Interconnection Costing
Eric Tyson
Bratislava September 18th 2001
Agenda
Ÿ Key elements in interconnection?
Ÿ Involved parties
Ÿ Cost allocation methodologies
– Revenue Sharing,
– Fully Allocated Costs (FAC),
– Current Cost Account (CCA),
– Long Run Incremental Costing (LRIC)
Ÿ Top down
Ÿ Bottom up
MSC
MSC
POI
Trunk Exchange
Telephone
POI
Trunk Exchange
Telephone
Involved parties
ŸIncumbent fixed line operator
ŸCompeting fixed line operator
ŸMobile operator
ŸRegulator/Ministry
Incumbent operators
ŸOperate profitably
ŸRebalance tariffs
ŸCost oriented customer tariffs
ŸEnsure all realistic costs are included in
interconnection charges
ŸMaintain investment programme
Competing fixed operator
ŸLow interconnect rates
ŸTransparent method for calculating interconnect
charges
ŸElement based charges
ŸCharging structure not tied to incumbent’s tariff
structure
ŸAccess to all services e.g. Directory Enquiries,
Operator Services, Emergency Services at
reasonable cost
Mobile operator
ŸElement based charges
ŸTransparent method for calculating
interconnection charges
ŸIncumbent operator not making high retentions
on calls to mobile networks
ŸRealistic payments for terminating traffic from
other operators
Regulator
ŸFull account separation
ŸClear, transparent, methodology for calculating
I/C charges
ŸRebalanced tariffs (political issues)
ŸRegulation through Return on Capital Employed
(ROCE)
ŸControl of fixed operator’s asset depreciation
policy
Cost Allocation Methodologies
ŸRevenue Sharing
ŸFully Allocated Costs (FAC)
ŸCurrent Cost Account (CCA)
ŸLong Run Incremental Costing (LRIC)
–Top down
–Bottom up
Revenue sharing
ŸStarting position before tariff rebalancing
ŸCan be used if costs are not understood
ŸDifficult to justify in a competitive environment
ŸNo incentive to reduce costs
Fully allocated costs
ŸHistoric costs
ŸFrom company accounting system
ŸCost causation principle
ŸResults by service
ŸNetwork cost elements
FAC - advantages
ŸReconciliation with published accounts
ŸLow cost of application ?
ŸAims to recover all costs
ŸTransparent
FAC - disadvantages
ŸBackward looking
ŸBroad brush
ŸCan involve arbitrary allocations
ŸUses book value of assets
ŸIncludes inefficiencies
–Manpower
–Equipment overcapacity
Current Cost Account
ŸBased on FAC methodology
ŸRevalue fixed assets to reflect current value
ŸEffect on different services
–Cables / ducts
–Switches
–New technology
ŸBetter reflection of cost of fixed assets
Long Run Incremental Costs
ŸThe average additional cost of supplying a
finite or discrete increment
ŸSame as marginal cost where increment
equals one
LRIC relationships
Increment
I/C
Minutes
Call Minutes
Cost
Leased
Lines
Other
Traffic Volume
cost
Cost of an existing network
Cost of an efficient
network
KdQ1
K dQ2
K
Ki
Kxf
Kz
Ko f
Network costs , overheads, etc)
Mi
Q1
Q2
Kg
quantity
additional quantity needed for
interconnection
Source: Telekom Control
K
Total cost of an efficient network
K0f
Fixed cost of an efficient network
Kxf
Step fixed cost of an efficient network
Kg
Overhead cost of an efficient network
KdQ1
The slope gives the directly and indirectly attributable cost of quantity Q1
KdQ2
The slope gives the average directly and indirectly attributable cost of quantity Q2
Ki
Average incremental cost of interconnection
Kz
Additional cost of interconnection (based on marginal cost)
Mi
Mark-up
Q1
Quantity without interconnection
Q2
Quantity including interconnection
Top Down and Bottom Up
ŸTop Down
–Very similar to current cost accounting
–Operator efficiency
ŸBottom Up
–Scorched earth vs scorched node
–Calculated network costs
–Uses current network utilisation data
Scorched node vs scorched
earth
ŸScorched node:
–maintain current network nodes
–Remote Concentrator policy
–modify technology e.g. PDH/SDH
ŸScorched earth:
–New network configuration
–Current technology e.g. fibre to curb
LRIC - advantages
ŸForward looking
ŸCost causation well defined
ŸCurrent asset costs
ŸPromotes efficient investment
ŸGives lower conveyance rates - Price Floor
LRIC - disadvantages
ŸDefining the increment is difficult
ŸOnly effective if traffic volumes are increasing
ŸNot the real world
ŸExternal audit not easy
ŸTreatment of shared and common costs Equal Mark Up v Ramsey Pricing
Costing Methodologies for
interconnection
FAC
CCA
LRIC(TopDown)
Relative
Cost
LRIC
(Bottom up)
Balance
Conclusions
Ÿ Cost based interconnect charging a requirement
Ÿ Methodology adopted must be appropriate to local
situation
Ÿ Cost allocation is a complex, time consuming activity
Ÿ Requires resources and input from throughout the
company
Ÿ Network element costs are based on individual network
configurations and utilisation
InterConnect Communications
Eric Tyson
Merlin House
Station Road
Chepstow
NP16 5PB
United Kingdom
Telephone: +44 1291 638400
Fax: +44 1291 638401
Email: erictyson@icc-uk.com
Website: www.icc-uk.com