Communication Satellite Corporation

Essay by khaitan_sunilUniversity, Master'sB, July 2005

download word file, 4 pages 3.0

Downloaded 63 times

Communications Satellite Corporation - Judgment

The following judgment on the appropriate economic regulations of the Communications Satellite Corporation (Comsat) has been arrived at after considering the due deliberations presented before the Commissioners by the two parties; namely Comsat and FCC.

Central to this judgment is the premise that "the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks." Also, the fair rate of return should be actually that required (or expected) by a firm's investors. The Commissioners are also of the view that the interests of the ratepayers should be safeguarded. The ratepayers should not be penalized for any change in circumstances (e.g. excess liquid cash due to change of technological needs) resulting in inefficiency at Comsat. Such risk should be borne by the Shareholders alone. The judgment covers the fair rate of return awarded to Comsat (commensurate to its risks), the rate base and the price structure to be followed by Comsat.

At the onset, we concur with Comsat's argument that their risk profile cannot be compared to that of AT&T due to the following:

1. Even though AT&T is in the same business of providing communication channels, yet the equipment used is vastly different i.e. satellites versus data cables.

2. AT&T is a well-established utility while Comsat is a new venture. Their risk profiles are not similar.

3. Considering the testimony of Dr. Myers, the beta found for AT&T and Comsat are different thus implying that the investors view the inherent risk of the companies differently.

Next, we look into the various risk factors discussed before us in order to reasonably estimate the risk inherent in Comsat.

Operating Risks

1. Technological Risk: The trial staff established low technological risk by considering in hindsight the fact that Comsat's evolution was...