Commonly Used Cost Models

This note reviews three commonly used cost approaches. The FCC Synthesis Model and World Bank Group Model are both bottom-up TSLRIC models. The ITU COSITU model is an example of a top-down cost model.

FCC Synthesis Model

The FCC Synthesis Model [1] is an example of a bottom-up TSLRIC model. The Federal Communications Commission used this model to determine high-cost universal service support for non-rural areas in the United States. In addition, the model has been adapted by some regulators internationally (for example by New Zealand’s Commerce Commission).

The original version of the FCC Synthesis Model and its documentation are available on the web site of the Federal Communications Commission. The model allows the user to change various inputs from their default values, to tailor the model to different requirements.  

The FCC Synthesis Model follows the steps set out in the general discussion of bottom up cost models. The specific steps in the model are:

Step 1: The model starts with a database of geocoded customer locations.

Step 2: The model’s clustering algorithm then groups the locations into small geographic areas. This grouping must satisfy a number of constraints. For example they must be consistent with the predefined maximum length for copper cables, maximum number of lines (or households), that can efficiently be served by equipment such as remote terminals. The resulting geographic areas are intended to approximate the distribution serving areas that a telephone engineer would design.

Step 3: Once geographic areas are identified, the model designs facilities routes:

  • Feeder routes between switches and either a remote terminal or serving area interface within the cluster,
  • Distribution routes between the remote terminal or serving area interface and customer locations, and
  • Interoffice routes between switch locations.

Step 4: The model determines the specific amounts of network facilities needed to provide service along the routes determined in Step 3. Network facilities include:

  • Copper and fibre cables,
  • Support structures such as telephone poles and underground conduits,
  • Remote terminals, and
  • Switches.

Step 5: Estimate the investment that would be required to build the model network. This requires unit price inputs corresponding to each type of facility. The FCC Synthesis model contains hundreds of such price inputs.

Step 6: The model determines the annual costs and corresponding unit costs for the form in question in the typical manner used by bottom up TSLRIC models.

World Bank Group model (WBG)

The World Bank Group’s Cost Model [2] was designed to develop usage costs (including interconnection costs) for developing countries in sub-Saharan Africa.

The model represents the components of a fixed (wireline) network suitable for African conditions, up to remote switching units. Unlike the FCC Synthesis Model, the World Bank Model does not depict the local loop facilities used to connect end-use customers to the first switching point.

The World Bank Group Model allows the user to change various inputs from their default values. Inputs that can be changed include:

  • Network equipment prices, and additional mark-ups that might apply to purchase and install equipment in developing countries,
  • Traffic and demand information, such as calls per line and routing tables,
  • Total lengths for important network facilities, such as metres of fibre cables of particular capacities, and metres of duct facilities, and
  • Cost of capital inputs.

COSITU

The ITU's COSITU [3] is an example of a top-down cost model. COSITU is based on enhanced fully distributed costing principles. COSITU requires the following input data:

  • Investment and expense data from accounting systems,
  • Current cost data to convert historical capital asset costs to current costs. For example, when accounting records report the purchase price of a switch, the model calculates the cost of the switch at current purchase prices,
  • Inputs for depreciation and cost of capital. Where the inputs needed to estimate the cost of capital are not available, COSITU benchmarks these to countries or firms of comparable risk, and
  • Traffic demand and routing data.

COSITU produces unit costs and prices for international, subregional, and regional calling. COSITU can account for the effects of universal service funding, taxes, and any access deficit as mark-ups over current unit costs, to calculate interconnection prices.

To the extent that accounting and demand data are available, COSITU’s basic modelling framework can be used to model interconnection costs for both fixed and mobile networks.

COSITU embodies the following principles:

  • Transparency: Information used in the cost derivation process should be openly available, so that external analysts can comprehend the final rate, 
  • Practicality: The demands of the costing methodology with respect to data availability and data processing should be reasonable, to keep the costing exercise economical yet still useful,
  • Causality: The model should demonstrate a clear cause-and-effect relationship between service delivery, on the one hand, and the network elements and other resources used to provide the service, on the other hand, taking account of relevant cost determinants (cost drivers),
  • Contribution to common costs: The cost calculation should provide for a reasonable contribution to common costs,
  • Efficiency: The cost calculation should provide a forecast of cost reductions that are likely to result from more efficient use of resources over time.

Endnotes

[1] http://transition.fcc.gov/wcb/tapd/hcpm/welcome.html

[2] http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2004/03/04/000090341_20040304155451/Rendered/PDF/280390PAPER0Model0for0calculating0costs.pdf

[3] http://www.itu.int/ITU-D/finance/COSITU/ 

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