Chorus takes Commerce Commission to High Court

The latest twist in the Chorus saga has seen the company file in the High Court in a bid to over-turn the Commerce Commission's October 31 determination that it must slash its copper line pricing by 23%.

With the government's political path to changing the law to help the company now blocked*, the legal challenge is Chorus' last chance to stop the regulator's price cut, which it says would blow a billion-dollar hole in its earnings between now and 2020.

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Echoing John Key's line, the company says the regulator was too narrow in its interpretation of the Telecommunications Act.

The protagonists have wildly different takes on the legislation, with the Coalition for Fair Internet Pricing and other Commerce Commission supporters say the regulator was right to benchmark NZ copper pricing against other, similar countries, while the onus is on the government and Chorus to make fibre more attractive, nor artificially inflate the cost of copper. The government and Chorus say the cost of copper should be pegged to the cost of a replacement network (that is, UFB fibre).

Pack a lunch
Any investors hoping for a speedy resolution should think again. Telecommunications cases cases involving the Commerce Commission tend to take years. And years. Telecom's 0867 spat with the regulator lasted a decade. And various Kiwi Share levy cases lodged by Telecom, Vodafone and TelstraClear against the regulator lead to a multi-year pile uip of High Court, Court of Appeal and Supreme Court cases.

Pricing review
In a seperate development, the Chorus also formally excercised its right under the Telecommunications Act to request a final pricing principle (FPP) review - a process that analysts say could take anywhere from months to two years (a fair estimate given this week marks the one-year anniversary of the start of the current fight over wholesale copper pricing.) Chorus had previously flagged its intention request an FPP review.

If upheld, the Commerce Commission-mandated cuts would kick in December 2014.

The multi-sided brawl over copper line pricing already involves ISP CallPlus suing ICT Minister Amy Adams over her review of the Telecommunications Act - in which the minister first raised the possibility of using legislation to over-rule the Commission on pricing; a standoff between National and usual allies ACT, UnitedFuture and The Maori Party; and an independent review of Chorus financing and abiility to complete the UFB, called for by Ms Adams and being carried out by EY Australia, due to report mid December.

While the tussle over pricing remains the headline, Forsyth Barr telecommunications sector analyst Blair Galpin tells NBR that Chorus' references to upcoming regulatory framework reviews is also interesting. They could be a means to discuss options for easing fibre rollout, such as consent requirements, he says. Chorus CEO Mark Ratcliffe earlier told NBR that UFB fibre installs could be held up for up to two months as the company sought permission from all owners town a right-of-way, or all owners of a multi-tenant dwelling. The Chorus boss wants the UFB made a designated service under the Resource Management Act so fibre can be laid straight away.

Chorus statement (below) is also notable for mentioning the government has so far invested just $160 million of its planned $929 million in the company (half in non-voting shares, half in interest-free debt).

Mr Galpin says Chorus should consider walking away from the UFB if that turns out to be the best result for shareholders. Telecommunications sector lawyer Michael Wigley argues that is not an option.

Chorus shares [NZX:CNU], which fell 15% Friday, were down another 6.89% to $1.42 in late Monday trading.

* Although the government cannot muster a majority to change the Telecommunications Act to over-rule the Commerce Commission's decision to slash copper line pricing, telecommunications lawyer Michael Wigley tells NBR the it doesn't need legislation to soften Chorus UFB contract by, say, raising its interest-free loan or giving it more time to pay it back. This morning on TVNZ's Breakfast, the PM ruled out extending the timeframe for the rollout itself, saying it would lead to NZ slipping behind other countries.

RAW DATA: Chorus statement.

Chorus takes next steps in copper pricing review

Chorus has today taken the next two steps in the broadband pricing review.

As is provided for under the Telecommunications Act, Chorus has applied to the Commerce Commission for a final pricing principle (FPP) review of the Commission’s initial decision on the price Chorus can charge for its copper broadband (UBA) service. An FPP involves economic cost modelling rather than benchmarking against other countries.

Chorus is also filing for a High Court appeal of the same decision to determine whether the Commission has applied the law correctly.

“The decisions to apply for an FPP and file for a High Court appeal have not been taken lightly by Chorus’ Board and Management, but the limitation of two benchmarked countries despite the specific factors set out in section 18 and 18(2A) has left us with no choice.  We have a duty to our shareholders to ensure we explore every option before us, including the High Court appeal,” said Mark Ratcliffe, Chorus CEO.

“Completing the FPP processes for UCLL and UBA could well mean that we take another two years to end up rebalancing at around the same aggregate price as we have today. There is also precedent for the revised prices from the FPP to be backdated.

“We recognise that the Commerce Commission has to operate within the regulations that are set in the Telecommunications Act. The Commission’s initial decision is a symptom of regulations that simply do not align with the Government’s policy of a transition to fibre.

“We are not looking to blame the Commission, because it can only referee by the rules of the game as they are set.

“While the Government has only just begun its policy reviews, and we recognise that it may no longer have the support it needs for a direct intervention on UBA pricing, a legislative process is required to free up the Commission to do its job in a regulatory framework that is aligned to Government policy,” he said.

Speaking when she announced a review of Telecommunications regulation earlier this year, ICT Minister Amy Adams said: “regulatory certainty is an important factor in the ability of New Zealanders to have early access to high-quality communication services based on new technologies … the policy framework needs to be predictable and stable for all concerned.”

And in an independent report, former Telecommunications Commissioner Dr Ross Patterson stated that the current regulatory framework is not appropriate to support the transition to fibre.  

“The ladder of investment regulatory framework that is currently in place is designed over time to remove the natural monopoly of the access network,” said Dr Patterson. “However, the structural separation model adopted through UFB accepts that the access network is a natural monopoly and building competing networks is inefficient.  The two frameworks cannot co-exist efficiently.”

In total, Chorus will be investing around three dollars for every dollar of Crown funding to support the delivery of UFB ahead of demand.  From 2008 to the end of 2011, about $500 million was also invested in upgrading the existing copper broadband network under Chorus’ fibre to the node rollout.

The Crown has so far contributed about $160 million in funding towards the UFB rollout, in the form of debt and equity securities to be repaid by Chorus over time.