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.