Following the UKE’s announcement yesterday requiring TPSA to offer a 47% WLR discount to its competitors, TPSA has responded by announcing that it will appeal the decision.
TPSA reiterates that the discount rate should be based on its costs, which are due to be audited and published in mid-August. TPSA contends that the 47% discount rate does not take into consideration their network infrastructure costs and investments. Although the UKE claims that the discount rate is in-line with EU benchmark, according to TPSA, it is much steeper than EU average of just over 10%, with the lowest rate at 21% discount to retail line prices.
Current average retail line rental stands at PLN 40, hence a 47% wholesale discount would imply that TPSA will have to lease-out lines at PLN 21.2, or EUR 5.3, versus our estimate EUR xx in western Europe.
Our view:
We do not expect material trading impact from this development. We believe the issue will likely drag on for a few months. Although we expect TPSA to contest the UKE’s decision every step of the way, the UKE has signed the 47% discount rate to be enforced in two months’ time. Hence, although we believe that the discount rate will be revised downwards closer to TPSA’s costs, it will have to implement the 47% discount by mid-September, and any changes from their appeal will then have to be applied retroactively.
Note, that TPSA’s guidance for 2006 incorporates deregulation (rate reductions in-line with their costs) as of the beginning of 2006, and therefore the delays in regulatory developments have given them a headstart to ensure that they achieve their 1-1.5% revenue decline guidance for 2006.