Squeeze on Chorus spending signalled
The competition watchdog has proposed that broadband company Chorus should be allowed to spend about $300 million less than the company had wanted expanding, maintaining and operating its ultrafast broadband network between 2025 and 2029.
The draft ruling should mean broadband services will be cheaper than they would otherwise have been under Chorus’ spending proposal, but the company has suggested there may be a downside in its ability to deliver “reliable, uncongested broadband”.
The Commerce Commission has the power to cap Chorus’ expenditure on the network as Chorus is the monopoly provider of fibre-optic broadband to most of the country and the prices it can charge for connections are to some extent regulated to reflect its costs.
A similar arrangement applies to some other utility companies, such as Transpower, which operates the national grid.
The commission proposed in a draft ruling yesterday that Chorus’ expenditure on the ultrafast broadband network in the four years between 2025 and 2029 should be capped at $1.59 billion when stated in terms of the value of the dollar in 2022.
That is 16% or $303 million less than Chorus had proposed, and comes on top of a $188m reduction that Chorus had previously agreed to make to its originally proposed budget by dialling back plans to expand its network.
Chorus shares have proved a steady earner for investors since the Government awarded it contracts to build the bulk of the ultrafast broadband network in 2011 and 2017, but fell 2% to $7.36 in morning trading in the wake of the announcement.
Chorus chief executive Mark Aue said in a release to the NZX that he was disappointed that as well as restricting Chorus’ capital expenditure, the commission had assessed it should only be allowed to spend $691m, rather than the $840m it had suggested operating the network during the period.
“Our expenditure proposal built on our success to date and was based on extensive stakeholder input and a desire to continue developing the capability and reliability of fibre-broadband for consumers,” he said.
Spokesperson Steve Pettigrew declined to set out in detail what impact the company thought the lower-spending cap would have on broadband users.
But he said Chorus was concerned about the “differences in expectation” between the commission and the company over the efficiencies the company could be expected to make.
Aue said in the company’s statement to the NZX that high-speed broadband played an increasingly important role for homes and business across Aotearoa and it was “critical that we have allowances that are sufficient to let us meet consumers’ expectations”.
Broadband retailers voiced support for a tighter lid on Chorus spending in previous submissions, but One NZ spokesperson Matthew Flood declined to comment on what impact it thought the draft ruling could have on retail pricing if confirmed.
Pettigrew agreed it could be a “working assumption” that lower spending by Chorus could be expected to translate to lower wholesale prices for ultrafast broadband, but said the connection to prices paid by consumers was “not a straight line”.
The proposed “cuts” to Chorus’ proposed capital expenditure hopes include a $56m reduction to reflect a more conservative forecast for the uptake of faster UFB services and $33m less for spending on measures to improve the resilience of the network that the commission said didn’t meet Chorus’ “architecture specification standard”.
The watchdog also nixed $30m of spending proposed by the company to account for “calculation errors and unexplained expenditure”.