Chorus heads to court, initiates final copper price review

Embattled New Zealand network operator Chorus has applied to the regulator, the Commerce Commission, for a review of the Commission’s decision to slash the price Chorus can charge for its copper broadband service.

At the same time, Chorus is also filing an appeal to the High Court to determine whether the Commission applied the law correctly.

The final pricing principle (FPP) review Chorus has applied for involves economic cost modelling rather than benchmarking against other countries. Using the latter method, the Commission ruled Chorus should sharply reduce the price it charges for copper broadband access.

With its new fibre network not yet completed or populated with customers, that leaves a hole in Chorus's revenues. That in turn could affect the company's ability to fulfill its contract with the Government to build around 70% of the nationwide ultrafast broadband (UFB) network. 

“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) [of the Telecommunications Act] 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,” Chorus's chief executive Mark Ratcliffe said in a statement to the NZX and ASX exchanges today.

Earlier this month, the Commerce Commission released the final price Chorus can charge internet service providers for services over its legacy copper network, setting it 23% lower than before at $34.44. The cuts apply from December 2014.

The Government looked likely to intervene through legislation until a successful consumer campaign by the Coalition for Fair Internet Pricing, which dubbed such efforts a "copper tax", made intervention politically unpalatable.

Last week, the Government's Parliamentary support for any such law change evaporated and Chorus's share price tanked to its lowest level since listing as a separate entity.

Completing the FPP processes could take two years, Ratcliffe said, but there is precedent for revised prices 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."

Coalition for Fair Internet Pricing spokesman Paul Brislen said Chorus was increasing uncertainty in the market with its latest moves.

"We thought Chorus wanted to increase certainty. What it is doing is delaying the final outcome and increasing uncertainty," he told ZDNet.

Ratcliffe said Chorus recognised the Government may no longer have the support it needs for direct intervention. However, he insisted, legislation is required to "free up the Commission to do its job in a regulatory framework that is aligned to Government policy."

Chorus quoted former Telecommunications Commissioner Dr Ross Patterson saying 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,” Patterson said. “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 said, it 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 NZ$500 million was also invested in upgrading the existing copper broadband network.

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, the company said.