The amount of the interconnection charges is particularly important for new market entrants, as the costs of interconnection for new providers amount to 30% to 50% of the total/overall costs, according to various studies of the EU Commission as well as enquiries made by TKC. Interconnection is an important prerequisite for the

market entry strategy of new operators. As can be seen in the following table, without interconnection market entry would not be possible at all. The strategy to be, in fact, pursued by individual operators depends on the existing infrastructure and in particular on the amount of the interconnection charges.

Because of the special importance attached to interconnection charges there exist legal standards at the European level and also in Austria and, on this basis, specific considerations on the criteria according to which interconnection charges shall be determined. The EU Commission recommends that interconnection charges be calculated according to the principle of Forward Looking Long Run Average Incremental Costs (FL-LRAIC). In the Austrian Interconnection Ordinance (ZVO) this is provided for in Art. 9. In Art. 3 this Ordinance also governs unbundled access to the local loop. Since these services are both "bottleneck" services of the SMP operator, also the FL-LRAIC approach shall be used. This cost accounting model tries to simulate a competitive situation, thus anticipating competitive prices which would become effective in this market under intensive competition only later. The following objectives shall be reached using this model:

• ensuring investment efficiency: this implies that opportunity costs, i.e. investment costs and a reasonable rate of return on investment, are taken into account.
  
• encouraging any-to-any connections: the amount of the interconnection charges are to foster communication between users of different networks.
  
• efficient use of resources: the price of a single additional unit shall not be below the marginal costs (costs of a single additional unit). It shall be an incentive to use efficient infrastructure and at the same time companies investing in infrastructure shall be able to achieve a reasonable return.
  
• encouraging efficient market entrants: entry of efficient companies shall be encouraged and entry of non-efficient companies shall be prevented.
  
• ensuring practicability: the system for determining the interconnection conditions shall be suited for practical application. The data basis shall be available, transparent and reproducible.
  

To achieve these objectives in the best possible way, such a cost model has to be based on specific assumptions and prerequisites.

In a competitive market the value of an asset or investment does not depend on the original investment costs (historic costs) but on the future revenues to be generated with this investment. In competition, the market player often cannot set the price for every product on the basis of his historic costs, as he has to observe market prices which often may be far below the historic costs.

Thus, a market player will not base his prices on historic costs since the majority of his investments cannot be reversed at all or only with significant cost. However, market players will include in the market prices at least the costs which are necessary for maintaining the assets of a company in the future.

This means that the company in future wants to provide the products offered, according to the demand to be expected, in an efficient way. Therefore, the calculation shall be based on the costs arising from maintaining the production capacity. To have the strongest possible position in competition, the market player would in future employ the economically most efficient technology or network topology. The current costs of these production facilities required for producing a good or service are the basis for calculation of the FL-LRAIC.

The usual method for calculating the FL-LRAIC is the combination of a top-down approach and an analytical bottom-up approach. The adoption of this cost accounting system and the implementation of these cost models require intensive resources and can take, for fixed networks, two to three years, as TKC's and experience from other countries suggest.

In mid-1998, TKC started the project "Cost accounting" with a view to producing guidelines for the cost accounting systems of the companies having significant market power in the fixed network, mobile network, leased line and interconnection markets. To comply with the requirements, the cost accounting systems of the companies with significant market power shall be transparent and reproducible.

Specifically, the following data shall be verifiable:

• network access and interconnection charges (interconnection, special network access and unbundled local loop);
  
• transparency and cost orientation of the tariffs;
  
• tariff applications for voice telephony, leased lines and other services;
  
• compliance with the prohibition of cross-subsidising between individual cost units and products; and
  
• the net cost of universal service.

Top-down model

The first objective of TKC was to support Telekom Austria in developing a cost accounting system. This cost accounting system should enable the regulatory authority to carry out its obligations and regulatory functions, as laid down in the relevant legal provisions (Directives and Recommendations of the EU and TKG, Telecom Tariffing Ordinance, Interconnection Ordinance). To enable Telekom Austria to meet its obligations of providing information to the regulatory authority in an appropriate manner it was attempted to create an extensive common approach with regard to the requirements for the cost accounting system.
For this purpose seven meetings were held in total between August and December 1998 which were attended by members of TKC, Telekom Austria and the consultants Deloitte & Touche Consulting Group called in by Telekom Austria. After the meetings, views on the respective points at issue were exchanged.

In January 1999, TKC handed over to Telekom Austria the requirements for the cost accounting system of Telekom Austria, which were prepared on the basis of the following sources:

• relevant legal provisions,
  
• findings of TKC,
  
• presentations of Telekom Austria and
  
• written and oral comments by Telekom Austria.

During the implementation phase no information exchange between Telekom Austria and TKC took place, until the next contact in November 1999.
The cost accounting model of Telekom Austria is based on the modular software product OROS which allows for activity based cost allocation. The major part of the costs is input into the model from Telekom Austria's cost accounting (SAP), where the costs are allocated step by step to activities or network elements, e.g. on the basis of hour lists, work profiles based on interviews and other information. Also, part of the costs is directly allocated to cost units (products and services) without any intermediate steps. The costs of the activities are allocated either to cost units or network elements. The costs of network elements are allocated to cost units on the basis of cost drivers.
In summary, it can be stated that the Telekom Austria approach does not take into consideration all aspects of the FL-LRAIC model . The method employed corresponds to budgeted full cost accounting which allocates the costs according to cost causation.

To meet the regulatory objective of costs calculated on the basis of FL-LRAIC a bottom-up model was also developed for reconciliation with the top-down model.

Bottom-up model for the core network

For determining the costs for interconnection services TKC decided to use a bottom-up model, in addition to the top-down model of Telekom Austria. After a thorough analysis of various bottom-up models existing or being developed (e.g. Hatfield, HCPM, BCPM etc.) it was decided to co-operate with the Wissenschaftliche Institut für Kommunikationsdienste (WIK) [Scientific Institute of Communications services] in Bad Honnef/Germany. The contract for the development of a bottom-up model was concluded on 21.03.1999. At the beginning of April, the public consultation directed at model analysis and data collection started. Based on a publicly available reference document in which all essential model algorithms and premises were demonstrated the model was presented in public by members of the WIK on 21.06.1999.

Telekom Austria, Mobilkom, European Telekom and Connect complied with the request to comment on the reference model. Unless the comments received were declared to be company and business secrets, they were made available to those interested. On 03. 08.1999, the parties were given the opportunity in a hearing to explain or specify their comments in greater detail. Telekom Austria complied with the request to supply model relevant data on node locations and subscriber numbers on 16.09.1999. During an operator jour fixe on 05.11.1999 information was provided on the progress in modelling and future steps. On 19.11.1999 and 28.12.1999, Telekom Austria submitted model relevant structure, investment and cost data to TKC. The Association of Alternative Telecom Network Operators (VAT) supplied corresponding data on 19. and 22. 12. 1999. In addition, interested parties were given the opportunity to inspect the bottom-up model software individually and to carry out sensitivity analyses and scenario calculations. This was done by the VAT (23.12.1999) and Telekom Austria (29.11.1999 and 29.12.1999).

Differences between bottom-up and top-down models

The main differences between the bottom-up and the top-down models are shown in Table 7.

Bottom-up model for mobile networks

Also for mobile networks a calculation of the interconnection costs according to FL-LRAIC was performed. In this field it was not possible to rely on international experience since so far hardly any decisions on this issue had been taken in other countries. Basically, the principles of the FL-LRAIC approach are also applicable to mobile networks, even though some specific issues, such as handling of the frequency usage fee, separation between access and carrier network and handling of the voice mail server, need to be solved. Already at the beginning of 1999, the regulatory authority initiated a dialogue with the operators concerned on the requirements for such a cost accounting system. This was an important preparation for forthcoming decisions of TKK, since it would not be possible to discuss also fundamental issues within the periods granted for decision. Contrary to cost calculations in the fixed network, a bottom-up model in the mobile network does not yet exist. Therefore, it might be an important task to develop an analytical bottom-up model also for mobile networks.

Bottom-up model for the access network

This analytical bottom-up model was prepared in 1999 on behalf of the petitioners in the proceedings Z 1/99 for calculating the costs of the unbundled local loop in Austria and was used as one of the major bases for the proceedings before TKK.

In this approach an abstract state-of-the-art access network with an efficient structure is set up, aiming at efficient satisfaction of the market demand which comes into the accounting model as extraneous factor and is put on an equal footing with the existing subscriber volume. The network thus created is assessed at current costs. The model is based on a scorched-earth approach, thus also re-modelling the MDF locations. It requires a small number of input parameters and, in comparison with other models (e.g. WIK Access Model), provides rather rough results. Input parameters are sociodemographic and geographical values, cost and other parameters.