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Commerce Commission delays Chorus copper pricing D-Day

Phone companies and ISPs have been on tenterhooks waiting for a regulatory determination that will influence the price of everybody's home line, and broadband - but will have to wait a little longer.

The Commerce Commission is delaying its final decision on the price Chorus can charge for its copper lines to coincide with a draft decision on wholsale broadband pricing.

The decisions were initially planned for Friday November 23 and Friday November 30 November respectively. Both will now be announced on Monday December 3.

The Commission has decided to combine the announcements because the new price for the copper lines (unbundled copper local loop or UCLL - essentially, the wholesale price Chorus charges a phone company or ISP for a line) has a direct impact on the draft price for the unbundled bitstream access (UBA) or wholesale broadband service.

Why it's so important
In a draft copper line determination, the Commission has set the average wholesale price Chorus can charge at $19.75 a month – a $5 trim that caught many on the hop and enraged some Chorus investors.

Chorus has argued that lowering the price it can charge for a copper line would (as well as diminishing it revenue in our still copper-heavy world) hinder fibre uptake.

"This is possibly the single most important issue before the industry right now," Telecommunications Users Assocaition (Tuanz) head Paul Brislen said in a recent Q&A with NBR readers.

"Chorus argues that we should raise the price of copper lines so as to avoid the situation where customers decline to move to fibre because they've got it good in the Old World.

"I would argue the opposite - copper isn't a competitor to fibre, it's the 'gateway drug' that will lead users  to fibre.

"At the moment I get about 12Mbit/s down and less than 1Mbit/s up. That's fine (the upload speed rips my shorts, but hey I can live with it).

"My kids are using more bandwidth every day - in the next five years I'd expect us to be connecting to the net at the same time as each other more often, and that'll mean my 12Mbit/s becomes our 12Mbit/s and that'll suck.

"I'm not getting fibre at least until 2015 (probably later I suspect) which means I'll want faster copper services in the short term. For that I need a competitive ISP market in the copper world and for that we need copper prices to continue trending down.

"We've really only had competition in New Zealand landline telcos since the introduction of unbundling. Before that we saw the same products and services being resold by all the wholesale customers - it was a resale market at best.

"Now we actually have competition, we have differentiation and we have a degree of dynamism. I want that to continue because it's these guys not Chorus who will provide us with the products and services that encourage us all to eventually move to fibre.

"I'll settle for 30Mbit/s down and 10Mbit/s up on copper next year and when fibre arrives I'll have a reason to move up. At the moment there's no reason."

Chorus [NZX:CNU] closed flat at $3.23.


Chorus says copper lines regulation threatens to derail fibre
Telecommunications network operator Chorus says copper lines regulation threatens to derail investment in building a national fibre network by undercutting the new technology.

Chief executive Mark Ratcliffe told shareholders in Wellington the decision to split Chorus out of Telecom as a standalone entity was on the idea that "fibre pricing was set so as to be attractive in comparison to the copper pricing" and that regulation could undermine that goal.

"Investors continually said they don't understand the rationale for pricing on copper-based services potentially being reduced at the same time that taxpayers are supporting a government-backed generational change to fibre," Ratcliffe says in speech notes published on the stock exchange.

"They are clear that reducing the price of copper services will inevitably slow the uptake of fibre."

Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion-dollar subsidy to build a nationwide fibre network and rural broadband system.

Some 80% of the network company's revenue is still derived from the ageing copper network and is subject to a pricing review by the Commerce Commission.

"It is crucial that any regulatory decisions reflect the generational investment that we are making and support an efficient industry transition," Mr Ratcliffe says.

"The commission's final UCLL (unbundled copper local loop) decision due late next month, followed by a draft decision on broadband access pricing shortly after, will be the clearest indications yet on whether fibre is indeed to be the industry's focus." 

Chorus reported a profit of $102 million, or 26 cents per share, in the seven months ended June 30, on sales of $613 million in its maiden result as a standalone company.

Chairwoman Sue Sheldon told shareholders the looming regulation means the board has not been able to firm up guidance on dividend payments beyond the 25.5 cents per share return flagged for 2013.

"Because Chorus is a wholesale provider, there is nowhere for a revenue shortfall to be absorbed, if Commerce Commission price reviews mean that Chorus does not recover its costs," she says.

"Without the regulatory uncertainty, the board expects Chorus would have been able to announce a dividend policy consistent with modest long-term dividend growth, subject to the standard caveat of there being no material adverse change in circumstances or operating outlook." 

Ms Sheldon says the board is considering a dividend reinvestment plan might apply from the 2013 dividend and beyond.

Chorus shares were unchanged at $3.36 in trading today and have gained 8.3% this year. The stock is rated an average "outperform" based on 10 analyst recommendations compiled by Reuters, with a media target price of $3.45.

Comments and questions
7

What should be done is to mandate a fibre connection (at no cost to the home owner) when fibre has passed the property to enable quick uptake of services. This will quickly eliminate the copper network and reduce the duplication. This is being done in Aus.

What you propose is logical. The forums are full of reports of especially the youth market (usually renters) getting stupid quotes and contracts offered which no one in their right mind will take up. I dont expect any 'associate' of Telecom to actually make any good decision on near anything. They are followers not pioneers.

The problem is a legislative one: they will need to amend the regulations for Chorus and the other UFB networks to madate it. It will also improve network reliability. Actually, the biggest challenge will be to get UFB in apartments as all owners have to agree en-masse for installation into every apt in one hit.

We cannot have Chorus and Crown Fibre set up a regime that bumps up the price of copper in order to force customers to move to fibre.

Give customers a reason to move to fibre, don't drive them there with artifiically high pricing in copper and by destroying what competition there is in the broadband market today.

This is just a sop to a complete failure of due diligence. Chorus keeps bleating on about what it expectations and hopes were about how the market would develop. It seem to think it's outrageous that consumers should keep buying copper bb when it wants them all to switch to fibre. Well - bad luck. We'll siwtch when there is a case for it - we won't switch just to help you make your numbers and enrich a small set of investors.

Remember 25% of New Zealanders are outside the UFB area (including myself). Would they raise the price of copper for us knowing we cannot connect up to fibre?! I would sign up for fibre even if it costed a little more, out here copper lines are hopeless because of the huge distances. It's the rural places that actually "need" fibre.

Really odd that Chorus talk about "looming regulation". The Commission is using the same regulation that has always been there - Chorus just doesn't like the answer it might get.