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- Networks and Telecommunications: Design and Operation, Second Edition.
Martin P. Clark
Copyright © 1991, 1997 John Wiley & Sons Ltd
ISBNs: 0-471-97346-7 (Hardback); 0-470-84158-3 (Electronic)
35
Charging and Accounting
for Network Use
So far we have concerned ourselves entirely with the technical and operational side of running
networks and providing telecommunications services. Network operators, if they wantto stay in
business, also need to think about capital and operational costs, and how to recover them from
their customers. For a network to be financially sound and independent its tariff structure needs
to cover the total expenditure made up of
0 provision of lineplant, exchanges and buildings (i.e. capital costs)
0 servicemaintenance and administration costs
0 interest on capital
0 depreciation of equipment
0 researchanddevelopment
0 futurecapitalinvestment
0 profitandshareholders’earnings
Government regulation in some countries set tight financial limits on profits and targets, whereas
in other countries the tariff structuretailored to meet political ends, and financing is direct from
is
government coffers. Nonetheless, the financial practices of charging and accounting for network
use are common throughout the world, and they reflect the principles explained in this chapter.
35.1 RECOMPENSE FOR
NETWORK USE
Public telecommunications customers will be familiar with the arrival of their monthly
or quarterly bill, comprising both subscription charges (paying for the rental of their
line), and a charge for usage (the number of calls made, or packets of data sent, etc.).
The practice of charging for network use is not confined to public networks; private
network operators, especially the large corporations, are increasingly levying internal
647
- 648 CHARGING AND FOR
NETWORK ACCOUNTING USE
‘transfercharges’ individual
on departments their
for use of telecommunications
services. This is to keep close control of areas of company activity representing either
‘profit centres’ or ‘cost centres’. Additionally, accounting between telecommunications
operators is becoming more common, as a result of the recent large increase in the
interconnection of networks.
ITU-T defines two different types of financial transaction, to each of which different
practices and a very particular vocabulary apply. The two types financial transaction
of
are described below, and a number of key items of vocabulary are highlighted.
35.1.1Charging (Also CalledBilling)
This is the namegiven to the practice of recovering financial costs end-users for their
from
use of the network. Charges, including subscription charges and usage charges, are
accumulated over a standard period, typically three months, and are billed to the cus-
tomer. Monies are then collectedfrom the customer, typically a telephone line subscriber.
35.1.2
Accounting
The term accounting is normally applied only to the practice of financial settlement
between different network operators, where they mutually cooperate to provide ser-
vices. An accounting settlement is usually made by the owner of the originating network
(i.e. the one collecting the customer charges) to all the other operators participating in
the connection. This reimburses the other operators for the use of their networks.
35.2 CUSTOMER
SUBSCRIPTION CHARGES
Customer charges, also known as tarzffs, usually comprise two parts, a subscription
charge and a usage charge. The subscription charge is made to offset the standing or
jixed costs, for example, the rental of a telephone or other end terminal, the provision
and upkeep of the local exchange and of the access line, and the operator’s general
administrative overheads. The actual rate of the subscription charge depends on the
type of access line,the end equipment provided, and the services to which the customer
subscribes. They are easily calculable from a fixed formula and are usually charged by
quarterly bill.Examples of services which attracta highersubscriptionchargeare
circuits specially designedfor carriage of data, orlines with supplementary services such
as closed user group ( C U G ) , diversion of incoming calls (on customer busy or customer
absent), three-party-call facility, etc.
35.3 CUSTOMER
USAGE CHARGES
Customer usage charges are madein addition to subscription charges, to offset the use-
dependent (the variable) costs of network provision. As we have seen in the chapter on
- PULSE METERING 649
teletraffic theory, the greater the amount of traffic between any two exchanges, the
greater the number of trunks that are required between them. The cost of these extra
trunks is recovered in the usage charge, which usually calculated on a cost-plus-mark-
is
up basis to reflect the network resources required to provide the service. The charge for
any given call (or for the carriage of a data message) thus usually depends on the
following parameters
0 the type of network used
0 the duration in time of the call, or
0 the volume of data carried, and
0 the distance of the communication
In addition, more sophisticated factors may also be taken into account.
0 whether operator assistance, or some other value-added service was provided
0 whether the call (or message) was conveyed during the network’s peak usage period
(the charge may be time-of-day dependent)
0 how many call attempts (whether abortive or not) were made; making a charge for
each call attempt dissuades users from congesting the network by incessantly re-
calling busy numbers
To calculate the charge due from each individual customer, the network operator must
have a means of monitoring and recording each incidence of usage. In most networks
charges are levied only on the call (or message) originator (so that the receiver does not
pay). Usage is normally monitored by the originating exchange, which must determine
the origin and destination of each call (or message), its duration, and the time-of-day
when conveyed. In a circuit-switched network the origin of a call can be determined
simply by detecting which incomingline is in use. The destinationis then determined by
analysis of the number dialled during call set-up. The chargeable duration of the call
(the call duration) is normally taken to be the conversation time, which is determined by
timing the period between the answer signal and the cleardown signal at the end of the
call. Call duration on manual networks, or of calls established semi-automatically, can
bemeasureddirectly by the human operator, but for automatic networks different
procedures are used. There are two principal means for automatic customer charge
monitoring: pulse metering and electronic ticketing, as explained next.
35.4 PULSE METERING
The older and simpler charging method (still used in many telephone networks) is to
levy call charges on the basis of the number of pre-determined intervals of time used in
.the courseof the call. This method is called pulse metering. In it a fixed price is charged
fora smalltimeperiod or unit of theconversationphase.Whenthecall is first
of
answered, the first unit (of time) commences. After a pre-determined period time (the
- 650 CHARGING AND ACCOUNTING FOR NETWORK USE
length of which will depend on the location of origin and destination and the time of
day), the first unit will expire and a second unit of time will commence. The charge
payable is calculated by multiplying the number of units usedby the fixed price per unit.
The customer is usually unaware when each unit ends and the next begins, or indeed
how much of a partially used unit remains.
On different calls, e.g. to destinations at different distances away, or on calls to the
same destination made at different times of day, the time duration of a unit may be
varied. In this way, the average per-minute-charge made for different calls be varied.
can
One caution, however: it is not generally understood that the upper limit of metering
pulse rate may not actually be determined by the capability of the pulsing unit, but on
the ability of the transmission line to carry the pulse correctly and the meter to clock
properly.
Over a given period of time (say three months) the number of units used by the cus-
tomer is accumulated on a counting device (called a cyclic meter), located at the ex-
change. Location at the exchange eases the job of reading the meters, and reduces the
scope for customer fraud.
During the courseof individual calls, thecyclic meter is triggered to step onward one
count at the beginning of each new unit of time. This is done by sending a perodic
electrical pulse to the meter. The customer’s invoice shows the total number of units
used, and a financial charge which is calculated by multiplying this figure by the fixed
price per unit.
While calls are being set up by the exchange, the exchangecontrol and routingsystem
(common equipment) obtains the destination of the call from the number dialled, to
determine the appropriate outgoing route and charge rate. For routing, as we described
in Chapter 28, a fair number of digits may need examined to decide to which precise
to be
exchange the call should next be routed. However, although the same piece of common
equipment may determine both the route and the call charge rate, itis likely that fewer
digits will need to be analysed for charging purposes. This is because most network
operators choose to run chargeband schemes, in which destinations within a fairlywide
geographical zone (or chargeband) are charged at the same rate. This eases the admin-
istration of the scheme and the customer’s comprehension of it. As an example of a
simple chargeband scheme, a public telephone company might opt to levy charge for
international calls based onlyon thefirst digit of the country code.This would dividethe
world into eight distinct zones, as saw inChapter 29 (North America, Africa, Europe,
we
South America, Far East Asia, Russia and ex-Socialist Republics, Middle East, and
Central Asia). A similar national chargeband scheme could equally well be developed
corresponding to the area code digits of the national telephone number.
Each of the chargebands needs a charging programme. The programme divides the
day into a numberof time periods, for eachof which a different per-minute-charge will
apply. At the busiest times, we expect higher rates, whereas cheap rates at off-peak
times may help to stimulate extra traffic and revenue without needing more equipment.
As an example, within United
the Kingdom, British
Telecomsub-dividesits
chargebands into times of day called peak rate (corresponding to the busiest times of
day, when highest
the per-minute-charge is levied), cheap rate (corresponding to
periods of low activity, when the lowest per-minute-charge is made) and standard rate
(for which a medium charge is made). Over the course of a weekday, peak rate applies
from 9 a.m. to 1 p.m.; standard rate from 1 p.m. to 6 p.m., and from 8 a.m. to 9 a.m.;
- PULSE METERING 651
and cheap rateapplies each evening from p.m. to 8 a.m. Theper-minute-charge during
6
the peak rate period is made more expensive by reducing the time duration of the unit
(remember that the units have a fixed price). Figure 35.1 illustrates the relationship
between price-per-minute and unit duration on the British Telecom scheme, and shows
the pulsing signal required to step the customer’s meter.
Exchanges which employ pulse metering to charge their customers usually have a
number of machines or electronic devices to generate the meter pulse signals, one for
each of the pulse supplies. A selector device, controlled by the dialled number analysis
and by the time-of-day, connects the customer meter the appropriatepulse supply for
to
any particularcall. More than one pulse meter supply may exist. example, local calls
For
will be pulsed from the local exchange (if metered at all). However, trunk and inter-
national call charge pulses will most likely be generated at the trunk or international
exchange which analyses the destination country code digits. A simplified diagram of a
pulse metering device is shown in Figure 35.2.
A very simple form of pulse metering, in which only one meter pulse generated for
is
each call, independentof call duration, is used in some networks, particularlyfor meter-
ing local calls. The advantage of such a charging philosophy is the simplicity of the
Price
per minute Peak rate
- Standard rate
Cheap rate
I 1 I I
I I I 1
08 09 13 18 day Timeof
l24h)
‘Unit’ time
duratlon
I
Tirneof day
Meter
pulsing
signal UL
U
Figure 3 . Pulse metering
51
- 652 CHARGING AND FOR
USENETWORK ACCOUNTING
Pulse signol selector Pulse
(time-of-day and supply
equtpment
number onalysls controlled)
I
Figure 35.2 Pulse metering selector or ‘tariff equipment’
equipment required and the ease of administration. However, as the need to recover
usage-dependent costs becomes more acute with the boom in demand (e.g. night-time
dial-in calls to the Internet), so the method is falling into obsolescence. Another draw-
back is the tendency to promote network congestion and phone box queues!
35.5 ELECTRONIC TICKETING
Electronic ticketing (also called automated message accounting or toll ticketing) is far
moreaccurateand reliable than pulse metering, and it is becoming common in
consequence of the spread of stored program control exchanges. In this method the
exchange control computer monitors and records information about each
call,
including the number dialled, the duration, the time of call set up, the time of call
clear, etc. The information is stored in an electronic cull record, usually on computer
storage disk or magnetic tape, until the time when the customer is due to be invoiced.
The invoice is calculated by adding the amounts due fromeach individual call, derived
from the details on the individual call records. Electronic ticketing provides the scope
formore complexchargebandstructures,andthecapability(muchdemanded by
customers) for an itemized record of the details and cost of each call made.
35.6 ACCOUNTING
Accounting is the methodof financial settlement between network operators, when more
than one network is traversed by a call. Accounting has historically been necessary to
allow reimbursement between the networks different countries in recompense their
of for
handling of international calls, but in addition accounting is also becoming common
even between networks operating in the same country, as deregulation allows or even
demands ever greater interconnection.
Most accounting is nowadaysundertaken usingcomputermonitoring devices to
record the details of individual calls in a manner resembling electronic ticketing. The
financial settlementis made on the basis of total usage over agiven period of time, and is
- ACCOUNTING 653
paid from the call originating network directly to all other network operators. Alterna-
tively, the accounting settlements maybe cascaded between network operators, starting
at the originating end, if more than two networks have been used (see Figure 35.3).
The direct method of accounting settlement (Figure 35.3(a)) is only possible when the
owner of network A knows the exact path taken by calls in reaching network C, after
traversingnetwork B. For example, if there were alsoa routefromnetwork B to
network C via a fourth network E, then the direct settlement method may not be
possible, because owner A may not be able to calculate an apportionment in settlement
for E. This is the main reason for theuse of the cascade method of settlement shown in
Figure35.3(b). In thismethodthetransitpartysettlementsareproportionedand
cascaded in sequence.
Accounting settlements depend on total usagemeasuredin paidminutes. As we
learned in Chapter 3 the number of accountable or paid minutes on each call is equal
1,
to the total useful time that has passed between answer and call cleardown. The settle-
ment is calculated by multiplying the paid minute total by the accounting rate. The
accounting rate itself is fixed by negotiation directly between the interconnected net-
work operators, and is intended to reflect the costs associated with
0 the destination of the call and the distance
0 the services used
( Network
1 € 1
( a ) Simple (direct) settlement
( b ) Cascadedsettlement
----I Call path, Accounting
settlement
Figure 35.3 Cascaded settlement of account
- 654 CHARGING AND FOR
NETWORK ACCOUNTING USE
0 the call duration
0 the time of day
0 thetype of switching
0 theroutetaken. etc.
The accounting rate may be set in any accepted international currency (e.g. US Dollars,
Sterling, gold Francs, special drawing rights (SDRs)), and may either be negotiated by
the bilateral agreement of the parties, or in case of difficulty paid at standardized rates
such as those recommended by the ITU-T D-series recommendations.
35.7 ROUTE
DESTINATION ACCOUNTING
When there is more than one route to a given destination, route destination accounting
must be undertaken; an example is shown in Figure 35.4, where calls between network
A and network B may either be routed directly or may overflow via network C.
Correct reimbursement of both operators B and C is possible only if operator A
records total paid minutes by route and destination (further sub-divided into peak,
standard and cheap rates according to time of day if necessary). Destination settlement
is due to the operatorof network B for all calls, whether routed directly or not, but the
payment may be slightly lower for calls transiting network C. This would reflect an
apportioning of revenue to operator C and also the effective cost saving that results
from the reduced number of direct (A-B) circuits that are required.
ITU-T recommendations demand that the operator of network A periodically (e.g.
monthly or quarterly) declares two Route-Destination (or RD) accounts, corresponding
to the total originated paid minutes sent
0 to Destination B; by Route direct
0 to Destination B; by Route via C
Figure 35.4 ‘Routedestination’accounting
- CHARGING AND ACCOUNTING ON DATA
NETWORKS 655
Declaration of accounts between network operators consists of exchanging informa-
tion about each other’s total originated paid minutes of traffic, categorized as Route/
Destination and peak/standard/cheap time-of-day (as necessary). The due payment is
calculated as the difference between outpayments due for outgoing traffic and revenue
duefromincomingcalls;andone of the operators pays theoutstandingbalance
accordingly.Whenincoming andoutgoing traffic are roughlybalanced, very little
settlement is required, but usually there is a net financial gainfor settling accounts with
an incomingbalance of traffic, and a netoutpayment when most of the traffic is
outgoing. For some developing countriesthe net balance can either provide a significant
service of hard currency, influencing the speed of development of their networks. For
others, the debt is a severe problem and embarrassment.
35.8 CHARGING AND ACCOUNTING ON DATANETWORKS
When dataarecarried by acircuit-switchednetwork,customercharges andinter-
operatoraccountsareusuallycalculatedaccordingtothetotaltimeforwhichthe
circuit was available to the end users. The usage time, or paid time, is the time that
elapses betweenthe answer signal and the circuit cleardown. This period equivalent to
is
the conversation time of circuit-switched telephone network, and the same principles
applyashavealready been described. Inadditionasubscriptioncharge is usually
applied to the use of each customer network port. Data network types charged and
accounted in this way include telex, circuit-switched data networks and ISDN.
In cases where data is carried by a packet-switched, frame relay or ATM (i.e. cell-
switched) network, the accounting and charging principles are usually different. The
subscription charges are typically on a per-port basis, but in addition, further charges
mayapplyaccording to thenumber of simultaneous logical channels (i.e. virtual
channels) which may be set up. Subscription charges may also apply for supplementary
services including, for example, the closed user group (CUG) facility which allows only
members of the CUG to communicate with one another. This may a useful featurein
be
a corporate data network, where the corporation does not wish outsiders to be able to
access their computers.
Usage charges in data networks are usually based on one or more of the following
factors
0 the speed of theconnectionestablished (i.e. thebitrate,typicallythe committed
information rate, CIR) is the determinor
0 the duration of the connection in time
0 the number of packets, frames orcells sent or some other measure of the transmitted
volume of data
In packet-switched (i.e. X.25-based) networks it is usual to charge andaccount
according only to the total volume data carriedby the network. The volume quoted
of is
in segments. The standard segment size is 64 octets (or bytes), equivalent to X 8 = 512
64
bits. (Confusingly, however, a segment of SMDS data is only 48 bytes long.)
- 656 CHARGING AND FOR
USENETWORK ACCOUNTING
Most frame relay networks were built up offering only PVC (permanent virtual cir-
cuit) service. A frame relay PVC can be setup only by subscription, and is a permanent
connection between two defined endpoints. So far as the end customer is concerned, a
frame relay PVC appears much like a leaseline with a bitrate equal to the committed
information rate (CZR), at times of low network usage the customer maybe able to
but
send much higher speed data for short bursts (excess bursts). Frame relay connections
have thus to date been charged in a similar manner to leaselines, based on a fixed
monthly subscription charge according to theCIR. As switched virtual circuit ( W C ) or
virtual call ( V C ) frame relay connections become possible, these are more likely to be
charged on a volume-related basis similarto the approach discussed above which used
is
in X.25 packet networks.
ATM networks are just emerging, and nofixed pattern is yetestablished. AsATM
only
is expected to be a ‘universal’ technology capable of providing many different types
of voice, data and video transport services, I expect the emergence of different types of
customer-charging principles, mimicking the charge structures the equivalent services
of
provided using ‘legacy’ technologies.
Methods of charging and invoicing customers, and for accounting and settling the
inter-network account, are in general similar to the electronic ticketing technique used
in circuit-switched networks.
35.9 CHARGING AND ACCOUNTING FOR MANUAL
(OPERATOR)ASSISTANCE
Calls set up on behalf of the end user, and controlled by the network operator (i.e.
manual or semi-automatic calls), are normally charged and accounted according to the
details of the call, as recorded on the operator’s paper ticket or electronic equivalent.
The chargeable (and accountable) time on an operator call is usually less than the
total conversationtime (thetime between thecalled-subscriber-answer and the call-
clear). This is because some time is taken up by the operator before the two end parties
of
can speak. According to the nature the call, the unchargeable conversation time may
have been used by the operator
to confirm that a particular person has answered the call, if a personal call has been
requested
0 to check that the receiver is willing to acceptcallcharges if a collect (i.e reverse
charge) call has been requested
0 for some other similarreason
Operator-controlled calls often carry a premium charge. This offsets the cost of the
operator’s time, and the extra unchargeable network time required at the commence-
ment of each call. Operator-assisted calls are also accounted between network operators
at aslightly
higher rate automatic
than calls, for similarreasons. The manual
accounting rate is used when a second operator is also used in the terminating country,
otherwise the semi-automatic accounting rate applies.
- CHARGING AND ACCOUNTING
CIRCUITS
LEASED FOR 657
As we learned in Chapter 14, semi-automatic calls which route via automatic
exchanges may be recognized by the presence of a language digit in the dialled number
train, rather than by the automatic call discrimination digit (i.e. language digit value ‘0’).
Thisfactpreventsthepossibilityofaccountingthesamecall twice, once onthe
operator’s ticket and once on the automaticexchange accounting record.
35.10 CHARGING AND ACCOUNTING FOR LEASED CIRCUITS
Besides providingswitched services, network operators are often willing to provide
transmission bandwidth on a point-to-point basis. Circuits conforming to any of the
standard bandwidths may be leased from the network either by private individuals as
private circuits (otherwise calledleased circuitsor leaselines) or by international network
operators (from other international operators) as administration leases. For both types
charges andaccounting rates are normallyappliedaccording to thestraightline
distance either between the end points the leased sectionof the circuit or between the
of
countries’ capital cities.
For private circuits, commercial market rates are set by the network operators, but
for administration leases, a lower accounting rate (nearer to cost) may be used. Within
Europe, TEUREM accounting rates used to govern the charges made between network
operators for administration leases. Nowadays these rates are tending to disappear
under competitive pressure as deregulation leads to a more open market.
35.11 CHARGING PAYPHONE CALLS
Payphones presentparticular
a challenge network
for designers.
Unlikenormal
subscription telephones, the call charges must be collected prior to or during the call,
because to attempt to collect the money afterwards, or by invoice, is an invitation to
fraud. Special telephones are required the
for purpose; collect money
they the
‘up-front’, calculate when the period paid for is about to run out and then they prompt
the caller to insert more money. Forced clearingis applied to the callif the caller failsto
insert more money when the paid time has expired. As with operator-controlled calls,
charges for payphone calls are generally slightly higher than normal calls. The extra
charge offsets the greater costs of the telephone, its maintenance, and upkeep of the
kiosk, which clearly cannot be defrayed against a subscription charge.
35.12 CUSTOMER BILLING
Compared with some of the other administrative and management tasks associated with
running a network, the process billing is relatively straightforward, involving collect-
of
ing the available information from several sources and calculating an ‘amount due’ sum
relevant to each customer based on a series of product-dependent tariff formulae and
- 658 CHARGING AND FOR
NETWORK ACCOUNTING USE
customer-specific negotiated discount schemes (as recorded in the contract archive).
This does not mean to say that it is done well. Many of the world’s public network
operators have enormous problems with their billing systems
The most challenging partof a good billing systemis achieving sufficient flexibility in
the tariff models which maybe applied to products, and sufficient reliability to achieve
high turnout of bills at month end and to satisfy even the most stringent auditor.
Simultaneously to providing all this flexibility in software routines, the same system
must be capable processing quantities
of huge of data accurately, reliably and
auditably, meeting the billing date each month.
35.13 SETTING CUSTOMER CHARGES AND ACCOUNTING RATES
Settingcustomercharges (turifls) andaccountingrates is a skilledtaskin which
network operators have not only to ensure coverage of their costs, a reasonable profit,
and a returnon investment, but also togive customers a ‘fair deal’. The setting turifs
of
and accountingrates thereforedemandscarefulconsideration,togetherwithacute
awareness of market expectations and willingness-to-pay. Anticipation competitors’
of
reactions is important, as tariff or accounting rate changes, particularly increases, tend
to have a deterrent effect on demand, and may have adverse political or public relations
consequences, factors which network operators cannot afford to ignore.
Figure 35.5 illustrates revenue breakdowns for the originated and terminated traffic
of an imaginary network. The calls or connections have been connected in cooperation
with another operator and relevant account settlements are shown.
In Figure 35.5(a), the overall revenue (area the pie chart) is large, reflecting thecall
of
collections from telephone user tariffs. Unfortunately, however, over halfof this revenue
has needed to be paid out to the terminating network operatorsettlementof accounts.
in
Staffcosts Staff costs
and administrative and administrative
overheads P r oI f it
Transmission
plant
costs SGitching
plant
c05 t S
Figure 35.5 Apportionment of revenue
- CHARGES
CUSTOMER
SETTING AND ACCOUNTING
RATES 659
You might think it fairerthat the settlement should be almost exactly halfof the collec-
tion revenue, and historically this was so; but although thecost of equipment has fallen
and the tariffs charged for calls have been forced down by market pressures, inter-
connection charges and international accounting rates have not always fallen approp-
riatelyquickly.Both interconnectioncharges and internationalaccountingrates are
typically difficult to negotiate down because the balance of traffic (and therefore the net
payment) often favours the other or more dominant network operator. Thus there is a
network outflow of traffic, the high interconnection charges and accounting rates which
exist for historic reasons can be heavily penalizing. This is a particularly acute problem
for national telephone companies in developing countries, and can a major problem
be
for the ‘new’ operators emerging as competitors to the old state monopoly telephone
companies in the developed nations.
In developing countries it is often the case that an outdated and congested national
network is the cause of more successful outgoing international calls than incoming ones.
The net outpayment settling the account canan extreme embarrassment and problem
be
for the country’s overall balance of trade. Surprisingly perhaps, even between more
advanced nations, a PTO (public telecommunications operator) may make considerably
more money from incoming calls received from the distant PTO than from outgoing
ones generated from its own customers. This despite the fact that his own outgoing
customer tariff may be nearly twice his compatriot PTO’s price for incoming calls! In
time this accounting rate injustice is likely to be redressed, but as you can imagine itis a
very sensitive issue between world governments.
In the case of interconnectioncharges it has been realized by most national tele-
communicationsregulatorsthatthesechargescancreateamajorobstacleinthe
establishment of a more open and deregulated market. The interconnection charges set
by dominantmarket players arethusnowadaysusuallykeptunderclosescrutiny.
Nonetheless, it is very difficult for regulators, given the difficulty in allocating the costs
of the ex-statetelephonemonopolies, to determinewhatrealisticfairchargesfor
interconnection should be. Many regulators have determined interconnection charges,
having observed continuing unresolved disputes between encumbent operators andnew
players, but their success in setting fair charges has been varied. Some new operators
receive the assurance of a new business ‘on a plate’, enabling them easily to undercut
the prices of their established competitor. In other countries thenew players struggle to
develop market share because of difficulties in achieving an adequate financial margin.
The next major element of expenditure shown in the pie chart of Figure 35.5 is the
transmission plant costs, then the company overheads and finally the switching costs.
All this leaves the margin available for profit.
For a contrast, look at the terminated(i.e. incoming) call revenue breakdown shown
in Figure 35.5(b). The overall revenue size of the pie chart) is smaller, but it greater
(the is
than half of the outgoing call revenue (provided that the accounts settlement is more
than half of the outgoing collections, and there a rough balanceof traffic). Meanwhile
is
the costs are similar (for similar traffic demand), so much larger amount of the revenue
goes to profit.
The example of Figure 35.5 is typical of the revenues and profits that an international
telephone network operator may earn from a given overseas route. Note the extreme
sensitivity of the profits and revenue to the call charge tariff and the accounting rate.
Note also the difference in profitability between originated and terminated accounts.
- 660 CHARGING AND FOR
NETWORKACCOUNTING USE
35.14 NETWORK COSTSAND HOW TO RECHARGE THEM
Networks rely on the cooperation of individuals to share communications, means and
costs. No-one would use the public telephone network if he had to pay for it all; it
would be far too expensive. Because everyone else in the country subscribes to a line
and pays for it, a customer has a wide choice of people that he can call for a moderate
and affordable cost. Once a network has reached a certain critical size and has become
stable, its financing and its cost allocation become relatively straightforward, based on
the average long term marginal cost. We return to exactly what thisis later. For smaller
networks, particularly those which are either growing or shrinking, cost allocation is
more problematic.
If all the cost incurred before the first customer all charged to the first customer,
were
there would never be a first customer. Not only would he have no-one to call, it would
cost him a fortune if he could do so. The problem is that just at the time when most
money is needed, the network has least to offer. The usual ways around the problem are
first to seek an initial critical mass of customers, so that shared between them both the
service and the costs are acceptable. The second way is to accept the need for a fairly
lengthy payback period on theproject (i.e. by depreciating the capital cost over a longer
period, say ten years instead of seven), so lowering the annual costs which must be
recharged to customers. This second approach puts the network operator into a risk
venture business.
The risks are twofold:first that the equipment will not last the planned lifetime,
second that customers find they no longer need the service and stop paying for it earlier
than anticipated by the budget. In this case, there may be a temptation to recalculate
costs, dividing by the number of remaining customers. The remaining customers in
consequence find their costs higher than expected, and are likely to re-evaluate their use
of the network. As more customers pull out, the problem only becomes worse.
The morals are simple; first recognize that operating a network is a business risk
venture. Second, a direct division of telecommunication network costs between all the
customers is not necessarily a good approach to determining appropriate charges.
Consider a value-added service provider installing a new voicemail system. Let us
imagine that the minimum size of equipment which may be installed would serve 100
customers and that this can subsequently be outfitted for the needs of individual extra
users up to a maximum of 400 customers. To provide for the needs of more than 400
users a second system must be purchased. The overall costs (capital investment) plotted
against the number of users are then as shown in Figure 35.6.
The question is, what is the right price to set for the initial customers, assuming that
the limit of 400 customers will be relatively quickly surpassed? We discuss two possibil-
ities, shown as pricing line 1 and pricing line 2 in Figures 35.6 and 35.7.
You may consider pricing line 1 (Figure 35.6) to be the fairest method of recharging
users. This represents the exact division of the costs for a fully utilized (400-user) system
between the 400 users.Thiswould be the averagelong termmarginal cost that we
discussed earlier. Using it at start-up leads to almost certain problems. First, if the
system is onlyeversubscribed to by 350 usersthenthereisalotofmoney short
(because the cost line on our diagram is above the price line(i.e. recouped costs) at this
point. Worse still, if 401 users turn up then virtually the entire initial cost($200) of the
second system will be in arrears.
- COSTS
NETWORK AND HOW TO
RECHARGE THEM 661
-price line 1
(straight line)
- l *. * l . s S ~ ~ ~ 1 ~ ~m m m 9 ~ 9 ; ~s : ~ 6 ~ a ~ ,
6 ~
number ol customers
Figure 35.6 Alternative pricing strategies based on average long term marginal cost
Figure 3 .
57 Alternative pricing strategies: initial recovery of investment
A better pricing line to use initially is pricing line 2 (Figure 35.7). This divides the full
cost of the first 400 user system and the costs of the initial part of the second system
between the first 400 users. This has two benefits; first, the venture is in profit after
about 200 users are added to thefirst system. Second, there is enough money available
to install the second system as soon as the need arises. However, as other businessmen
notice the market potential they are likely to enter the market with their own competing
services. In the long term, therefore, the price will be oriented to the average long term
marginal cost (pricing line 1) because this represents the minimum cost per customer.
The end-customer price in an established market is likely to be this cost plus a reason-
able profit margin.
- 662 CHARGING AND FOR
NETWORK ACCOUNTING USE
It is theaveragelongtermmarginalcostwhich is the goal of regulators when
determining interconnection charges. The problem is in trying to find out exactly what
these costs are (which costs of a large ex-monopoly should be apportioned to which
customers and services?).
35.15 FUTUREACCOUNTINGAND CHARGING PRACTICES
More and more new telecommunications services emerge and the world is becoming
litteredwith new andcompetingnetworkoperators, new chargingandaccounting
methods and new monitoring techniques. They are bound tobe more complicated than
those that we have already, and they will demand skilful administrators and engineers
to realize them and set the rates.
nguon tai.lieu . vn
