Commerce Commission decides financial loss asset provisions for fibre providers

3 Nov 2020

New Zealand’s competition regulator, the Commerce Commission, has released its final decision on its approach to determining the value of the financial loss asset for fibre service providers under the new fibre regulatory regime. The financial loss asset captures the unrecovered returns of wholesale fixed line provider Chorus and the local fibre companies (Enable Networks, Northpower and Ultrafast Fibre) during the initial period of operating Ultra-Fast Broadband (UFB) networks before demand met supply. This decision concludes the input methodologies process, following publication of the Commission’s core decisions on the key regulatory rules, requirements and processes (known as input methodologies) for the new fibre regime in October. Once the new regime is implemented in January 2022, it will form part of the regulatory asset base on which fibre providers earn returns.

‘As signalled earlier this year, we have decided to adopt a discounted cash flow approach to valuing the financial loss asset, rather than the building blocks method we initially proposed. Submitters, including fibre companies and financial analysts, recognised this would help make the calculations easier to understand and therefore provide greater transparency when we set Chorus’ price-quality path and the broader information disclosure regulations next year,’ Telecommunications Commissioner Tristan Gilbertson said, adding: ‘We have also decided that pre-2011 investments can be included in the discounted cash flow calculation. We have put safeguards in place to address the risk of windfall gains or over-recovery.’

In response Chorus took a swipe at the Commission, claiming the ruling means its shareholders will not be properly compensated for the risks they took financing the lion’s share of the UFB network. In a statement to the stock exchange, the company complained the decisions ‘simply do not reflect commercial reality and the true level of cost or risk that was faced in building the UFB network’. ‘The final views today, and range of changed views from the commission during this process, send extremely poor signals to investors in New Zealand’s infrastructure and future public private partnerships,’ it said.