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Overview of Principles of
Cost Modelling
Eric Tyson
Overview
Cost Causation
Access and Core Networks
Direct, Joint and Common costs
Capital and Current Account costs
Common cost mark ups
Use of Glide Paths
Cost Causation
Cost causation is key to all forms of cost
modelling:
Why was a cost incurred?
Network Elements
Network elements reflect the joint or shared costs
in a telecoms network
Switching and transmission networks consisting
of:
Switching (local, trunk/transit, international)
Transmission (inter-local, local to trunk, inter-trunk,
international)
Intelligent Network
Signalling
Billing
International
Switch
Trunk
Switch
International
Network
Inter-Trunk Transmission
Trunk
Switch
National
Core Network
Local
Switch
Local-Trunk
Transmission
Inter-Local
Transmission
Local
Switch
RCULocal
Transmission
RCU
Access Network
Accounting Separation
Developed as a way of regulating business of
incumbent fixed operators
Separate business for:
Access
Core network
Retailing
Other activities
Accounting
Separation:
Retail
Access
Network
Core
Network
Other
Costs
Core Network
Switching
Matrix
Connection
Dependent
Customer
Line
Cards
Traffic
Dependent
Trunks
Signalling
Shared by
Access and
Core
Accommodation
Power
Software
Types of Costs
Direct costs
Related to one service only e.g. SMSC
Common costs
Costs which relate to all services e.g. human resources
department, payroll system, HQ building
Types of Costs
Capital costs:
Relate to the purchase of equipment
May also include labour costs for installation
Types of Costs
Current account costs:
Costs which are fully expensed at the time of spending
Cost Modelling
Can be created using spreadsheets
Need virtual team of people from across the
business:
Finance (lead?)
Network planning
Billing
HR
Regulatory Affairs
Calculation Methodology
Allocate costs to network elements
Directly
Indirectly using drivers
Drivers
Cost
Pools
Manpower
Analysis
Current
Account Cost
Functional
Activities
Direct
Shared
Depreciation
Common
Algorithms
Final
Services
Common Cost
Common Cost is the cost which relates to all or a
group of services
HR
Finance
Senior Management
Common Costs
Equal Proportionate Mark-up (EPMU)
Allocates common cost in proportion to the direct and joint
costs already allocated to each service
Common cost
Network cost
o/g
call
i/c
call
onnet
call
Ramsey Pricing
Common cost
Ramsey pricing is based on
taxation theory
Common costs are allocated
based on price elasticity
Network cost
o/g
call
i/c
call
onnet
call
Model Outputs
The cost models output 24 hour average costs
Need to use retail tariff gradients to set Peak, OffPeak and (if appropriate) Weekend charges
Current interconnection charges often seen to be
well above cost
Common for Regulators to use 3 or 4 year Glide
Paths rather than significant step reductions
Glide Paths
Increasing Regulation of
Termination Rates
Glide Paths used by
regulators to bring rates
towards an expectation
of cost over time
Rates set
By determination of price
each year
By reduction to target end
price