Ann: COMCOM: SPK: Spark NZ calls on ComCom to rethink wholesale charges

• Release Date: 24/02/15 09:05
• Summary: COMCOM: SPK: Spark NZ calls on ComCom to rethink wholesale charges
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24/02/2015 09:05
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REL: 0905 HRS Spark New Zealand Limited

COMCOM: SPK: Spark NZ calls on ComCom to rethink wholesale charges

Market Release
24 February 2015

Spark New Zealand calls on Commerce Commission to rethink Chorus wholesale
charges

International experts calculate proposed charges could be at least $12 a
month higher than they should be

Industry input costs - which influence the retail prices for broadband
services and landline phones - may be at least $12 a month more per customer
than they should be if the Commerce Commission goes ahead with proposed new
charges for access to the Chorus copper wholesale network, Spark New Zealand
said today.

In a submission to the Commerce Commission, Spark New Zealand has called for
the Commission to rework its numbers and consult further with industry
players before it finalises the new charges later this year.

General Manager of Regulatory Affairs John Wesley-Smith said Spark New
Zealand believed the large increases in wholesale charges proposed by the
Commission in a draft decision published last December were unnecessary and
should be reversed when the Commission sets the final charges later this
year.

He said the Commerce Commission's primary duty is to protect consumers
against high prices in monopoly markets like the Chorus network where there
is no competition. It is meant to do this by regulating Chorus charges based
on what it would cost to replace the Chorus copper network today, using the
most efficient combination of modern technologies.

However, the Commission's first attempt at modelling this cost had come up
with a proposed charge for landline access (required for broadband and/or
voice services, and known as the UCLL Price) that was 80% higher than the
median price in 14 other comparable countries - and 60% higher than the next
most expensive country.

Please see UCLL Price Comparison graph in the attached PDF of this media
release.

"This is not because of any New Zealand specific factors - it does not cost
80% more to provide landline access in New Zealand than everywhere else on a
like for like basis," Mr Wesley-Smith said. "This is the result of choices
made in the draft modelling, and in a number of cases we think there are
better choices it could make that avoid this significant divergence from
international prices.

"Our experts' analysis shows that the Commission's draft model loads an
enormous amount of unnecessary costs onto New Zealand consumers. We think
we've shown enough to put the onus on the Commission to change its model to
exclude these costs - or if not, to explain why it would be in New Zealand's
best interests to hold broadband prices up by setting wholesale charges 80%
higher than in other countries."

He said two international expert firms commissioned by Spark New Zealand had
independently reviewed the Commission's cost model and concluded it
overstated the costs involved in Chorus providing wholesale voice and
broadband services by a considerable margin.

By making some conservative adjustments to the Commission's model, one expert
firm came up with a charge for landline access of $16.64 a month - compared
with $28.22 proposed by the Commission. The other expert firm said this
charge could be reduced even further if the model took more account of newer
technologies such Fixed Wireless Access (FWA).

"With these adjustments the wholesale charges in New Zealand would be much
more in line with those applied overseas - and this would translate into
lower retail broadband prices than we have today," Mr Wesley-Smith said.

"We are doing everything we can, in what is a fiercely competitive market
with about 80 providers, to give New Zealanders more value and keep broadband
prices low. Yet the Commission's draft decision will make broadband less
affordable for New Zealanders. It also doesn't make sense that the charges
for last-century copper broadband are increasing at a time when ultra fast
broadband (UFB) over fibre is being rolled out to three quarters of New
Zealanders. The Commerce Commission needs to make it clear why any increase
in wholesale charges for copper access would be justified."

Spark New Zealand was also concerned that the Commission was leaning towards
backdating the new Chorus charges to 1 December 2014, even though it would
not finalise charges until at least the second half of 2015.

Because of this uncertainty, Spark reluctantly increased its prices for home
phone and broadband packages by between $2.50 and $4 a month from 1 February
2015, in a move that only partially offset the expected increase in Chorus
wholesale charges.

Mr Wesley-Smith said Spark New Zealand had given a written undertaking that
if the Commission decided not to backdate any increase in Chorus charges, "we
will pass the value of our related retail price increases back to our
customers in a fair and transparent way."

A copy of Spark New Zealand's submission can be downloaded at
http://www.comcom.govt.nz/regulated-industries/telecommunications/regulated-s
ervices/standard-terms-determinations/unbundled-copper-local-loop-and-unbundl
ed-bitstream-access-services-final-pricing-principle/

Further notes:
The Commission released two draft decisions in December 2014, setting out
proposed charges for Chorus unbundled copper local loop network service
(UCLL) and wholesale broadband service (UBA).

The Commission proposed charges of $28.22 for UCLL (up $4.70 from $23.52) and
$10.17 for UBA.

The Commerce Commission's draft charge for UCLL is 80% higher than the median
of 14 comparator countries, including those countries that New Zealanders
like to compare to in social and economic terms. It is almost 60% higher than
the second-most expensive country.

Spark New Zealand commissioned international experts to review the Commerce
Commission's cost modelling for UCLL and UBA. Specific concerns raised by the
experts include that the Commission's model:
a) Does not use modern FWA technology and incorrectly models potential FWA
coverage and so overstates the cost of serving non-urban New Zealand by 37%;
b) Compensates Chorus for lead-in costs (which make up 26% of overall network
costs) that are actually separately funded by end-users;
c) Makes unrealistic assumptions that an efficient operator building a modern
network today would not re-use any existing ducts and trenches, or seek to
share the cost of trenching with any other utilities in order to save costs -
even though both practices are used by operators in our market today; and
d) Assumes no population growth in New Zealand over the next five years, and
no further high or medium density housing projects - despite policies being
put in place by central and local Government to drive exactly this sort of
urbanisation in Auckland and other areas. Correcting for those two
assumptions alone reduces the wholesale charges in the Commission's model by
almost 10%.

ENDS

For media queries, please contact:
Andrew Pirie
General Manager Corporate Relations +64 (0) 27 555 0275

For investor enquiries, please contact:
Chante Mueller
Investor Relations Coordinator +64 (0) 27 469 3062
End CA:00261041 For:SPK    Type:COMCOM     Time:2015-02-24 09:05:40