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Chorus warns of more earnings pain from latest review on copper lines

Chorus faces another hit to its earnings as the regulator looks into the price of another component in the embattled telecommunications network operator's copper lines.

The Commerce Commission has started a review for the price list for Chorus's unbundled copper low frequency service (UCLFS), which lets telecommunications companies provide voice services using the low frequency band on the copper local loop network.

The Telecommunications Act requires the UCLFS price to be the same as the unbundled copper local loop (UCLL) price, and the regulator is of the view the change should be backdated to Dec. 3 last year, when the final UCLL price was set. UCLL lets telecommunications companies use the copper network between an exchange and an end-customer's premises to offer their own voice and broadband services.

Chorus estimates the change will trim between $5 million to $6 million from its annual earnings before interest, tax, depreciation and amortisation. In all, Chorus has warned its annual EBITDA may be cut by up to $148 million from a raft of price regulations to its copper network, about a quarter of its $654 million annual earnings in the 2013 financial year.

"This is yet another example of the regulatory framework delivering prices that are disconnected from real costs," Chorus chief executive Mark Ratcliffe said in a statement. "These costs have not been accounted for in the proposed charges and the draft prices do not reflect those real costs."

Shares in Chorus gained 0.4 percent to $1.32 today, having plunged 61 percent since the regulator flagged a steep cut to the regulated prices of its unbundled bitstream access service on the copper lines.

The commission set the UCLFS charges in November 2011, the month Chorus was officially carved out of Telecom, saying at the time it would update the connection and transfer charges for the service once the UCLL pricing review was complete.

In the UCLL determination last year, the regulator affirmed its view that a single price for the services was appropriate.

Separately, Chorus chair Sue Sheldon wrote to shareholders updating them about the regulatory uncertainty hanging over the company, saying it couldn't finalise its medium term strategy while in negotiations with Crown Fibre Holdings, with whom it holds the contract for fibre network build.

"At this stage it is likely Chorus will need to cut all discretionary activity, including growth-related capital investment, re-price most of its commercial services, and generally manage for cash until the commission's final price review outcomes are resolved," Sheldon said. "We are also continuing to assess capital management options that might be appropriate."

(BusinessDesk)

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Comments and questions
15

In the end Chorus will own both the copper network and the UFB
It will be a total monoply and a cash cow pricing on replacement cost for both networks.
I pity the consumer in a couple of years

Being a monopoly, it will be regulated by ComCom, which will set the price Chorus can charge, so it will NOT be a cash cow!

Why not put it straight forward like: "Chorus, you are forbidden to earn any profit for your investment because you are monopoly!!!"

""At this stage it is likely Chorus will need to cut all discretionary activity."

Ain't nobody going to be living in Gigatown.

VDSL or UFB for OneTrack. Doesnt look like it.

Is Chorus NZ's worst managed and worst-governed company?

Methinks they take both prizes, exceeding even the old finance companies, the old Air NZ under private ownership, Feltex, the old Telecom - jeez the list of contenders goes on and on.

Not sure why Chorus shareholders are not demanding change in directors and senior management, who cannot run a company - a regulated monopoly! - for the benefit of shareholders.

How does the management of Chorus have anything to do with what the Commerce Commission dictates what Chorus is allowed to be paid, without any regard to the business impact?

What the ComCom have done to Chorus is like taking Dan Carter, chopping off his legs, then telling him he still has to kick the ball over the goal-post, just like he did before, and he's not allowed any help.

No it really isn't.

It's like Dan Carter arguing with the ref over the rules and everyone else telling him to get on and just play the game.

These services are all related because Chorus is a monopoly provider. Nobody should be surprised that the regulator thinks Chorus is charging too much for these services.

The scenario should like this:
The ref and everyone else tell Dan Carter - he can only earn minimum wage from now on for playing Rugby because all the effort he spent on training etc to become the top player has already been paid off. Therefore, he earns too much now. The ref and everyone else also tell Dan Carter to spend more effort/money on learning golf and become the top 1 player, but without any help other then the minimum wage he is on now.
The worst part of all that is if Dan Carter wants to argue with the ref and everyone else, he is accused of charging Kiwis 'Rugby Tax', or call it 'Dan Carter tax'

What the regulator thinks and what is an accurate reflection of reality and/or correct interpretation of the intention of legislation may well be poles apart and now subject to the pricing review and the courts decision. There are 2 diametrically opposed perspectives to this situation. It will be interesting to see where common ground (if any) can be found.

People are surpirsed because finally we have people in position that are willing to stand up and make some hard calls. In the past people like Telecom / Chorus just did not care. Same thing has happend with the likes of the SFO and FMA - not too many people complaining that they are playihng tough - other than the ones who benefited from slack enforcement.

I see in another media report the Chairman said NZ reputation has been damanged with investors - yes it probably has, less because of the regulation, but more because of the incompetence of the management and directors.

In reply to Anonomous #3 - worst company, unfrotunately we have a long sorry list of companies that could be contenders.

Brislen and Chetwin want corporate social welfare from Chorus. They want UFB to be subsidized by the Chorus shareholders and for those shareholders to get no return on their investment. That's what they want and Com Com is giving it to them biased individual that he is. What if Chorus choose to stick to the legal obligations and provide service at the speed required for the Com Com set price. Bet Brislen and Chetwin would jump up and down then. OK for Com Com to stick to the law then OK for Chorus to do likewise. And yes I am a Chorus shareholder and proud to have put my money into the company rather than like Brislen Chetwin etal sit on the side lines doing nothing to provide NZers with a first world service that they don't deserve to get.

In a Kiwi Saver fund that's not a cash only or offshore invested fund. Then guess what folks. You too are a Chorus shareholder who has taken a bath courtesy of Com Com Brislen Chetwin et al. Because your fund manager will have some of your hard earned kiwi saver dollars in Chorus shares. Bet you never thought of that know did you.

I thought the ComCom, TUANZ and telco industry were all working towards a better broadband market for NZ's?! All I've seen to date is regulations which destroy company value, the likes of Vodafone financing lobby groups like TUANZ to increase their own retail margins and factless headline grabbing PR campaigns like 'AXE the TAX'. All we're left with is a stand-off which puts the new fibre network at risk and sees a company like Chorus prepared to work to order. Awesome Tui's billboard opportunity here: "Delivering Kiwi's better broadband, Yeah right!"

Its a monopoly for goodness sake! Of course its going to be regulated. The basis for that regulation was set out in the Act which this government re-wrote two years ago with input from Chorus/old Telecom. If analysts and Chorus management are surprised then they need look no further than themselves. If Chorus think that consumers should now pay a premium to bail Chorus Board and management out of poor decisions then they should not be running the company. Chorus opted to bid for the UFB work, Chorus knew about the law and regulation more than 2 years ago. Chorus need to just get on with business and meet contractual obligations - or table real evidence that they genuinely can't and go into receivership. That's the nature of markets.