Telecom NZ inflates network value by $1 billion

New Zealand’s telecommunications regulator, the Commerce Commission, has released a report claiming that the network assets of incumbent Telecom New Zealand are overvalued to the tune of billions of dollars.

Describing Telecom’s statements “unreliable for regulatory purposes”, the Commission said the telco has overestimated key assets such as its access network by “over a billion dollars”.

Telecommunications Commissioner Dr Ross Patterson said Telecom is overstating a number of costs - such as the provision of rural phone lines.

Telecom NZ has agreed to go through accounting separation of its business units as part of its regulatory undertakings with the New Zealand government - leading the Commission to publish a summary and analysis of the incumbent’s financial statements for the year ending June 30, 2010.

The company said defending itself, saying that the report submitted to the regulator "does not relate to Telecom’s statutory accounts, and has no impact on Telecom’s financial reporting, any regulated pricing or guidance."

The telco said any discrepency between its statutory accounts and what it is required by law to produce for the Commission came down to the "form determined" by the Commission.

The incumbent nonetheless ran with a concilliatory tone.

"Telecom has noted the Commission’s concerns relating to the valuation methodologies applied in certain areas of the regulatory accounts," said Tristan Gilbertson, group general counsel at the company.

Gilbertson said there were "many possible valid interpretations" of the telco's financial performance. 

"Valuation methodologies, for example, have an element of judgement and subjectivity. Different interpretations can produce quite different results," he said. 

“However, if the Commission provides us with any additional clarification then we will have regard to that in the production of the next set of regulatory accounts."

While the Commission can now require Telecom to republish the financial statements, the exercise is “territory marking” that won’t have any material effect on the financial markets, according to Greg Main, telecommunications industry analyst with First NZ Capital Securities in Wellington.

Main told iTnews it was not certain what the regulatory financial statements would be used for.

“New Zealand has not in the past regulated based on asset returns, but on benchmarking and comparing with other countries,” Main said.

Main said the discrepancy may be due to the regulator using current basis accounting, while the telco reports historical accounts to financial markets, in which case it "wouldn't be a huge discrepency."

Financial markets are likely to overlook the Commission’s report, he said, but the disagreement on the valuation of assets may have some effect long-term, depending on whether Telecom goes ahead with operational separation and floats off its infrastructure arm as a separate company.