The LRIC cost accounting method
LRIC is a method for calculating cost-oriented pricing. This method is based on the long run incremental cost for an efficient operator who uses modern technology. The method used by PTS now includes an increment for such distributed common costs incurred by an efficient operator in conditions of competition.
The top-down model is based on the cost of a network owned by an operator with significant market power. This model is produced by the network owners themselves.
The bottom-up model is based on the hypothetical costs of a new network using modern technology. This model is produced by PTS together with stakeholders in the market.
PTS then combines the results to harness the benefits of the respective models. This combination is called the hybrid model. The result of the combination forms the basis of the cost-oriented price.
These costing models are updated annually. PTS also revises the models at regular intervals.
PTS uses the LRIC method to regulate the price of mobile and fixed interconnection as well as access to the local loop.
Method of calculating required returns
PTS uses the WACC method based on the CAPM model to calculate the level of return on the capital investment.
WACC (Weighted Average Cost of Capital) is the return that a company needs to generate on its assets.
CAPM (Capital Asset Pricing Model) describes the link between the required return on equity and the assessed risk of an investment.
Other methods in other markets
The market for wholesale broadband access (bitstream) has a price regulation based on cost oriented prices according to the LRIC-method with a markup.
The 'retail minus' method is used in the market for access to the fixed network (WLR). This method means that the price of WLR is calculated as the retail price minus a percentage margin. This margin should be high enough to enable operators to compete for consumers.
PTS uses the FDC method in the markets for leased lines and broadcasting access. FDC means ‘Fully Distributed Costs’. The FDC method is a costing based on historical, booked costs (in contrast to the LRIC method above, which is based on forward looking costs).