Chorus takes copper price review to High Court

Chorus is turning to the High Court as it continues to battle with a Commerce Commission ruling on the price the network company can charge for its copper broadband service.

At the same time Chorus has applied to the Commerce Commission for a final pricing principle (FPP).

An FPP is a review of the earlier decision on the price Chorus can charge for its copper broadband service. It is a lengthy process which could take as long as two years. It involves economic cost modelling, not benchmarking against other countries.

The company’s court action questions whether the Commerce Commission applied the law correctly when making its ruling.

Benchmarks

In a press statement Chorus CEO Mark Ratcliffe points at the way the Commerce Commission benchmarked New Zealand’s network. He says: “The limitation of two benchmarked countries despite the specific factors set out in section 18 and 18(2A) has left us with no choice.”

Ratcliffe says the company has duty to its shareholder to explore every option.

He also turns on the Telecommunications Act which the government enacted only two years ago. He says: “We recognise that the Commerce Commission has to operate within the regulations that are set in the Telecommunications Act. The Commission’s initial decision is a symptom of regulations that simply do not align with the government’s policy of a transition to fibre.

“We are not looking to blame the Commission, because it can only referee by the rules of the game as they are set.

Regulatory framework

Chorus rolled out former telecommunications commissioner Dr Ross Patterson to support its position. He says: “The ladder of investment regulatory framework that is currently in place is designed over time to remove the natural monopoly of the access network.

“However, the structural separation model adopted through UFB accepts that the access network is a natural monopoly and building competing networks is inefficient. The two frameworks cannot co-exist efficiently.”

Comment: Despite the litigation and the lengthy FPP review, political events could be moving towards a resolution.

Earlier today Prime Minister John Key said the government had “a number of options” for dealing with the billion dollars or so that the Commerce Commission ruling looks set to cost Chorus. He then ruled out two of the most obvious options: slowing the project and putting more government money into the company.

A report from Ernst & Young Australia into Chorus’ finances is due on Thursday and that’s likely to influence the next step which may or may not involve some horse-trading between the government and Chorus.

What’s clear is Chorus shareholders will suffer financial pain. The question is whether they cop the full cost of the Commerce Commission determined price cut.

Equally clear is the cost to shareholders if Chorus walks away from the UFB project will be higher and more devastating in the long-term than swallowing the regulated price cut.

Also clear is a lack of public support for Chorus and its shareholders. In the space of weeks the company has gone from being something hardly anyone cared about to being a pariah in waiting. The Gigatown promotion is unlikely to change many opinions.