Analysis of the cost-of-capital rate proposed by PTC

PTC considers that the conditions for launching the parameter review mechanism provided for in the Decision of February 2010 have been met. On the grounds of the significant change of the Portuguese macro-economic context, PTC intends to change the risk-free interest rate from 4.8% defined in the Decision of August 2011 to 7.82%. This situation results from the fact that the average of monthly observations for the last two years (2010 and 2011) for 10-year Treasury.

^{(*) Average value for 2009-2010
(**) Average value for 2010-2011
Source: PTC and ICP-ANACOM calculations}

Decision of 2010 lays down that the calculation of the cost-of-capital rate must use 10-year treasury bonds, the series being based on monthly observations with reference to the last two years.

PTC replicated values of treasury bonds for 2010 and 2011, achieving a value of 7.82%, that is, an alteration of 3.02 percentage points relatively to the average value calculated for 2009 and 2010 (4.80%).

ICP-ANACOM also replicated the calculations for the average of monthly observations of the last two years (2010 and 2011) and, just like PTC, the Authority obtained a value of 7.82%.

That Decision refers that the use of government bonds concerning the domestic market is generally deemed to be a good proxy for risk-free assets, being also a common and consensual measure of financial and regulatory practice.

However, the unfolding of the international financial crisis created a great instability in financial markets, namely at the level of the sovereign debt, and so the implicit interest rate of national treasury bonds showed an atypical behavior. This undermines, in the opinion of this Authority, the reasonableness of using national government bonds as proxy for the risk-free interest rate indicator.

In fact, the risk-free interest rate reflects the remuneration of risk-free assets. However, this is a theoretical rate, as there are no financial assets absolutely risk-free.

It is also important to note that Portugal is part of a wide currency area, thus the indicative value of the risk-free rate should not, and cannot, differ significantly, or be contrary to similar indicators obtained from data of other countries in the same currency area.

In this respect, it should be recalled that Decision of February 2010 refers explicitly that "in the event that, during the period in question, any extraordinary situation occurs which has a significant impact on the validity of the assumptions used, the parameters defined will be reviewed."

Specifically as regards the risk-free interest rate, ICP-ANACOM referred explicitly in the Decision of February 2010 that "the domestic market should be chosen as the relevant market. However, in the event that local bonds are not issued on a consistent basis or where they lack liquidity, both PwC and the IRG support the choice of another market".

In the light of the above, and taking into account the macro-economic context of the country, which had a strong impact on the regularity and liquidity of issues of long-term government bonds¹, ICP-ANACOM disagrees with PTC view to maintain the use of treasury bonds as proxy for the risk-free interest rate, as currently it is no longer valid to assume that such bonds can be deemed to be a good proxy for risk-free asset indicators.

As such, and in the alternative, ICP-ANACOM takes the view that a different approach for calculating the risk-free interest rate is required, which gave rise to this determination² (vide table 3), based on monthly observations of government bonds between 2010 and 2011, of a selected set of countries (including Portugal), which belong to the same currency area, resulting in a value of 5.36% (vide Annex A).

This approach has the advantage of maintain consistency in the way the various assessed parameters are calculated, and, at the same time, it somewhat reflects the worsening in the Portuguese macro-economic context, with consequences at the level of the risk-free interest rate.

^{(*) Average of monthly observations of government bonds of the referred countries, at nominal value, and Euro as currency of transaction}

^{Source: European Central Bank}

In addition, as the regulatory period in which prevailed the current approach for defining the cost of capital to be considered by PTC for regulatory costing purposes, is coming to an end, ICP-ANACOM stresses that a new decision on this subject is under way, for the 2011-2014 period, reflecting in an integrated manner the changes of context occurred since the adoption of decision of February 2010. This Authority expects that new elements on this issue may soon be made available.