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Brook: Lights dimming on our “bright fibre future”

It is expected that by the end of 2019, 75 per cent of New Zealanders will have access to Ultra Fast Broadband (UFB) through a network of fibre optic cables.

Tuesday, January 8th 2013, 10:22AM

by Frances Sweetman

UFB will not only allow us to watch more television over the internet and download music and films, but it is also expected to increase economic activity and productivity thereby enabling New Zealand to keep pace with the exponential rate of technological development taking place the world over. You would be correct in calling it a key investment for our future then.

Chorus, a telecommunications infrastructure company that was split from Telecom in November 2011, is charged with undertaking a large proportion of the fibre installation project. It has already started the arduous task of delivering fibre to more than 830,000 premises across New Zealand, a process that is expected to cost around $2.5bn. This rollout is complex and expensive and whilst Chorus is hitting its milestones, cost reductions and operating efficiencies will need to be made.

Unfortunately for Chorus, this mammoth undertaking is not its only task. While we all wait for UFB to be delivered to our homes, schools and businesses, we currently consume most of our internet and landline usage over copper based lines. Chorus also provides and maintains this infrastructure which accounts for over 80 per cent of its revenue, predominantly through fees paid by Retail Service Providers (Telecom and Vodafone etc) for the use of those lines to provide us with our home phone and internet packages. 

These services have been the subject of much scrutiny this year. The Commerce Commission has set about the unenviable task of updating the wholesale prices charged to access these services. Changes are made to reflect changes to the copper network, changing input costs, new international benchmarks, inflation and the creation of Chorus as a standalone entity. It is a delicate balance for the regulator to ensure that consumers are getting the best deal for their current services while also incentivised to move to UFB, and the service provider can maintain reasonable returns. This balance has been difficult to achieve and it has been Chorus, and in turn Chorus’ shareholders, that have borne the brunt of the uncertainty created throughout the process.

The latest Commerce Commission announcement proved to be a double edged sword for Chorus and its shareholders. The final determination of the Unbundled Copper Local Loop (UCLL) price was set at $23.53 per month, a 4 per cent decrease from the existing price but a significant improvement on the 19.3 per cent decrease proposed in the draft decision released in May 2012. However in conjunction with this good news, the Commerce Commission also announced its draft determination for the price of Chorus’ Unbundled Bitstream Access (UBA) service to apply from December 2014, proposing a 58.4 per cent price reduction in the direct cost of UBA from $21.46 to $8.93 per month. This was the second blow the Commerce Commission had delivered by way of a surprisingly low draft determination, and one that was not softened by the Commission’s statement that it remains open to changing its view in light of submissions and new information provided by industry during the consultation processes.

Putting it into context, the UCLL price impacts around 1.6 million of Chorus’ 2.8 million lines, and the UBA price impacts around a further one million lines. Chorus estimate the impact of the UBA decision could reduce annual EBITDA by $150-$160m from December 2014, or approximately 25 per cent of FY15 EBITDA based on analyst estimates.

At the initial split of Chorus from Telecom the decision facing potential shareholders was whether to invest in a company with significant risks. The risk of overruns and cost blowouts on the largest telecommunications infrastructure project ever undertaken in New Zealand; the risk that revenue could reduce significantly as most of its services are directly or indirectly subject to regulatory review and long term structural risks such as fixed- to-mobile substitution. While the company was pitched as a dividend paying utility, the higher levels of risk inherent in its operating environment required a higher dividend yield than that offered by most other utilities in the New Zealand and Australian markets. Now, one year on, investors are faced with the prospect that the dividend on which this initial risk-return analysis was based could fall as revenues drop significantly.

The wider implications are damaging to more than just Chorus’ shareholders. The draft UBA price means that the full cost of a copper based broadband service will become $32.45 per month, around $5 cheaper that the $37.50 cost for entry level fibre. John Key’s comments illustrated the apparent disconnect between regulation and policy, as well as its potential to hinder the success of the UFB project, stating ‘‘the government needs to go away and fully assess that (decision), but in its current form it would be very problematic”. Further, the impact this continual regulatory too-ing and fro-ing will have on the demand from overseas investors for other New Zealand utilities is anyone’s guess.

We do not know what the final UBA price determination will be. What we do know is this process has some way to go, and a lot more uncertainty to deliver. Meanwhile Chorus will be busy digging trenches and installing fibre optic cables to deliver our “bright fibre future”.

« Tyndall Monthly Commentary: The expectations gapHamish Douglass Unplugged - Latest Video from Adviser Briefing - August 2012 »

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