Session 2: Cost methodologies in Asia and Oceania Beijing, 26 March 2010
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Session 2 Regional Seminar on Costs and Tariffs for SG3RG-AO Members Session 2: Cost methodologies in Asia and Oceania Beijing, 26th March 2010 Jim Holmes © Copyright Incyte Consulting 2010 Discussion Agenda Objective Sources and a caveat Propensities to regulate Cost methodologies – where do they fit? Cost methodologies – what are they? Eurocentric influences Training programmes Concluding observations 2 © Copyright Incyte Consulting 2010 Objective: My objective in this session is share my experience with you to provide a high level overview on the diversity of regulatory pricing and costing activity in the Asia – Oceania regions and to offer some thoughts for the future. 3 © Copyright Incyte Consulting 2010 Sources and a caveat Recent sources of experience and comments ITU Cost Modelling Training in Auckland (July 2009) and Bangkok (November 2009) Costing and access projects in Samoa, Bhutan, Bangladesh, Fiji, Australia, PNG, Saudi Arabia, and Palestine Survey and assessment of interconnection and cost methodologies in 15 Pacific countries (April 2010) Earlier costing and access projects (not necessarily for regulators) In Singapore, Malaysia, Korea, Australia, New Zealand, Kyrgyzstan, Hong Kong, China Training and workshop programs for APECTEL, PITA, APT Caveat The Asia-Pacific region is huge and diverse and changing General conclusions need to be drawn with great care 4 © Copyright Incyte Consulting 2010 Propensities to regulate My first general observation is that there is a propensity to regulate prices and other terms of service at wholesale and retail level in the Region There are relatively few examples of explicit regulatory forbearance or of de-regulation (the removal of regulation) This is relative to the numbers of specific service markets at national level in the Region This is also relative to Europe where the European Commission has been very active in encouraging de-regulation and change of regulatory focus where it considers appropriate 5 © Copyright Incyte Consulting 2010 Propensities to regulate (2) This suggests that – there have been few assessments of the need for ex ante regulation in specific service markets (such as retail mobile service markets) or limited trust in the market mechanisms at work or insufficient competition in specific markets or a combination of these 6 © Copyright Incyte Consulting 2010 Cost methodologies – where do they fit? Clearly the choices in competitive markets are driven by price as a clearing mechanism that tends toward long run costs In some markets – particularly wholesale services such as access and interconnection, and in some retail business service markets – most regulators seek to mimic the cost approach of a competitive market In others – especially in retail consumer service markets – cost is usually subordinated to social policy considerations that are not reducible to cost terms Cost methodologies are used across the board and are likely to be major decision determinants for pricing of services where social policy considerations are not seen as paramount Even with social pricing, it is better to understand costs before acting, because costs will determine the sustainability of the prices imposed 7 © Copyright Incyte Consulting 2010 Cost methodologies – what are they? Cost based v Costs in the country of service Cost models included Cost related Costs in other countries Benchmarking included v Not a cost method at all Revenue sharing Indexed (?) Affordability and what the market will bear These terms (cost based and cost related) are becoming terms of art; they are not vague and interchangeable They mean whatever the legislation in which they occur defines them as meaning This distinction has been supported by the Supreme Court of Samoa in 2009 8 © Copyright Incyte Consulting 2010 Eurocentric tendencies EC and European national regulators have documented very well their pricing principles and pricing decisions, and the cost considerations that support them The EU provides a ready source of information for benchmarking. Much benchmarking occurs within Europe and is published Unfortunately there is less documentation on regulated decisions for economies outside Europe and for developing economies Eurocentric tendencies are spread by consulting firms – many of which are European based Whatever the source of costing principles and methodologies they need careful adaptation to the circumstances and context of the Asia – Pacific country where they are being applied. 9 © Copyright Incyte Consulting 2010 Cost related methods Benchmarking is a preferred method (because it is quicker and cheaper) in some countries Benchmarking has strict principles. They must be adhered to if the benchmarking process is to lead to cost related outcomes, such as: Comparison data must be from a published decision of a regulator The other regulator must have employed a cost based approach The cost standards must be those required in the home country - LRIC, FDC / FAC, etc Benchmarking is sometimes of a poor standard Benchmarking needs to be transparent and open to scrutiny by stakeholders Remember that benchmarking is not an automatic mathematical routine – there are policy judgments to be made at every stage including the selection of the comparison countries, choice of figures where there are options and where to locate your country (mean, median, second quartile, best practice?) Cost related methods are important and good practice should be encouraged by training and good documentation 10 © Copyright Incyte Consulting 2010 Cost based methods – cost modelling Where modelling is done by regulators, there is a recognition that bottom up LRIC models are best practice LRIC models are always LRIC+ in the Region and are usually TSLRIC+ There are many FDC approaches in practice No regulator in the Region appears to have adopted a pure LRIC approach of the kind recommended by the EC on 7 May 2009 for implementation in the case of call termination on mobile networks in Europe by the end of 2012 11 © Copyright Incyte Consulting 2010 Cost based methods – cost modelling (2) Cost Common costs LRIC of B TS LRIC + This is best practice in the Region Service A VA 12 © Copyright Incyte Consulting 2010 Service B VB Volume Cost based methods – cost modelling (3) Cost Cost FDC / FAC FDC B LRIC of B Pure LRIC Also practised in the Region EU by end 2012 Service B Service A Service B FAC A Service A Fixed, common costs VA 13 © Copyright Incyte Consulting 2010 VB Volume VA VB Volume Interconnection and cost modelling in the Pacific 15 All developing countries of the Pacific (including Timor Leste) were in my recent study for the ITU Only 6 have competition in a market – usually the mobile services market Of these only one (Samoa) has a verifiable cost model – although there are claims More cost models might be expected in the next few years as modern regulatory frameworks are instituted Transparency is a major issue – sometimes brought on by the conditions of entry 14 © Copyright Incyte Consulting 2010 Training and capacity development Interest in understanding cost modelling and developing skills is high At the Auckland Workshop in July 2009 there were 25 participants from 9 countries (7 Pacific Island countries plus Sri Lanka and Indonesia) At the Bangkok Workshop in November 2010 there were 68 registered (65 attended) from 17 Asia-Pacific countries plus Zambia Always a risk that participants are at very different stages of personal development in this field Workshop objective was not to produce cost modelling experts, but to give a good basis of understanding not only cost models but also the economic context and framework in which they can be used. We wanted participants to be able to specify the model they wanted, to assess models, to use and manipulate models Therefore we had a bottom up mobile network cost model (2.5G) prepared for the purpose. 15 © Copyright Incyte Consulting 2010 Training and capacity development – successful? Successful at some levels – yes Very good feedback and marks at the end of both courses. This is to be welcomed but is not conclusive Participants now have a comprehensive set of materials – including a model on disc Participants now have a network of others to contact on cost modelling and related issues – may have expanded previous networks but Unless they are used skills will atrophy Some participants would probably not be in jobs where the skills could be used Some anecdotal feedback suggesting that learning was not as effective as the feedback comments suggested 16 © Copyright Incyte Consulting 2010 Training and capacity development – more to come There is still much to do with Level 1 (fairly basic) training in modelling and model usage However there is a need to look at 3G cost modelling The ITU will be running Level 2 training in cost modelling using a 3G Network Model in Bangkok from 14-18 June 2010 The model is being developed now and will seek to reflect The way in which operators invest in 3G capability and deploy it over the top of existing 2G/2.5G platforms The handling of traffic across 2G and 3G network elements Bangkok from 14-18 June 2010 17 © Copyright Incyte Consulting 2010 Concluding observations Many administrations and regulators in the Region have yet to commit to using cost methodologies for their pricing and related decisions The pool of expertise on cost methodologies (both benchmarking and modelling) across the Region is shallow. Most of the expertise is in the regulatory agencies who have used the models over a long time. Expertise that is needed is not about developing leading edge benchmarks or models – it is about the ability to specify, interpret, use and manipulate these tools. Being able to build a model may not be required – many exist that can be adapted and consultants may be used as needed. There is much that remains to be done. 18 © Copyright Incyte Consulting 2010 Thank you for your attention Jim Holmes jrh@incyteconsulting.com +61 3 9752 7828 © Copyright Incyte Consulting 2010
