Policy makers are considering a reduction in the profit percentage that rate of return carriers are allowed to earn, a financial analyst who specializes in rural telephone companies said December 17.
“One of the talking points that has been going around Washington on the regulatory front . . . has been a potential reduction in the rate of return,” said Chris King, equity research analyst for Stifel Nicolaus in a conference call to discuss 2009 trends and predictions for 2010. The rate of return percentage is currently set at just over 14%.
Noting that an abrupt change could have a significant negative effect on rural carrier revenue streams and cash flows, King said, “It comes down to whether there is a glide path and if modifications are made over a period of time to reduce that exposure.”
Policy makers could be emboldened to decrease the rate of return percentage for rural carriers because they do not expect strong opposition. King noted that two of the larger rural local exchange carriers (RLECs)—CenturyLink and Frontier—have transitioned away from operating as rate-of-return carriers, instead operating 100% or close to 100% as price cap carriers.
Previously carriers such as CenturyLink and Frontier could “gin up support on Capitol Hill” and smaller telcos could benefit from their actions, said King. Now, he said, there could be “bifurcation in terms of what RLECs are looking for from a regulatory standpoint.”
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Categories: Policy
