Accounting Separation and beyond

From Compliance to Value Creation

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Why Accounting Separation is important again

The expected addition of Operational or Functional Separation to the remedies available to European regulators in the forthcoming revisions of the Electronic Communications Directives has raised the profile of all separation-based remedies including Accounting Separation. Accounting Separation is a less intrusive and much less costly remedy to implement and it can provide a defence against the imposition of more intrusive separation obligations. Regulators increasingly see Separation (Accounting, Functional and potentially Structural) as a common suite of measures designed to tackle perceived incentives of operators to discriminate against other access seekers in favour of their own downstream businesses. These remedies are designed to: impose and police non-discrimination obligations in the provision of access to the dominant operators network increase transparency of the business performance reporting for the operators identify cross subsidies within the dominant operators businesses demonstrate price non-discrimination identify predation strategies applied by the dominant operator particularly through price and quality squeezes PwC can provide insight and expertise to assist you in relation to Separation and in particular to help minimise the risks of regulators imposing disproportionate operational separation obligations.

Accounting Separation is a key challenge for telecom operators

Is your Accounting Separation good enough to stay the threat of Functional or Structural Separation? Are there additional actions you could take to enhance or complement Accounting Separation which would reduce the risk of more intrusive forms of Separation? Are you negotiating with the Regulator? What are your negotiated options and what is the impact of implementing them? Are there trade-offs available and how can you take advantage of them? Could your Separated Accounts potentially expose issues to the regulator and your competitors? What steps can you take to pre-empt and mitigate this?

Effective fulfilment of regulatory requirements

What controls and processes do you need to ensure reliability of non-financial data? How will you ensure that your data meets audit requirements?

Alignment with the organisations processes

How will you streamline the preparation of your Separated Accounts? What is required and how will this impact your systems, processes and people? How will you ensure that you get your strategy and implementation right first time? Not doing so may mean large penalties from the regulator and heavy costs to undo past mistakes.

How can you maximise the business benefits of implementing Accounting Separation? How can you use the information in your decision making? For example, how do you use profitability analysis of activities, products, customers and channels to help you mobilise your strategy. What are the alternative business models that may boost shareholder value creation? For example, is your current stand-alone value higher than a hypothetical sum-of-parts?

Leveraging for Value Creation

PwC is the leading expert to help you with Accounting Separation

Extensive experience of regulatory consultations and negotiations in addition to our dedicated Telecommunications Regulatory Centre of Excellence over 100 assignments. We have over 200 person-years experience in Accounting Separation and have produced 20 sets of separated accounts with no audit qualifications. We have a We produced the track record and first set of Separated operational Accounts for BT experience in and eircom. Accounting More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

We have expertise in understanding Economics and Costing

Separation & Product Profitability

PwC

We have a global footprint and local knowledge

Our client base generates over 70% of telecommunications revenue world-wide, and includes 18 of the top 20 global telecom players.

We are telecom industry and functional specialists

We are telecom Industry and functional specialists

We have expanded the boundaries of Accounting Separation into commercial and strategic profitability analysis, and KPIs for 20 mobile and fixed operators.

We bring a tried and tested approach and a first class team to ensure our clients achieve the best outcome
We will create one team, combining our consultants and your staff to ensure maximum efficiency and better knowledge transfer, both on the job and via structured learning We use effective project management that covers all phases of the project: initiation, team mobilisation, day-to-day progress monitoring, timely consideration of potential issues and delays, consideration of large scale project risks, and stakeholder management which includes managing the relationship with the Regulator. We perform an in-depth review of all data both financial and non-financial input to the models to ensure reasonableness and the best outcome for you We apply very robust analytical procedures for the review of the results We are committed to deliver within challenging deadlines We apply robust methodologies developed and refined over the last 10 years and applied successfully with a large number of our clients We provide you with comprehensive model documentation that provides a clear audit trail of the models built We have the commercial expertise to assist you in transforming a pure regulatory reporting capability into information to assist your commercial and strategic planning We are a large organisation with performance improvement and strategic and transactions expertise which we use to complement our regulatory and commercial costing capabilities

From Compliance to Value Creation through enhancing performance and transforming the business model

To-be
Operationalise models
build own internal capability

Manage stakeholder to achieve the desired outcome Redefine marketing and brand strategy Assist with implementation of the operating models Define service delivery and operating models

Manage regulatory changes/ improve reporting

Design enhanced governance and management processes

Statements Production, Audit and Publication

Develop KPIs and accountabilities for cost reduction

Develop KPIs and accountabilities for customer centricity

Cost model Design, Implementation & Review

Target inefficiencies and propose cost reduction

Develop Target Operating Model

Consider Strategic Investment Options

Define Vision for a Customer Centric organisation

Compare Sum-of-parts vs current market value

Evaluation of regulatory requirements and consultation

Assess efficiency of various functions, channels, network

Assess profitability of Customer Segments

Assess profitability of Business Units

As-is
Compliance
minimum costs to meet the rules

Enhance Performance
using data to identify cost reduction opportunities

shift customer centric become business unit strategy to be more effective in the competitive market

Transform the Business Alignment organisation model and Transactions

Business Alignment and Transactions

shift business unit strategy to be more effective in the competitive market

Meeting regulatory obligations is not optional, but PwC believes that the steps that follow are opportunities to enhance performance, transform the business model, therefore create value.

Companies can use costing data as a catalyst for improved performance and/ or transformational change. They can also use this data as a means to analyse how well positioned they are to respond to competition through redefining the business units operating models.

The results achieved: management of regulated revenues, insight into profitability by product, customer and channel
Business challenge
A European incumbent operator was struggling with intensified competition and harsh regulatory conditions in the light of liberalisation The operator was facing unknown territory with an onslaught of regulatory, market and competitive challenges: Aggressive liberalisation in the market led by an inexperienced regulator SMP designation for key profit-making products in wholesale & retail markets Regulators adoption of reduced mobile termination rates that did not reflect the operators realities Declining customer base (20% a year) and fierce competition from mobile and cable operators especially in profitable city areas High degree of regulatory intervention on retail pricing thereby restricting the operators ability to implement retention strategies Lack of internal expertise and experience to quickly and costeffectively design and implement a regulatory reporting capability

Methods of pricing based on cost-orientation considered by our client

Methodology

Fully Allocated Cost

Long Run Incremental Cost Top-down

Model

*starting from Financial Records

Bottom-Up
*based on best practice engineering

Cost basis

Historical costs

Current costs

Key data adjustments

Network and operational efficiency

WACC

Our Approach
PwC took a total business approach to helping the client, and demonstrated how it could transform its regulatory reporting capabilities to provide powerful commercial insights and assist their business decision-making.
Over the past years, we have been the consultant of choice for this operator and we have worked with the senior management across its regulatory and business strategies. PwC was instrumental in developing and implementing our clients regulatory strategy and regulatory reporting capabilities: We designed and implemented their Fully Allocated Cost model and Separated Accounts based on Historic and Current Cost Accounting principles and assisted in achieving a clean audit of these accounts Ongoing production of Separated Accounts and management of relationship with the auditors Development of Top Down and Bottom Up Long Run Incremental costing capability used for interconnection rate setting Determination of comparative efficiency using the stochastic frontier econometric technique. Results were used as inputs to the incremental cost model Assistance in negotiations and submissions to the regulator Complete revaluation of its fixed assets using Current Cost Accounting principles followed by an end to end Fixed Asset Register Reconstruction exercise Adjustments to the regulatory reporting capability to enable use of information for commercial decision making, profitability and channel analysis and pricing decisions We adopted a multi-dimensional and customised approach for the client including: Detailed case studies of practice in other European countries Targeted investigations on other issues such as treatment of depreciated assets and large capital work in progress balance Comprehensive scenario analysis to quantify the impact of different calculation methods for key data inputs on the operators unit costs, e.g. depreciation methods, WACC calculation

Our client has realised tangible regulatory and commercial benefits as a result of our work
Tangible cost savings for the client we implemented the capability more quickly and cost effectively than would be the case had the client done the job themselves Operational and compliant regulatory reporting capability and robust costing information for interconnection price setting Knowledge transfer and training to client Confidence of the regulator in the quality and reliability of its reporting A series of regulatory wins including an increase in mobile termination rates and push back on harsher reporting requirements Complete visibility of product and channel profitability and margins Rigorous retail price monitoring that enables competitive yet compliant pricing

Contacts
Alastair Macpherson Partner +44 20 7213 4463 alastair.macpherson@uk.pwc.com Alistair is a Partner in the UK practice and the leader of our Telecommunications Regulatory Centre of Excellence. He has worked in the telecommunications industry for over 20 years for operators, regulators and governments in over 40 countries specialising in the provision of regulatory policy, economic and strategic advice to the telecoms sector. Prior to joining PwC, he worked for BT where he was responsible for implementing BTs Accounting Separation, Top Down and Bottom Up incremental costing capability. Dr Robert Bates Director +44 20 7804 0795 robert.w.bates@uk.pwc.com Robert is a Director in the Strategy practice with 15 years experience in the telecommunications sector. A chartered accountant by training, the majority of his experience has focused on costing, regulation and interconnection. Robert provides advice and assists with the implementation of Accounting Separation, Current Cost Accounting and Long Run Incremental Costing solutions in a number of different operators. He was responsible for the BT regulatory audits, including Accounting Separation, Current Cost Accounting and LRIC for the first five years of his career. Ioana Dobre Assistant Director +44 20 7583 5000 ioana.e.dobre@uk.pwc.com Ioana is an Assistant Director in the Strategy practice with 10 years of consulting experience in telecommunications. She has advised senior management teams for more than 20 clients across Europe, Asia and Caribbean to design and implement sophisticated costing and profitability solutions to define and support their commercial and regulatory strategies. She is a trained Chartered Management Accountant and holds an MBA in International Strategy. Prior to joining PwC she worked for Vodafone. Catherine Lunn Manager +44 20 7213 8547 catherine.m.lunn@uk.pwc.com Catherine is a Manager in the Strategy practice with 4 years experience in the telecommunications sector. The majority of her experience is in regulatory costing for both mobile and fixed operators including six Accounting Separation projects, LRIC modelling and Fixed Asset Register Reconstruction with a number of operators in the UK and Europe. She has also worked on commercial costing projects.

www.pwc.co.uk/telecoms
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