Cost orientation and xDSL services: Retail-minus vs. LRAIC

Forward-looking long run average incremental cost (LRAIC) bottom-up models have now established themselves as a popular methodology to guide European telecommunications regulators’ setting of interconnection charges between the incumbent and other operators. The purpose of this article is to discuss the adequacy of using bottom-up LRAIC models or retail-minus to calculate bitstream access charges—the charges typically applicable to wholesale xDSL services. In particular, the author is interested in the cost drivers of such services, how different they are from circuit-switched voice services, and ultimately whether retail-minus should be preferred over LRAIC models when setting these bitstream charges.