Editorial: Consumers must not pay for telco woes

Consumers are an innocent party in all of this, and nothing that penalises them unduly should be contemplated. Photo / Glenn Taylor

The EY report on the financial position of Chorus, the company chosen to install most of the ultra-fast broadband network, contained some potentially bad news for consumers. They, it said, could receive lower service levels and suffer an increase in fault rates, high prices for new connections, and network congestion on the company's copper-line network if its recommendations for covering a funding shortfall are adopted. In no way must that occur. Consumers are an innocent party in all of this, and nothing that penalises them unduly should be contemplated.

The EY report confirmed that Chorus faces a $1 billion funding shortfall between now and 2020, when the broadband rollout is meant to be complete. That is a consequence of a Commerce Commission ruling that it must charge rival internet providers a 23 per cent lower price for its copper network. EY suggested a range of remedies to reduce the shortfall to about $250 million. Aside from operational and capital expenditure savings, these included a two-year dividend holiday, which would reduce the funding gap by $290 million, changes to the company's debt headroom, revenue increases and possible capital raising.

The dividend holiday has attracted most attention. Shareholders in Chorus are, understandably, unhappy at the prospect. They would be far more dismayed if the view of the Telecommunications Users Association was heeded. Its chief executive, Paul Brislen, sees no reason why Chorus should be paying a dividend when it is rolling out the network. "How about we have a seven-year dividend holiday ... with a seven-year holiday, you would end up with the problem going away entirely."

That is, of course, an extreme solution. Nonetheless, shareholders should appreciate that they have had a good run with Chorus. Their dividends have been commensurate with a company that, according to EY, enjoyed a 29.7 per cent return on equity in the 2013 financial year. That is significantly higher than other New Zealand infrastructure businesses, which had average returns of 12.5 per cent.

The shareholders' problem is their investment in a company that, to all intents and purposes, chose to ignore the probable consequences of a Commerce Commission review of copper connections charges, as required by the 2011 Telecommunications Amendment Act. In that, its behaviour bore an alarming similarity to that of its former parent, Telecom, for which shareholders also eventually paid a heavy price.

There will be no seven-year holiday. Chorus and Crown Fibre Holdings, the entity responsible for the taxpayer investment in ultra-fast broadband, will, instead, probably overcome any problems associated with the company's debt ratios by tweaking the contract. There may, for example, be changes to the timing of Crown Fibre's payments to Chorus.

The company appears to understand that consumers should not head the list of those who suffer. It says a balance must be struck to ensure they continue to benefit from high-quality infrastructure. There must be no calculated slippage in that quality. Encouragingly, the Communications Minister, Amy Adams, seems to appreciate this. She has noted the commission monitors Chorus's performance and that the company must meet a number of standards when providing regulated services. Chorus was, she said, currently performing above those benchmarks.

That may surprise many jaded consumers. By and large, they have not been served well by the industry. Most infamously, a former Telecom chief executive, Theresa Gattung, once disclosed that confusion was one of her company's major marketing tools. In the response to Chorus's financial woes, there can be no confusion. Consumers must not play the role of sacrificial lambs.