On 3 December 2012 the Commerce Commission ("Commission") released its final decision on adjustments to the price for Chorus’ unbundled copper local loop ("UCLL") service and its draft decision on a new cost-based price for Chorus' unbundled bitstream access ("UBA") service. The decisions are an important step in the transition of the telecommunications regulatory regime following Telecom's and Chorus' separation into separate retail and wholesale / network companies ("separation").

Statutory context

Telecom and Chorus separated in December 2011 to allow Chorus to partner with the Government to provide ultra-fast broadband ("UFB"). Separation also had significant implications for the regulation of copper-based services under the Telecommunications Act 2001 ("Telecommunications Act"). In essence, the former regime was predicated on Telecom being a vertically integrated company (subject to operational separation), so the Telecommunications (TSO, Broadband, and Other Matters) Amendment Act 2011 ("Amendment Act") implemented complex changes that were necessary to provide for separation.

Broadly speaking, the UCLL price will be geographically averaged (instead of maintaining an urban and rural distinction), and the UBA price will be UCLL plus additional costs incurred in providing the UBA service. UBA is currently priced on a retail-minus basis, which is no longer appropriate give that Chorus does not have a retail business. Another key feature of the new regime is a transition period until December 2014, during which current prices and approaches for UCLL and UBA are largely maintained. The rationale for this transition period was to provide industry participants with certainty post-separation and to provide an opportunity for them to obtain a return on investments in UCLL made prior to separation.

UCLL decision

In addition to being required to make technical changes necessary to accommodate separation, the Commission retained the power to review UCLL prices at any time. Accordingly, the Commission chose to undertake a review because a significant period of time had passed since the original prices were set by the Commission's UCLL Standard Terms Determination ("STD") in 2007.1 The UCLL decision therefore sets the final updated prices2 for UCLL, which take effect immediately (with the geographically averaged price to apply from December 2014). The Commission has re-benchmarked the price in accordance with the initial pricing principle ("IPP"), which requires it to "benchmark against prices for similar services in comparable countries that use a forward-looking cost-based pricing method".  

The Commission grappled with some difficult issues during the review, the outcomes of which were as follows (in summary):  

  • In response to the problem of identifying countries that now meet the IPP requirements, using econometric and indexing methods to update prices established using the 2007 sample set.
  • UCLL line length should not be a factor in the price, as there is insufficient evidence to show that shorter loop lengths (due to fibre to the cabinet roll out) has an impact on UCLL costs.
  • A new geographically averaged price of $24.46 to come into effect on 1 December 2014, which is a 3.85 percent reduction on the 2007 price.3
  • Geographically de-averaged updated prices to come into effect immediately, with urban and non-urban UCLL monthly rental prices of $19.08 and $35.20 respectively.

While the prices are final, the Commission, in response to submissions during consultation, has expressed the view that the amendments to UCLL prices are a determination capable of being reviewed and the final pricing principle applied.

UCLFS

A further contentious issue that arose during the review was whether any adjustments to the UCLL price should automatically flow through to the unbundled copper loop frequency service ("UCLFS") price. UCLFS provides access to the part of the local loop that enables the provision of voice services. 

The prices of UCLL and UCLFS are "linked", meaning that the UCLFS price is the same as the full UCLL price. Earlier this year the Commission considered launching a Schedule 3 investigation to consider whether the pricing principle for UCLFS should be amended to effectively "de-link" UCLL and UCLFS. It subsequently decided that a review was not required, because it had reached the view that the existing IPPs allowed different prices to be set. The underlying rationale for considering de-linked pricing was that since UCLFS was available on cabinetised lines, the loop length was longer relative to UCLL, which is available on non-cabinetised lines only. Following submissions and feedback that demonstrated broad industry support of maintaining the link, the Commission found no clear evidence that shorter lines cost less, and that UCLFS should therefore remain at the same price as UCLL.    

UBA draft decision

The draft decision provides the Commission's preliminary views under the review of the UBA STD required by section 77 of the Amendment Act.4 The review is to determine new prices for the UBA service to apply from 1 December 2014, and is limited to making the amendments necessary to implement changes from a retail-minus to cost-based IPP.

The challenge is to benchmark the additional costs in providing UBA against prices in comparable countries that use a forward looking cost-based pricing method. The Commission has found that only Sweden and Denmark's bitstream access prices met the criteria, and selected the mean price point between Sweden and Denmark as the appropriate price for providing the UBA service.

As has been extensively commented on in the media, this has resulted in the Commission proposing significant reductions to the UBA price. However the Commission has emphasised it is a preliminary decision, subject to submissions, cross-submissions, and a potential conference before a final decision is made.5  The Commission plans to release its final benchmark price for the UBA service in June 2013.

Comment

The draft UBA decision has attracted considerable public attention, to an extent that the final UCLL decision has largely been relegated to the background. It is worth pointing out that the final UCLL decision is materially different to the draft UCLL decision, under which the Commission had proposed price reductions of approximately 20%.

It remains to be seen whether the Commission will shift on UBA in a similar fashion. It is clear that Ministers are taking a close interest in the outcome. The Government characterised the Commission's draft decision on UBA as "very problematic", no doubt because of the potential implications for the Government's UFB initiative.

Accordingly, a key debate before the UBA decision is finalised will be in relation to the requirement for the Commission to consider "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" (section 18(2A) Telecommunications Act). Although this clearly applies to Chorus' investment in UFB, there is debate as to what it actually means or requires for the pricing of UBA. The Commission's current view is that it is unclear whether a UBA price higher than the mean will promote investment in new UFB services.

The Act also requires the Commission to consider relativity between the UBA and UCLL services. This is designed to implement the "ladder of investment theory", where UCLL requires greater investment by the access seeker in comparison to UBA, and should be priced to incentivise that investment. The Commission's current view is that it is not clear that a higher UBA price is required to promote investment in UCLL, given that other incentives to invest exist.

Because of the complexity of the issues, the Commission has called for submissions on the relativity between the UCLL and UBA prices and the implications for investment in these services, and the likely impact on incentives to invest in broadband services over fibre or copper.6  In essence, the Commission is seeking further submissions on whether an uplift to the mean price is required.

Regardless of the final outcome, the Commission's draft decision has encouraged further questions about the stability of, and certainty provided by, New Zealand's economic regulatory environment. On the one hand, the Commission should not be criticised for independently and objectively applying the legislative provisions it is required to work under. However a key objective of the Amendment Act was to provide certainty for investment following separation, and it seems further thought needs to be given about how this objective can be achieved in practice. In this context, if changes in share price are any guide, it appears that the investment community does not take comfort that the Commission's draft decisions are subject to change. Indeed, it might be argued that material variations in reasoning between draft and final decisions (such as occurred for UCLL) contribute to the climate of regulatory uncertainty. In response, the Commission might point out that genuine and open debate on complex regulatory issues is essential, and it is entirely appropriate for draft decisions to fearlessly expose the Commission's preliminary views and thinking, to ensure interested person can make fully informed submissions. In that context, it might also adopt the view that those companies affected by its decisions should take the lead in managing investor expectations.