Financial analyst, Ramon Gaskin, has advised the Public Utilities Commission (PUC) and President Bharrat Jagdeo to reject the phone company's request for massive increases in rates and to order a comprehensive audit of the company's operation to secure reliable data on its operations.

Based on a preliminary perusal of GT&T's request for rate increases, Gaskin says he has has found "extraneous" issues in the balance sheet which he said should not be allowed for rate making and which conflict with the agreement the company signed with the government in 1991.

According to Gaskin's calculations, if the extraneous items are deleted and assuming that the numbers provided by the firm are verified, GT&T would only require $1.7 billion in increased revenues and not the whopping $5.5 billion it is claiming. The company has proposed to increase local rates within exchanges by as much as 1,900%, but Gaskin points out that this is economically indefensible and is equivalent to a 33% hike in income and Pay As You Earn taxes.

There would be no acceptable outcome of the rate filing unless there is an independent verification of the numbers being provided by GT&T, Gaskin said. He noted that a simple equation yields the guaranteed return of 15% for GT&T i.e. gross required operating revenues less allowable expenses equals not less than 15% of rate base.

However, the former financial adviser has a difficulty with GT&T's treatment of and comprehension of the terms allowable operating expenses, depreciation and the question of whether income taxes (tax on profits) constitute an expense of the company for tariff setting purposes. He also has a difficulty with the exclusion of cellular services from the rate filing, the inclusion of the six per cent advisory fees GT&T pays its parent company, and the use of accelerated depreciation of assets which leads to higher gross revenue requirements.

Gaskin points out that the company continues to treat income taxes (tax on profits) as some kind of expense for regulatory purposes but says it is not a normal operating expense and profit taxes are always calculable on net income. He points out that there is nothing in GT&T's agreement to allow it to treat taxes on profits as an operating expense for regulatory purposes. He said this expense calculated by GT&T should be ignored by the PUC.

Addressing the contentious issue of the rate base for GT&T, Gaskin said the minimum rate of return of 15% is calculated on the capital dedicated to public use. Section 6.11 of the company's agreement says "expression capital dedicated to telecommunications business of GT&T means the capital assets of GT&T." He pointed out that the latest balance sheet of the company values its property, plant and equipment at cost or valuation less accumulated depreciation as $16.8 billion for 2000 and projects it at $16.9 billion last year.

"Anything else [in the capital base] is extraneous and contrary to the Act and the agreement and is therefore not allowable for rate making purposes," Gaskin told the PUC and Jagdeo. GT&T has included material, inventory, stock, receivables and payables among others thing in its calculation. Gaskin argues that this means that the rate base formulation accompanying GT&T's application for rate increases is flawed and should not be relied upon.

He has a difficulty with the exclusion of the cellular operations to form the rate base for the company, pointing out that cellular subscribers contribute in an important way to the international traffic and the exclusion of this service is unjustifiable in this regard. He argues that for cellular rates, the services need to be separated, but because cellular service impacts on international traffic in a significant manner, it cannot be excluded from this rate hearing. He noted that there are 35,000 cellular phones in use but only 21,000 business lines reinforcing his point for the need to include cellular services in this hearing.

Combining the cellular and wireline operations, Gaskin arrives at gross revenues of $9.6 billion for 2002 and points to the company seeking revenues of $15.2 billion in revenues from the two services. Net incomes for the two services are negative $240 million for wireline operations and positive $485 million for cellular, realising net profit of $244 million.

Gaskin adds back the advisory fees of $580 million and realises a net profit of $824 million. However, the required return for the firm is 15% of $16.9 billion or $2.5 billion. This yields a deficit in revenue requirement of $1.7 billion and not $5.5 billion as GT&T is seeking if the figures are correct.

The former tax agent said that excluding advisory fees and international long distance expense, the company's expenses are projected to increase by $1 billion this year and this sharp increase needs to be carefully investigated since they are crucial in the final determination of rates.

The private consultant said GT&T in its quest for higher rates is seeking to penalise internet users and to dampen what is a versatile educational and informational tool. He urged the PUC to disregard the proposal to tax internet users at a rate of $4 per minute.

Gaskin noted that GT&T's parent company ATN invested US$16.5 million for 80% of that company and at the end of 2000 had made more than $16.7 billion in profits and paid $6 billion in advisory fees to ATN.

During the last 11 years, ATN, Gaskin said, received $3.3 billion in dividends while the government got $837 million.

He feels that GT&T is not accurate when it says its viability would be threatened if it is not granted the rate increases, noting that the firm has $9 billion in current assets, including $4 billion in cash and a huge net worth.