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Further blow for Chorus as regulator floats another price cut

The Commerce Commission is shaping up to cut the price New Zealand network operator Chorus can charge for its regulated unbundled copper low frequency voice service, and to backdate its determination.
Written by Rob O'Neill, Contributor

A further regulatory blow is looming for Chorus, one that could cost it NZ$5 million to $6 million a year in lost earnings before interest, tax and depreciation.

The Commerce Commission has released a draft decision slashing the connection charges retail service providers pay to connect end users to Chorus' regulated unbundled copper low frequency service (UCLFS).

If implemented, Chorus told the NZX and ASX exchanges this morning, the changes will reduce UCLFS connection charges by between 5.8% and 31.1%. Chorus estimates this would have around a $5 - $6 million annualised EBITDA impact.

The UCLFS service enables telecommunications companies to provide a voice service to their customers using the low frequency band in Telecom's copper local loop network. Telecommunications companies can combine it with a wholesale broadband service to deliver broadband and voice services to their customers.

The Commission has determined charges should be re-set so they are the same as benchmarked UCLL connection charges. These were determined by the Commission as part of the initial benchmarking decision released in December 2012 and delivered an estimated NZ$142 million impact on Chorus's EBITDA.

That in turn forced Chorus into discussions with Crown agency Crown Fibre Holdings about how it can fulfill its contract to build most of New Zealand's new ultrafast broadband network.

The Commission has also proposed that the new UCLFS charges be backdated to the date of its UCLL decision, 3 December 2012.

“This is yet another example of the regulatory framework delivering prices that are disconnected from real costs,” Chorus CEO Mark Ratcliffe said.

“The Commission has proposed re-setting UCLFS connection charges based on the benchmarking of connection charges for local loop unbundling in other countries. Why wouldn’t they look at the actual prices that Chorus pays to service companies and which are negotiated through a competitive tender process. These costs have not been accounted for in the proposed charges and the draft prices do not reflect those real costs.”

“Whilst many things in the world of telecommunications regulation are difficult to explain, this isn’t. The person in the van needs to do some work, the cost for the service is a factor of how long it takes to do the work and how much they charge per hour.

"Do we really need to benchmark against international countries, when the answer is right here in front of us in New Zealand?”

Submissions on the draft decision are due on 10 January 2014.

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