Last week the Commerce Commission issued a draft decision on the value of Chorus’s regulated asset base (RAB). It set the value at a precise $5.427 billion.
The number is important as it sets the stage for the fibre company’s future revenue.
Or in the Commerce Commission’s language:
“It is part of the process for determining the maximum revenues the company will be able to earn from the operation of the Ultrafast Broadband network.”
Chorus wanted the asset value to be set at $80 million higher than the regulator’s figure. It made the case in its submissions.
Reduced maximum allowable revenue
The final difference is about one and a half percent short of that claim.
With these figures Chorus can expect a two to two and a half percent reduction in maximum allowable revenue.
Knowing it could have been worse for the company won’t please all the investors.
A long time brewing
It has taken a long time to reach this point. On my desk is a reporter’s notebook from mid-2017. Interview notes include mention of Commerce Commission moves to estimate the value of assets from before the fibre build started in the regulated asset price.
At that time, the interview source joked about people sitting around tables arguing about the resale value of old Chorus trucks and whether anyone would buy telephone poles.
It’s not an accurate representation of the process, but it paints an easy to understand picture.
You may hear grumpiness about the valuation process from Chorus investors.
Yet the company’s share price jumped 13 percent on the day the news was announced. The market has spoken and it says it likes what it heard from the Commerce Commission.
Getting the asset valuation right is more important than it may appear at first sight.
The UFB network was a high profile public-private partnership where the government sought investment to build key infrastructure.
At the time, the project looked risky. Investors wanted a return that reflected the risk.
The project has been more successful than any early estimates. Investors have had a solid return. Yet they might not have done so.
There are investors who feel the valuation process retrospectively reduces the return on their investment.
How it looks
Whether this is true or not matters less than how it looks to the investment community.
Future governments may want to go back to investors to fund other projects. They will be less willing to invest if they think successful projects will be subject to a similar retrospective value reduction.
Which could mean the cost of private investment in government infrastructure projects will rise to reflect this.
In the same way, Chorus investors may feel reluctant about future investments in the network if the return on that investment is restrained.