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CallPlus confirms lawsuit against Amy Adams over telco review, 'copper tax'

UPDATE 10.30am: CallPlus has confirms it has filed proceedings against the government in High Court at Wellington over its controversial review of the Telecommunications Act (2001).

The review proposed three options, all of which involved over-ruling the Commerce Commission (which proposed a 25% cut in Chorus wholesale copper line pricing), and the government directly setting the price. Monday, the Commerce Commission made its final determination, ruling Chorus should cut its pricing by 23%.

The Coalition for Fair Internet Pricing, of which CallPlus is a member, calls the difference between the Commerce Commission's steep cut and the modest trim proposed via the government's Telco Act review the "copper tax'.

Today's CallPlus filing, which names ICT Minister Amy Adams as the Respondent, seeks a judicial review and declaratory judgment that the government’s review of the Telco Act  does not comply with section 157AA of the Act and therefore cannot proceed.

In its statement of claim, the ISP says the terms of the government's review are much too narrow, focussing only on Chorus' wholesale copper line pricing when it is bound by section 157AA to also take in factors such as the extent of network coverage, the level of investment in fibre and copper, developments in wireless technology and the ability of access providers to achieve a reasonal rate of return on their investments - the latter presumably a reference to CallPlus $10 million investment in moving its own gear into Chorus phone exchanges (so-called local loop unbundling).

Earlier this morning, Ms Adams announced an independent review into Chorus' financial position and capability.

CallPlus CEO Mark Callander tells NBR he welcomes the review "but that is a separate issue and does not impact the proceedings that we have issued this morning."

Wigley & Co principal Michael Wigley is representing CallPlus in its High Court action.

(See end of story for RAW DATA - CallPlus statement.)


CallPlus will sue Adams this morning - Coalition source

Nov 7, 8.30am: ISP CallPlus will sue ICT Minister Amy Adams, a source inside the Coalition for Fair Internet Pricing tells NBR ONLINE.

The action will be taken this morniing, "challenging the the legitimacy of her telecommunications review process."

When approached by NBR, CallPlus CEO Mark Callander refused to confirm or deny he was heading to the High Court. 

The leak from the coalition camp was followed just a half hour later by Amy Adams yieldiing to a key coalition demand and annoucing an independent review of Chorus - it remains to be seen whether that will be enough to head-off or temper the lawsuit. The inside word is that it won't mollify CallPlus.

CallPlus (which includes the Slingshot and Flip consumer brands) belongs to the Coalition for Fair Internet Pricing, which is pushing for the government to uphold a Commerce Commission determination that Chorus must cut its wholesale copper line charges by 23%.

Other members include Orcon, InternetNZ, Tuanz and Consumer.

Assuming it goes ahead, the CallPlus legal action will be lodged at a nervous time for the industry.

Chorus says if the Commerce Commission's 23% cut goes ahead, it will leave the company with a "$1 billion shortfall", meaning it will not be able to borrow enough funds to complete the UFB. Analysts boosting the stock are now wondering why the government hasn't immediately made good on its promise to over-ride the regulator with changes to the Telecommunications Act. Is it leaving a diplomatic pause, or is it genuiinely reassessing the situation?

Dark comments from Chorus saw S&P and Moodys put it on a downgrade review yesterday. The Coalition said it did not believe Chorus' take, and rolled out research by an Auckland University academic that says Chorus is at "no risk of financial distress."

'Outrageous' that Adams planning private sit-down with Chorus - Coalition

Nov 5: The Coalition for Fair Internet Pricing has seized on a comment by ICT Minister Amy Adams today, in which she implies a private sit-down with Chorus following a controversial Commerce Commission recommendation to slash the wholesale price of copper broadband.

"The number has come out this morning and now as the PM said, we need to work through that in some detail, sit down with Chorus now that it's public, really go through their numbers and look at the options and come back with some options reasonably quickly," Ms Adams told a press conference.

NBR was not present, but was forwarded an audio recording.

“Any suggestion of a third price-setting process, involving only the government and the monopolist Chorus, is outrageous," Coalition spokesman and Tuanz CEO Paul Brislen told NBR.

No one from the government should hold private talks with Chorus outside the publicly announced price-setting processes, Mr Brislen says.

Ms Adams did not directly respond to a question from NBR but her office forwarded her explanatory tweet, "what I said was that we would take time to go thru Chorus' numbers to satisfy ourselves re their claims of threat to UFB."



The press conference was also notable for Prime Minister John Key's refusal to rule out the government taking an equity stake in Chorus, or lending the company more money for the UFB rollout. 

The Crown is already investing $928 million in Chorus - half in the form of non-voting shares, half in interest-free debt securities.

Equity analysts spoken to by NBR this morning were disappointed by the muted reaction from Mr Key and Ms Adams, who have said they will take advice from MBIE and Treasury before deciding on next steps.

Prime Minister John Key earlier said the government would intervene to over-rule the Commerce Commission if stuck to its decision to slash copper broadband pricing by 25% (in the end it plumped for 23%), which the PM says could send Chorus broke and imperil the UFB rollout. But now that the decision had come through, the government was not immediately making good on its promise to over-rule the regulator with legislation but is instead assessing its options.

"It's not encouraging," Craigs Investment Partners' Arie Dekker told NBR.

Ms Adams did not immediately return a request for comment.

RAW DATA: CallPlus statement

Copper Tax proposal heads to court

CallPlus Limited has filed proceedings in the High Court in Wellington seeking a judicial review and declaratory judgment that the Government’s review of the Telecommunications Act 2001 does not comply with section 157AA of the Act and therefore cannot proceed.

Section 157AA of the Act requires the Government to commence a review of the policy framework for telecommunications regulation by the end of September 2016.

Section 157AA(3)(b) requires the minister to take into account ten factors, including:

1.     the extent of network coverage of services provided on fibre, copper, wireless, and other telecommunications networks; and

2.     the level of investment in fibre, copper, wireless, and other telecommunications networks, and the ability of access providers to recover that investment within a reasonable period; and

3.     the ability of access providers to achieve, within a reasonable period, reasonable rates of return on their investment in telecommunications networks that adequately reflect the risks assumed by those access providers when the relevant investments were made; and

4.     the level of competition in relevant telecommunications markets; and

5.     the effects of the regulatory framework under this Act on investment in fibre, copper, wireless, and other telecommunications networks, and on outcomes for end-users; and

6.     the sustainability of the regulatory framework under this Act, given developments in technology and convergence of traditional telecommunications markets; and

7.     the importance of any regulatory intervention being proportionate, having regard to the problems being addressed, the size of the relevant market, and the number and size of the potentially regulated entities; and

8.     developments in wireless solutions and whether they should be part of any telecommunications regulation; and

9.     experience in comparable jurisdictions and economic relations with Australia, weighed against what is appropriate for New Zealand conditions and the make-up and history of New Zealand's telecommunications markets; and

10.  any other matters that the Minister considers relevant.

The discussion document has only dealt with the pricing of Chorus’s copper broadband and voice services network.  It has failed to address any of the matters mandated under 157AA(3)(b) of the Act which should be a critical part of the review process.

“We have some concerns that the Government has not taken into account a number of factors that will have a material impact on the competitive market and most importantly our customers.  The Government should stop the consultation process as it would be wrong to launch major new policy initiatives or legislation until this matter has been reviewed“ says Mark Callander, CEO of CallPlus.

More by Chris Keall

Comments and questions

Of course Amy Adams should sit down with Chorus. They've given the better part of $1.35B to Chorus to deliver on a policy. It's the governments duty to represent the taxpayer investment by meeting with Chorus and discussing the implications. Did the Coalition of Greedy Retailers not think the taxpayer had a say in thus?

No government minister should sit down in private to negotiate giving yet more tax payers' money to a monopoly in light of regulation.

Sunlight is the best disinfectant and we would expect any and all negotiations around the future of the telco industry be discussed in public with input from both telcos and consumers alike.

We've had private, secret agreements thrust upon the industry in the past (I'm thinking of the 'upgrading' of the Kiwi Share to become the TSO in particular) and the damage that caused is still being felt more than a decade later. We don't want to see another cosy deal being signed that leaves customers in the lurch, stuck with the bill.

Oh ok. So when the government wants to sit down with Chorus to discuss the implications of the Commerce Commission decision, it's a bad thing. Yet the real shady activity was when the ISP retailers (the ones you are now in cahoots with) sought a back room deal in May/June of this year.

C'mon, you guys are pretending to be angels. You're not. You're as self-interested as anyone else in this matter.

I agree with Share Watcher - the unexpectedly low Commerce Commission copper broadband price determination is a "force majeure" event. Hence it is right and proper that Chorus is entitled to a variation of the fibre rollout contract and that the government should enter into negotiations with them. And commercial sensitivity dictates that the negotiations should be in private with only the final agreement made public and put to parliament for ratification.

So the 2007 government should not have done the deal behind closed doors to deliver NZ the world class FTTN network it already has either?

Get real - all of the significant regulation of NZ's telco markets has been done using çontractual undertakings''- i.e. behind closed door deals between the government and the investor. Think Kiwi Share, and even the fibre deals themselves with Chorus and the three other 'UFB Partners' who would all be in short street along with Chorus if they were listed (except they aren't as they are electricity lines trusts and a municipality).

I don't represent ISPs. TUANZ works to represent our members - customers of telcos and ISPs.

I stand by what I said. Government intervention in a market is a major step and should be done only on full view of the facts and the public. Currently we see little information and lots of hyperbole coupled with a seeming desire to sort some real out in private.

I think that's unacceptable.

Paul, perhaps this is a little off-topic albeit with striking parallels, but what are your thoughts on Labour & the Greens altering the electricity regulatory framework?

They Haven't they said that if elected here is our power policy good job I hope they are elected.

The UFB itself is government intervention in the market in the first place! Government started the debacle by funding the UFB, so its a bit rich of critics to complain if government subsequently gets involved t ensure the UFB policy gets delivered as intended. In the real world (i.e. foreign financial markets) most investors expect that when the government is an investor in the firm (as it is with debt and non-voting shares in Chorus), it will not do anything silly that dilutes the value of its stake. The real problem here is not govt action but government inaction. The time to sort it out was December 3 last year, when Key first threatened to intervene. its too late now - NZ is just too hard for foreign investors to be bothered with any more. NZers will likely end up owning all the shares in a network costing orders of magnitude more than it might otherwise have cost, for no reason other than government ineptitude leading to a missing market for investment.

Brislen, get your preverbial out of the clouds. Chorus has a legal right to challenge the CommComm decision. If the CommComm ruling goes through unchallenged, it wipes out a third of the budget Chorus had assigned to complete the premise-build portion of the UFB contract. The govt backing for the UFB build only covers running the UFB Fibre down the street. Getting the fibre from the street into the house is fully down to the LFCs.

Chorus was relying on copper revenues to fund the approx $3billion required to build into every premise by the year 2020. The CommComm's ruling wipes out a third of this budget, and seriously puts the UFB project in jeopardy from Chorus' perspective.

Simple matter of fact, Mr Brislen, is where do you think this $1billion shortfall is going to come from?

There is no billion dollar shortfall. Chorus knew the price of copper would fall and should have built that in to its business model. That it didn't or is saying it didn't should not result in yet more public spending on the network.

If the company underbid on the contract and is now caught by that it should either acknowledge that or relinquish the contract. We can go out to tender again and I'm sure we can find another network operator willing and able to deploy UFB in Auckland and Wellington for a $900m interest free loan.

How did Chorus "know"?

The government allowed for a 3 year period to smooth out the transition to Fibre where pricing would be based on 'retail-minus' pricing before a review & shift to 'cost-plus' - Chorus would have known very well what their costs were for maintaining the copper network and bet on the three year buffer to underbid competitors and win the UFB contracts for 70% of the country.

What goes up often comes down.

Cycles in commodity prices, perhaps?

This has probably been asked and answered before, so forgive me;

All LFC's appear to be locked-in to offer the same wholesale rates (e.g 30/10 for $37.50), so national pricing. It would be fair to say that uptake would, on average, be consistent across all LFC's. So how is it that Chorus require a subsidy from their copper network in order to complete their UFB build but the other LFC's (e.g. Northpower/Ultrafast/Enable) that have no other revenue stream are required to achieve the same outcome? Where does their additional funding come from, or put another way, why can't Chorus achieve the same without dependency on copper? Has the taxpayer via CFH put less UFB funding into Chorus?

I have to agree with Paul, Chorus should have/would have modeled the impact of declining copper prices and therefore the $1billion shortfall would appear to be a complete overstatement. An independent financial review is critical.

Because Chorus has to pay to build their part of the UFB. CFH pays for the UFB elsewhere and the LFCs only pay money to CFH when a customer actually connects (and they then start receiving revenue). Chorus are completely exposed in a way LFCs are not.

Thanks Jeremy, my view exactly. Chorus is trying to say they are worse off than any other UFB contract winner in other areas! If they couldn't afford to do it at the price they bid, they shouldn't have bid so low and effectively extended their monopoly position in the process. The Government also should have had rules in place as part of the UFB bid process to ensure no one company got such a large share of the UFB rollout. Who lets this happen in the first place???

There's no way CallPlus can successfully challenge the review - as the government hasnt yet made a decision to challenge!

For all CallPlus knows the government might issue another discussion doc, pause the review, ask for cross-submissions, say the pricing issue is now being dealt with outside the review framework etc. All of which would render their lawsuit moot. CallPlus is being premature in the extreme.

And the implications if CallPlus won would be huge. It would limit the ability of government to 'test the water' with a discussion document, which is exactly what government should be doing!

callplus just fighting now to save the free money they made from comcom decision

Ironic isn't it! They said they would pass through 100% of the savings, which if true should mean they'd be indifferent to what the wholesale price actually is. The fact they're fighting so hard must mean they must be in for a windfall.

Surely if the Government changes the legislation, what the current Act says is irrelevant.

Is Parliament running NZ or the Commerce Commission?

Anyone who thinks the rapacious Telco retailers are going to pass on any savings have rocks for brains, They will pass the savings onto their shareholders as dividends as some cases like Vodafone that's means to foreign owners. If Chorus goes broke no one else is going to build UFB. Why should they when the Com Com will regulate away any profits they might make as he already has.

Do you have a shareholding in Chorus.