Aercp

March 2011
Criteria for choosing an investment cost

annualization methodology and the transition
from copper to fibre
Public consultation
© Autorité de régulation des communications électroniques et des postes 1

Contents
1. Analyses and practices applied up until now.............................................................. 5

1.1. The principle of annualizing investment costs............................................................... 5
1.2. History of the practices employed by ARCEP................................................................. 6
1.2.1. Defining a simple model: historical costs........................................................... 6
1.2.2. Stimulating infrastructure-based competition: asset replacement paths......... 7
1.2.3. Guaranteeing strict cost recovery: economic current costs .............................. 9
1.2.3.1. Need to refer to an investment record.................................................... 11
1.2.3.2. Results of the current methodology for the copper local loop ............... 11
1.3. Comparison of ARCEP practices and those employed by other NRAs around Europe 13
1.4. Lessons to draw............................................................................................................ 14
2. Specific questions concerning copper cables, in view of their gradual replacement by
optical fibre .................................................................................................................... 16
2.1. How to recover the investment costs of copper cables at the end of their lifecycle? 16
2.2. Which reference costs to use in future for copper cables? ......................................... 17
2.3. Geographical and temporal considerations................................................................. 17
Appendix - Definitions and properties............................................................................. 19

Introduction
The rise in internet traffic, the development of media content and the emergence of new
personal and collective services will result in growing demand from consumers for ultra-fast
broadband access over optical fibre networks in the coming years. The deployment of new
generation ultra-fast broadband networks across the country therefore represents a major
development issue – at once social and economic – in France.
Carriers have been involved in large-scale fibre-to-the home (FTTH) network rollouts along
the main thoroughfares in the country’s biggest cities for many months now, which should
soon result in a growing rate of adoption for the new technology. In June 2010, the French
government unveiled the national ultra-fast broadband programme, which was allocated a
budget of €2 billion. The implementation of this programme over the coming months should
also help accelerate the spread of ultra-fast broadband across the country, and especially of
optical fibre, and make it accessible to all households and businesses.
ARCEP helped bring about the first solution for accessing France Telecom civil engineering
back in 2007. This solution was perpetuated by the adoption of ARCEP’s analysis of the
market for accessing the passive infrastructure that constitutes the wireline local loop. This
included access to the copper pair and access to underground civil engineering infrastructure.
Under the provisions of the French Postal and electronic communications code, CPCE (Code
des postes et des communications électroniques) – resulting in particular from the Law on
modernising the economy of 4 August 2008, and the Law on bridging the digital divide of 17
December 2009 – ARCEP defined the regulation governing ultra-fast broadband network
rollouts through two decisions: the first, dated 22 December 2009, specifies the terms of
infrastructure sharing in very high-density areas and the second, dated 14 December 2010,
lays out the terms that apply in more sparsely populated parts of the country.
The economic terms and conditions governing access to France Telecom local loop civil
engineering ducts were stipulated in Decision No. 2010-1211 of 9 November 2010. This
decision, which concerns the tariffs charged for accessing the ducts, deals primarily with cost
allocation between fibre and copper and restates the principle of using a single method for
calculating annualized investment costs for the same asset, in accordance with the European
recommendation. When used to deploy an optical fibre network, civil engineering ducts will
be treated the same way as when they are used for the copper local loop network, and the
economic current costs method defined by Decision No. 05-0834 of 15 December 2005 will
therefore be employed.
This consultation is an extension of the work performed in 2010, its purpose being to
determine whether the copper network’s eventual replacement by optical fibre networks
will require adjustments to be made to the annualization methodologies that are currently in
effect.
After having provided some background here on its previous choices concerning investment
cost annualization, ARCEP will lay out the issues that are specific to fibre deployments.

Stakeholders are requested to comment first on the properties of the different methods that
have been employed by ARCEP up until now. They are then invited, as a lead-up to large-
scale optical fibre rollouts, to propose possible amendments to the methods employed to
ensure that this technological transition takes place smoothly.
This consultation will run until 2 May 2011. Responses must be sent via e-mail to:
annualisation@arcep.fr.
ARCEP is also engaged in parallel efforts on this topic with European regulators and the
European Commission.

1. Analyses and practices applied up until now
1.1. The principle of annualizing investment costs
For certain wholesale tariffs, ARCEP may decide to impose an obligation of cost-oriented
pricing as a result of its market analyses. There are several possible approaches to cost-
oriented pricing: notwithstanding price comparisons provided for by the regulatory
framework1, a tariff can be based on costs that correspond to the regulated carrier’s actual
costs, or on the costs of a generic efficient operator.
Moreover, because tariffs generally remain the same throughout the year, it is advisable to
assess costs on an annual basis. Investment costs are recorded for a given year whereas
assets are employed over time, which results in charges being set for the asset’s entire
period of use. To ensure that operators are treated fairly and equally over time, it is
necessary to maintain a stable charge.
This is illustrated in the following graph established for an asset with an initial value of €100,
with a lifespan of 30 years and replaced twice. The vertical bars represent investment
expenditures, with a 2.0% rate of inflation and a 1.0% rate of technical progress. The curve
here represents the annualized investment costs based on the constant amortization
formula (see above), with rate of return of 7% in real terms and thus a rate of return of 9.1%
in nominal terms.
Euros
200
180
160
140
120
100
80
60
40
20
0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Year
The different methods employed for annualizing investment costs spread these costs out
over time and result in a series of annuities, each of which corresponds to the portion of the
investment costs allocated to the year in question.
Each annuity is calculated based on the economic record for the year in question:
- at the start of year k, the carrier makes an investment Ik,
- at the end of the year, this investment has a value of Ik+1 and has produced an annuity of
Ak.
1
According to Article D311 of the regulatory portion of the CPCE, ARCEP may “consider prices being charged in
comparable markets in France and abroad”.

Achieving economic equilibrium implies that, for a discount factor of a:
Ik+1 + Ak = (1+a)Ik
or:
Ak = (Ik – Ik+1) + aIk
In all of the methods, annuities therefore include two components:

- the first (amortization) corresponds to the depreciation of the value of the asset in
question;
- the second (return on capital employed) corresponds to the cost of holding the capital or
the opportunity cost of the sum invested.
Ultimately, once the source of the investment costs to be taken into account is determined,
the fact of annualizing investment costs supposes the choice of a cost amortization method.
Theoretically, if investments are regularly spread out over the years during which the
infrastructure is used, any annualization methodology will make it possible to obtain stable
annuities over the period of use of these assets, thereby ensuring the fair and equal
treatment of operators over time.
1.2. History of the practices employed by ARCEP
1.2.1. Defining a simple model: historical costs
In the past, ARCEP has employed historical costs for the cost accounting of interconnection
products subject to price control obligations, obtained directly from the regulated operator’s
accounts. These costs have the advantage of simple implementation: neither the
amortization periods nor the amortization methods are altered with respect to accounting
entries. ARCEP did, however, allow itself to restrict the scope of the considered costs to only
those it deemed relevant.
The amortization method most commonly used in accounting is constant amortization.
For an investment I with an economic lifespan of T made in year 0, amortization for year k is
therefore calculated as:
I
Amok = , 1 k T
T
The annuity obtained with a nominal rate of return of an which is constant throughout the
period is therefore:
I I
Ak = + an (T (k 1))
T T
In practice, a tariff based on thus-calculated annual investment costs could translate into
operators being treated unfairly over time. Indeed, for a given investment, the application of
linear amortization results in annuities that decrease over time. This is what is depicted in
the graph below for an asset with an initial value of €100, with a lifespan of 10 years, under a

scenario of a 1.0% rate of technical progress and a 2.0% rate of inflation, with a real rate of
return of 7.0% (9.1% nominal rate of return).
Annuities resulting from constant amortization
Euros
20
18
16
14
12
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10
Year
Amortization Return on capital employed
Furthermore, in instances where several assets are replaced simultaneously, the series of
total annuities will include sudden fluctuations, which leads to a lack of predictability on the
tariffs for operators.
1.2.2. Stimulating infrastructure-based competition: asset replacement

paths
In accordance with the objectives laid out in the French Postal and electronic
communications code 2 , ARCEP considered it necessary to adopt a more economical
approach to the annualization of investment costs for certain assets, taking account of the
economic signal sent by the tariff to the different players.
When working on setting unbundling tariffs following the adoption of the European
regulation of 2000, and at a time when certain technologies such as the wireless local loop
(WLL) and cable appeared to constitute truly competitive alternatives to the copper local
loop for serving subscribers, it was deemed necessary to introduce a long-term economic
signal aimed at alternative operators for access products.
It was within this context that the asset replacement path method was implemented for the
first time. It was then extended to the assessment of interconnection costs on fixed
networks in 2002.
This method consists in establishing annual infrastructure costs:

- taking account of the latest available technologies (which France Telecom would use if it
were to rebuild its network);
2
In the current wording of the CPCE (Article D311 of the regulatory portion), “the Postal and electronic
communications regulatory authority will ensure that the chosen methods promote economic efficiency,
stimulate lasting competition and optimise benefits to the consumer”. The code therefore explicitly stipulates
that a distinction exist between the accounting costs considered for regulatory purposes and the costs
recorded for the purposes of social accounting: “the cost accounting methods […] can be distinct from those
applied by the operator”.

- considering the restrictions to which France Telecom is subject in terms of the location of
subscriber connection points and interconnection points (so that the scope of the
services assessed corresponds to the scope of the services actually sold);
- while maintaining the capacity of the France Telecom network (optimal provisioning with
corresponding economies of scale).
While factoring in the economies of scale achieved by the incumbent carrier, this method is
designed to allow an alternative operator to make an informed choice between building its
own network and renting existing infrastructure from the incumbent (i.e. “make or buy”), in
instances where it is at least as efficient as the benchmark (efficient) operator. This method
therefore enables the development of infrastructure-based competition.
In practice, as it has been implemented in keeping with ARCEP decisions, the asset
replacement path method is based on economic annuities (constant annuities adjusted to
take account of price changes).
For an investment I with an economic lifespan of T made in year 0, with a constant rate of
technical progress g (expressed in real terms), a constant real rate of return ar, and noting
h=(1+g)(1+ar), the economic annuity at the start of year k is calculated in constant euros
as:
1
1
I 1+ h , 1 k T
Ak* = × (1 + a r ) ×
(1 + g ) k 1 1
1
(1 + h) T
Inflation needs to be taken into account to obtain an annuity in current euros:

k 1
Ak = Ak* × (1 +inflation j )
j =0
By definition, economic annuities will change apace with the price of the assets:
(1 + inflationk 1 )
Ak = Ak 1 , 1 k T
(1 + g )
It has by now been clearly established that economic annuities is the amortization method
most capable of producing a stable cost signal, not only over the life of a given asset but also
in cases where assets are replaced.
The stability of economic annuities for a given investment is illustrated in the graph below,
depicting an asset with an initial value of €100, with a lifespan of 10 years, under a scenario
of a 1.0% rate of technical progress and a 2.0% rate of inflation, with a real rate of return of
7.0% (9.1% nominal RoR).

Economic annuities
Euros
20
18
16
14
12
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10
Year
Amortization Return on capital employed
The stability of economic annuities in the case of replaced assets is illustrated in the
following graph, established for an asset with an initial value of €100, with a lifespan of 30
years and replaced twice. The annuities correspond, on the one hand, to constant
amortizations and, on the other, to economic amortizations – under a scenario of a 1.0%
rate of technical progress and a 2.0% rate of inflation, with a real rate of return of 7.0%
(9.1% nominal rate of return).
Euros
20
18
16
14
12
10
8
6
4
2
0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
Year
Annuities resulting from constant amortization Economic annuities
1.2.3. Guaranteeing strict cost recovery: economic current costs
Contrary to what had been anticipated, neither the existence of cable networks in certain
metropolitan areas nor the expected emergence of new forms of access (WLL, PLC) robbed
the France Telecom copper local loop of its status of essential infrastructure. This means that,
for copper local loop assets, the choice between building a new network (“make”) or renting
the existing one (“buy”) is meaningless and the long-term economic signal constituted by
replacement costs has no reason to exist. On the contrary, the reuse of these assets that are
not bound to be replicated should be encouraged.
Using an approach based on the operator’s real investments in these assets is therefore
more suitable than modelling that results in a “make or buy” type signal. The economic
current costs method, in which the link between the tariff and actual investments is clearly
established, is thus more appropriate than the asset replacement path method.

In instances where certain parameters have been assessed incorrectly, applying the asset
replacement path method can indeed result in the setting of tariffs that could lead the
regulated operator to perceive fees that do not correspond to the sum invested.
Assessing parameters is a particularly delicate matter when it comes to the copper local
loop:
- as an essential infrastructure, the copper local loop is managed by a single carrier,
which means a maximum degree of asymmetry in the information;
- assessing the parameter of asset life is especially complicated since the assets that
make up the local loop have never yet been replaced.
In the case of the local loop, then, applying the asset replacement path method was based
on the hypothesis that investments would be automatically renewed at the end of their
amortization period – but observation of the France Telecom network revealed that the
actual lifespan of the assets in question was longer than predicted.
The economic current costs method has the advantage of guaranteeing that a fully
amortized asset no longer produces annuities. The sum of the discounted annuities rendered
by the economic current costs method do not change when a parameter assessment error
occurs. This means that, while the asset replacement path method produces annuities for as
long as the assets are in service, the economic current costs method produces annuities only
for as long as the assets have not been fully amortized. In instances where an asset that is
still in service after it has been fully amortized is not replaced, the economic current costs
method produces an annuity of zero for this asset, whereas the asset replacement path
method continues to attach a value to the use of this asset. It was notably because of this
property that the economic current costs method was chosen in 2005 to assess copper local
loop costs3.
The economic current costs method therefore satisfies the demand that quality of service be
maintained (the operator continues to have an incentive to invest efficiently), but
guarantees the strict recovery of investment costs and ensures that the incumbent carrier
does not enjoy an undue financial advantage.
As with the historical costs method, the economic current costs method is based on the
actual investments made by the regulated operator, but instead of the constant
amortizations that are generally applied in accounting, it employs economic annuities
(annuities that keep pace with changes in price, in other words which neutralise the effect of
inflation and technical progress proper to the assets in question). The record of investments
in copper local loop assets is in fact characterized by a great deal of irregularity, and so
requires the use of a method that makes it possible to obtain a stable cost signal.
3
It should be mentioned that when ARCEP adopted the economic current costs method to annualize the
investment costs on copper local loop, it was employed in a consistent manner for setting all of the tariffs for
access products using the corresponding assets.

1.2.3.1. Need to refer to an investment record
As with any method based on the actual infrastructure of the regulated operator, the
economic current costs method supposes access to a reliable and detailed investment
record.
However, no accounting record was kept of investments that France Telecom made in
access-related assets prior to 1993. Only a fictional record was available and it was not used
as it was unrealistic (according to this account, all France Telecom investments were made in
three stages: 1979, 1984 and 1990 for copper cables, 1974, 1984 and 1991 for civil
engineering). The use of this record would have also translated into very brutal fluctuations
in annualized capital costs.
A detailed investment record was therefore reconstructed based on non-accounting data.

This reconstruction work was carried out in 2005 in tandem with all of the stakeholders. The
results of this exercise were made public in Decision No. 05-0834 of 15 December 2005.
For investments made after 1993, ARCEP was able to use accounting records directly.
1.2.3.2. Results of the current methodology for the copper local loop
Once the entire record had been reconstructed, it was possible to calculate annualized
investment costs using the economic current costs method.
So, for a series of investments Ii made during years i prior to k, the total annuity in economic
current costs for year k is obtained with the following formula:
1
1
Ii k 1
1 + h × (1 +inflation )
(i ) Ak = × (1 + a r ) × j
k T i < k (1 + g )
k i
1 j =i
1
(1 + h) T
with g, ar and h corresponding to the parameters introduced earlier.
The economic current costs method makes possible both:
- the strict recovery of France Telecom investment costs since, for each investment, the
sum of the discounted annuities is equal to the expenditures. In concrete terms, for an
investment I with an economic lifespan T made in year 0, noting Ak annuity (nominal) in
year k and an with a supposed constant rate of return, the following equality is verified:
Ak
(ii ) I= ;
T (1 + a n )
k
1 k
- and the equal treatment of operators over time.

The economic current costs method is not based on investment forecasts since its aim is only
to annualize actual past expenditures. It can therefore not result in creating a provision for
replaced or renewed assets4.
Every year, the amount remaining to be amortized is altered by taking account of logged
amortizations and newly made investments5 . This operation falls within the scope of
regulatory accounts audit.
The method adopted in 2005 resulted in unbundling tariffs that were compatible with real
infrastructure-based competition: there are now around 9 million unbundled lines in France,
most of which (close to 8 million) are fully unbundled. At the end of 2010, alternative
carriers had installed their equipment in 5,412 exchanges which account for roughly 83% of
all lines.
In addition, this method for annualizing investment costs was used in a consistent manner to
set all tariffs, both retail (telephone subscription) and wholesale (unbundling, wholesale line
rental). It made it possible to reconcile the market price and underlying costs for all services
that employ the copper local loop.
ARCEP therefore considers that, in the absence of any contextual change, this method could
remain relevant for determining the cost of services that are based on the copper local loop
(bitstream, unbundling, wholesale line rental, telephone subscription).
Respondents are invited to comment on the use of the economic current costs method for
determining annualized investment costs for the copper pair, drawing a distinction between
the properties of the economic annuities and those tied to the source of the chosen relevant
expenditures.
Respondents are asked to express themselves in particular on how equitable the different
forms of annualization are over time, depending on the type of investment record used
(theoretical regularly staggered or actual fluctuating).
Respondents are invited to comment on the verification of equation (ii) by the annuities
calculated using the different annualization methodologies.
On the matter of equation (i), respondents are invited to specify the extent to which
discounting the annuities calculated using the economic current costs method could result in
the recovery of an amount that differs from the actual expenditure. In particular,
respondents are asked to cite any instances in which a form of provision for a replacement of
4
On the other hand, based on economic annuities, this method facilitates reinvestment to the extent that it
produces annuities that evolve apace with the price of the assets: as is the case with constant amortizations,
reinvestment does not incur dramatic fluctuations in the annuities used to calculate the tariffs.
5
Should a change in method be considered, it should be implemented based on the last remaining amount to
be amortized. For instance, if constant amortization is deemed more relevant today, it is based on this amount
that the annuities must be calculated. Assessing tariffs cannot be based on historical costs as supplied by
France Telecom accounting since it does not take account of the amortizations actually realized using the
regulatory annualization method in effect between 2005 and 2010.

the regulated operator’s assets appears, and to specify in what way the formulas need to be
amended to ensure the strict recovery of investment expenditures.
1.3. Comparison of ARCEP practices and those employed by other

NRAs around Europe
The approach taken by ARCEP has led stakeholders in France to question the consistency of
the practices employed across Europe for annualizing investment costs. At first glance, the
economic current costs and the asset replacement path methods may appear to be
exceptions when compared to the practices of other European NRAs, all of whom have
adopted methods called HCA6 or CCA7.
The European Commission accepted the use of historical costs in its recommendations for
some time, but it is now working to enact a shift to accounting methods in current cost. The
Commission also recommends adopting a forward-looking approach and factoring in
technical progress by referring to modern equivalent assets. It requires national regulatory
authorities to compare top-down8 and bottom-up9 approaches, but leaves it up to NRAs to
choose their implementation modalities.
The disparities in the terms employed by the different regulators suggests, sometimes
mistakenly, considerable disparities in the actual practices. This is why ARCEP formed a
working group with its European counterparts to examine the reality of the investment cost
annualization methodologies that were actually being used.
The following findings emerged from this group:
1. On the matter of the amortization formulas employed, regulators occasionally use

different terminology but all in fact refer to five main modalities:
- constant amortization (seven instances, including the one used in the past by
ARCEP for investments related to mobile call termination), in most cases referred
to as “historical cost accounting”10;
- constant amortization, taking account of price changes (two instances employing
the version with operating capital maintenance, or OCM, two instances
employing the version with financial capital maintenance, or FCM) generally
referred to as “current cost accounting”;
- constant annuities (five instances);
- constant annuities adjusted to take account of changes in price or economic
annuities (four instances, including one which does not take technical progress
into account – a modality that corresponds to ARCEP’s approach to investments
tied to France Telecom wireline services, referred to as economic current costs
6
HCA: Historical Cost Accounting
7
CCA: Current Cost Accounting
8
A top-down approach consists of assessing costs based on those incurred by the regulated operator.
9
In a bottom-up approach, costs are established based on a technical-economic modelling of one or several
carriers’ businesses.
10
Fourteen NRAs supplied detailed responses to the questionnaire that ARCEP sent out prior to the first
working meeting. Like ARCEP, some regulators use different approaches in different situations.

(coûts courants économiques) and asset replacement path (coûts de
remplacement en filière)) generally referred to as “current cost accounting”;
- constant annuities adjusted to the scale of demand and changes in price (two
occurrences), referred to as “economic depreciation” 11.
ARCEP does therefore not stand out from its European counterparts for employing
heterodox amortization modalities.
2. Discussions with the other regulators also helped to reveal the degree to which the
choice of a top-down, bottom-up or hybrid approach was central. In many cases, this
choice is in fact more influential than the choice of amortization formula.
Using investment cost sources which differ depending on the economic context, like its
European peers, ARCEP leaves open the possibility of departing from accounting records to
adopt a more economical approach to tariff regulation.
Respondents are invited to comment on the methods used by the other European regulators
and the European Commission recommendations on annualized investment cost
methodologies.
1.4. Lessons to draw
ARCEP has had occasion to issue decisions concerning the two aspects of annualized
investment cost determination:
- the cost amortization modality on the one hand,
- and the source of investment costs to be taken into account, on the other.
It does appear today that economic annuities (employed by the asset replacement path and
economic current costs methods) is the amortization modality that is the most apt to
produce a stable cost signal that would ensure that players are treated fairly and equally
over time, regardless of the type of investment cost considered. Constant amortization, on
the other hand, could induce jagged signals that disrupt the players’ long-term strategies or
encourage opportunistic behaviour.
Various responses may be brought to the question of the source of investment costs,
however, depending on the regulatory situation and how much information ARCEP has at its
disposal:
- a record of actual investments appears to be the most appropriate when regulating an
essential infrastructure since it provides a guarantee of reliability within a situation of
very imperfect information on assets whose lifespan is hard to estimate: combined with
economic annuities, it is the current economic cost method that ARCEP uses for the
copper pair cost;
- a modelled investment record that corresponds to an efficient operator but which
11
Economic depreciation consists of spreading out annual costs in such a way as to obtain stable unit costs. It is
therefore based on establishing a growth hypothesis for demand.

satisfies the incumbent carrier’s interconnection constraints appears the most apt to
produce a “make or buy” signal that enables the development of infrastructure-based
competition over the long term, while maintaining the conditions of service-based
competition (by allowing each to benefit from economies of scale): combined with
economic annuities, it is the asset replacement path method.
The investment costs for all regulated services should now be processed using this approach.
Call termination provides a good example here12.
It now appears that optical fibre will eventually replace the copper network and could
therefore rid that component of the copper local loop (cables, cabinets) of its property of
non replicable infrastructure.
In high-density areas13, several competing local loops will be deployed alongside the copper
local loop. Carriers, both France Telecom and alternative telcos, have already performed
substantial network rollouts in 148 high-density municipalities.
For more sparsely populated areas, however, ARCEP Decision No. 2010-1312 of 14
December 2010 lays out an infrastructure-sharing scheme for a sizeable portion of this new
network at concentration points composed of at least 1,000 lines.
In any event, the copper network’s replacement by fibre could also accelerate the
obsolescence of corresponding assets, which creates uncertainty over the recovery of
investment costs.
The non-replicable nature of the civil engineering infrastructure is not, however, likely to be
called into question: able to be used by both copper and optical fibre technology, this civil
engineering, which represents 60% of the local loop’s replacement value, remains an
essential infrastructure, and the advent of fibre does not bring with it any new information
on the lifespan of the civil engineering. In addition, ARCEP Decision No. 2010-1211 of 9
November 2010 guarantees that the recovery of corresponding costs will not result in a
12
To assess the costs of a reciprocal service such as call termination (fixed or mobile), where each operator
enjoys significant market power on its own network, an efficient common generic cost benchmark is needed.
This is why, in this instance, ARCEP refers to hybrid investment records, resulting from a modelling whose
hypotheses draw on existing carriers’ references.
Because of the fact that, in their construction, these modelled records are comprised of stable recurring
investments, as network deployment is supposed to occur in an ongoing fashion and the assets being
employed have a relatively short average life, the choice of the amortization method in this case has a limited
effect on the cost of call termination (see models that ARCEP has submitted for public consultation). In this
specific instance, applying one type of amortization rather than another will have little effect. Historically, the
mobile call termination model was based on constant amortization whereas the fixed call termination model, in
which France Telecom plays a central role, was based on economic annuities.
Today, in a bid to achieve consistency between the methods and in light of the guarantee of stability they
provide, constant annuities constitute a natural benchmark for all call termination services, both fixed and
mobile.
13
As defined in ARCEP Decision No. 2009-1106 of 22 December 2009 which stipulates, in accordance with
Articles L. 34 8 and L. 34 8 3 of the French Postal and electronic communications code, the terms governing
access to ultra-fast broadband optical fibre electronic communication lines, and the instances in which the
concentration point can be located on private property.

change in the unit cost paid by copper local loop network customers, other than changes
resulting from the marginal increase in the total number of connections (copper and fibre)
that use the civil engineering (and which contribute to covering its costs).
Fibre rollouts therefore give rise to questions over the status of the copper pair cables and
the possible acceleration of their obsolescence. Because the annualized investment cost
methodology currently being employed is tied to the non-replicable nature of the copper
local loop, the following section raises several points to consider when examining the
annualization methodologies that need to accompany this technological transition.
Respondents are invited to remark on the preliminary analysis which tends to confirm that
local loop civil engineering ducts constitute an essential infrastructure. At what point in time,
or under what circumstances, would this qualification cease to be relevant for the local loop
network’s copper cables?
2. Specific questions concerning copper cables, in view of their gradual

replacement by optical fibre
2.1. How to recover the investment costs of copper cables at the end
of their lifecycle?
Today, all of the investments that France Telecom makes in copper cables for the local loop
are covered by the entirety of the copper local loop’s users, according to a single annualized
investment cost formula. With the deployment of fibre come questions of the relevant scope
of investment costs that will be shouldered by the last remaining users of the copper local
loop, and how these costs should be annualized.
On the one hand, as operators roll out their optical fibre networks, customers will switch
over to these new access networks and France Telecom’s copper loop will find itself with
spare capacity.
This means that, using a consistent method and without any additional considerations
regarding efficiency, the number of customers using the copper network is expected to
decrease more quickly than the cost of the cables in the base of relevant costs. Efficiency
considerations could therefore result in a decreased scope of the relevant costs according to
the number of connections to the copper local loop.
On the other hand, the smooth transition from copper to fibre during this period requires
France Telecom to maintain its copper network and to continue to make the necessary
investments to guarantee a sufficient quality of service, at least in those areas where fibre is
not available. It is entirely possible to imagine an accelerated obsolescence for all
investments made in the copper network, which results in a forecast lifespan for copper
assets that is shorter than what is currently being applied, i.e. 25 years.

In any event, the annualization methods employed for the retained costs will need to be
used in a consistent manner for setting all of the tariffs for the access products that use
these assets.
Respondents are invited to comment on efficiency considerations and on the impact of the
reduced life of assets which could alter the copper network’s annualized investment costs.
2.2. Which reference costs to use in future for copper cables?
If copper were to be considered as replicable (at least in certain areas: see above), ARCEP
could be induced to retain reference costs other than those that are being used today, and
which would be justified by the goal of preventing France Telecom from benefitting from
undue supplementary income due to its status of incumbent carrier who owns the copper
local loop. This change could result in a gap between the costs incurred by France Telecom
and the amounts spent on copper local loop access services.
This cost benchmark would:

- on the one hand, incorporate a notion of efficiency which, all things being equal,
would result in a reduction in the scope of costs considered compared to the costs
actually incurred;
- and, on the other hand, enable efficient operators to make an informed choice
between renting the copper pair and building an optical local loop, which would
likely lead to an increase in the considered costs.
Respondents are invited to comment on the objectives that ARCEP will need to consider to
assess copper local loop costs, and on the means to be implemented to this end.
2.3. Geographical and time considerations
Fibre rollouts are expected to result in the definition of two geographical areas:
- in the first, operators would engage in infrastructure-based competition;
- in the second, operators would share a single infrastructure, either copper or fibre.
The divisions between these two areas may not correspond to divisions between high-
density and more sparsely populated areas given the existence of residential
neighbourhoods in high-density areas.
The absence of optical fibre rollouts in certain areas could both consolidate the copper local
loop’s status of essential infrastructure and enable the perfect recovery of investments in
copper, at least those incurred in these parts of the country not covered by fibre.
Given the different economic signals that could prove relevant in each of these two areas,
creating a distinction in the way copper costs are evaluated may be considered.
Respondents are invited to comment on the interest and feasibility of introducing a

geographical distinction for investment costs.

The transition from copper to fibre will in all likelihood be only gradual. The implementation
of adjustments that may result from the considerations listed above must therefore occur
apace with the deployment of fibre and its adoption in retail markets, while guaranteeing
operators sufficient visibility into the future to make the investments needed to build a fibre
network that covers the majority of France.
It is necessary to ensure that:

- France Telecom is encouraged to maintain its copper network in those areas where it
cannot be replicated, but without benefiting from a competitive advantage;
- alternative operators are supplied with the relevant cost references on which to base
their decision of whether to invest in replicating the copper network.
Respondents are invited to comment on the roadmap for implementing a possible change in
methods.

Appendix - Definitions and properties

1. Definition of the investment cost annualization methods ......................................... 21
1.1. Preliminary definitions ................................................................................................. 21
1.1.1. The different notions of value............................................................................. 21
1.1.2. Modern equivalent asset and rate of technical progress ................................... 21
1.2. Amortization of an asset in the context of sectoral regulation ................................... 22
1.3. The different methods ................................................................................................. 23
1.3.1. The historical cost accounting method............................................................... 23
1.3.2. Current cost accounting methods....................................................................... 24
1.3.2.1. OCM version of the cost accounting method .............................................. 24
1.3.2.2. FCM version current cost accounting .......................................................... 24
1.3.3. Constant annuity methods (keeping pace with variations in price) ................... 25
1.3.3.1. The economic current costs method ........................................................... 25
1.3.3.2. The asset replacement path method........................................................... 26
2. The methods’ sensitivity to investment date and price variations ............................. 28
2.1. Hypothesis of no variation in price .............................................................................. 28
2.2. Hypothesis of inflation with no technical progress...................................................... 29
2.3. Hypothesis of technical progress without inflation ..................................................... 30

1. Definition of the investment cost annualization methods
What we propose here is a standardized presentation of investment cost annualization

methods, in order to obtain a single conceptual framework. There could be formal
differences between this presentation and the method generally employed by carriers, but
no fundamental changes have been made to the methods compared to the practices
employed by carriers and the Authority to date.
1.1. Preliminary definitions
1.1.1. The different notions of value
The asset purchase price is the price paid to acquire it. This corresponds to the gross book
value logged in the company’s balance sheet and to the actual investment made.
The asset’s net book value is the price attached to it in the company’s balance sheet after
deducting any possible amortization and past provisions. This value corresponds to the
investment that would need to be made to ensure the same service.
The current replacement cost of the asset is the price that would be paid on a given date for
an asset with the same productive output. This may be referred to as the gross replacement
cost (GRC).
The replacement cost is assessed using the concept of modern equivalent asset (MEA) or the
rate of technical progress.
1.1.2. Modern equivalent asset and rate of technical progress
In a document published on 24 November 2000 called “Principles of implementation and

best practice regarding Forward-looking – Long Run Incremental Cost modelling”, the IRG
(Independent Regulators Group, since replaced by BEREC) points out that a forward-looking
approach requires assets to be valued using the cost (market price) of replacing them with
their modern equivalent (i.e. Modern Equivalent Assets or MEA), in other words, “the lowest
cost asset, providing at least equivalent functionality and output as the asset being valued.”
The notion of MEA therefore makes it possible to track price variations in a set of assets over
time, with a productive output that remains unchanged.
Alternatively, the MEA cost reference can be translated through the rate of technical
progress. A positive rate of technical progress corresponds to decreasing asset prices.
Variations in price resulting from technical progress can be evaluated:

- either within the national economy (technical progress measured based on national
price indexes);
- or within the company that uses the factor of production to produce its goods and
services (technical progress calculated based on the actual asset purchase price,
possibly adjusted according to their productive output)

1.2. Amortization of an asset in the context of sectoral regulation
Taking variations in the value of the assets into account, the annuity paid at year-end for the
use of an asset in year k corresponds to the difference between the net price of the asset at
the start of the year 14 (initial expenditure), capitalized at the relevant rate of return
(regulatory rate of return15 in each individual case) and its net value which is re-evaluated
according to the technical progress at year-end16.
The annuity17 is therefore written as follows, depending on whether it is expressed at

current prices or in constant prices:
~~ ~~
Ak = (1 + ak ,n )VN k VN k or A *k = (1 + ak , r )VN *k V N *k
It can also be expressed thus:
~~ ~~
Ak = (VN k V N k ) + ak ,nVN k or A *k = (VN *k V N *k ) + ak ,rVN *k
When annualized, investment costs therefore comprise two components:

- the first component corresponds to the asset’s loss of value over the period being
considered, which translates into a regulatory amortization18;
- the second component corresponds to the carrying cost of capital or the
opportunity cost of the amounts invested, which results in the return on fixed
capital employed19.
The annuity can therefore be expressed as follows, depending on whether it is expressed at

current prices or in constant prices:
Ak = Amok + Capk or Ak* = Amok* + Capk*
All of the annualized cost methodologies can be reported based either on net values (and re-
evaluated net values) or directly on amortizations. There is a strict equivalence between the
two types of reporting, with the net value of the asset being calculated by recursion based
on the investment and past amortizations, expressed in constant or current prices
depending on the method being used:
k 1 k 1
VN k = I Amoi or VN *k = I Amoi*
i =1 i =1
The presentation in what follows is based on amortizations.
14
Notation: VNk in current prices, VN*k in constant prices.
15
Notation: ak in a generic fashion, ak,n if the rate is nominal and applied to the net value in current prices, ak,r if
the rate is real and applies to the net value in constant prices (indice k disappears if the parameter is supposed
constant during the period being considered).
Notation: V~N~ in current prices, ~ ~ in constant prices.
16
k V N *k
17
Notation: Ak in current prices, A*k in constant prices.
~~ ~~
Notation: Amok = VN k V N k in current prices, Amok* = VNk* VN k* in constant prices.
18
19
Notation :: Capk = ak,n VNk in current prices, Cap*k = ak,r VN*k in constant prices.

The way in which the annual amortization is calculated differs from one annualized
investment cost methodology to the next. Five main amortization methods are employed for
the purposes of sectoral regulation: historical cost accounting (HCA), current cost accounting
with financial capital maintenance (CCA FCM) or operational capital maintenance (CCA OCM),
economic current costs (ECC) and asset replacement path (ARP).
1.3. The different methods
1.3.1. The historical cost accounting method
This method relies entirely on the accounts of the regulated enterprise for the amortization
schedule:
- the regulatory amortization chosen corresponds to the amount logged as an
amortization in the accounts;
- the cost of capital is obtained by applying the nominal rate of return to the net
book value of the asset (resulting from accounting amortization).
The annuities produced by this method therefore depend on the enterprise’s choice of
amortization method. In practice, however, these choices are governed strictly by
accounting rules so the risk of having to depend entirely on the company’s accounts is only
relative.
As a result, this method cannot be strictly applied in situations where the regulated activity
is modelled.
It is nevertheless possible to approach the annuities calculated by the historical costs

method by considering, to put it very simply, that the method is characterized by a constant
amortization over the economic life of the asset: the value of the asset’s amortization in
current euros is constant for each period.
For an investment I with an economic life of T made in year 0, the amortization for year k is
therefore calculated:
I
Amok = , 1 k T
T
The annuity in historical costs obtained with a nominal rate of return an which is consistent
over the period is therefore:
I I
Ak = + an (T (k 1))
T T
It should nevertheless be mentioned that:

- although constant amortization is the most common, other amortization methods
also exist in accounting;
- the length of the amortization period can differ from the length of the economic
life;
- exceptional amortizations exist in accounting, for instance in the case of the
definitive non-use of an asset before it has reached the end of its accounting life,

which alters the net book value (but which are not taken into account in cost
accounting since they are exceptional items).
1.3.2. Current cost accounting methods
Current cost annualization methods adjust the amortization according to variations in the
price of the assets being considered, due to technical progress20 and general variations in
price.
As with the historical costs method, cost accounting methods rely on constant amortizations.
1.3.2.1. OCM version of the cost accounting method
Under CCA OCM systems, it is the gross replacement value, in other words the current price
of an asset with the same productive output, expressed in constant euros, which is
amortized. This makes it possible to neutralize any possible inflation along with the technical
progress.
The gross replacement cost of an asset with a value of I and an economic life T invested in
year 0 is expressed for year k, when the actual rate of technical progress g is constant:
I
Grossreplacement cos t k = ,1 k T
(1 + g ) k
it is expressed in constant euros.
Amortization in CCA is then given by:

GRCk
Amok* =
T
This corresponds to the constant amortization of an asset purchased in year k with no
inflation. Because it is in constant prices, the annuity in constant euros, with a real rate of
return ar is written as:
GRCk GRCk 1
Ak* = + ar (T (k 1))
T T
Inflation needs to factored in to obtain an annuity in current euros. If the investment is
made in year 0, the annuity in current euros is:
k 1
j =0
1.3.2.2. FCM version current cost accounting
The second approach to CCA is a more financial one in that it aims to maintain the
enterprise’s financial capital: whatever transpires, the sum of the discounted annuities must
be equal to the initial investment.
20
Variations in price tied to technical progress are addressed either directly through the rate of technical
progress, or indirectly through application of the notion of modern equivalent asset. See the appendix for more
detailed explanations of these concepts.

As with OCM, CCA FCM relies on the gross replacement value expressed in constant euros,
but incorporates two new notions when calculating amortization to obtain a zero net value
at the end of the amortization period, referred to as the holding gain (or loss) and backlog
depreciation.
In constant euros, for an investment I with an economic life T made in year 0, the
amortization in year k is given by:
Amok*FCM = Amok*OCM Holding Gaink 21 + backlog depreciation22 , 1 k T

where:
HGk = GRCk GRCk 1
and:
GRCk GRCk
Bklgk = (k 1) 1
T
The holding gain (loss) corresponds to the gain or loss derived from choosing to keep one’s
asset rather than to replace it from year to year, and measures the variation in the asset’s
replacement value over that year. Backlog depreciation is an adjustment of the amortization
resulting from the existence of this holding gain (loss). It makes it possible to balance the
sum of the discounted annuities and the value of the initial investment.
The annuity is written as follows, in constant euros:
GRCk GRCk GRCk GRCk

Ak* = (T (k 1)) 1
+ ar (T (k 1)
T T T
Inflation needs to factored in to obtain an annuity in current euros. If the investment is

made in year 0, the annuity in current euros is:
k 1
j =0
1.3.3. Constant annuity methods (keeping pace with variations in price)
The economic current costs (ECC) and asset replacement path (ARP) methods make it
possible to smooth out possible sudden fluctuations in investment schedules. They are
based on an economic amortization and so on constant annuities (keeping pace with
variations in price)
1.3.3.1. The economic current costs method
21
Notation: HGk.
22
Notation: Bklgk.

The economic current costs method is constructed in such a way that annuities evolve only
apace with prices (variations tied to inflation and the rate of technical progress) and that
their discounted sum is equal to the initial investment.
For an investment I with an economic life T made in year 0, with a constant rate of technical
progress g, and a constant real rate of return ar, the economic amortization corresponds to
the series of T annuities which meet a dual criteria:
1
1) annuities evolve apace with prices, in other words: Ak*+1 = Ak*
1+ g
2) the discounted sum at the rate of ar of annuities T is equal to the initial investment in the
equipment in question.
I
There is thus a parameter µ such that Ak* = µ for all k between 1 and T, and the
(1 + g ) k
discounting of this schedule of annuities paid at year-end must make it possible to match the
T
I
initial investment I: - =I.
k =1 (1 + ar ) (1 + g ) k
k
T
µ
Using the notation 1+h=(1+ar)(1+g), this is rewritten as: = 1.
k =1 (1 + h) k
1
1
1 1+ h .
therefore: - = T = (1 + h) ×
1 1
1
t =1 (1 + h)
t
(1 + h)T
1
1
I 1+ h .
The annuity in ECC is therefore written as A *k = × (1 + ar ) ×
(1 + g ) k 1
1
1
(1 + h)T
This annuity is expressed in constant euros. Inflation needs to factored in to obtain an
annuity in current euros. If the investment is made in year 0, the annuity in current euros is:
k 1
j =0
1.3.3.2. The asset replacement path method
The underlying idea of the asset replacement path method is to express the choice available
to an operator in the wholesale market between investment (in a provisioned infrastructure
like the one owned by the regulated operator but valued at the price of a newly-built
installation) and the use of wholesale solutions marketed by the regulated carrier. This
choice is referred to as “make or buy”.
Implementing this method is based on the current cost of building the infrastructure and
therefore supposes determining, each year and for each category of asset:
- the unit price pk for the modern equivalent asset in year k,

- the number of modern assets n’k needed in year k to obtain the same productive
output as the old n0 assets of the existing infrastructure, while complying with
regulatory constraints23.
For all of the assets in the category, the replacement cost in year k is therefore rendered
with: grck = n’k pk
For all of the assets in a category with an economic life T, with a replacement cost grck in
year k and in proper working condition at that time, the annuity corresponding to year k,
with a constant rate of technical progress g, a real rate of return ar and noting
h=(1+ar)(1+g)-1, is given by the ECC formula (with no actual investment being made, it
seems logical that the reference to annuities be independent from the asset acquisition
date):
1
1
ak* = grck (1 + ar ) 1+ h , 1 k 0
1
1
(1 + h)T
With the ARP method, as long as a category of assets is in proper working condition, it
results in annuities. These annuities correspond to the ECC annuities for an asset with an
economic life T, acquired in year 0 for the sum of i = grck (1 + g ) k and replaced every T years
until 0.
In practice, it is possible to achieve annuities on an asset by asset basis.
The annuity corresponding to year k for an asset with an economic life T, with a replacement
cost GRCk in year k and in proper working condition at that time, with a rate of technical
progress g, a real rate of return ar and noting h=(1+ar)(1+g)-1 is therefore given by the
following formula:
Noting that the replacement cost in year k for an asset acquired in year 0 is given as
n'
GRCk = k pk , and knowing that grck = n’k pk, we verify the following equality:
n0
grck
= GRCk .
N0
23
In the case of a telecom network, the customer routing point (Centre Acheminement des Abonnés or CAA –
France Telecom term) and the platforms will be treated differently with respect to the provisioning of the
theorectically reconstructed network:
- if the output capacity of the platforms increases over time, the network theorectically reconstructed
with the ARP could contain fewer platforms than the actual network;
- these routing points (“CAA”) are concentration points, so the possible increase in their output capacity
over time cannot be taken into account in the ARP: the infrastructure theorectically reconstructed
using the ARP must be composed of as many “CAA” as the actual infrastructure.

1
1
Therefore: Ak * = GRCk * 1+ h , 1 k 0
1
1
(1 + h)T
This annuity is expressed in constant euros. Inflation needs to factored in to obtain an

annuity in current euros. If the investment is made in year 0, the annuity in current euros is:
k 1
j =0
2. The methods’ sensitivity to investment date and price variations
2.1. Hypothesis of no variation in price
If there is no variation in price (neither technical progress, nor inflation), the annuities
calculated using current cost accounting (CCA OCM and CCA FCM) methods correspond to
the annuities calculated using the historical costs (HC) method. This is easily explained:
- the lack of technical progress implies that the value of the asset is the same at the
start and end of the period, in current euros, hence the equality of CCA OCM and
CCA FCM annuities;
- the lack of inflation implies that a constant amortization in current euros is equal
to a constant amortization in constant euros, hence the equality of the annuities
produced by the CCA and HC methods.
If the regulatory lifespan is equal to the actual lifespan, the annuities calculated according to
the economic current costs (ECC) method will be equal to those calculated using the asset
replacement path (ARP) method.
The following graph depicts the annuities calculated according to the different methods,
under the hypothesis of a lifespan of 30 years (both regulatory and actual) with three
investment cycles and no variation in price.

Absence of price variation
(zero technical progress and inflation)
Euros
18
16
14
12
10
2
0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
Year
Annuities using HCA, CCA OCM and CCA FCM Annuities using ECC and ARP
Regardless of the method employed, the sum of the discounted annuities is equal to the
initial investment.
Whereas the economic current cost and the asset replacement path methods produce
annuities that are independent of the date of investment, “cost accounting” methods
produce annuities that vary over the life of the assets.
2.2. Hypothesis of inflation with no technical progress
In the absence of technical progress, the annuities calculated according to the two current
cost accounting methods (CCA OCM and CCA FCM) are equal: in constant euros, the value of
the asset is the same at the beginning and end of the period.
However, the introduction of inflation implies that the annuities calculated using the
current cost accounting (CCA) method differ from those obtained with the historical costs
(HC) method. CCA amortizations, constant in constant euros, increase (decrease) in current
euros when the general price level increases (decreases), the result being that CCA annuities
increase (decrease) more slowly that HC annuities when the general price level increases
(decreases).
The following graph depicts the annuities calculated using the different methods, under the
hypothesis of a lifespan of 30 years (both regulatory and actual) with three investment
cycles, without technical progress but with inflation.

General increase in prices (+1%) General decrease in prices (-1%)
(in current euros) (in current euros)
Euros
18
16
14
12
10
0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
Year
HC annuity OCM annuity FCM annuity ECC and ARP annuity
Regardless of the method used, with the exception of CCA OCM, the discounted amount of
the annuities is equal to the initial investment.
Whereas the economic current costs method produces annuities that change gradually,
regardless of the date of investment, the annuities produced by “cost accounting” methods
contain sudden fluctuations that can be amplified by variations in price.
2.3. Hypothesis of technical progress without inflation
When there is technical progress, the annuities that are calculated using the two current
cost accounting methods (CCA OCM and CCA FCM) will differ since, in constant euros, the
value of the asset is not the same at the beginning and end of the period.
To be more precise, OCM annuities are lower (higher) than FCM annuities when technical
progress is positive (negative) as the asset’s replacement cost is higher (lower) than its
acquisition cost, and the amount to be recovered decreases (increases) under OCM.
Under the FCM method, the holding gain (loss) indicates what has been gained (lost), as a
result of technical progress, to be invested at the beginning of the period rather than at the
moment in question, and the backlog depreciation component adjusts the annuity such that
the capital that was initially invested is recovered at the end of the period. The FCM method
therefore “adjusts” HC annuities according to purchasing power:
- under a hypothesis of positive technical progress, the enterprise sustains a holding
loss (the price of the asset today is lower than what it was yesterday, so a loss was
sustained by keeping that asset). The amount of this loss is deducted from the
annuity since it constitutes an additional charge for the enterprise. As a result,
FCM annuities are higher than HC annuities at the start of the period. The
difference is then inversed due to backlog depreciation which adjusts the annuity
such that the capital that was initially invested is recovered at the end of the
period;
- the opposite occurs in the case of negative technical progress: the enterprise
posts a holding gain, the amount of which is deducted from the annuity. FCM
annuities are therefore inferior to HC annuities up until the adjustment induced by
the backlog depreciation reverses the difference.

At the start of the period, the OCM method renders annuities that are close to those
calculated using the historical costs method. At the end of the period, the annuities
calculated according to the OCM method converge towards those obtained using the FCM
method. This is explained by the fact that the backlog depreciation at the end of the period
fully corrects the holding gain (loss).
The following tables depict the annuities that are calculated using the different methods,
under a hypothesis of a 30-year lifespan (both regulatory and actual) with three investment
cycles, when there is technical progress but no inflation.
Positive technical progress (+1%) Negative technical progress (-1%)
(in current euros) (in current euros)

Euros Euros
18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
Année Année
HC annuity OCM annuity FCM annuity ECC and ARP annuity
Regardless of the method used, with the exception of CCA OCM, the discounted amount of
the annuities is equal to the initial investment.

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March 2011

Criteria for choosing an investment cost

© Autorité de régulation des communications électroniques et des postes 1

1. Analyses and practices applied up until now.............................................................. 5

© Autorité de régulation des communications électroniques et des postes 2

© Autorité de régulation des communications électroniques et des postes 3

© Autorité de régulation des communications électroniques et des postes 4

1.1. The principle of annualizing investment costs

© Autorité de régulation des communications électroniques et des postes 5

In all of the methods, annuities therefore include two components:

1.2. History of the practices employed by ARCEP

1.2.1. Defining a simple model: historical costs

The amortization method most commonly used in accounting is constant amortization.

© Autorité de régulation des communications électroniques et des postes 6

Annuities resulting from constant amortization

1.2.2. Stimulating infrastructure-based competition: asset replacement

This method consists in establishing annual infrastructure costs:

© Autorité de régulation des communications électroniques et des postes 7

Inflation needs to be taken into account to obtain an annuity in current euros:

© Autorité de régulation des communications électroniques et des postes 8

1.2.3. Guaranteeing strict cost recovery: economic current costs

© Autorité de régulation des communications électroniques et des postes 9

© Autorité de régulation des communications électroniques et des postes 10

A detailed investment record was therefore reconstructed based on non-accounting data.

The economic current costs method makes possible both:

- and the equal treatment of operators over time.

© Autorité de régulation des communications électroniques et des postes 11

© Autorité de régulation des communications électroniques et des postes 12

1.3. Comparison of ARCEP practices and those employed by other

The following findings emerged from this group:

1. On the matter of the amortization formulas employed, regulators occasionally use

© Autorité de régulation des communications électroniques et des postes 13

1.4. Lessons to draw

© Autorité de régulation des communications électroniques et des postes 14

© Autorité de régulation des communications électroniques et des postes 15

2. Specific questions concerning copper cables, in view of their gradual

© Autorité de régulation des communications électroniques et des postes 16

2.2. Which reference costs to use in future for copper cables?

This cost benchmark would:

2.3. Geographical and time considerations

Respondents are invited to comment on the interest and feasibility of introducing a

© Autorité de régulation des communications électroniques et des postes 17

It is necessary to ensure that:

© Autorité de régulation des communications électroniques et des postes 18

© Autorité de régulation des communications électroniques et des postes 19

© Autorité de régulation des communications électroniques et des postes 20

What we propose here is a standardized presentation of investment cost annualization

1.1. Preliminary definitions

1.1.1. The different notions of value

1.1.2. Modern equivalent asset and rate of technical progress

In a document published on 24 November 2000 called “Principles of implementation and

Variations in price resulting from technical progress can be evaluated:

© Autorité de régulation des communications électroniques et des postes 21

The annuity17 is therefore written as follows, depending on whether it is expressed at

When annualized, investment costs therefore comprise two components:

The annuity can therefore be expressed as follows, depending on whether it is expressed at

The presentation in what follows is based on amortizations.

© Autorité de régulation des communications électroniques et des postes 22

1.3. The different methods

1.3.1. The historical cost accounting method

It is nevertheless possible to approach the annuities calculated by the historical costs

It should nevertheless be mentioned that:

© Autorité de régulation des communications électroniques et des postes 23

1.3.2. Current cost accounting methods

AmokFCM = AmokOCM Holding Gaink 21 + backlog depreciation22 , 1 k T