Pacific Bell Calls Upon Crystal
Ball
To Help Negotiate Financial Settlement
In 1994, Pacific Bell hired Dr. Dale Lehman to forecast voice
mail revenues as part of a contested financial settlement with the
Public Utilities Commission in California. Dr. Lehman, a consultant
and Associate Professor of Economics at Fort Lewis College in Durango,
Colorado, is an expert on the telecommunications and information
industries, with extensive publications and consulting experience
in those areas.
The settlement required Pacific Bell to submit revenue forecasts
for its subsidiary, Pacific Bell Information Services (PBIS). At
the time, such forecasts were difficult because PBIS had not earned
any profits and had only a short, three-year history with voice
and electronic mail services. Pacific Bell claimed the business
was worth only the net book value of its assets, while the Division
of Ratepayer Advocacy claimed that the unit was worth $400 million
in terms of future profitability.
Dr. Lehman knew that no forecasting method based on such a brief
history would be robust. He also understood that any forecast he
presented would be disputed, particularly given the contentious
nature of the dispute. Dr. Lehman turned to Decisioneering's Crystal
Ball software to help apply simulation to his spreadsheet model.
He used Crystal Ball to simulate all of the major uncertainties,
including the rates at which consumer adoption of the services would
increase (the diffusion rate), the costs of providing the services,
and future prices for the services.
The Public Utilities Commission accepted Dr. Lehman's completed
forecast, a result he directly attributes to the simulation methodology.
Simulation modeling not only produced a mean forecast but also yielded
a sense of the amount of uncertainty in the forecast. This was essential
for valuation purposes, since the uncertainty of profits is intimately
related to the cost of capital. In particular, the Crystal Ball
trend charts provided an excellent graphic description of the time
stream of earning and the extent of uncertainty in the forecasts.
The ranges Dr. Lehman used for his probability distribution parameters
permitted him to include all reasonable views of the future, and
so the analysis was able to withstand a great deal of scrutiny.
In contrast, if he had selected any single set of assumptions about
future conditions, Dr. Lehman believes that it would have easily
been disputed and dismissed.
"Crystal Ball allowed me to easily conduct a complex simulation,"
Lehman stated. "It permitted me to focus on the appropriate characterization
of uncertainty, rather than me needing to bother with the cumbersome
details of programming the Monte Carlo simulation myself. I have
been a devoted Crystal Ball user ever since." Dr. Lehman is currently
using Crystal Ball as part of a new course on simulation analysis
he is teaching at Fort Lewis College.
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