1
Bridging The ICT Divide
•
i.
Istanbul Action Plan:
Access to ICT facilities is an imperative to
Socio-econ growth, particularly in developing
countries.
ii. Access to ICT services is highly contingent on
telecommunication networks that deliver
services at prices that are equitable, affordable
and cost oriented.
iii. These are fundamental pricing principles.
2
Interconnection & The Digital
Divide
• A range of physical, logical and commercial
interface required to complete a call on a
network on which the call did not originate.
• Indeed interconnection is essential to
facilitate seamless communication between
end users subscribing to different service
providers.
• It is,Therefore, a critical node to ensure that
end users are exposed to a matrix of choices
in accessing ICT services.
3
Interconnection Triangle
• Regulator
Consumers
Service Providers
4
Conceptual Battleground.
• FDC vs IC
• Historical vs Current Cost
5
FDC vs IC
• Developed countries favoured IC while
developing countries favoured FDC
• Developing countries operators claim that FDC
permit cost recovery while IC does not necessarily
guarantee such.
• Developed countries operators complain that FDC
is inefficient pricing and would consider FDC
only if certain efficiency criteria are met
including:
• Cost allocation based on causality, ABC;
• Valuation of assets at current prices;
6
The Triangle &ITU/WTO
Interconnect Imperatives?
• Applicability: Network technical standards.
(legislation/Regulation)
• Compulsory Interconnection: access to ROAs at
any technical feasible point on incumbent’s
network to duly authorized
competitor.(Legislation/Regulation)
• Network Unbundling: Separation of network
elements according to usage/demand.
(Legislation/Regulation)
• Non-Discrimination: No most-favoured
interconnect pricing between an ROA and its
subsidiary. (Legislation).
7
Continued
Transparency: An overarching clause.
(Legislation/Regulation)
Cost-Oriented Prices: interconnect rates should
be based on the cost of the components used to
deliver the service. (Legislation/Regulation
supported by appropriate costing
methodology/model to estimate cost)
Cost estimates are necessary to determine cost
oriented pricing for providing service.
8
Fundamental Costing Principles
• Transparency: “Open availability of
information used in cost derivation in order
to allow comprehension of the final from
the vintage point of an external analyst”
• This principle is critical for verification of
cost and advancement of the process of
competition.
9
Continued
• Practicability: “the ability to implement a costing
methodology with reasonable demands being
placed on data availability and data processing in
order to keep the costing exercise economical, yet
still useful.”
• The complexity of cost models must take into
account the trade off between limitations in
available human resource, timeliness of
information, cost of implementation of
methodology and and in-house resources to
monitor and revise methodology.
10
Continued
• Efficiency: “The provision of forecasts of cost
reduction that results from a more efficient
combination of resources.”
• This is the most nebulous principle since there is
no common barometer for stipulating efficiency.
Even within the ITU models different models have
different benchmarks for measuring/extrapolating
efficiency.
11
Network Pricing Revolution
• Unbundled Costs:
(i) Access Network
(ii) Conveyance Network
Unbundled Conveyance Network to provide
interconnection at:
• Local switch
• Single tandem
• Double tandem.
12
PSTN
Diagram 1
Point of
Interconnection 2
(Single T ransit)
Point of
Interconnection 3
(double Transit)
,.
TS-TS
Tandem Switch
T andem S witch
LS-TS
Transmission
P oint of
Interconnection 1
(Local Lev el)
Local Switch
RCU-LS
Transmission
Remote Concentrator
Conveyance
1
Main Access
1
Some access will be direct to local switches
SSP Service Switching Point
STP Signal Transfer Point
SCP Switching Control Point
EO End Of Switching
TDM Tandem Switching
IP/SN Intelligent Peripheral / Service Node
13
Simplified Component Usage
RE: Call Path
• Number dialed on originating network
to subscriber on another network.
• Signal sent from equipment to
originating switch.
• Originating switch examines called
digits, recognizing that digits are in
another local exchange activates and
routes a query trigger to the STP.
14
Continued
• The STP performs the translation and routes the
query to an appropriate SCP.
• SCP matches the location of routing number
associated with dialed number.
• SCP response containing location routing number is
sent back to the originating switch by the STP.
• Originating switch receives message and routes call
to recipient switch based on location routing
number.
• Recipient switch continues the switching (including
signaling and transmission until call reaches
15
destination.
Invariably Call Path Utilizes
Components Of:
• Switching network (including signaling network),
• Transmission Network and
• Access network (if included)
Since the first two are used invariably whenever
interconnection is required, the objective is to find an
estimator which derives the most efficient component
Costs, subject to market peculiarities. This is the
objective of the TAL model for Caribbean and Latin
16
American countries.
Objectives Cluster
Regulator :
Ensure market price
Encourage consumer
Demand and network
Investment
Incumbent:
Needs the
Best rate for use of
Network facilities.
Consumers:
Need affordable
Prices
Competitors:
Need the most cost
Efficient
Rates to encourage
Investment.
17
Economics of TAL Model
• Long Run Efficiency Costing
18
Formula
•
•
•
•
•
•
•
General LREC formula:
C = A(1-ß)/Mo
Where:
C= per minute cost of traffic
A= total cost (direct, indirect and common)
ß = Efficiency factor
Mo = traffic throughput.
19
Efficiency Constraints
• Diseconomies of scale
• Relatively high
financial costs
• Geographical
impediments
• Procurement
disadvantages
• Etc
• Long Run EconomicEfficiency Costing
(LEC)
• Incremental
Economic-Efficiency
Costing (IEC)
• Note that they are both
long run concepts.
20
LEC & IEC
• EEC = Aå/M1
• IEC= A@/M-1
• A@ = cost of
• Aå = total cost adjusted
additional components
for unavoidable disto deliver interconnect
economies of scale
traffic, subject to
(inefficiency).
adjustment for
• M1= total traffic
inefficiency
(current + expected)
• M-1= interconnect
traffic
21
Accounting Modalities
Direct Costs : Annualized equipment costs
(depreciation) + annualized cost of capital
(interest on loans and reasonable return to
equity) + acquisition and installation costs +
proportion equipment which cannot as yet be
depreciated + annualized operational, repair
and maintenance costs (OPEX) where appropriate
R&D costs; plus
22
Accounting Modalities
Indirect Costs:
Shared expenses attributed to more
than but not all activities i.e. site, trenches,
ducts, electricity, network management
systems etc. Plus
Common Cost: General administration, Other
R&D, bad debt expenses, taxes not included in direct
or indirect expenses.
23
Continued
Generally incurred in the provision of
All services that do not have specific
And therefore traceable causal relationship to
any one i.e. general administration,(including:
over heads, head office expenses, training),
accounting systems, taxes, bad debts, etc.
24
Modeling Equipment Cost
• Equipment Cost: estimated on the basis of
current cost.
• Historical costs tend to favour the
incumbent at the expense of the competitor
and consumers welfare.
• However, there may be need for adjustment
to account for diseconomies of scale.
25
TAF/BDT Model
• Objective : Assess the cost of resources used in the
delivery of telephone service.
• Cost concept: ITU –T Recommendation D 600R
Enhanced Fully Distributed Cost (EDFC)
• Adopting the principles of ABC unit cost of service
= total cost/traffic volume
• Adjusted historical cost: use the accounts of the
network operator, amortization is adjusted to
correspond with current replacement cost.
• Demand side of the equation is modified to deduct
non-voice traffic and the cost side is modified
26
accordingly.
TAF Adjustment to Current Cost
• Example: Purchase price of equipment in
year 0 = $10 Million
• Manufacturer’s amortization schedule 10yrs
• Market price of equipment falls by 8% per
annum
• Depreciation allowance in year 2
= 10 000000x (1-0.08)2/10 = 846, 400
instead of 1 000 000.
27
Depreciation
A very sore bone of contention
Methods:
• Straight line
• Adjusted straight line
• Front loaded or back loaded sum of digits
• Annuity
• Applicability
• Likely movement of real price of asset over its life
span taking into consideration productivity, revenue
earning capability over asset life and obsolescence
28
Modeling Other Costs
• Cost of capital: Should reflect opportunity cost of
investment. Rate of return should be determined
by the capital market. Note that the rate should
cover investment costs, including equity and debt
costs.
• OPEX: Proxy mid-range/best practice values
should be used given that the Latin America &
Caribbean region has relatively high OPEX costs.
• Ancillary costs: May be estimated by allowing a
mark up based on best practice bench marks.
29
Technology Modalities Re:
Efficiency
• Core network is circuit switched;
• Complete digital switching;
• A two tier switching system: tandem
switching, local switching supported by
remote switching;
• Extensive usage of fibre in urban areas; and
• Application of relatively modern
transmission technology.
30
Estimating Unbundled Switching
Costs
• Objective is to estimate the LEC and
IEC of switching traffic over different
switching elements on the network
including:
• Tandem Switch
• Local Switch
• Remote Switch
31
Partial Core Network
Switching Network
Subscriber
Line Termination
Units
Digital LIne Termination Units
2 Mbit/s
Output
Ports
Traffic
Routes to other
Exchanges
SLTU
DLTU
SLTU
Switch Block
DLTU
SLTU
DLTU
Customer
Premises
Processor
32
Switching Network Continued
Local Switching:
Line side facilities: (including but not limited
to) connection to local loop at MDF and Line
cards;
Trunk side facilities: Connections between
trunk-side termination at trunk-side cross
connect panel and trunk cards
Other facilities that connect lines to lines, lines
to trunk, trunk to trunk and features such as
telephone numbers, dial tone, local area
signaling, customer calling, Routing functions
33
Continued
Tandem Switching:
Facilities that afford connection between trunk
termination at cross connect panel and trunk
cards;
Facilities that provide trunk to trunk switching;
Facilities that provide other functions including:
call recording, call routing to operator services
and signaling conversion features.
Signaling Network: includes signaling links and
signaling control and transfer points.
34
Cost Estimation
• 1. Component Identification
• 2. Data collection (See table 1.p13)
• 3. Undertake cost estimates : unit & total
investment costs (appendix I), Depreciation,
annualized (OPEX, indirect costs and common
costs that are traffic sensitive).
• Calculate total cost per switching component sum:
annualized direct, indirect and common
costs.(appendix I)
• Calculate interconnect component costs
35
Estimating Demand
• Definition: number of calls or number of minutes
switched.
• Current demand, calls = number of successful &
unsuccessful call attempts that engage the switch
• Current demand, minutes= minutes of switched
traffic plus holding time.
• Expected demand Calls /minutes) = current
demand + growth factor.
• Traffic per switching component is determined by
traffic routing. Routing factors have to be
36
accessed or computed.
Primary LEC &IEC
• LEC = total cost /total demand.
• IEC = Incremental cost/incremental
demand.
• Crude calculations that do not take into
account market distortions and such do not
address issues of efficiency.
37
Network Dimension & Efficiency
• Network is normally dimensioned to facilitate
peak loads as denominated in busy hour call
attempts and busy hour erlangs.
• Efficient dimensioning of the switching network
to equate required capacity to handle busy hour
traffic (call attempts and erlangs, including growth
factor) with installed switching capacity.
• If not the network is inefficient either in terms of
excess or under capacity.
• The key concern for the regulator is excess
capacity.
38
Efficiency Adjustment
Key efficiency adjustment questions:
1. Is excess switching capacity avoidable? If so
what is the economic cost of the excess? E.g. If
computed consistent busy hour traffic demand for a
particular switch is Q but closest manufacturing
specification for that switch is of capacity Q1where Q1
> Q, the excess capacity Q1- Q is unavoidable.
2. If the operator elects to install a switch with
capacity Q2, where Q2 > Q1, there is a gap Q2 - Q1. If
pQ2 > pQ1 the efficiency gap is negative and
avoidable and requires an efficiency adjustment
39
factor.
Evaluating Economic Cost
• Negative efficiency gap in terms of excess
capacity is Q1/Q2 = ß
• Then ß is the adjustment factor that should
be applied to reduce LEC or IEC switching
cost estimated earlier.
40
Modeling Transmission
PSTN transmission involves narrow band and
leased line services.
Objective is to derive the unbundled cost of
narrow band services.
Such services do not include Fax and voice
via ISDN lines.
Linkages modeled:
RAU-LS LS-LS
41
LS-TS
TS-TS
Transmission Network
Transmission electronics Multiplexers, digital cross
connectors,regenerators etc
Infrastructure: ducts, trenches, poles, cable & fibre etc.
Network Unbundling
Interconnection at: (See relevant diagram above)
i) Local switch: purchase restricted to transmission linkage
between remote and local switches.
ii) Single tandem : purchase restricted to those at (i) plus linkage
between local and tandem switches.
iii) Double tandem: purchase of transmission link between tande
switches plus purchases indicated at (ii) above.
42
Costing Procedure
• Similar to that employed for switching:
• Data collection on transmission equipment and
infrastructure (pp 22- 24)
• Critical to make appropriate assumptions as to the
minimum levels of transmission technology. (pp
24-26)
• Access and study blue print of transmission
network.
• Estimate the cost of the transmission links on
actual network (Appendix V)
• OPEX and Ancillary cost may be estimated using
benchmarks. (optional)
43
Accounting for Leased lines
• Collect data re: number of 2 Mbits links dedicated
to:
• Retail carriers
• Mobile carriers
• Other services
• Estimate the proportion of the PSTN dedicated to
leased line traffic.
• Based on dedicated capacity calculate leased line
traffic in Mbits (Eq 23. P.32) and subtract from
total traffic.
• Subtract that from total transmission cost leased
44
line cost
Estimate Re: LEC & IEC
• Subject to routing profile:
• LEC per transmission link = Tci/Vi
• IEC per transmission link = Ici/Vni
• Where Tci = total cost of transmission facilities
used for voice traffic including interconnect
traffic.
• Vi = total mbits of voice traffic.
• Ici = additional cost of facilities for interconnect
traffic.
• Vni = Mbits of interconnect traffic.
45
Actually Incurred Cost vs Cost of
Efficient Service Provision
• General agreement that every service provider
should strive for provision of “optimal”cost efficient
services.
• This concept should form the basis for cost
derivation and therefore cost oriented pricing.
• This concept proposes costing based on up-to-date
technology supported by efficient operation.
• Developing countries argued that: because of
difference in economies of scale efficiency criteria
are different on relatively smaller networks given
that network dimensioning do not favour even the46
largest operators in developing countries.
Critical Efficiency Indicators
• Capacity reserves built into installation to
accommodate future traffic since cost based
on this capacity would not truly reflect the
cost of current operation.
• Depreciation rates based on economic life of
assets.
• Cost of capital
• The relationship between OPEX and
equipment costs.
47
• Cost of universal service.
Efficiency
• Maxim: “Operators must verify that idle
capacity is not the result of inefficient use of
resources. They must ensure that all
available capacity is used within a period
compatible with good replenishment
practices “
• K1 = Max {0,∆K-K0 *[(1+λ)n – 1]}
Where:
λ is the compounded growth rate;
48
Continued
•
•
•
•
•
K0 is current capacity;
N is appropriate replenishment period;
K is spare capacity; and
K1 is inefficient capacity.
If K1 is positive, investment cost should be
reduced by K1/(K0 + ∆K).
• Example:
• Assume K0 = 200
49
Continued
• Current Demand = 150, is forecast to
increase by 15% per annum;
• Period for capacity maturity i.e long run
period is 3 yrs
• Them K1 = {0; 50- 150* [(1+0.15)3 – 1]}=0
• If actual growth in demand is 5% then:
• K1 = 26.36 in which case cost would have to
be reduced by 26.36/200 = 13.8%.
50
Primary Efficiency
• Again the question of Efficiency refers to capacity
utilization:
• Assuming that estimated traffic throughput on a
transmission linkage is Ej Mbits,
• Installed transmission capacity on the link is W(j+1)
Mbits, and
• Ej/ W(j+1) = wj = <1
• Then there is a primary inefficiency gap of 1- wj w
• Which prompts the question, is the gap avoidable.
51
Secondary Efficiency
• Assuming optimal transmission network for
relevant traffic throughput is w(j+q) and
• w(j+q)/ W(j+1) = ŵ = > 1
• Avoidable excess capacity = ŵ – 1= @
• Which is the factor to be used to adjust the
LEC.
• A similar procedure is used to derive the
adjustment factor for IEC.
52
Unbundled LEC
Core
Network
Total Cost
Adjusted
Total
Routed
Traffic
Unit Cost
TS
K(i)
V(I)
K(i) /V(i)
LS
K(ii)
V(ii)
K(ii) /V(ii)
RAU
K(iii)
V(iii)
K(iii) /V(iii)
TS-TS
K(iv)
V(iv)
K(iv) /V(iv)
TS-LS
K(v)
V(v)
K(v) /V(v)
LS-LS
K(vi)
V(vi)
K(vi) /V(vi)
LS-RSU
K(vii)
V(vii)
K(vii) /V(vii)
53
Unbundled IEC
Core
Network
Total Cost
Adjusted
Incremental Incremental
Routed
Cost
Traffic
TS
I(I)
V(n-i)
I(i) /V(n-i)
LS
I(ii)
V(n-ii)
I(ii) /V(n-ii)
RAU
I(iii)
V(n-iii)
I(iii) /V(n-iii)
TS-TS
I(iv)
V(n-iv)
I(iv) /V(n-iv)
TS-LS
I(v)
V(n-v)
I(v) /V(n-v)
LS-LS
I(vi)
V(n-vi)
I(vi) /V(n-vi)
LS-RSU
I(vii)
V(n-vii)
I(vii) /V(n-vii)
54