Financial analyst to PUC explains the procedure behind the fixing of temporary phone rate increases
Stabroek News
Dear Sir, I have, for the last three weeks, been engaged in a constant battle with myself not to respond to the volume of misinformation that has been spreading across Guyana about the recent rate increases that have been granted to the Guyana Telephone and Telegraph Company Limited (GT&T) by the Public Utilities Commission (PUC). That I chose to write this letter came out of a deep desire to put some perspective to arguments about the process that was engaged in the rate-making and to answer some of the criticisms made. Let me immediately advise that I am the Financial Analyst attached to the PUC. As such I was an integral part of the entire process. What I say here, therefore, are my opinions informed by the function I perform and should not be taken to be those of the PUC. I want to begin with the question of the rate of return to which GT&T is entitled. The Sale Agreement between the Government of the Cooperative Republic of Guyana and Atlantic Tele-Network Inc. (ATN) by which 80% of the shares oaf GTC was acquired by ATN states as follows: "In determining the rates to be charged the subscribers, the Authority shall take into account GT&T shall be entitled to a minimum rate of return of 15% on capital dedicated to public use. The revenue requirement shall be calculated on a rate of return methodology to be mutually agreed to by the Government and ATN prior to the establishment of a Regulatory Body or any other agency charged with the responsibility of regulating the rate of return for GT&T. Unless and until such mutual agreement is reached between the Government and ATN, the revenue requirement shall be calculated on the basis of GT&T's entire property, plant and equipment pursuant to a rate of return methodology consistent with the practices and procedures of the United States of America Federal Communication Commission." It would be seen from the above that apart from stipulating the minimum rate of return which must be earned by GT&T annually, the Agreement also stipulates how the revenue requirement that would allow for the 15% minimum rate of return should be determined. Perhaps I should also point to Section 33 of the Public Utilities Commission Act of 1990 as amended by the Public Utilities Commission (Amendment) Act of 1994. Section 33 reads as follows: "Where the Government and a public utility have entered into an agreement specifying - a) the rate of return the public utility is entitled to in respect of the capital invested or dedicated for providing any service; or From the above quotes it should be quite clear that the PUC had to allow GT&T a minimum rate of return of 15%. That the 15% had to be calculated on a rate base that took into consideration all of GT&T's property, plant and equipment dedicated to providing the service or services used by the public was also a given if the PUC was to remain within the law. The property, plant and equipment referred to in the previous sentence is what, in regulation, go to determine the base on which the rate of return is calculated or the rate base. Test period Before filing for rates GT&T established a test period, i.e. the first period over which the new rates would have first impact. This is a methodology adopted from the practices and procedures of the Federal Communication Commission of the United States of America. The period chosen happens to be the calendar year 1998. Estimates were made of revenues, expenditures and investments and these took into consideration all the known factors which affected or would affect the business, both negatively and positively during 1997 and beyond. After adjustments for increased investments were made, GT&T arrived at an average base rate of G$16,791,391,000. Included in this figure was G$871,917,000 which GT&T always described as Franchise Rights and to the inclusion of which the PUC always took exception. It was, therefore promptly removed by me. I also felt that to use an accumulation of assets and liabilities over the coming year as a basis for setting rates at the beginning of the year was incorrect in principle, and that a more related figure would have been that in existence at the beginning of the year. The entire base rate calculation was therefore reworked to arrive at the average base rate over the year 1997 -excluding Franchise Rights, of course - which amounted to G$16,292,557,000. This lower base rate attracted a smaller total revenue to arrive at the 15% rate of return. Audiotext revenues Ever since 1992 revenues from audiotext formed the major part of the total revenues of the GT&T. Revenue figures for the last three years 1995 to 1997, after providing for possible debt, shown below, attest to this fact. Revenue 1995 1996 1997 In percentage terms they amounted to 70%, 72% and 53% of the total revenues for 1995, 1996 and 1997 respectively. In addition, audiotext contribution to the total profit or net income of the company for rate-making purposes were as follows: Revenues 1995 1996 1997 G$000 G$000 G$000 Audiotext Revenues 12,965,000 15,080,000 8,818,000 With net income before taxes (after disallowing advisory fees as an expense item) of G$5,470,958,000, G$4,819,576,000 and 3,614,288,0000 for 1995, 1996 and 1997, it could be seen that without the contributions from the audiotext revenues the profits in 1995 and 1997 would have been minimal indeed, while the company would have made an overall loss in 1996 the year in which the rates were reduced and a 50% discount offered during the off-peak period. The table below illustrates these observations: 1995 1996 1997 Net Income before Taxes 5,470.958 4,819,576 3.614,288 I also wish to point out that I am no legal expert and could not decide whether the audiotext services were regulated or not. What I did know was that the PUC was engaged in a battle with the GT&T since 1995 to have the revenues from these services included in the rate-making process. In fact the Order by the PUC in October 1995 specifically deemed audiotext a regulated service (since it was made possible by the licence granted to GT&T) and identified audiotext revenues as the funds which were to be used to subsidise both the local and international telephone rates. It was only grudgingly that GT&T accepted this position in its recent filing. Audiotext expenses There is some suggestion abroad that the revenues received from audiotext should be recognised but similar recognition should not be given to the expenses. In its Order 7-1995 of October 1995 the PUC ruled that recognition should not be given to the expenses, and as a servant I was obliged to follow its ruling. It does seem strange, however, that such a suggestion should be made. True, GT&T receives revenue for these calls as accounting rate payments through their contracts with their correspondent telephone companies, but these calls are made possible through contracts with audiotext service providers (copies of which are in the possession of the PUC) for services for which they should pay. It appears to me, therefore, that the suggestion is absurd since, as an accountant, I could not fail to observe the matching principle and the ruling of the PUC. By the way, GT&T has dedicated 73 international lines to audiotext. These are not lines that could be used within the country and should not be confused with local lines. Any suggestion that lines available for local use are given to audiotext services is a complete misrepresentation of the facts as they are known to us. What the above indicates was that the company relied almost exclusively on audiotext revenues for its continued existence. The income brought in by its regular telephone business could not sustain it. While audiotext traffic was good there was no need to contemplate rate adjustments, but by the end of 1997, the level of this business showed a marked decline. At this point it is not expected to recover in 1998. What this means is that a large part of the subsidy for local and international telephone rates has been removed, and if the company's survival is to be assured, that slack created has to be absorbed, in the short term at least, by the very rates that were being subsidised. By an Order of February 1997 the PUC ordered GT&T to cease making payments of advisory fees to its parent company and to have repatriated to Guyana all such payments previously made. This followed on its refusal to recognise such payments as legitimate business expenses in its Order of October 1995. Advisory fees, therefore, were disallowed as an expense in the rate-making process and formed no part of the equation. Significantly, this too was accepted by GT&T albeit with the proviso that such acceptance should not prejudice their right to insist on its inclusion as an expense when permanent rates are being fixed. In looking at the rates I was, of course, very mindful of the provisions of Section 32 (2) of the PUC Act 1990 as amended by the PUC Amendment Act 1994. This section states that: "In determining the rate a public utility may charge for any service provided by it, the Commission shall have regard to * consumers interest and * to the rate of return in other enterprises having commensurate risks, What Section 32 (2) demands is that in fixing rates the PUC should hold a balanced view of the interests of both the consumers and the investors. There is also the perception abroad that the PUC is there to represent the interest of the public against the public utility. What gave rise to this perception is unclear, but clearly it is not supported by the provisions of Section 32(2) and, if followed, could only lead to the PUC being accused of bias by the utility. No memoranda filed You would be aware that so far I have talking about the interest of GT&T and following the procedure for rate-making as laid down in the Sale Agreement and Section 33 of the PUC Act. It was now time to look at the interest of the consumers bearing in mind that setting rates which did not ensure the continued financial viability of the company was like shooting the consumers in their own collective feet. A bankrupt company would not be able to provide the services which unrealistic rates might require. As established in Section 32 (2) a balance had to be kept between the consumers and investors interests. GT&T's returns Ever sine 1992, after the devaluation of the Guyana dollar of 1991, GT&T's finances began suffering a shortfall from its regular telephone service. That they continued as a viable company was the result of an audiotext windfall which began just about then. Even though the PUC did not endorse the audiotext services, it was never averse to the use of its revenues to subsidise the rates the consumers were asked to pay. With audiotext running at the high levels they did, GT&T made handsome returns as shown below: enough though it continued to expand its assets base. In the circumstances as existed up to the beginning of 1997 all was well with the cheap and sometimes unrealistic rates. In 1997, however, audiotext revenues began falling away drastically (refer to audiotext revenues above). The result was a return of 14.28% which was .72%below the minimum guaranteed according to my calculation after disallowing advisory fees and franchise rights. GT&T's justification for an increase was that if the rates continued as they were at the end of 1997 and audiotext revenues remained as low as they were during the last quarter of 1997, with additional investments in plant of about G$lb, the rate of return for 1998 would have been in the region of 3.58%. The question, then, was whether this situation should be allowed to continue. In its filing GT&T advised the public that it was requesting approval for an increase in rates of 28.7%. That was quite untrue since the increases in the international rates sought ranged from 600% downwards and 4,428% downwards for local rates. At the same time they sought rates for new services, like three-way calling, call forwarding and caller ID, which they intended to introduce since 1995 but for which rates were not given. If GT&T wishes to be truthful they could advise that the matter of affordability was raised by them. In fact figures were produced to show that, apart from Cuba, Guyana enjoyed the lowest standard of living among countries quoted by them to support the level of increases sought. It was against this background, the need to ensure that GT&T got their 15% minimum rate of return and the need to keep the balance of payment in favour of Guyana, that the process of fixing the rates proceeded. Off-peak rates While the GT&T applied for approval of flat international tariffs for both night and day, the PUC approved rates for a peak period and two off-peak periods. This occurred because when it was realised that the rates would have to be increased appreciably to allow GT&T to get their 15% return because of the fall away of revenue from audiotext, every effort was made to alleviate the burden on consumers, and for that reason two off-peak periods offering discounts of 40% off the peak period were inserted in the process. In fact I am still to see the media pointing out that if the second off-peak period lasting from 10:00pm to 6:00am, is used to make international calls those would be at cheaper rates than the rates which existed in January of this year. This has been completely obscured in all the arguments put forward against the rates. And, certainly, when the time zones of a number of countries, or sections of countries, with which business is done are taken into consideration, business calls could also be made cheaper. Where does consumer interest end? Does it end with only the present consumers or the prospective ones as it is licenced to do? When one understands that more investments means more revenue to arrive at the 15% rate of return and possibly higher rates, then one would understand that the present investments should be used as efficiently as possible. Distribution of phones That brings me to the distribution of telephones in areas of the country where they proliferate. If Georgetown is taken as an example, residents of Hadfield Street, Bent Street and Durban Street (streets neighbouring the exchange), not to mention South Georgetown etc; do not have telephones and have been waiting for years for the service while business and some residents have multiple land lines. Nowhere else in the Caribbean are businesses and Ministers graced with so many direct lines. That arose, of course, from the ridiculously low rates attached to telephones and local services. I am confident that the businessmen who travel would support this observation. The provision regarding the possession of multiple telephones were not intended to be harsh, punitive or oppressive. They were intended to encourage proper management of the facility and a redistribution of the telephones available at present so that others, particularly residential consumers, who have been waiting in line for years would also enjoy the provision of telephone facilities. The hope is that businesses would, in time, use the PABX and the other communication devices available to them more, and that those residential users who have multiple lines would see the wisdom of giving up some of them to others. There has been some concern expressed about why temporary rates had to be fixed. You would be aware that consumers are now being asked to pay an 11% surcharge on the peak international rates. This had its genesis in the length of time it took the PUC to decide on rates after the filing which resulted from the devaluation of the Guyana dollar in 1991. Not only does this surcharge increase the effective rate paid, but it would remain with the consumers for about 12 years at the rate at which recovery is now being made. In addition GT&T has itself illegally imposed a more onerous surcharge on the consumers for losses it claimed to have incurred during the period November 1995 and January 1997 when Justice Carl Singh ruled against the reduced rates ordered by the PUC in October 1995. So as not to exacerbate this position, a decision had to be made on whether to complete all the investigations of GT&T necessary to set permanent rates before rates are fixed and, thereafter, ask the consumers to carry an added burden of paying a third surcharge if there were rate increases in the end, or whether temporary rates should be set until all the investigations are completed. It is my opinion that the PUC went for the latter course of action in the interest of the consumers. Positive developments It should also be pointed out that it was only the second time that rates were fixed after observing the procedure set out in the Sale Agreement and Section 33 of the PUC Act. The first time this happened was in October 1995. Before then no attempt was made, in my knowledge, to agree on a rate base or to establish a rate of return before fixing rates. It was also the first time, too, that agreement was reached (albeit tentatively) between the PUC and the GT&T on what items should constitute the rate base and what should be expunged from the expense statement. These are not only positive developments in the relationship between the PUC and the GT&T, but they recognise the need to follow the law in the rate-making process. There has been some criticism that the higher rates could have been phased in from earlier periods. Let me draw the readers' attention to the rates of return earned by the GT&T over the years before 1997 in answer to this question. With returns of 19%, 25%, 16%, 22%, 23% and 19% it would have certainly been unfair to the consumers to increase the rates while the GT&T enjoyed comfortable returns. It would also have defeated the purpose of using audiotext revenues to maximally subsidise the rates paid by the consumers. I believe it was with the consumers' interest at heart that the PUC went for the maximum subsidisation period knowing all the while that the audiotext business could not be guaranteed to stay forever because of its very nature and the unreliability which attended it. Let me conclude by saying that rates of return and telephone tariffs are expressed in figures not words. GT&T's filing is a public document, a copy of which could be had from the PUC. In addition, the PUC has set a hearing to deal with complaints about the temporary rates fixed on February 26, 1998. I am hereby taking the liberty of inviting interested persons and organisation to submit memoranda to the PUC suggesting what the rates should be before and at the hearing. Yours faithfully, 
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