Gale cedes ground on copper pricing, citing investment incentives; Chorus shares still tumble

Tuesday 5th November 2013

Telecommunications Commissioner Stephen Gale has defended his proposal to cut Chorus's copper network pricing, saying he has ceded some ground because he doesn't want to deter investment in fibre.

Chorus shares tumbled 7.6 percent to $2.43 and earlier touched a four-month low $2.41 after the network company forecast a 21 percent earnings hit if the price cut goes ahead and the government held off a decision on whether to override the regulator.

The regulator set a total unbundled bitstream monthly price, which phone companies and ISPs pay, of $34.44 per line, up from the $32.35 price Gale proposed in his draft decision last December. He made the adjustment in the UBA component of the price, lifting it to $10.92 from $8.93. The unbundled copper local loop component has already been fixed at $23.52.

The amended price is still 23 percent less than the $44.98 Chorus currently charges retailers for copper access though it is still cheaper than the government has proposed.

"Competition is for the long-term benefit of end-users, but there's cascade in all our work where we look out for investment incentives," Gale told BusinessDesk. "Underestimating the regulated price can deter investment, which is not good for consumers in the long run," he said today.

Gale said his view on pricing is based on the commission's interpretation of telecommunications law as it currently stands.

Communications Minister Amy Adams, who ordered a review of law governing the sector after Gale's initial price cut proposal last year, said today the government "will consider its options in detail before making any further decisions."

She had already put price controls on hold until November next year, having indicated the government was concerned that the economics of the fibre network Chorus is building could be undermined if the cuts were too steep.

The government's cautious response had been "pretty disappointing" for investors and contributed to the decline in Chorus's shares today, said James Lindsay, a portfolio manager at Tyndall Investment Management.

"They have had plenty of time to have considered this and come to a conclusion," Lindsay said. "This gap is going to add to uncertainty."

Chorus said the regulator's new proposal, which would kick in from December next year, would cut earnings before interest, tax, depreciation and amortisation by $142 million a year, and implied a $1 billion funding shortfall by 2020 as lenders became more reticent as cash flows shrank.

Unless the government intervenes, the company would be forced to re-negotiate the terms of its funding and seek to re-assure ratings agencies that it could avoid defaulting on debt payments, Chorus said today. It would need to review capital management and dividend policy, and potentially contemplate a large equity raising.

"We simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB," Chorus chief executive Mark Ratcliffe said in a statement.

Gale said other telecommunications companies had argued that cheaper wholesale prices on the copper network would be "helpful for them as they can invest in business systems to offer fibre products."

While pricing will play a role in determining the migration of customers from copper services to faster fibre services, Gale said the content available and the quality of services would also drive uptake.

The final determination is still open for parties unhappy with the benchmarked costs to ask the regulator to calculate the costs itself.

If that happened, Gale said the commission would form a view on what would be an acceptable return on investment for Chorus, something that hasn't considered under the benchmarking process.

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 demerge 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.

BusinessDesk.co.nz

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