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Regulation to blame for sharp copper price cut, not Commerce Commission, lawyer says

UPDATED 2pm March 18Sweeping changes to laws governing the telecommunications sector were to blame for size of the drop in what Chorus [NZX: CNUcan charge for access to its copper lines services, rather than the Commerce Commission's decision to impose the cut, the High Court heard today.

Counsel for the regulator, John Farmer QC, rejected claims by Chorus that it had erred in law by choosing two nations to act as a benchmark price without an evidential basis or that it hadn't correctly followed section 18 of the Telecommunications Act, which seeks to minimise the risk regulation would have on investment and innovation in the sector.

Farmer said the shift in how the commission would set the price using a forward looking cost-based model informed the new price, which had previously been set using retail pricing under a vertically-integrated monopoly.

"It was the change in regulation that caused the shock, not the Commerce Commission decision made under that new regulation," Farmer told the High Court in Wellington.

The regulator didn't need to account for the section 18 provision throughout the whole process, and only had to show the piece of the act wasn't ignored, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in its draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Earlier today David Goddard QC, counsel for Chorus, said the company wants to have the initial decision set aside if it's successful in its appeal, for the commission to undertake the review again. The initial pricing principle is a proxy for the regulator to try and determine the full-cost of replacing the copper network using international comparisons, rather than going through a more rigorous process called a final pricing principle.

Goddard said such a review shouldn't undermine the work that's already underway to determine a final price, as a separate component of the copper network, the unbundled copper local loop, is still proceeding.

Justice Stephen Kos said he would have "serious reservations" about the impact of setting aside the review and ordering the process to start again.

The judge-alone hearing is into its second day, and is continuing.

(BusinessDesk)

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EARLIER March 18Chorus [NZX: CNU], whose shares have tumbled 53 percent in the past two years because of price cuts imposed by the regulator, wants the Commerce Commission's review of network pricing set aside, the High Court heard today.

The network operator told Justice Stephen Kos that it wants the initial pricing principle (IPP) process for its unbundled bitstream access services set aside and for the regulator to go back to the drawing board.

The Commerce Commission has ordered Chorus to slash prices for access to its copper lines, a move the company says will undermine its profitability and its ability to build the government-sponsored fibre network.

Chorus counsel David Goddard QC told the High Court in Wellington that the IPP process could be restarted without hindering the move to a more robust price review.

Justice Kos said he would have "serious reservations" about setting aside the review and ordering the process to start again.

Chorus's share price has slumped since November 2012, when the Commerce Commission first made public its view that regulated prices should be cut. The shares rose 1.2 percent to $1.70 on the NZX today.

The stock selloff should have told the regulator the market didn't anticipate the size of the proposed reduction in pricing, and made it consider section 18 of the Telecommunications Act, which aims to protect innovation and investment in the sector, Goddard told the court yesterday.

The regulator also should have considered what impact regulatory shocks might have on the wider market, and should have telegraphed its thinking, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in its draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Goddard told the court yesterday that the regulator erred in law when setting the price Chorus can charge for access to its UBA services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's goal of building a nationwide fibre network.

(BusinessDesk) 

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EARLIER: March 17 The sharp drop in Chorus's [NZX: CNUshare price after the Commerce Commission signalled plans to slash what the network operator could charge for access for services on its copper lines should have rung an alarm bell at the regulator, the High Court heard today.

Since November 2012, various Commerce Commission statements on the regulated price Chorus could charge on its copper lines have wiped as much as 60 percent from the share price, something that the regulator should have recognised when making its final determination on the charges, Chorus counsel David Goddard QC told Justice Stephen Kos in the High Court in Wellington.

The shares rose 0.3 percent to $1.68 and have gained 16 percent this year.

The stock selloff should have told the regulator the market didn't anticipate the size of the proposed reduction in pricing, and made it consider section 18 of the Telecommunications Act, which aims to protect innovation and investment in the sector, Goddard said.

The regulator also should have considered what impact regulatory shocks might have on the wider market, and should have telegraphed its thinking, he said.

"You need more information, not less, to justify intervention of that magnitude," he said.

The regulator didn't pick up on other warning signals, such as when the number of countries the commission was using as a benchmark to set the initial price was whittled down to two nations, Sweden and Denmark, he said.

The regulator didn't have a sound reason for limiting its benchmark price range without taking in other factors, or the legislative requirement to support investment, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Goddard said the regulator erred in law when setting the price Chorus can charge for access to its UBA services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's aims in building a nationwide fibre network.

The benchmarking process lacked statistical rigour, and the regulator should have had a wider band for what could have been a plausible price range in setting the price band, he said.

The court heard a cross-appeal by Orcon and by some consumer agencies had been dropped. The Commerce Commission will put forward its argument after Chorus, followed by Vodafone New Zealand, Orcon, and finally Telecom.

The judge-alone hearing is set down for four days and is continuing.

(BusinessDesk)

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EARLIERThe Commerce Commission narrowed down its modelling to set the regulated price of Chorus's [NZX: CNU] copper lines without any evidential backing and didn't account for a section of the act designed to minimise the risk to investors in telecommunications services, the High Court heard today.

The regulator erred in law when setting the price Chorus can charge for access to its unbundled bitstream access services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's aims in building a nationwide fibre network, counsel for Chorus, David Goddard QC, told Justice Stephen Kos in the High Court in Wellington.

Goddard said the warning signals should have started sounding when the number of countries the commission was using as a benchmark to set the initial price was whittled down to two nations, Sweden and Denmark. At that stage the commission should have considered section 18 of the act, which was designed to protect innovation and investment in the sector.

"The whole point of section 18 is it tells you how to approach uncertainty, it tells you not to risk innovation and investment," Goddard said.

The regulator didn't have a sound reason for limiting its benchmark price range without taking in other factors, or the legislative requirement to support investment, he said.

Chorus is appealing the commission's final determination in November last year setting the UBA monthly price at $34.44 per line, up from the $32.35 price initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

The court heard a cross-appeal by Orcon and the consumer agencies was dropped. The Commerce Commission will put forward its argument after Chorus, followed by Vodafone New Zealand, Orcon, and finally by Telecom.

The judge-alone hearing is set down for four days and is continuing.

(BusinessDesk)

Comments and questions
8

There is more risk involved with technology such as fibre network compared to say building an airport. As a new replacement technology could be much cheaper coming out in 5-10 years. Therefore this section clearly states such consideration must be taking into account for this risk it takes to calculate the fair return for the investment Chorus makes if people are still using its network. Currently people are using Chorus network, and Com Com is going to cut the price so Chorus would return less (in this case around 0% equity after inflation) than an Airport on every metric, so clearly violating that section.

Indeed such as the pcell 4g based solution being trialled soon in San Francisco.

Truthly speaking the lack of competition is because of government intervention primarily through the RMA and restrictions on utility poles which requires resource consent for each new cable. More regulation is not the answer, the answer is less regulation and more competition

The move from a retail-minus based model to a cost-plus based model was always going to result in a massive drop in revenue. That's why minister of communications Steven Joyce built in a three-year delay to its introduction - to allow Chorus time to get its house in order.

That it didn't and that various fund managers also failed to see the obvious doesn't mean the Commerce Commission got it wrong: far from it.

Paul Brislen
TUANZ CEO

Oh really Paul? To quote you:

"the move retail-minus based model to a cost-plus based model was always going to result in a massive drop in revenue"

Then how come before it was enacted on July 1 2011, you and your lobbyist mates were featured in an article (coincidentally 3 years to the day) dated 24th March 2011 in the NZ Herald:

""Consumer groups are calling for changes to proposed telecommunications legislation, which they say will lead to higher broadband prices and less choice.

Consumer NZ, Federated Farmers, Tuanz and InternetNZ today published a joint supplementary submission they have made to Parliament's finance and expenditure committee.

Its focus is on protecting competition in the copper market, improving the fibre regulatory framework, making Telecom's structural separation work in the public interest, and removing Commerce Act exemptions for the big telco players, the organisations said.

The suggestions showed how broadband infrastructure could be regulated in the public interest.

Consumer NZ chief executive Sue Chetwin said it was vital New Zealand broadband customers did not lose huge gains seen since competition was introduced on Telecom's network in 2006 - but the legislation would bring that to an end.

InternetNZ chief executive Vikram Kumar said customers were being asked to pay higher prices for broadband today to pay for the promise of ultra fast broadband in the future.

"This bill will lead to higher prices for most urban customers and reduced choice while we wait for the future to arrive," Kumar said.

"Worse, we will continue to pay higher prices. It is simply impossible to know today what the right prices are over a ten year period for something that changes as quickly as the internet and technology. The Government promises good prices for ultra fast broadband on day one, but setting prices for ten years may mean that while the rest of the world is benefitting from falling prices, our prices either rise or decline much more slowly."

Tuanz chief executive Paul Brislen said the bill proposed sidelining the regulator."

The link is here:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10714634

I particularly like the line from Vikram Kumar where he says "This bill will lead to higher prices for most urban customers"

So Paul, it was so "obvious" that you and your mates at the time thought it was going to mean prices go up??????

Pull the other one mate. Just admit you've got (temporarily) lucky with a qualitative and patently wrong ComCom decision (I mean Sweden??? Come on!) and the FPP will sort things out.

Why all the angst about potential backdating if the FPP is going to come out lower? Oh is that because the UCLL price is supposed to encompass the whole vale of the network and its going to go up significantly?? And it kicked in on December 2013 so when it goes up probably $10 a month, the multinationals (Vodafone and Telecom) plus the minnows will be up for probably $10 x 1,500,000 lines x at least 12 months = $180m payable to Chorus? BIG red flag all this concern about backdating that the price is only going to go in one direction......up - I don't see Chorus worried about backdating, do you?

We all understand what cost-plus means, it means the cost of provide the service plus the right amount of profit Chorus should earn taking account the risk it is taking. With the initial price ruling, Chorus is earning no profit, so it is becoming a pure cost rather than cost plus model. In fact expert expected no change or very minor drop in revenue going into a cost-plus model.

So, "REGULATION TO BLAME FOR SHARP PRICE CUT, NOT COMMERCE COMMISSION."
That sounds like an admission that the comcom decision was perverse.
It seems to me that the Regulator should have had the gumption to abort the process and tel the Govt why.

The ComCom cannot "abort the process and tell the Govt why". It simply doesn't have the power to do that.

What it can do, and what it did do, is send a letter to the government explaining why it has only two benchmark countries and pointing out the problem inherent in that.

The upshot is, the ComCom did what the rules say it should do. Whether those rules need changing or not is another matter and not one for the High Court to decide. That's for the policy folk - the government.

There is a review of the Act underway currently - we believe the review should encompass all of the Act including these kinds of issues.

Paul Brislen
TUANZ

Com Com doesn't understand nor it seems care about the market and how markets work, This is what you get when you have pointy head academics heading up regulators instead of people with real market experience who understand the intentional and more importantly the unintentional consequences of their actions. The regulator didn't.