MONEY TALKS: Untangling Chorus's copper conundrum

(Fixes 15th par to show fibre companies don’t get a regulatory holiday on pricing)

By Paul McBeth

Dec. 7 (BusinessDesk) - The telco sector's jumble of nonsensical acronyms and jargon-packed explanations puts most people to sleep. UFB, UCLL, UBA?


And by and large, the technical aspects of telecommunication retailers, wholesalers, distributors and network operators is largely irrelevant for someone who's looking to invest in, say, Telecom or Chorus.

The problem is, those doo-whatsits and hoo-jiggies actually have meaning, and when things go sour, they take on all the properties of a genetically-modified lemon.

At the start of this week the new Telecommunications Commissioner, Stephen Gale, gave the owner of the core network of hoo-jiggies, Chorus, quite a serve when he outlined his thinking on how it should set prices for unbundled bitstream access. Take my word for it, this is the bit governing how everything digital arrives on your screen.

It's the part of its copper network that lets internet service providers use Chorus's existing electronics, software and distribution, meaning an ISP doesn't have to spend money building those things itself.

Gale was tapped by new Communications Minister Amy Adams earlier this year and thought to be a friendlier face for industry after an activist predecessor. So much for that.

Gale was at pains to stress to reporters that the pricing decision was only a draft and that he didn't want to spook investors. Well, fat chance of that.

The stock price plunged 18 percent in two days, wiping $240 million from the market capitalisation of Chorus, and valuing it at less than when it was spun out of Telecom last year. That's one hell of an expensive regulator's decision, draft or no draft.

Sure the price has come back since plummeting from $3.40 to hit rock-bottom at $2.78, but it's still languishing at $2.79, some 5.1 percent below its $2.94 listing price a bit over a year ago.

Needless to say, Chorus was not amused by the whole shemozzle, calling the regulator out and pleading for the government to bring the Commerce Commission into line.

The early signs for the network company are promising with IT Minister Adams seemingly keen on a turnaround, and Prime Minister John Key saying if the decision stands it's "highly problematic" and that legislation is an option to get the government's favoured outcome.

At risk getting thrown out of the Capitalists' Club, that seems an overly violent reaction at such an early stage in the process.

Chorus already got a "gimme" when the government wrote legislation enabling Chorus, the monopoly network operator, to be split from Telecom and become the recipient of a billion dollar subsidy to build a fibre network around the country.

While fibre pricing didn't get the regulatory holiday the government was pushing for when it first tabled the legislation, the Crown did agree to wear the risk if the Commerce Commission decides fibre prices need to come down. That meant co-investors like Chorus get an extension on repaying the government if the regulator gets too heavy-handed, and may partially explain the Crown's response if it's left carrying the can.

That makes the pricing of copper networks, which are still a credible threat to fibre because they deliver "very fast" if not "ultra-fast" broadband, a live issue for consumers.

Copper lines still make up about 80 percent of Chorus's revenue, and the pricing had been jiggered to create a national average, meaning the company would be able to recover more of its costs from more densely populated urban areas while giving under-populated rural areas a pricing break.

It's not that the regulatory threat was unforeseen. It was all in Telecom's scheme booklet for shareholders - the mammoth offer document it put distributed last year to shareholders outlining the pros and cons of the historic and internationally unusual Telecom/Chorus split.

In hindsight, it seems most people thought the regulator would strike more of a happy medium between using copper technology as a way to force more competitively priced fibre services. The way it's written now, copper could prove popular for longer by being cheaper, slowing the uptake of ultra-fast broadband, which the government's policy desires.

On the head of such pins dance competition regulators.

The Commerce Commission's reason for being is to protect end-consumers from monopolies throwing their weight around and corporates acting in an uncompetitive manner.

Telecom is now in a competitive environment - Chorus is not. And that regulatory framework isn't going to change before a scheduled review is done by March 2019 - eight and a bit years away.

That's a lot of price-gouging opportunity, while Gale's job is to be sure that when he sets prices for the copper network, it's not so low as to deter investment in the new technology. Gale reckons there's no such threat from the new copper pricing regime.

Investors clearly disagree, and so does the government at this stage.

The shift in attitude to Chorus becomes pretty apparent when you look at the analysts' recommendations. In August, the average recommendation among 10 analysts was for the stock to 'outperform' with a median target price of $3.44. Now half of them are thinking it will 'underperform' dragging the average down to a 'hold' with a median target price of $3.19.

Last time I visited Chorus in these pages I was touting the confidence fund manager AMP Capital had in the network operator, as it built its stake in the company to 11 percent after the Telecom split. As of today that's down to 5.4 percent.

When Chorus started standing on its own two feet, the general assumption was that this was no megalithic Telecom exerting its dominance in a tiny market.

I guess the regulator didn't get the memo.



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