The name may say Chorus, but it's singing alone

It must be lonely being Chorus.

Spun out from Telecom in 2010 to allow participation in the government-backed ultra-fast broadband project, the semi-monopoly providing much of the country's telecommunications backbone has found itself in a waking nightmare ever since.

This week's High Court decision, defeating one of the ways Chorus hoped to challenge the 50 per cent cut delivered by the Commerce Commission last November to a key element of regulated copper network prices, is just the latest in a string of defeats and mis-steps.

It may appeal the latest decision. But the failure in recent months of similar challenges, at vast legal expense, by Auckland network company Vector to regulated electricity and gas network pricing suggests the courts are not the place to decide such complex issues.

The problem, perhaps, is that there seems to be no such place.

The commission, which regulates pricing on networks where competition is limited, is establishing a track record of wins in court, and for independent-minded interpretation of parliamentary intention.

In Chorus's case, that saw Telecommunications Commissioner Stephen Gale all but ignore what the Government thought was an enormous legislative hint to ensure that regulated pricing for copper wire-based telecommunications infrastructure didn't undermine uptake of UFB.

After all, the Crown is throwing $1.35 billion into the UFB rollout to get New Zealanders on to fast internet faster than the market would deliver.

The last thing it wants is low-priced copper network broadband products undercutting fibre-optic cable offerings, but that's what it's got.

That pricing blew a billion dollar hole in Chorus's balance sheet, with 2015 and 2016 requiring the biggest spending on UFB roll-out and no credible way to wriggle out of its contractual obligations.

The Government not only won't alter the terms of the UFB contracts, but it also doesn't want to spend any more.

While Chorus might raise fresh capital, that would almost certainly be at a crushing discount, given the exodus from its register by foreign and institutional investors. Its shares have traded as high as $3.03, before the price cuts, and as low as $1.31 in the last year, recovering to $1.77 on Wednesday.

Crown Fibre Holdings has agreed to some tweaks to payments timing to take the boot off Chorus's throat a little, but it's not enough. It's clear that Chorus's most effective way to close the billion dollar gap will be to let the aging copper network age faster. Less proactive maintenance, more reacting to outages, and lower quality service for ADSL and VDSL customers loom.

Chorus does have the commission's final pricing principle (FPP) review to look forward to in December. Optimistic equities analysts believe that may see the prices set last November raised somewhat, which would also give Chorus some relief.

But underneath all this argy-bargy, there's another big problem, which Finance Minister Bill English pinpointed in a talk to the Infratil investors' day in Wellington last Friday.

"A lot of that type of regulation has got well beyond the capacity of politicians to know what the hell's going on," he said. "I don't mean this as a criticism of the Commerce Commission, but we appear to be getting into a world of elevated complexity."

His comments were in response to a plea to "get rid of the Commerce Commission", with its performance on Chorus being Exhibit A in its list of alleged crimes.

But English wasn't biting.

"If you think the result [on copper network pricing] was unpredictable, then that's poor policy process when the provisions went in the legislation," said English. That will have them wincing down at the Ministry of Business, Innovation and Employment, where the advice came from.

"You'd think Government would have enough regulatory experience to understand the implications of that sort of provision, and I don't think they did," said English, who has always regarded the UFB project as more a political than a public good investment.

"It'll take five to seven years for Chorus to wash through the minds of offshore investors," he predicts.

At the end of that period, Chorus will have emerged from the UFB construction phase with both a new fibre network and a new regulatory regime.

With a whopping $675 million of debt due for rollover in November next year, both the company and its remaining shareholders are focusing on how that new environment will look, but Chorus is getting no traction in the Beehive.

Its issues are nothing but a political liability until after election day, and it's not clear Labour knows any better than the Government what it would do.

In the meantime, so uncertain is the future for Chorus that the Australian research firm, Morningstar, has a mad value range for its shares of between $1 and $3.10.

That range reflects Morningstar's judgement that Chorus, which should be a boring year-in, year-out yield stock, is a "high risk investment at this point".

That's why English says: "I'm not so concerned about where they (the commission) come out on prices. I'm more concerned about the lack of predictability." BusinessDesk

Fairfax Media