Hamish Fletcher

Business reporter for the NZ Herald

NZ's $450 million broadband battle

Broadband battle Part 1 of a 4 part inquiry into New Zealand's grumpiest telco scrap in a decade
Amy Adams is waiting for the Commerce Commission's final ruling next week. Photo / APN
Amy Adams is waiting for the Commerce Commission's final ruling next week. Photo / APN

A regulatory tussle threatens to make Kiwis pay up to $450 million more than they should for internet, slow down uptake of the Government's ultra-fast broadband scheme, or put NZX-listed Chorus at risk of "going broke" - at least according to those involved in the stoush.

It's the "grumpiest" telecommunications policy argument in at least a decade, according to one industry observer, who says both sides are talking past each other in "mutual incomprehension".

The fight centres on whether the Government should directly set wholesale broadband prices or leave it to the Commerce Commission, the regulator which normally oversees this market.

The prices being argued about are what infrastructure company Chorus charges internet retailers such as Vodafone or Orcon for broadband services over its copper-line phone network.

Although the dispute is about wholesale prices, it has implications for what consumers pay for broadband.

These wholesale prices also have a big impact on NZX-listed Chorus, which kept ownership of the copper network when it split from Telecom in 2011 to build the majority of the Government's ultra-fast broadband network.

This new fibre-optic network, due to be completed by 2020, offers much faster internet speeds than the copper network which most New Zealanders use for their broadband today.

Only a small proportion of the country is able to connect to fibre now and Chorus is still reliant on the copper network for a big chunk of its revenue - which is why it has a lot at stake in the price fight.

Because Chorus is deemed to have a monopoly, the amounts it charges are regulated by the Commerce Commission.

As part of this regulatory process, the commission released a draft decision last December that suggested wholesale copper prices should be nearly 28 per cent less than Chorus charges now. The commission is due to announce a final decision on pricing next week.

Chorus' share price tanked and the company estimated the proposed cuts could shave up to $160 million from its annual earnings before interest, tax, depreciation and amortisation (ebitda).

This is almost 25 per cent of the ebitda Chorus recorded in its last annual result and at the time of the regulator's announcement the company said the cut could require it to "fundamentally rethink its business model".

Chorus chief executive Mark Ratcliffe said cutting copper prices by that level would also significantly reduce uptake for fibre internet services. This is because if copper prices are low relative to fibre, consumers have less of an incentive to move to the faster service, which undermines the UFB network.

That afternoon the Prime Minister, John Key, said the situation appeared "problematic" and would not rule out using legislation to overturn the commission's decision.

Prime Minister John Key said the situation appeared "problematic". Photo / Mark Mitchell
Prime Minister John Key said the situation appeared "problematic". Photo / Mark Mitchell

Communications and Information Technology Minister Amy Adams then fast-tracked a review of telecommunications law, suggesting in August that the Government intervene and set copper prices itself from 2015 to 2020. Under the proposal, copper prices would be 5 to 17 per cent less than Chorus charges now, but still much higher than if the commission's draft decision was finalised.

One of Adams' arguments in favour of intervention is that it would provide certainty to the telco industry during the UFB rollout.

Because the commission's final price decision could be appealed against, Adams said the current process could lead to years of uncertainty and expensive litigation.

As well as this, Adams said she needed to ensure the market gave infrastructure providers, such as Chorus, a "fair return" and one that encouraged them to invest.

But the Coalition for Fair Internet Pricing - a collection of industry associations, internet retailers and consumers groups - cried foul.

The coalition argued that the intervention, by proposing price cuts smaller than the commission had, was putting a $588 million "tax" on broadband customers that would go to Chorus' shareholders. It later revised estimates of this "tax", putting it between $390 million and $449 million. It argued the regulator should be responsible for setting prices rather than the Government.

The commission's price announcement which kicked off this tussle was only a draft; all eyes will now be on the regulator's final decision due out next week.

This will play a part in whether the Government intervenes or not, with Adams saying no decision will be made until then.

- NZ Herald

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