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Govt must resist Aussie corporate bullying over 'copper tax' - Coalition

Prime Minister John Key must resist attempts by Australian-based fund manager Investors Mutual Ltd (IML) to bully his government into imposing a 'copper tax' on every Kiwi household and business, the Coalition for Fair Internet Pricing says.

The coalition - which includes CallPlus, Orcon, InternetNZ, Tuanz and Consumer - made the call after a letter to Mr Key was, published on NBR ONLINE today from IML senior portfolio manager, Simon Conn.

In a follow up interview, Mr Conn told NBR his fund will invest no more in New Zealand companies unless parliament legislates to override the Commerce Commission.

The Coalition calls the difference between the Commission's determination for a 23% price cut to Chorus' copper broadband pricing and the government's proposed own, more modest cuts, the 'copper tax'.

IML’s website claims it had more than NZ$4.4 billion under management in February 2013 but it is not one of Chorus’s top twenty shareholders meaning it has less than NZ$5 million invested in the New Zealand copper lines monopolist, the Coalition says.

Nor is IML reported to be a top twenty shareholder in Telecom New Zealand or any other Kiwi telecommunications company.

“Mr Conn seems not to know that in New Zealand, unlike other countries he may be familiar with, governments have traditionally respected the role of independent regulators and have not rolled over in the face of special-interest pleading from foreign fund managers, especially ones with so little invested in our country,” Coalition spokeswoman and Consumer NZ CEO Sue Chetwin says.

In his letter to Mr Key, Mr Conn said IML invested in Chorus because it was ‘attracted to the highly recurrent cashflows’ it generates from its copper monopoly, which ‘would enable Chorus to pay a regular and consistent dividend to shareholders’, the Coalition notes.

Last year, Chorus made monopoly profits of $171 million and paid $95 million in dividends to shareholders, of which up to $600,000 would have been paid to IML.  At the same time, Mr Key has told parliament that Chorus chair Sue Sheldon privately provided him with confidential information that indicated her company was at risk of going broke.  Despite this, the copper monopolist planned until recently to pay another $100 million to its shareholders in 2013/14 dividends, the Coalition says.

Mr Conn’s letter also slammed the New Zealand Commerce Commission, saying it was acting unlawfully.  The NBR says he went on to attack Mr Key’s government, saying he had thought Mr Key’s election ‘heralded the return of sensible government where investments are not subject to adverse regulation and the rule of law is upheld’.

He criticised Mr Key and Communications & IT Minister Amy Adams for not immediately over-ruling the Commerce Commission and instead making ‘ambivalent’ statements about Chorus.

Ms Chetwin said Mr Conn’s letter and public comments were “arrogant and uncalled for, especially from a fund without a major stake in New Zealand or its telecommunications industry”.

“We don’t need an Australian fund manager like Mr Conn falsely claiming that our independent regulators are acting unlawfully and then going on to demand our prime minister and parliament impose extra costs on every Kiwi household and business to support his dividend flows,” she says.

“Kiwis have rejected the copper tax because it is unfair, inequitable, totally unnecessary to the completion of our new ultra-fast broadband network, and would simply be paid in dividends to people like Mr Conn.  Mr Key must resist this Australian corporate bullying."

Comments and questions
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Good on ya, Sue. We do what we damn well like in our own interest without being lectured and threatened by some arrogant and ignorant big mouth bully from OZ.

It's not Aussie corporate bullying. It's an offshore investor who wants to put more money into NZ but is frustrated by the regulatory uncertainty over Chorus.

Afraid it is bullying. I find it hard to reconcile a desire for regulatory certainty and stable business environment with a request for parliamentary intervention to override a regulatory body's mandated decision. Most FDI investors around the world campaign for just the exact opposite. No political interference. What next? Apple to request Govt to intervene and legislate away GST on its transactions otherwise it won't invest? The issue is with how UFB rollout was set up. Not the pricing decision of Commerce Commission.

Without doubt this is a feeble attempt at bullying a government into protecting monopoly profits. Investing is risky, he has miscalculated the risk and now wants the NZ govt to break its own laws to protect his profits. The only regulatory uncertainty would be if the govt were to change the law now to benefit him.

He probably said the same thing when Telecom was forced to split that was going to be the end of the NZ capital markets, or when the likes of Vector faced controls from the commerce commission, or the airports.

If he is that concerned about the regulatory environment why invest, as others say he has clearly misread the situation. his ego is also over inflated to think a government would listen to a small fund like his.

spot on, i fear this is the thin edge of the wedge once the TPP is signed

It will be interesting to see if the internet coalition is so supportive of the current regulatory structure if the Commerce Commission's final pricing review of Chorus' prices delivers a price that is higher than the current price. We need to depoliticise the regulatory process but first we need a regulatory framework that is fair to all parties and encourage investment in infrastructure.

I cannot see how the Commission FPP review will increase the cost of copper delivery. Final Pricing Principal review is based on actual cost and as we've got evidence from CallPlus about how much they currently sell the exact same product for (less than the draft determination price) I can't see how Chorus will be able to "prove" it costs more.

But in many respects, that's besides the point. There is a process, the Commerce Commission is following it and it's laid down in law. Nobody, especially the government, should be able to ignore and override the Commerce Commission midway through the process.

By all means, change the rules before a project begins but part way through is far too late to change the rules.

The UBA price may not change but the UCLL price probably will (Does CallPlus have evidence of the UCLL price as I thought they only did UBA - if their actual cost of UCLL is that low maybe they should build the UFB network). Surely if the process or the law as it stands throws up some silly results who else is going to change the process/law but the government - that is their job. Remember there was always a review planned part way through this process - it was legislated for.

Disagree.

Even people who only holds very little interest in Chorus spoke out publicly against commerce commission's decision and government, there must be some serious mistakes in this.

So the comments are in favour of socalled cheaper prices, that will be the price for subsidised "competition"The coalition only looks after themselves as well, they do not own the copperr or have invested in that. In the real world the owner has the rights to the product and profits are owned by the share holders / owners, not trying to legislate to a group with the loudest voice.

Won't invest any more money in NZ? Rubbish - like every other fund manager they will decide investment strategy based on expectation of returns, after allowing for regulatory risk. Any experienced investor putting money in a monopoly business will always have an eye on the regulatory environment.

If anything the IML letter merely confirms that the monopoly profits of Chorus are above what is commercially reasonable - which is why they invested in the first place. Win some, lose some Mr Conn.

There is no such thing as a "copper tax". Just a bunch of vested interests who are happy to lock NZ internet users into yesterday's technology to make their lives easier. No wonder the country is going nowhere.

Lindsay, never was a truer word spoken.

If the business case is dependent on subsidies then have we learned nothing.

I saw recently that the government has invested another $2m of dollars into a new industry, which will be worth $1bn to NZ - problem was that when the last lot of money went in it was going to be worth $1bn by now, yet it is still gone nowhere.

We are going backwards because for too long we have subsidied inefficient industries for the benefit of a few.

You expect people to wait years for UFB to roll-out and all houses to be connected up Lindsay before they get fast internet at a reasonable price? Sounds you are an arrogant one as well!

As a NZ investor I have been gobsmacked at the regulators' decision on Chorus.

To take reportedly 80% of the profit from a privately owned company is ridiculous. The direct and indirect ramifications are enormous.

There must have been far better ways to achieve this without any of the possible unintended consequences - e.g. freeze the prices charged and let inflation do the job over time.

What do people think is going to happen to the quality of the internet infrastructure in NZ when the company that owns it is making no money.

As a NZ investor I look at the electricity companies - no. Too much regulatory risk. I look at Sky City - no. Too much political risk. Telecom, Chorus, Team Talk - hmmm. Same issue. Fonterra? No voting ownership available. Xero? Great product but its gives me a nose bleed just looking at the price.

There are very few 'safe' utility style, good dividend yielding investments in NZ that a retail investor can invest in.

Whilst I don't run a multi billion dollar fund I do invest millions of NZ dollars. For me, now that the NZD:AUD cross rate is historical high my money is going back to Australia as the opportunities are better there.

I would far prefer to invest in my own country but there simply isn't an appropriate return relative to the risk.

Chorus knew about the move to cost-based pricing before it won the UFB contract. It knew about it before it was separated off from Telecom.

So great would this drop be that the govt wrote in a three year moritorium on the introduction.

I find it astonishing that anyone can claim the regulator has acted out step with expectation. The move was always expected to have a major impact on Chorus' revenue.

This is a re-writing of history by parties that haven't bothered doing their homework before recommending customers buy stock based on monopoly rents and the belief that these rents would continue in perpetuity.

If we are having cost based pricing then by all means lets cost out the value of the network rather than rely on some somewhat arbitrary benchmarking process. I remember TUANZ advocating for full cost but now you seem to be advocating for benchmarking - are you rewriting history? I disagree that the move was always expected to have a major impact on Chorus' revenue. If you were so wise you could have made a bundle of cash by knowing this. As all the industry participants have said and what you conveniently ignore is that they thought the copper price would stay broadly similar. It destroys their business cases otherwise. While consumers may get a short term gain (but still subject to the FPP and what could result in a higher price again), longer term the industry will be worth off. TUANZ was originally a key proponent of fibre and the longer term vision. Now you seem to be solely focused on short term benefits.

Tuanz would rather see actual prices rather than economic models but the current rules say quite clearly that copper wholesale rates would be based on "cost plus" rather than "retail minus" because Chorus doesn't have any retail customers. Very straight forward.

I'm not sure how I would have made money knowing this - the entire industry knew this. Most acted accordingly.

I completely agree Paul. The lack of diligence by investors and their advisors is the truly startling story here.

Cost-based pricing for copper? Does that work the same as cost-based electricity from old hydro-electric stations? So who is going to pay for the fibre roll-out? More unsecured loans from Japanese banks? Yeah right. Mum and Dad investors who have just lost a third of their money? I think not. Maybe the ISP's who will benefit will most reduce their charges - I suggest the Commerce Commission look into that.

Why does Chorus get picked on? The NZ telecommunications sector has been gauging NZ consumers for years and this has led to excellent returns for investors - albeit at the expense of infrastructure investment which tax payers are now funding.
This is an extremely successful business model - obtain a former government utility with a captive consumer base and then instigate the types of profit margins usually reserved for companies like Apple.
What's more such companies are often shielded from having to make long term investment by government intervention.
It's almost to good to be true so why knock it.

TUANZ and the CFFIP lobbyists: do you people want a world leading fibre telco infrastructure in NZ that will outlast your grandchildren? If not, please go home and unplug your landline connection, and run all your comms and internet on mobile. Or Voda/TestraClear co-ax if you've got it. Hey Vodafone - how much would it cost to run co-ax cable past every house in NZ? The comcom have clearly demonstrated their incompetence by comparing NZ with mainland connected European countries. This lobbying will turn NZ back into a backwater. Investors are entitled to a return for their support of NZ Inc.

Hi CoIB, I think you may need to review both the regulations and the law.

The Commerce Commission is required to benchmark with similar countries. It chose the two countries that most closely match New Zealand's approach to copper wholesale regulation.

It is required to do so by law. It's in the Telco Act and was put there in 2010 by Steven Joyce and builds on the regulation that's been in place since 2001.

It's regulation that works well. The Commission's approach is tediously transparent - it puts out a discussion document, puts out a draft determination, holds a conference, asks for submissions and cross submissions and then puts out a final determination.

At every step of the way the Commission's process does two things - it provides the regulated answer to any particular issue and it builds a sequence of regulatory decisions that are consistent and deliver certainty to the market.

Thanks for the well detailed explanation. The regulatory systems in Denmark and Sweden may be the same but the topography and population distribution of those countries are vastly different to NZ.

If the law is structured in such a way that a critical infrastructure utility provider is abandoned by their investors and bankers and the copper and fibre lines in NZ fall silent then NZ will return to the dark ages.

Sticking religiously to the precise letter of the law in setting pricing without ANY regard to business factors means that the law needs to be fixed, hence the need for govt intervention.