Investor, Labour, Tuanz slam govt as Chorus price regulation put on hold

Chorus 12-month NZX performance (NZX.com; click to zoom)

UPDATE / 10.30am: Chorus shares [NZX:CNU] were up more than 10% in early trading after the government followed through on its threat to over-rule the Commerce Commission's draft ruling to slash wholesale line prices - or at least to put a freeze on the watchdog.

The Telecom spin-off's shares fell sharply before Christmas (see chart right) when the Commission proposed slashing what Chorus could charge. Chorus said the cuts would wipe 40% from its earnings from December next year.

High profile investor Aaron Bhatnagar (who sold his Chorus shares) told NBR ONLINE the Commerce Commission was being overly assertive. While cheered by this morning's statement, he added; "There are two issues that still need addressing. There needs to be a regard for an 'acceptable rate of return' for regulated businesses to provide certainty when investing in big ticket infrastructure, as there is in Australia. Secondly,  the Commerce Commission should also have regard to the government's National Infrastructure Plan, so there are no glaring divergences in Commerce Commission operations and the government's infrastructure strategy."

Labour: stall will cost households $400
Labour’s ICT spokeswoman Clare Curran says the Commission's proposed wholesale price cuts would have saved $12 a month on the average home line - or $396 over the 33-month delay (the amount assumes retails ISPs and phone companies would pass the saving directly on to customers).

“Amy Adams and John Key are yet again putting their private investor friends ahead of Kiwi families. This law review is a smokescreen cut in a smoke-filled room to save the Government from unethically overriding the Commerce Commission through legislation. Keeping copper prices artificially high only benefits Chorus’ profits.

“This is a legal mess and it’s Steven Joyce’s creation. Unfortunately it’s too much for Amy Adams to handle so she’s kicked the Commerce Commission can down the road for three years. That’s not fixing, that’s fudging.

“The truth is this review is overruling an independent regulator and it’s even more underhand than legislating. New law would be open to Parliament’s scrutiny, but no one will know what went on behind closed doors. The lengths this Government will go to to protect its elite investor allies are breath-taking. The only supporters are the Government, Crown Fibre Holdings and Chorus."

Tuanz: political meddling leaves industry in limbo
This morning Telecommunications Users Association head Paul Brislen said that extending the review means we have a half-house regulatory regime in place until after this new review has been completed. That troubled him.

"In December I wrote about the regulatory process and why it's important to ensure politicians don't meddle in an ongoing process. Regulatory certainty only comes about via an arm's length process where investors can be sure the rules of the road are dictated by the regulator and not by the politicians of the day with one eye on the polls," Mr Brislen blogged this morning.

"All this has come about because a rule the government put in place when it last revamped the Telecommunications Act has proved unsavory. Chorus makes its money today from wholesaling copper services, yet by the end of the decade it will have built a fibre network that makes its copper lines surplus to requirements. Chorus (and Telecom before it) knew the rules going in. In exchange for separation, Chorus would win the UFB project and would expect to have the copper regulation set once and for all and left alone. That regulation would include moving from "retail minus" pricing to "cost plus" and that's exactly what the Commerce Commission has introduced.

"The government has chosen in effect to freeze that process and to leave the industry in limbo. We don't have new pricing for wholesale services and we now face an intensive round of lobbying on our new regulatory process, something which in an ideal world would be as bloodless and clinical as possible but which now will no doubt be rather more exciting than that."


9am: Telecommunications network operator Chorus has been given some breathing space over price regulation of its ageing copper lines after Communications Minister Amy Adams put the regulator's plans on hold pending a wider review of rules governing the sector.

The Commerce Commission will not be able to implement cost-based prices on unbundled bitstream access services on Chorus' copper lines until November 30, 2015, while the government embarks on its review and makes any changes, Ms Adams says in a statement.

The decision comes after Telecommunications Commissioner Stephen Gale surprised the Beehive when flagging plans to impose a monthly regulated price of $32.45 for UBA, down from $44.98 at present.

What rankled policymakers was that the draft determination seemed to undermine the government's stated aim of rolling out a nationwide fibre broadband network through subsidising Chorus and other partner companies, by making cheaper services on legacy copper more attractive to end consumers.

"Increased certainty around the transition path from copper to fibre will promote development of retail fibre products, boosting the ability of New Zealand homes, businesses, schools and hospitals to maximise the transformative potential of these technologies," Ms Adams says.

"One common message I have continually heard from consumers and industry is that they want certainty."

Chorus estimated the decision could shave 40 percent from its annual earnings, and the stock plunged after the announcement last year. The shares were unchanged at $2.86 yesterday.

"From an investor's perspective it's a good outcome," says Shane Solly, portfolio manager at Mint Asset Management. "It's appropriate to take some time to review policy implementation, to slow down and take a holistic approach."

Ms Adams has ordered a review of the Telecommunications Services Obligation and a wider review of the policy framework regulating telecommunications services.

The reviews will focus on long-term interests of consumers, while taking into account market structure, technology developments, competition and network investment, she says. Any legislative changes will be ushered through by the end of this year.

The announcement comes after submissions on the regulator's draft report showed a divide between those investing in the network, including Chorus, and those purchasing services from the company and group's representing end-consumers.

The Telecommunications Users Association said in its submission this week that it was "gravely concerned" over the potential for political interference after the commission had followed the law as it's written, fearing it could undermine the regulator's good work.

The lobby group said Chorus should not have been surprised by the draft decision, with the industry discussing the law at some length in the lead-up.

Wholesale prices for access to the copper lines were averaged as a result of legislation enabling Telecom to carve out its Chorus unit last year, something that annoyed rival telecommunications companies who said it would lift their costs.

At the time of the enabling legislation, Ministry of Economic Development officials downplayed concerns about the impact on copper-line prices, saying it wasn't "deemed significant" and that any increase in UCLL pricing may "have the positive impact of encouraging more investment and innovation on fibre".

(BusinessDesk)

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17 Comments & Questions

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Because the reason for having government-sponsored ultra fast broadband was always about the investor opportunities. Not the customers. Want NZ's internet access and price for services to ever approach the rest of the OECD? Watch the invisible hand give you the finger.

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Shares went up considerably prior to the announcment
Mmmm

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Needs to be looked at. Would not be surprised if a nice cosy deal between Government and Chorus also meant staffers buying in just beforehand.

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Not true. Announcement to NZX 7.41am today. Chorus closing price yesterday 285c, lower than the previous two trading days.

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There was market talk of a govt intervention as early as Wednesday. Leaky.

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Blatant cronyism.

A three year golden holiday for Chorus to continue extracting monopoly rates for copper connections while they take their sweet time rolling out the $929 million tax payer funded UFB network.

Why on earth was Chorus awarded the lions share of the UFB contract? Cronyism.

Why is the National Govt taking the unprecedented, arrogantly over ruling the Commerce Commission? To protect excessive Chorus profits: cronyism.

Why is the National Govt trying to block the release of The Hobbit fiasco documents? That's right yet again cronyism; in a futile attempt to mask their selling out of NZA to Warners Bros / New Line.

Disgusting.

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Long term, building a successful and growing economy requires a government to create competitive markets for as many industries as possible. Apparently the NZ government believes in strangling competitive markets, especially when it has invested in a particular company in an industry.

Investors will take note of the possibility of government intervention whenever it sees fit. Today the Chorus investors appear to be a winner. Tomorrow, the government could turn on them.

Looking forward to investing in NZ energy companies when they are floated on the NZX? Be very careful - you never know when the government will arbitrarily change the regulations and structure of that industry.

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Wow. I can’t believe they really did this. As someone who votes National I am really questioning who I will vote for next election. I just cannot subscribe to a government who claims to be free market and then stomps all over markets for their own political purposes. I like free market hands off government but now it would seem that both National and Labour are charging down the hands on interference form of government. Perhaps it is time to move to Australia...

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So, Kevin, you are no doubt opposed to the Commerce Commission and believe everything should be open slather. Your idealism is clouding your judgment.

There are monopoly industries in any developed economy, and NZ is no exception. Without the ComCom, these operators would be free to gouge prices at the expense of consumers.

I'm no great fan of the ComCom, indeed I thought their UBA /UCLL pricing decision was appalling, hence today's announcement from government. But a competition regulator is necessary and fulfils an important role in our economy.

By the way, I think you'll find that Australia has an active competition regualtor as well. Ever heard of the ACCC?

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I don't have a beef with the ComCom. What they do and don't do is governed by legislation made by government. I agree they play an important role in regulating monopolies.

My beef is with a government that makes and changes legislation to serve its corporate partners and not the people they serve - New Zealanders.

And don't give me all the B.S. about Chorus shareholders being New Zealanders. I am sure at least 80% of Chorus is owned by foreign investors.

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This is called regulatory creep. It is inevitable, governments cant keep their hands off. But this is nothing, wait till Labour get back in, and watch them regulate programming and content as well.

By the way, my copper based broadband works really well. It could be upgraded to deliver HD video or super HD video at far lower cost than fibre, but dont tell anyone will you.

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The problem here is actually a lack of regulation - the National government is going into bat on behalf of private investors and a private company with a monopoly (newly gifted to it by the public), and against the public Regulator (ComCom) which is defending the interest of consumers (and 99% of the general public).

There you are, Chorus, feel free to price gouge copper customers all over NZ ...

We should be used to it after a quarter century's worth of corporate welfarism.

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A shocking move by a power-crazed government.
Bad for investor certainty.
Bad for New Zealand households who will keep paying over the odds.
Great for the surge of foreign investors who today bought back into the market.

When a government gets this out of touch with reality, it gets voted out. Ask Helen.

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The commerce commission's ruling was filled with inaccuracies which anyone who comments here had actually bothered to read the entire decision and Chorus's response to it they would be aware of. So before the classic "the little man getting screwed by big business bleat bleat bleat" lets have a look at some facts shall we?

Fact 1.
The Chorus Commission had to move from a retail minus to a cost plus pricing model (mandated in the telco act 2011) and benchmark against appropriate countries.

Fact 2. They started with a set of 31 countries and could only find 2 applicable countries - 19 had to get struck off immediately as they were retail minus and we are talking such 1st world countries (OECD) as Germany, Italy and Australia (seems to work alright for them!).

Fact 3. The 2 countries they used (Denmark and Sweden) are such a small subset the CC had to admit their decision was a Qualitative one (ie essentially an opinion rather than a process)

Fact 4. None of these countries are rolling out a UFB program at the same time

Fact 5. The CC used the lowest speed pricing in these countries in its rulling which is a miserable 250kbs.- Is this really appropriate?

Fact 6 They totally disregarded the UFB rollout in NZ and the effect it would have with customers moving from the copper to the fibre network - what this would mean would be less and less people using the copper network, meaning its fixed costs would need to be spread across less customers, meaning either price rises or significant undercharging will occur

Fact 7. The CC used a median approach (ie 50/50) where as in previous rulings they had used a 75% 25% approach in favour of the infrastructure provider - the reason for this is that it is the 'lesser evil' if the infrastructure provider can receive excess profits with a higher price as in this case the infrastructure will be built. If the end result is undercharging then the infrastructure will either not be built or to a substandard degree.

So the government is trying to recify a flawed decision by the C/C caused by faulty legislation (its governments own fault by passing it, namely the 2011 Telco Act) and a very 'average' (and thats been nice) decision by the C/C.based on limited data and questionable conclusions.

As for favouring investors over consumers - the commerce commision is not getting a name in the market as the 'consumer' commission for no reason. Investors in Telecom have seen a massive destruction of wealth due to regulation, and investors in Chorus (since being spun out) have seen their price go from $3.29 to $3.15 (which is after the 10% rise yesterday) a fall of 4.2% when the rest of the market is up over 30% over the same time period - yep those greedy Chorus investors are really cleaning up aren't they?????

So to conclude, do you want the infrastructure or not? Because if you do (SHOCK HORROR) you're actually going to have to pay for it TUANZ and all those (ie ISPs) with their own agendas (Ie cheap infrastructure cost for them so they increase their margins at the expense of both consumers and the infrastructure provider.)

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Hard to argue with your Points 1-3 as they're entirely accurate.

Point 4 is irrelevant. The Commission was told to review copper wholesale pricing and nothing was said of fibre. Rightly so - there is no fibre market to regulate at this point - it's far too early to consider it in regulation. Uptake rates are well below 1% of the total market. The Commission has taken a similar stance with VDSL.

Points 5, 6 and 7 could and should all have been argued via the Commission process. That's how it's happened in the past and how it was happening when this government stepped in and made the whole process redundant.

Now we are told there will be a review of the entire business.

Where does that leave the investors in the telcos other than Chorus? It leaves them with uncertainty, with half a regime in place and half on hold.

Chorus knew exactly what the rules where when it signed up for the UFB. We all did. Those rules included a move to cost-based pricing for copper wholesale and that's what should be happening now.

Telecom's investors earned a lot of money off the back of a monopoly investment that reaped huge returns out of the New Zealand market for many years before being reigned in. I don't think anyone else wants to go back to such a market (yourself aside of course) because we can see the higher levels of investment in the rest of the market.

Those investments were based on a belief that the Commerce Commission would set the pricing, not be derailed by a political move halfway through the process.

Do we want a UFB? Yes. It makes sense for the country, it makes sense for the telcos and it makes sense for the investors. Copper is fine for now but in a decade's time almost every home and business will want and demand 100Mbit/s speeds because of the sheer volume of connections coming in and out of their buildings.

Are we going to own any of it? After putting up $1.35bn the people of New Zealand will own none of it - it's a gift to the local fibre companies and to Chorus. All we will get is cheaper prices for faster speeds and now it seems even that is off the table.

This is not what the customers and investors in New Zealand asked for.

Paul Brislen
CEO TUANZ

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Is this the voice of Chorus?

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Chorus could ask for the full cost model treatment for the UBA price so the benchmarking arguments are largely irrelevant.

Furthemore, Chorus could roll-out better specd UBA plans that cost a little more (rather than $20 a month more as currently) that ISPs would buy.

The Minister's comments are hopelessly confused. There are huge costs to connecting up all houses to fibre that aren't included in UFB tender (wiring to and in the house) so it will never happen quickly. Many of the benefits can be gotten from faster copper services - and much more cheaply.

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