Media Releases

Commission releases further draft decisions on prices of copper lines and broadband service for consultation

2 July 2015

The Commerce Commission has today released further draft decisions for consultation setting proposed 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.

The proposed maximum monthly rental prices that Chorus can charge for its unbundled copper local loop (UCLL) and unbundled bitstream access (UBA) service change slightly over the five years, but average $27.59 and $10.84 per month respectively. The total price Chorus can charge for its wholesale broadband service averages $38.43 per month.

The total price is nearly identical to the initial draft decision of $38.39 per month released in December 2014. 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. Tables detailing the UCLL and UBA price components proposed for the next five years and set during this process are included in the background below.

Telecommunications Commissioner Dr Stephen Gale said the Commission had taken full account of all the submissions it had received on the December 2014 draft decision, as reflected in the 1400 pages released for consultation today.

“The modelled price released today is very similar to the draft we released in December and continues to reflect that New Zealand’s local loop network is unique when compared to overseas benchmarks. We have done further analysis on why this is, and it’s clear that our dispersed population is a significant cost factor,” Dr Gale said.

“Simplistic comparisons of international wholesale broadband prices do not tell the true story.  New Zealand’s average cable length per connection is 64 metres. That is 13 metres more than in Sweden, the nation that most closely resembles our own, and 23 metres more than in France.

“Our civil engineering costs are also comparatively high. Physically digging and laying the network makes up nearly half New Zealand’s monthly wholesale broadband price alone.”

The Commission has released a report from consultants TERA that further details New Zealand’s costs of constructing the copper network compared to other nations. Read a copy of the report.

“We now propose not to backdate the UBA and UCLL prices, so once finalised, the prices are likely to come into effect on release of the final determinations in December 2015. Our revised majority view is that backdating will not promote competition for the long-term benefit of end users. However, we are still seeking views from submitters on whether they believe the final prices should be backdated, and if so, what would be an appropriate date for this,” Dr Gale said.

The Commission is welcoming submissions from interested parties on both draft decisions. Submissions are due by Thursday 13 August 2015.

The further draft decisions can be found on the project page.

View an infographic detailing the cost breakdown of the proposed total price.

Background

Why has the Commission released  further draft determinations?

As we highlighted in our 18 December 2014 Process Update paper, extending the consultation periods has affected our process. In order to incorporate revisions to our draft determinations, taking into account submissions, and include our views on non-recurring charges and backdating, we have published these further draft determinations, which we are seeking further submissions on.

What are the new proposed prices Chorus can charge?

Service

Year 1*

Year 2

Year 3

Year 4

Year 5

UCLL

$26.74

$27.18

$27.63

$28.09

$28.56

Basic UBA additional costs

$11.15

$10.97

$10.80

$10.65

$10.52

Basic UBA

$37.89

$38.15

$38.43

$38.74

$39.08

• Year 1 prices would be valid from the date of the final determination (December 2015)

• The average monthly (levelised) price across the five years is $38.43

Prices set during the IPP and FPP processes are:

 

UCLL

UBA

Total Monthly Price

Pre 1 December 2014 price

$23.52

$21.46

$44.98

Final IPP price (current price)

$23.52

$10.92

$34.44

Proposed price December 2014

$28.22

$10.17

$38.39

Proposed levelised price July 2015

$27.59

$10.84

$38.43

What is a levelised price?

A levelised price is a single price calculated for the entire regulatory period. We have calculated a levelised price just for comparison with the December 2014 draft price, which was also levelised. However, for these determinations we have calculated a price for each year of the regulatory period.

Why has the Commission set prices over five years?

In our December 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 draft decisions made since December 2014?

The further draft decisions made since December are predominantly technical changes to the modelling. They include:

  • Fixed Wireless Access changed from being deployed on a regional basis to specific end-users
  • Increasing aerial deployment of distribution cables from 36% to 47%
  • Excluding trenching costs for lead-ins
  • Excluding costs of trenches related to new subdivisions
  • Moving the weighted average cost of capital (WACC) from 6.47% to 6.03%, largely as a result of the lower risk-free rate
  • Correcting the ‘islanding problem’ in our modelled network
  • Correcting the number of modelled poles
  • Deciding against backdating

Why has the Commission revised its view on backdating?

The Commission’s preliminary view in December 2014 was to favour backdating for UBA and UCLL (and therefore SLU and UCLF). This view was primarily based on conceiving the FPP price as a correction of the ‘proxy’ IPP price, with the FPP being a more accurate implementation of forward-looking cost-based pricing.

Having considered the impact on both Chorus and RSPs, we do not now see a compelling reason for backdating the FPP prices. On balance we currently consider that backdating (either via lump sum payments or claw-back) does not provide incentives that promote competition for the long-term benefit of end-users, and may in fact harm them.

Has an alternative view been expressed?

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).

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 draft decision announcement is the latest step in the FPP process and will be followed by consultation with the industry before a final pricing decision is made in 2015.

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 pricing, 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.

Court process

Following the announcement of the IPP pricing, 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.