Profit threat over ultra fast broadband

Telecommunications wholesaler Chorus could have between $150 million to $170 million wiped off its operating profit if decisions announced yesterday by the Commerce Commission are enacted.

Chorus chief executive officer Mark Ratcliffe urged the Government to bring forward the regulatory review required by legislation in 2016 after the Commerce Commission report released yesterday.

Chorus wanted the review carried out earlier to bring about a sustainable framework next year that would support the ultrafast broadband (UFB) vision.

"At a time when New Zealand needs economic efficiency, productivity and social progress enabled by public private partnerships, today's decisions are a significant step backward."

The whole telecommunications industry needed to be aligned to a transition to fibre if New Zealand was to get better broadband and new innovative services and applications, Mr Ratcliffe said.

The Commerce Commission released a final determination on unbundled copper local loop (UCLL) and a draft regime for unbundled bitstream access (UBA), conceding ground on the regime for UCLL while signalling a sharp cut to UBA pricing.

Chorus shares were suspended for a short time yesterday while the company analysed the decision.

In a later statement to the market, Chorus said the annualised impact on its operating earnings of the UCLL decisions was a reduction of about $20 million, based on numbers at June 30 this year

The annualised impact of the UBA monthly rentals, if they were to become final, would result in operating earnings reduced by a further $150 million to $160 million from December 2014.

Mr Ratcliffe said Chorus had "very serious concerns" about the potential impact of those decisions.

"While noting the UBA decision is a draft, and there is a process to run, management expects the collective impact of these two changes - should the UBA decision become final - would require Chorus to fundamentally rethink its business model, capital structure and approach to dividends."

The world was watching to see if New Zealand's world-leading UFB policy and the demerger of Chorus as a wholesale-only company would be a success story.

Investors did not understand the rational for reducing copper-based prices at the same time that taxpayers were supporting a Government-backed generational change to fibre, he said.

"This will significantly reduce fibre uptake."

Shifting the relatively of copper and fibre pricing would discourage the transition to fibre, Mr Ratcliffe said.

Communications and Information Technology Minister Amy Adams issued a cautionary statement saying the Government would consider the report.

The decisions on both prices, taken together, were potentially significant for the industry and end users.

New Zealand was one of the few countries to have structurally separated its main telecommunications company while at the same time rolling out a fibre network.

"This potentially highlights the need for a pricing methodology appropriate for the New Zealand context," Mrs Adams said.

Craigs Investment Partners broker Chris Timms said a reasonable outcome was still likely that would allow dividend payments to continue. But a downside risk to dividends remained.

"The Commerce Commission acknowledged difficulty within the existing benchmarking framework and was only able to find two countries that it considered comparable without a requirement for adjustments."

The regulator set the new UCLL rates at a geographically averaged price of $23.52 per month per line from December 1, 2014, a 3.9% reduction to the prices set in 2007.

Urban UCLL prices are $19.08 and rural is $35.20, effective immediately.

UBA prices will be provisionally set at $32.45 per month, effective from December 1, 2014, from the existing $44.98.

Mr Timms said the size of the potential reduction in UBA pricing, and its relativity with fibre, was so great that the potential of political intervention had clearly increased.

"We remain in a situation with a wide range of potential outcomes for Chorus' medium-term earnings but our sense is that something reasonable should prevail," he said


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