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Government to do own analysis of Chorus before deciding on options for UFB rollout

Thursday 7th November 2013

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The government has ordered up arm's length analysis of Chorus's financial position and its ability to deliver the national ultra-fast broadband network before deciding whether it needs to bridge a funding gap that may flow from regulated prices.

Chorus has raised the prospect that it may no longer be a credible partner for the government in the rollout of UFB given the Commerce Commission plans to cut the price the company can charge for access to its copper lines from December next year.

The company has forecast an annual earnings hit of $142 million, flagged potential funding shortfall of $1 billion by 2020 and said it will review dividend payments, capital structure and potentially a large equity raising. Moody's Investors Service and Standard & Poor's both have its credit ratings on review for a possible cut.

"In recent weeks, I have had the Ministry of Business Innovation and Employment work with external consultants to carry out an independent analysis of Chorus' financial position across a range of pricing options, based on publicly-available information," Communications Minister Amy Adams said in a statement. "To complement this work, I have decided to seek an independent assessment at arm's length from the government."

The review will look at the impact of the regulator's pricing decision on Chorus' ability to deliver on its contractual commitments under the UFB and rural broadband initiatives as well as assessing "the scope for Chorus to manage the impact within the constraints of the reduced revenue, and if required, a range of alternative options," she said.

In a separate letter to Chorus chief executive Mark Ratcliffe yesterday, Adams said she is "seeking your full cooperation on this." The independent review will also take into account Chorus's own analysis of its options to manage the price cuts.

In response today, Chorus said in a brief statement that it "will now engage with the government on how it may assist with this process."

Telecommunications Commissioner Stephen Gale this week said the regulator has set a total unbundled bitstream monthly price, which phone companies and ISPs pay, of $34.44 per line, up from the $32.35 price Gale proposed in his draft decision last December. He made the adjustment in the UBA component of the price, lifting it to $10.92 from $8.93. The unbundled copper local loop component has already been fixed at $23.52.

The amended price is still 23 percent less than the $44.98 Chorus currently charges retailers for copper access though it is still cheaper than the government has proposed.

Adams has previously said the government was concerned that the economics of the fibre network Chorus is building could be undermined if the cuts were too steep.

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 its pricing 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.

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