Commerce Commission Unveils Draft Price-Quality Decision for Chorus

The Commerce Commission has unveiled its draft decision outlining the price-quality path (PQP2, 2025-2028) for Chorus’ second regulatory period for fibre. This decision projects annual revenues ranging from NZ$908 million to NZ$1,018 million, encompassing pass-through costs. However, based on the April 2024 draft expenditure allowances decision, the draft does not fully incorporate additional data submitted by Chorus. Final expenditure allowances are slated for Commission determination in August, influencing the Q4 2024 final price-quality determination.

Key Decisions and Implications

• Depreciation Strategy: The draft includes tilted annuity depreciation for core fibre assets, aligning with Chorus’ recommendations to defer NZ$267 million of depreciation slated for recovery in PQP2.
• Financial Balancing Acts: It proposes drawing down the PQP1 wash-up balance within PQP2 and smoothing revenue profiles over the period.
• Financial Metrics: A ‘draft estimate’ vanilla Weighted Average Cost of Capital (WACC) of 7.71% is proposed, set to finalize at 7.68% for PQP2, alongside a proposal for new provisioning quality standards.
• Updates and Challenges: The Commission plans to apply CPI wash-up adjustments in year 1 of PQP2, reflecting evolving economic conditions.

Julian Kersey, Chorus’ Chief Corporate and Regulatory Officer, highlighted the company’s intent to scrutinize the draft decision closely. Chorus aims to ensure that the set revenue limits and quality standards are equitable, delivering positive outcomes for fibre users.

The draft decision also raises concerns about potential errors in applying fibre Input Methodologies to pass-through costs, estimated at NZ$60 million. Chorus disputes this assessment, having already provided guidance to the Commission on this matter.

This draft marks a crucial step in shaping the regulatory framework for Chorus’ fibre operations over the coming regulatory period, prompting industry stakeholders to engage actively in the consultation process ahead of the final decision later this year.

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