The Public Utilities Commission (PUC) on Wednesday ruled that the phone company's rate of return is sufficient and that temporary tariffs for service now in force will be made permanent with effect from March 27th, 1998.

"Extremely disappointed and distressed" was how the Guyana Telephone and Telegraph Company (GT&T) last night described its reaction to the PUC decision and warned that the ruling threatens the very viability of the industry in Guyana. GT&T said that the PUC had based its decision on an "obviously less than robust analysis" and had disregarded widely acceptable international telecommunication accounting practices on allowable expenditure for ratemaking purposes.

Decision took four years

Order No.7/2001 - unveiled by the PUC yesterday - culminated an application for increases in local phone rates first made by GT&T almost four years ago on December 31,1997. The PUC pointed out that the delay in the handing down of the ruling was attributable to various legal actions that had been brought against it by GT&T and the consumers movement.

To arrive at its decision, the PUC undertook its own calculation of the rate of return that GT&T was entitled to and disallowed as an expense the controversial 6% advisory fees that the local company pays to its US Virgin islands-based parent firm, Atlantic Tele Network (ATN).

Wednesday's ruling takes on added significance in the light of the recent rejection of ATN's application to the US Federal Communications Commission (FCC) on behalf of GT&T for a waiver on the settlement charges that US companies will pay GT&T for the termination of calls from the US here. This tariff will plummet from US$0.85 to US$0.23 per minute with effect from January 1 and will put a further strain on GT&T's finances. The issue of rate rebalancing then becomes critical as GT&T has long argued that revenue from its international service has subsidized its local service. The PUC, however, pointed out in its Wednesday ruling that what was before it in December 1997 was an application for a rate hike and not a petition for rate rebalancing.

Rates insufficient

On December 31, GT&T had applied to the PUC for a change in rates through Tariff Notice 1-97 since it argued that the rates in effect at that time were insufficient for it to earn the 15% return stipulated in the 1990 purchase agreement with the Government of Guyana. This rate of return calculation was based entirely upon forecasted earnings and the rate base for the calendar year 1998. The PUC later determined that GT&T made certain regulatory presumptions and on January 6, 1998 suspended the filing.

After a hearing on January 26, 1998, Order 1/98 was issued by the PUC setting temporary rates for the services GT&T had sought rate changes for. These temporary rates included a 61.6% hike in tariffs for calls to the US, Canada and UK and increases for local calls. A PUC press release on January 28, 1998 had said that GT&T's application for rate hikes had sought increases which range from "4400 percent and downwards in the case of local calls and services to nearly 600 percent and downwards in the case of outbound international calls". The temporary rates were only a fraction of these. These were later amended by Order 2/98 lowering the temporary rates for telephone rentals and installations (both residential and business) and for local calls. The PUC then advised GT&T that permanent rates would be fixed upon the conclusion of a "thorough investigation of the company's operations".

Court action

The PUC pointed out that before this process could be completed, an Order Nisi was issued by the High Court on January 20, 1999 on proceedings filed by GT&T. As a result, the rates currently effective are the interim rates from that filing.

On October 27, 1998 GT&T filed an amendment to tariff notice 1/97 predicated on the following: that there had been a 13% depreciation in the value of the Guyana dollar against the US$ since the filing; that US phone company AT&T had decided to reduce the accounting rate agreed between itself and GT&T from June 1998 and there had been a 67% decline in audiotext revenues. This filing was also suspended by the Commission on November 9, 1998 and again on February 19, 1999.

After GT&T's matters before the courts were dealt with, the PUC continued to hear the application in September 2000 and this continued until December when the consumers associations went to court to challenge the PUC's ruling that GT&T was entitled to a 15% rate of return. That matter was discontinued in June this year and the PUC reconvened thereafter.

Rate of return

The PUC said that in making its rate of return determination it included revenues and expenditures from the cellular operations. It noted that the cellular service was producing a rate of return of over 20%.

In making its calculation of the average rate base, the PUC eliminated the franchise asset (the difference between the purchase price and the book value) saying this is not an item permitted by the US FCC.

In the area of working capital, the PUC said that GT&T's lead-lag study indicated that working capital of $3.4B was required. The PUC said that a review of the results of the study showed that the single largest component is international calls and the audiotext revenue. If the revenue from these services was reduced, the PUC surmised that the working capital requirement would be substantially lowered. With the expected decrease in international accounting rates for calls from the US, the PUC said there would be a reduction in revenue and it ruled that an allowance of $1B would be appropriate compared to the $3.4B sought by GT&T.

Also in the crosshairs of the PUC was the debt service reserve. The regulatory body pronounced that the FCC does not provide for this item and therefore the ratepayer should not be required to foot an additional 15% on this balance.

Turning to the valuation of assets, the PUC said that in March 1999 GT&T submitted the December 1998 unaudited results and it appeared to reflect the increase in the value of the US dollar against the local currency without the PUC's green light. "No adjustment was made to reverse this increase in calculating the rate base", the PUC said.

On the issue of depreciation, the PUC said that the rates for fixed assets were altered by the phone company without its approval. Saying this was not the norm before the FCC, the PUC said that the depreciation expense was accepted for determining the proposed rates. It said the PUC expects that GT&T will seek its approval for changes in depreciation rates.

Alighting on the vexed issues of advisory fees, the PUC said that GT&T "pays the advisory fees without record of services, invoices and without arms length dealings. Since this is a transaction with an affiliate, the inclusion of this expense for ratemaking purposes is not consistent with FCC practice and procedures.

Therefore, the PUC said that its analysis of GT&T's accounts for the year 2000 showed that it notched up a rate of return of 18%. For the first nine months of this year it was in excess of 15%. Further, it pointed out that GT&T's update to its filing took into account settlement rates for calls from the US of US$0.65 compared to the US$0.85 that is being received now but which will slide to US$0.23 from January.

The PUC added that it is very difficult to forecast the impact on GT&T's rate of return given the pending decline in international settlement rates.