UPDATE: Chorus falls after regulator affirms view on copper pricing, ditches backdating

Thursday 2nd July 2015

Chorus shares fell after the Commerce Commission's latest ruling on wholesale telecommunications prices were largely unchanged, though the regulator changed tack on whether any update will be backdated.

The regulator today released its draft determination for what Chorus can charge on its regulated copper lines in its final pricing principle - a more rigorous process to find the price than the initial pricing principle which relied on international benchmarks. The commission proposes setting the total price Chorus can charge for wholesale broadband services at an average $38.43 per month, largely in line with the $38.39 price established in an earlier estimate and up from the $34.44 price set in the benchmarking process which came into effect on Dec. 1.

Chorus shares fell 0.7 percent to $2.98, while Spark New Zealand, the company's biggest customer, gained 0.2 percent to $2.79.

"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," telecommunications commissioner Stephen Gale said in a statement. "We have done further analysis on this, and it's clear that our dispersed population is a significant cost factor."

The regulator is seeking submissions on the latest draft, due on Aug. 13, and will deliver its final verdict in December.

Gale told a briefing in Wellington there are a number of areas he expects submissions, which could influence the final determination.

"Issues of that sort of scale that could amount to a dollar or two will still be debated in these submissions," he said. "It's hard to know how the combined effect of all of the parties argue ups and downs, and it's hard to estimate the average effect of all of that."

The regulator reassessed comparisons with European providers after Spark urged its customers to lobby the commission over the different prices, and found the average length of cablings and cost of construction was much higher than in Sweden or France.

Chorus sought the more fulsome review for network pricing after claiming the original decision would force it to cut prices too steeply and put its investment in building a nationwide fibre network at risk.

The commission today said it wasn't "worthwhile for end-users to pay a premium" to mitigate the risks of migrating customers to fibre products "given the benefits are far less certain than for the energy sector where we raised the allowed return on capital."

Gale said the regulator has done more quantitative work on accelerating the migration to fibre and the value of potential increases in innovation if the cost of capital was raised.

"You couldn't make the case that it was beneficial for customers to pay higher prices for those," he said.

The regulator today said it proposes not to backdate the wholesale pricing in a split decision, where commissioner Pat Duignan was of the view that retail service providers such as Spark New Zealand should compensate Chorus for the difference in price between the new start date and Dec. 1, 2014.

Gale said he and commissioner Elisabeth Welson didn't think backdating would promote competition for the long-term benefit of consumers, though are still seeking submissions on the issue.

Chorus said the impact of the draft decision was largely in line with the previous ruling, though a move to reduce one-off transaction charges could require the company to provide those services below cost.

The company also opposed the proposal not to backdate pricing, saying it was a "significant reversal" on the regulator's previous position.

Spark affirmed 2015 financial guidance for low single digit growth in earnings before interest, tax, depreciation and amortisation and for a low single digit decline in revenue was unchanged, and welcomed the change in backdating, while warning retail prices will face upward pressure if the commission changes its mind again.

Industry groups the Telecommunications Users Association of New Zealand and Internet New Zealand welcomed the decision not to backdate prices, though both said the price remained too high.

BusinessDesk.co.nz

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