WACC-off: Chorus, regulator at odds over future of broadband

Chorus and the Commerce Commission remain in a stand-off over a financial metric that will play a key role in determining the future price of broadband - but the network provider seems to be slowly nudging the regulator in its desired direction.

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A major overhaul of the Telecommunications Act, which will kick in on January 1, 2022 (following the ComCom's successful request for a two-year delay), will see Chorus subject to an annual revenue cap - as, for example, listed lines company Vector is in the power sector. The wholesale price of Chorus' "anchor" (or mass market) UFB fibre plan will also be regulated. It will also have to meet minimum quality standards.

The new law sets the broad outlines, such as putting a revenue cap in place. But setting the specific size of that cap, and other metrics, is up to the commission.

This morning, the ComCom released a 700-page draft decision paper on input methodologies, that industry players see as a key step in the process (final decisions won't be made until between June 2020 and July 2021).

A Chorus insider told the Herald that the door-stop report will probably take his company a full week to digest and model.

But Chorus' first-blush take is that the report is broadly positive, with the regulator shifting modestly in the network provider's favour on several issues, including that tax losses can be carried forward to the implementation date of the new regime.

But the regulator has moved the needle on the key weighted average cost of capital (WACC) metric, it's still not enough for Chorus' liking.

In the draft released today, the commission has suggested an increase in asset beta from 0.46 to 0.49. Chorus had wanted 0.51.

In plain English, that means Chorus still thinks the Commerce Commission is being over-optimistic about UFB fibre's prospects (in the face of competitive threats like 5G) and the cost of capital as it mulls how to set regulated pricing - and in turn potentially too tough on Chorus as it considers where to set a revenue cap and other criteria under new regulations.

The ComCom document this morning did not address a separate bunfight, which sees Chorus and retailers ISPs such as Spark, Vocus and Vodafone at odds over the cost of unbundling UFB fibre. That is, retailers being allowed to add their own electronics to Chorus exchanges to give themselves more power over pricing and features. The commission is expected to update on that issue before Christmas.

Chorus shares closed yesterday at $5.19. The stock is up 3.18 per cent for the year.

In May, ForsythBarr analysts Matthew Henry and Matt Dunn downgraded Chorus to neutral and shaved the network operator's 12-month target price from $6.25 to $5.65 (shares were $5.87 at the time).

But last month they upgraded the company to outperform with a $5.80 target.

While it's still not clear where the ComCom will land on WACC and other metrics, Henry and Dunn says they're "comfortable with the uncertainty" given Chorus strong long-term cashflow prospects, especially after the UFB rollout (and attendant hight capex) wraps up in 2022.

The Herald has asked retail ISPs and other parties for their take on today's draft. Comment is expected later today.