Overview of Chorus’ expenditure proposal

Chorus Limited
Level 10, 1 Willis Street
P O Box 632
Wellington
New Zealand

Email: company.secretary@chorus.co.nz




STOCK EXCHANGE ANNOUNCEMENT


8 November 2023

Overview of Chorus’ expenditure proposal

Attached are the following:
− An overview of Chorus’ price quality proposal submitted to the Commerce
Commission for the January 2025 to December 2028 regulatory period
(called ‘PQP2’); and
− The Chorus Chair’s letter that accompanied the PQP2 proposal.

ENDS

Authorised by:
JB Rousselot
Chief Executive Officer

For further information:

Brett Jackson
Investor Relations Manager
Phone: +64 4 896 4039
Mobile: +64 (27) 488 7808
Email: Brett.Jackson@chorus.co.nz

Steve Pettigrew
Head of External Communications
Mobile +64 (27) 258 6257
Email: Steve.Pettigrew@chorus.co.nz

---

PQP2 Proposal
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
2
Overview of Chorus’ expenditure proposal

>We’ve submitted our price-quality proposal to the Commerce Commission for the January 2025 to December 2028
regulatory period (PQP2). The Commission will consult and seek submissions on our proposal with a final
determination on our proposed allowances not expected until Q2 2024.
>We have proposed capital expenditure of $1.5bn (nominal) and operating expenditure of ~$840m for the four-year
period.
>The majority of investment is either for discretionary projects (e.g. rural fibre network expansion and resilience) or
demand-driven spend (e.g. fibre installations and data growth). This is consistent with the indicative 10-year view
on discretionary growth capex presented in HY23 and our focus on growing shareholder value, while delivering a
sustainable growing dividend through time.
>Fibre network extension and network resilience bring significant benefits to NZ Inc but have challenging
commercial cases. Telecommunications is much more dynamic than other utility sectors - evolving technology,
policy and macroeconomic developments have a significant influence on our investment decisions. To invest in the
network, we need to have confidence in our ability to earn an appropriate return over time.
>This is whykey areas of discretionary capex remain subject to pricing, market and regulatory developmentsthat
we’ll continue to assess in the lead-up to and during PQP2. And we’ll continue to engage with government to find
ways to bring fibre to more Kiwi homes and businesses.

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
>This pack summarises key aspects of the proposal, which includes proposed capital and operating expenditure,
with the Commission expected to release further information in the coming weeks as part of the consultation
process (see slide 4).
>Our proposal has been subject to external audit, and review by an Independent Verifier. External audit raised no
issues and the Independent Verifier found that almost all capex and opex has been verified as ‘prudent and
efficient’ and ‘consistent with good telecommunications industry practice’.
>The proposal represents our best view of the operation and plans for our business in a dynamic market. It
includes judgments as to the allocation of costs, with final allocation principles to be decided by the
Commission.
>The proposed expenditure is for fibre fixed line access services (FFLAS) outside of other local fibre company
areas and excludes other non-FFLAS fibre or copper related costs. The regulatory cost categories are based on
functional groupings and do not reflect our current financial reporting categories.
3
Proposal scope

8 November 2023
The Commission’s implementation process
PRICE-QUALITY EXPENDITURE PROPOSAL
Expected timing
(calendar year)
Detail
Q4 2023▪Consultation on Chorus’ expenditure proposal
▪Submissions on Chorus’ expenditure proposal
Q1 2024▪Draft determination of Chorus’ expenditure allowance
▪Draft fibre Input Methodologies (IM) amendments, if required
Q2 2024▪Final fibre IM amendments, if required
▪Final determination of Chorus’ capex and opexallowances
▪Draft determination of Chorus’ revenue path and quality standards for PQP2
▪WACC determination
Q4 2024▪Final determination of Chorus’ revenue path and quality standards for PQP2
4

>discretionary growth capex:
▪can be phased to fit the parameters of our dividend policy and debt limits
▪will be subject to business casing, market conditions and regulatory settings/approvals
>it is Chorus’ expectation that the range of investment opportunities mean the core RAB value (i.e. excluding the
Financial Loss Asset) will be at least maintained in the longer term
>growing shareholder value and delivering a sustainable growing dividend through time is a key principle of our
capitalmanagement framework
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Proposal is consistent with HY23 investment view
HY23 overview
of indicative
long-term
investment
opportunities
(10-year $m
totals in 2023
dollars)
5

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
How we developed our PQP2 proposal
Extensive end-user and stakeholder inputs overlaid by Independent Verification
Annual business planning
cycle
Draft PQP2
Proposal
Financial outcomes from 2022
regulatory base year
Industry & stakeholder
consultation
Consumer surveys and panel
(2,500+ orgs and individuals)
Auditor review
Review and testing by
Independent Verifier
Final PQP2
Proposal
submitted to
Commerce
Commission with
detailed
Independent
Verifier report
Discretionary capex
prioritised via consumer
workshops overseen by
consumer advocate, Sue
Chetwin
Board approval
6

Long-term investment requires certainty
To ensure good outcomes for end customers and fair returns for investors, we
need...
1. To know regulatory settings won’t be interpreted or changed in a
way that undermines a fair return.
2. Confidence the government’s wholesale fibre network model isn’t
being undermined by large vertically integrated retailers who unfairly
favour their own wireless networks.
3. A regulatory process that has the flexibility to allow for the
dynamic nature of the telecommunications industry. (e.g. changing
market conditions that diminish the business case, or government
policy/funding that helps accelerate or reshape investment )
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
7

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Capital expenditure proposal
We propose capex of $1.5 billion (nominal) over PQP2
>our proposal includes allowances for discretionary capex
(e.g. network expansion and resilience) and these are
subject to pricing, market and regulatory developments
that we’ll continue to assess in the lead-up to and during
PQP2.
>capex per connection is forecast to decline, after it
increased slightly in 2023 largely due to COVID-related
project deferrals

>The capex amounts on slide 10:
▪are actual capex for the 2022 calendar year and H1 2023, with forecast capex to 2028
▪exclude capex spend for FFLAS in LFC areas and other non-FFLAS capex
▪include forecasts for installation volumes, with a wash-up mechanism to address variations in demand
▪are net of capital contributions
▪are nominal with the following actual and forecast inflation
8

Greenfields: fibre to new developments (excl contributions)
Fibre installations: build and provisioning for ~150k standard
and complex installations
Key elements of proposed $1.5bn investment
Majority of investment is discretionary or linked to demand
491
253
73
38
333
93
234
0
200
400
600
800
1000
1200
1400
1600
$m
(nominal)
Rural expansion: fibre to pass 40,000 rural premises
Resilience: investment to support network robustness
Hyperfibre: installation of multi-gigabit ONT
Capacity/Transport: enabling continued growth in data demand
Other network investment: includes network sustain/enhance
investment, business and IT support
the commercial investment case is challenging and
investment is subject to further business casing,
market and regulatory developments
amounts are based on forecasts
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
9
DISCRETIONARY:
DEMAND-DRIVEN:

Capex by regulatory category
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Capex categoriesSub-categories2022
(actual)
202320242025202620272028
Extending the network▪Augmentation4.87.932.258.161.664.073.6
▪New property developments21.319.810.79.010.48.210.3
▪UFB communal34.7-0.3-----
Installations▪Complex2.13.63.43.43.43.43.4
▪Standard162.1155.7124.993.085.085.872.0
IT and support▪Business IT11.821.021.119.522.221.919.1
▪Corporate4.10.90.61.52.42.08.6
▪Network & Customer23.025.827.627.927.826.826.1
Network capacity▪Access18.052.351.129.233.539.932.2
▪Aggregation19.126.327.222.923.018.020.6
▪Transport11.222.825.427.927.719.615.0
Network sustain & enhance▪Field sustain10.524.730.133.033.536.735.8
▪Relocations
2.95.35.05.05.15.35.4
▪Resilience
2.813.915.719.823.120.330.2
▪Site sustain
13.424.628.029.824.924.523.5
Total (excluding capital
contributions)
341.8404.1403.0380.1383.6376.3375.7

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
11

>our proposal is based on a base-step-trend (BST) economic
analysis using 2022 as the base year:
▪BST is used by regulated businesses to produce medium to long term
forecasts of efficient opex
▪we expect financial/volume outcomes in the 2023 year to be considered
in the Commission’s process through 2024
▪opex per connection remains largely flat at ~$180 per annum despite
growth of the fibre network
>we propose updating cost allocators (May Info Disclosure) and
changing to a revenue allocator, for corporate labour and some IT
operating costs, to reflect fibre’s dominance of Chorus’ business
activity (e.g. fibre was 83% of total connections at 30 Sept)
>recent market trends, such as accelerated copper withdrawal,
should result in greater allocation of shared costs to fibre
8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Operating expenditure proposal
We propose opexof $842 million (nominal) over PQP2
>The opex amounts on the following slide:
▪are actual opex for the 2022 calendar year and H1 2023, with forecast opex to 2028
▪exclude pass through costs (e.g. local body rates and regulatory levies) which would need to be added to align
with Chorus’ reported opex categories
▪are nominal (see slide 8 for inflation assumptions)
12

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Opex by regulatory category
TO REPLACE WITH
FINAL
Opex
CategoriesSub-categories2022
(actual)
202320242025202620272028
Customer▪Customer operations-6.4-5.9-7.3-7.9-8.2-8.3-8.6
▪Product, Sales & Marketing23.928.830.031.432.433.334.2
Network▪Maintenance28.533.933.436.638.640.041.1
▪Network operations16.619.419.321.222.523.424.1
▪Operating costs7.87.69.210.712.513.213.3
Support▪Asset management21.621.224.225.926.727.328.0
▪Corporate41.344.949.055.057.259.060.4
▪Technology23.122.424.726.426.626.627.3
TOTAL (excluding
pass through costs)
156.4172.4182.5199.3208.3214.4219.9
Pass through costs$15.8$15.5$18.6$19.4$20.0$20.6$21.1
13

8 November 2023
PRICE-QUALITY EXPENDITURE PROPOSAL
Operating expenditure categories
14

---

OUR FIBRE PLANS 2023 2

FOREWORD

FOREWORD
Consumers expect digital infrastructure to be accessible, reliable and affordable, just like other
essential utility infrastructure.
The recent pandemic and extreme weather events have shown Kiwi homes and businesses to be
more reliant than ever on fast and reliable broadband connections. Cyclone Gabrielle proved fibre
services were less likely to be interrupted and faster to be restored than the copper network.
Fibre is superior to other broadband technologies – it is the fastest, most reliable and lowest
emissions broadband service. This is recognised by the major fibre deployment and upgrade
programmes underway in virtually every developed economy.
We want to bring the benefits of fibre to as many New Zealanders as possible, consistent with our
purpose “to connect Aotearoa so we can all live, learn, work and play.” This purpose is at the heart
of our plans (the ‘PQP2 proposal’), which we now present to the Commerce Commission for
review.
Meet demand, invest for the future and grow the network
Our proposal is to maintain the current high quality of service and a congestion-free network, even
as data use doubles and more people connect to our network. We will do this while improving the
resilience and sustainability of our services, extending the network to give more New Zealanders
access to fibre, and preparing for the next generation of broadband technology.
After extensive stakeholder testing and careful balancing, we propose total capital investment of
$1.3 billion and total operating expenditure of $0.7 billion over PQP2. This will enable us to:
• make our services more resilient, especially for those living in smaller communities, to major
seismic, weather or other network impacting events. This is essential given increased consumer
reliance on broadband as an essential enabler of daily life
• extend the fibre network to make world class fibre services available to 40,000 premises where it
is not currently available. A report we commissioned from the New Zealand Institute of
Economic Research calculated a $16.5 billion benefit for rural homes and businesses over the
next decade if they all had high-capacity broadband
• continue to meet demand for fibre by carrying out 150,000 new installations on our network
(this includes installations in our current network footprint and where we expand the network)
Dear Commissioners and stakeholders
The Chorus board and shareholders are pleased to
share Chorus’ fibre investment plans with you.
These plans cover the years 2025 to 2028 (called
‘PQP2’). They reflect what our end-users have told
us matters most – increasing resilience of and
access to fibre, while maintaining the current high
quality of service and keeping fibre affordable.

OUR FIBRE PLANS 2023 3

FOREWORD

• future-proof our network by making Hyperfibre available to those who need it. Hyperfibre is the
fastest broadband available in Aotearoa and uses technology that is becoming the default for
new fibre deployments globally. It makes up a small but growing share of our services and we
need to support it to make sure we do not fall behind other countries in our access to leading
connectivity
• invest prudently in solar generation, to improve sustainability and reduce energy costs
• all supported by efficient operating expenditure, which declines slightly per connection over the
regulatory period.
Telecommunications is much more dynamic than other utility sectors - evolving technology, policy
and macroeconomic developments have a significant influence on our investment decisions. To
invest in the network, we need to have confidence in our ability to earn an appropriate return over
time. This is why key areas of discretionary capex remain subject to pricing, market and regulatory
developments that we will continue to assess in the lead-up to and during PQP2.
Our proposal has also been stress tested by an 'independent verifier’, which has provided its report
to the Commission.
These are bold, but carefully considered plans that we believe will best meet Aotearoa’s needs.
Our success is tied to how well we meet end-users’ needs
Our success as a business, reflected in our strategy, core beliefs,
1
and our PQP2 proposal, also
depends on a deep understanding of end-user and stakeholder needs. Understanding these views
and ensuring the PQP2 proposal fully takes account of them is a priority for the Commission and
has been a key focus for the Chorus Board.
We know that ‘consultation documents’ can be useful, but also that many end-users find these
difficult and they are by nature not interactive. This led us to use a combination of surveys, market
observation and research, and formal consultation to inform our proposal. Also, when it came to
tough trade-offs, stakeholder feedback helped us prioritise investments – so our scarce capital can
be directed to what matters most to end-users.
We want to acknowledge and thank:
• the more than 2,500 people, businesses, educational institutions, local authorities, iwi
representatives and other parties who engaged with us as we developed and refined our PQP2
proposal
• consumer advocate (and former Chief Executive of Consumer New Zealand) Sue Chetwin, for
her role in establishing and overseeing our final rounds of stakeholder engagement and acting as
an independent voice for our end-users as we finalised investment and future engagement
plans.
The only area where we did not adopt the option preferred by stakeholders is resilience.
Stakeholders supported substantially increased resilience investment, driven by recognition of
people’s reliance on internet services and the social and economic benefits of connectivity, as well
as the issues associated with digital exclusion.
We are still proposing a material uplift in resilience investment (doubling what we proposed for our
first regulatory period) although not as much as our stakeholders wanted us to invest. The main
reasons are that we are mindful of the cost impact for end-users and the risk of ‘recency bias’ after

1 Described in our letter to investors, page 1 of Chorus’ FY23 Annual Report Chorus Annual Report 2021 (nzx-prod-
s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com)

OUR FIBRE PLANS 2023 4

FOREWORD

recent weather events. We prefer to retain the option to seek approval for additional investment
over the coming years.
Chorus performance and operating environment
Chorus has a strong track record of delivery through the UFB build and, more recently, in navigating
COVID-19 disruptions, severe weather events, and a critical shortage of skilled technicians. We are
confident in Chorus’ ability to deliver on our PQP2 proposal and that our investment plans are in
line with the needs of our end-users.
Our analysis clearly shows our plans to expand the network are economic and would deliver real
benefits to end-users, whilst our resilience investments are strongly supported by stakeholders.
Chorus is regulated as a monopoly but operates in an environment where our largest customers are
also network competitors offering competing products that earn them higher margins. This
competition constrains our prices and creates strong incentives to deliver an excellent customer
experience and operate as efficiently as possible.
Capital allocation is one of our Board’s most important responsibilities. The long-dated nature of
our investment means that, for us to invest, we need to have confidence that end-users will utilise
our infrastructure and that we will be able to earn a fair return on that investment.
To promote investment in this market context, the government and Commission need to do their
part by making balanced policy and regulatory decisions across the sector:
• For Chorus, that means having the flexibility to recover investment over time, and removing
outdated and unnecessary regulation, so we can undertake commercially challenging
investments that are beneficial for end-users. This includes ensuring rules relating to copper
services do not make copper revenues unsustainable and, as a result, discourage our
shareholders from supporting broader investment.
• For the retail market, that means greater vigilance to ensure fair marketing to end-users by
retailers. Current marketing practices risk directing end-users to products that will not best meet
customer needs. This in turn undermines the economics of further fibre investment. Fair
marketing is also beneficial for retailers, as the retail market will work best when end-users have
the right information to make informed choices.
Although progress is being made to improve retail service quality and transparency, a better balance
is needed between the ‘belt and braces’ economic and competition regulation of Chorus and the
comparatively light touch obligations for retailers to market and sell broadband products fairly and
transparently.
Next steps
Fibre is the best broadband technology, and we are excited about how our fibre services can enable
the digital future of Aotearoa. The Chorus team looks forward to working with the Commission and
our stakeholders through the consultation and evaluation process.
Yours sincerely,

MARK CROSS
CHAIR