Chorus earnings take $10m regulatory hit

Telecommunications network company Chorus sticks with market guidance as regulator backdates decision and charges interest.

New Zealand regulator the Commerce Commission has delivered an earnings blow of up to NZ$10 million to listed network operator Chorus.

The Commission has determined that Chorus' regulated unbundled copper low frequency service (UCLFS) charges should be re-set to the same price as the benchmarked unbundled copper local loop (UCLL).

UCLL pricing was set in a separate and more costly determination made on 3 December 2012.

However, Chorus is still hoping to reverse or partly reverse the decisions through a separate review of the Commission's methodology which is already under way. The company is already cutting costs across the business, including in its major fibre rollout contract with the New Zealand government, to manage the impact of the decisions.

The Commission also determined the new UCLFS connection charges will align to UCLL charges and therefore be backdated to 3 December 2012, including interest.

Chorus estimates the net effect of backdating and interest charges will reduce the company's 2014 earnings before interest, tax, depreciation and amortisation (EBITDA) by NZ$9-$10 million. Chorus further estimates the decision will have an annualised EBITDA impact of around $6 million.

The Commerce Commission said in its determination that, in submissions, retail telco Telecom and Chorus both appear to accept the Commission has the power to revise and backdate UCLFS prices.

"They, however, have different views on when the price revisions should be made; and if they are made now, on whether or not they should be backdated," the regulator said.

Chorus opposed the UCLFS prices being amended before the completion of the UCLL process, and also argued revised prices should not be backdated.

Telecom, however, supported the UCLFS changes being made before the completion of the UCLL process, and argued that charges should be backdated,

Chorus left its 2014 EBITDA guidance unchanged but told the New Zealand Stock Exchange the company now expects to track to the middle of the range of flat to low single digit percentage decline in EBITDA, relative to underlying 2013 EBITDA of NZ$654 million. 

Chorus’ added that it believes the connection charges for UCLL are part of a UCLL final pricing process that is due to be completed by 1 December 2014, under which the regulator's use a cost modelling rather than a benchmarking will be reviewed.

Chorus has proposed that the Commission consider the review of the UCLFS connection charges with the benefit of cost modelling analysis.

"In a situation where the final pricing reviews change benchmarked connection charges again, consideration of backdating remains relevant – today’s outcomes have the potential to be reversed," the company told the market.