Monday, 8 September 2014

Two 5 - 0 defeats

Chorus got bowled like ninepins this morning by the  Court of Appeal, having earlier been skittled by the High Court.

The cases were about the Commerce Commission proposing a big reduction in the price Chorus could charge for UBA, or as it is formally defined, "the additional UBA service component, which allowed access seekers to supply broadband services over Telecom’s copper access lines without investing in their own equipment or software". In other words, the bits and bobs that carry broadband traffic across the gap between the copper line from your place and the start of an ISP's network.

The reduction (roughly halving the price) had been based  on a benchmarking exercise, where the Commission (as required by the Telecommunications Act) looked at the prices overseas for UBA as a quick and dirty proxy for what it might well cost here. There's lots more about the exact details of the benchmarking comparability exercise, but that's the gist of it.

The Court's decision is here as a pdf and there's a shorter media release pdf if you prefer. Chorus's reaction is here: essentially, not surprised by the outcome, but felt they had to make a point about what they see as a regulatory regime mess around pricing of broadband services.

I'd reckoned, as I said some time ago, that (a) Chorus had very little chance of succeeding and (b) in any event the whole exercise was a waste of money, but Chorus went ahead anyway. And this morning, sure enough, they got squashed like a bug. Chorus had raised five issues: the Court said No to each and every one of them, as the High Court had earlier. While Chorus has said it is studying the decision, and I suppose could take it to the Supreme Court, after two successive 5 - 0 defeats you'd think they'd flag the game away.

Chorus didn't get anything helpful about any incoherence in the regulatory regime, either. The reverse, if anything, when the Court of Appeal said at [44], "the mandatory requirement for the Commission to carry out the “benchmarking” itself designed to implement the statutory purpose, not to contradict or undermine it". In other words, the Telco Act is internally consistent.

So now on we go to the Commission's final word on the UBA price, which will be determined by modelling the actual costs of an efficient provider in New Zealand (Chorus had exercised its right to object to the benchmark stab at the price and to have local costs estimated explicitly). According to its media statement welcoming the decision, the Commission says it expects to have the first draft of the "real" cost (my words) in December.

Who knows what that price will be, but I wouldn't be in the least bit surprised if it came out within cooee of the original benchmarked stab at it. As I've said before,  my experience across a number of contexts is that  often benchmarking gets you to an approximately correct place, and far quicker and much more cheaply than the model-building route. I didn't start at that position - in fact, I originally thought the exercise would be too flaky to rely on - but what you find, when you get your hands dirty, is that you can say, the cost of this thing is somewhere around X. It might really be 1.1 times X, or 0.9 times X, but it sure isn't twice X or  half X. And that shouldn't be too surprising: in areas like telecoms, for example, companies tend to be delivering much the same sort of thing with the same sort of technology.

It's all moot now, as we're donkey deep in the formal cost modelling, but I'll say it anyway: I have a soft spot for simple, practical-enough regulation options like benchmarking. For all our general preference for light handed regulation and our national propensity to come up with a cheap and cheerful Number 8 fencing wire answer to things, our current regulatory approaches seem to be favouring ever more complicated, ever more expensive, ever slower, ever more intrusive options, as anyone who's had anything to do with the regulation of electricity lines businesses (for example) would agree.

We're currently having a review of the telco regulatory policy regime. It would be nice, as an outcome, if simplicity and speed got more of a look in than they do now.


  1. I would have thought one of the fairest criticism of the Commission's decision is that a data set made up of two data points isn't a reliable benchmarking exercise. That was somewhat forced upon the Commission because of the requirement that it benchmark "against prices for similar services in comparable countries that use a forward-looking cost-based pricing method". While that sounds great (in the abstract no-one would argue the benefits of using non-comparable countries), it might have been better if the Commission had been able to expand the dataset by using, say, countries that aren't entirely forward looking cost-based. While TSLRIC was all the rage in 2000/2001, it seems its not so internationally popular any more.

    In a nutshell, even sensible sounding restrictions on the Commission's discretion as to how it carries out its task can come back to bite as time and regulatory theory march on. I would bet, though, that the next regulatory reform imposes more specific regulatory rules, because regulated firms equate that with regulatory certainty. And 5-8 years after those rules come into effect, those rules will be causing odd outcomes and people will complain about the ill-fitting regulation, amend it again, and then marvel at the fact it causes uncertainty. Again. Like last time.

    (Incidentally, the Telecommunications Act was passed in 2001, amended to allow for operational separation in 2006, amended again in 2011 for structural separation, and up for a review in 2015. When the 2016 Amendment Act is passed into law at least firms can argue we have certainty over the frequency of regulatory uncertainty...)

    1. Thanks Ben. I agree with all of this (and wish I'd found the wit at the time to come up with your last sentence...).
      On the benchmarking, in the end they sort of went the direction you suggest by using 3 more not-completely-comparable countries as a 'cross check'.
      I was also struck by how both courts requoted Vogelsang's off-the-cuff (but informed) comment that he'd have expected a price of $10 or so. With so little else to go on in the benchmarking, it ended up taking on a lot of significance - if it crossed their honours' minds to make that "two countries isn't enough" point, they had Vogelsang saying, don't worry, it's probably right.

  2. A "pretense of knowledge" problem here?

    1. Donal. Thanks for the comment on my post. Have given a quick reply here.


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