Interconnect costing for mobile operators at ITU Forum
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Interconnect Charge for Mobile Operators Principles and Costing Methodology ITU (RWG) Forum Bangkok August 03-05, 2005 Ahmad Nadeem Syed Director Interconnect Mobilink Pakistan [email protected]
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Interconnect costing is a specialized subject. The presentation by Ahmad Nadeem Syed made at ITU (RWG) forum in Bangkok discusses the principles and methodology for working out Interconnect charging.
Transcript of Interconnect costing for mobile operators at ITU Forum
Interconnect Charge for Mobile Operators
Principles and Costing Methodology
ITU (RWG) Forum Bangkok
August 03-05, 2005
Ahmad Nadeem Syed
Director Interconnect Mobilink
Pakistan
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Interconnect Rate Determination
● Benchmark Basis
(Difficult to follow because of varying economies and market sizes)
● Cost Basis
- Regulatory Requirement
- Business Requirement
3
Composition of Cost Based Interconnect Rate
● Cost of Operation
● Return on Investment
Network Externality factor as adopted in UK may be added on
4
Natural Evolution Process for Costing
Exercise
FAC Historical FAC Current Cost
LRIC – Top down LRIC – Bottom Up
FAC – Fully Allocated Cost
LRIC – Long Run Incremental Cost
5
Cost Causation The Basic Principle
Key to all forms of cost modelling:
● Why was a cost incurred?
● What does the cost contribute to?
The answers to these questions vary from country to
country thus no hard and fast rules can be applied
with respect to treatment of certain expenses
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Cost Model Structure
Direct Cost
Shared Cost
Common Cost
Depreciation
Network Element Split
Curre
nt A
ccount
Cost Pool Allocation/
Unit Cost
WACC
Cost/
Minute
Routing
Factors
No. Of
MSCs
Call
Scena
rios
Traffic Services
7
Cost of Operation
● Direct Costs
– Related to one service only e.g. Co-location Charges
● Joint or shared costs
– Costs with relate to two or more services e.g. Network
cost
● Common costs
– Costs which relate to all services e.g. Overheads
– Allocation on Ramsey Pricing or EPMU (preferred)
basis
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Identification of Network Elements and
relationships between the services and the cost
pools
PSTN Fixed Network
BSC/BTS
BTS
BSC
BTS
MSC / BSC
HLR/VLR
BTS
PSTN DTE
Point of Interconnection
MSC / BSC
BTS
BSC/BTS
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Identification of System Elements and
relationships between the services and the cost
pools
Data Communications Network
Mobile network elements
Network Management Systems
Mobile network elements
Finance systems
Rating &
Billing Systems
Mediation Platform
Bill
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Routing Factor Table
Call
types MSC BTS
Lin
ks
BTS
to
MS
C
Links
MSC
-
MSC
HLR/
IN
Inter
conn
ect
links
Voic
e
SMS
c
Interc
onne
ct
billin
g
Cust
ome
r
billin
g
Cus
tom
er
serv
ices
Cost
of
sale
s
%
Split
of
traffic
type
Minutes
Fixed to Mobile - Incoming
1 MSC 1 1 2 0 1 1 0 0 1 0 0 0 85% 85,000
000
2 MSC 2 1 2 1 1 1 0 0 1 0 0 0 15% 15,000
000
3 MSC 3 0 0 0 0 0 0 0 0 0 0 0 0 0
Mobile to Mobile On-net
1 MSC 1 2 2 1 1 1 1 1 0 1 1 1 75% 75,000
000
2 MSC 2 2 1 1 1 1 1 1 0 1 1 1 25% 250000
00
3 MSC 3 0 0 0 0 0 0 0 0 0 0 0 0 0
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Return On Investment - ROI
WACC = Rd D/V * (1-Tc) + Re * E/V
• Rd Cost of Debt
• Re Return on Equity
• D Value of Debt
• E Value of Equity
• V Total Value of the company, D+E
• Tc Corporate Tax Rate
Cost Of Equity
Re = Rf + β (Beta) * (Rm - Rf)
• Re Return on Equity
• Rf Risk free return
• Rm Market Risk
• β Market Co-Variance
Cost Of Debt
• Interest Rate
Or
• Inter-bank Rate + Debt margin
ROI = Net Capital Employed * WACC
Net Capital Employed = Fixed assets+ Working Capital
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Network Externality
“a cost or benefit that results from a decision where this cost or benefit accrues to someone other than the decision-maker and is not, therefore, taken into account by the decision maker…..
….Mobile call termination charges should be cost based plus a share of fixed and common overheads as well as an allowance for Network Externalities…..”
(Report of UK Competition Commission enquiry into the costs of call
termination in UK mobile networks)
“Since callers to mobiles therefore benefit from the called party’s decision to subscribe to a mobile network, the economically efficient charge they pay for the call must reflect this benefit” (Oftel)
Oftel assumed that the Rohlfs-Griffin factor is between 1.3 and 1.7
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Issues for Discussion
● Could ITU be approached on (non-binding basis) for guidance in case of varying interpretation of principles by the operators and regulators?
● How could ITU (RWG) provide assistance in developing a standardized costing methodology/model and establish guiding principles considering that both operators and regulators in Asia Pacific region are in learning curve?
● Accounting separation plays a major role to determine interconnect cost. How can ITU provide assistance in this respect?
● β for mobile sector is generally not available. How could ITU provide assistance in this respect?
● Should network externality factor be considered?
● Could a permanent ITU (RWG) Asia Pacific region interconnect working group be established to provide guidance and professional assistance, where needed?
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Thank You !
