Good money after bad? (Post mainly for telco tragics)

Last week the High Court delivered its judgement in Chorus's challenge to the Commerce Commission's initial UBA pricing decision.

If you're a telco tragic you'll be up with the play already, but if you're a normal person, UBA is the internet data feed that internet service providers buy from Chorus using Chorus's electronic gear (rather than buying access to the copper line from your house, and providing their own gear). The Commerce Commission had been told to regulate this price, initially on the basis of what it costs in places overseas that regulate prices like we do ("benchmarking") and if that didn't please everyone, then on the basis of calculating the actual costs of a New Zealand provider.

Chorus hadn't liked the result of the benchmarking, which proposed to drop the price from Chorus's current grandfathered price of $21.46 to $10.92, so it asked for the full costing exercise, as it was entitled to. But it also challenged the initial benchmarking, which you might well think was a completely moot wander down the garden path, since the full costing exercise was going to be the last word and the benchmarking was now of no practical import whatsoever, but there you are.

Chorus lost. The judge said there were basically five questions for him to decide (six if you included what remedy was in order if any of the first five were in fact justified Chorus complaints), and he decided every one against Chorus and for the Commission. Slam dunk.

While the outcome of this kind of litigation is often a crap shoot, I wasn't surprised*. I reckoned that even Chorus's QC, David Goddard, who enjoys working in the interface between economics and the law, and is very good indeed at it, would have trouble with this one. I wasn't totally sure: I was pretty certain that the benchmarking process would stand up to most challenges, except potentially for one wild card, a requirement for the Commission to take account of what impact its decision might have on big investors in new, innovative telco services (the semi-notorious s18(2A) of the Telco Act). But in the end that didn't fly as an argument, either.

The judgement is worth a read as a primer on the history of telco regulation and how the benchmarking/full costing approach got adopted in the first place. It's also left me with two thoughts.

One is on the question of how much of a regulatory shock the Commission's pricing decisions have been to the Chorus share price. There have been plenty of folks who have said that the Commission's decisions have been a destabilising bolt from the blue, with unfortunate chilling consequences for investors. I was only mildly sympathetic to this view in the first place, and am less so now. The judgement reminds us at [40] that

"Moving, after the three year freeze period, from a price based on retail-minus to a TSLRIC-based price – in effect, the costs of an efficient access provider – was structurally, and potentially economically, a significant change.  The regulatory impact statement provided by the Ministry of Economic Development at the time of the Amendment Act anticipated a drop in UBA pricing". 

It also cites at [66] the Commission's expert, Professor Ingo Vogelsang of Boston University:

"Professor Vogelsang was clear that the true UBA cost established in a TSLRIC model would be “substantially below” the current UBA retail-minus price of $21.46 per month.  This was, he said, clear from the evidence presented in the draft determination.  And it was clear from his own knowledge of other areas of the world.  As the professor put it: 

I would have expected a ballpark figure of about NZ$10 per month, based on international data, certainly nothing in the range of the retail-minus price of $21.46".

My conclusion is that Chorus was allowed three full years of gravy train pricing, and given a clear signal that the gravy train would cease from December '14. This doesn't look like a bolt out of the blue to me.

My other thought is this: why is Chorus persisting, and taking this to the Court of Appeal?

Its press statement mentioned s18(2A), which is probably the only argument it's got that has any chance at all. But I can't get past the pointlessness of it. As I mentioned, this sort of litigation is highly uncertain, and maybe the appeal will indeed succeed in throwing pixie dust in the eyes of a Court of Appeal bench - maybe one that mightn't be as conversant with the competition and regulation landscape as the High Court judge was (Stephen Kós knows his way around). It might happen, though going into the rematch 5 - 0 down from the first leg isn't a promising sign.

But even if they do go through on away goals - so what? Chorus says the "so what" is that there's a bigger picture and that we need clear guidance on s18(2A), which "is a critical part of the regulatory regime and affects both current and future industry outcomes". But if the Archangel Gabriel descended tomorrow morning, with a judgement graven on tablets of gold saying that Chorus's view of s18(2A) was right in every particular, it wouldn't make a blind bit of difference to anything. We're still on our way to a cost based price (which, to be complete, Chorus says it is still committed to working towards).

Maybe there's some long game here I don't understand. Maybe there's some value to Chorus in discrediting any document that had a $10.92 price in it. Maybe there's value in having a judgement that might support a change in the regulatory regime. And everyone's obviously entitled to take their case as high as they like if they believe right is on their side. But from the outside, all I see is perhaps a million dollars or two in direct and opportunity costs at the High Court, and maybe quarter or half a mill more about to go down the Court of Appeal gurgler, and all this at a supposedly cash-strapped company, for obscure or even non-existent payoffs, and I seriously wonder about good money after bad.

*(Added on April 16). I'd forgotten about an earlier post I'd written, but if you wondered whether I was rationalising after the event, I'd picked early in the piece that Chorus was pushing its luck - "I rate Chorus's chances of success at low".