Commission move could cost Chorus $160m a year

Chorus has argued a cheaper pricing regime would be unfair and deter people from buying into the fibre network it is rolling through the country. Photo / File

Network-operator Chorus says the Commerce Commission's proposed wholesale price cuts could shave up to $160 million a year off its operating revenue and cause the lines to company to fundamentally rethink its business model.

Chorus' share price is down 12.4 per cent this afternoon following two announcements from the Commerce Commission.

In the first, the market regulator made a "small reduction" to the wholesale price that internet provides must pay to access parts of Chorus' copper network.

The cut is far less than what the regulator proposed in a draft decision in May and the commission said today that the new geographically averaged wholesale price for access to Chorus' unbundled copper local loop (UCLL) would be $23.52 per month per line.

The change into effect on 1 December 2014 and equates to a 3.85 per cent reduction on the prices set in 2007.

Chorus said this afternoon that the annualised impact of the final UCLL decision would be an EBITDA (earnings before interests, tax, depreciation and amortization) drop of around $20 million a year.

Because the decision applies from today, the impact for the 2012/13 financial year is an EBITDA reduction of $11-12 million, Chorus indicated.

But a second announcement from the commission this morning could strike a harder blow to Chorus.

In this move, the commission has proposed to slash what Chorus charges internet provides to access unbundled bitstream access (UBA) services.

The full UBA service enables retail telecommunications companies - like Telecom or Vodafone - to supply broadband services to households and businesses without the need to replicate Chorus' local copper lines, electronics and software.

The proposed UBA price is $32.45 per month per line - down $12.53 from the current price of $44.98 and would come into effect from December 2014.

If the UBA decision was finalised, Chorus it could reduce annual EBITDA by a further $150-160 million from December 2014 (based on connection numbers as at 30 June 2012).

"Chorus has very serious concerns about the potential impact of these decisions. While noting that the UBA decision is a draft, and there is a process to run, management expects that the collective impact of these two changes (if the draft

UBA decision were to become final) could require Chorus to fundamentally rethink its business model, capital structure and approach to dividends," the company said in a statement to the exchange.

Deutsche Bank analyst Arie Dekker said the UBA draft determination created more uncertainty for Chorus.

"The cut's quite significant... having got the clarity Chorus was looking for on UCLL, it's ended up with a whole lot of uncertainty on UBA," Dekker said.

Telecommunications Minister Amy Adams signalled immediate disquiet, saying the government is reviewing the draft UBA determination, which is "potentially significant for the industry and end users."

"New Zealand is one of the few countries in the world to have structurally separated its main telecommunications company, while at the same time rolling out a fibre network," Adams said. "This potentially highlights the need for a pricing methodology appropriate for the New Zealand context."

Additional reporting: BusinessDesk