The methodology approved by ANACOM determines that the establishment of CLSU is based on the determination of costs that the USP would avoid and revenues it would lose where, were it not subject to US obligations, it did not supply the service in unprofitable geographic areas, and in profitable areas, it did not supply the service to customers that were unprofitable therein, or did not supply the service in conditions which depart from normal commercial conditions. Information on costs required for this exercise is mostly obtained from MEO’s accounting records, whereby USP costs and assets must be evaluated on the basis of historic costs.
As such, the calculation of CLSU results from the establishment of direct net costs, with a direct measurable impact on accounts of the USP, and of indirect benefits, from which the USP derives a gain as a result of being one.
The methodology further determines that CLSU result from the sum of loss-making components, that is, in case any of the components shows a positive margin, it should not be used to compensate negative margins calculated for other components. In fact, it is deemed that the USP would always provide non-deficit components of the service, even where it was not under the obligation to provide them.
The following US offers are thus taken into consideration: connection to the public telephone network at a fixed location and access to publicly available telephone services, including specific offers intended for retired persons and pensioners, and also the offer concerning the public payphone service.
It should be noted that positive margins of all services provided outside the scope of the US and which rely on US accesses are taken into consideration for the purpose of CLSU calculation. On this issue, ANACOM’s determination of 20.06.2013, on audit results of CLSU for 2007-2009, specified that MEO must include as relevant services provided outside the US those that remain as profitable services as from 2007 up to the year to which the CLSU estimate refers. Moreover, the company must present an annual analysis, and where appropriate, grounds, which will be appropriately weighted, for not considering services that may not be profitable on a multi-annual approach on a cumulative basis, but which on an annual approach present a positive margin for any of the years at stake.
The methodology determines also, with respect to the issue of how to treat one-off costs and revenues, that costs/ revenues of one-off installations must be annualised on the basis of the number of years to which corresponds the average useful life of MEO’s customers, which was set at five years. As such, the methodology establishes that in each year, one-off costs and revenues assigned to customers installed in that year are annualised, as well as one-off costs and revenues of previous years assigned to customers installed in the years concerned.
In terms of geographical division, the methodology takes the USP network topology into account, whereby the area covered by each of MEO’ Main Distribution Frames (MDF) is the reference unit for assessment of cost areas.
It is noted that, in 2014, MEO did not provide the US the entire year under the regulatory framework for the period preceding the USP tender designation. This led to the adjustment of the methodology for determination of CLSU for the period between 01.01.2014 and 31.05.2014 as regards the connection to the public telephone network at a fixed location and access to publicly available telephone services (FTS), and for the period between 01.01.2014 and 08.04.2014 as regards the provision of the public payphone (PPP) service.
In the scope of the decision of the CLSU calculation methodology for 2014 (decision of 22.07.2015), it was established that “[a]s regards inputs (operational, financial and cost inputs) to be used in the calculation of CLSU, indicators which concern the period concerned, that is, inputs for the first 5 months of 2014, should be used as much as possible. In the scope of such inputs, in case average unit values calculated on the basis of annual CAS data for 2014 are used, the following issues must be safeguarded:
a) average unit costs determined for the period the US was provided must not be significantly different from average costs of the 2014 operation, namely as regards operational costs, costs of capital and amortizations; and
b) Operational indicators (no. of installations, monthly payments, etc.) and financial indicators used to calculate costs must not be influenced by seasonal effects.
In this context, MEO must fully demonstrate that average unit costs for 2014, as well as the operational and financial indicators used to calculate net costs, adequately reflect the company’s operation in the referred period. It is stressed that in case significant differences are identified, MEO must identify and apply the necessary adjustments to remedy these differences.”
Audit Report
Auditors describe in the audit report the process implemented by MEO to determine CLSU, which is based on the use of the following models:
- Avoidable costs model, which calculates inputs of avoidable costs feeding other CLSU determination models;
- Area model, which calculates CLSU of unprofitable areas;
- Customer model, which calculates CLSU of unprofitable customers;
- Public payphone model, which calculates CLSU of unprofitable public payphones;
- Model for retired persons and pensioners, which calculates CLSU arising from the offer granted to retired persons and pensioners;
- Indirect benefit model, which calculates indirect benefits which are deducted from overall CLSU concerning unprofitable areas, unprofitable customers in profitable areas, unprofitable public payphones in profitable areas and retired persons and pensioners.
As regards adjustments made to estimate CLSU for 2014, AXON refers that, at the level of revenues, these are identified for the 2014 January-May period on the basis of “revenues entered in general accounts for the first five months of 2014, which are in line with those reported in the CAS, in compliance with ANACOM’s determinations in the decision of 22.07.2015”. AXON also refers that it found that “those revenues take into account volumes recorded for each month, entered in MEO’s operational systems, thus the criterion referred in preceding paragraphs relies on a basis of reliability, transparency and appropriateness, which reflect the business seasonal spread and evolution, which are very important so that the determination of CLSU accurately depicts the reality intended to be represented.”
As regards costs, the audit report describes the process of identification of relevant costs and mentions that it is based on annual costs of the CAS and traffic volumes corresponding to the first five months of 2014 reported in MEO’s operational systems. On the basis of these inputs, MEO calculated unit costs taking into account the results of the analytical accounting model and volumes registered in the entire year. Subsequently, the proportion of volumes for the first 5 months of 2014 obtained from operational systems was multiplied by unit costs.
Moreover, the report stresses that MEO conducted reasonableness tests to evidence that costs of the period of service provision (January to May 2014) do not differ substantially from the use of average costs of the period. As such, on the basis of information supplied by MEO, auditors compared the share of monthly costs entered in general accounting and those included in calculations, having found that the accumulated difference in the 2014 January-May period amounts only 0.04%, having thus concluded that: “(...) using average costs of the 2014 financial year is not significantly different from using average unit costs determined for the period of US provision (January-May 2014), thus calculations made and included in the model are in line with ANACOM’s determinations”.
It should be noted also, as regards the determination of avoidable costs and lost revenue arising from the provision of the public payphone services, that the calculation for the January-May 2014 period was conducted, and in compliance with ANACOM’s determinations, MEO subsequently applied a correction factor based on the number of days on which the service was effectively provided, in order to estimate costs and revenues associated to this provision in the period between 1 January and 8 April 2014.
The determination of CLSU takes into consideration costs and revenues of all services included in the provision of the FTS and PPP US, as well as all services provided outside the scope of the US, but which rely on copper pairs and which present positive margins. As far as the latter are concerned, the audit report identifies categories of services excluded from the calculation of CLSU due to the fact that they present a negative accumulated margin between 2007 and 2014, and identifies a service which is excluded, despite presenting a positive margin on an annual basis in 2014.
Bearing in mind that ANACOM’s determination of 20.06.2013 provides that the USP must justify not taking into account relevant services that, although not profitable on a multi-annual approach on a cumulative basis, present however on an annual approach a positive margin for any of the years at stake, AXON analysed the justification presented by MEO, having concluded that the exclusion conducted is reasonable and complies with ANACOM’s determination, not least because not taking the service concerned into consideration involves only 0.8% of the total margin for 2014, having AXON taken the view that this element has but a negligible impact in the calculation of CLSU.
Still on this subject, AXON mentions that the determination of relevant services was based on total values for 2014 instead of the five months during which the service was provided, referring that MEO justifies the use of total values of the year given that the CAS - the source used to make the calculation - is only updated on an annual basis, and, consequently, the calculation of accurate margins is only possible for an annual period. AXON concludes that the use of values for the whole year is a reliable proxy for the value of each service in the five months concerned, and leads to the same conclusions.
As regards the annualisation of one-off revenues and costs, the audit report refers that MEO annualised one-off revenues/costs by applying the 5/12 proportion (revenues/costs up to May) to the amount concerning the deferral concerning each of the years from 2010 to 2013, and the proportion of 1/5 to 2014 revenues/costs occurred up to May 2014. Auditors consider this approach followed by MEO to be consistent with the methodology approved by ANACOM.
As far as the implementation of other general principles is concerned, auditors checked the approach followed by MEO and considered it to be in line with the methodology established by ANACOM, not having been identified any situations that justify the amendment of values presented.
MEO comments
In its comments, MEO mentions that, in the identification of relevant services, margins presented by auditors, in the audit report, do not include the full costs established in the CAS, as curtailments costs were not considered, and in the opinion of this operator, the assessment of the total margin of a given product or service must take the full costs into consideration.
This operator believes that the inclusion of curtailments costs in the determination of margins could change the conclusion they point towards, and mentions that this occurred already for the 2013 financial year as regards the service identified in the audit report with positive margin on an annual basis in 2014, claiming that this alters conclusions reported in the fourth paragraph of page 33.
Line taken by ANACOM
Bearing in mind the positive assessment presented by AXON on how MEO implemented the general principles, and the conclusion set out in the audit report, whereby the approach followed by the company is consistent with the methodology defined by the Regulatory Authority, ANACOM takes the view, as far as the general principles are concerned, that MEO has implemented the CLSU calculation methodology correctly. This assessment includes the correct implementation of ANACOM’s decision of 22.07.2015 on inputs to be used for the calculation of 2014 CLSU. In this respect, it must be noted that, according to ANACOM’s determination, it has been safeguarded that average unit costs obtained on the basis of annual CAS data are not significantly different from average costs of the period under consideration, thereby guaranteeing that the model and its results appropriately portray the reality. In this respect ANACOM highlights, in particular, the analysis conducted by AXON, monthly costs contained in MEO’s general accounting and costs taken into account in the establishment of CLSU, which allowed the Regulatory Authority to ascertain that the accumulated difference of such costs in the January-May period of 2014 is a mere 0.04%.
It is noted that in the audit to values resubmitted in May 2016 by MEO, AXON did not identify any alterations with impact on its conclusions, whereby ANACOM’s opinion, expressed in the paragraph above, is maintained.
At the level of the establishment of relevant services, the audit report presents the analysis of the profitability of services provided outside the US on US accesses on a cumulative basis as well as on an annual basis. It was found that, in the period considered, in case an exclusively annual approach was followed, an additional service should have been considered, however the margin of that service has but poor representativeness compared to the margin of all services deemed to be relevant, given that it shows, as referred in the audit report, a negligible impact. It is also referred that the audit report presents, according to ANACOM’s determination, MEO’s justification for not including the referred service, having auditors taken the view on the matter that “(...) MEO followed ANACOM’s determinations appropriately.”
In the light of the above and also of the conclusion of auditors on the determination of relevant services, according to which the “(...) exclusion is reasonable, and in line with ANACOM’s determinations”, ANACOM considers that MEO’s approach leads to similar results to those that would be obtained with an annual approach and presents greater consistency at methodological level. As such, MEO’s approach is accepted.
As regards MEO’s comment on whether curtailment costs should have been taken into account in the calculation of the margin for the purpose of the establishment of relevant services, it must be mentioned that the referred costs result from MEO’s human resources policy and strategic options, and as such are not affected by the termination of the provision of unprofitable services, and, consequently, are not directly related to the US provision. For this reason, it is deemed that they should not be included in the scope of relevant services, being stressed that, in fact, they were not taken into consideration.
