Commission Establishes Maximum Revenues And Quality Standards For Chorus Under New Fibre Regulatory Regime

New maximum revenue and quality standards for Chorus announced by the Commerce Commission today are aimed at a smooth transition of prices into the new regulatory regime and locking in the quality that New Zealanders have come to expect from their fibre services.

The Commission has set the maximum revenues the country’s largest wholesaler of fibre services can earn over the first three years of the new regulatory regime beginning 1 January 2022 and the minimum quality standards it must meet. The revenues are collected from retail service providers who use Chorus’ network to sell broadband services to homes and businesses.

Telecommunications Commissioner Tristan Gilbertson said that Chorus will be able to earn revenues up to $690 million in 2022 rising to $790 million in 2024 in line with anticipated growth in demand for its fibre services.

“Our decisions announced today will create incentives for Chorus to deliver quality and value for New Zealand consumers while promoting continued investment in this essential infrastructure,” he said. “It is the culmination of three years of work, with input from Chorus and the wider industry, and provides certainty for all wholesale providers of fibre services as well as the retail service providers who on-sell their services to consumers.”

The maximum revenues for the first three years of the regulatory regime have been increased from the draft decision by $60 million but are $88 million, or roughly 4%, less than initially estimated by Chorus.

The final decisions were arrived at through scrutinising Chorus’ estimate against the requirements of the underlying rules and processes for the new regime set last year, known as Input Methodologies (IMs), with input from external experts and other stakeholders. It builds on previous draft decisions and has regard to submissions from Chorus and other interested parties.

Key inputs into the maximum revenues were the value of Chorus’ fibre assets, or its initial regulatory asset base (RAB), at 1 January 2022, as well as its projected capital and operational expenditure over the first regulatory period from 2022 to 2024.

The Commission decided on a transitional value for Chorus’ initial RAB of $5.425 billion to set a revenue cap for the first three-year regulatory period. This is $82 million less, or roughly 1.5%, than the $5.5 billion RAB estimated by Chorus. The difference is due largely to the Commission’s view that certain costs allocated to Chorus’ fibre network are more appropriately attributed to its legacy copper network, and a lack of assurance provided by Chorus around certain other costs that it claimed.

A transitional initial RAB was used because all the information required to determine the initial RAB is not yet available. A final initial RAB will be determined in 2022 when all the required information is provided by Chorus. The Commission expects the difference to be limited to the difference between forecast and actual expenses incurred by Chorus for the current year up to the start of the new regime, as well as one category of costs Chorus has claimed but that the Commission has asked for further assurance over before approving.

Any difference in the revenue that Chorus is allowed to recover in the first regulatory period as a result of the difference between the transitional initial RAB and the final initial RAB will be accounted for in the revenue Chorus is allowed to earn in the second regulatory period starting in 2025. This is referred to as a wash-up.

Three key elements of new regulatory regime

Price-quality regulation of Chorus builds on new information disclosure requirements for Chorus and the three other regulated fibre wholesalers announced in late November. These regulatory tools are further supplemented by a requirement for Chorus to provide an “anchor” voice and broadband service at price and quality levels set in regulations under the Telecommunications Act. The same requirements apply to a direct fibre access service (DFAS) that Chorus must provide to connect commercial users including fixed wireless and mobile providers.

Mr Gilbertson said the new regime is built around these three key elements: information disclosure for all regulated fibre wholesalers; price-quality requirements for Chorus as the largest of the wholesalers with about 70% coverage of the Ultra-fast Broadband (UFB) network; and anchor service and DFAS protections, also for Chorus.

“Together they will provide a smooth transition of prices into the new regime, prevent any backsliding on quality and encourage Chorus and the other regulated fibre wholesalers to continue to invest, innovate and find operational efficiencies for the long-term benefit of fibre end-users,” he said.

Chorus has the right to appeal the price-quality determination, as do other persons.

The reasons papers setting out the price-quality path for Chorus and the value of its transitional initial RAB are on the Commission’s website.

Developing a new regulatory regime for fibre services

New Zealand’s fibre networks were built by four regulated fibre wholesalers in partnership with the Government under its UFB initiative. The other three regulated fibre wholesalers are Enable Networks, Northpower Fibre and Tuatahi First Fibre (previously Ultrafast Fibre).

With the build phase almost complete, the Government introduced a new regulatory framework in 2018 through the Telecommunications (New Regulatory Framework) Amendment Bill, which has the long-term benefit of fibre end-users at its heart.

The telecommunications sector is changing rapidly with end-user demand for data and services growing and broadband technology responding—or leading—the change. The Commission has consulted with industry and other stakeholders over the last three years and recognises the need to develop and put in place a robust and adaptable regime that will help industry manage these challenges and deliver the best price and quality outcomes for consumers.

This involved setting the underlying rules and processes for the regime last year and applying these input methodologies (IMs) to develop the price-quality path for Chorus and the information disclosure requirements for all regulated fibre wholesalers announced on 30 November.

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