Developing Telco Plant Cost New Trends: Reproduction Cost New Approach

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CostQuest provides a variety of services and data aimed to assist users in understanding the wireline telecommunications industry for a wide range of appraisal purposes. This Telco Reproduction Cost New (RCN) Trend Factors narrative focuses on providing the wireline industry with reproduction cost new trend factors that address the change in cost over time for wireline communications equipment.

Detailed in this narrative are index factors used to capture the excess capital portion of functional obsolescence that exists in wireline communication technologies. The goal is to assist users in effectively applying a trend factor to a network component to calculate the most recent reproduction cost for each component of the network. Providing users with the true cost of their wireline communication equipment over time.

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Telco cost trend factors

Quick summary

Wireline industry communication technologies not only show a drop in price over time but also incorporate changes in capacities and efficiencies. Only when you take into consideration both the impact of the change in cost, capacity, and efficiencies do you get the true cost of wireline communications equipment over time.

In general, the cost changes during calendar year 2020 are moderate
At the same time, the wireline industry has continued to upgrade its network with cost effective and efficient equipment. These upgrades address the telco industry’s need for additional capacity in a very cost competitive industry.
As the wireline industry continues to upgrade its equipment, it is imperative to have the most recent reproduction cost for each component of the network

This report targets the development of data to support trend factors related to the following subcomponent categories:

Electronics
General Labor
Poles/Pole Attachments
Switch Components
Circuit Components
Customer Premise Gateway
Fiber Cable
Conduit
Buried Trenching Labor

Using the appropriately representative publicaly available data for a wireline system, the above trend categories are combined, (using public values as the weighting factor), into the 6 overall trends representing a typical Teleco plant depicted below:

Switching
Circuit Equipment
Terminal Equipment
Poles
Fiber Cabling
Conduit

About cost trend approaches

Reproduction Cost New & Replacement Cost New

The cost trend factors developed in this report are reproduction cost new trend factors, however, they do incorporate some concept of a replacement cost new approach in several ways:

The basis for certain indices incorporates the concept that the capacity and/or capability of the unit is increasing over time. Within this model, this capacity change is combined with the cost change to reflect the cost change per unit of capacity, rather than simply the cost change per unit of plant.

The weighting of the cost indices for various components (i.e., labor and material) into a combined weighted average is based on investments per component from current Replacement Cost New analysis.

The key to generating appropriate trend factors is obtaining an accurate representation of the components’ costs coupled with a robust understanding of the functionality, capacity, and performance of the equipment. It’s important to note the trend factors described in this report do not incorporate the value impact attributable to a portion of the subject’s book value that is the result of remodeled plant, ghost assets, and other investments.

This Telco Plant ReprCN Trend Factors report reflects the changes in cost indexes that occurred during the calendar year 2020. Overall, this study captures the Telco Plant ReprCN Trend Factors from the tax year 2021 (the calendar year 2020) back to 1994.

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Reproduction cost indices & trending

Cost Indices have been applied to historic costs for many years to “index” the values of current costs as a means of estimating reproduction cost. Also referred to as a trend factor, an index is often applied to an asset’s historical cost to convert the known cost into an indication of current cost when using the reproduction cost new approach, the practice of which is referred to as trending.

For valuation purposes there are two prominent cost approaches utilized; one is reproduction cost and the other is replacement cost.

Reproduction cost new is the cost of constructing a new and exact replica of the property at current prices with the same or closely related materials.

Replacement cost new is the current cost of a similar new property having the nearest equivalent utility as the property being appraised, as of a specific date. is usually the preferred starting point for the development of the cost approach.

The logic behind the cost approach is the principle of substitution:

A prudent buyer will not pay more for a property than the cost of acquiring a substitute property of an equivalent utility. Thus, a buyer will normally consider the cost to obtain a replacement property in comparison to the property they are considering purchasing to help them decide what they should pay for the property.

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