New cost methodologies
in the light of regulation policy &
their impact on pricing principles
Bratislava 2001
ITU Seminar
18.09.01, Bratislava
1
New cost methodologies in the
light of regulation policy ? their
impact on pricing principles
I.
Changes in the Regulatory System in
Slovak Republic
ITU Seminar
18.09.01, Bratislava
2
Short history preview
• Regulators in past (till 2000)
Ministry of Transport, Posts and Telecommunications
- international prices (calls)
Ministry of Finance
- domestic prices (all voice, TV, radio) - since January
1999 - ROCE 16 % accepted
Price proposals - usually at July 1st
• Regulation
each item had to be approved by regulator
annual service costing report base
ITU Seminar
18.09.01, Bratislava
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Present situation in regulation
• New Telecommunications Act approved
(June 2000)
- new regulatory systems set
- redefinition of the telecom market subjects
obligations and rights (universal service obligation,
cross - financing…)
• New regulator - Telecommunications Office
of the Slovak Republic
- license for Slovak Telecom (July 2000)
- set the Price Cap for next 5 years (end users prices)
ITU Seminar
18.09.01, Bratislava
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What does it represent nowadays?
• Approx. 60 % ST revenues (2000) are
regulated
Regulator’s point of view has to be taken into account
for business planning
• Regulator recognize rebalancing is
necessary to end up with cost oriented
prices
ITU Seminar
18.09.01, Bratislava
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New cost methodologies in the
light of regulation policy ? their
impact on pricing principles
II.
Costing methodology in ST, Plc.
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18.09.01, Bratislava
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Service costing in ST
• Evolved since 1996
• ~ 90 different services/products incl. profitability
analysis
• Methods used:
- Top-down Allocation model
- Activity Based Costing (ABC)
- Element Based Costing (EBC) for network elements
• Principles
- (Audited) historical costs (FAC)
- but: “economically allowed” costs only according to legal requirements
ITU Seminar
18.09.01, Bratislava
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Structure of the allocations
Financial
accounting system
Cost allocation system
TECHNICAL & OPERATIONAL INFO
SAP
COST CENTER ACCOUNTING
Cost Pools
Functional
Cost Pools
Transport
Deprec.
Based
Activity cost
level x
Network
Support
Activities
Networks
elements (e.g.)
EWSD
Switches
Hosts
S12
Switches
Hosts
Remote
Hosts
Services
Network
Building
blocks
Intern.
Switches
Building
Facilities
Cost
Centre
Based
Activity cost
level y
Business
Activities
Business
Activities
ITU Seminar
18.09.01, Bratislava
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New developments in service costing
• Optimal interface between SAP/R3 Cost Center
Accounting module and Service Costing tool
• Fullfilling all requirements according to EU legislations
– Development and Implementation of a Long Run
Incremental Cost method (LRIC)
– Calculation of Carrier Service Products
(e.g. Interconnection, Local Loop Unbundling)
– Accounting Separation, Universal services, Number
portability,Call-by-call, Carrier-pre-selection
ITU Seminar
18.09.01, Bratislava
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Multidimensional Costing analysis
Costing Methodology view:
Fully Allocated Cost / LRIC
Historical / Current Costs
Activity view:
local switching
transmission
billing
.....
Service
(e.g. Local call)
Cost category
view:
depreciation
personnel
material
.....
Cost Object view:
regions
customers
ITU Seminar
18.09.01, Bratislava
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New cost methodologies in the
light of regulation policy ? their
impact on pricing principles
III.
Regulated prices & pricing principles
in ST, Plc.
ITU Seminar
18.09.01, Bratislava
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Why regulation?
• Exclusive rights (until December 31, 2002)
for fixed voice services (license)
• Monopoly position in fixed voice, radio &
TV broadcasting
• Dominant position in data (LL, FR, IP…)
• Strong competition in mobile
= Subject has to be compelled to “fair
competition”
ITU Seminar
18.09.01, Bratislava
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Price cap & Retail Tariff basket
New tariff mechanism - price cap. The following formula is used
for setting of end user prices of services included within the
Tariff basket:
n
t
t
Wi
Pi
CPI
(( ) × ( t −1 − 1)) ≤ (
) −1+ X
∑
t −1
W
Pi
CPI
i =1
ITU Seminar
18.09.01, Bratislava
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Retail Tariff basket
• Services included in
Tariff basket:
– fixed line installation
– monthly rental of fixed
line
– local calls
– long distance calls
– international calls
– payphone calls
• The price control factor X =
3% for 1 period of
regulation, is set for 5 years
• regulation period - half of
year
• CPI - customer prices index
in Slovakia (3 months)
• Wi - revenues of individual
service
• W - total regulated revenues
• Pi - unit price of regulated
item
ITU Seminar
18.09.01, Bratislava
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The new part - Interconnection
• Non regulated prices in Slovakia in present
Regulator has the right to set a price calculation
method (based on inevitable costs)
• Dominant positioned operators are obliged to submit
these data to Regulator
• ST is obliged to set up the IC prices based on EU
prevailing methods in January 1st, 2003
• Increasing importance of that part
significant part of the traffic and revenues expected in
the future
ITU Seminar
18.09.01, Bratislava
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Value chain in next future
ITU Seminar
18.09.01, Bratislava
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Effect of regulation
Degree of freedom
Price cap level
ST pricing space
Competitors pricing space
conceded margin
interconnection
rates
interconnection
rates
ITU Seminar
18.09.01, Bratislava
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Outcomes I.
• Harmonization of the whole pricing system
in ST (both ends of value chain regulated)
ASAP
• Non-discrimination pricing
• No predatory (below IC) pricing
• Understanding for the wholesale customers
ITU Seminar
18.09.01, Bratislava
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Outcomes II.
Regulation (price cap)
Product/Volume
Regulation (IC)
Price
Residential
Business
Wholesale
Interconnection
Pricing principles
ITU Seminar
18.09.01, Bratislava
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Thanks for your attention!
Frank Däschle, Service Costing Dept.
frank.daschle@st.sk
Peter Poliak, Group Strategic Planning Dept.
peter.poliak@st.sk
ITU Seminar
18.09.01, Bratislava
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