Commission releases final decision on Broadband

Commission releases final decision on wholesale broadband prices

The Commerce Commission has today released its final decision setting the prices that Chorus can charge for use of its local copper lines and broadband service over the next five years. These are wholesale prices that Chorus charges retail telecommunications companies.

From tomorrow, the maximum monthly rental prices that Chorus can charge for its unbundled copper local loop (UCLL) and unbundled bitstream access (UBA) service for the first year are $29.75 and $11.44 per month respectively – a total of $41.19. This is an increase from the July draft decision, which proposed a UCLL price of $26.74 and UBA price of $11.15, with the total being $37.89 for the first year.

The maximum monthly prices increase slightly each year for the next five years, but average a total of $41.69 over that period. Tables detailing the UCLL and UBA price components for the next five years and set during this process are included in the background below.

The current price of $34.44 per month was established by international benchmarking at the end of 2013 and came into effect on 1 December 2014. Prior to 1 December 2014, Chorus was able to charge $44.98 per month for its wholesale broadband service.

The Commission has confirmed in a split decision it will not backdate the final UCLL and UBA prices, meaning Chorus cannot recoup the difference from the current price over the past year from retail telecommunications companies.

Telecommunications Commissioner Dr Stephen Gale said modelling the UCLL and UBA prices, as set out under the Telecommunications Act, had been a complicated and lengthy process and the Commission appreciated the expertise of stakeholders who had engaged with it throughout the project.

“This is the most complex and extensive economic model the Commission has ever been tasked with creating, evidenced by the 240 submissions – totalling more than 6000 pages – we have received during our consultation process,” Dr Gale said.

“After considering submissions and reviewing our July draft decision we have made several changes to correct technical errors and account for updated or additional costs in our model. Significant changes, such as the need to increase the amount of trenching required to physically lay the network and adjusting the make-up of fibre and fixed wireless connections, led to the final price rising. This has been partially offset by other changes, including a decrease in the allowed rate of return for Chorus due to the fall in interest rates since July, and the removal of vacant properties from the model.”

The final determinations can be found on the Commission’s website.

View an infographic detailing the significant changes to the model since the July draft decision.

Background
What are the final prices Chorus can charge?

Prices set during the IPP and FPP processes are:

Why has the Commission set prices over five years?
In our December 2014 decision, we proposed constant prices for the five year period. Retail service providers have said they prefer a trend that tracks changes in the underlying costs, partly to ease the initial upward adjustment.

What are the key decisions made since the July 2015 draft?
Further decisions made since July are predominantly technical changes to the modelling. The most significant changes include:
• the number of modelled fixed-wireless connections decreased, reflecting a requirement that fixed-wireless connections at least meet existing copper line speeds
• vacant customer premises were removed from the hypothetical efficient operator’s network footprint and demand for cable connections was excluded
• trenching costs have increased, based on additional advice from Beca
• the allowed rate of return decreased, largely due to a fall in interest rates since July
Has an alternative view been expressed on backdating?
Yes, Commissioner Pat Duignan considers that the start date for the FPP prices should be 1 December 2014, with retail telecommunications companies compensating Chorus accordingly for the difference between the IPP and FPP prices during this year.

What is UCLL?
UCLL stands for unbundled copper local loop and are the copper lines that Chorus owns and maintains. The copper network is the means for delivering telephone and internet services to businesses and households all over the country.

What is UBA?
UBA stands for unbundled bitstream access and this is the service that Chorus sells to retail telecommunications companies so that they can provide broadband services to businesses and consumers without replicating Chorus’ electronics or software.

How do the prices for these services relate to each other?
The UCLL price is the base price for using Chorus’ lines. The UBA price is for the use of Chorus’ electronics and software that enables retail telecommunications companies to provide phone and broadband to their customers.

Any change in the UCLL price will flow through to the total prices of the UBA service (for broadband services), the unbundled copper low frequency (UCLF) service (for voice services), and the sub-loop service (SLU).

How do the UCLL and UBA prices impact on what consumers pay for broadband?
These are the wholesale prices Chorus charges retail telecommunications companies like Spark, Vodafone and CallPlus to use its network. The total wholesale price makes up roughly half of what consumers pay when they sign up for a standard $80 broadband plan.

The process under the Telecommunications Act
The processes for setting prices for UCLL and UBA services are set out in the Telecommunications Act 2011. The legislation sets out a two stage process. The first stage is to set prices by benchmarking against similar services in other countries. The benchmarking approach is called the initial pricing principle (IPP).

If any industry parties are not satisfied with the benchmarked costs, they can require the Commission to calculate the full cost of the services. This approach is called the final pricing principle (FPP). The FPP approach involves the Commission calculating the price and modelling the cost of a hypothetical network that uses modern technology, to efficiently deliver the regulated services.

Today’s decision is the final step in the FPP process.

The process to date
In 2012 and 2013, the Commission carried out the required benchmarking exercises to establish the maximum prices for UCLL and UBA. Following the announcement of the IPP pricings, Chorus New Zealand Ltd, Telecom New Zealand Ltd (now Spark), Vodafone NZ Ltd, CallPlus Ltd, Kordia Ltd and Orcon Ltd all asked the Commission to undertake an FPP for both the UCLL and UBA services.

In December 2013, we published a process and issues paper on UCLL which set out the framework for modelling the UCLL service, and a number of modelling issues. We also hosted an industry workshop on initial processes.

In February 2014, we published a process and consultation issues paper on UBA.

In March 2014, we published further consultation papers on topics including backdating and modern asset equivalents and a technical consultation paper on the cost of capital. We also hosted an industry workshop on TSLRIC.

In April 2014, we held a workshop with industry for our consultants from TERA to explain the modelling approach.

In June 2014, we published the TERA Literature Review and expert reports from Oxera, Dr Martin Lally on WACC and Professor Vogelsang on TSLRIC and promoting competition.

In July 2014, we published a consultation paper relating to the cost models that we would build for both the UCLL and UBA service.

In September 2014, we published an open letter on the process for next year and also a consultation paper on Service Transaction Charges.

In December 2014 we published draft determinations for the UCLL and UBA services followed by a process update paper.

In April 2015 we held a conference with industry to discuss our draft determinations and additional information to be included in our further draft determinations.

In July 2015 we released our further draft determination for consultation.

Court process
Following the announcement of the IPP pricings, Chorus challenged the Commission’s decision setting benchmarked cost-based prices for the UBA service through an application to the High Court.

In April 2014, the High Court dismissed Chorus’ application and found in favour of the Commission. Chorus then appealed this decision to the Court of Appeal.

In September 2014, the Court of Appeal upheld the High Court’s decision.

ENDS

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