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Key hints at Chorus contract renegotiation

Prime Minister John Key appears to be holding the door open to renegotiating the price at which Chorus undertakes its part of the national roll-out of fibre-optic cable under the government's ultra-fast broadband project.

Speaking after Cabinet, Key told journalists the government had "a number of options" for dealing with the billion dollar hole blown in Chorus's earnings between now and 2020 by the Commerce Commission's decision to far larger price cuts for existing broadband services than expected.

However, slowing down the UFB roll-out is not an option, Key said, and nor is a capital injection of taxpayer's funds to shore up Chorus's balance sheet.

Asked whether the contract price could be renegotiated or a greater role for the government's implementation agency, Crown Fibre Holdings, Key said: "There's a range of potential options there. I'm going to go through which the best ones are and which ones aren't. It's all about us seeing what financial position they are in to actually honour their contract.

"But given they were proposing to use what would have been much more significant earnings than in theory they are going to get post-December 2014 to fund UFB, that would indicate that's a problem at the moment."

He would not be drawn on what other options exist, but appeared lukewarm on suggestions the government's Crown Fibre Holdings might pick up a greater share of the job, while leaving open the possibility of a contract renegotiation with Chorus.

Key also claimed the government had known for months that it wouldn't be able to force legislation through Parliament over-ruling the Commerce Commission's decisions on cutting the price of access to unbundled bit-stream access (UBA) for broadband services based on existing copper wire technology.

"You'd have to be blind Freddy not to be able to see that you've got to get a whole bunch of people voting for something which would be portrayed as voting for higher internet interconnection charges."

The government was now waiting on a report from Ernst & Young Australia, due this Thursday, to decide a way forward.

"From the government's point of view, we need to see that report and see what our options are moving forward. All I can tell you is we are committed to the UFB rollout and we need to find a way through that," he said.

The government's escape clause for paying more for a UFB roll-out appears to be to blame the Commerce Commission for making a determination on UBA prices that no party had foreseen.

"All I can tell you is when Chorus signed the contract with CFH, its share price didn't dramatically halve, did it? Everybody knew there was regulatory risk. No analyst, the company sat there and credibly thought such a direct impact on their earnings could take place.

"One assumes if they had, the directors wouldn't have allowed the company to sign the contract, that the analysts would have put out negative outlooks, the rating agencies would have done something about them. No one anticipated the magnitude of the fall," said Key.

While Chorus was launching a judicial review of the commission's pricing decision, that would be a "very long-running process" and would not meet the government's intention to maintain the intended pace on its flagship policy to bring world-class internet speeds to New Zealanders sooner rather than later.


Comments and questions

This is a manufactured crisis. Current share price reflects hysteria, not the reality that Chorus is a utility with infrastructure that simply cannot be replaced. (Thanks RMA) Most of that infrastructure has decades left of use in it. Existing Chorus fibre connecting thousands of exchanges and cabinets could not be replaced for the company's current valuation and the country can't survive without it.

I was never interested in owning Chorus but at the fire sale prices on offer this week I took on a fair amount of shares.

You're not worried that even the most optimistic Chorus boosters see its 24c/share dividend scaled back or cancelled over the next two years?

The 24c/share forecast dividend was in no way sustainable given the level of capital investment required for UFB. I would surmise that kiwibrew intends to make his capital gain on the rise of the Chorus share price on an inevitable Govt bailout in 2014 rather than through dividends. CU4EVA!

So we are going to have another (business) welfare beneficiary. Set Paula Bennett on to them....

Perhaps suggesting a blank cheque from NZ Taxpayers in the pipeline for Chorus, being the NZ monopoly company.....

Strange how in 87 I had shares in companies that slipped away yet the government that champions the superiority of the free market is quite willing to bung some taxpayer funds or equivalent in easing the pain of a tough contract.

What market are you and Tricyclist talking about in relation to Chorus when it the only supplier of copper and eventually of UFB in the areas where it operates? The price Chorus is allowed to charge customers is set by a government agency, not a market! And if the price is set unreasonably low after Chorus has signed the UFB contract, then either the government, the cause of Chorus' predicament, increases the subsidy for the UFB rollout or the whole idea of UFB will be in limbo until David Cunliffe sets up his KiwiFibre.

You must be thinking of another government. This one is centre-left at best. Not much free market here. The problem is the alternatives are even further left.

See? No impediment to Chorus, with the CC's ruling. Heaps of ways for the Govt. to circumvent it.

Good bye Johnny,, Chorus and their evil little brother in this Visionstream Australia should never had control over this in the first place you were warned 4 years ago ,, now the 900 techs that lost their jobs 4 years ago can sit back and watch some pay back.

The comment from the Commerce Commission that they set a price high enough not to deter investment in the fibre network (which, as he says, they are required to do by law in the Telecommunications Act), shows a huge disconnect between the Commerce Commission and the real world.

The price the comcom have set means most people who invested in the fibre network have lost half their money and now also their dividends.

And the Commissioner says the price he set won't deter investment. Planet earth calling the telco commissioner - anyone there.?

John, yes investors may have lost 50% of their investment but that does not make the ComCom wrong. The previous valuation of Chorus may have been unreasonable. The price (not saying it is) now might be right.

The ComCom job was not to justify the market value of Chorus. For everyone selling shares in Chorus there is a buyer so people are still willing to take the risk - at a much lower and maybe sustainable value.

I think if Chorus went out to raise capital they would secure it - might be at a discount to the current price but their would be investors - ComCom effectively can underwrite their returns through price setting.

Remember Chorus is still making some money so has some value and i am sure with the right management team they can resturcture the business to meet the new demands.

I believe Kiwibrew has correctly assessed the situation

So, JK not interested in capital injection but happy to consider re-contracting. That is disappointing. If there is going to be a bailout of any description they should at least share in the upside and become a long shareholder a la AirNZ

A bit rough on the companies such as Vector and the other lines companies that bid for the UFB contracts. Chorus undercuts them (fair enough, it was a competitive process) but then the Government decides to increase the price being paid, possibly to a higher figure than the others offered in the first place. Is someone going to determine whether bidders other than Chorus could have done the job for a lesser price than what Chorus will ultimately receive?

Chorus entered into a tendering process along with a number or other parties. All were aware of the change from Retail Minus to Cost Plus Pricing determination. All could see (apart from Chorus) that the end of price gouging had come, the astute predicted to within cents what the determination would be. All were aware of the three year holiday Chorus was being given to adjust its position. Incompetent management and poorly advised shareholders should not be bailed out.

The government is trying to give Kiwis a faster world-class internet - the kind most who don't travel overseas have never experienced. This will make businesses, universities, retail etc. way more efficient and allow Kiwi business to compete better globally. This is essentially a public good as the private sector never had the incentive to build it given the small 4M pop. (or they would have already). The mechanism for doing this was through a private-public partnership. Now part of the arrangement (offering higher copper prices to offset the costs of building infrastructure) has been undermined by ComCom, putting something that would benefit the country at risk. The government is trying to patch things up. Not sure why so many Kiwis want to prevent this. Would rather save a penny now and remain in the 20th C than make a dollar later and join the 21st C.

As a previous comment says, the ComCom rules were set before Chorus won the bid.

The change was expected to be so great that the government introduced a three-year holiday on its introduction to give Chorus time to prepare. That it didn't is an issue that will need to be raised by shareholders, but it is incorrect to say that the ComCom has "undermined" anything. It has done exactly what was expected by all participants.