The Government has provided more flavour on the direction of the ongoing review of the Telecommunications Act but there is still a long way to go, Forsyth Barr broker Suzanne Kinnaird says.
The Government confirmed a "building blocks model'' (BBM) would be used to set regulated copper and fibre pricings from 2020.
Chorus would be provided with similar pricing certainty to that in the New Zealand utility markets which followed the same approach.
A key message in the announcement was future pricing for both copper and fibre services would be set based on the BBM approach.
Both overall revenue and individual service price caps were likely to apply.
Starting values of assets would be the most critical decision, she said.
A glide path approach would be established if there was a variant between current and proposed pricing to avoid price shock.
The requirement to provide fibre unbundling remained an option, although Forsyth Barr believed actual unbundling was unlikely.
Unrelated to Chorus, the review might also look at regulated pricing for mobile roaming and co-location.
The review of the Act was being carried out by the Ministry of Business, Innovation and Employment.
A further round of consultation would occur later this year, Ms Kinnaird said.
Actual regulated pricing would be set by the Commerce Commission using the principles set up by the ministry.
"Given previous experience, we expect the entire period up to 2020 will be required before final prices are confirmed.''
Given there was industry-wide acceptance for adopting a BBM-style model for copper and fibre pricing, it was almost certain to be the model chosen by MBIE.
The confirmation of that approach was seen as a minor positive for Chorus, she said.
Chorus' current pricing was based on the cost of replacing its current assets with modern technology.
BBM was a historic actual view as opposed to a theoretical future view.
There were some difficult decisions to make in setting the asset values, Ms Kinnaird said. They included. -
● Two Chorus networks: Would Chorus recover the cost of its copper assets that had been over-built by Chorus fibre? Customers required only one service; Chorus had two networks.
● Competing networks: How would pricing reflect competition Chorus would face from both third party fibre and mobile networks? Did a forced shutdown of the copper network start making sense?
● Treatment of government subsidies: How would the government subsidies through UFB and the rural broadband initiative be reflected in the asset value?
● Impact of continued migration: Forsyth Barr expected a significant number of premises would continue to migrate to fibre post-2020. How would Chorus recover migration costs?
Ms Kinnaird said MBIE had proposed a glide path approach be adopted if there was a meaningful change between current pricing and that set under the BBM model.
"This suggests MBIE recognises this risk exists but wants to avoid the hard shock previously experienced by Chorus.''
While the certainly of a BBM model would be positive for Chorus in the long-term, it was also beneficial for the entire industry.
For Chorus, once prices had been set, it became similar to a Vector-type utility.
Until then, the market awaited further details of the next step, she said.
At a glance
• More direction, future steps awaited
• Chorus earnings unchanged
• Target price unchanged at $3.85 a share
• No change in underperform rating
