Ann: GENERAL: SPK: ComCom propose material increase to regulated input charges

• Release Date: 02/12/14 11:25
• Summary: GENERAL: SPK: ComCom propose material increase to regulated input charges
• Price Sensitive: No
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					SPK
02/12/2014 11:25
GENERAL
PRICE SENSITIVE
REL: 1125 HRS Spark New Zealand Limited

GENERAL: SPK: ComCom propose material increase to regulated input charges

Market Announcement

2 December 2014

Commerce Commission proposes material increase to regulated input charges

The Commerce Commission has announced today its draft Final Pricing Principle
(FPP) determinations in relation to two regulated input products that Retail
Service Providers (RSPs) purchase from Chorus, the Unbundled Copper Local
Loop (UCLL) product and the Unbundled Bitstream Access (UBA) product. Spark
New Zealand purchases UBA and a Baseband product which is priced equivalent
to UCLL.

The FPP determinations, which are being derived using a replacement cost
methodology, will supersede earlier Initial Pricing Principle (IPP)
determinations, which were derived using an international benchmarking
methodology.

Under the draft FPP, it is proposed that the UCLL wholesale charge increase
from $23.52 to $28.22 per customer connection, per month. This draft
determination is subject to further industry consultation and the Commerce
Commission is seeking views from submitters to see if the final UCLL price
should be backdated to no earlier than 1 December 2014.

It is proposed that the UBA wholesale charge under the FPP be $10.17,
compared with the IPP charge of $10.92 which took effect from 1 December
2014.  The Commission has also indicated the earliest the FPP could apply is
1 December 2014.

These charges are set out in the table below.

Pre 1 Dec 2014
UCLL / Baseband $23.52
UBA $21.46
Total $44.98

IPP effective 1 Dec 2014
UCLL / Baseband $23.52
UBA $10.92
Total $34.44

Draft FPP
UCLL / Baseband $28.22
UBA $10.17
Total $38.39

The FPP charges would increase Spark New Zealand's input costs by
approximately $60 million on an annualised basis, relative to the IPP charges
that came into effect yesterday.

FY15 Financial Guidance

Spark New Zealand's FY15 financial guidance is based off the IPP charges.
FPP charges, if implemented in line with the draft, will materially increase
Spark New Zealand's input costs and will have a negative impact on FY15
financial guidance if the new charges take effect during the current
financial year.  The extent of the impact in FY15 will be dependent on both
the final determinations, timing of implementation (including possible
backdating) and any revenue impacts resulting from competitive market
dynamics.  We are not in a position to provide updated guidance at this time,
but will provide an update when more information becomes available.

Spark Comments on Draft FPP

Spark New Zealand Managing Director Simon Moutter commented:

"Today's announcement is unexpected and we are now facing costs substantially
above the levels we previously anticipated. These higher costs will affect
all our fixed services, not just broadband services.

"For the past two years, we have been anticipating a $10 reduction in
broadband costs, which has been reflected in our current customer pricing.
But what we didn't expect was a $5 increase in the cost for a residential or
business line - for both broadband and standalone voice services. All of this
comes on top of recently implemented increases in Chorus connection charges
for broadband services."

Mr Moutter said intense market competition meant the anticipated reduction in
wholesale broadband charges (signalled as far back as December 2012), had
already flowed through into retail broadband prices.

"For instance, what you get in our basic $75 broadband plus home phone plan
today would have cost you $105 three years ago. In that time, our wholesale
costs have barely moved until the new charges came into effect yesterday."

 "Given today's decision, we feel we have no choice but to undertake an
urgent review of our current pricing across both fixed voice and broadband
plans.

"As well as the surprise increase in line charges, there is now considerable
uncertainty about when these new charges will take effect - with the
possibility of backdating any increase to 1 December 2014.  This means we
will need to take a conservative view now to hedge against any financial
exposure from the final decision."

Mr Moutter said today's announcement highlights the challenges as retail
broadband providers fiercely compete to give consumers the best possible
deals, yet face a continually shifting outlook in terms of their underlying
costs.

"This is not a criticism of the Commerce Commission, which as the regulator
is required to follow due process - or of the process itself which is
inevitably complex given the transition from the previous regulatory regime.

 "Over the last two years, we have consistently called for more certainty to
ensure retailers can plan appropriately and deliver customers the best
competitive deals. We led an initiative seeking an agreed industry solution
for wholesale broadband charges, and we also welcomed the Government's
attempt to provide this certainty through legislation.

"Neither came to pass, meaning we - and the rest of the industry - were left
with only the initial schedule of charges set out by the Commission in 2012
and 2013 to guide our budgeting and retail pricing.  These initial charges
were finalised by the Commission in November 2013, upheld by the High Court
in April 2014 and by the Court of Appeal in September 2014.  They have been
anticipated by Spark and other providers in our existing customer pricing."

Note:

In addition to the proposed changes in UCLL and UBA charges, effective 1
December 2014 RSPs will be charged for both UBA and UCLL, even if they resell
PSTN services via Spark Wholesale. As this means Spark Wholesale will no
longer face UCLL charges from Chorus, it will reduce revenues by
approximately $70 million on an annualised basis.  This will have no impact
on EBITDA.

-ENDS-

For media queries, please contact:
Richard Llewellyn
Head of Corporate Communications +64 (0) 27 523 2362

For investor relations queries, please contact:
Mark Laing
General Manager Corporate Finance +64 (0) 27 227 5890
End CA:00258397 For:SPK    Type:GENERAL    Time:2014-12-02 11:25:55