ComReg sets out return-on-investment rate for Eircom

23 May 2008

The Commission for Communications Regulation (ComReg) has suggested a new rate at which Eircom can get a return on investment on earnings from its fixed-line business.

In a paper, ComReg said it is necessary to ensure the incumbent does not obtain too high a price – at the expense of the consumer – or too low a price – at the expense of competition – if it undercuts its costs, compromises investment and impacts the long-term sustainability of the industry.

ComReg has set the new cost of capital that Eircom should be allowed at 10.21pc.

Cost of capital is the return on investment that Eircom is allowed to earn on its fixed-line business, using a process known as Weighted Average Cost of Capital.

It says that setting the rate at 10.21pc strikes the right balance.

ComReg said it stress-tested potential return on investment for Eircom across a range of 7.77pc to 11.08pc and found that the mid-point of the range at 9.43pc would constitute an adequate return on investment for Eircom.

Because of volatility in financial markets and how this might affect Eircom’s future performance, ComReg conducted further analysis and decided that an increased rate of 10.21pc would be both “prudent and appropriate”.

In terms of future gains from investment in next-generation networks, ComReg said it considered applying split rate return on investment triggers.

However, based on responses from industry and in the absence of detailed plans from Eircom, the regulator decided to stick with the 10.21pc rate.

ComReg said it may revise this figure if it gets further information.

By John Kennedy