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Seven ways to make the UFB rollout cheaper

Chorus has begun a series of meetings with Crown Fibre Holdings over possible renegotiation of its UFB contract (Crown Fibre Holdings being the company that doled out the UFB contracts, and oversees the rollout).

With the Crown not wanting to top up its $1.35 billion contribution to the 10-year Ultrafast Broadband (UFB) fibre rollout ($929 million of which is invested in Chorus) the discussions will centre on ways to cut the cost of Chorus' UFB rollout as the company faces a $1 billion revenue shortful between December 2014 (when copper price cuts kick in) and 2020.

NBR's happy to chip in with some suggestions on this front.

(One proviso: Forsyth Barr telecommunications sector analyst Blair Galpin points out we've yet to see Labour's broadband policy. If Labour-Greens take power in 2014, investors can expect renewed uncertainty. And another: if Chorus doesn't like Crown Fibre Holding's line, it can always fall back on its High Court appeal against Commerce Commission's decision to slash copper pricing plus its final pricing principles appeal to the Commission itself. Both are expected to take years; certainly, until after the next election).

1. Cut or cancel the dividend. Last year, Chorus paid out $95 million (or 24c a share) of its $170 million profit as a dividend to shareholders. ForBarr expects the dividend to be cut over the next couple of years - and he's one of the analysts who's still relatively positive about Chorus long term prospects. It's hard to see any deal with the government that doesn't involve dividend pain for shareholders.

2. Sling more fibre overhead. One-time UFB bidder Vector – which has laid its own fibre around parts of Auckland, notably the North Shore – told NBR it can string fibre over 3km of power poles a day, vs 250m shallow trenching with the same crew.

And it says running fibre along poles is a quarter of the cost of trenching.

NorthPower Fibre, responsible for the Whangarei leg of the UFB, has hung a lot of fibre from power poles. It’s not like the fat hybrid fibre-coaxial cable that snakes overhead in parts of Wellington and Lower Hutt. You’d be hard pressed to tell it from power lines.

Interestingly, Chorus has no specific overground vs underground fibre targets itself, nor mandated in its Crown Fibre Holdings contract (CFH tells NBR) – though there is the limiting factor that lines companies are making a general shift to eliminate power poles.

The government could come to the party here with RMA tweaks, and by leaning on councils.

3. Let some of the other UFB companies help out. Overall fibre uptake, as of September 30, was just over 4% overall, with 14,000 of 320,000 customers now within reach of the UFB choosing to take a retail plan.

Last quarter, when overall uptake was 3%, when Enable (which holds the UFB contract for Christchurch) was pushing 6%, and Northpower (Whangarei) close to 7%.

That stat is related to uptake from homes within reach of fibre, but it can't hurt that Enable is rattling through its work. And while the overall timeframe for the UFB is 10 years, Ultrafast Fibre (Tauranga, Hamilton and a smattering of other North Island towns) says it'll be finished in seven.

It's notable that Northpower has engineer on the ground nationwide, by dint of its contract work for power line companies.

Then there are outsiders. Vector CEO Simon MacKenzie says his company would look at taking on some of Chorus' leg of the UFB rollout, if asked (Chorus is responsible for around 70% of the UFB by premise).

Mr Mackenzie has previous complained lines companies, such as Vector, are limited by regulation to returns of 8.8%, verus what he estimates is 20% to 25% for Chorus from its copper lines.

Vector - which bid for but lost the Auckland UFB contract - would likely be up for some of Chorus' work, but it could well want an equity stake in Chorus in return (Vector hasn't responded to NBR's query on that front).

But Chorus won't want that. The next few years of pain aside, one day that fibre will be paid off (and remember 50% of that $929 million from the Crown is in the form of an interest-free loan). And at that point, it will start making fat profits. Chorus won't want to give up a chunk of ownership to Vector (or Northpower etc) for some short-term assistance today.

A complicating factor: Crown Fibre holdings has gagged Enable, Northpower and Ultrafast Fibre, so it's impossible to tell if they're within budget, or to guage their level of enthusiasm for taking on Chorus work.

4. Make UFB a designated service under the RMA. The time and cost of resource consents is said to be a big barrier. It can take up to two months to get fibre if you live down a right-of-way or in a multi-tenanted building, CEO Mark Ratcliffe told NBR, because Chorus (or any other UFB company) has to locate every owner involved, then get permission from each.

Mr Ratcliffe has a solution: make the UFB a designated service under the Resource Management Act, so his company can jump right in.

This one’s been on the table for a good couple of years; perhaps the current crisis will lead to some action.

[UPDATE: This doesn't look likely. See Amy Adams' response in her NBR Ask Me Anything session here.]

5. Not rollover free connections. The government leaned on Chorus to chip in $20 million for free non-standard UFB connections from kerb to home. That was a good thing because Chorus’ UFB contract only required it to provide a free hookup if a home is within 15m of the curb, and then only fibre 5m into the home (including up or under walls). Under the free residential connections deal, a home can be 200m or more from the kerb – good news for the many who live down right of ways, and fibre is wired a “reasonable” distance into the home.

The bad news: Chorus estimates the $20 million will run out at the end of 2015.

It could save itself some money by lobbying for no rollover. But that, of course, would mean pain for ISPs and consumers as many face an $1800 to $2500 bill for connection, and dramatically slow fibre update just as it should be gaining momentum.

One possiblity here would be to open up the content market by regulating Sky TV (which the Commerce Commission recently found had abused its monopoly power to hinder new market entrants, even though it took no legal action). New content providers could subsidise home connections if the householder took a long term contract.

6. Chorus cut costs. Before its demerger from Telecom, Chorus went through the wrenching process, strikes and all, of turning around 3000 linesman into independent contractors - who in turn went to work for Transfield, Downer or Visionstream (the three Australian companies who are doing the on-the-ground UFB work for Chorus , as well as Enable and Ultrafast Fibre. NorthPower has used its inhouse crew). 

Chorus renegotiated these contracts earlier this year, after Chorus revealed it was running $300 million over budget on its UFB rollout. Indications are that things are now pretty close to the bone (or sliced into the bone, in the case of Transfield, which embarrassed Chorus during August and September as it was unable to pay UFB subcontractors).

Could Chorus follow up by culling its management and analyst ranks? ForBarr's Blair Galpin says there won't necessarily be a management trim, but that there is definitely scope for Chorus to cut costs overall.

7. Scale back. Across the Tasman, the incoming Tony Abbott government has scaled back the National Broadband Network (NBN) from fibre-to-the-premise (into homes and businesses) to fibre-to-the-node (or neighbourhood level, with copper used for the last leg).

Chorus has already done a lot of fibre-to-the-node work in NZ, so going down this path would essentially mean chucking in the UFB - but John Key and Amy Adams have already indicated that's not an option. They believe NZ needs fibre to stop falling behind other countries. And they're right.

ckeall@nbr.co.nz

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