ComCom copper pricing decision a win for Chorus

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See also: ComCom proposes to let telco retailers keep $57 million

Chorus has scored a key win in the ongoing war over the regulated wholesale price of copper lines.

The Commerce Commission has set a regulated price of $38.43 per month*.

That's a reduction on the former price of $44.98, but also not nearly as bad a cut as Chorus had initially feared.

In November 2013, the ComCom set an initial price of $34.44, which is what retailers like Spark, Vodafone and CallPlus (now owned by M2) have been paying Chorus since December 1, 2014.

It was the slice to $34.44 that set off panic at Chorus (and its largest shareholder, the Crown), and the company's warning over a billion-dollar hole in its earnings up to 2019 that saw its share price head south, its debt rise and its once-fat dividends put on hold.

ISPs complained $34.44 was still more expensive than comparable overseas companies. Chorus also wanted the regulator to take a second look, triggering a formal review process. In December, the ComCom released the first draft of its Final Pricing Principles (FPP) decision, which raised the price to $38.39 following a review that was based on the cost of building a modern equivalent replacement network.

This morning, the regulator has released its final FPP draft price. Analysts approached by NBR yesterday picked it would be close to the $38.39 FPP first draft, and indeed that's where it's landed, at $38.43.

No backdating
Telecommunications Commissioner Stephen Gale says the regulator has come to an initial decision not to backdate pricing. However, Dr Gale says there will be consultation on this point. Given the final draft price is higher than the $34.44 retailers have been paying since December, Chorus misses out on a back-dating windfall of around $57 million (Forsyth Barr has put it at around $82 million). That's a bit of a setback, but the company will be much more focused on its headline win.

What it means for investors, customers
For Chorus investors, it means the earnings damage is much less than initially feared. Analysts expected that if the regulator stuck closely to its IPP pricing, as it has, then dividends would resume in the next year (although at what level is a more open question).

For consumers, it shouldn't mean any change to broadband pricing. When the initial $10 cut was announced, ISPs immediately cut their pricing and indeed Spark included the figure in its earnings guidance. But when the December decision indicated the ComCom was leaning toward a cut of $6.50 or so, internet providers quietly put their prices up by around $5 per month in the New Year. [UPDATE: Spark points out it did make some noise; other ISPs did not flag their intentions until bugged by NBR.]

What's next? The ComCom will now take submissions on its final draft pricing, followed by cross-submissions and consultation. The actual final, final no-appeals price will be announced in December.

Commissioner explains his thinking
Spark strongly pushed the line wholesale prices are higher than those of comparable countries, presenting research it commissioned that said New Zealand pricing was 70% higher.

But this morning Dr Gale rejected that argument, instead adopting a similar line to that taken by Chorus:

“The modelled price released today is very similar to the draft we released in December and continues to reflect that New Zealand’s local loop network is unique when compared to overseas benchmarks. We have done further analysis on why this is, and it’s clear that our dispersed population is a significant cost factor,” the telecommunications commissioner says.

“Simplistic comparisons of international wholesale broadband prices do not tell the true story.  New Zealand’s average cable length per connection is 64 metres. That is 13 metres more than in Sweden, the nation that most closely resembles our own, and 23 metres more than in France.

“Our civil engineering costs are also comparatively high. Physically digging and laying the network makes up nearly half New Zealand’s monthly wholesale broadband price alone.”

A coalition that included ISPs, Consumer, Tuanz and InternetNZ criticised any increase over $34.44 as a "copper tax" to subsidise Chorus and line the pockets of shareholders. Chorus countered that it needed a robust copper price to fund its leg of the UFB, and that a low copper price would keep consumers from upgrading to fibre.

Chorus [NZX: CNU] shares closed flat yesterday at $2.90.

Ahead of today's decision, First NZ Capital had a neutral rating and a 12-month target of $3.14.

ForBarr also had the company on neutral. Its 12-month target is $3.13.

* The regulated price is averaged over five years and includes the alphabet soup of components that make up a typical household copper line (of which there are around 1.5 million). UCLL stands for unbundled local loop service, which includes voice; UBA for unbundled bitstream access. The five-year glide path approach, introduced with today's decision, is not optimal for Chorus given there will be fewer and fewer copper lines over time as people upgrade to UFB fibre.

Click to zoom.

Final draft one-off charges:

Fees for one-off Chorus work, such as a visiti to an exchange or cabinet to upgrade a retail ISP customer's plan, have also been lowered.

See also: Telecommunications Commissioner Stephen Gale opinion - NZ broadband – land of the long trenches

To build your own NBR Radio playlist and enjoy instant on-demand access to any audio, sign up for our FREE smartphone-only subscription to NBR ONLINE.