Telecom to Chorus: cut costs without cutting service

Telecom says Chorus should "put forward a constructive proposal to resolve its funding issues and achieve industry pricing certainty that does not involve eroding the current network and service levels across its monopoly copper network."

Telecom says it is concerned that the Ernst & Young report into Chorus' financial position, released yesterday, indicates Chorus' funding gap could be partially closed by $400-450 million of "cash flow savings initiatives" suggested by Chorus management.

Although the EY report does not detail these initiatives, it indicates they may have adverse effects on Chorus customers and consumers, including:  a reduction in current service levels, which others have speculated could mean artificially reducing copper broadband speed (the so-called "nuclear option" canvassed by IDC and Tuanz); an increase in network fault rates as Chorus moves to a reactive rather than proactive approach to network maintenance; longer lead times to repair faults; and an increase in the number of businesses and consumers who can't get a telco connection, with Chorus only agreeing to new connections on a 'full cost recovery basis'.

Actions such as these will penalise many consumers and businesses and represent a degrading of the high-quality telecommunications infrastructure enjoyed today by New Zealanders.  Eroding the quality of the current telco network and service levels is not an appropriate way for Chorus to resolve its current financial difficulties, Telecom says.

Telecom says it has consistently taken the view that a collective industry solution, which appropriately balances the needs of Chorus, its customers (the retail service providers), consumers and taxpayers is the best way to resolve the current uncertainty affecting Chorus' UFB fibre rollout and the wholesale pricing of telecommunications services over the existing copper network.

Telecom says it played a lead role in industry discussions earlier this year that sought to put a collective proposal before government.

The results of the Commerce Commission-brokered discussions between Chorus and retail ISPs were not made public. But leaks indicate ISPs pushed for steep copper wholesale pricing cuts, which were rejected by Chorus.

Although those discussions failed, Telecom says it remains willing to engage with Chorus, other RSPs and other interested parties in reaching a solution that ensures the country will reap the significant economic benefits from the new fibre network whilst maintaining the integrity of the existing copper network, upon which the vast majority of New Zealanders still rely.

Ball in Chorus' court
"It's good to see one of the country's largest telcos point this out," Telecommunications Users Association (Tuanz) CEO Paul Brislen told NBR this afternoon.

(Telecom holds around 50% of the retail ISP market. It has not always made life easy for the Coalition for Fair Internet Pricing, of which Tuanz is a member - notably with its refusal to give a clear-cut answer to the question of whether it will pass on wholesale Chorus price cuts to customers - vacillation the government and Chorus supporters have seized on.)

"The ball is firmly in Chorus's court now with regard to how it reduces its deficit and the risk is it will throw its toys out of the cot and do something that damages the industry as a whole," Mr Brislen says.

"Telecom is indicating that it would welcome Chorus looking at more realistic options and the unstated threat is that Telecom will be able to unbundle next year. While it might not want to, if Chorus cuts its service levels the Telecom will have no choice.

"Fortunately as Lance Wiggs points out today, Chorus has plenty of options that don't include self destructive behaviour."

Chorus has already entered discussions with Crown Fibre Holdings over potential cost-cutting moves, and says it is open to new discussions with ISPs.

However, its multipronged strategy also involves a High Court appeal against the  Commerce Commission's copper price cut ruling, which is due to kick in in December 2014. Other regulatory cases in the sector have stretched through years of appeals.

Chorus has also exercised its right to a final pricing principles review by the Commission - a process the regulator says could take two years.

Cunliffe: no bailout
Separately, Labour leader David Cunliffe said the government should not put any more money into Chorus.

Through Crown Fibre Holdiings, the government is already committed to a $929 million investment in Chorus (half in non-voting shares, half in interest-free debt).

Mr Cunliffe says the EY measures that close the UFB "funding gap" from $1 billion to $200 million to $250 million (or $40 million to $50 million a year until 2020) could be taken further. He suggests deeper dividend cuts beyond those suggested by EY.

In its report released yesterday, the consultancy suggested a two-year "dividend holiday" followed by the dividend being reduced from 24 cents a share (which saw $95 million of a $271 million net profit paid out to shareholders last year) to 12.75c until 2020.

The government should not buy more shares in Chorus, or otherwise bail out the company, Mr Cunliffe says.

Some pundits will note the irony of Labour pushing for National to back away from investing more in Chorus, while at the same time fighting against the government sale of shares in power companies.