Chorus faces mounting regulatory costs as first TDL bill arrives

When Chorus demerged from Telecom NZ, the parent company pushed as much of its regulatory burden onto the network spin-off.

Some of these regulatory costs were anticipated and built into Chorus' share price from the outset. No doubt there was a provision for unknowns.

However, it’s unlikely anyone could have foreseen the sheer extent of regulatory costs foisted on Chorus. Inside the company headquarters it must feel as if regulators see the business as a milch cow.

The TDL is a tax on telecommunications companies

Today the Commerce Commission confirmed Chorus is to pay 13 percent of the Telecommunications Development Levy – some NZ$6.4 million. The money pays for the government’s rural broadband initiative, which, in part, Chorus is building.

The TDL follows an earlier Commerce Commission decision to cut the price of unbundled bitstream access (UBA) – that's the wholesale charge service providers pay Chorus for copper network access.

The UBA pricing issue has been building for months. Back in February, concerns were already emerging about how UBA and unbundled copper local loop (UCLL) regulation could threaten the UFB project, with Chorus warning that price cuts could wipe up to $160 million from annual profits.

By May, analysis warned that government intervention to inflate copper prices could backfire by driving customers to wireless alternatives instead of fibre. The government finds itself trapped between supporting Chorus's UFB rollout and maintaining competition in the copper broadband market.

Adding to investor uncertainty

The Commerce Commission had signalled in earlier draft decisions that UBA prices would face significant cuts, adding to investor uncertainty.

Add these to the cost-blowouts on connecting homes to the fibre network and Chorus is being squeezed on all fronts.

Regardless of your opinion about the justice of the Commerce Commission decisions, costs and uncertainty are mounting at Chorus.

It was never meant to be that way. The business is structured as a utility. Investors like utilities because they offer predictable returns from regulated assets. Yet Chorus faces mounting regulatory costs, uncertain pricing outcome, and UFB cost overruns—life for Chorus is anything but stable. The question is whether the utility model can survive this level of regulatory uncertainty.