Spark New Zealand has warned that prices could rise following the announcement by the Commerce Commission of proposed new wholesale rates that Chorus charges retail service providers, including Spark.

"Today's announcement is unexpected and we are now facing costs approximately $60 million a year higher than we previously anticipated. These higher costs will affect all our fixed services, not just broadband services," said managing director Simon Moutter.

Shares of Chorus, the regulated telecommunications network operator, jumped as much as 17 per cent after the Commission lifted the prices it can charge for access to the traditional copper lines network for broadband internet services.

The shares rose as high as $2.50, the highest the shares have traded since October last year, when the antitrust regulator priced its copper pricing, and recently traded up 15 per cent at $2.47.

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In a draft determination issued this morning, the competition regulator has proposed raising the monthly total charge allowable for the unbundled copper local loop (UCLL) and for unbundled bitstream access (UBA) by $3.95 a month to $38.39, from the $34.44 monthly regulated price that came into effect on December 1.

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Moutter said that for the past two years, Spark (formerly Telecom) had been anticipating a $10 reduction in broadband costs, which had been reflected in current customer pricing.

"But what we didn't expect was a $5 increase in the cost for a residential or business line - for both broadband and standalone voice services. All of this comes on top of recently implemented increases in Chorus connection charges for broadband services."

Moutter said intense market competition meant the anticipated reduction in wholesale broadband charges (signalled by the Commerce Commission as far back as December 2012), had already flowed through into retail broadband prices.

"For instance, what you get in our basic $75 broadband plus home phone plan today would have cost you $105 three years ago. In that time, our wholesale costs have barely moved until the new charges came into effect yesterday."

"Given today's decision, we feel we have no choice but to undertake an urgent review of our current pricing across both voice and broadband plans."

"The pricing has come out and it is certainly better than, or as good as what could be expected," said Grant Williamson, director at brokers Hamilton Hindin Greene. "That's brought investors into the market and removed uncertainty about what Chorus is going to be able to earn in the future."

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Forsyth Barr telecommunications analyst Blair Galpin said that the share price would likely settle by the end of today.

It was important to remember that today's determination was only a draft that would change when the final price determination was set. Theoretically that would be April 2015.
Sometimes the Commission had been aggressive on the draft price and then come back on the final price but in the past the determination had gone both up and down, he said.

Chorus chief executive Mark Ratcliffe said the new draft rates would still knock an $80 million hole in annual operating earnings, compared to the aggregate annualised earnings before interest, tax, depreciation and amortisation reduction of around $170 million.

"It's a lot better than the first lots of pricing that came out," Williamson said. "It is still going to mean a reduction in Chorus's forecast earnings, but still not as bad as what was expected."

See the Commerce Commission's Chorus announcement here:

The combined services dictate the base cost for provision of broadband internet services over the copper network, which competes with fibre-optic cable-based services, which are becoming available under a government-subsidised national roll-out currently under way, the majority of which is being installed under contract by Chorus.

In July, Chorus cut a deal with Crown Fibre Holdings, the government body overseeing the UFB rollout, to bring forward funding of $178 million though at a high interest rate and the expense of dividends. In March, Crown Fibre gave Chorus greater flexibility in building the network provided it meets an agreed deadline. Chorus also gained more wiggle room under its banking covenants, allowing for weaker earnings relative to its borrowings.

Today's decision "will now add a bit more certainty into Chorus's performance and share price going forward and will hopefully lead to the reintroduction of dividend payments at some stage," Williamson said.

Chorus had sought the commission's reworking of regulated charges because it argued lower than anticipated monthly charges for copper-based broadband services would frustrate the government's policy goal of rapid public uptake of UFB. In the past, the network provider has claimed regulated copper service price cuts left a $1 billion hole in funding for the ultra fast broadband.

"We accept the possibility that an uplift could be justified to avoid slowing the uptake of UFB," said telecommunications commissioner Stephen Gale. However, advice from international experts found there was adequate allowance already for any network risks to UFB uptake.

The new draft rate, which does not yet apply and is subject to further submissions from the industry, is still $6.49 per month lower than the $44.98 monthly rental for UCLL and UBA that had applied until yesterday.

The increase is composed of a rise in the UCLL monthly charge from $23.52, established in an international benchmarking exercise completed in 2012, to $28.22, and a small decrease in the monthly regulated charge for UBA of $10.17, compared with the $10.92 charge that has applied since yesterday. Both the newly applied rates will continue in place until the current consultations are concluded, with some prospect of backdating for the final decision on the UCLL price.

The UCLL price has risen because the commission concluded New Zealand's copper network had a higher underlying cost of replacement because of the number of long lines connecting to small numbers of customers in remote rural areas, among other factors.

"There appear to be uniquely New Zealand factors, such as the dispersed nature of the rural network, that may differentiate our UCLL prices from the overseas benchmarks," said Gale.

IDC consultant Peter Wise said the draft price-setting seemed to have been conducted as goal-seeking, so that Chorus received some relief and telcos retained some benefit.
He doubted that any benefit to the telcos would be passed on and they would argue that prices have already come down.

He said that in normal cases the final price might be expected to come out in April.
But this was complex cost modelling and he expected the final price would be "pushed out" a few months. There was an economic element to the decision. If the draft price for copper had come out at $30 it would have been very cheap and undermined the move to fibre optic, Wise said.

A final pricing decision will be made after the consultation process.

The commission is also seeking views on whether it should conduct a review of the standard terms determination for the UBA service and, if so, what it should examine.

Submissions are due by January 23.

- additional reporting John Drinnan


Read the Commerce Commission's full decision on copper pricing here: