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News & insights

Date: June 2017 | Client: Ofcom | Sector: Telecoms | Communications, media & payment systems | Expertise: Finance & transaction advisory

Expert advice on cost of capital issues in the telecoms sector

The challenges ahead

We were asked by Ofcom, the telecoms regulator, to provide expert advice, review and analytical/ research support for work relating to the cost of capital and corporate finance in the context of economic regulation. At the time, Ofcom was undertaking a number of projects that required estimating the weighted average cost of capital (WACC) and considering other corporate finance issues such as discount rates and interest rates. 

The CEPA team provided advice on: 

  • the WACC to use in charge control reviews e.g. leased lines charge control on BT;
  • the discount rate to use in calculating annual licence fees for mobile spectrum;
  • the appropriate interest rate to apply in resolving disputes about overcharging between communication providers; and
  • WACC and corporate finance matters on an ad-hoc basis.

Valuable advice

We provided advice that spanned across a number of workstreams: 

  • Interest rate determinations for Ethernet (2015) – reviewing the interest rate charge to be applied in the case of overcharging for the Ethernet service, including submissions from stakeholders, statements from Ofcom and support in developing the regulator’s conclusions. 
  • Annual Licence Fees (ALF) for mobile spectrum (2015) – this included research and analysis around the appropriate discount rate to use in the decision around mobile spectrum fees. 
  • Leased Lines Charge Control (LLCC) determination (2015-16) – review and analyse the approach proposed by Ofcom in setting the WACC for BT, in particular the disaggregation of beta between different parts of BT’s business (e.g. Openreach copper access and the rest of BT). This included a review of Ofcom’s in-house analysis and review of Ofcom’s draft statement. 
  • LLU/ WLR charge controls (2016-17) – supporting Ofcom in setting the cost of capital, in a similar sense to the work setting out for the LLCC determination set out above. 

CEPA's input and deliverables consisted of analytical support on technical issues, short briefing notes on a number of topics and reviewing Ofcom documents prior to publication. 

To find out more, please contact our experts listed below.

Mark Cockburn
Managing Partner United Kingdom