Chorus won't meet UFB, RBI contracts if copper prices cut, Adams says

Thursday 5th December 2013 2 Comments

Telecommunications network operator Chorus won't meet its contractual obligations to build the bulk of the country's broadband network if regulated cuts to the wholesale price it charges on its ageing copper lines go ahead, Communications Minister Amy Adams says.

Accounting firm Ernst & Young Australia has verbally briefed Adams on whether the Wellington-based company can deliver on its contracts, and came to the early conclusion that a 23 percent cut to what Chorus charges for unbundled bitstream access services will have a "significant impact" on its financial position.

As a result of the briefing, the government expects Chorus will discuss specific provisions in its contract to build the ultrafast broadband network with Crown Fibre Holdings, but will expect the network operator to make up "a significant part" of any shortfall. The outcome of any negotiations is in a few months, Adams said.

"The preliminary conclusion from Ernst & Young is that copper price changes will have a significant impact on Chorus's financial position and that absent further action, Chorus is at risk of not meeting its UFB (ultrafast broadband) and RBI (rural broadband initiative) contractual commitments, after taking into account a wide range of actions Chorus can take itself," Adams said in a statement.

"While the quantum of the shortfall is still being finalised and will be outlined in its final report, Ernst & Young has indicated it is unlikely to alter the high-level findings, and that the government can act with confidence on the information Ernst & Young has supplied," she said.

EY Australia is due to deliver its final report on Dec. 12 after being hired last month to run the ruler of Chorus's books to see if it has the financial capability to deal with a Commerce Commission imposed cut to services on the copper lines.

Adams is mulling how to respond to Telecommunications Commissioner Stephen Gale's planned price cut for access to Chorus's regulated copper lines, which the network company says will force an overhaul of its capital structure and may threaten the taxpayer subsidised build of national fibre cable infrastructure.

The government lost its ability to legislate away the problem after its support partners declared they would not back re-writing the law, effectively limiting Adams' options.

This week Prime Minister John Key ruled out slowing down the roll-out of the UFB network, which should be completed by the end of the decade, and wasn't open to injecting taxpayer funds to shore up Chorus's balance sheet.

Chorus's shares fell 1 percent to $1.435 in trading yesterday, and have slumped 58 percent since Gale first flagged the proposed cuts in a draft decision last year.

BusinessDesk.co.nz

Comments from our readers

On 5 December 2013 at 1:32 pm dave said:

how did the government let the commerce commission have enough power to cripple a company as has happened with chorus. What company will they attack next ??? this is corruption and nanny state stuff

On 5 December 2013 at 2:01 pm Neil said:

Chorus is not the first company the ComCom has shot in the back and it won't be the last. The queue to the Courts for remedy is getting longer by the day. Someone needs to deal to the ComCom but it won't be this Minister. In the meantime, the risk capital flight is all out of NZ just when we need it the most.