UPDATED: Telco Commissioner proposes smaller cut to copper
UPDATED: Telco Commissioner Gale proposes smaller cut to copper line pricing in final decision
(Adds Chorus, Adams comments in 6th, 7th, and 8th graphs)
By Paul McBeth
Nov. 5 (BusinessDesk) – Telecommunications Commissioner Stephen Gale has ceded some ground in setting the final regulated price for Chorus’s wholesale copper services, though is still backing a cheaper price than what the government has put forward as an entry level for faster fibre services.
The regulator is proposing a total unbundled bitstream monthly price of $34.44 per line, up from the $32.35 price Gale initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52, it said in a statement. That’s down from $44.98 presently charged by Chorus for retailers to access its services on the ageing copper network.
That’s still cheaper than the $37.50 monthly charge the government has suggested at the bottom of its proposed range for wholesale access to services on a fibre network.
“In choosing a price from the benchmark set the Act directs us to promote competition, taking into account incentives to invest in new services such as UFB (ultrafast broadband),” Gale said. “We have sought to ensure that we don’t under-estimate the UBA price, which might hamper investment and disadvantage end-users over the long-term.”
Communications Minister Amy Adams put any price controls on hold until November next year, and sought a review of law governing the sector after Gale proposed sharp cuts to the regulated price of UBA, something the government viewed as undermining the economics of the fibre network it is bankrolling.
Adams said the government will “consider its options in detail before making any further decisions.”
Chorus said the proposed new prices, which would apply from December 2014, would reduce earnings before interest, tax, depreciation and amortisation by $142 million a year. The UBA price implies a $1 billion funding shortfall by 2020, reflecting less cash, reduced borrowing capacity and increased interest and funding costs, the company said in a statement.
The network operator will need to discuss today’s decision with existing lenders and rating agencies as the lower prices are likely to have a material adverse effect which would entitle lenders to trigger a default. The company said it will also need to review its capital management settings, including its capital structure, dividend policy and the potential need for a large future equity raising.
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.
In an August report, brokerage Craigs Investment Partners said the law review was a positive for Chorus, whose share price plunged on the regulator’s proposed price cut path, though wouldn’t necessarily let the network operator retain its dividend at 25 cents per share.
Shares in Chorus rose 0.4 percent to $2.63 in trading yesterday, and have dropped about 11 percent this year. The stock is rated an average ‘buy’ based on nine analyst recommendations compiled by Reuters, with a median target price of $3.05.