Compromise ruling on UFB revenue caps looks set to leave pricing unchanged

Thursday, 16 December 2021

Chorus shares slipped on a long-awaited regulatory ruling, but have still proved a solid long-term investment.

Chorus will be allowed to earn revenues of up to $690 million from its ultrafast broadband network next year, rising to $790m in 2024, the Commerce Commission has determined in a compromise ruling.

The watchdog said the revenue caps were $60m higher over the three-year period than implied by a preliminary decision in August, but $88m or about 4 per cent lower over the period than initially sought by Chorus.

The caps, which are part of a new regulatory regime, are believed to have been set at a level where they should not result in significant changes to the price that Chorus charges internet providers for UFB connections, and hence to retail prices.

The wholesale price of Chorus’ “anchor” 100 megabit-per-second UFB service, which Chorus is upgrading at no extra cost to 300Mbps, is agreed separately with the Government.

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Telecommunications commissioner Tristan Gilbertson said the ruling was the culmination of “three years of work”.

Spark, which had queried some of the expenses Chorus’ had wanted reflected in the revenue caps, and Vodafone declined to comment.

Spark had accused Chorus of essentially of overestimating and loading too many corporate and other unrelated costs into the price calculation for its regulated UFB service prior to a draft ruling in May.

But Spark spokeswoman Althea Lovell said on Thursday that it didn’t think it was Spark’s place to comment on the final ruling.

Chorus shares slipped 3.1 per cent to $6.86 in late afternoon trading following the announcement, having risen by 70 per cent over the past five years.

Chorus made no indication in a statement to the NZX that it was seriously considering challenging the ruling, with chief executive Jean-Baptiste Rousselot saying it was “pleased to finally have clarity”.

The company appeared to suggest the cap would mean the Government would need to pay for any work to extend UFB beyond the current footprint covering 87 per cent of homes and businesses.

“Given some of the final regulatory settings, we'll need to keep looking for ways to work with the Government to help meet New Zealand's increasing connectivity needs beyond our planned fibre footprint,” Rousselot said.

But it is understood the revenue cap is based on Chorus’ current investment plan and that it could seek approval to recover additional investment expenditure that was not foreseen at the time that was drafted.

Chorus has been responsible for building about 70 per cent of the UFB network, not including the network in Christchurch, Hamilton and some other parts of the central North Island, and Northland.

The increase in allowable revenues from $690m to $790m during the three-year period is designed to reflect the forecast growth in demand for UFB connections as more homes and businesses connect to the network in areas where fibre has already been laid to the street.