transforming regulatory model
DESCRIPTION
This presentation discusses how we can transform regulatory models into commercial modelsTRANSCRIPT
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
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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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Telecom Cost Accounting
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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Telecom Cost Accounting
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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Telecom Cost Accounting
Contents
Regulatory costing objectives
Growing demand of commercial cost modelling
Comparison of both model approaches
Quires form internal stakeholders
Commercial Costing Objective
Methodologies
Scope of cost selection
Cost calculation
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Telecom Cost Accounting
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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Telecom Cost Accounting
Difference between regulatory and commercial costing
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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Telecom Cost Accounting
Difference between regulatory and commercial costing
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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Telecom Cost Accounting
Difference between regulatory and commercial costing
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)
Costing Methodologies
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Telecom Cost Accounting
Difference between regulatory and commercial costing
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.
Costing Methodologies
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Telecom Cost Accounting
Difference between regulatory and commercial costing
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)
Scope of cost selection
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Telecom Cost Accounting
Difference between regulatory and commercial costing
Scope of cost selection
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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Telecom Cost Accounting
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.
Difference between regulatory and commercial costing
Scope of cost selection
(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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Telecom Cost Accounting
Difference between regulatory and commercial costing
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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Telecom Cost Accounting
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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Telecom Cost Accounting
Contents
Transforming Model
Growing demand of commercial cost modelling
Comparison of both model approaches
Quires form internal stakeholders
Level of details
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Telecom Cost Accounting
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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Telecom Cost Accounting
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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Telecom Cost Accounting
Contents
Transforming Model
Growing demand of commercial cost modelling
Comparison of both model approaches
Quires form internal stakeholders
Disseminating information to departments
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Telecom Cost Accounting
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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Telecom Cost Accounting
Contents
Transforming Model
Growing demand of commercial cost modelling
Comparison of both model approaches
Quires form internal stakeholders
Disseminating information to departments
Advantages of transforming
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Telecom Cost Accounting
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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Telecom Cost Accounting
Thank You!