1. David Rogerson, ITU Expert
EXPERT LEVEL TRAINING ON TELECOM NETWORK COST MODELLING FOR THE HIPSSA REGIONS
Arusha
15-19 July, 2013
David Rogerson, ITU Expert

2. Session 11: The regulatory process for cost accounting and cost modeling – what is involved and how should it to be addressed?

3. Agenda Aims and objectives for this session Identify key steps
Review best practice
Discuss possible challenges
Review how to implement
Aims and objectives for this session

4. 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.

5. Cost modelling steps – six of the best
Legal basis
Methodology
Data sourcing
Consultation
Timelines
Confidentiality
Spot the link with the 7 habits described in Session 4!

6. 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)

7. 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.

8. 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.

9. Data sourcing for bottom-up models
Best source
Alternatives
Coverage and subscribers
Operator
Other operators with market share adjustment
Traffic
Network design parameters
Benchmarks
Unit equipment costs
Equipment suppliers
Operator data or benchmarks
Operating expenditure
Efficient operator benchmarks
Cross-check with operator data
Mark-up (common costs)

10. 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.

11. 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.

12. 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.

13. Group discussion and presentations

14. 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.
Legal basis
Methodology
Data sourcing
Consultation
Timelines
Confidentiality