Predicting Revenue Revisions of Local Networks in Telecommunication Industry (2002)

Explores a variety of techniques to predict best data revisions over a twenty-four month period...a series of external changes that occurred in the market place and internal changes that occurred in the pool's settlement system, they all changed substantially the data revision patterns ... history does not repeat itself. The National Exchange Carrier Association (NECA) sets wholesale rates charged to long distance carriers for completing their calls over member's local networks. NECA sets these rates on behalf of more than 1100 small, often rural telephone companies. These companies pool their revenues and expenses and receive a common rate of return on investment. NECA administers this pool. Companies in NECA's pool submit monthly revenue data. They have a right to revise a given month's data in the succeeding 24 months. Using this preliminary data, NECA must set rates based on forecasted demand for an upcoming test year that begins July Irst and ends June 30th. Management review of forecast performance is based on expected data for the calendar year immediately prior to the test year. THE PREDICTION DILEMMA This paper explores the use of a variety of techniques to derive the best predictor of revenue data revisions over a twenty-- four month period. One technique of particular interest is a two-step procedure that predicts an intermediate view and then uses actual intermediate views to predict the final view. An intermediate view is the one that falls in the middle of the first and final views. Each view represents a company's monthly revenue estimate. This technique is compared to others based either on historical averages or a regression technique that uses initial views and historical averages to predict the final view. The results show that the two-step technique is superior to the others. NECA utilized a system to derive predictions of data revisions for the twenty-four month period still open to potential data revisions. The system tracks the methods used by pool members to supply preliminary data to NECA. Then it uses statistical techniques to extract the data revision patterns from historical data. Tests are conducted to determine whether the historical patterns have undergone any structural change. When they have, NECA estimates these impacts using econometric techniques. NECA'S POOLING PROCESS NECA is divided into seven regions, each with responsibility for collecting and reviewing data supplied to headquarters. The Settlement group at NECA receives this data stream, which is passed on to the Demand Forecasting and Rate Development group for earnings assessment and demand forecasting. The total revenue pooled at NECA exceeds $2 billion per year. LEGACY SYSTEM The Demand Group kept a history of data views for all historical data months (see Table 1). These views were used to compute data revisions (ratios between subsequent updates as shown in Table 2). For example, the ratio of 1997-10 for the fourth revision is 1.0042 (68978425/ 68690914). At the bottom of Table 2 are the average factors for each revision. Average factor is an average of the revision factors over most recent 24 months. For a given month, the current view is the starting point for estimating the month's final view. Twenty-fourmonth average percent change derived from historical data is used to estimate the final view for the month from its current view. The benefit of this approach is that it uses the most recent data available for the live months to estimate final levels. As the demand group sought to refine its data revision method, it identified a series of problems with this approach for predicting final levels: 1. Companies in the pool use different techniques for supplying preliminary data. 2. The historical averages were based on only the most recent twenty-four months of revisions, not all of the historical revisions available. 3. …