1. Framework

The cost-of-capital rate consists in the appropriate rate of return to compensate the investment opportunity cost. In the context of the regulation of the telecommunications market, this rate is determined in order: (i) to ensure the right incentives to invest; (ii) to guarantee the absence of market distortions, via discriminatory and anti-competitive practises; (iii) to eliminate any barriers to the entry of new competitors; and (iv) to protect consumers from excessive prices. It is fundamental to define a methodology that allows an appropriate calculation, without any accounting and analytical constraints, of the cost-of-capital rate to recompense the investments made by regulated companies.

Law No. 51/2011, of 13 September, provides in its article 74, paragraph 2, that in imposing cost recovery and price control obligations, the National Regulatory Authority (NRA) must take into account the investment made by the operator, allowing him a reasonable rate of return on the capital employed, taking into account any associated risks.

On the other hand, Commission Recommendation 98/322/EC, of 8 April 1998 (point 5.1 of the Annex thereof) requires that “charges for interconnection be cost-oriented, including a reasonable return on investment” and that “the cost of capital of operators should reflect the opportunity cost of funds invested in network components and other related assets”.

Also according to point 5.1 of the referred Annex, the cost of capital “conventionally reflects the following: the (weighted) average cost of debt for the different forms of debt held by each operator; the cost of equity as measured by the returns that shareholders require in order to invest in the network given the associated risks, and the values of debt and equity. This information can then be used to determine the weighted average cost of capital (WACC) using the following formula: WACC = r_e * E/(D+E) + r_d * D/(D+E) where r_e is the cost of equity, r_d is the cost of debt, E is the total value of equity and D is the total value of interest-bearing debt”.

By determination of 10/02/2010¹, ICP-ANACOM defined the methodology for calculating the cost-of-capital rate of Meo Serviços de Comunicações e Multimédia, S.A. (MEO) for the 2009-2011 period.

This determination aimed to reduce the lack of predictability associated to the calculation of MEO's cost-of-capital rate, and at the same time to provide greater regulatory certainty, in a framework of greater transparency for all stakeholders, given that the implementation of the process of allocation of the cost-of-capital, which had been historically used, was undertaken after the financial year concerned had elapsed.

The ex ante establishment of transparent rules for the determination of the cost-of-capital rate contributes to a predictable environment to which agents can adapt, anticipating and managing their expectations more effectively.

Moreover, establishing ex-ante rules reduces the need for later investigation, which is usually complex, time-consuming and potentially a cause of dispute.

After the end of the 2009-2011 regulatory period, the methodology for calculating the cost-of-capital rate was redefined, to be applied as from the 2012 financial year. According to that determination², dated 05/12/2013, the rate applicable in each financial year should be updated by the end of the 1st half of the year concerned, in the light of elements required for the calculation. In case it is found that a criterion and/or source of information may not be updated, there are grounds for replacement - which may be triggered by either party, by the end of the first third of the concerned year - and subsequent submission to a prior hearing. Otherwise, the calculation is simply be updated, on an annual basis.

In this context, as neither party triggered any methodological review, taking into account the above-mentioned determination, applicable as from the 2012 financial year, and given the need to calculate the cost-of-capital rate applicable to the 2015 financial year, to provide ANACOM with a better basis for its intervention in the scope of the referred powers, the services of Mazars & Associados, SROC, S.A. (hereinafter Mazars) were contracted, to determine the parameters for calculation of the cost-of-capital rate.

According to the report drawn up by Mazars, entitled “Determination of the cost-of-capital rate of Meo Serviços de Comunicações e Multimédia, S.A.” (vide annex), consultants were of the opinion that, in the light of the methodology established by ANACOM, “methodological principles on which the calculation of the cost-of-capital rate of MEO Comunicações is based are appropriate”, having as such agreed “with its application along the lines described.”

Notwithstanding, it must be referred that when Mazars’ calculation was undertaken, there were situations where it was not possible to use the full amount of data and respective series required for the calculation of the cost-of-capital rate, although consultants did not believe that such situation required a methodological change or brought any robustness problems. In addition to situations where some data were absent, namely as regards the risk-free interest rate and debt premium, a situation was identified where one of the comparable companies, PT SGPS, suffered very significant alterations in its corporate structure, after the first quarter of 2014. The consultant thus proposed, for the purpose of the calculation of parameters which include PT SGPS, the exclusion of observations for the last 9 months of 2014, to consider only 4 years and 3 months of observations of series for the calculation of beta and gearing and 15 months of observations for the calculation of the debt premium.

Acknowledging that there are situations where elements supporting the calculation of the cost-of-capital to be applied to MEO for the 2015 financial year may contain limitations, and in order to promote transparent and accurate action, ANACOM thus believes that for the financial year concerned - 2015 - it would be best to submit the value of the cost-of-capital determined to the prior hearing of stakeholders, as opposed to the summary notification of the calculation result laid down in the determination of December 2013.

For this purpose, and explicitly aiming to maximize regulatory predictability as far as this issue is concerned, it was sought within the framework of the draft decision (DD), whenever possible, to determine the individual value of each of the parameters used in the calculation of the cost-of-capital rate as closely as possible to the methodology in force, established in the 2013 determination, introducing deviations only where required to address, on one hand, the lack or insufficiency of information, and on the other, the structural change undergone by PT SGPS, the comparable company.

Taking into consideration contributions received, and in the light of positions taken in the scope of the prior hearing, a correction was introduced in data concerning the debt premium, having Mazars prepared a new report further to the DD (vide annex) and a prior hearing report which is an integral part of this decision. These corrections affected the average debt premium, which increased from 1.98% (average obtained with 2.20% for 2013 and 1.76% for 2014) to 2.12% (average obtained with 2.38% for 2013 and 1.86% for 2014). This on its turn entailed an increase by 0.0587 p.p. in the cost-of-capital rate mentioned in the preceding report, which raised from 9.2660% (in the preceding version of the DD) to 9.3247% (in the final corrected version, post DD).

Moreover, and so as to meet MEO's concerns, it is also informed that Mazars’ report was reviewed, namely in order to report beta values to three decimal places and the calculation of cost of equity to four decimal places.

Finally, to meet some of the concerns pointed out by MEO, ANACOM took the view that to the methodology defined in the determination of 2013 should be introduced an addition, replacing the paragraph indicated in the DD:

“Notwithstanding, where it is found that databases that enable the calculation of parameters show limitations, and that the application of the defined methodology is not possible, there are grounds for its alteration/replacement - only where it is not possible to guarantee the inclusion in the calculation of at least 80% of observations or of sources of information required for the determination of parameters - which may be triggered by either party, by 31 May of the year concerned and subsequent submission to a prior hearing. Otherwise, the calculation will simply be updated, on an annual basis” with the following paragraph:

“Notwithstanding, where it is found that databases that enable the calculation of parameters show limitations, and that the application of the defined methodology is not possible, there are grounds for its alteration/replacement - only where it is not possible to guarantee the inclusion in the calculation of at least 80% of observations or of sources of information required for the determination of parameters, considering that all comparable companies continue to comply with selection criteria - which may be triggered by either party, by 31 May of the year concerned and subsequent submission to a prior hearing. Otherwise, the calculation will simply be updated”.

In this respect, the European Commission assessed, on 27.11.2015, the draft final decision notified on 29.10.2015, and did not present any comments.

In the light of the above, a more detailed analysis of relevant parameters for the determination of MEO’s cost-of-capital rate is presented below.