The targeted consultation took place between 11 July and 3 October 2018. The objective of the consultation was to collect additional evidence and views from external stakeholders to inform the Commission's future guidance on the Weighted Average Cost of Capital (WACC), expected in early 2019.

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Objectives of the consultation

This consultation is part of a Commission initiative aiming to provide guidance to National Regulatory Authorities (NRAs) regarding the methodology for calculating the reasonable rate of return in the context of NRAs' regulatory measures falling under the EU's Regulatory Framework for electronic communications.

Draft decisions with cost-orientation remedies, or ensuring there is sufficient economic margin between the wholesale and retail prices SMP operators set, include an estimation of the reasonable rate of return allowed on regulated services, which is typically measured through the Weighted Average Cost of Capital (WACC). The Commission services have observed significant discrepancies in the approaches of NRAs to estimating the WACC, including in the methodology the same NRA applies in sequential notifications to the Commission.

The targeted consultation aimed at collecting additional evidence and views from external stakeholders to inform the Commission's future guidance on the calculation of the WACC.

Who replied to the consultation?

23 replies were received: 11 from electronic communications operators, 5 from NRAs, 1 from an individual and 6 from other entities (four trade associations and two public bodies/institutions other than NRAs).

Out of the electronic communications operators 7 are fixed network operators, 6 mobile network operators and 5 convergent operators (some respondents fall into more than one categories). One respondent is a mobile virtual network operator.

The largest number of replies came from Belgium and Italy.

Preliminary trends observed in the replies

Without prejudice to the in-depth analysis of the replies, we can observe the following overall trends:

General approach to assess the most appropriate methodology to estimate the WACC

  • The majority of respondents consider that both differences in the (i) methodologies used by NRAs to estimate the WACC and (ii) in the national economic and financial conditions in every Member State explain the differences in the current WACC levels estimated by NRAs. Further, the prevailing view is that methodological differences are, at least in part, likely to distort market participants’ investment decisions and create inefficiencies affecting the Digital Single Market.
  • Most respondents consider that the Commission should act to reduce inconsistencies in NRAs’ methodologies to estimate the WACC (the rest is either opposed to the idea, does not know or did not answer the question). However, respondents are divided as to whether applying a consistent methodology would imply certain important risks.

Estimation of the WACC parameters

  • The prevailing view is that the Risk-Free Rate (RFR) should not be estimated using an EU (notional) value, whereas opinions are split on whether the Equity Risk Premium (ERP) should be expressed by a domestic value or an EU (notional) value. The vast majority of respondents take the view that the ERP should be estimated using published historical series.
  • Respondents are likewise divided on whether the equity beta, the gearing and the cost of debt should be estimated using the domestic operator with significant market power (SMP) as the main focus. However, the majority of those who defend the use of a domestic value agree that this should be compared with the values of a benchmark of peer EU electronic communications companies. 

Distinction between electronic communications services

  • Views also vary on whether NRAs should be able to set different WACCs for the services they regulate and, if so, what the most appropriate way would be to differentiate the WACC between services.  

Transitional period

  • More than half of the respondents consider that there should be a transitional period during which NRAs could converge towards the approach described in the Commission’s Guidance and most indicate a three-year period as an appropriate timeframe.  

Next steps

The Commission is now carrying out an in-depth analysis of the replies received to the targeted consultation. A synopsis report will be published in due course. The results will feed into the Commission's future guidance on cost of capital for EU electronic communications regulators.

Download the summary report (pdf format).


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