c

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Oc Main focus of the case to determine the fair ͚Rate of Return͛ for the capital between ͛64 & ͛74 &
͛75 onwards.
Oc Êomsat believes 12% from ͛64 to ͛74 & 15% for ͛75 onwards.
Oc ‘ÊÊ believes 7% from ͛64 to ͛71 and 8.33% for ͛72, 8.70% for ͛73, 9.15% for ͛74 & 9.42% for ͛75.
Oc Êomsat͛s capital is entirely made up of equity. (100% equity financing).
Oc uew company with no prior track record and none for the type of business (Satellite
communication) so could not raise any debt financing.
Oc £dvancements in technology and deployment strategy below:
è
  
  
1965 ͚Iu
S£ I͛ launched as 1st commercial satellite, 2 years ahead of schedule
due to external advances in technology.
1966 ͚Iu
S£ II͛ launched, 2 in synch over Pacific & 1 over £tlantic.
nhanced
communication capabilities of the Satellite over ͚Iu
S£ I͛.
1968-69 ͚Iu
S£ III͛ enters regular commercial service with 5 times the power
capabilities of ͚Iu
S£ II͛. 5 satellites placed in orbit.
1972 £ spare satellite launched over every ocean for backup purposes.
1973 ͚Iu
S£ IV͛ launched into service. 5 satellites provide  £ global
coverage. Power increased from ͚Iu
S£ III͛ 5 fold.
1975 ͚Iu
S£ IV-£͛ launched, twice the capacity of ͚Iu
S£ IV͛.

Oc ‘ewer product launch failures than anticipated in early years.

Oc Satellites lasted their full design lives. nly 1 instance of failure which prompted backup satellite
program in ͛72.
Oc ·y ͛75 there was a backup satellite for all parts of the globe.
Oc Î
   

  


 
 
 


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c
Oc PV of satellite program estimated to be around $190-$230million in ͛64.
Oc üalf of company stock sold to 163 U.S. communication carriers & other half to public @$20 a
share.
Oc üectic trading pushed up share price to $27 a share.
 Oc nly equity that was needed at the time was used the rest was placed in marketable securities
to ensure the equity did not lose value over time. (Reducing risk of invested capital for
shareholders).
Oc Êomsat could only lease half of the capacity as the other half was the responsibility of a foreign
entity (Most likely Dept. of Defense).
Oc In ͛65 ½ circuit leases accounted for 20% of revenues, this went up to 90% by ͛71.
Oc ‘irst Decade elephone services accounted for majority of revenue.
Oc In the ‘irst decade data transmission and television revenues very small but growing.
Oc Most services offered by Êomsat were also offered by cable operator competitors.
Oc Êompetitors used the facilities of Êomsat during outages. herefore competitors were also
Êomsat͛s customers.
Oc Management believed the high start up cost combined with low revenues justified it charging
higher rates than its competitors.
Oc his prompted the management to adopt a market approach to pricing. ( hey were a monopoly
so could charge what they liked as long as they justified the price).
Oc hey added nonsensical premiums such as long distance charges, regardless of the fact that
there costs were not affected by the distance of the telephone call.
Oc hese premiums were tolerated because of good quality service with regards to telephone calls
and because they were in a monopoly position with regards to television.

c
c
Oc Êommission claimed the general authority to order refunds.
Oc Determination of cost of capital over past 10 years has huge implications on future regulatory
decisions.
Oc Prior to this proceeding on a similar proceeding on ͚£ & ͛ the ‘ÊÊ gave its guiding principles of
RoR (Rate of Return).
Oc d

 



   


  
 
 
  
 
 

 
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Oc In another case against ͚üope uatural Gas company͛
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Êomsat no more risky than £ & (probably even Êomsat has unique risks so it cannot be compared
less) in ͛64 & certainly less risky in ͛74. to £ & . hese risks were not present in the rest
of the telecommunication industry.
Government mandate & assistance provided which £ & was based in the domestic industry while
reduced the risk in the teething stage. Êomsat͛s operated internationally & therefore was
more risky.
Risks were fully disclosed at the start to investors.
Êomsat͛s financial policies were far more
conservative. (uo debt taken)
Êomsat exaggerated the risks Êomsat͛s witnesses said company had technology
risk as they were using untried technology. aunch
and product life uncertainties.
echnological evolution & track record
demonstrated that risk assigned was unfounded.
nly risks which can be foreseen can be entitled to
consideration in formulation of appropriate risk
premium.
Êomsat͛s prospectus Œ   
 made it £s there was no prior record of such an activity
very clear that although there was no government before ͛64 the shareholders had no way to judge
guarantee, there was strong government mandate how risky there investment was.
assuring the investors.
£lthough the demand risk had decreased in ͛72,
initially there was significant risk related to the
telecommunication industry.
Demand risk was negligible based on the historic Dr ·righam asserted that Êomsat could not
growth of the elecommunication industry & the forecast demand in the telecommunications
continued rapid growth. industry.
Presented growth rate between ͛64 & ͛72 of
telephone message services showing a growth of
19% to 35%.
Demand risk no greater than £ &
uominal risk in ͛64 and now reduced to zero. Demand risks from planned & existing cable
systems, high frequency radio & domestic satellite.
In ͛64 and that strong national policy stating that
satellite would be sharing in the future of
telecommunications. hey quoted many previous
‘ÊÊ rulings which showed the ‘ÊÊ desire to have &
other telephone services providers. his served to
assure Êomsat of their guaranteed market share.
£gain repeated strong national policy which totally Regulatory uncertainty more so than already
rebutted Êomsat͛s argument. established regulated enterprises.
£nd whenever certain benefits have been blocked
they have been allowed through in another form.
£lso investment community expected regulatory
bodies to curtail RoR between 8-10% in line with
common carrier basis.
State Department was backing Êomsat so Substantial Political & International risk.
negligible risk.

cc
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100% equity represented a higher degree of Êould not have raised debt before ͛72. £s not
financial stability. £ & was 50% leveraged & the considered a mature business before then.
telco industry average was between 40-49%.
Whereas utilities was around 61%.
Debt capital cheaper than
quity capital.
xcessive £greed that in the long run it would be desirable
managerial conservatism punishing the ratepayers. to include some debt in the capital structure.
45% debt should be imputed on Êomsat. 45% will
not create a considerable financial risk. @45%
Êomsat would easily get ££ rating.
Western Union got lots of debt without govt.
backing or monopoly power within the first few
years of operations while competing international
carriers.
‘ÊÊ Decided to raise all capital at beginning because of
R = (Rs)r +
where favorable marketing conditions.
R = otal Revenue (i.e. revenue requirement)
Rs = ‘irms rate base (capital employed in rendering Investors deserved to earn return on entire
the service) amount they invested not just the operating.
r = £uthorized or fair rate of return ( i.e. cost of
capital)

= perating
xpenses