Hamish Fletcher

Business reporter for the NZ Herald

Vector slams Govt copper internet intervention

Workers roll out fibreoptic cable cover in Faraday Street, Napier. Photo / Glenn Taylor
Workers roll out fibreoptic cable cover in Faraday Street, Napier. Photo / Glenn Taylor

Chorus would get "windfall gains" and have an incentive to "go slow" building the ultra-fast broadband network if the Government intervenes in the copper internet market, says Vector.

Vector's take on the Government setting wholesale copper internet prices was among 48 released publicly this afternoon.

The NZX-listed infrastructure company, which lost out on Auckland UFB contracts to Chorus in 2011, heavily rebuked the Government's proposal to sideline the Commerce Commission and set copper prices itself.

Over ruling the Commerce Commission would "create regulatory uncertainty and interfere with [the] development and evolution of the broadband market", Vector said in its submission.

"The Government's willingness to overrule a regulator's decisions with new legislation sets a dangerous precedent," Vector said.

"The Government should hold Chorus to its contractually agreed commitment to roll-out of fibre, without additional subsidy or regulatory relief."

Rather than favour the fibre network, Vector said intervention could to be "detrimental to the UFB initiative and make consumers worse-off".

Others against intervention - including the Coalition for Fair internet Pricing lobby group - have argued it amounts to "corporate welfare" and shift $600 million from consumers to Chorus.

In a similar argument, Vector said the proposed intervention "would result in a significant transfer of value from New Zealand consumers to Chorus shareholders."

By Vector's own calculation, intervention would allow Chorus to extract 20-25 per cent return on investment from its copper network between 2014 and 2019.

"No other regulated entity is permitted returns of this size," Vector said.

The brouhaha over copper stems back to last December when the Commerce Commission suggested it could cut what Chorus charges retailers for access to wholesale copper internet services by $12 a month.

This sent Chorus' share price tanking and about $190 million of shareholder value was wiped off the company the day of the announcement. Chorus said the commission's draft pricing decision could shave $150 million to $160 million off its pre-tax earnings if finalised.

Chorus complained if copper pricing was pitched too low, it would kill customer appetite for fibre services being rolled out as part of the $1.5 billion UFB network.

The Government signalled it would intervene and in February fast-tracked a review of telecommunications law.

As part of this review, Communications and IT Minister Amy Adams proposed setting Chorus' wholesale charge for copper line services at between $37.50 and $42.50 a month - the same price as faster fibre services, and up to $10 higher than the Commerce Commission's proposal last year.

Vector responded to this in the submission released today and said that Chorus, which is responsible for about 70 per cent of the UFB build, would be encouraged to "go-slow on the fibre rollout" if the Government intervenes in the way proposed.

A higher copper price equivalent to the entry-level fibre prices would "heighten the cost to Chorus of its new fibre network cannibalising its copper network's consumer base".

"The incentive this would create would be for Chorus to roll-out fibre no quicker than it is contractually-obliged to, and to retain customers on its copper network. This would seem to Vector to be the exact opposite of what the Government hopes would occur as a result of intervening in copper access pricing," Vector said.

Vector said it was not clear what criteria the Government was using to work out whether it should intervene and that it should be supported by a cost benefit analysis.

While a Government discussion document said the depth of Commerce Commission's copper price cut was a surprise, Vector said this was incorrect and it was known by those involved in the UFB tender.

One of the arguments the Government has advanced supporting intervention was that the commission process would mean years of uncertainty for the industry.

In response to this contention, Vector said that if the time it takes for the commission to determine prices was "inappropriate" then this "may reflect a broader concern with regulation that should be addressed."

"A 'quick fix' for copper access pricing is not an enduring solution".

If the Government still determined intervention was necessary following the commission's pricing process, Vector said a copper levy was more appropriate.

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