2013: When Chorus faced potential failure

Editor's Note: In late 2013, New Zealand’s Ultra-Fast Broadband (UFB) rollout hit a wall when a Commerce Commission ruling threatened Chorus’s financial viability. This post merges five reports filed during that period, documenting the interactions between the network provider, the regulator and the government.

November 6: Chorus heads to the high court

Chorus turned to the High Court to challenge the Commerce Commission’s ruling on copper broadband pricing. At the heart of the matter is a "benchmarking" decision that Chorus claims doesn't align with the government’s policy of transitioning to fibre.

CEO Mark Ratcliffe argues the company has a duty to its shareholders to explore every option. To bolster its case, Chorus called on former Telecommunications Commissioner Dr. Ross Patterson, who points out a fundamental flaw: the current regulatory framework is designed to encourage competition, yet the UFB model acknowledges that the access network is a natural monopoly.

These two frameworks, he argues, cannot co-exist efficiently.

November 19: Could the UFB build be at risk?

As the legal showdown brewed, Communications Minister Amy Adams called for an independent review from Ernst & Young (EY) to see if Chorus can actually finish the job. With Chorus holding the lion’s share of UFB contracts, including the critical Auckland build, the stakes for the wider New Zealand economy are high.

However, the risk to businesses might be less than the headlines suggest.

By the time the copper price changes at the end of 2014, roughly 75 percent of business areas should already be connected.

Even in a worst-case scenario where Chorus "pulls the plug," these business areas are a lucrative enough opportunity that another commercial builder would likely step in. The real concern lies with residential connections and the remote workers who rely on them.

December 9: Nuclear Option and the worst-case scenario

What happens if Chorus fails?

Last week, TUANZ CEO Paul Brislen wondered out loud about Chorus going for the "nuclear option”. The idea is that if the company sticks to the letter of the law, copper internet connections could slow to a crawl.

He has a point. Yet this is not even the worst thing that could happen.

Chorus is the private owner of the most important parts of the national telecommunications infrastructure: the copper network, cabinets, exchanges, and national transport fibre. It is responsible for around 1.8 million phone lines—roughly 90 percent of New Zealand’s fixed-line connections.

This is a national, strategic asset, as vital to our economy as roads or water. If Chorus were to go bust tomorrow, say it couldn’t pay its bills and power companies stopped supplying electricity to the company network or repair crews stopped fixing faults, New Zealand’s economy would grind to a halt.

While Prime Minister John Key’s recent warnings about this risk may have been dismissed as scaremongering, subsequent events have done little to repair investor confidence.

Last week’s report from Ernst & Young suggests the company is at genuine risk of not meeting its contractual commitments. No one is panicking yet, but the "unthinkable" is now on the table.

December 16: The Ernst & Young Report Hits the Fan

The government-commissioned Ernst & Young report into Chorus’s accounts has landed and it paints a grim picture.

According to the report, Chorus faces a $1 billion funding gap between now and 2020.

Chorus CEO Mark Ratcliffe has come out swinging, describing the report as "flawed" and "extraordinarily conservative." His frustration is clear: he argues that EY has ignored some of the company’s potential ways to mitigate the shortfall.

Meanwhile, Telecom NZ isn't sitting quietly. It has warned that the uncertainty is hitting its margins and could lead to a price war or worse: a lack of investment in new services. The report confirms that the gap is real, but the argument now is over exactly how big that hole is and who is responsible for filling it.

December 20: Political fallout

Political reaction to the EY report has been swift. Labour’s communications spokesperson, Clare Curran, is calling the report’s methodology into question. She argues that the report was "framed" to give the government the answers it wanted to hear.

Curran’s main point of contention is that the report assumes Chorus cannot make any more savings or find other ways to bridge the gap without government help.

She has warned of a "work to rule" scenario where Chorus does the bare minimum to meet its contract while the network degrades. This echoes Paul Brislen’s nuclear option outlined in the December 9 story above.

From Curran's perspective, the government and Chorus are in a standoff where the public's connectivity is being used as a bargaining chip.

While the industry bickers over $1 billion shortfalls and EBITDA margins, the political reality is that the UFB rollout—the government's flagship infrastructure project—is now on shaky ground.