1. Executive Summary

The aim of the cost-of-capital rate is to represent the rate of return required to offset the opportunity cost of the investment.

In the context of postal regulation, the determination of the cost-of-capital rate seeks: (i) to ensure the right incentives to investment on the part of the universal postal service (UPS) provider; (ii) to ensure that there are no market distortions, through discriminatory and anti-competitive practises; (iii) to remove any barriers to the entry of new competitors; and (iv) to protect consumers from excessive prices.

ANACOM thus considers it essential to define a methodology that allows an appropriate establishment of the cost-of-capital rate, without any accounting and analytical constraints, to compensate investments made by regulated postal companies in the scope of the provision of the Universal Service (US).

In this respect, it must be stressed that the guiding principles of the Cost Accounting System (CAS) of CTT – Correios de Portugal, S.A. (CTT) establish the concept of reasonable profit, a concept which is in line with Directive 2008/6/EC, amending the Postal Directive (Directive 97/67/EC, of 15 December), by considering that the calculation of universal service net costs (USNC) should take into account, among other elements, the entitlement of the postal service provider designated to provide US to a reasonable profit (Recital § 29 and paragraph 3 of Part B to Annex 1).

This understanding is also supported by the Postal Law¹, by considering that USNC must allow a reasonable profit to be obtained, represented by the cost-of-capital, reflecting the risk incurred in investments made to provide US (point b) of paragraph 3 of article 19).

CTT CAS, which has been regularly reported to Autoridade Nacional de Comunicações (ANACOM), is based on the Fully Distributed Costs (FDC) methodology, thus including all expenses incurred by his operator, plus a reasonable margin of return, which corresponds to the cost-of-capital.

Bearing in mind that, in the last few years, the methodology to calculate the cost-of-capital used in CTT CAS has remained unchanged, and in the light of relevant changes occurred in the meantime in the postal sector, in particular as regards the privatization and entry into the stock market of several postal operators active in the European marketplace, including CTT itself, it is deemed that the cost-of-capital methodology that is currently used may now be out of date as far as comparable factors used to determine some of the parameters are concerned (such as Beta and gearing).

In addition, and considering that some of the parameters used in the establishment of the cost-of-capital are exogenous, that is, not dependent on the performance of the regulated company (e.g. risk-free interest rate, risk premium, tax rate) rather on the macroeconomic context (country) where the company is located, ANACOM believes that it is also necessary to revise the determination on the methodology to calculate these parameters so as to maintain the regulatory consistency, where appropriate, with the methodology defined by this Authority, in the scope of the regulation of electronic communications, as regards the establishment of the cost-of-capital.

This decision aims to minimize the unpredictability associated to the calculation of CTT’s cost-of-capital rate and, at the same time, to provide for greater regulatory certainty, improving transparency for all stakeholders, given that, contrary to the situation that applied so far, the cost-of-capital is no longer determined a posteriori, now being established before CAS results for the financial year concerned are prepared.

The ex-ante establishment of transparent rules governing the determination of the cost-of-capital rate contributes to a predictable environment to which agents may adjust, anticipating and managing their expectations more effectively. Moreover, when ex-ante standards are set out, the need for subsequent investigations, which are typically complex, lengthy, and potentially the matter of disputes, is reduced.

In this context, this methodology aims to determine a cost-of-capital that appropriately allows a reasonable profit to be obtained, taking account of the risk incurred in investments made to provide the US.