CallPlus, Kordia bosses rage against Chorus ruling; shares fall 14%


Chris Keall

Chorus CEO Mark Ratcliffe
Telecommunications Commissioner Stephen Gale

UPDATE: Chorus shares closed down 14.41% [NZX:CNU] or 49 cents to $2.90 - three cents below its December IPO price 12 months ago.

Investors have taken fright at a draft regulatory determination to make big cuts to the amount Chorus can charge phone companies and ISPs for more than 600,000 broadband lines. Chorus has warned this could cut $150 million to $160 million from its annual earnings from December 2014, based on existing connections if the proposed $21.46 a month to $8.93 per line/per month price reduction goes ahead.

CEO Mark Ratcliffe said not just dividends but the company's whole business model could be in question.

However, Telecommunications Commissioner Stephen Gale stressed it was a draft recommendation only and that industry consultation had yet to take place.

Similar consultation on the price of unbundled copper lines saw a suggested 20% cut in what Chorus could charge moderated to jus t 3.85% in the final determination issued this morning (below).

ISP bosses see Chorus profiting long term; rage
But while Chorus investors seem unhappy, so are the company's customers, especially with the modest cut to what Chorus can charge for unbundled lines (those from exchanges were the likes of Vodafone/TelstraClear, Callplus/Slingshot and Orcon have moved in their own gear).

"Today’s announcement is incredibly disappointing," CallPlus/Slingshot CEO Mark Callander told NBR ONLINE.

"It appears to be token tinkering with the price – this decision will ultimately force up the price of broadband for consumers in the longer term," Mr Callandar said.

"It is hard to understand the obsession with ensuring Chorus profits are maintained at the expense of competition and investment in copper. 

"CallPlus had planned to invest in unbundling a further 100 exchanges to expand the reach of copper based services to more New Zealanders to deliver lower prices, but this will now have to be reviewed. As expressed on numerous occasions, fibre and copper based technologies such as VDSL will coexist for a considerable amount of time, but the myopic focus on fibre seems to continue at the expense of everything else."

Click to zoom. Chorus peformance since its Dec 2011 IPO (Source: Today's 11% fall echose a similar dive in May after the Telecommunications Commissioner's draft ruling was released.

Click to zoom. Chorus NZX performance since its Dec 11 IPO. Up until today's 31 cent+ drop, its biggest one-day dive had taken place in May, when a draft determination on unbundled copper line pricing was released.

Scott Bartlett, head of Kordia NZ (which includes Orcon), also railed that "Today’s Commerce Commission UCLL decision holds the interests of Chorus ahead of New Zealand internet users.

"Holding the price of copper artificially high will damage investment in new technologies and new services, which in turn will see New Zealand broadband speeds languish."

"We hope that the draft decision on UBA, for implementation in December 2014, remains because it is in the best interest of the uptake of broadband in New Zealand.”

Telecommunications Users Association head Paul Brislen was also critical.

By potentially reducing the price for wholesale so dramatically, many retail players would cease unbundling in favour of simply reselling the Chorus wholesale product set, he said.

Like NBR, Mr Brislen sees comments by ICT Minister Amy Adams (below) about the difficulties the Commission has faced as a hint at possible intervention.

One scenario would be that Ms Adams throws demands a whole new system to calculate wholesale pricing.

9.30am: The average price Chorus can charge for an unbundled copper line will drop to $23.52 from $24.46 from December 1, 2014, Telecommunications Commissioner Stephen Gale said in a final determination published this morning.

The 3.85% cut was much less than the $5 or 20% cut suggested in a draft determination in May, by previous Commissioner Ross Patterson, which sent investors into a tiz.

Dr Gale also cut he price of an urban ubundled copper line from $19.75 to $19.08 with immediate effect. The $23.52 across-the-board price being introduced in December next year (under the Telecommunicatins Act) will be an average of urban and (more expensive) rural pricing.

Chorus had argued that cutting the price of copper lines too sharply would (apart from trimming its revenue) make copper more attractive, hindering the uptake of fibre under the Ultrafastbroad (UFB) rollout.

Today, Mr Gale told NBR it was not the Commerce Commission's statutory role to promote fibre.

The Telecommunications Act required the watchdog to pay special attention to incentives that would boost update of new technology - but that technology could be enhanced copper services as much as fibre, Dr Gale said. Copper boosters say VDSL technology, offered by some ISPs, can offer fibre-like download speeds - at least for those lucky enough to live close enough to their local exchange.

Dr Gale agreed the modest price cut would dampen the incentive for the likes of Vodafone, Orcon and CallPlus to unbundle (move their own broadband gear into) Telecom exchanges, but added it would 'not extinguish" it.

Surprise broadband twist
However, in a surprise move, the Commissioner also made a draft to recommendation that Chorus UBA (unbundled bitstream access) price is $32.45 per month per line and will come into effect on 1 December 2014. Until then, the cost of UBA will remain at the current price of $44.98 for most lines.

“I have asked my officials to review the effects of the pricing and report back to me," Ms Adams said in a statement today. 

The UCLL cut will take effect without the need for ministerial approval (although industry observers will note that when the Commmission initially decided against regulating mobile termination rates early last year, then ICT Minister Steven Joyce suggested it reconsider, which it did, reversing its initial ruling).

“I note that the Commission’s report says it has only found two countries to benchmark the UBA rate against, and has struggled to find a broad sample of countries," Ms Adams said in her statement this morning.

“New Zealand is one of the few countries in the world to have structurally separated its main telecommunications company, while at the same time rolling out a fibre network. This potentially highlights the need for a pricing methodology appropriate for the New Zealand context.”

Dr Gale stressed there would be industry consultation before, and that the proposed UBA cut was a draft only. 

It was 24 months before any cut would take effect.

"A lot can happen in the telecommunications industry in two years," the Commissioner said.

Investors, ISPs on tenterhooks as regulator poised to rule on Chorus home line pricing

ISPs and Chorus investors are on tenterhooks.

This morning, new Telecommunications Commissioner Stephen Gale will reveal his ruling on what Chorus can charge for certain home lines.

In May, Dr Gale's predecessor, Ross Patterson, issued a draft determination on ubundled urban copper local loop (UCLL) charges. It recommended, against market expectations, that Chorus' wholesale price be chopped from $24.46 to $19.75 a month.

Today's decision will be the new Commissioner's first major decision, and will stamp his mark on the role. Will he go with the cut suggested in May (as many ISPs and lobby groups want) or reverse the draft decision (Chorus' desired outcome).

The cut in May's draft decision sent investors were sent into a tiz, including Aaron Bhatnagar who told NBR ONLINE, "Chorus only just came free of a massive regulatory overhang last year when it split from Telecom and became the government's fibre partnerk.

"It is outrageous that the Commerce Commission is now wading in with further intervention

"It sends a real mixed message over New Zealand's infrastructure plans. The Commission is pushing cheaper prices for the old copper wire technology that the government is trying to move us away from with their significant fibre investment," Mr Bhatnagar said.

Chorus also warns that making copper lines cheaper could hinder fibre uptake under the government-backed Ultrafast Broadband (UFB) rollout.

At the company's annual meeting on November 1, CEO Mark Ratcliffe told investors that regulatory uncertainty had undermined Chorus' ability to provide firm guidance.

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And so the circus that is NZ state-regulated telecoms "market" rolls into its 10th year...

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What a crock. It's a fine line for ISPs to say "woe is me, UBA is too expensive" and then turn around and say later on down the track chorus aren't investing enough money in its own network. They need revenue to upgrade their network because, guess what folks, it ain't free. It's a bit like tenants complaining the rent is too high so they cant save up to buy their own house. I can see their point. However, saying they are interested in lower cost prices for the rates they charge for DSL in NZ is cr*p. They are motivated purely by money. No company in its right mind wants to charge less for its services unless it is profitable in the end/long run. They are basically saying Chorus should make less money so we can make more. Ridiculous.

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The real problem here is no-one in the industry knows what the government's intention was when investing in the UFB. Was it to accelerate the replacement of fibre with copper? Or was it to provide real infrastructure competition for the copper network? No-one knows for sure, as the signals have been so confused in all of government's policy, legislation and contractual actions.

The Commissioner's legislated mandate is to make copper more competitive - his only engagement with fibre is to enforce the agreements that Crown Fibre made with the UFBCos (including Chorus). To that end, the UBA decision has done just that - made copper more competitive, using the benchmarking process required by legislation. If that was not what the Government intended, then why did it legislate for that mandate in the first place?

If the government's intention was to accelerate the uptake of fibre to replace copper, then given that Chorus is the fibre operator for most of the country, the logical thing to do would have been to either deregulate the copper market region by region as fibre was laid out, or at least give the Commissioner the power to set both copper and fibre prices to achieve this outcome. If each region was successively deregulated as fibre was laid, then presumably Chorus would have raised copper prices, making fibre more desirable, and could then have shut down the copper network more quickly, saving costs overall. The problem is that Chorus is not the fibre operator for 30% of the market - in these regions, it would face an incentive to drop the copper price in order not to lose broadband customers to the competitor's fibre network. This should have been the only 'anticompetitive' action that would have warranted regulation in the event of rapid uptake being the government objective (or the whole problem could have been avoided by awarding all fibre contracts to Chorus and then relying on on separation and fibre price regulation to constrain subsequent anticompetitive behaviour). However, copper prices rising would lead to the stranding of unbundling assets deployed by Telecom's competitors under the 2006 LLU arrangements. This is, in part, what is being seen with competitors' reactions to the simultaneous announcement that the final UCLL prices are higher than announced in the draft prices from earlier this year.

If the intention was to invest in fibre so as to provide real infrastructure competition for the copper network, then once again, the need to regulate copper goes as soon as competitive fibre is deployed. But in this case, why award fibre contracts to the copper operator at all? Under separate ownership of fibre and copper networks, and structural separation of network and retail operators in both technologies, pricing agreements between Chorus and unbundling investors that reduce the price of copper relative to fibre, thereby inducing further investment by the unbundlers deeper and deeper into the copper network are precisely what would be expected in a dynamically competitive market. As long as the same opportunities were available for the fibre operators to also come to pricing arrangements with retailers, there is no 'competition problem' warranting regulation. Increasing infrastructure competition is precisely what was the desired outcome of LLU regulation in the first place. When it occurs, there is no longer any need for the regulations designed to create it. Yet if facilitating infrastructure competition was the government's objective, then the Commission's final UCLL prices appear to push in the opposite direction relative to the signal given with the lower prices in the draft decision. Higher ULL prices diminish the incentives for both Chorus and all the unbundling investors to invest in new high-speed technologies on copper - thereby denying higher speeds to those customers who will have to wait some time to get access to fibre, even if there would have been time for the investments to have been recovered before the fibre actually arrived.

In the absence of any other clearer indications, one might be forgiven for concluding that the only objective the government was clear about with the UFB decision was to have one of those fibre networks that Japan and Korea had, and that Australia had announced it was getting, with no real thought being given to the competition implications arising from the insertion of a subsidised government network into an industry where all other operators (save for Kordia and Orcon) were privately owned. However, unless a decision is made very soon about what the relevant competition policy will be going forward, it is certain that none of the investments - from either the public or private sectors - will be serving the New Zealand economy to best effect. This decision was not difficult for Australia - the intention has been clearly announced that the aim is rapid substitution - and all policies are aligned to this end, including the buy-out of Telstra and Optus by the government. Whilst the Australian processes are not without problems, there is much less confusion amongst industry participants about how it is expected that the industry will develop. As government will own and control all fixed line infrastructures, then it bears the costs and risks of all decisions made (or not made), This is not to say that the Australian system is a good model - but it does go some way to illustrate that a little forethought given to competition policy leads to less uncertainty and a a sector that can work collectively towards a single objective rather than pulling in conflicting directions and satisfying no single objective.

These matters are considered in more depth in the paper I presented in September at the Telecommunications Policy Research Conference in Washington DC in September 2012 - available on,21321/TPRC_2012_Antipodean_Competition_and_R... . They were also substantially addressed in a submission to MED in 2010 on the future requirements of sector regulation following the letting of the fibre contracts.

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