General considerations on the methodology by PTC

Following the comments on the review of the rate of the cost of capital, PTC considered it was important to state its understanding of two particular aspects of ICP-ANACOM’s Determination:  the decision´s time frame and the methodology’s simplicity and transparency.

It should be mentioned that under the draft decision on the review of the calculation of the rate of the cost of capital of PTC applicable to the 2010-2011 period (DD), ICP-ANACOM received comments both from PTC, within the contribution of Grupo PT, and from other respondents, on the methodology itself and on generic issues in addition to these two aspects mentioned in the DD. Since the points raised by those bodies do not affect the current Decision, they can be analyzed in the report of the prior hearing, which is an integral part of the present Decision.

Time frame

PTC considers that even though ICP-ANACOM set out to provide a more predictable environment, with less regulatory uncertainty for all parties, ICP-ANACOM’s decision did not aim, in fact, to define a methodology but actually merely translated the calculation of the figures and their sources.

Furthermore, PTC states that “the ex-ante establishment of the rate to be applied for such a long period, calculated based on data from the past referring to years that are some way away from those in which the rate will be applied, should not be mistaken for the transparency of rules.”

With the Decision of 10 February 2010 ICP-ANACOM defined the rate of the cost of capital applicable for the 2009-2011 three year period, as a result of a thorough methodology review of how each of the parameters is calculated, the remuneration base and the procedure itself, changing from an annual rate to a rate established for three years, with a review mechanism that could safeguard the parties against unanticipated significant effects.

The ex-ante establishment of transparent rules concerning the determination of the cost of capital aimed to promote a predictable environment to which parties may adapt, by anticipating and managing their expectations more effectively.

In fact, the implementation of a methodology defining the rate of the cost of capital a priori is a common practice in several countries, such as Ireland ¹, France ², Belgium ³ and the United Kingdom ⁴.

Additionally, establishing rules ex-ante reduces the need for later investigations that are usually complex and time consuming, and possibly subject to dispute, regarding the possible abuse of market power by fixing excessive capital costs.

PTC also states that "what resulted from ICP-ANACOM's determination was an exaggerated regulatory determinism, which is not necessarily a proper and timely reflection of normal market fluctuations, thus favouring the occurrence of hasty reviews of the rate of the cost of capital every three years."

PTC considers that ICP-ANACOM’s argument that knowing this rate beforehand would decrease regulatory uncertainty was found to be fallible, given the time lapse and the magnitude of the discrepancies between the data used for calculating the parameters and the figures observed in each financial year.

ICP-ANACOM disagrees with PTC’s interpretation that the current methodology for establishing the rate of cost of capital favours the occurrence of hasty reviews of the rate of the cost of capital. In fact, it is easily demonstrated that the methodology previously used by PTC resulted in the considerable volatility of the rates presented, which were in the 11% to 17% range between 1997 and 2008 (vide graph I and table 5).

Graph I - The rate of cost of capital of PTC 1997-2008      

Source: AAS PTC 1997-2008

Source: AAS  PTC 1997-2008 results.

PTC also notes that the prior establishment of a value relative to a single cost factor, with the justification that it reduces the unpredictability of trend of the cost of the products, is a feeble argument when all other cost factors have a higher weight on the establishment of the final cost.

ICP-ANACOM is perfectly well aware that the cost of capital is only one of the cost items of PTC’s operation. However, the possibility of setting a priori this component of the cost of products and services contributes to greater regulatory predictability, a procedure which is in fact followed by several other sectoral regulators.

Simplicity and methodology transparency 

PTC observes that the regulatory uncertainty involving the cost of capital cannot be eliminated by administrative means for limited time periods, stressing that it has to be fought with a methodology that enables an annual alignment of its parameters with the evolution recorded in the market, through a set of rules that are simple, transparent and accessible to all parties.

In this context, PTC also claims that ICP-ANACOM, after starting from consensual methodologies, such as WACC and CAPM, ended up by embracing excessive information sources and criteria, complicating what should be simple, with reserved access for data that should be accessible to all, and therefore PTC suggests that the methodology defined be reviewed.

Regarding PTC’s challenge to the methodology for calculating the cost of capital, ICP-ANACOM stresses that with the Decision of February 2010, the uncertainty and volatility of this cost component decreased drastically (see previous graphs), but still considering the annual alignment of the main parameters of the cost of capital, as the present review process bears out. Therefore, it is this Authority’s understanding that, even admitting that possible improvements to the defined methodology might be assessed in the appropriate forum, the Decision of February 2010 represented, in comparison to the practice followed up to then, a definite procedural improvement, and that in any case this subject will be revisited for 2012 and the following years.

It should be noted that the guidelines are already defined, and therefore that the degree of complexity inherent to this task does not seem to be a disruptive factor in the calculation process, especially because all data bases and information sources used for establishing the parameters are properly identified, thus guaranteeing the total transparency and independence of the data used.

Additionally, the methodologies considered for calculating the cost of capital are not significantly innovative with respect to the methodologies that are followed by other European regulators, as shown in the benchmark considered in the Decision.