Copper fight: Spark says ComCom's estimate of Chorus costs $12/month too high

The latest round of trench warfare over Chorus' [NZX: CNU] regulated copper line pricing is taking place today. Spark [NZX: SPK] says the Commerce Commission's estimate of Chorus' costs is $12/month per customer too high, inflating the regulator's proposed pricing.

Submissions are being published over a draft Commerce Commission proposal, released in December, to cut Chorus' wholesale pricing on a typical home line setup should be cut from $44.98 to $38.39*. Retail ISPs were up in arms over the $6.59 cut. They had been expecting the regulator to confirm the larger $10.54 cut to $34.44 flagged in its earlier Initial Pricing Principals (IPP) process — and many, including market leader Spark, had already baked the full $10 cut into their retail pricing, and market guidance.

The Commission's Final Pricing Principals (FPP) review, due to wrap up in September, hinges in part on the move from a "retail minus" to a "cost plus" model (as allowed for, after a three year lead-in, by an update to the Telecommunications Act in 2011).

First off the blocks is Spark, which says the regulator's estimate of Chorus' input costs — which in turn influence the retail cost of voice and broadband services — could be as much as $12 a month too high. It drafted in an international panel of experts who found the ComCom had over-estimated Chorus' costs, and failed to allow for elements that will low its costs, such as population increase and a move to higher-density housing.

Spark wants the ComCom to rework its numbers, and consult more widely.

The Commission’s first attempt at modelling costs come up with a proposed charge for landline access that was 80% higher than the median price in 14 other comparable countries – and 60% higher than the next most expensive country, Spark says.

There have been more than fifty shades of grey to arguments over copper pricing. Opposing sides have had different interpretations of the 2011 legislation, and the law itself puts different emphasis on different elements at each stage of the process (the IPP had a focus on international benchmarking; the FPP has a focus on what it would cost Chorus to build an equivalent network today).

The stakes are high: Spark, which holds around 50% of the retail market says if Chorus sticks with its draft pricing it will add $60 million to its annual costs. Conversley, Chorus' earnings will be boosted by double that amount. Yesterday, Chorus CEO Mark Ratcliffe said a favouable copper pricing decision in September could see his company resume dividends. 

ComCom spokesman Christian Christian Bonnevie says "We welcome all submissions and will be reviewing Spark’s contribution as part of our process, but we can’t comment further at this stage."

Chorus spokesman Nathan Beaumont reiterated the headline poiints from his company's own submission, namely:

• Chorus, Spark and others all requested that the second phase cost modelling process be carried out to review the benchmarked initial decisions
• This second phase process requires a cost modelling approach be used for the first time to assess the costs of building a nationwide network in New Zealand  (this is not benchmarking)
• The draft determinations represent around a $6.50 decline from the regulated wholesale price of $44.98 that was in place until 1 December 2014 and around an $80 million annualised EBITDA reduction from demerger pricing, based on connection numbers at 30 September 2014 

"It’s also worth noting Telecommunications Commissioner Stephen Gale’s comments in December," Mr Beaumont says.

To wit: "The UCLL [unbundled copper local loop] price has risen because the Commission concluded New Zealand's copper network had a higher underlying cost of replacement because of the number of long lines connecting to small numbers of customers in remote rural areas, among other factors.

"There appear to be uniquely New Zealand factors, such as the dispersed nature of the rural network, that may differentiate our UCLL prices from the overseas benchmarks."

* The total cost of different wholesale services needed for a typical home line with voice and broadband.