The cost-of-capital rate consists in the appropriate rate of return to compensate the opportunity cost of the investment. 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 remunerate the investments made by regulated companies.
Law No. 51/2011, of 13 September, provides in paragraph 2 of article 74, that in imposing cost recovery and price control obligations, including obligations for cost orientation of prices and for adoption of cost accounting systems, 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 = re * E/(D+E) + rd * D/(D+E), where re is the cost of equity, rd 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, ANACOM defined the methodology for calculating the cost-of-capital rate of Meo Serviços de Comunicações e Multimédia, SA. (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, 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 by determination2 of 05/12/2013, and applid as from the 2012 financial year. Subsequently, by determination3 of 17/12/2015, it was determined that “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 context, 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, SA. - for the 2016 financial year”, consultants carried out a critical review and update of data required for calculation of each parameter of the cost-of-capital rate, and methodological changes were recommended for the calculation of the risk-free interest rate, debt premium and risk premium, as well as for the selection of comparable companies.
In this respect, the European Commission assessed, on 07.09.2016, the notified draft final decision, and did not present any comments.
A more detailed analysis of the methodological review proposed by Mazars, as well as of the calculation of each of the relevant parameters for the determination of MEO’s cost-of-capital rate, is presented below.
1 Calculation of the cost of capital of PTChttps://www.anacom.pt/render.jsp?contentId=1014532.
2 Methodology for calculating the cost-of-capital rate of PTC as from the 2012 accounting year - final decisionhttps://www.anacom.pt/render.jsp?contentId=1184468.
3 Approval given to MEO's cost of capital rate for 2015 financial yearhttps://www.anacom.pt/render.jsp?contentId=1375198.
