Hamish Fletcher

Business reporter for the NZ Herald

'Fair' returns aim of internet plan

In the second part of a four part inquiry into the battle over broadband in New Zealand, telecommunications writer Hamish Fletcher asks whether Chorus is set to get a $450m windfall or is this just a fair return?

Chorus supports the proposed intervention but raised issues with the parts of the Government's approach. Photo / Stephen Parker
Chorus supports the proposed intervention but raised issues with the parts of the Government's approach. Photo / Stephen Parker

Opponents of government intervention in the broadband market argue it would line NZX-listed network company Chorus' pockets with up to $450 million at the expense of households and businesses.

However, Communications and Information Technology Minister Amy Adams said the proposed reform was about reducing uncertainty and ensuring the returns Chorus received from its copper network were "fair".

Those against intervention have made a good deal of noise and want the Government to continue to let the Commerce Commission set wholesale broadband prices over the copper network.

See beginner's guide to NZ's broadband battle here.

Because the Government proposes to cut these wholesale prices by less than the regulator, opponents claim the difference is effectively a tax on "Kiwi broadband customers" for the benefit of Chorus - the owner of the copper phone network.

A coalition of industry associations, internet retailers and consumers groups in September commissioned a report by consultancy group Covec which claimed that this "tax" would amount to $588 million between 2014 and 2020.

Covec later revised its figures and said the "tax" would be $390 million to $449 million, depending on how the Government decided to intervene.

It is important to note that Covec's calculations are based on draft cuts and the commission could suggest copper charges more in line with the Government's numbers when it releases its final pricing decision next week.

And while the coalition said the government intervention would "impose a tax on every consumer of internet services in New Zealand", this stoush is over wholesale prices - what internet retailers pay Chorus for broadband services that are then onsold to consumers.

This being said, some internet retailers such as Orcon have committed to pass on at least some of the commission's draft price drop to customers if it is finalised.

Despite this, Adams claimed most retailers were reluctant to indicate what they would pass on and said it wasn't a question of "the lower the price the better".

"We have to have a price which is both as low as possible for consumer benefit in the short term but not so low that you destroy the economics of the businesses who provide these services because consumers don't benefit if we have a market where no one is prepared to invest, no one is prepared to develop new technologies, no one is prepared to spend money on maintenance," Adams said.

Her focus was to ensure infrastructure companies - in this case Chorus - received "fair" returns and that prices were "appropriate" until 2020.

To work out this "appropriate" price, Adams said the agreed-upon method was to look at the cost of building a replacement network for existing infrastructure and set the price based on that.

The Commerce Commission used international benchmarking to come up with this cost and the wholesale prices it suggested in its draft decision.

But Adams said New Zealand had a far better yardstick to measure the replacement cost than international benchmarking because the country was building a fibre network to replace the existing copper network.

Given this "unique" scenario and because the prices would apply only until the year 2020, Adams said there were grounds for debate as to whether the Government should set copper prices directly for the five-year period.

In using the UFB infrastructure to work out the costs of a replacement network, the Government has then proposed to set copper charges at the same level as entry-level fibre prices.

However, Telecommunications Users Association chief executive Paul Brislen said using UFB as the replacement network was wrong and produced prices well above cost.

Infrastructure company Vector, in a submission to the Government on the intervention, said there was no evidence the Commerce Commission's process would set wholesale copper prices below cost "or preclude Chorus from recovering a reasonable return on its investment".

Vector calculated the proposed intervention would allow Chorus a 20 to 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.

Chorus supports the proposed intervention but raised issues with the parts of the Government's approach.

The company has suggested copper charges should be set at current prices or at the level anticipated when the company split from Telecom in 2011.

"Chorus is not recovering its costs today ... there is no evidence that Chorus is making excessive returns or that end users are getting a bad deal," the company said.

On the issue of the claimed "tax"of up to $449 million, Chorus said this assumed the draft prices the commission reached through its benchmarking were the actual cost of copper services.

"This is misleading and wrong," Chorus said.

Prime Minister John Key said 'If the Commerce Commission ruling stands there is a chance Chorus will go broke.' Photo / Dean Purcell
Prime Minister John Key said 'If the Commerce Commission ruling stands there is a chance Chorus will go broke.' Photo / Dean Purcell

PM's Chorus line adds fuel to opposition

Prime Minister John Key saying there is a risk Chorus will go broke if a Commerce Commission interim decision on broadband prices is finalised has added fuel to allegations the Government is overly focused on the finances of the lines company.

Speaking on TVNZ's Breakfast show last month Key said: "If the Commerce Commission ruling stands there is a chance Chorus will go broke."

Key later stood by the comment when opponents said there was no evidence to back up the contention.

InternetNZ chief executive Jordan Carter, who is part of the coalition opposing intervention, said he doesn't think the statement stood up.

"We can't find anyone in the industry who knows about these things who thinks Chorus is at financial risk. Chorus CEO Mark Ratcliffe has denied there is a problem with the ongoing viability of his company, and I have no reason to think him wrong. No analysis in the Government's review documents substantiates this as a concern that the Government needs to address," Carter said in a blog post.

When the Herald approached Chorus, a spokesman reiterated what the company had already told the market. Namely, that the Commerce Commission's draft cut could reduce ebitda by $160 million a year and that the Government's proposals could reduce annual ebitda by $20 million to $100 million.

Chorus could not comment on the effect this ebitda reduction would have on the business, the spokesman said.

Asked if she shared the Prime Minister's view on the chance of Chorus going broke, Communications Minister Amy Adams said: "Companies always have the potential of going broke and if you make a substantial hit [to] companies' returns then you have to question that."

However, she stressed that the proposed intervention was not about protecting Chorus investors.

Adams said: "The issue for us is not to look at Chorus specifically but if we have a regulatory system that is setting up a fair and appropriate return rate. Beyond that, whether Chorus is able to succeed or not is a matter for them and their investors."

Correction
A story on this topic yesterday said high copper prices relative to fibre prices would create less incentive for consumers to move to faster internet. This is incorrect, it should have said lower copper prices.

- NZ Herald

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