HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed? EXPERT LEVEL TRAINING ON TELECOM NETWORK COST MODELLING FOR THE HIPSSA REGIONS Arusha July, 2013 David Rogerson, ITU Expert 1

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed?

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed 3 Agenda Identify key steps Review best practice Discuss possible challenges Review how to implement Aims and objectives for this session

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed What are the key steps in cost-based regulation? Brainstorm in your groups what are the key practical steps that need to be taken to ensure that cost accounting and cost modelling is successful. 4

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Cost modelling steps – six of the best 5 Legal basisMethodologyData sourcing Consultation Timelines Confidentiality Spot the link with the 7 habits described in Session 4!

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Legal basis  Before regulatory action is taken you must make sure there is sufficient legal basis for it.  Check for:  The extent to which costing methodology is constrained  Which operators/services are open to cost-based regulation  Any prior determinations that need to be made (e.g. determination of dominance; evidence of failed commercial negotiations).  Ideally the law will give:  direct justification for cost-based termination rates, but for other services market analysis may be required  A clear framework for key processes such as public consultation and data protection (confidentiality) 6

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Methodology  The legal framework on its own is unlikely to be sufficient to establish cost-based rates.  A separate regulation on a costing methodology is usually helpful to determine how the legal requirements will be met in practice  The methodology should cover the key issues described in sessions 5 and 7:  Cost FAC, LRIC, Pure LRIC etc.  Bottom-up, Top-down, Hybrid or benchmark?  Consult and decide on the methodology before starting the cost model work. 7

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Data sourcing  Appropriate data sources will depend on the type of model being constructed.  Top-down models are best constructed by the operators so the methodology needs to be more carefully specified and data inputs verified against the audited accounts.  Obtain confirmation from the auditors that this has been done.  Bottom-up models can be built by the regulator (or its consultants) but they need data from operators to be effective. 8

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Data sourcing for bottom-up models Best sourceAlternatives Coverage and subscribers OperatorOther operators with market share adjustment TrafficOperatorOther operators with market share adjustment Network design parameters OperatorBenchmarks Unit equipment costsEquipment suppliers Operator data or benchmarks Operating expenditureEfficient operator benchmarks Cross-check with operator data Mark-up (common costs) Efficient operator benchmarks Cross-check with operator data 9

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Consultation  Stakeholders (both those being regulated and those paying regulated charges) deserve to be involved in the regulatory process.  The best way to achieve this is through a formal public consultation process.  There could be up to four separate consultations:  To agree the methodology  To request relevant data  To review the cost model and results  To allow for comments on the proposed prices.  A report on the consultation should indicate who said what and include responses and action points. 10

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Timelines  Without strict project management, cost modelling work can easily result in major delays.  It is always in the interests of some stakeholders to seek delay and they will find many ways to achieve it  It is important to:  Establish target dates and deadlines  Build in some contingency  Be realistic  Publicise the schedule  Enforce the schedule (especially with external stakeholders)  Keep the momentum up. 11

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Confidentiality  Operators often try to derail the process by demanding respect for the commercial confidentiality of their data.  This is a reasonable request regulators should:  Disallow “blanket” claims of confidentiality – specific and justified requests only  Provide as much transparency as possible. Options include:  Publish models with averaged data: useful but hard to guarantee full data confidentiality  Publish the models with “dummy” data: allows the model’s integrity to be checked, but not to verify the results  Publish results and methodology but not the model itself.  Do not let confidentiality unreasonably slow-down or stop the process. 12

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Group discussion and presentations 13

HIPSSA Cost model training workshop: Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed Consider and discuss in groups  Reflect on the situation in the country you come from:  In which of the areas is your regulatory regime of cost accounting and cost modelling working best and what makes it effective?  In which of the areas is your regulatory regime least effective, and why? What could be done about it?  Share your thinking with others in your group. 14 Legal basisMethodologyData sourcing Consultation Timelines Confidentiality