Chorus forces regulator to review broadband charges

Chorus chief executive Mark Ratcliffe.

Chorus will force the Commerce Commission to go back to the drawing board to work out broadband charges after a price cut from the regulator yesterday slashed more than $71 million off the company's value.

In the meantime, the Government is still mulling whether it will intervene in the market, override the commission and set broadband prices itself. NZX-listed Chorus sounded the alarm yesterday as the commission made a 23 per cent cut to what the infrastructure company charges internet retailers such as Orcon or Vodafone for monthly broadband services and line access over its copper network.

The new prices would come into effect from December 2014. While yesterday's cut was not as severe as the almost 28 per cent price drop the regulator tabled in a draft decision last year, Chorus said the move would hit its earnings before interest, tax, depreciation and amortisation (ebitda) by $142 million each year.

If the decision stands Chorus said it would also have to notify its bank lenders that the price cut would have a "material adverse effect" on its borrowing arrangements and its "lenders would be entitled to trigger an event of default".

As well as owning and operating the copper network, Chorus is building the majority of the Government's ultra-fast broadband network (UFB), which will deliver much quicker internet to 75 per cent of New Zealand by 2020. But the company claimed the decision would lead to a $1 billion shortfall for UFB and other projects and chief executive Mark Ratcliffe said it meant Chorus "simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB".

Chorus' share price plunged after the commission's announcement, eventually closing down 6.84 per cent at $2.45.

However, the Government has signalled it could solve some of Chorus' woes and intervene in the market, which the company is pushing for.

The Government has proposed overriding the commission and cutting wholesale prices by between 5 and 17 per cent.

Prime Minister John Key said the impact of the price cut claimed by Chorus yesterday "could have very significant implications in their capacity to fulfil their obligations under the ultra-fast broadband contract with the Government".

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.

Communications Minister Amy Adams, who is spearheading the proposed intervention, did not respond to questions yesterday on when the Government will make a decision.

While the Government makes up its mind, a Chorus spokesman confirmed yesterday that the company was getting the commission to go through a "final pricing principle" (FPP) review to work out the wholesale charges.

The spokesman said it was Chorus' right under the law to ask for this review.

This can take years to complete and will see the commission use a different and far more complex model than for yesterday's decision. The length of the FPP process is one argument the Government has advanced in favour of intervention.

Instead of benchmarking against prices from markets similar to New Zealand, the FPP process involves a full analysis of the cost of Chorus building a replacement network from scratch, and working out prices from that.

First NZ Capital's director of equity research, Greg Main, said, based on his analysis, there was a "strong possibility" wholesale prices would come out higher once the FPP process was complete.

Main did say, however, that the process was untested and the commission had quite a lot of room for discretion.

If the FPP process was not complete by December next year, yesterday's price cuts would still come into effect, a commission spokeswoman said yesterday.