Session 06: Methods of charging fixed and mobile termination

1. Session 06: Methods of charging fixed and mobile termination

3. Benchmark on the different approaches used across Europe Cost base used in member countries for mobile termination 2006 Source: CRA research, based on regulatory decisions from regulators’ websites and EC comments to the decisions imposed by national regulators.Note that as of June 2006, Belgium, Denmark, Greece and Luxembourg had not yet adopted final measures * Includes benchmarking based on LRIC Source: RTR by end of /2003

4. Approaches not based on costs: Benchmarking Not always relevant: • does not take into account some specific parameters that • affect the cost function.

5. Approaches not based on costs :Retail minus • The wholesale tariffs are based on the corresponding retail tariffs (Avoided or avoidable costs). • Avoidable costs shall include : • Marketing • Sales and Distribution • Customer Service • Billing and recovery • Common Cost related to the retail market

6. Methodsbased on demandEfficient Component Pricing Rule (ECPR)

7. Methodsbased on demandEfficient Component Pricing Rule (ECPR)

8. Methodsbased on demandRamsey pricing

9. Methodsbased on demandRamsey pricing

10. Methodsbased on demand

11. Approachesbased on costs

12. Approachesbased on costs Means : the average cost of integrating the potential : • economies of scale and • the economie of scope achieved By the operator who must offer interconnection services.

13. Methods based on costs

14. classification of costs

15. Objectives The classification of costs can help to avoided the maximum cross-subsidies between services through the optimum allocation of costs

16. costs classification of an operator Y=a + b*X Variable part Fixed part

17. A B C D E Direct Costs Shared Costs costs classification of an operator P/S P/S P/S P/S P/S VC VC VC VC VC FC FC FC FC FC VC VC JC / IC FC FC VC CC FC VC : variable costs FC : Fixed cots JC : joint costs CI : indirect costs CC : Common costs

18. Direct Costs • Costs directly related to a service / specific activity. • The resources, which costs are attached, are totally assigned to a product. • No ambiguity or difficulty of allocating costs to the product.

19. Direct Costs Example (mobile network)

20. Joint costs or indirect Costs shared by a number of service / activity as key distribution based on causal relation The resources, which costs are attached, are shared with at least one other service / activity. The allocation of indirect costs require a certain treatment

21. joints or indirect Costs Examples Source WIK

22. Common Costs Costs that are not classified as direct costs and indirect costs are common costs. The resources, which costs are attached, are shared with all other services / activities without causation.

23. Common CostsExamples

24. SharedCosts • isformed by : • Indirect costs or joint costs and • commoncosts • Assigned to different services with or without respect causality : • According to key distribution more or less arbitrary set on the basis of causal relations

25. FixedCosts Are: • independent of production volume • Made especially for heavy investments : • Buildings (technical, administrative) • Equipment (switching, transmission) • Etc..

26. Variable or operating costs Are : • Closely related to the level and changes in production volume • Influenced by : • the development of techniques employed and • rhythmsadopted for the production operations. • May vary : • directly proportional to production (raw materials) or • not directlyproportional (salaryexpenditures).

27. Variable or operating costs Examples Source WIK

28. Fixed and variable costs • The separation between fixed and variable costs corresponds to a strong “temporal” component. • Fixed costs Correspond to a concept of long-term • Variable costs involve the short-term. • The direct costs, indirect and joint can be fixed or variable

29. Methodsbased on costs

30. Costingbased

31. CostingbasedCurrentcosts • Investments are revalued at current replacement cost. • How much cost the investment if you wish to replace them now ? • They take into account the environmental changes : • Price changes • Changes in the local currency • Adjustments are made at the level of OPEX • The current costs can be obtained : • Accounting Statements • Data engineering • Market information

32. Historical Costs vs. current costs

33. Modern equivalentasset Source: IRG

34. Method of cost allocation The fully distributed cost method (FDC-FAC) • The data are obtained from the method of accounting for previous years • The approach is based on full cost accounting and reliable • Assume that all costs are allocated to different services • The relevant costs direct and indirect of services are combined with a proportion of common costs not attributable. • The methods of allocating indirect costs are often performed on a causal base • Les coûts commun peuvent être alloué au prorata sur la base d’un mark-up

35. Method of cost allocation The fully distributed cost method (FDC-FAC) Steps of calculation : Records details of historic spending, Costs are grouped by type and by function, Costs are allocated to products using a cascading allocation process according to a hierarchy of nested classifications.

36. Method of cost allocation The fully distributed cost method (FDC-FAC)

37. Method of cost allocation Activity based costing (ABC )

38. Activities Resources 1 Activity A Service 1 Resources 2 Activity B Service 2 Resources 3 Activity C Resources 4 Cost of resources (labor, depreciation) Activities demanding in resources Services demanding in activity Cost driver Activity driver

39. The activity and cost driver

40. Approaches based on costsLRIC • Assess the additional costs incurred for the production of a particular service compared to the costs already incurred for the production of other services. • placed on a long-term perspective to take into account the investment needed. • The costs considered are those that would be avoided if these services were not offered. • Better reflected through the use of current costs rather than historical costs • Evaluated based on the price of best technology • Allowing optimum sizing of facilities

41. The transition from method FDC to LRIC • FDC with adjustments in terms of : • Relevance of common costs • Economic Lifetimes • Efficient suppliers • Joint costs (alternative network elements) • Current costs • = TELRIC « Top-down » with adjustments in terms of : • Optimisation (switching, transmission ) • = FL-TELRIC « Bottom-up » with adjustments in terms of : • Deleting relevant common costs • Joint costs • =LRIC

42. Costingmethods Source: RTR

43. Costingmethods Source: RTR

44. Different models used by different European countries Models used in Europe 2002 – framework before 2002 Source: Andersen

45. LRIC method

46. LRIC In recent years, the long-run incremental cost has become the main method of regulating the setting of interconnection tariffs of telecommunications markets in the world

47. Objectives of the LRIC method Better understanding the forming of the costs. Improved economic efficiency. Visibility on the evolution of tariffs. Incentive regulation and reactive support for market development.

48. Best practice in accounting methodology Source: ERG RA-PT 2007

49. Definition of the increment

50. Definition of the increment Assess the additional costs incurred for the production of a particular service compared to the costs already incurred for the production of other services. placed on a long-term perspective to take into account the investment needed.