By Bernard Hickey
Prime Minister John Key has said the Government is considering all its options in response to Chorus' warning it may default on its debt and restrict its rollout of the Government's Ultra Fast Broadband (UFB) network after the Commerce Commission ruled it must cut its wholesale copper broadband price by 23%.
Key agreed those options included Government intervention to over-rule the Commerce Commission decision, a government loan to Chorus or the Government taking an equity stake in Chorus. He said some were more palatable than others and the Government would now consider its options.
Key told a news briefing after National Party's weekly Parliamentary caucus meeting that New Zealand needed the UFB project to continue unimpeded and no investors or analysts had predicted the heavy impact of the Commerce Commission decision on Chorus' financial position.
Meanwhile, the Green and Labour parties and the Coalition for Fair Internet Pricing all called on the Government to let the Commerce Commission's decision stand, describing the Government's August 7 proposal for a cut of just 5.5% to 16.6% as the imposition of a 'Copper Tax'.
The Commission ruled that Chorus could only charge NZ$34.44 per copper broadband line from December 1 next year, down 23% from the current price of NZ$44.98/month and only slightly higher than its December 3, 2012 draft ruling for a NZ$32.45 price. The Government proposed on August 7 a range for copper broadband that was the same as the cost of fibre of between NZ$37.50 and NZ$42.50.
Chorus said in a statement titled "Regulatory black hole puts Chorus funding at risk" that the decision would reduce its EBITDA by NZ$142 million, wiping out most of the NZ$171 million in EBITDA net profit it made last financial year. It warned that without Government intervention its lenders would be able trigger a default on its debt, which stood at around NZ$1.7 billion at the end of June. That debt includes NZ$1.195 billion of unsecured debt to a syndicate of unidentified banks and 260 million pounds of bonds. Also see David Hargreaves' story; Chorus gives dire warning.
Chorus also warned it may not be able to complete the UFB rollout, saying it would have to "discuss with the Crown whether Chorus is still a credible UFB partner in the way intended at demerger and how Chorus might deliver the balance of its programme despite the very material funding gap in Chorus’ business implied by this decision."
Chorus' share price fell 7% this morning and is down more than 20% in the last year since the Commission's draft ruling in December last year.
'Range of options'
Key agreed with Chorus it was not guaranteed the lower wholesale price ruled by the Commerce Commission would be passed on by Retail Service Providers (RSPs) to customers.
"It's not true the government has no options. The Government has a range of options. Some are more palatable than others. What is true is the Government cares passionately about Ultra Fast Broadband and it certainly had in Chorus a good partner and nobody predicted the Commerce Commission would come up with this final pricing," Key said.
"What this does is effectively test the cashflow and the likes of Chorus," he said.
Key said Chorus' warnings of a potential default were in line with his own recent comments that Chorus could go broke.
"If everything follows through, Chorus will earn a lot less revenue and that will give them a lot less options in terms of fulfilling its UFB contract, because the money it would have received would have been poured into building the UFB that we want New Zealanders to be connected to, and New Zealanders will want to be connected to," he said.
He said the Government would now get some advice on what its options would be.
"Our interests are ultimately the consumers of New Zealand, and ensuring they have access to Ultra Fast Broadband. We believe that is a piece of infrastructure that will have the capacity to turn and change the dial when it comes to New Zealanders' ability to compete in the world," he said.
"At one level, some consumers might be saying they'll be paying a little bit less because of this decision, and that's not guaranteed, but if New Zealand gets left behind in the Internet race and New Zealanders don't have access to Ultra Fast Broadband that will have very significant long term implications for this country."
'Don't over-rule it'
The 'Axe the copper tax' Coalition for Fair Internet pricing said the Commission's decision should be allowed to stand.
It said New Zealand households and businesses would pay NZ$104 million a year less for copper broadband and voice services from December 2014 if the decision was allowed to stand and total benefits would be NZ$522 million by 2019. It pointed out the Commission's decision was made under rules legislated in 2011 when Steven Joyce was minister.
“This is a fantastic early Christmas present from the Commerce Commission, which, from next November, will give Kiwi households and businesses over $100 million a year more to be pumped back into the economy through everything from new school shoes for the kids to new technologies to help companies become more productive,” said Coalition spokesman Paul Brislen, who is also chief executive of the Telecommunications Users Association of New Zealand (TUANZ).
“Any price the government might now propose above NZ$34.44 per month would represent an obvious tax on Kiwi households and businesses in order to subsidise Chorus, an already highly profitable monopolist. Even NZ$35.50 would transfer over a million dollars a month from Kiwi households and businesses to Chorus shareholders, to no benefit to anyone else," Brislen said.
Brislen said any suggestion the decision would hurt the UFB rollout was “plain wrong”. “The government has contracts with Chorus and others to build the new world-class fibre broadband network. Ministers should tell them to just get on and do it," he said.
A Covec study for the coalition, which has been peer reviewed by Network Strategies, concluded that the government’s proposed pricing (August 7) would cost Kiwi households and businesses between NZ$390 million and NZ$449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission had ruled. More recent demands by Chorus would take this cost to Kiwi households and businesses to NZ$979 million, the Coalition said.
'Crying wolf'
The 'Axe the Copper Tax' Coalition said Chorus was "crying wolf" with its "extraordinary" press statement this morning.
“Chorus is a strongly profitable company that cannot possibly be at any risk as a result of this morning’s determination,” Brislen said.
The NZ$104 million impact compared with its revenue of NZ$1.06 billion last year, its NZ$663 million EBITDA, the NZ$681 million it spent on capex, its net profit after tax of NZ$171 million, the NZ$95 million it paid in dividends to its largely foreign shareholders and its NZ$3.3 billion in total assets, the Coalition said, adding Chorus had known about the review since 2011 and the draft since November last year.
"The suggestion it could default on its debt as a result of not planning for a long-signalled regulatory change beggars belief coming from a chief executive earning $1.8 million a year," Brislen said.
“It almost appears to be a case of the company talking down its own share price, to put pressure on the government to intervene in the market and over-ride the independent Commerce Commission in order to boost its profits," he said.
“Chorus is crying wolf, and the government should simply tell it to accept this morning’s decision, make whatever minor adjustments are needed to respond to it, and get on with meeting its contact it build UFB for the 30% of New Zealanders who are believed to want it by 2020, and the 75% of New Zealanders who will eventually have access to it.”
Cunliffe reacts
Labour Leader and Telecommunications Spokesman David Cunliffe rejected Key's suggestion the Government could invest in a stake in Chorus and said the Commerce Commission decision should be allowed to stand.
"Renationalising Chorus is an extreme response which I suspect the PM is only putting out there as cover for other steps, but we will see," Cunliffe told reporters after Labour's Parliamentary Caucus meeting.
"When we were breaking up the Telecom monopoly when I was the minsiter of ICT everybody said if we regulated it would be the end of the world, hell would freeze over, no-one would invest in broadband, so we created a more competive market and investment levels doubled. I think we need a very sober assessment of the situation before people buy into the PM's panic."
“New Zealand families should not be forced to pay $100 a year more than the regulator says is needed for broadband just because the Government negotiated a bad contract.
“Nor should National bail out its corporate mates and force the taxpayer to pick up the tab. This is a ridiculous situation and is totally of the Government’s own making.
“The underlying problem is the slow uptake of UFB. If Chorus is truly struggling to stay solvent then it is the uptake rate by customers of UFB that is the problem, not the actions of the independent regulator. The National Government’s unwillingness to stimulate a compelling, multi-provider online content environment has made the UFB uptake problem worse."
Cunliffe said a reshuffle or ministerial resignation should now be contemplated.
Green reaction
Green Telecommunications Spokesman Gareth Hughes said a cheaper copper price would not necessarily slow fibre uptake.
“Consumers can currently access the internet for as little as $5 per month on dial-up, but very few choose this cheaper option," Hughes said.
“It’s not the first time National have used legislation to transfer public wealth to large corporations,” he said.
“National’s Sky City legislation and NZ$30 million cash pay-out to Rio Tinto’s Tiwai Point paint a picture of a Government beholden corporate lobbying rather than protecting the interests of consumers and tax payers."
(Updated with more reaction from Key, the Coalition for Fair Internet Pricing, David Cunliffe, Gareth Hughs, background)
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