Every year, Telefonica, the incumbent fixed operator in Spain, must present a top-down regulatory accounting model, prepared following the FDC-HCA/CCA standards, to CNMC (Comisión Nacional de los Mercados y la Competencia), the national regulatory authority. The main regulatory goal of this model is to separate revenues, costs and margins of all segments and services provided by Telefonica during the relevant year.
CNMC needs an independent expert review of the models prepared by Telefónica to ensure its compliance with the existing regulations, the correctness of the information used and the reasonability of the model’s technical and economic calculations. This work is critical for the regulator as the results of Telefonica’s model are relied on as a basis for a diverse set of regulatory measures (wholesale services pricing, replicability assessments, identification of cross subsidies and margin squeeze practices, etc.).
Additionally, an independent audit is required for the calculation of the Net Cost of Universal Service Obligations. This is a highly complex and sensitive process since such net costs will determine the compensation that major operators in Spain must pay to Telefonica as the Universal Service Provider. The calculation establishes the revenues, costs and margins (or losses) associated with the provision of telecommunications services (mainly voice and broadband) with a high granularity, so as to identify remote rural any other areas of the country where an operator following solely economic reasons would never deploy its network.
In this and other similar projects, the audit of the regulatory accounting model requires:
In order to successfully carry out the above activities, Axon Consulting’s approach includes:
The main output of the audit is a detailed report providing a detailed assessment of the results, their evolution over the past years and a description of all the issues identified, with recommended amendments and improvements.
In parallel, we audit the calculation of the Net Cost of the Universal Service Obligations. The methodology for the calculation of the universal service relies on inputs from the regulatory accounting part of the project, for the following stages:
The following map shows the most non-profitable areas in Spain:
The benefits of this project go beyond ensuring the correctness of the top-down regulatory cost accounting of the operator, as the final results will also affect several other processes and activities of the regulator.
The revised results, after the implementation of our recommendations, are relied upon by regulators for regulated tariff setting, replicability analysis and evaluation of anticompetitive practices (e.g., margin squeeze), updating bottom-up models, etc.