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Chorus boss lashes broadband regulatory process that 'scared off' foreign investors

Have "spent more time on regulation than any chief executive could possibly dream of".

Wed, 11 Jul 2018

New Zealand's ultra-fast broadband initiative is threatened by a regulatory process that is "weird" to foreign investors, could ultimately be redundant, and is producing the opposite of the intended effect of splitting Telecom in two, Chorus chief executive Mark Ratcliffe says. [Read Tuanz head Paul Brislen's riposte in Managing Expectations - CK].

Mr Ratcliffe used a speech to a Commerce Commission conference on proposals to regulate prices for unbundled bitstream access to express deep frustration at a process he says should be halted and reviewed instead of continuing to be pursued.

"To be honest, I'm not sure why we are here," he said, complaining that in the 17 months since Chorus was split from Telecom to become a regulated provider of backbone telecoms infrastructure he had "spent more time on regulation than any chief executive could possibly dream of".

The split was meant to simplify the regulatory tangle that used to surround Telecom, when it involved both regulated and unregulated activity under one roof.

"Domestic and international investors are baffled. Perversely, regulatory risks for our business have increased following the structural separation and government-sponsored industry change - the opposite of what was expected," he said.

One result of that was a sharp drop in international investor support for Chorus, from 55 percent of the shareholder base last December, when the Commerce Commission released its draft decision on UBA, to 45 percent today.

"At the time of demerger, around 75 percent of Chorus shares were held by international investors, so there has been a dramatic flight of international capital out of Chorus and New Zealand.

Impact every New Zealander

"If the incoherence in the framework is not reconciled, it will impact every New Zealander," he said. "International investors will simply walk away."

The commission's review stems from its legislative requirement to regulate prices to access existing copper-based telecoms networks under rules written to cope with an unseparated Telecom.

While Telecommunications Minister Amy Adams has announced an accelerated review of those requirements, the commission's process continues in the absence of new instructions and based its draft UBA pricing on "two Scandinavian countries that bear no resemblance to New Zealand".

On top of that, Mr Ratcliffe says the commission's proposal to set a benchmark monthly access price for UBA at $8.93 is far below Australian benchmarks for the same service and undermines the basis on which Chorus won its bid to install most of the government-subsidised national UFB network.

"How is it then that we are making a $3 billion investment, and just as this investment begins, the revenues and price signals supporting the investment are all over the place," Mr Ratcliffe said.

There was no suggestion Chorus was currently making excessive returns, and there was no guarantee that around $160 million of implied price cuts for UBA would be passed on to consumers rather than kept by telecoms retailers such as Telecom and Vodafone.

"$8.93 simply cannot be the right price," he said. "Australia has just concluded that an urban bitstream price of around $24 is appropriate, and this is without the level of fibre-to-the-node and VDSL [copper-based fast broadband] investment that New Zealand has made."

"Common sense" dictated that pricing copper below $42.50 would undermine fibre prices, which were "competitively negotiated to promote fibre uptake and will negatively impact the migration to fibre".

Chorus share price fell sharply after the December 3 UBA draft determination from around $3.34 in late November, and fell 0.8 percent to $2.57 today.


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Chorus boss lashes broadband regulatory process that 'scared off' foreign investors