Telco commissioner Gale proposes smaller cut to copper line pricing in final decision - but Chorus wails about '$1b shortfall'

The Commerce Commission cedes some ground in setting the final regulated price for Chorus's wholesale copper services - but not enough to avoid the government's threat to over-ride the regulator. UPDATED: Chorus shares spiral.

UPDATE: Chorus shares [NZX:CNU] fell 7.98% on open to $2.42, taking the stock close to its all-time low - and well off its November 2011 IPO price of $2.94.

The government has issued a neutral, stalling-for-time response after the Commerce Commission released a proposed but to Chorus' wholesale copper broadband pricing that was not as steep as expected - but still deep enough to potentially trigger the government's threat to over-ride the regulator.

“Now that the final UBA price is known, the government will consider its options in detail before making any further decisions,” ICT Minister Amy Adams says.

Chorus, pressuring govt, claims $1B shortfall
Chorus reacted much more sharply, saying it had been placed in a "regulatory black hole" that puts its funding at risk - a comment clearly aimed at putting pressure on the government to make good on it promise to introduce new legislation to over-rule the Commission's proposed cuts.

"Under current legislation this pricing will apply from 1 December 2014 and Chorus estimates that this will have around a $142 million annualised ebitada impact, based on connection numbers at 30 September 2013.  This is in addition to the around annual $20m edita reduction from the December 2012 UCLL benchmarked decision. Chorus’ net profit for the year ended 30 June 2013 was $171 million," the company said in a statement.

The UBA price announced today would imply around a $1 billion funding shortfall by 2020, Chorus says, reflecting a combination of loss of operating cash flows, reduced borrowing capacity and increased interest and funding costs.

“Without the proposed Government intervention, the loss of these revenues would have two very negative consequences for Chorus’ funding ability,” CEO Mark Ratcliffe, says, “We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

The company has also reiterated its argument there is no guarantee wholesale price cuts will be passed on by retail ISPs.

Coalition: $104m Christmas present
The Coalition for Fair Internet Pricing (which includes ISPs) argues cuts will be passed on (although in real life the situation is a lot messier); that fibre should be made more attractive rather than the price of copper being kept artificially high, and that bonus revenue from Chorus avoiding copper price cuts will got to shareholders rather than speeding the UFB rollout.

The Coalition this morning called the final pricing "a fantastic early Christmas present from the Commerce Commission" that it estimates will save NZ households and businesses $104 million a year.

Spokesman Paul Brislen (who also heads the Telecommunications Users' Association or Tuanz says Chorus is highly profitable and that it is "plain wrong' to suggest the proposed copper broadband price cuts would affect the UFB fibre rollout.

What's next? If the government doesn't intervene, Chorus can make a Final Pricing Principle review (as it already has done with the separate UCLL or unbundled local loop pricing decision). That process could take up to two years, the company says.

At question time in Parliament, Labour leader David Cunliffe said the government is in the throes of a "Soviet-style renationalisation of Chorus" (the Crown is investing $928 million in Chorus, half in the form of non-voting shares, half in the form of interest-free debt, as per the company's UFB agreement). The Prime Minister refused to respond.

Chorus [NZX:CNU] closed flat at $2.63 yesterday. Shares are down 20.3% over the past 12 months, and below their November 2011 IPO price of $2.94. 

READ ALSO: Analyst concerned at latest Chorus pricing developments; political reaction

ckeall@nbr.co.nz


EARLIER: Telecommunications commissioner Stephen Gale has ceded some ground in setting the final regulated price for Chorus's wholesale copper services, though is still backing a cheaper price than what the government has put forward as an entry level for faster fibre services.

The regulator is proposing a total unbundled bitstream monthly price of $34.44 per line, up from the $32.35 price Gale initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52, it said in a statement. That's down from $44.98 presently charged by Chorus for retailers to access its services on the ageing copper network.

That's still cheaper than the $37.50 monthly charge the government has suggested at the bottom of its proposed range for wholesale access to services on a fibre network.

In short, the regulator has put the Prime Minister in a tricky spot. It has compromised its position since its draft determination for a steeper cut, which the PM said could send Chorus broke and imperil the Ultrafast Broadband (UFB) rollout. Yet it still hasn't moderated its position to match the more modest price cuts put forward in a government discussion paper.

"In choosing a price from the benchmark set the Act directs us to promote competition, taking into account incentives to invest in new services such as UFB (ultrafast broadband)," Gale said. "We have sought to ensure that we don't under-estimate the UBA price, which might hamper investment and disadvantage end-users over the long-term."

Communications Minister Amy Adams put any price controls on hold until November next year, and sought a review of law governing the sector after Gale proposed sharp cuts to the regulated price of UBA, something the government viewed as undermining the economics of the fibre network it is bankrolling.

The proposed cuts to UBA pricing came after a three-year freeze and were seen as a way to offset the national averaging of the price of unbundled copper local loop access, which effectively increased prices for urban customers, accounting for about 70 percent of users as part of a proposed transition period.

Legislation introduced in 2011 to enable Telecom to de-merge its Chorus unit and free up the network operator to win the lion's share of a $1.5 billion subsidy to build the ultrafast broadband network required the regulator to make 'reasonable efforts' to complete the determination by December 2012 to derive a cost model by December 2014.

Before the structural separation, regulated pricing for the UBA services were determined using Telecom's retail broadband service plans. After the split, a new cost-based model was deemed appropriate.

In an August report, brokerage Craigs Investment Partners said the law review was a positive for Chorus, whose share price plunged on the regulator's proposed price cut path, though wouldn't necessarily let the network operator retain its dividend at 25 cents per share.

Shares in Chorus rose 0.4 percent to $2.63 in trading yesterday, and have dropped about 11% this year. The stock is rated an average 'buy' based on nine analyst recommendations compiled by Reuters, with a median target price of $3.05.

(BusinessDesk)

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