Regulatory Accounting

1. Regulatory Accounting Peter KLUNE London, 21 st November 2007

2. Agenda

Introduction of Telekom Austria Group

Legal framework and requirements

Instruments in use

Success factors and issues to consider

3.

Austrias leading telecommunications company

Main business segments:

wireline - market share of ~ 57%

wireless - market share of ~ 39 % (in Austria)

International operations in several eastern European countries

Revenues FY 06: EUR ~ 4.8 billion

Employees: 15,428 (end of Dec. 2006)

Act. market capitalization: ~ EUR 8,7 billion

Shareholder Structure

Free float ~ 73%

Republic of Austria ~ 27%

Introduction of Telekom Austria Group Belarus Austria FL Slovenia Bulgaria Croatia Macedonia Serbia Kosovo Czech Republic

4.

Liberalization of the Austrian telecommunications market since the beginning of 1998

Austrian telecommunications market is one of the most competitive in Europe:

With 38 fixed line providers the Austrian market is very competitive. Following the mergers of UTA&Tele2 and UPC&Inode the most important wire line market players in Austria are: Telekom Austria, Tele 2, and UPC.

With 4 mobile network operators (mobilkom austria, T-Mobile Austria/tele.ring, one, Hutchison) and 3 service providers (Yesss!, eety and eTel) Austria still has one of the highest concentrations of mobile providers in Europe.

Internet - approx. 200 service providers currently registered as ISPA members

Competitive Landscape in Austria

5. Agenda



Instruments in use


6. Regulatory framework - wireline segment Residential customers Retail level Business customers Wholesale level Leased lines M1 Access M3 National Calls M4 Intern. Calls M11 ULL Interconnection Leased lines M8 Call origination M9 Call Termination M10 Transit services M13 Terminating segments M14 Trunk segments M2 Access M5 National Calls M6 Intern. Calls M7 Minimum set of leased lines no remedies Voice services No remedies M12 Broadband Access No remedies

7. Different accounting rules per segment

The remedies are defined specifically on a per market base (dependent on the competitive situation and the aim of regulatory intervention)

This leads to different cost accounting rules per segment

Retail level

Voice Services

Leased lines

Wholesale level

Interconnection

ULL

Broadband Access -> Retail minus

Accounting separation obligation for all listed markets

Universal Service Calculation -> historic costs (but higher level of detail)

-> FL-LRAIC -> Historic costs -> Planned costs

8. Historic costs versus FL-LRIC

Based on historic costs

Fully allocated costs (FAC)

Usually top down modelling based on companies accounting information

Based on existing resources, network infrastructure and network topology

Cost allocation often based on activity based costing

Asset re-evaluation usually based on MEA concept; current cost accounting (CCA)

Assumptions on efficiencies (efficient service provision)

All costs are potentially variable (in the long run)

Only incremental costs are relevant

Usually modelled bottom up

Network topology

Green field approach

Scorched node approach

Mark-up for common costs

HCA FL-LRIC

9. Challenges of retail-minus approach

Determine margin and gap

Monitor gap, based on changes in retail pricing and/or product mix

Evaluate effects on gap due to permanent price changes and promotions

Adopt WS-pricing if necessary to ensure appropriate gap

weighted average retail price ARPU Retail Minus ULL Bitstream avoidable costs add. costs Margin target WS-price actual WS-price GAP 1 GAP 2 weighted average wholesale price ADSL costs based on ULL business case

10. Intern. comparison of methods in use Different types of price control methods, used in EU member countries grouped per market Different types of cost bases, used in member countries grouped per market Source: Regulatory Accounting in Practice 2007, ERG Report, April 2007 Wholesale markets Retail markets Wholesale markets Retail markets

11. Accounting separation

Objective

Provide a higher level of detail of information than that derived from the statutory financial statements, to prevent discrimination in favour of an operators own activities and to prevent unfair cross-subsidy.

Obligations

Disaggregation of costs, revenues and capital employed (profit and loss statement) between regulatory entities (markets).

Provision of Volume and cost driver information

Average cost per Unit

12. Reporting requirements (1/2)

13. Reporting requirements (2/2)

14. Agenda



Instruments in use


15. Instruments used at Telekom Austria to fulfil the various regulatory requirements FL-LRIC top down calculation USO-costing e.g. public payphones Accounting separation Retail-minus calculation for bit-stream access One integrated core model which allows several variations FAC/HCA

16. Model details (GAMMAxx)

Cost input out of SAP-CO (according to IFRS)

Predefined cost categories (labour costs, OPEX, depreciation, interest costs, direct costs)

Use of technical platforms (switching, ATM, IP, etc.) for cost aggregations and further allocations to products which are commonly used by controllers and technicians.

Platform costs are assigned to products based on a network model (usage of network elements)

Use product structure (product definition) used by marketing and sales people as far as possible. Specific regulatory needs (aggregation and/or disaggregation is done in a separate step

Cost allocation based on activity based costing. Activities and internal products are similar to the ones used by the controlling department (IT-products, customer care processes, etc.)

17. Cost modelling process Structuring & Design Modelling Documentation & Validation Cost Models GAMMAxx

Definition of (output) product structure

Definition of technical platforms

Definition of activities (ABC-costing)

Definition of input structure (resources) and data sources

Setup of model structure (resources, activities and cost objects)

Population with cost input

Implementation of driver quantities

Documentation of modelling process (cost allcoation process, data sources, assumptions, etc.)

Validation of results

Preparation of standard reports for regulatory reporting

Calculation of simulations

Certification process (audit by NRA)

Utilize model for price setting, tariff applications, other legal proceedings (provide evidence of costs)

18. Organisational structure and resources Regulatory affairs CEO-Wireline Regulatory cost accounting team International regulation Brussels Office Wholesale regulation Retail regulation Staff position Assistance

Information gathering

Participation in intern. associations and working groups

Lobbying

Benchmarking

Cost Modelling

Scenario analysis

Regular reporting

Ad hoc analysis

Support of legal proceedings

Negotiation of RUO, RIO with ANO

Guidance in wholesale product development

Tariff applications

Support of legal proceedings (unfair competition, etc.)

Guidance in retail product development

19. Internal and external stakeholders Regulatory accounting and reporting internal external Product management Regulatory authority Competition agency Share holders Competitors Controlling Accounting Management

20. Agenda



Instruments in use


21. Success factors of cost modelling

Find the right level of granularity

Cost allocations must be retraceable in a transparent way

Reconciliation of cost input with legacy system and annual report

Build your own regulatory model to overcome limitations of financial accounting and controlling systems and structures

The regulatory focus (cost causation, margin squeeze test, avoid cross subsidy, etc.) is different from controlling purposes (budgeting, plan/actual comparison, etc.)

Therefore build your own model but use existing structures as much as possible

Ensure predictability of costs and revenues (e.g. retail minus)

Scenario analysis must be possible (e.g. useful lifetime)

22. Issues to consider regarding regulatory reporting

Obligation to deliver monthly data on a quarterly base makes it sometimes difficult to reconcile these figures with annual values.

Ensure consistency. Coordination with other reporting requirements such as capital market reporting is necessary

To provide the level of detail which is necessary, the use of different source systems is necessary. This makes reconciliation sometimes difficult.

NRA do collect data over a long period. Therefore actual figures must be consistent with the historic development. Graphic representation (charts) enable you to realise deviations much easier than based on huge tables

The usage of the data for other proceedings requires approval by TA

23. Lessons learned regarding relationship with authority

Try to establish a climate of trust and confidence

Develop a discussion culture

Discuss and agree structure of reporting, cost modelling, etc. in advance

Show them what they need but not more

Try to be at least one step ahead

Ensure early involvement in product development process (pricing)

24. Thank you for your time Questions? Peter KLUNE Regulatory Affairs TELEKOM AUSTRIA AG Lassallestrae 9 A-1020 Austria E-Mail [email_address] Phone +43 (0)59059 1 16012 Fax +43 (0)59059 91 16012 Mobile +43 (0)664 629 61 76

25. Appendix: helpful links and related documents

COMMISSION RECOMMENDATION ON ACCOUNTING SEPARATION AND COST ACCOUNTING SYSTEMS UNDER THE REGULATORY FRAMEWORK FOR ELECTRONIC COMMUNICATIONS, 21.9.2005 ( http://ec.europa.eu/information_society/policy/ecomm/doc/info_centre/recomm_guidelines/acc_separ_ca/recom_en.pdf )

Regulatory Accounting in Practice 2007, ERG Report, April 2007 ( http://www.erg.eu.int/documents/docs/index_en.htm )

Guidelines for implementing the Commission Recommendation C (2005) 3480 on Accounting Separation & Cost Accounting Systems under the regulatory framework for electronic communications, ERG common position ERG (05)29 ( http://www.erg.eu.int/documents/docs/index_en.htm )

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Regulatory Accounting

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