Tuesday, 1 Dec 2020

Chorus uses AGM to fire volleys at regulator, Spark, Vodafone

Chorus used its annual meeting to keep up the heat on the Commerce Commission as the regulator weighs the rules for the post-UFB rollout era.

Investors following the virtual AGM were told that international investors would shun future public-private infrastructure projects if the regulator did not come to its senses.

Read More

  • Two veterans depart as new Chorus boss looks to downsize executive team
  • Devonport, Miramar customers face ‘forced migration’ from Spark copper

The ComCom is in the process of determining factors such as the market risk Chorus faces and its weighted average cost of capital (WACC), which in turn will feed into the annual revenue cap, regulated anchor pricing and other utility-like limitations that the network operator will face from January 2022.

The process has at least another six months of PR and submission and counter-submission trench warfare to go. Most exchanges are couched in dense language and peppered with formulas, in keeping with the complex process of determining how the Telecommunications (New Regulatory Framework) Act, which sets the rules of the telco game for the post-copper era.

But today, it was addressed in simple, red meat language.

The decade-long, public-private Ultrafast Broadband (UFB) fibre rollout had been “bloody hard”, chairman Patrick Strange told investors at the virtual AGM.

ComCom a poor judge

The Commerce Commission was “simply wrong” in its sums because, in his view, it undervalued the risk taken by the project’s backers.

“If the ComCom did not acknowledge the risk investors had taken on since 2011, international investors will not be prepared to take this risk in New Zealand again, and future financing of New Zealand infrastructure will require, essentially, Government
underwrites of the risk before they start,” Strange said.

“If they had known how we were going to, be treated at the end, they would never have invested at the outset, he added.

If the ComCom sticks with its current line, “We will never be able to do another ‘Chorus’ to address our infrastructure deficit in New Zealand,” Strange said.

ComCom a wise judge

In two other areas, however, the Commerce Commission was praised as a savvy adjudicator.

Strange praised a Commerce Commission report that judged fibre performance better than fixed-wireless.

And the chairman said Chorus had recently “raised the bar” for would-be competitors by investing in the technology and the unconstrained network – over 17 per cent of our users are on a Gig plan now, and we have just made our new 2 and 4 gigabit Hyperfibre service widely available.

Vodafone, Spark and 2degrees – who have all snubbed Hyperfibre as not ready for primetime – are pushing 4G (and soon 5G) fixed wireless as a landline alternative.

Strange said Chorus had been fielding complaints from customers who had been told they would be migrated from copper lines to fixed-wireless if they did not respond in a given time.

He did not name the retail telco involved, but it appeared to be a clear reference to a Spark trial – now underway in Devonport and Miramar – under which all of the telcos customers in those suburbs have to move off copper line calling by December 18, with fixed-wireless and fibre pitched as alternatives.

Earlier, Technology Users Association head Craig Young criticised the pilot as a “forced March from copper”.

This morning, Chorus chief executive JB Rousselot said his company would be taking its concerns to the Commerce Commission as part of the regulator’s new inquiry into a spike in complaints about retail telcos.

Rousselot said fixed-wireless operators overall should be under more regulatory scrutiny.

Spark has been asked for comment.

A Vodafone spokeswoman said: “No matter what Chorus might allege, we believe Kiwis simply want internet choices that are fast, reliable, plentiful and competitively priced so we’ll continue to provide a range of broadband options that suit different needs.”

She added: “It’s worth noting the Commerce Commission’s latest measuring broadband report [the one quoted by Rousselot] shows average download speed for wireless broadband was 25.2 megabits per second, which is plenty fast enough for the activities most Kiwis conduct online such as browsing and video streaming.”

Rousselot said the retailers could not be relied on to promote fibre.

Mobile network operators had economic incentives to offer fixed-wireless service to the 470,000 or so copper customers who have yet to upgrade to UFB fibre, he said. That is, Chorus – and its roughly 50 per cent clip of the ticket – gets cut out of the loop.

Chorus was stepping up its own marketing efforts with its “How we internet” campaign.

Pointedly, he also welcomed Sky to the world of broadband. Sky will offer UFB fibre plans from next year, with the prospect of cut-price internet for those who commit to more Sky channels. A trial with staff is underway.

Chorus shares were up 1.53 per cent to $8.64 in midday trading, outpacing the NZX50 which was up 0.87 per cent.

Analysts: At least another 12 months of ComCom-Chorus bickering ahead

Strange said the ComCom’s views were already baked into Chorus’s share price, which has given up a modest fraction of its recent gains since the ComCom released an Input Methodologies paper that veered against the network operator on October 31.

The stock has been on a bull run since March, with the pandemic remote-working trend fuelling a rise in broadband use, buoying profits, and Chorus’ confirmation that a big dividend increase is close as the most capital-intensive phase of the UFB rollout winds up.

Jarden analysts Arie Dekker and Grant Lowe noted, however, that the Input Methodologies determination was just another round. Next up is the regulator’s assessment of Price Quality, which might be wrapped up until late next year (the Input Methodologies phase was four months late).

With a degree of regulatory uncertainty remaining, and the threat of fixed-wireless to chip away at Chorus’ profits, the Jarden pair rate Chorus neutral, with an $8.38 12-month price target.

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