eting & sales Interconnect Figure 4.43 Example of costs for an operator. Principal targets for savings: network management and annualized capital cost. Source: Federal Communications Commission (FCC) Figure 4.43 shows an example of the main investment and operation expenses of an operator. Taxes are not included. It should be noted that the investment expenses are split into annualized capital cost and short-term procurement/equipment cost. Annualized capital costs arise for example when building a telecommunication network. The annualized expenses are related to loans for financing the investment. Short-term procurement is not annualized. It is crucial to balance the investments in relation to the traffic. As an example, traffic bottlenecks spread and reduce income in other network parts. Over-dimensioned parts increase the capital employed without contributing additional income. In both cases ROCE will decrease. To better explain CAPEX and OPEX we need a couple of other definitions: baseline cost and discretionary cost. Baseline costs are required just to keep the network operational and for meeting cus- tomer growth. OPEX expenditure is known as baseline expenditure, but, as pointed out, investments to meet customer growth are also baseline costs. Discretionary costs (CAPEX) are investments incurred when expanding the capability of the network to generate new revenue or to modernize, that is reduce the baseline costs. The objective is to maximize funds available for discretionary investments in order to minimize funds spent on baseline costs, which will drive up revenue and profit. Any operator has a limited supply of corporate funds to invest in its business and networks. An operator determines a spending level for OPEX, which is usually fixed with a percentage for growth each year, and CAPEX, which can vary depending on how much is available and what is needed. CAPEX is achieved by raising funds externally or using available profit. It is the objective of any operator to minimize the proportion of funds that