Transforming Regulatory Model

Determining How To Transform Regulatory Cost Models Into Commercial Cost Models For Effective Business Planning

IIR’s Telecoms Cost Accounting26th October, 2009

Mian Mutti Ur Rehman

Costing & Regulatory Economist - Mobilink Pakistan

[email protected]

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Telecom Cost Accounting

Contents

Transforming Model

Growing demand of commercial cost modelling

Comparison of both model approaches

Disseminating information to departments

Advantages of transforming

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Growing demand of Commercial Cost modeling

Strategic Management department

What is the cost of Infrastructure sharing?

Marketing Department

What is the cost of new service plan?

– New Voice Packages, new VAS – Mobile banking etc

What are the cost trends of existing services?

– Tariff refresh

What is the cost per voice customer or cost per data customer?

Questions could be asked by internal stakeholders

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Growing demand of Commercial Cost modeling

Technical / Engineering department

What is the operating cost of specific network element or links?

– Cost of operating BTS, Cost of operating Switches.

These questions need to be answered on the commercial cost modeling

basis rather than regulatory cost basis.

Questions could be asked by internal stakeholders

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Contents

Regulatory costing objectives



Quires form internal stakeholders

Commercial Costing Objective

Methodologies

Scope of cost selection

Cost calculation

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Difference between regulatory and commercial costing

Setting interconnection rates or termination rates .

Acquiring costing data to analyze cross subsidization practices.

Obtaining costs of Significant Market power to control the Prices in less competitive times

Increase competition

Increase efficiency

Increase Transparency

Regulatory costing objectives

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To fulfill the requirements of management who are decision makers.

Doing cost sensitivity analysis and price setting.

Technical procurement analysis

Input for joint ventures.

Commercial costing objectives

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Regulatory costing framework is predefined.

Costing Principles

Cost allocation dictation by regulator

Audit Trails

Commercial Costing mechanism is according the management’s objectives.

Cost allocation could be different.

Costing Methodologies

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Fully allocated cost – Historical Cost basis (Top down)

Long run incremental cost (Bottom up)

Long run incremental cost (Top down)

Fully allocated cost – Current Cost basis (Top down)

Regulatory Costing MethodologyThe entire network is costed on the basis of

following methodologies

Commercial Costing MethodologyAll accounting cost data to be allocated on

network elements and on all services

Fully allocated cost – Historical Cost basis (Top down)

Long run incremental cost (Top down)

Fully allocated cost – Current Cost basis (Top down)


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Why not using Bottom up approach in Commercial costing methodology

Business cases should include existing network structure

Built in network inefficiencies should not be removed for management decision making.


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Regulatory costing models uses following types of costs.

Direct network costs (e.g Cell site utility cost)

Joint network costs (e.g Payroll of network planning of core network)

Common network costs (e.g Logistics cost)

Unattributable costs (e.g rent and rates of finance/Strategic management department building)

Cost of Capital (WACC)


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Regulatory cost models includes only network operating costs for interconnect rates.

Commercial models also recovers all other costs like.

Retail level costs (marketing and advertising costs etc)

Regulatory costs to be analyzed (Royalty fee, spectrum fee etc)

Parked Costs to be included (Management fee etc)

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WACC

Weights of debt and equity could be different in both models

In regulatory costing model debt and equity components are dictated.

– Short term financing included in Debt

– Pre-tax debt is used.



(Re x E) + (Rd xD) * (1-t)WACC =

(D+E)

Where:Re = cost of equity

Rd = cost of debt (pre-tax)

t = applicable tax rate

E = market value of equity

D = market value of debt

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Cost calculation

Source of data

(ABC/financial)

Activity centres (building block)

Costs by serviceReflected costs

Direct

Directly attributable: e.g. switching

Indirectly attributable: e.g. corporate

Access

Traffic

Lease lines

Interconnection

Broadband

Others

All

oca

tio

n t

o a

ctiv

ity

All

oca

tio

n t

o s

ervi

ces

Accounts

Asset registers

Lifetimes

Financials

Org

anis

ed b

y n

atu

re

Dep

reci

atio

n

and

val

uat

ion

ru

les

Personnel

Expenses

Extraordinary

Provisions

Taxes

Depreciation

Cost of capital

Reconciliation adjustments

Specific operating analyses

Gri

terí

a

Reconciliation

Interconnect Costing

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CAPEX Information

OPEX information including

Depreciation

Identification of services and

Network elements

Network Costs

Retail Costs

Common Costs

Retail Services

Network Services

Network Elements

Costs

RetailCommonNetwork

Reconciliation

Application of Routing FActors

WACC/ Rate of return

Statutory accounts

Traffic (MOUs etc)

Revaluation of assets

Cost of Capital/Capital charge

CVRs

All Services Costing

(different packages)

Typical Commercial model

process

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Contents

Transforming Model




Level of details

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Transforming Model

All accounting information regarding cost to be used and find out more activity level cost..

Introduction of new cost pools

Marketing

Customer Billing

Customer services etc.

Costing Network elements.

Selection of routing factors for new pools/cost centers.

Level of details

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Transforming Model

Call types MSC BTS

Links

BTS to

MSC

Links MSC - MSC

HLR/IN

Interconne

ct links

Voice mail

SMSc

Interconnec

t billing

Marketing

Customer services

Cost of

salesMinutes

Fixed to Mobile - Incoming

1 1 2 0 1 1 0 0 1 0 0 0 85,000,000

Outgoing Call

1 1 2 1 1 1 0 0 1 1 0 0 15,000,000

Mobile to Mobile On-net

2 2 1 1 1 1 1 1 0 1 1 1 25,000,000

Level of details

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Contents

Transforming Model





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Depends upon the detail level demands by the departments

Cost could be given into following forms.

Cost per service unit (cost/minute according to different packages)

Cost per network element.

Cost by different cost centers (Marketing department cost inclusive unattributable cost allocation)

Cost of whole function (Network management cost or Retail function cost)

Disseminating information to stakeholders

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Contents

Transforming Model





Advantages of transforming

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Advantages of transforming Regulatory Cost model into Commercial cost model

Regulatory cost accounting allocates costs on cost causality principles.

Using different drivers and assumptions

Regulatory cost models also provide current cost and long run costing approach along with historical data.

There are already inputs available (drivers, routing table etc)

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Thank You!

Documents

Transforming Regulatory Model