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
Approaches not based on costs: Benchmarking Not always relevant: • does not take into account some specific parameters that • affect the cost function.
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
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.
Objectives The classification of costs can help to avoided the maximum cross-subsidies between services through the optimum allocation of costs
costs classification of an operator Y=a + b*X Variable part Fixed part
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
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.
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
joints or indirect Costs Examples Source WIK
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.
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
FixedCosts Are: • independent of production volume • Made especially for heavy investments : • Buildings (technical, administrative) • Equipment (switching, transmission) • Etc..
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).
Variable or operating costs Examples Source WIK
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
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
Modern equivalentasset Source: IRG
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
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.
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
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
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
Costingmethods Source: RTR
Costingmethods Source: RTR
Different models used by different European countries Models used in Europe 2002 – framework before 2002 Source: Andersen
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
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.
Best practice in accounting methodology Source: ERG RA-PT 2007
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.