state, a group of wire centers, a single wire center, zones within wire centers, individual distribution areas--to provide both an overview and as much supporting detail as may be needed for a particular task. It saves all inputs and outputs to a database, making it easy to generate a wide variety of different tabular and graphic reports, as well as maps.

The Telecom Model is a general purpose computerized cost model which is flexible enough and powerful enough to be useful in a wide array of situations. It has the flexibility to estimate a wide variety of different types of costs under a wide range of scenarios. Hence, it is capable of answering many "what ifs" without much coaxing. For example, models used by local exchange companies (LECs) are typically designed for a monopoly market, examining the costs of a single supplier with 100% market share. In contrast, the Telecom Model can examine costs from many perspectives--that of the incumbent LEC plus any reasonable number of new entrants. Furthermore, it can compare competing scenarios with different market shares for the various competitors--and with different shares of different submarkets (e.g., business vs. residential, urban vs. rural).

Recent major revisions to the Telecom Economic Cost Model allow it to incorporate an extremely flexible and powerful geographic information system (GIS) approach to data handling. With this fundamental redesign, the Telecom Model can utilize virtually any type of information which is, or can be, converted into a geographic data base format, including the actual addresses and/or latitude and longitude of individual customers, and the actual latitude and longitude of the incumbent LEC's existing network components, including the physical locations of feeder cable and serving area interfaces.

At least with regard to loop costs, the cost models used by incumbent LECs are often heavily dependent upon company-specific data sets (usually reflecting their embedded network to varying degrees).In contrast, the Telecom Economic Cost Model has been designed with a high degree of flexibility and generality, so that it can be readily adapted to a variety of different data sources and situations.

The Telecom Model is fully consistent with the FCC's recently announced requirement for its universal service proceeding that "[t]he cost study or model and all underlying data, formulae, computations, and software associated with the model must be available to all interested parties for review and comment... [and]... must include the capability to examine and modify the critical assumptions and engineering principles." [FCC, Report and Order in CC Docket No. 96-45 (May 7, 1997), 250.]

The review and auditing process is made easier in the Telecom Model by the extensive use of "named cells" which aid users in reading and understanding the algorithms, and by a computerized auditing tool that allows users to tag the computer screen with colored arrows that graphically trace from one algorithm to the next, tracking backward or forward from any point in the model. Since these arrows can be selectively inserted or removed as needed, they allow creation of a visual "road map" through the model, a map custom tailored to a specific issue or to the specific focus of the auditing effort.

The Telecom Model has far greater flexibility and power than most incumbent LEC models. It can develop costs for virtually any geographic unit, ranging from a wire center serving area, to specific zones served by each wire center, to specific neighborhoods or distribution serving areas. Normally, the smallest geographic area modeled would be a distribution area. The model can readily accommodate the fact that distribution areas can vary widely in size. In an urban wire center, a single distribution area would typically encompass about 300 or more customers, and each distribution area would represent perhaps 1 percent to 5 percent of the overall wire center serving area. In more rural locations, a distribution area would typically cover a larger geographic area, but it would encompass fewer customers. A typical rural wire center could have distribution areas serving as few as a dozen customers; each distribution area would encompass perhaps 3 percent to 10 percent of the overall wire center serving area. (These statistics are for illustrative purposes only; the specifics can and will vary, dependingupon the source and characteristics of the geographic data used in running the model.)

Because the Telecom Model uses a geographic information system (GIS) approach, the cost results can be aggregated and aligned to match virtually any geographic area which is larger than a distribution area. For instance, cost results can be summarized in accordance with political boundaries (e.g., counties), census boundaries (e.g., census block groups), or post office boundaries (e.g., zip code areas).

Furthermore, the Telecom Model takes advantage of a wide variety of different geographic data, in order to more accurately estimate costs. For instance, data can be obtained concerning soil conditions, including the presence or absence of bedrock or a high underground water table, which indicate where it will be unusually difficult to install cable. These data are used in the Telecom Model to more accurately estimate the costs of installing facilities in a particular area.

The Telecom Model and GIS

A geographic information system (GIS) is a computerized data handling and processing system which is capable of storing and using data describing places on the Earth's surface. It enables the user to analyze the spatial relationships between different data sets using location as the common attribute. User defined data layers can be combined to produce a map or perform spatial analysis functions as long as each layer is registered to a common geographic referencing system (e.g., latitude and longitude).

Central to a GIS (and distinguishing it from a computer mapping system that produces only graphic output) is a data base system linking spatial data to geographic information for map features. It is based on three types of data elements: polygons, lines, and points. Behind each element is a table of attributes describing each map feature and its relationship to other features. Any item stored in the tabular data base can be used for spatial analysis and mapping purposes in conjunction with any other map features and associated attributes. Thus a wide range of spatial and tabular information can be analyzed, stored, and updated with minimal effort and expense.

The Telecom model begins with GIS data relating to three key concepts: feeder segments, nodes, and distribution areas. The model uses GIS-based data describing soil conditions, telecom demand characteristics, and other attributes of distribution areas (DAs). These DAs are grouped into wire center serving areas, which are approximately (or exactly) equivalent to the geographic areas served by each existing wire center. The model can potentially use GIS-based data specifying the exact boundaries of the wire center (if available).

The distribution areas are connected to the wire center central office using a series of feeder segments. It isn't necessary to tell the model the exact routing of each feeder segment; it is sufficient to indicate the sequence of segments which connect to each other, and which ultimately connect to the central office. Each segment of feeder cable connects to the next segment of feeder cable at a "node," which is typically the same point where a feeder/distribution interface exists--where a feeder segment connects to distribution cable. Within the Telecom Model, these points are described as "DA nodes." Most feeder segments connect at "DA nodes," but can also connect at "non DA nodes" unassociated with any particular distribution area.

In this regard, the Telecom Model is far more flexible and powerful than most incumbent LEC cost models. It can model long-run economic costs in a context where none of the geographic attributes of the existing network are retained except the latitude and longitude of the wire center (the "scorched node" approach favored by the FCC). Alternatively, the model can develop costs for a network where some or all of the geographic attributes of the existing network (e.g., the latitude and longitude of DA nodes) are retained.

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