telecoms regulation - pwc

Telecoms Regulation

Our experience

Telecommunications Strategy

March 2012

ContentsIntroduction..............................................................................................1

1.1 PricewaterhouseCoopers LLP (PwC) telecoms regulation ............... – our experience

1.2 About PwC.........................................................................................

1.3 PwC and the communications industry.............................................

Regulatory strategy and case building.........................................................2

Sector policy.................................................................................................3

Cost modelling.............................................................................................4

Interconnection.............................................................................................5

Retail price regulation...................................................................................6

6.1 Tariff rebalancing................................................................................

6.2 Price cap regulation............................................................................

6.3 Retail price regulation and universal service......................................

Retail pricing strategy...................................................................................7

7.1 Pricing strategy...................................................................................

7.2 Retail pricing strategy and competition policy..................................

Cost of capital...............................................................................................8

Comparative efficiency analysis...................................................................9

Separation support.......................................................................................10

Regulatory accounting.................................................................................11

Business modelling......................................................................................12

Competition policy.......................................................................................13

Next Generation Networks...........................................................................14

Universal Service Obligations......................................................................15

Mobile termination rates..............................................................................16

16.1 Service costs.....................................................................................

16.2 Network effects / network externalities..............................................

Number portability........................................................................................17

Mobile virtual network operators..................................................................18

Spectrum allocation and policy....................................................................19

Regulatory compliance and assurance........................................................20

Summary .....................................................................................................21

21.1 Alphabetic list of topics.....................................................................

Contacts......................................................................................................22

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1 Introduction1.1 PricewaterhouseCoopers LLP (PwC) telecoms regulation – our experience

This document offers an overview of our work for telecoms clients across the globe, and demonstrates our depth of knowledge and expertise across all key areas of telecoms regulation and strategy. As these case studies prove, we have delivered real value to our public and private sector clients across the world, in every segment of the telecommunications value chain. No-one is better positioned to understand and anticipate the issues and challenges facing industry players, both now and in the future.

This document follows the same structure as the PwC Telecoms Regulation Strategy and Policy Capability Statement, and should be read alongside it.

As you would expect, we have only chosen a few examples to include in these pages, and have not indemnified the clients concerned. We would be happy to provide further details and references on request.

1.2 About PwC

PwC has unparalleled experience in the whole range of assurance, tax and advisory services. We aim to build public trust, and create value for our clients and their stakeholders. We have over 146,000 bright and committed people in 150 countries across our network. They share their thinking and know-how to develop fresh perspectives and practical advice for every client, on every piece of work.

Our clients choose us because of the quality of service we provide them every day.

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1 Introduction1.3 PwC and the communications industry

In the last few years the communications industry has changed out of all recognition. What has driven this degree of change? There are two main factors: new technology and regulation. Mobile, email, and internet have transformed business and personal communications, and at the same time there have been huge regulatory changes as well as increasing liberalisation and convergence of the marketplace. And as the pace of change quickens, both decision-makers and industry players will face an increasingly complex operating environment.

PwC is one of the world’s leading advisors to the telecommunications industry, from fixed and mobile operators to governments and regulators. With a large dedicated telecommunications team, we believe we have the skills, expertise, experience, and credibility to assist our clients on every aspect of their business, whether regulatory, commercial, economic or operational.

UK Accounting separation

Ireland Regulated product pricing

France Price Squeeze Analysis

Austria Mobile Licence BID

Netherlands Interconnect Policy

Sweden Price Elasticities

Germany Interconnection

Italy Interconnect Strategy

Turkey Sector Review

Hungary Mobile Termination Rates

Luxembourg NGN costing workshop

Romania NGN Programme Development

Mexico Evaluation of Fixed Cellular Services

Poland Functional separation

Brazil Mobile Licensing Review

Argentina Cellular Interconnect Strategy

Puerto Rico MNP Implementation

Romania Policy Advice

AT&T• Belgacom• Bell Canada• Bell South• BT• CAT• COLT• Cellcom• Cesky Telecom• Deutsche Telekom• Equant• Eircom• Era• Estonia Telecom• Etisalat• Far EasTone• France Telecom• Hutchison 3G•

HTTC• Infostrada• Jersey Telecom• Korea Telecom• KPN• Level 3• Magyer Telekom• Maxis• MTN• NTT• Netcom• O2• Ofcom• Oman Tel• Optus• Orange• OTE• Pacific Cellular•

Pannon GSM• PCCW• Portugal Telecom• Proximus• Qtel• Romtelecom• Saudi Telecom Co• SBC• Singapore Telecom• Slovak Telecom• Svyazinvest• Swisscom• Tanzania Telecom• TDC• TCNZ• Telecom Egypt• Telecom Italia• Telemar•

Teléfonica• Telekom Malaysia• Telekomunikacja Polska• Telekom Slovenjie• Telenor• Telia Sonera• Telkom South Africa• Telstra• Thus• T-Mobile• TOT• Turk Telekomunikasyon• UMC• Ukrainian Telecom• Vodacom Services• Verizon• Virgin Mobile• Vodafone• WIND•

Our clients account for over 70% of telecommunications revenue worldwide, and include 18 of the top 20 global players across Europe, the Americas, the Middle East, Africa and AsiaPac.

Zimbabwe Telecoms Policy Privatisation

South Africa Rural network planning

Saudi Arabia Preparation and re-organisation for privatisation

Jordon Sector policy

Oman Restructuring of telecoms sector

Kuwait Mobile Licensing Evaluation

Qatar Interconnect costing

Pakistan Tariff Rebalancing

India Sector Restructuring and Interconnect Policy

China GSM Business Planning

Taiwan GSM / Paging License Bids

Japan Costing studies

Hong Kong Tariff Regulation review

Malaysia Sector Masterplan

Indonesia Cellular forecasting

Thailand Tariff Restructuring and Universal Service

Australia LRIC Costing

New Zealand Interconnect Policy

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Over the last decade, PwC has helped shape government strategy and regulatory policy across the globe. We have advised on every aspect of regulation, including interconnection and access, mobile termination rates, network effects, New Generation Network regulation, spectrum issues and licensing. We have also supported clients in regulatory negotiations, the preparation of regulatory submissions, and the development of detailed regulatory impact analysis.

Here’s a sample of our work to date:

Regulatory strategy supportOver a period of several years we provided ongoing strategic advice and support to an Eastern European incumbent facing the challenge of market liberalisation. We assisted them to develop a strategy to deal with a number of regulatory measures including Long Run Incremental Cost (LRIC) based interconnection, the mandatory provision of unbundled access, partial private circuits, and carrier pre-selection. We also managed the implementation of complex accounting separation requirements. With our advice and guidance, and careful implementation of the strategy we helped to create, the client achieved a series of important wins with their regulator. We also seconded a senior manager to the client over a three-year period to provide day-to-day advice, and to assist the client to develop its own regulatory expertise.

Impact analysis of Next Generation Access NetworksWe undertook an economic impact study on the likely economic impact of Next Generation Networks for a Western European regulator. This included complex econometric modelling to assess possible new applications, and the effect of higher bandwidth on existing applications. Stakeholders across the telecoms value chain were included in our analysis and their private and social impacts determined.

Definition of regulatory strategyWe defined and prioritized the key regulatory issues for an Eastern European incumbent. This included interconnection provisions to competitors, interconnect, universal service obligations, number portability,

2 Regulatory strategy and case building

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carrier pre-selection, local loop unbundling, internet telephony, and commercial flexibility. We constructed a strong argument for each regulatory area, and helped the client decide how best to approach both the regulator and the media. We also worked with the client to establish a clear agenda, including the priorities, process and timing of communications. The client secured a number of regulatory wins as a result.

Regulatory risk assessmentWe conducted an evaluation and risk analysis of the regulatory environment for a Middle Eastern telecommunications company prior to their acquisition of an internet business. We looked at both the regulatory barriers, and the features of the regulatory regime that would facilitate entry. A major part of the project involved assisting the client in developing the public interest arguments that the regulator should take into account when considering how the regulatory environment should develop in the future. We also provided benchmark comparisons from the rest of the Arab region and various European and Asian countries.

Broadband profitability and margin analysisWe worked with an Eastern European incumbent to develop a wholesale broadband strategy. This required us to determine the right product and pricing strategy for the entire wholesale broadband product portfolio. Our work included analysis of likely changes in the market environment for both fixed and wireless, and the likely impact on the client’s full range of wholesale and retail products. We also built a model of its competitors’ make and buy decisions, and advised the client how to maximise its margins.

Based on our analysis the incumbent was able to:

Understand the rest of the market, identify likely future scenarios, and evaluate how competitors might • react to these trends;

Identify the retail and wholesale products and pricing that would generate the most value for the business;•

Determine the best approach to its retail and wholesale routes to market;•

Develop a business case for the alternative products identified in the economic analysis. For instance, there • is an opportunity to provide multi-play products both at the retail and wholesale level.

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PwC has helped to shape and define the telecommunications landscape across the worldIn the last decade, we have helped governments and regulatory authorities define their policy objectives for the communications sector, and determine the right targets and metrics to measure whether these objectives are being reached. Our advice has incorporated into different regulatory environments across the world, covering issues as wide-ranging as retail pricing, interconnection pricing, interconnection processes, spectrum allocation and numbering.


Restructuring the telecommunications sectorWe helped a Middle Eastern government develop and execute a strategy to restructure the country’s telecommunications sector. One important facet of this project was the establishment of a Telecommunications Policy Department within the Ministry, as well as policy development advice. We also set up an independent regulator and transformed the state-owned operator into an efficient and effective commercial enterprise. The scope of work was broad and ranged from financial control and planning, corporate strategy, specifications for information technology systems, and tariff strategy and structure, to the establishment of a customer service ethos within the organisation, and assistance in human resource planning.

Market review and regulatory policy strategyWe worked with a Latin American telecoms regulatory body, to create an institutional framework for the country. This was a major piece of work, and involved making recommendations on competition policy, interconnection arrangements, price regulation, frequency allocation, service quality, and financial performance monitoring. We also developed the detailed methodologies, procedures, and systems the client needed to function as an effective and efficient regulator.

Interconnection and retail price regulationWe developed a regulatory framework for a West African regulatory authority, covering interconnection, retail price regulation, and fixed and mobile interconnection cost models. The project also included an assessment of the competitiveness of fixed and mobile retail markets.

Country regulatory strategyWe worked with the Department of Communications of a Western African country to develop a strategy for the Information, Communications and Technology sector. The project included a study on the impact of regulatory measures such as price caps, a Universal Service Obligation (USO), and additional licences, using various indicators such as line penetration, service consumption, operator financial performance and investment. We also made recommendations relating to the government’s ownership of various companies in the sector, and its options for disposing of these equity stakes.

3 Sector policy

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Development of a regulatory strategy and assessment of organisational requirementsWe helped a Middle Eastern regulatory authority to develop its agenda for the communications sector in its first three years of operation. This included defining its priorities and creating a pragmatic action plan. We then designed an effective organisational structure for the authority, covering headcount, competencies, and job descriptions. We also defined a training plan on the regulatory skills the authority required to achieve its objectives, and the necessary HR policies and procedures it would need to manage its staff effectively.

Country regulatory policy and developmentWe advised a European government and the European Commission how to set the course for the country’s telecoms industry over the next decade. The project included an analysis of the operations and financial performance of the current incumbent, and comparing the local telecoms environment with that in other European countries. We conducted a complex scenario analysis, and used the findings to determine the optimum long-term strategy.

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4 Cost modellingPwC has led the thinking on telecommunications cost modelling for many years. We’ve developed a wide range of highly sophisticated models for clients across the world. Our clients see our cost models as essential tools for the analysis of product profitability, interconnection, accounting separation, competition policy, and pricing strategy.

Here are some examples of how they’re being used in practice:

Top down incremental cost model and CCA asset valuationWe developed a complex top-down incremental cost model of network services for a leading Western European incumbent. The work included a current cost valuation of fixed assets, and the development of a system to calculate incremental cost based on various cost-volume relationships. The methodology used to produce these LRIC proxies centred on a number of clearly-defined areas, in particular a Current Cost Accounting (CCA) valuation of the asset base, and analysis of efficiency and network capacity. The results of the model were audited and published as part of the client’s regulatory accounts.

Regulatory costingWe worked with a Middle Eastern incumbent over a number of years to design, build, and update the costing frameworks and models for both its mobile and fixed businesses. These were based on Activity-Based / Fully Allocated Costing (FAC), Current Cost Accounting, Top Down Long Run Incremental Cost (TD LRIC) and Bottom Up Long Run Incremental Cost (BU LRIC). The results of this work were used to support the cost-based prices that were then incorporated into its Reference Interconnection Offer (RIO). Our work also involved the preparation of an International RIO benchmarking paper, and a set of recommendations for RIO rates based on FAC, TD LRIC or BU LRIC models.

FDC, CCA and LRIC cost modelling for accounting separationWe developed and implemented a range of Fully Distributed Costs? (FDC), CCA and LRIC cost models for an Eastern European telecoms operator. We also helped the company to produce fully separated accounting statements for its core, access, retail and other services for three successive years. These were subsequently audited. We also project managed the implementation of the company’s legacy FDC model into SAS’s ABM service costing product.

Service costing and profitability systemWe were commissioned by a European operator to develop a service costing and profitability system to satisfy its regulatory and managerial reporting requirements. The priority was to develop estimates of service profitability for its main telephony services, and present its results in an accounting separation format, identifying the revenues and costs of network activities separately from those of access, retail and other business activities. We later helped the client extend the costing system from FAC to LRIC. This required a complete revaluation of the client’s assets on a forward-looking, CCA basis.

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PwC has advised operators and regulators worldwide on a wide range of technical and commercial issues relating to interconnection, including the preparation and negotiation of Reference Interconnection Offers and Reference Access Offers for Public Switched Telephone Networks (PSTN) mobile telephony, and Local Loop Unbundling. Our work in this area has also included interconnection scenario analysis, interconnection negotiation support, the preparation of position papers, and the development of communications strategies. More recently, we have been advising our clients on the topical areas of interconnection in Next Generation Networks (NGNs) and Next Generation Access (NGA) networks.


Fixed interconnection strategyWe helped a South American incumbent to develop its regulatory strategy in anticipation of new regulations on LRIC-based interconnect costs for PSTN services and local loop unbundling. PwC developed a costing tool which calculated the access element and service LRIC for each of the operator’s five regions. Access targets were a particularly sensitive issue politically, so the tool we developed took into account charging mechanisms for Access Deficit Contributions (ADCs) on both local loop costs and on PSTN services.

LRIC and interconnection supportWe’ve provided regulatory advice to a leading Western European mobile operator on its interconnect strategy for a number of years. This has included a detailed review of the UK experience in developing a LRIC methodology, and the reconciliation of the top-down and bottom-up models for the Carrier Services Division of an incumbent European telecoms operator. This was used in negotiations with the regulator over its proposed charges for interconnection services.

Interconnection strategy and costing methodologiesWe advised a Western European incumbent on the best interconnect strategy in their competitive environment. This included defining costing methodologies, and determining the client’s cost-based interconnection tariffs. We also recommended how they should conduct negotiations with other new licensed operators, the regulator, and the courts.

World Bank telecoms sector restructuring project As part of a major World Bank telecoms sector restructuring project in a South Asian country, we advised a government policy group on possible interconnection conditions for new entrants to the local market. The project included assessing investor requirements, financial feasibility, and technical interconnection conditions, as well as making recommendations on revenue sharing.

Development of Reference Interconnection OffersWe have assisted operators in a wide range of countries in the development of RIOs, including NGN-based services. Our work has included the technical definition of services and processes, the calculation of regulated interconnection tariffs, and support in negotiations between regulators, incumbent operators, and new entrants.

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6 Retail price regulation6.1 Tariff rebalancing

PwC has done a wide variety of work on retail price regulation, including advice on tariff rebalancing, price cap regulation, and retail pricing in the context of Universal Service Obligations.

Tariff rebalancingWe’ve advised incumbent operators and regulatory authorities on how tariffs should be rebalanced, taking into account the anticipated impact on different customer groups, and the overall regulatory environment.

Price cap regulationWe’ve done complex modelling for operators and regulatory authorities to determine appropriate levels of “X” in a “CPI-X” price cap regime. We’ve also examined the duration of control, and the number and definition of the baskets, as well as the relationship between price controls and tariff re-balancing. This is a key area of conflict in jurisdictions which have unbalanced tariffs and relatively low fixed line penetration.

Retail price regulation and Universal ServiceWe’ve assisted governments and regulators to design regulatory safeguard caps, and implement other measures aimed at regulating the conduct of universal service providers.


Telecommunications demand and re-balancing of tariffsWe examined the impact of tariff levels and structures for a South Asian regulator. This included examining duties and taxes on customer bills. As part of the work, we conducted a survey of existing and potential subscribers to determine potential levels of demand for each major service, and assess how these would be affected by changes in tariff structures and levels. We also conducted an in-depth assessment of the possible demand for new services.

Tariff restructuringWe helped an Asian incumbent to restructure its tariffs in anticipation of privatisation and the liberalisation of the market. The work included an analysis of the key pricing issues facing the operator, which ranged from rebalancing, local call metering, and the pricing of fixed, mobile and new services, to an analysis of regulatory and competitive trends. Our analysis was used to develop a pricing strategy that would maximise profitability while minimising the potential for market share erosion.

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6.2 Price cap regulation

Development of tariff, interconnection rate, and price cap regulationsWe developed price cap regulations for an African authority, and a roadmap for regulatory reporting in the future. Our approach recognised the need for a pricing framework for wholesale and retail services which was practical, fit-for-purpose, and would work in that particular market, without imposing disproportionate costs on local operators and consumers.

Development of a financial price cap modelWe advised a Middle Eastern authority on a new financial price cap model. This included a service costing exercise, and a forecast of the market demand for both mobile and fixed line telephony. We assessed the fiscal impact of various different market scenarios, regulatory price caps, and network roll-out regimes. Our model was used to advise the authority on network roll-out targets for the incumbent operator, as well as tariff regulation and the right X factor for the price cap regime. We also led a series of workshops to train the regulatory staff on the theory and practice of the tariff regime.

Negotiation of price cap frameworkWe helped an incumbent operator in the Caribbean to develop and negotiate a price cap framework. This included determining the right structure (such as the number and composition of price cap baskets) as well as the right parameters (such as the level of X). We also created a working model to determine an appropriate level for X, alongside a price cap negotiation tool.

6.3 Retail price regulation and Universal Service

Retail pricing and USO strategyWe developed a regulatory strategy for a Middle Eastern operator to help them prepare for the liberalisation of the telecoms market. The project included retail pricing, tariff structures and controls, universal service, interconnection pricing, and ADCs.

Tariff restructuring and Universal ServiceWe helped an Asian integrated fixed-mobile operator to construct a complex model that would calculate the cost of the USO and determine their optimal funding mechanism. This involved analysing the profitability of each individual subscriber in each operating area. Our recommendations were successfully put forward to the regulator.

Price regulations for USO operatorsWe worked with a Middle Eastern authority to develop tariff regulations for competing USO operators. These regulations included a low user scheme that was to be made available in specific universal service priority areas.

7 Retail pricing strategyPwC has advised fixed and mobile operators across the globe on their retail pricing strategies. Our approach balances key strategic factors such as pricing, demand, market segmentation, and the need to strike a balance between customer value and vulnerability. We’ve also advised telecoms operators on competition policy issues related to retail and wholesale pricing.


7.1 Pricing strategy

Strategic analysis of pricing in the market for data servicesWe helped a global mobile operator faced with the challenge of maintaining control over the value generated by its network in the face of changing market dynamics. We created an analytical framework that enabled the client to understand the strategic implications of changing the contractual terms between different players in the value chain. We reviewed the pricing models for each mobile data service to determine a range of end-user pricing scenarios. We then designed and managed primary market research to establish the potential demand for – and price sensitivity of – these services. We also evaluated the impact of different combinations of wholesale and retail pricing. The final phase of the work involved combining these projections with financial analysis to develop strategic recommendations on business and pricing models.

Internet pricing strategy

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We worked with a Southern American telecoms operator to develop prices for internet access that would comply with local regulatory requirements. The work included reviewing internet access and service pricing plans and the local, national long distance, and international rates of other telecommunications companies. These were then compared to the company’s own internet pricing plans.

IPTV pricing strategyWe worked for a European fixed line incumbent who was losing customers to cable competitors offering a combined telephony and TV service. Our analysis showed that the client would be unable to roll out an IPTV service fast enough to meet the threat and would be hampered by increasing regulatory pressures, which would impede effective price competition. We recommended the launch of a satellite TV service with three goals: to stem customer defections, improve profitability by selling higher-value services to existing customers, and prepare the company for an eventual move into either IPTV, or a hybrid satellite and IPTV service. We were then commissioned to launch the service. This included detailed business planning, the design and evaluation of the

content proposition, and technical project management.

7.2 Retail pricing strategy and competition policy

Price compliance strategy and implementationWe developed a competitive pricing framework for a leading European mobile operator. This was designed to allow the company to price its mobile products competitively, even within strict regulatory constraints. We then created a comprehensive implementation plan, covering the changes that were needed to the company’s systems, tools, processes, organisation and skills. The project was later extended to include the development of a defence against price squeeze claims made against the client by two of its competitors.

Price squeeze analysisWe worked for a European incumbent to develop a response to allegations of broadband margin squeezing. The regulator had used a complex model to evaluate the profitability of the client’s retail broadband product over several years, and we were hired to prepare a critique of the regulator’s findings. This was a real challenge, as we were not allowed to see the actual model, only the results generated by it. The first step, then, was to reconstruct the model, and in doing so we discovered that it contained a number of incorrect assumptions, both financial and operational. On the basis of our report, the allegations were successfully refuted.

Response to allegations of anti-competitive conductWe were taken on by an Eastern European incumbent to help them challenge the financial penalties imposed by their regulator for alleged monopolistic practices. The preparation of an effective rebuttal involved benchmarking international tariffs, and examining the various factors that determine tariff levels, including call area sizes.

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8 Cost of capitalThe cost of capital plays a crucial role in regulation and is central not just to competitive analysis but to the calculation of price caps, interconnection rates, discounted cash flow models, and licence and business valuations. PwC has recognised experts specialising in this area, and we’ve advised many operators and regulators using our own proven methodology.


Calculating Return on Capital Employed We’ve helped regulatory authorities across the world to calculate Return on Capital Employed. Among the factors we consider are the state of the telecoms markets, the dominant position of the incumbent, the financial situation of the other operators, and the methodology and assessment of the WACC used by the authority in question.

Cost of capital submissionsWe’ve made recommendations to a range of fixed and mobile operators across the world on the cost of capital submissions they make to regulators.

Optimising capital structuresWe’ve advised both fixed and mobile operators on their optimal capital structure. This involves using simulation models that look at key financial ratios for a business, and employ credit ratings to evaluate the mix of debt and equity that will deliver the lowest cost of capital without adversely affecting the company’s credit rating.

Assessing country risk We’ve developed our own in-house methodology to calculate country risk premia for 140 different markets. The model assesses the impact of different macro-economic, political and institutional environments, and how these affect the cost of capital that should be used for international cross-border valuations. This approach is used widely throughout the firm and has been tried and tested by many of our clients.

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PwC has helped operators and regulators across the globe to carry out the complex comparative efficiency analysis needed for retail and interconnection tariffs. Our approach incorporates techniques such as Stochastic Frontier Analysis (SFA), Ordinary Least Square Analysis (OLS), Data Envelopment Analysis (DEA), and Total Factor Productivity Analysis (TFP).


Comparative efficiency analysisWe conducted a comparative efficiency analysis for a Western European incumbent telecoms operator. The work was used by the client to defend their interconnect charges against claims of network inefficiency. By using Stochastic Frontier Analysis, which exploits both statistical and econometric techniques, we were able to compare the client’s costs to the costs of a large sample of other operators. We were also able to filter out country- and company-specific differences, such as geographic and demographic factors. We’ve taken the same approach for a number of other clients, including a global telecoms service provider and a Western European incumbent operator.

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PwC has advised a whole range of incumbent operators and regulatory authorities on separation strategies. We’ve helped our clients understand the regulatory, commercial, competitive and strategic implications of each form of separation, whether accounting separation, operational separation, structural separation, or ownership separation. We’ve also advised clients on how to go about doing it, including the development of KPIs, the determination of new working arrangements, and the establishment of internal trading processes.


Functional separation supportWe worked on a major project to help an Asia Pacific incumbent meet the new legislative requirement to separate its access, wholesale, and retail businesses. Our work included an analysis of the implications of the different degrees of separation, and the development of internal trading to support operational separation, as well as advising on the accounting aspects of separation. The latter included asset valuation, the development of KPIs and other metrics, and the setting up and managing of a programme office to implement the changes.

Regulation and separationWe worked with an Eastern European incumbent to assess the commercial impact of functional separation on the company. We estimated the quantitative financial impact under different scenarios, and different levels of separation. We also assisted the client to develop an effective regulatory strategy, including advice on the public policy arguments that could be used to achieve a favourable regulatory outcome. The project also involved conducting detailed case studies of countries like the UK and New Zealand, where functional separation has been, or is being, implemented.

Developing KPIsWe helped an Asia Pacfic incumbent to formulate KPIs for its wholesale service.

Accounting separationWe’ve assisted regulators and operators in the design, negotiation and implementation of accounting separation frameworks (see Section 11).

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PwC has provided operators and regulatory authorities expert advice on regulatory accounting. This has ranged from service costing and asset valuations, to the production of regulatory accounts, regulatory reporting, and accounting separation. Our work has included both the design of the regulatory accounting frameworks, and the implementation of regulatory accounting systems in a range of suitable software programs. We have designed and negotiated various valuation methodologies, and implemented numerous asset valuations.


LRIC and FAC regulatory costingWe helped a global telecommunications company to develop a regulatory costing system, and create the systems and processes to provide the regulator with Fully Allocated and LRIC current cost statements. The project included drafting all the supporting documentation, and detailing the allocation and asset valuation methodologies. We also designed and implemented a process to report complex activities within the business, and defined what information needed to be collected.

Accounting separation supportWe worked with a European incumbent to develop the right methodology and statements for its submissions of separated accounts to the regulator. We also provided the client strategic advice on its responses to the regulator on accounting separation, current cost accounting, RIO, and other regulatory policy issues.

Regulatory costing and accounting supportWe helped an Eastern European incumbent to develop a service costing and profitability system which complies with its regulatory and managerial reporting requirements. We developed estimates of service profitability for its main telephony services, and identified the revenues and costs of network activities separately from those of access, retail and other business activities. We later assisted the client in extending their current FAC costing system to LRIC. The LRIC implementation is designed to meet regulatory and management requirements, and exploit the FAC model work already undertaken. A key factor when introducing LRIC costing is the need to revalue the incumbent’s assets on a forward-looking, CCA basis.

Development of regulatory accounting policy and proceduresWe helped a West African authority to formulate a comprehensive manual and reporting framework for designated telecommunications operators. The scope of the work covered separated accounts, cost allocations, transfer pricing, current cost valuation, and long run incremental costs. We also advised the client on implementation and measurement. Our recommendations were adopted, and have since been successfully implemented.

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12 Business modellingPwC has supported leading operators, governments and regulators to create effective models to assess regulatory and commercial issues. Our models have been used as regulatory negotiation tools, as well as for options and impact analysis, demand forecasting and revenue modelling, elasticity estimation, licence valuations, merger clearance, service costing, and the evaluation of external network-related factors.


Business model development Our teams in the UK and Russia worked together to help a new mobile operator develop the business plan and financial model it needed to apply for financing. We had to put together a market demand forecast for mobile voice and data services, and support the client in developing a market entry and positioning strategy. We also developed a number of possible scenarios for how the market might develop for both the client and its competitors, and explored what new services might evolve as a result.

Regulatory trade-off modelWe created an analytical tool for a leading Eastern European incumbent to help them quantify the relative and absolute impact of a range of potential regulatory interventions. The key metrics we assessed were impact on revenue, market share, capex, opex, and shareholder returns. This analysis was used in negotiations with the regulator. The different regulatory scenarios were also integrated into the client’s business plan, where the potential financial impacts were assessed.

Strategic plan developmentWe prepared a sophisticated 10 year business plan for an Eastern European mobile operator looking to expand its business in the face of anticipated changes in the regulatory regime. We modelled complex market dynamics, and took into account both technical and cost estimations. The business plan was complemented with detailed scenario and sensitivity analysis to give a deeper understanding of the market and regulatory environment, and support management decision-making. We helped the client determine its preferred approach to expansion by providing detailed reviews of the existing strategy, the evolution of the mobile market, and the client’s strategic options.

Analysis of the future demand for numbersWe were commissioned by a Western European regulator to develop a forecasting model to analyse the future demand for phone numbers for a wide range of services. Our model allowed us to assess a number of different scenarios, and analyse the impact of different numbering strategies. The results of our analysis were published by the regulator as part of their consultation document.

Business planning scenario modellingWe developed a sophisticated financial model for an Eastern European incumbent, with the aim of assessing the impact of possible trade-offs between different potential regulatory outcomes, such as a USO, carrier pre-selection, or tariff rebalancing. The model was used to guide the company’s negotiation strategy with the regulatory authorities.

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13 Competition policyOur Global Telecoms Group and Competition Economics Group work closely together to advise operators, regulators and competition authorities on a wide range of competition policy issues. This includes market definition and analysis, and the assessment of market dominance and anti-competitive behaviour. We’ve helped telecoms companies to comply with the relevant competition law and policy, and respond to enquiries by regulatory and competition authorities. Likewise we’ve supported regulators and competition authorities to identify and investigate suspected anti-competitive behaviour.

We are recognised experts in competition policy in Europe, and were lead advisor in all three of the UK’s Competition Commission Inquiries into call termination rates.


Expert advice on anti-competitive conductWe provided economic advice to a leading Western European incumbent to ensure that its pricing strategy in the ISP market complied with competition law. This included determining and testing for price squeeze.

Assessing the cost of mobile phone callsWe gave economic advice to a mobile operator in response to a Competition Commission inquiry into the cost of calling mobile phones. We were also retained to provide advice on the Judicial Review.

Competition Commission inquiryWe were lead advisors to a Western European mobile operator in a Competition Commission Inquiry into call termination charges. We carried out a comprehensive review of the regulator’s bottom-up LRIC network cost model, and this eventually led to the development of a more robust revised version, which was submitted to the Commission, along with a thoroughgoing top-down incremental costing model for the business. We also developed a fully allocated costing capability to help the client respond to the Commission’s requests for information.

14 Next Generation NetworksPwC has established itself as a leader in Next Generation Networks, and as part of this we have developed an approach to cost allocation for IP-based networks based on the effective bandwidth concept. This approach takes into account data transferred as well as the Quality of Service characteristics of the services concerned. Our NGN service costing can be used to allocate costs between voice and multiple data services. We have also advised operators on their NGN strategies including the transition and migration to NGN networks, and NGN procurement strategies.


NGN wholesale product and service developmentWe were engaged by a large European incumbent to help develop its SIP-based IP Interconnection Services using VoIP broadband access. These services were based on NGN broadband voice access. The work included the development of principles to underpin the IP interconnection framework, taking into account factors like the access model for other operators, interoperability issues, interconnection migration, and development of an interconnect RIO.

NGN business planning, deployment, and transformation We helped a global telecommunications provider review its options for NGN deployment, and design a transformation plan. Our work included developing a robust NGN business case, conducting scenario and sensitivity analysis to assess financial risks, and developing an operational model to deliver the strategy.

NGN cost modellingWe advised an incumbent operator in Eastern Europe on the construction of a service cost model based on NGN

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technology. The model was a bottom-up engineering model, designed to calculate the costs of xDSL services using projections of xDSL demand as well as the demand for other services like voice and IPTV.

NGN programme developmentWe helped an Eastern European incumbent to set up an NGN programme structure for the roll-out of new technologies. This included an assessment of the implications for current regulation. The framework we developed combined the NGN programme with existing projects, as well as regional operations activities and commercial initiatives. It also ensured that the NGN programmes reflected commercial constraints and were in line with budget. We helped the client track their progress, and continued to provide support and advice to top management after implementation.

NGN thought leadership This research project focused on the relationship between quality of service (QoS) and bandwidth requirements for NGN services. The QoS parameters analysed included packet loss, blocking probability, and throughput speed. These QoS parameters were then converted into effective bandwidth requirements. Effective bandwidth is more suitable as a basis for cost allocation pricing and capacity planning than measures such as the amount of data transferred, because effective bandwidth more accurately reflects the resource requirements of NGN services.

NGN costing workshopWe ran a two-day workshop for a Western European fixed incumbent, with the aim of exploring the economic, strategic, technical and financial factors that needed to be taken into account when assessing the cost implications of NGN services. We also covered the issue of service cost allocation for NGNs, where multiple services are transported over packet switched networks. The workshop included technical issues like the blurring of the traditional ‘voice’ and ‘data’ boundaries, stochastic routing and QoS considerations. The commercial implications of NGNs were also explored in detail.

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15 Universal Service ObligationsPwC has advised regulators and operators on every aspect of universal service, including the design of USO policy, the optimal methodologies for determining USO costs, the assessment of total funding requirements, and the design and implementation of USO funding mechanisms. The accurate assessment of the cost of USO by an independent party is critical. Otherwise there can be a risk that incumbents consider their own costs to be excessive, while competitors see the Universal Service Fund as nothing more than a stealth tax.


Universal Service policy and implementation strategyWe advised a Middle Eastern regulator on the development of their universal service policy, and how best to implement it. This work covered the whole process from the definition of objectives and priorities, and the identification of delivery vehicles and options, to the development of the policy and the implementation of a tender mechanism to be used in allocating USO funds to universal service providers.

Costing the Universal Service Obligation We assisted an Asia Pacific incumbent to design and build several models for the pricing of its wholesale services and the cost of its Universal Service Obligation. The work included the modelling of the core network using both a top-down and a bottom-up approach, and evaluating the access network on an exchange-area-by-exchange area basis, in order to determine the regional profit or loss on each service.

USO policy reviewWe conducted a comprehensive review and analysis of the universal service policies of a number of developed telecommunications markets for a European regulator. We also identified the implications of EU policy for the incumbent monopoly operator, and advised the client on its options for USO policy moving forward.

International review of USO and interconnect regulationWe conducted an international review for a South American Ministry of Communications, comparing the market structures of different countries’ telecoms sectors, and the impact that regulatory policies had made on these market structures. Particular emphasis was given to the regulation of interconnection and USO.

Recovery mechanisms for ADCs and USOWe advised a European incumbent on recovery mechanisms for the ADCs and for the USO. Our work included an internal discussion paper, presentations to the regulatory authority, and a detailed model quantifying the effect of various recovery mechanisms.

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PwC has advised many telecoms clients on the design and implementation of suitable costing systems for calculating the costs of mobile termination. We have also advised clients on network effects, assessing a range of models to quantify the level of mobile termination rates (MTRs) that lead to the best outcome for consumers.

16.1 Service costs


Mobile cost modellingWe helped an international mobile operator determine its FAC, average incremental cost (AIC) and proxy LRIC over a ten year timeframe. The analysis included four mobile technologies -GSM, GPRS, EDGE and W-CDMA (UMTS) - and 21 different services, both voice and data. We developed an extremely flexible strategic tool which became an integral part of the client’s business plan, and was able to provide meaningful analysis on a wide variety of issues. The work was also used in the client’s negotiations with mobile virtual network operators.

Mobile termination ratesWe assisted a European mobile operator in the setting of MTRs. This included cost-modelling using a top-down LRIC model, the drafting of submissions, and representing the client at meetings with the regulator.

Cost modelling and mobile regulatory strategyWe helped the number two operator in a Western European country to develop its cost-based mobile termination rates for presentation to the regulator. We also helped them to draft their submission to the regulator, which set out the international precedents, and the economic arguments to support the cost allocations used in their mobile termination costs and tariffs.

16.2 Network effects /network externalities

MTR and network effects determinationWe gave specialist advice to a leading European mobile operator on the development of a range of tools to calculate the mobile termination rates which would produce the best outcome for consumers. These termination rates included a Ramsey type mark-up on incremental costs, as well as a mark-up accounting for the presence of network effects.

16 Mobile termination rates

17 Number portabilityPwC has worked with operators and regulators across the world on how they deal with number portability, or NP.We’ve advised regulators on the regulatory impact of NP, and conducted complex modelling for operators to assess the impact this has on their churn levels, business plans, and commercial position. In some instances, the costs of NP could outweigh the benefits, and we’ve helped operators to explain this in their submissions to the regulatory authorities.


Wireless Number PortabilityWe were engaged by North American wireless industry to develop the Wireless Number Portability (WNP) implementation plan required by government. We developed an independent and objective implementation programme that underwent extensive public consultation before being endorsed by the regulator. In 2005 the international research firm, the Yankee Group, called it one of the best WNP implementation plans yet developed. The plan also considered the MVNOs serving the North American marketplace.

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WNP implementationWe were engaged to lead the Programme Management Office (PMO) for the implementation of WNP in a North American country. This included mobile-to-mobile, as well as fixed-to-mobile and mobile-to-fixed. The PMO oversaw the selection of a clearinghouse vendor, addressed the network enhancements required to accommodate WNP, and dealt with a number of regulatory challenges, while co-ordinating both fixed and mobile service providers.

Mobile Number Portability We managed the PMO for a Caribbean mobile carrier implementing Mobile Number Portability (MNP). Our work included developing and implementing the project plan, and the management of all the various functional areas to ensure personnel, processes and systems were appropriately trained, created or modified to accommodate MNP. We also worked with both software and hardware vendors to ensure timeliness of delivery and implementation.

MNP benchmarking studyWe examined the likely impact of the introduction of MNP for a European mobile operator. We carried out a benchmarking study of MNP implementation across a number of international markets to assess the different regulatory terms that had been imposed, and how these had impacted the telecoms market.

MNP and regulatory strategyWe worked for a global mobile operator to develop an overall regulatory strategy for its operations in an Asian country. This involved giving specific on-going advice on a number of issues, including number portability, interconnection pricing, and retail price regulation. We also reviewed the regulator’s proposals for tariff regulation, and prepared an independent study on issues such as economic efficiency and consumer welfare. This was subsequently submitted to the regulator.

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18 Mobile virtual network operators PwC has advised telecoms operators on the regulatory and strategic challenges, risks and implications associated with the pricing of wholesale access for mobile virtual network operators (MVNOs). We’ve helped both MVNOs and mainstream mobile network operators, or MNOs. We’ve written Service Level Agreements (SLAs) and advised on the organisational tools required to support MVNO activity. We’ve also advised regulators on the trade-offs between MNO and MVNO entry to the market, and the implications for policy and for consumer welfare.


Strategic and costing adviceWe helped a European operator formulate their MVNO and wider wholesale access strategy. We supported them to define their strategy in terms of the different types of wholesale access they could provide, which included national roaming. We identified the risks associated with each of the different types of wholesale access, and the different pricing options that should be considered. As part of our support, we built a cost model to help them understand the potential impact of the different options.

Costing MVNO and national roaming accessWe prepared a qualitative and quantitative analysis of the differences between MVNO models and national roaming arrangements for a new entrant to the Eastern European mobile market. Our report was presented to the regulator as support to the company’s statement.

MVNO access strategyWe worked for a Western European MVNO to provide technical advice on the commercial terms for their interconnection agreement with MNOs.

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PwC has provided expert advice to regulators and operators on spectrum issues, including usage, allocation, and reallocation. Over the last few years, market-based mechanisms such as spectrum trading and auctions have become a popular means of allocating this scarce resource. We’ve helped both operators and regulators determine the real value of the spectrum, and develop the most effective strategies to obtain it.


Spectrum auction and post-digital switchover strategiesWe advised a leading Western European broadcaster on its spectrum auction, and on its post-digital switchover strategy. We carried out economic analysis to estimate the value of different services that could compete to acquire the released UHF spectrum in the UK. We also developed the client’s longer term approach to High Definition broadcasting and mobile TV.

Spectrum valueWe helped a client understand the uses and potential commercial value of spectrum being auctioned at 2010-2025MHz, 2290-2300MHz and 2500-2690MHz.

Spectrum strategyWe were commissioned to conduct a detailed analysis of the uses and business plans for the range of services potentially bidding for the DDR spectrum.

Spectrum allocation for USO servicesWe gave advice to a regulator in the Middle East on the allocation of spectrum to a number of services to be included within the scope of the country’s USO. This included voice, internet, broadband, and maritime services.

19 Spectrum allocation and policy

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20 Regulatory compliance and assuranceOver the years, PwC has helped many telecoms operators to meet their regulatory reporting and accounting requirements. Many of our clients are incumbent operators that have taken on heavy regulatory reporting requirements and are subject to extensive audit requirements. We have successfully worked with them to meet these requirements, and supported them in their ongoing discussions and negotiations with the regulator.


Regulatory assuranceWe audited the accounting separation of the mobile network elements and services of a leading Western European operator. This included the introduction and development of current cost accounting, accounting separation, and cost accounting for the network components and services.

Regulatory compliance and assuranceWe have been acting as auditors for a leading Western European operator’s regulatory reporting requirements since their introduction in the early 1990s. This included the introduction and development of current cost accounting and accounting separation, and included extensive LRIC reporting requirements. The requirements imposed on the client are possibly the most onerous in the world, and are subject to extensive audit requirements, including differing levels of audit assurance on elements of the financial statements. We have also assisted the client in discussions and negotiations with the regulator relating to the form and content of financial statements, the nature and form of audit opinions, the nature of supporting framework documentation, and the appropriateness of costing methodologies and supporting data sources.

Operational separationWe’re providing assurance to the board of a telecoms operator, and its regulator, on the new governance structure put in place to manage the access part of the company’s business. We’re reviewing the annual reporting of this new structure, including the effectiveness of the company’s separation undertakings, and the information it presents on governance, compliance and future risks. This also covers a number of product performance measures which track the relative operational performance of services delivered to internal and external customers.

Accounting separation, CCA and LRICWe have acted as auditors for a European fixed-mobile operator’s regulatory reporting requirements since their introduction in the late 1990s. This included the introduction and development of current cost accounting, accounting separation, cost accounting for network components and services, and extensive LRIC reporting requirements. With our help, the client has successfully met the substantial regulatory reporting requirements imposed upon it.

We have also advised an Eastern European integrated operator, and assisted them in their discussions with the regulator about the form and content of their regulatory financial statements, the nature and form of their assurance opinions, the nature of the supporting framework documentation, and the appropriateness of costing methodologies and supporting data sources. We’ve also helped them to resolve issues raised by auditors appointed by the national regulator.

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21 Summary21.1 Alphabetic list of topics

page 16-17 Accounting separation and regulatory filings

page 16 Argumentation on operational and structural separation

page 8,17, 29 Asset valuations

page 27 Auctions

page 8-9, 17,19 Bottom-up and top down costing models

page 18 Business Modelling

page 18, 27 Business valuations

page 15 Comparative efficiency studies (Stochastic Frontier Analysis)

page 13, 19 Competition investigations

page 8-10, 17 Cost modelling

page 14 Cost of capital studies

page 15 Data Envelopment Analysis (DEA)

page 4-7, 9 Definition of regulatory policy

page 10-13, 18 Demand forecasting

page 10-13, 18 Demand elasticities

page 10-13, 18 Elasticity Estimation

page 15 Efficiency Analysis

page 4-5, 18 Impact Analysis

page 8-9, 17, 19 Incremental and average cost models

page 18, 27 Licence valuations

page 4-6 Licensing regimes

page 8-9 Local Loop Unbundling (LLU)

page 19 Market dominance

page 4-6 Market liberalisation

page 18 Merger clearance support

page 23 Mobile Termination Rates (MTR)

page 24-25 Mobile Number Portability (MNP)

page 26 Mobile Virtual Network Operator (MVNO)

page 8, 17, 29 Modern Equivalent Asset (MEA) valuation

page 23 Network Effects

page 20 New Generation Network (NGN) cost models

page 20 NGN service costing

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page 24-25 Number Portability

page 6, 18 Numbering

page 16 Operational Separation

page 12-13, 19 Predation, bundling, margin squeeze etc.

page 8-9 Pricing of local loop unbundling offers

page 26 Pricing of MVNO and national roaming access on mobile networks

page 10-11 Privatisations

page 8 Profitability studies

page 9 Reference interconnect offers (RIOs)

page 4-5 Regulatory case-building

page 4-5, 18 Regulatory Impact Analysis

page 6-7 Regulatory Roadmaps

page 4-5, 10-13 Regulatory strategy

page 18 Regulatory trade-off models

page 23 Representation at meetings

page 6-7, 10-11 Retail and network price caps

page 12-13 Retail pricing strategy

page 18 Revenue modelling

page 6-7 Sector Liberalisation

page 6-7 Sector Policy

page 16 Separation support

page 8-9, 17, 19 Service costing

page 27 Spectrum allocation

page 27 Spectrum auctions

page 27 Spectrum issues

page 27 Spectrum Policy

page 15 Stochastic Frontier Analysis

page 16 Structural Separation

page 9, 10-11, 16 Support in Regulatory Negotiations

page 19, 23 Support in termination rate investigations

page 22 Universal service obligations (USO)

page 18, 27 Valuations

page 4-5, 14, 23-24 Writing of regulatory submissions

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Regulation

Alastair Macpherson Partner1 Embankment Place, London, WC2N 6RH +44 (0) 20 7213 4463 [email protected]

Michael Hardt Director1 Embankment Place, London, WC2N 6RH +44 (0) 20 7804 3112 [email protected]

Regulatory Assurance and Regulatory Reporting

Rob Bates Director1 Embankment Place, London, WC2N 6RH +44 (0) 20 7804 0795 [email protected]

Mark Allsop Director1 Embankment Place, London, WC2N 6RH +44 (0) 20 7213 4982 [email protected]

22 ContactsIn this section we provide contact details for some of our regulatory specialists below.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

ML1-2012-02-28-09 57-TM

www.pwc.co.uk/telecoms/regulation

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