Regulation to blame for sharp copper price cut, not Commerce Commission, lawyer says

UPDATED 2pm March 18: Sweeping changes to laws governing the telecommunications sector were to blame for size of the drop in what Chorus [NZX: CNU] can charge for access to its copper lines services, rather than the Commerce Commission's decision to impose the cut, the High Court heard today.

Counsel for the regulator, John Farmer QC, rejected claims by Chorus that it had erred in law by choosing two nations to act as a benchmark price without an evidential basis or that it hadn't correctly followed section 18 of the Telecommunications Act, which seeks to minimise the risk regulation would have on investment and innovation in the sector.

Farmer said the shift in how the commission would set the price using a forward looking cost-based model informed the new price, which had previously been set using retail pricing under a vertically-integrated monopoly.

"It was the change in regulation that caused the shock, not the Commerce Commission decision made under that new regulation," Farmer told the High Court in Wellington.

The regulator didn't need to account for the section 18 provision throughout the whole process, and only had to show the piece of the act wasn't ignored, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in its draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Earlier today David Goddard QC, counsel for Chorus, said the company wants to have the initial decision set aside if it's successful in its appeal, for the commission to undertake the review again. The initial pricing principle is a proxy for the regulator to try and determine the full-cost of replacing the copper network using international comparisons, rather than going through a more rigorous process called a final pricing principle.

Goddard said such a review shouldn't undermine the work that's already underway to determine a final price, as a separate component of the copper network, the unbundled copper local loop, is still proceeding.

Justice Stephen Kos said he would have "serious reservations" about the impact of setting aside the review and ordering the process to start again.

The judge-alone hearing is into its second day, and is continuing.

(BusinessDesk)

-----------

EARLIER March 18: Chorus [NZX: CNU], whose shares have tumbled 53 percent in the past two years because of price cuts imposed by the regulator, wants the Commerce Commission's review of network pricing set aside, the High Court heard today.

The network operator told Justice Stephen Kos that it wants the initial pricing principle (IPP) process for its unbundled bitstream access services set aside and for the regulator to go back to the drawing board.

The Commerce Commission has ordered Chorus to slash prices for access to its copper lines, a move the company says will undermine its profitability and its ability to build the government-sponsored fibre network.

Chorus counsel David Goddard QC told the High Court in Wellington that the IPP process could be restarted without hindering the move to a more robust price review.

Justice Kos said he would have "serious reservations" about setting aside the review and ordering the process to start again.

Chorus's share price has slumped since November 2012, when the Commerce Commission first made public its view that regulated prices should be cut. The shares rose 1.2 percent to $1.70 on the NZX today.

The stock selloff should have told the regulator the market didn't anticipate the size of the proposed reduction in pricing, and made it consider section 18 of the Telecommunications Act, which aims to protect innovation and investment in the sector, Goddard told the court yesterday.

The regulator also should have considered what impact regulatory shocks might have on the wider market, and should have telegraphed its thinking, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in its draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Goddard told the court yesterday that the regulator erred in law when setting the price Chorus can charge for access to its UBA services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's goal of building a nationwide fibre network.

(BusinessDesk) 

------------

EARLIER: March 17:  The sharp drop in Chorus's [NZX: CNU] share price after the Commerce Commission signalled plans to slash what the network operator could charge for access for services on its copper lines should have rung an alarm bell at the regulator, the High Court heard today.

Since November 2012, various Commerce Commission statements on the regulated price Chorus could charge on its copper lines have wiped as much as 60 percent from the share price, something that the regulator should have recognised when making its final determination on the charges, Chorus counsel David Goddard QC told Justice Stephen Kos in the High Court in Wellington.

The shares rose 0.3 percent to $1.68 and have gained 16 percent this year.

The stock selloff should have told the regulator the market didn't anticipate the size of the proposed reduction in pricing, and made it consider section 18 of the Telecommunications Act, which aims to protect innovation and investment in the sector, Goddard said.

The regulator also should have considered what impact regulatory shocks might have on the wider market, and should have telegraphed its thinking, he said.

"You need more information, not less, to justify intervention of that magnitude," he said.

The regulator didn't pick up on other warning signals, such as when the number of countries the commission was using as a benchmark to set the initial price was whittled down to two nations, Sweden and Denmark, he said.

The regulator didn't have a sound reason for limiting its benchmark price range without taking in other factors, or the legislative requirement to support investment, he said.

Chorus is appealing the commission's final determination in November last year setting the unbundled bitstream access monthly price at $34.44 per line, up from the $32.35 price initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

Goddard said the regulator erred in law when setting the price Chorus can charge for access to its UBA services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's aims in building a nationwide fibre network.

The benchmarking process lacked statistical rigour, and the regulator should have had a wider band for what could have been a plausible price range in setting the price band, he said.

The court heard a cross-appeal by Orcon and by some consumer agencies had been dropped. The Commerce Commission will put forward its argument after Chorus, followed by Vodafone New Zealand, Orcon, and finally Telecom.

The judge-alone hearing is set down for four days and is continuing.

(BusinessDesk)

---------

EARLIER: The Commerce Commission narrowed down its modelling to set the regulated price of Chorus's [NZX: CNU] copper lines without any evidential backing and didn't account for a section of the act designed to minimise the risk to investors in telecommunications services, the High Court heard today.

The regulator erred in law when setting the price Chorus can charge for access to its unbundled bitstream access services in that it didn't have any evidential basis to narrow its inquiry and ignored a section of the legislation aiming to support the government's aims in building a nationwide fibre network, counsel for Chorus, David Goddard QC, told Justice Stephen Kos in the High Court in Wellington.

Goddard said the warning signals should have started sounding when the number of countries the commission was using as a benchmark to set the initial price was whittled down to two nations, Sweden and Denmark. At that stage the commission should have considered section 18 of the act, which was designed to protect innovation and investment in the sector.

"The whole point of section 18 is it tells you how to approach uncertainty, it tells you not to risk innovation and investment," Goddard said.

The regulator didn't have a sound reason for limiting its benchmark price range without taking in other factors, or the legislative requirement to support investment, he said.

Chorus is appealing the commission's final determination in November last year setting the UBA monthly price at $34.44 per line, up from the $32.35 price initially mulled in his draft decision, with the additional UBA component accounting for $10.92 and the unbundled copper local loop accounting for $23.52.

The court heard a cross-appeal by Orcon and the consumer agencies was dropped. The Commerce Commission will put forward its argument after Chorus, followed by Vodafone New Zealand, Orcon, and finally by Telecom.

The judge-alone hearing is set down for four days and is continuing.

(BusinessDesk)