Hamish Fletcher

Hamish Fletcher is a business reporter for the NZ Herald

Broadband blow-up: Chorus talks 'default event'

Workman Josh Brown feeds ducting for the ultrafast broadband network in Tauranga.  Photo / NZ Herald
Workman Josh Brown feeds ducting for the ultrafast broadband network in Tauranga. Photo / NZ Herald

Confused by what the broadband blow-up is all about? Read our six burning questions.

Infrastructure company Chorus has raised the spectre of a "default event" if the Government doesn't intervene in the stoush over a cut to internet prices.

The Commerce Commission this morning released its final decision for what Chorus charges internet retailers such as Vodafone or Orcon for services over its copper-line phone network, setting it at $34.44 - a cut of 23 per cent would apply from December 2014.

That cut is outside the Government's proposed final range of $37.50 to $42.50.

In reaction Chorus said the Commission's decision today means it won't be able to borrow what it needs to invest $3 billion in building the ultra-fast broadband network - unless the Government intervenes.

Chorus shares fell by 20 cents or 7.5 per cent to $2.44 after the Commerce Commission announcement.

Chorus said that as a consequence of the Commission's decision it would need to discuss with the Crown on whether the company is still a "credible UFB partner" in the way intended in 2011 and also how it might deliver the "balance of the [UFB] programme despite the very material funding gap".

It also said if the Government didn't intervene it would have to notify its banks lenders that the price cut would have "material adverse effect" on its borrowing arrangements.

If the price drop did come into effect, the company said its "lenders would be entitled to trigger an event of default".

Chorus is building the majority of the Government's ultra-fast broadband network, which will deliver much quicker internet to 75 per cent of New Zealand by 2020.

The company, which split from Telecom in 2011, still makes the majority of its revenue from the old copper-line network which it charges internet retailers like Vodafone and Orcon to access.

Commerce Commission decision

Read the full Commerce Commission report here.

The commission regulates these wholesale broadband prices and this morning released its final decision on what Chorus can charge.

The monthly wholesale price per line the commission decided was $34.44, a cut of 23 per cent.

This is slightly shallower than the $32.45 per month price the regulator announced in a draft decision last December, which was a cut of almost 28 per cent on the $44.98 Chorus charges now.

The final price is, however, well outside the Government's proposed range for copper broadband prices of $37.50 to $42.50.

Today's decision follows months of controversy after Chorus expressed distress at the Commission's draft ruling and the Government signalled it would intervene in the regulatory process.

Chorus: $1b funding shortfall

See the Chorus reaction here.

Chorus renewed calls this morning for the Government to intervene and said the Commission's decision would hit its earnings before interest, tax, depreciation and amortisation (ebitda) by $142 million each year.

The company said the decision would see a $1 billion funding shortfall 2020, when the UFB network is completed.

"Without the proposed Government intervention, the loss of these revenues would have two very negative consequences for Chorus' funding ability," Chorus chief executive Mark Ratcliffe said today.

"We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB," he said.

"We are intensely disappointed with today's decision. We are proud of our role as a cornerstone partner in delivering the Government's vision to build a fibre future for New Zealand...but unless the Government intervenes, it is likely that the benefits for New Zealand will be significantly compromised," Ratcliffe said.

Government reacts

Prime Minister John Key said the impact of the price cut claimed by Chorus this morning "could have very significant implications in their capacity to fulfill their obligations under the ultrafast broadband contract with the Government".

"So this is, in that regard, quite a serious matter. On the other side of the coin we just need to think through all of the issues, what the options might be what's in the best interests of everyone."

He said the Government was considering how it would respond but would not rule out legislating over the top of the Commerce Commission's decision or even taking an equity stake in Chorus.

"The Government is now going to go away and consider all of the options, have some discussions with industry players and see what happens next.

"Our primary concern is to ensure that ultrafast broadband is build and that can be rolled out to New Zealanders but we'll just need to work our way through all of these particular issues."

He warned against jumping to the conclusion that the cut in wholesale copper prices put forward by the commission would result in cheaper prices for consumers.

"Whether that's fully passed on to consumers is a completely different issue."

Asked about different possible responses including legislating to overrule the commission, lending Chorus taxpayer cash or even the Government taking a stake in Chorus, Mr Key said "no options have been taken off the table.

"We don't have forever the minister will go away and do her work now and we'll continue to get advice from Mbie and probably Treasury about what the options are."

Communications Minister Amy Adams said the commission's rulings had come as a surprise to everyone involved.

"No analysts or companies saw that coming, no one priced it in. When we entered into the UFB contracts this was pored over by all the players and people with a very high level of understanding if anyone was going to foresee it, it would have come up then and it certainly didn't and frankly no one's on record as predicting a drop on this scale.

Certainly there was some small drop expected and everyone was very aware of that."

Mr Key said Opposition leader David Cunliffe had been "pretty quick to criticise me some time ago when I said there could be issues for Chorus if the final determination looked anything like the draft determination, well let's see how it plays out".

Cunliffe: Govt should let it stand

Mr Cunliffe said this morning the Commerce Commission's ruling should be allowed to stand.

"That's the proper lawful process. Any intervention or over ride in that would put the Government really at risk and expense New Zealand's households."

He also suggested the Government was indeed considering "nationalising what's left of Telecom and now is Chorus because of the extraordinary failure of its broadband policy".

He said, rather than overruling the commission's decision, the Government "should look at why ultrafast broadband uptake has been slow, desultory, slow".

"The reason is it's expensive to hook up, it's a hassle to hook up and in fact there isn't enough available on line to give households a powerful reason to do it. If they solved the content problem the rest of it would take care of itself."

Mr Cunliffe didn't believe it was likely that Chorus would fail if the commission's decision stood, "there will probably need to be some discussions with Chorus to get some more information about but the Government must not warp the law and it certainly must not make kiwi households pay the bill or (create) the bizarre situation of renationalising Chorus to make taxpayers take the risk, that's ridiculous."

'Early Christmas present'

Opponents to intervention, who said the Government's proposed copper prices would be a "tax" on consumers, have also called on it to step down.

CallPlus and Slingshot boss Mark Callander said as far as his companies were concerned the commission had "done its job".

"The Government should not intervene any further. Kiwis will benefit from these savings, Slingshot has already made a commitment that it will pass through savings to consumers," Callander said.

Vodafone's Tom Chignell said the Government should just accept the decision so the industry "can all move on".

A spokesman for the lobby group Coalition for Fair Internet Pricing - an opponent of intervention - called it a "fantastic early Christmas present".

"This is a fantastic early Christmas present from the Commerce Commission, which, from next November, will give Kiwi households and businesses over $100 million a year more to be pumped back into the economy through everything from new school shoes for the kids to new technologies to help companies become more productive, said Paul Brislen, who is chief executive of the Telecommunications Users Association of New Zealand (TUANZ).

"Any price the government might now propose above $34.44 per month would represent an obvious tax on Kiwi households and businesses in order to subsidise Chorus, an already highly profitable monopolist. Even $35.50 would transfer over a million dollars a month from Kiwi households and businesses to Chorus shareholders, to no benefit to anyone else," Brislen said.

The commission's price of $34.44 is made up of two components, the unbundled bitstream access (UBA) charges and the unbundled copper local loop (UCLL) charge.

UBA is a service that allows telecommunications companies to supply broadband services to customers without the need to replicate Chorus' electronics or software while UCLL allows telecommunications companies to supply voice and broadband services to customers using their own equipment over Chorus's local loop.

The UCLL component was set at $23.52 per line per month last year and today the commission decided the UBA component should be $10.92.

Chorus is able to appeal the commission's decision, in a process known as a "final pricing principle" review.

- NZ Herald

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