April 15, 2016
By Malcolm Webb
The NZ Government’s proposed regulation of broadband access
The NZ Government has proposed new forms of regulation of Chorus’ fibre and copper broadband access network post-2020.
The New Zealand Government has recently proposed new forms of regulation of Chorus' fibre and copper broadband access network post-2020.
Chorus is the structurally separated, wholesale-only network company that won about 70% of the Government’s regional tenders to rollout a fibre to the home/premises network to three quarters of the population. It has the lion’s share of fibre access lines as well as copper access lines. Other local fibre companies also won tenders in the balance of the country. The Government’s proposals apply to them as well. The 2020 period is relevant because, under the tender, Chorus and the other local fibre companies are contractually committed to fibre access prices until 2020.
The NZ Government’s proposal is to use a building blocks methodology (BBM) to regulate Chorus’s fibre and copper access networks for the period post-2020. The BBM is a utility-style regulation that is used in the regulation of NZ’s electricity and gas distribution network infrastructure and in relation to airports.
Under BBM, a revenue cap would be set for Chorus, which is designed to cover its efficiently incurred costs but avoid monopoly profits. The revenue cap is worked out after valuing the network using various “building blocks”. A revenue cap will enable Chorus a degree of pricing flexibility and allows it to experiment with its pricing, while all the time being subject to the overall revenue cap.
Chorus will be able to get pre-approval of future investment, with some regulatory oversight to avoid gold plating. The Government has indicated that there will be a single RAB for Chorus’ copper and fibre access networks.
As well as a revenue cap, there will be (fibre) anchor products, where the price will be set by the regulator, but otherwise Chorus’ revenues will need to fit within the revenue cap. Anchor products have been used in other jurisdictions, notably the UK, to allow a degree of pricing freedom for fibre products, while being constrained by regulated products (copper in the case of the UK).
There are a number of implementation issues still to be resolved. One of the most important will be the opening regulatory asset base (RAB). Because the network is largely made up of existing (sunk) assets, the value placed on those assets will determine the base on which prices are set. These assets may have been fully or substantially depreciated in an accounting sense, but are still used and useful.
One approach that may be adopted is to calculate the opening RAB consistently with current and reasonably expected access prices. This is known as a “line in the sand” approach, which was used in Australia when moving from TSLRIC+ to a BBM in order to mitigate the risk of price shocks.
Chorus’ structural separation was a factor in the Government’s decision. Structural separation is not a necessary condition for use of BBM, as the methodology is also used in Australia with respect to Telstra’s copper network (and Telstra is subject to a less stringent form of separation).
But with structural separation comes the expectation that the Government is not anticipating fixed network overbuild. At least at the passive layer, there is no expectation of widespread infrastructure competition for Chorus. The Government has reached the view that, at least for fixed networks, infrastructure competition is not its primary goal – rather encouragement of retail competition over the top of the wholesale-only fixed broadband networks. This may not be the case in other jurisdictions deploying fibre broadband networks and where there is greater potential for infrastructure competition. In those cases, TSLRIC+ models (involving hypothetical efficient new entrant calculations on price resets) may still have a part to play.
The fact that there are high investment costs in upgrading to a fibre access network was also a factor in the Government’s decision. TSLRIC+ models were not seen as conducive to providing the necessary regulatory certainty to support the ongoing investments required.
Nevertheless, utility-style regulation was not necessarily the obvious choice of pricing methodology in these circumstances. Fibre broadband is not the same as electricity and gas distribution. Broadband technology is evolving in ways that do not readily apply to other utilities. Fibre broadband faces competition at the margins from fixed wireless and other fixed access networks and consumer demand is uncertain.
BBM will be one of several options that governments in other countries may consider for the regulation of fibre networks. For example, Singapore is perhaps in a comparable position to New Zealand with the wholesale-only NetLink Trust, which owns and operates the NGNBN passive network. Under the Netco Code of Practice, the IDA must review the netco prices every three years and can determine the applicable pricing methodology.
BBM may be considered as a potential pricing methodology in that context, but other options are available, including using anchor products only, long-term contracts negotiated between access seekers and access providers or long term regulatory undertakings or contracts.
Disclaimer
This article is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this article.