forward looking concept, the basis for the valuation of an asset should be current cost accounting (CCA). CCA evaluates the replacement cost of an asset with the lowest cost asset which serves the same function (this is called modem equivalent asset, and it should incorporate the latest technology available), rather than the historic cost at the purchase time followed by HCA.

An historical accounting basis may distort decisions when technology is evolving rapidly. Moreover, inefficient past decisions will have effects on future choices if a HCA basis is adopted. Take the example of the replacement of BT's ducts: the current cost is likely to exceed the historic cost. The reverse is true for switches costs. If access prices are calculated with HCA, then inefficient entrants may enter access services and efficient firms may not find it convenient to enter into conveyance. On the other hand, a CCA basis sends signals to all players that reflect current market conditions and therefore a CCA basis is helpful both to the incumbent and to the entrants in their investment and pricing decisions.

Despite its flaws, HCA is deeply rooted into many firms' accounting systems and it may be the only option available before better accounting procedures are introduced. Oftel, anticipating that it would have taken time to switch between the systems, decided to keep the old one in place while working on two interrelated projects. One methodology, known as "topdown", was developed by BT to estimate the incremental cost of different network components in both historic and current cost terms, starting from BT's management and financial accounting data. The other model, based on a "bottom-up" methodology, involved the construction of an engineering model of the plants and other parts needed to provide an inland Public Switched Telephone Network.

The bottom-up model attempts to determine the cost of network with a topology similar to BT's existing network, and to compute the average incremental cost of providing a particular service. The model is rather simple and transparent and it explicitly focuses on the parameters that drive network dimensioning. The top-down model contains a large number of categories of costs, each one with one or more cost drivers and a cost-volume relationship. Its strength is to examine costs in a highly disaggregated and articulated way, so that, if correctly specified, it can provide a picture of the way in which output levels drive individual costs. However, both models also present weaknesses, for instance the top-down approach is strongly influenced by accounting conventions, while the engineering models are often not enough articulated. In addition, the models use different ways to calculate several factors.'<sup>0</sup> In the end, the models produced different estimates for the same interconnection service, and a subsequent attempt was made to integrate and reconcile the two approaches. What is relevant to our discussion, is that the process lead to a _gradual shift toward better accounting_

> 10 For instance, the bottom-up model calculates operating costs that reflect the international experience of a range of operators, rather than BT's experience alone as implied by a top-down approach. Differences in utilisation or pricing can produce different capital equipment costs. Alternative depreciation profiles based respectively on economic and accounting depreciation can also give rise to conflicting results (see Cave, 1 997b for a discussion).

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