Ann: GENERAL: CNU: Chorus takes next steps in cop

• Release Date: 02/12/13 18:22
• Summary: GENERAL: CNU: Chorus takes next steps in copper pricing review
• Price Sensitive: No
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					CNU
02/12/2013 16:22
GENERAL

REL: 1622 HRS Chorus Limited (NS)

GENERAL: CNU: Chorus takes next steps in copper pricing review

Chorus has today taken the next two steps in the broadband pricing review.

As is provided for under the Telecommunications Act, Chorus has applied to
the Commerce Commission for a final pricing principle (FPP) review of the
Commission's initial decision on the price Chorus can charge for its copper
broadband (UBA) service. An FPP involves economic cost modelling rather than
benchmarking against other countries.

Chorus is also filing for a High Court appeal of the same decision to
determine whether the Commission has applied the law correctly.

"The decisions to apply for an FPP and file for a High Court appeal have not
been taken lightly by Chorus' Board and Management, but the limitation of two
benchmarked countries despite the specific factors set out in section 18 and
18(2A) has left us with no choice.  We have a duty to our shareholders to
ensure we explore every option before us, including the High Court appeal,"
said Mark Ratcliffe, Chorus CEO.

"Completing the FPP processes for UCLL and UBA could well mean that we take
another two years to end up rebalancing at around the same aggregate price as
we have today. There is also precedent for the revised prices from the FPP to
be backdated.

"We recognise that the Commerce Commission has to operate within the
regulations that are set in the Telecommunications Act. The Commission's
initial decision is a symptom of regulations that simply do not align with
the Government's policy of a transition to fibre.

"We are not looking to blame the Commission, because it can only referee by
the rules of the game as they are set.

"While the Government has only just begun its policy reviews, and we
recognise that it may no longer have the support it needs for a direct
intervention on UBA pricing, a legislative process is required to free up the
Commission to do its job in a regulatory framework that is aligned to
Government policy," he said.

Speaking when she announced a review of Telecommunications regulation earlier
this year, ICT Minister Amy Adams said: "regulatory certainty is an important
factor in the ability of New Zealanders to have early access to high-quality
communication services based on new technologies ... the policy framework
needs to be predictable and stable for all concerned."

And in an independent report, former Telecommunications Commissioner Dr Ross
Patterson stated that the current regulatory framework is not appropriate to
support the transition to fibre.

"The ladder of investment regulatory framework that is currently in place is
designed over time to remove the natural monopoly of the access network,"
said Dr Patterson. "However, the structural separation model adopted through
UFB accepts that the access network is a natural monopoly and building
competing networks is inefficient.  The two frameworks cannot co-exist
efficiently."

In total, Chorus will be investing around three dollars for every dollar of
Crown funding to support the delivery of UFB ahead of demand.  From 2008 to
the end of 2011, about $500 million was also invested in upgrading the
existing copper broadband network under Chorus' fibre to the node rollout.

The Crown has so far contributed about $160 million in funding towards the
UFB rollout, in the form of debt and equity securities to be repaid by Chorus
over time.

ENDS

Ian Bonnar
Corporate Affairs Manager
Chorus
[email protected]
+64 27 2157 564

Brett Jackson
Investor Relations Manager
Chorus
[email protected]
+64 27 488 7808

Detail of the applications

These applications follow the Commission's announcement on 5 November 2013 of
an initial $10.92 UBA price, based on benchmarked prices from Denmark and
Sweden.  The price reduction of about 50%, from Chorus' current $21.46
monthly wholesale charge, means the aggregate $44.98 per month charge for a
copper line and copper broadband service would reduce to $34.44 from December
2014.

Chorus believes the benchmarked prices are below the cost of providing a
national broadband service in New Zealand, will discourage further network
investment and that the price decreases are unlikely to be passed through to
consumers.  The reduced aggregate price also significantly undermines the
fibre prices agreed under the ultra fast broadband (UFB) public-private
partnerships and implies a $1 billion funding shortfall for Chorus.

In parallel with the Commission process, Chorus is also asking the High Court
to determine whether the Commission was correct to rely on pricing from just
two countries when setting the initial UBA price and whether s18(2A) of the
Telecommunications Act was considered as intended.

Chorus has invested about $1 billion in fibre related network since it was
established as a separate telecommunications utility business and has already
completed 20% of the UFB rollout with more than half of priority premises
(schools, hospitals and businesses) passed.

Background to the current regulatory process

The Telecommunications Act (Act) was established in 2001 to regulate a
vertically integrated Telecom to provide access to wholesale services.

The framework of the Act is that the services and prices are detailed by
Parliament in Schedule 1 of the Act.  Any updates, changes, or omissions need
to be made by legislation.

A two phased approach to determining prices has been entrenched in the Act
since 2001.  Generally the first pricing principle is benchmarking and the
second is an economic cost model of TSLRIC on a service by service basis.

These pricing principles are not widely used overseas. New Zealand is world
leading in moving the industry structure and investment to structurally
separated open access wholesalers in 2011 and significant fibre to the home
investment is underway.  Other regulated utilities in New Zealand, such as
electricity networks and airports, operate under building block regulation.

The Act is highly prescriptive (as opposed to principle based) and has had
two major legislative amendments made by Governments as policy maker:
- In 2006 when Telecom was operationally separated and fibre to the node
investment was introduced; and
- In 2011 when Chorus was demerged as a standalone company from Telecom and
fibre to the home was being rolled out under UFB contracts with the Crown.

The Act provides for reviews only if they are filed within statutory
deadlines as follows:
- final pricing review applications must be filed within 25 working days of
an initial pricing review determination; and
- appeals on questions of law must be filed within 20 working days.

The Commission's published timeline indicates the UCLL final pricing review
process will be completed in late 2015 with a scoping and issues discussion
paper due shortly.

The Commission indicated on 5 November that it may not be able to complete a
UBA final pricing review before the benchmarked price applies from 1 December
2014.

There is no full merits review appeal available as there is in relation to
other Commerce Commission decisions.

Section 18(2A) of the Telecommunications Act was inserted as part of the 2011
amendments and states:

To avoid doubt, in determining whether or not, or the extent to which,
competition in telecommunications markets for the long-term benefit of
end-users of telecommunications services within New Zealand is promoted,
consideration must be given to the incentives to innovate that exist for, and
the risks faced by, investors in new telecommunications services that involve
significant capital investment and that offer capabilities not available from
established services.

The Government's Discussion Document in August said:
- "...it was expected that new section 18(2A) of the Act would be a clear
signpost for the Commission to set copper prices in a way that facilitated
investment in the replacement of the copper network over time"; and
- "The implementation of the 2011 reforms has not delivered on the policy
intent.  In particular:

Prices for regulated copper services have, at least at the benchmarking stage
of the process, been set at prices well below UFB fibre prices.  In
particular, the Commission has found that the Act, notwithstanding section
18(2A), does not allow it to set benchmarked prices on the basis of
relativities between copper and fibre prices."
End CA:00244624 For:CNU    Type:GENERAL    Time:2013-12-02 16:22:05