Good morning, everyone. Thank you for standing by, and welcome to the Chorus Regulatory Update Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise that this conference is being recorded today, Friday, June 25, 2021.
I would now like to hand the conference over to your speaker today, Mr. David Collins, Chief Financial Officer. Thank you, and please go ahead.
Thank you, James. Good morning, listeners. Thanks for joining us this morning. I've also got Brett Jackson with me here in Wellington. My intention this morning is to step through the slide deck that we've released to the Exchange this morning, and we'll take some questions and answers at the end of the call.
So starting on Slide 3, we have this morning or we will today submit to the Commerce Commission an IAB model or initial asset value model, which supports a RAB or initial asset value of $5,500,000,000 The IOV model is compliant with the Commerce Commission's input methodologies requirements. We've audited it for accuracy and compliance. It's been certified by the executive within the company and approved by the Chorus Board. As we've done previously, we've used Analysis Mason based in the U. K.
To support us in building and developing the model. And we believe that our submission should enable the Commerce Commission to move reasonably quickly through its price quality determination process, noting the tight time lines that we face in the coming year. We will also be submitting some alternative cost allocation approaches, which we believe reflect the full cost of Chorus' stand alone participation in the fiber PPP, which support a range up to $6,000,000,000 And I'll come back to that in a moment to give a little bit more color. In terms of maximum allowable revenue or MA, the model at $5,500,000,000 supports an estimated MA range of $715,000,000 to $755,000,000 per annum over the RP1 period. And to be specific, when I say a range, I mean that €715,000,000 is the 2022 estimate and €755,000,000 is the 2024 estimate, and we'll come back to that in the chart a little later in the deck.
Amara, this range supports or is consistent with our existing business plans and our forecast fiber revenues for RP1, but it does leave very little room for any unintended consequences. We believe that perverse incentives for Chorus and also poor outcomes for consumers would arise if we were capped by our revenue caps from pursuing our natural expected rate of growth. It's important to note that this MAIR estimate is based on an estimated or current risk free rate, and that will be finalized at the 3 months ending the 1st June. And we will also be providing a MAR model to the commission later in April, which we expect will support the range that I've just quoted. In terms of the expenditure submission that was lodged in December, as we noted at the time, we do need to update that submission to reflect the final allocation methodology within the IAV model.
We are also planning and will do that today as part of this submission to the Commerce Commission. The adoption of the updated allocations has resulted in a reduction in the operating expenditure over the 3 year RP1 period from $625,000,000 to $550,000,000 nominal. There are nonmaterial changes to the CapEx submission. And to be clear, the updated OpEx numbers I've just quoted are reflected in the MAH estimated range that I mentioned a few minutes ago. Just to come back to the alternative cost allocation approaches to the IAB that I mentioned before and to give a little color to what I'm talking about or what we're referring to here.
The key impacted area is in corporate OpEx and in particular, the impact on the level of the financial loss asset, which we'll be talking about a little bit later on. From our perspective, Chorus was established as a PPP to build a fiber network. As a result of that, a number of corporate functions were created and therefore duplicated from Spark for this purpose. Some examples would include a board cost, an investor relations cost, a treasury function cost, a CFO cost, all of those corporate functions or cost centers. Our view is, therefore, that these costs should be directly allocated to FIDA and not treated as a shared cost.
This is a so called stand alone cost approach to cost allocation. Unfortunately, at the moment, such an approach is technically not compliant with the input methodologies due to the way that the rules have been written. And we are required to submit a certified compliant model, and that's why we've submitted a model at 5,500,000,000 dollars However, we will be engaging with the commission around the alternative approach to cost allocations to more of a stand alone approach as we believe this should be considered as it reflects the full costs of structural separation required by the PPP. Moving on to Slide 4, a view of the initial asset value. Two components to it: base RAB at $4,000,000,000 which is comprised of UFP assets and shared assets a financial loss value of $1,500,000,000 giving a total of $5,500,000,000 and the gray shaded area at the top reflects the allocation alternatives that I've just spoken to.
Financial loss asset itself, as required under the input methodologies, has been calculated using a discounted cash flow methodology. And a reminder that the depreciation of the loss asset going forward into RP1, that depreciation will be based on a weighted average remaining life of USB assets immediately before implementation date. The base RAB itself, as a reminder, it excludes assets funded through capital contributions. The main examples of that are greenfield expenditure, roadworks and installation charges. And it also excludes assets funded by government grants.
The main one there is the Rural Broadband Initiative or RBI, but we also have a current one, which is the West Coast Fiber Field. As we'll get to over the page, it also excludes approximately $1,300,000,000 of copper or shared assets and excludes noncoreous USB zone fiber assets. So that is LFC area fiber assets, which totaled to $1,300,000,000 Moving on to Slide 5. We're showing here a dissection of the balance sheet by category between the unallocated asset value and the proportion that's going into the price quality ramp. A couple of key important points to note here.
The unallocated asset values, we have rounded these for ease and simplicity. They do represent the written down values per Chorus' statutory accounts at 30 June 2020 plus a forecast of CapEx for the 18 months to 31 December 2021 and then less forecast depreciation for those 18 months. And as we've talked about previously, depreciation under the input methodologies follows accounting asset lives. In terms of the price quality fiber reg column itself, a reminder, again, these are net book values, and they are stated as at 31st December 2021 or alternatively, 1st January 2022. And these are the allocations to the price quality RAB and these are the or that price quality RAB is the basis for calculating or setting the maximum allowable revenue.
Looking at the 3rd column, the proportion allocated to the fiber RAB, as a reminder of how cost allocations work, when we have an item of expenditure, the first question is whether it can be directly allocated to fiber. And if the answer is yes, as an example, the USB communal spend, then 100% of that asset or that spend is directly allocated to fiber. If the answer is no, it's shared, then there is a shared cost allocation to determine the proportion that goes into the price quality RAB. A couple of callouts. In terms of fiber cable, the reason that all fiber cable does not get into the price quality RAB is firstly fiber or the main reason actually is fiber in LFC areas is not covered under price quality regulation.
The other main component on the slide is DUCs, manholes and poles. The component that's excluded, which is about 14%, relates mostly to copper assets across New Zealand, but also to the shared asset allocation to excluded fiber assets, so the assets within LSE areas that I mentioned a little bit earlier on. As I mentioned on the previous slide, the price quality ramp also excludes about $300,000,000 of fiber assets that are funded either by capital contributions or by a government funding arrangement. Moving on to Slide 6. We thought it would be useful to give a summarized view of how the financial loss asset calculation works.
There's been a lot of discussion on this over the last year or 2, so we're trying to give a simplistic view of what is a very complicated calculation process. We have followed the Commerce Commission template, and this analysis has been prepared by Analysis Mason as our support contractor. It's also consistent with the input methodologies. Call out a couple of the details on the page. The post tax WACC for each of the years across the loss asset, that is an annual calculation, and it's based on the details that are described on Slide 10.
And you can see the decline in the WACC over the period, broadly reflecting the reduction in risk free rates. The USB asset closing value, which is the 2nd line, that represents the buildup of the USB asset over the loss period. So as asset or as CapEx is spent on the USB, that is included. As shared assets are utilized for FLAS services, that is included in the asset. And you see the USB balance build up over the 10 years.
Important to call out that when you look at the total at 2022, and to be clear, that means that the 1st January, 2022, the closing USB asset for the purposes of the financial loss calculation is $3,800,000,000 The reason that is less than the RAB for Mar purposes is that the financial loss calculation only includes contracted USB spend. It therefore excludes any spend on fiber in RON's areas and excludes any non contracted fiber spend in USB areas. And an example of that might be infill type expenditure that's outside the contracted footprint, but still within USB areas. Looking at the calculation of the financial loss itself, it is a discounted cash flow approach, as the commission noted in November of last year with their final decision on input methodologies. What we've shown on the slide here are the cash inflows, which is the USB revenue and the cash outflows, which is CapEx, OpEx and tax.
And one minus the other gives the present value of annual net cash flows. So if you add up the PVs of annual net cash flows, you'll get to 5,700,000,000 dollars negative, which is the present value or if you like, the future value at 1 January 2022 of the net cash flow on the USB project. We've also shown just to help with modeling what the compounding factors are within each of those years. As a reminder, the cash flows each year are compounded up to the 1st January of 2022. The dollar numbers shown on those two lines are present value as at 1st January 2022.
Coming down to the bottom of the slide, the way the calculation works is you have the total cash outflow present value of $5,700,000,000 deducts the value of the RAB at that point. Again, as a reminder, that's contracted UFP spend only at $3,800,000,000 and deducts the present value of the Crown financing benefit, which is $400,000,000 As a reminder, on that calculation, that reflects the commission's treatment of avoided costs due to concessionary government funding for the UFB project. Another way of thinking about that is it effectively excludes a component of the assets that were funded by Crown Funding when calculating the return on capital on those assets or the WACC on those assets. So that's the summary of the financial loss. So $1,500,000,000 is what we will be submitting today as the financial loss asset.
Moving on to Slide 7. We thought it would be useful today to give a view of the implied math that relates to the submitted IAB today of $5,500,000,000 Summary is that the indicative MA range is $715,000,000 to $755,000,000 As I mentioned earlier in the call, dollars 7.15 is actually the 2022 number, dollars 7.55 is the 2024 number. So as we say a range, it's actually the beginning in 'twenty two until the final year in 'twenty four. This is consistent with the existing board approved business plan, which are the forecasts we're showing on the page, which are the blue boxes. The MA reflects the current 3 year risk free rate in New Zealand, which is when we measured this about a week or 2 ago at 0.3%.
The actual rate will be based on a 3 month average ending 31st May. A reminder that in RP1, the MA is constrained by carry forward tax losses, meaning that the tax building block within RP1 is 0. Reiterate again that the MA excludes capital contributions, so greenfields in particular and also any government grant income relating to rural broadband initiatives, and it also excludes fiber revenue in LSC areas. I talked a lot on the call for our half year results a few weeks back on our views of why it's important and we believe it's appropriate that the MA in RP1 should be above our forecast revenues. Firstly, it's important to note that as at the most recent results release, we are only 63% connected.
So we don't believe it's appropriate to constrain Corus' natural expected rate of growth. We think it's critical that we retain incentives to continue investing in better consumer outcomes. We believe we have a great product to sell, and we believe that growing fiber uptake and growing newer products, faster speed products are in the consumers' interests and lead to better consumer outcomes. And lastly, a stated government goal for this regime was to achieve a smooth transition for consumers and investors, and we believe above our forecast revenue is necessary to achieve that. I do note that we will be submitting a model to the commission in late April, which we expect will be consistent with the range we've quoted today, subject to risk free rate movements in the market.
The last thing I would call out on this slide is that the MA range we're showing does not include any depreciation profiling or tilting. It is the raw number that falls off the back of the initial asset value at $5,500,000,000 Moving on to Slide 8. As I mentioned earlier in the call, we have updated our OpEx expenditure submission originally lodged in December. We've provided on the slide a view of the statutory P and L and an update of the proportion of the total statutory costs for each cost element that are included in FLAS and a comparison to the view at December. The summary is that we estimate now that circa 47 percent of full year 2020, total OpEx will relate to flares, and this is down from an estimate of 55% in December, which reflects the updated cost allocation assumptions.
It's really important to note when we look at this slide that, that FLAS proportion at 47% is expected to increase significantly as fiber uptake grows looking forward and as the copper network is retired. When you look at the slide, you can see labor is the key impacted area. And the reason that's the key impacted area reflects back to my earlier discussion about a stand alone approach to cost allocation, which is what we based our December expenditure submission on versus a shared approach, which is what underpins the $5,500,000,000 IAB model. To reiterate a comment I made earlier on, the updated OpEx building block numbers have been included in the quoted MA range of $715,000,000 to $755,000,000 Moving on to Slide 9. This is an update of the OpEx regulatory template.
The format is the same as you saw in December. The categories are different for regulatory purposes. And in the December presentation, we provided definitions of what those categories are and also how they map to our statutory P and L. The headline here is that the OpEx, whilst the gross spend number is unchanged, the allocation to FLAS OpEx has reduced from $625,000,000 to just under $550,000,000 The main difference, as I noted previously, is around the treatment of OpEx labor, and the updated OpEx numbers have been reflected in the quoted mile range within the pack. The remaining slides in the deck, I won't go through in detail because they're grounds that we have covered in some detail previously, but we have included because it's very relevant on Slide 10 the key parameters coming from the input methodologies process, both for the LOF asset on the left hand side and then for RP-1, 1st regulatory period.
And then on Slide 11, we've included the current regulatory timetable on the left hand side and some detail on how the RAB roll forward works on the right hand side of the slide. In terms of the REG timetable, the commission's published time line has a draft decision in the first half of this calendar year and a final decision in the second half of this calendar year. And that is therefore our expectations of the time line looking forward. So I will pause there, and thank you for joining with us. I'll now hand back to James, and we will go to questions and answers.
Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Our first question is from Ari Dekker. Ari, your line is open.
Yes, good morning. Thanks, David. I guess the first sort of question was just around, I guess, the comments you've made about your incentives with the mass sort of ending up where it is and that and kind of needing it to be above where your projected revenue is. In terms of your CapEx that you're forecasting and have sort of put forward in this, that doesn't factor in any slowdown in your push to connect people onto fiber as you look to sort of get it embedded, particularly against competitive threats in the future?
Thanks, Harry. That's correct. Our CapEx submission and our OpEx submission is based on our board approved business plan. And our business plan is based around achieving 1,000,000 connections by 2022 and continuing to push better outcomes for consumers. So there is no adjustment for any slowdown in spend in any of our internal forecasts or in any of our expenditure forecasts to the commission.
And it just reinforces our view that we should be able to grow into our MA and retain the incentives to improve consumer outcomes.
Yes. And then as you've mentioned, you haven't applied any tilting in what you've submitted here. So just in terms of on the basis, and I know there's going to be more detail on the MA coming in April, But in terms of what you've applied to come up with that sort of MA that indicative MA that you've outlined today, the asset base, I guess, at the end of RP1, where does that sit versus January 2022?
Sure. So to check that I understand, you're asking net of CapEx and depreciation over RP1.
Correct. What
does the $5,500,000 become at the end of RP1?
Correct, yes.
So that's a good question. I'll give you a response off the cuff, and I might try and give you something in a little more detail. Over the RP-one period, we've put a our CapEx proposal is approximately $1,000,000,000 for the 3 years. And if you look at what our depreciation is per annum, it's between $350,000,000 $400,000,000 per year. So at a broad level, those 2 will offset, but you have an indexation of the RAB that will occur each year, which is CPI.
So I think if you add all of that up, I'd expect it to be a little higher at the end of RP-1. But I might just come back to you, Ari, and double check that logic, but the broad parameters are as I described.
No, that's helpful. Yes. So the depreciation and that indicative of NAR is at around the 3.50 to 400 per year over that period?
Well, I haven't given what the actual building blocks are, but depreciation reflects within the regulatory model does reflect statutory depreciation. So when you look at our stat accounts, you can see what our stat depreciation is. So that is a good starting point. And then the thing to remember when you're estimating the depreciation building block in a rate context is there's a deflation that's deducted off that for CPI given that the RAB itself is indexed.
Yes, sure. Okay. No, that's good. Just in terms of the revenue you're generating in noncoreous U. S.
B. Areas at the moment on that nonregulated fiber asset base, can you just give a better context of how large they are and whether they're growing? And just broadly, what the value of those further assets are or that asset base in the non U. S. B.
Areas?
Yes. I probably can't give that detail out at the moment, Ari. That's not something that we've published previously, and it's probably a little bit early in the process to give a specific on that at the moment.
Sure. And then just on, I guess, your cost base is around $300,000,000 currently. You've talked about that coming down, I think, sort of slowly over time. I mean, clearly, you've got a skinny and sort of shrinking revenue base on the non regulated side. Is there like, what can you do to better manage, I guess, cost down that you can't apportion to the non to the regulated?
And like is there a risk of you being because you've clearly got a very large asset base at book value on the non regulated side. But is there a risk that you're are you seeing a risk that you're going to be going negative cash flow in that non regulated slide in the next few years on the obligations you have with regards to continuing to provide copper?
Thanks, Eric. No, we don't expect to go negative cash flow in the next few years. A couple of points to note on our cost base. You're right. As I talk about that publicly, I've talked about consistent but gradual reduction in our total cost base, but then accelerating through the 3 to 5 year period.
The biggest driver of our decreasing cost looking forward will be on the maintenance line where most of it is reactive copper maintenance. So our job is to manage our fiber costs to within our regulatory allowance and then to ensure that our remaining copper business is optimized so that pay is profitable. And the key driver to that is that we manage our costs. So that's our job, and I don't expect to be negative cash flow in copper.
No. I mean that was probably put it not didn't put it quite the right way. But if you look at that $1,300,000,000 of assets that aren't in the PQ, do you think that you can make a return on capital over the RP1 into RP2 on that book value?
Yes, I do.
And a reminder that, that does also include fiber in our CAs. But yes, yes, we do.
Okay. And do I have any others? No, no, that's all. Thanks. Thank you.
Thanks,
Harris. Thank you. Our next question is from Phil Campbell. Phil, your line is open.
Yes. Good
morning, everyone. Just a couple David, in terms of the RAB, obviously split between the fiber RAB and the financial loss asset, should we really not worry too much about the allocation because they're going to be amortized at the same rate? Or do you think they will be amortized going forward at different rates?
Okay. Sure. No, I wouldn't be too worried about the difference in amortization rates between the 2 there. The fiber RAB in total is based on statutory accounting asset lives. So whether it's the MARRAB at 4 or the RAB for the purposes of the financial loss asset, the asset life rules are the same.
So I don't think you need to worry about the difference between the 2 of them in terms of asset lives or depreciation.
Yes. Awesome. The second one was just, I suppose, in terms of the MAH estimates, that $7.15 to $7.55 which is consistent with the kind of fiber revenues approved in the business plan. Obviously, I'm not sure when the business plan was approved, but obviously, in the meantime, we have seen some quite steep declines in wireless broadband prices. Now obviously, I appreciate that they only catered a portion of the market, but does those lower wireless broadband prices, does it make it difficult in the next few years to be actually able to increase the anchor product of CPI, do you think?
We don't think that makes that challenging. We think when we look at our continuing growth in uptake levels, we've grown at 7% per annum for 3 years in a row now. We're due to provide our next quarterly update in early April. We don't expect the CPI increase on a 100 meg to make have any noticeable impact at all. I would also note Sky's entrance into the market in recent days, pushing the 1 gig product, which we think is an enormous positive for us in that context.
So no, I don't think the CPI issue is significant for us.
Okay. And then I'm not sure if it's in the pack. Just when you were doing the RAB estimate, do we know what the estimate of the shared assets was at the starting period?
Yes, we do. There's a tiny little footnote at the bottom. So the starting U. S. B.
At that's why I said sorry, Phil. The starting U. S. B. Asset is circa $30,000,000 at 2012.
A couple of notes on that because we had have had some questions on this. The reason that's low is that the commencement of the USB build, the number of FLAS services was 0 and then started to grow through year 1 in 2012 all the way up to 2022. The loss asset itself only relates to contracted USB build. So therefore, at the start of the period, there is none of that and then that starts to grow. So hence, the pre existing asset value is low at the start of the loss asset at $30,000,000 the loss asset period, but that grows to just over $200,000,000 by the end of the loss period.
And that's just a function of the proportion of those assets being used by USB contracted services growing.
Okay. Awesome. Thanks for that.
Thank you. Our next questions are from Ryan Tan. Ryan, your line is open. The next questions are from Ryan from Morningstar.
It's Brian. Hi, David. My first question was, was there a regulatory template that you followed in allocating asset values to fiber? Or was the allocation done by your own methodology, which itself needs to be reviewed by ComCom? I'm talking about the cost allocation.
Sure, Brian. Sure. No problem. The input methodologies outline what are acceptable cost allocation approaches and what are not. So what we've done with the help of analysis Mason, and as you'd expect, we get a bunch of experts to assist with this, is that we've built our cost allocation approach based on what is allowable under the input methodologies.
So therefore, reflecting or referencing my earlier discussion about a full standalone cost approach to labor OpEx over the financial loss period. We have not submitted that basis in our IAB value, the $5,500,000,000 because it's technically not compliant with the I'm but we believe it is appropriate and a real reflection of the reality of what happened. So yes, the import methodology is defined, the way the cost allocations are required to work. That's what we followed. And the commission will review what we've done and make sure that we have done it appropriately because, of course, there's still a lot of judgment in that area.
Okay. You mentioned that a firm called Analysis Mason helped you develop the models you're presenting today. Is it possible for you to tell us some of the other overseas companies it has helped with this type of work? And whether they have been mostly telcos? Or have they done this type of things mostly for traditional utilities?
Sure. What I can say is something general, Brian, on this one. They have helped international telcos previously, and they have helped done a lot of international work also. They have done what I can say is they've done work in Singapore, but I can't be any more specific than that. They also did extensive work for us in the copper review process over 2014 2015.
So we refer to them as world renowned experts in this area. That's not their marketing line. That's how we view them, and they do carry significant credibility, and they bring that to the table.
Thank you,
Our next questions come from Ian Martin. Ian, your line is open.
Thanks. Just a couple of questions, if I could. You talked about the potential perverse incentives of having too tight a MA on the regulated fiber revenue. So I just wonder how material the opportunity is beyond that. Obviously, you've still got a big chunk of other revenue, which is mostly copper.
But how much of it is fiber revenue outside of the regulated base? And is there a potential to grow that? And if you get disincentives in the regulated area, other incentives to expand it in LFC areas? And I think JV has talked about potential wind services. That's my first question.
The second question is obviously you would have seen Ofcom make announcements about the regulatory arrangements to apply in the U. K. I just wondered if you can perhaps highlight some of the differences in the incentive arrangements in the U. K. Versus the sales that apply in New Zealand.
Sure. Okay. That's fine, Ian. Thank you for the question. In terms of nonreg revenue, we absolutely have the incentive to develop streams of nonregulatory revenue.
The way our business plan is structured at the moment is we view our first task as getting uptake levels up to the appropriate level, and we've defined that as 1,000,000 connections by 2022 and then growing further past that whilst we haven't been specific on an uptake level. So that's our priority. And also in our business plan, we do contemplate non regulatory streams of revenue, but they are, at the moment, not a material part of our business. In the longer term, we want to grow them into a more significant part of our business, and we've talked about some of the examples that we are pursuing. Your point is very valid.
If we're kept on the regulatory side by MR, then our incentive to look at non regulatory sources of income grows significantly. And yes, that would be one of our reactions if we were constrained was, well, what else can we do to deliver value for our shareholders? So that's on the non reg revenue. In terms of Ofcom, yes, we noted it in the announcement that they have allowed a lack of circa 6% in their recent decision. And within that, there's an asset beta of 0.62.
And they take the view that assets are long term, so they match the risk free rate term to a longer period of time. When you contrast that with what happens in the New Zealand market, the risk free rate is spot rate that's set over a short period of time, and we're in that time now, 3 months up to the 1st June. It's based on a 3 year government bond, which you've got to interpolate between the 2 and the 5 year. So it's a short term view, which is unhelpful. And then we look at the components of the WACC itself.
The asset data is 0.5 for under the import methodology. I compare that to 0.62 in the U. K. So we do have differences of view with the commission over some of the outcomes from input methodology process. The key one is ultimately the WACC.
And you just got to look across at what Ofcom have just done for A5 asset in the U. K. And I think that's a really good example or comparison point.
Thanks,
Our next questions are from Lance Reynolds. Lance, your line is open.
Good day, guys. Actually, it's a pleasure on the call. I've got a question
on the non wrap site.
Just one comment. On that non regulatory side, does that business make kind of operating EBITDA, I think on a pre IFRS basis, does it make operating EBITDA excluding proper access? Just trying to get a feel for how much of that earnings is not since the proper excess going away. It's not on my numbers, it doesn't as well. I think numbers are based on that.
Sure. Yes, there's not much in that bucket, Lance. So we'd like that bucket to grow in the future, but we don't it's not a significant portion of our earnings at the moment. And I think referencing my earlier comments, the priority in the next few years is to get the core asset upside levels high, but we might start to change that priority if we are kept within the Mar itself. So there shouldn't be to try to be specific for you, there shouldn't be differences in our or material differences in our EBITDA margins on those products, but it is a very small part of the bucket at the moment.
So it's probably a longer term thing for us to contemplate.
Would it be unfair to say that the non resourced business doesn't make it as ex corporate? Will there be a few representation at the moment?
Can I just try to understand a bit better, Lance? When you say ex copper excess, what do you mean?
Well, just ex the copper excess business, part of the non regulatory business.
Yes, okay. Yes.
Would it be fair to
say Yes, okay. Yes, no, no. There's no reason to think the margins will be different in that part of the business. So yes, but again, it's a small number. It's not a material number.
So just on that, when you on your fiber cable assets, which is me, I will just so just breaking down the asset base, that $300,000,000 of copper cable, copper cost has gone well for you. Is there economic extraction value or does extraction value and time to export down nullify? Is there a genuine residual value on that?
Yes. Good question. And the copper price is interesting. We've done a little bit of extraction in the past. The challenge is that the cost varies depending on where the copper is and how long it's been in the ground.
Overall, when we've looked at this, I probably haven't looked at this really recently, but it is marginal for us. The cost to rip it up and get it to market, there's not a lot in it. But as you say, if the copper price goes continues to go up, that might change. But it's not as easy to do as we would like it to be. So there's not a lot of it going on at the moment.
And my final question is on the non regulated fiber cable value of circa 700,000,000 dollars which is in the GSE zone. How much of your how much of those fiber assets are consumable? So the GSE data assets or how much their value is actually in monopoly assets this is competitive?
Right. Okay. So generally, the way we get fiber into LSP areas is in greenfield type developments or small patches that we're able to service and we have to win that piece of work over the LSC. So it's contestable to the point that it's there's another provider in the market. But when we win the job, then we've got the fiber in that area.
So I hope if that helps, I hope. But that's how it works in the LSE area. So yes.
You haven't seen activities where you've got assets in the ground and then you see another fiber assets come next year or it's pretty rational?
It's pretty rational. We have a little bit of point to point in CBD in the LSC areas, but now it's reasonably rational, Lance.
Okay. Thank you very much, Jeff. It's really clear up to you.
Okay. Thanks, Lance.
Our next question is from the line of Phil Campbell. Phil, your line is open.
Yes, David, just a couple of kind of clarification ones. I was just wondering if you could just go through a little bit more detail on the alternative kind of allocation method. Just give us a little bit more detail on that. And then the other one was just, I know you did explain it, but just wanted to understand the difference between the UFP closing asset value of $3,800,000,000 and obviously the $4,000,000,000 that's in the rate calculations. I want to understand the difference on that again.
Yes. That's absolutely fine, Phil. So if we start with the cost allocation approach, and the easiest way to talk through this is to give a specific example. So let's run with CFO cost. So let's run with myself and my function.
When you look over the financial loss asset period 2012 to 2022 and to be specific, when we talk about an alternative cost allocation approach, what it impacts is the financial loss asset. The base RAB is not impacted. It's the financial loss asset that grows significantly with an alternative cost allocation approach. So for you, the example of the CFO cost, our view is when Chorus was established in 2012, we were established for the purpose of building a fiber network. That's our reason for being.
As a result of that, the CFO function along with a number of other functions were created and therefore duplicated for that purpose, duplicated because they existed in Spark as it was at the time. Our view therefore is that those costs should be directly allocated to fiber. They are a standalone fiber business cost established for the purpose of building a fiber network. Our view is, therefore, it's not appropriate to treat those costs as a shared cost. The interesting thing is that the reason it's such a material number is you might think, well, how could corporate OpEx add up to another $500,000,000 of value in the financial loss asset?
The reason is because the cost is there in 2012 and then compounds 10 times. And then the 2013 cost compounds 9 times. So it's quite a material impact. However, under the input methodologies, unfortunately, that standalone basis of approach is technically not compliant. And the reason it's technically not compliant is basically the way the commission's rules have been written within the input methodologies preclude us from taking that approach.
We were required to submit a certified and compliant model. So therefore, we have not been able to follow that approach in our base IOV submission of $5,500,000,000 But we will be engaging with the commission around this view because we do believe it should be considered, and we do believe it reflects the full costs of structural separation required by the PPP back in 2012. So that is an example of the CFA cost that applies to board costs or treasury costs or a long list of corporate type costs. Does that help, Phil, in terms of
That's a really good explanation actually. I suppose I just go and look at the ComCom consultation report they did in February, 12th February. They do it's only a one sentence comment, but they do say that they given the relative segments of Corus' business in 2020, as Corus reported, we query the allocation method. So I suppose that's the only kind of feedback we've got from ComCom so far, but I suspect you will be engaging with them in more detail soon.
Sure. Yes. Yes, we absolutely will. And Phil, the second question was around the 2 RAV values. So Slide 6, where we've got a USB asset as at the 1st January 'twenty two for the purposes of the financial loss calc.
So that's $3,800,000,000 whereas the RAB for the or the base RAB for the mark calculation is €4,000,000,000 which is on the previous slide. The reason for the difference is the financial loss asset under the input methodologies only relates to the contracted USB spend. So any fiber spend that we undertake that's not within the USB contract, and the biggest example of that is fiber in RONs, but there are also examples within our USB footprint. An example is infill, where we have, for economic reasons, agreed or decided to spend CapEx to lay fiber, where that was not in the USB contract. So it's just a function of way the input methodologies are written that the financial loss asset only relates to UFP contracted spend, not total fiber spend.
Okay. That makes more sense now. So that's why you've used the $4,000,000,000 in the RAB calculation?
Yes. The $4,000,000,000 is what drives the math. But for the financial loss asset calc, there's a component that's excluded.
Okay, great. Thanks.
Thank you. Our next question is from Iain Martin. Iain, your line is
open. Thanks. Just a question, clarification around Slide 5, which looks at the balance sheet composition, particularly at the base asset value, dollars 5,300,000,000 unallocated, dollars 4,000,000,000 allocated. And you talked around the copper issues in a previous question. But there's quite a big difference in the allocated and unallocated value for DUCs, manholes, poles and property.
Is it fair to assume that once you get through this first regulatory period, those percentages are going to go up because basically you have the same asset base roughly given what you said about
CapEx and depreciation? Yes, it is.
And the percentages will be higher? Or is there opportunity to rationalize, for instance, some of the property once you've closed down copper?
Yes. Yes. So yes to both. And in terms of the percentages, the copper business will continue to decline until it reaches a certain point where it will be stable. So as you look forward, that proportion that goes to copper will broadly reduce.
So that's correct. And in terms of the property footprint, the reason that percentage is so low is because copper takes up more space, to be simple about it, and there are a lot more older copper assets, property assets that we have. And we absolutely have an opportunity to consolidate and rationalize, and we have a plan that we're pursuing to do that. So again, as you look forward to future regulatory periods, that percentage that is allocated to the RAB should be higher.
We have a follow-up question from Lance Reynolds.
Sorry, Lance, we're struggling to hear you. Would you mind just coming a bit closer to that, Mike?
Yes. On the you got me now?
Yes. Thank you.
Yes. On the non regulated property value of $200,000,000 is the bulk of that of those assets standalone assets or they actually share and being split within a wider group?
I would suggest most of them are shared. Most of them are shared. There will be some that are purely copper, but the bigger ones will be shared.
So I mean on that math, if copper bleeds down and goes to copper with 0 tomorrow, you wouldn't get to realize $200,000,000 a belly. So would that property base
be done? Yes. So it's not linear. That's correct. It's not linear.
That's correct. And I should also have called out there's LFC copper assets will be in there as well, which I should have called out. But you're right, Lance, it's not linear. Yes.
And one more question. If the sorry, I'm trying to get this right. If the non corporate excess EBITDA of the non regulatory business doesn't make much earnings and you've got a $500,000,000 delta on your arguments around what corporate costs are, which I kind of buy into, wouldn't it be value adding just to actually sell that business? So the reality of your CapEx is your so the reality of your corporate function function, so there will be no argument at all by the regulator? And then at a later date, you've been investing in non regulatory business?
Sure, Lance. And just to be clear, the value add for selling the business, do you mean the non reg business or the copper business?
Yes. Just get rid of the I'll look this up here. But if you got rid of the entire non reg to business, the arguments on splitting your corporate cost would be a midpoint. And then suddenly, you're deciding to run the rough, that's when you're at. Well, I mean, that's
I must admit, I haven't looked at it that way before. But I guess, yes, theoretically, that's something that we could consider. It's probably a little bit early for me to be running down that path, but I understand your point.
Yes. Because it makes sense given the residuals make much sense to anyone at all. Thanks.
All right, thanks. Thank you.
We have no further questions
at this time. I'd like to turn back to the presenters.
Okay. Thanks, James. Well, thank you all for joining us. I know there's a lot of information in those few slides, and I'm sure there'll be more questions as time goes by. Brett and I are always available to chat.
But thank you for joining us. We appreciate your support, and we'll be back in touch again soon. Bye for now.
Ladies and gentlemen, that does conclude today's conference. Thank you for attending and you may disconnect your lines.