Transforming Regulatory Model

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This presentation discusses how we can transform regulatory models into commercial models

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Transforming Regulatory Model

  1. 1. Determining How To Transform Regulatory Cost Models Into Commercial Cost Models For Effective Business Planning IIR’s Telecoms Cost Accounting 26 th October, 2009 Mian Mutti Ur Rehman Costing & Regulatory Economist - Mobilink Pakistan [email_address]
  2. 2. Contents Transforming Model Growing demand of commercial cost modelling Comparison of both model approaches Disseminating information to departments Advantages of transforming
  3. 3. Growing demand of Commercial Cost modeling <ul><li>Strategic Management department </li></ul><ul><ul><li>What is the cost of Infrastructure sharing? </li></ul></ul><ul><li>Marketing Department </li></ul><ul><ul><li>What is the cost of new service plan? </li></ul></ul><ul><ul><ul><li>New Voice Packages, new VAS – Mobile banking etc </li></ul></ul></ul><ul><ul><li>What are the cost trends of existing services? </li></ul></ul><ul><ul><ul><li>Tariff refresh </li></ul></ul></ul><ul><ul><li>What is the cost per voice customer or cost per data customer? </li></ul></ul>Questions could be asked by internal stakeholders
  4. 4. Growing demand of Commercial Cost modeling <ul><li>Technical / Engineering department </li></ul><ul><ul><li>What is the operating cost of specific network element or links? </li></ul></ul><ul><ul><ul><li>Cost of operating BTS, Cost of operating Switches. </li></ul></ul></ul><ul><li>These questions need to be answered on the commercial cost modeling </li></ul><ul><li>basis rather than regulatory cost basis. </li></ul>Questions could be asked by internal stakeholders
  5. 5. 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
  6. 6. Difference between regulatory and commercial costing <ul><li>Setting interconnection rates or termination rates . </li></ul><ul><li>Acquiring costing data to analyze cross subsidization practices. </li></ul><ul><li>Obtaining costs of Significant Market power to control the Prices in less competitive times </li></ul>Increase competition Increase efficiency Increase Transparency Regulatory costing objectives
  7. 7. Difference between regulatory and commercial costing <ul><li>To fulfill the requirements of management who are decision makers. </li></ul><ul><li>Doing cost sensitivity analysis and price setting. </li></ul><ul><li>Technical procurement analysis </li></ul><ul><li>Input for joint ventures. </li></ul>Commercial costing objectives
  8. 8. Difference between regulatory and commercial costing <ul><li>Regulatory costing framework is predefined. </li></ul><ul><ul><li>Costing Principles </li></ul></ul><ul><ul><li>Cost allocation dictation by regulator </li></ul></ul><ul><ul><li>Audit Trails </li></ul></ul><ul><li>Commercial Costing mechanism is according the management’s objectives. </li></ul><ul><ul><li>Cost allocation could be different. </li></ul></ul>Costing Methodologies
  9. 9. Difference between regulatory and commercial costing Long run incremental cost (Bottom up) Long run incremental cost (Top down) Fully allocated cost – Current Cost basis (Top down) Regulatory Costing Methodology The entire network is costed on the basis of following methodologies Commercial Costing Methodology All accounting cost data to be allocated on network elements and on all services Long run incremental cost (Top down) Fully allocated cost – Current Cost basis (Top down) Costing Methodologies Fully allocated cost – Historical Cost basis (Top down) Fully allocated cost – Historical Cost basis (Top down)
  10. 10. Difference between regulatory and commercial costing <ul><li>Why not using Bottom up approach in Commercial costing methodology </li></ul><ul><li>Business cases should include existing network structure </li></ul><ul><li>Built in network inefficiencies should not be removed for management decision making. </li></ul>Costing Methodologies
  11. 11. Difference between regulatory and commercial costing <ul><li>Regulatory costing models uses following types of costs. </li></ul><ul><ul><li>Direct network costs (e.g Cell site utility cost) </li></ul></ul><ul><ul><li>Joint network costs (e.g Payroll of network planning of core network) </li></ul></ul><ul><ul><li>Common network costs (e.g Logistics cost) </li></ul></ul><ul><ul><li>Unattributable costs (e.g rent and rates of finance/Strategic management department building) </li></ul></ul><ul><ul><li>Cost of Capital (WACC) </li></ul></ul>Scope of cost selection
  12. 12. <ul><li>Regulatory cost models includes only network operating costs for interconnect rates. </li></ul><ul><li>Commercial models also recovers all other costs like. </li></ul><ul><ul><li>Retail level costs (marketing and advertising costs etc) </li></ul></ul><ul><li>Regulatory costs to be analyzed (Royalty fee, spectrum fee etc) </li></ul><ul><li>Parked Costs to be included (Management fee etc) </li></ul>Difference between regulatory and commercial costing Scope of cost selection
  13. 13. <ul><li>WACC </li></ul><ul><ul><li>Weights of debt and equity could be different in both models </li></ul></ul><ul><ul><li>In regulatory costing model debt and equity components are dictated. </li></ul></ul><ul><ul><ul><li>Short term financing included in Debt </li></ul></ul></ul><ul><ul><ul><li>Pre-tax debt is used. </li></ul></ul></ul>Difference between regulatory and commercial costing Scope of cost selection
  14. 14. Difference between regulatory and commercial costing Cost calculation Interconnect Costing Source of data (ABC/financial) Activity centres (building block) Costs by service Reflected costs Direct Directly attributable: e.g. switching Indirectly attributable: e.g. corporate Access Traffic Lease lines Interconnection Broadband Others Allocation to activity Allocation to services Accounts Asset registers Lifetimes Financials Organised by nature Depreciation and valuation rules Personnel Expenses Extraordinary Provisions Taxes Depreciation Cost of capital Reconciliation adjustments Specific operating analyses Gritería Reconciliation
  15. 16. Contents Transforming Model Growing demand of commercial cost modelling Comparison of both model approaches Quires form internal stakeholders Level of details
  16. 17. Transforming Model <ul><li>All accounting information regarding cost to be used and find out more activity level cost.. </li></ul><ul><li>Introduction of new cost pools </li></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><li>Customer Billing </li></ul></ul><ul><ul><li>Customer services etc. </li></ul></ul><ul><li>Costing Network elements. </li></ul><ul><li>Selection of routing factors for new pools/cost centers. </li></ul>Level of details
  17. 18. Transforming Model Level of details Outgoing Call Fixed to Mobile - Incoming Mobile to Mobile On-net 25,000,000 1 1 1 0 1 1 1 1 1 1 2 2 15,000,000 0 0 1 1 0 0 1 1 1 2 1 1 85,000,000 0 0 0 1 0 0 1 1 0 2 1 1 Minutes Cost of sales Customer services Marketing Interconnect billing SMSc Voice mail Interconnect links HLR/IN Links MSC - MSC Links BTS to MSC BTS MSC Call types
  18. 19. Contents Transforming Model Growing demand of commercial cost modelling Comparison of both model approaches Quires form internal stakeholders Disseminating information to departments
  19. 20. <ul><li>Depends upon the detail level demands by the departments </li></ul><ul><li>Cost could be given into following forms. </li></ul><ul><ul><li>Cost per service unit (cost/minute according to different packages) </li></ul></ul><ul><ul><li>Cost per network element. </li></ul></ul><ul><ul><li>Cost by different cost centers (Marketing department cost inclusive unattributable cost allocation) </li></ul></ul><ul><ul><li>Cost of whole function (Network management cost or Retail function cost) </li></ul></ul>Disseminating information to stakeholders
  20. 21. 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
  21. 22. Advantages of transforming Regulatory Cost model into Commercial cost model <ul><li>Regulatory cost accounting allocates costs on cost causality principles. </li></ul><ul><ul><li>Using different drivers and assumptions </li></ul></ul><ul><li>Regulatory cost models also provide current cost and long run costing approach along with historical data. </li></ul><ul><li>There are already inputs available (drivers, routing table etc) </li></ul>
  22. 23. Thank You!

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