Commerce Commission

by Winslow Taggart

It seems that anything that can go wrong, will go wrong for the government’s push on mixed ownership for state assets.

First, the broker community rebelled against excessive Commerce Commission interference for publicly listed companies, after ComCom draft decisions wiped hundreds of millions of dollars of NZ investment away. Senior brokers and funds managers warned that the partial floats will be at risk from investors spooked by the uncertain regulatory environment. The replacement of the tired and emotional Ross Patterson with Stephen Gale is a useful first step, but nowhere near the big shakeup the ComCom needs.

Then, the Maori Council have greedily and opportunistically raised water rights as a blatant grab on future earnings by the power companies that will be part floated. While it seems that the Maori Party have accepted assurances from PM Key, the question is, whether “Mr Market” will do likewise.

Now, the capability of the lead broker for the SOE floats is being called into question. Craigs Investment Partners has just been fined by the NZX Disciplinary Tribunal for bodgy trades by clients. Unknown software errors then compounded the error with faulty filters. This will hardly inspire the government, who is relying hugely on Craigs to lead the process successfully. If their trading system is riddled with faulty filters easily distorted by clients entering rubbish bids, then the government should demand Craig either guarantee their system or spread the load amongst other brokers like First NZ, Forsyth Barr and Hamilton Hindin Greene.

As we are reminded by the wise writings of Warren Buffett, markets are determined by fear and greed. Ominously for the government, their vaunted SOE sales programme may well be defined by a troika of fear; fear of regulation, fear of Iwi interference, and fear of broker failure.

ᔥ NZ Herald

Telecom’s long lasting battle against their breaches and fines under the Commerce Act has failed:

Telecom has lost an appeal against a court ruling that resulted in it being hit with a $12 million penalty for using its market dominance to kneecap competitors a decade ago.

In 2009, the High Court upheld a Commerce Commission complaint that Telecom used its dominant market power to deter competitors in the wholesale and retail market for high-speed data services between 2001 and 2004.

The legal action, which began in 2004, focused on Telecom’s pricing of “data tails” – the Telecom-owned connection between a customer and the competitor’s own network.

Telecom’s rivals relied on buying access to these data tails to serve customers in mainly provincial areas where it wasn’t cost effective to copy Telecom’s network.

The High Court judgment found Telecom’s high wholesale prices for data tails shut its rivals out of the associated retail market and deterred them from offering competing wholesale services.

As such, Telecom had breached section 36 of the Commerce Act.

by Winslow Taggart

We’ve blogged a bit about the “mad dog” issues at the Commerce Commission. Today it’s the NBR’s turn to highlight the extreme decisions of the ComCom, with commentary from the financial sector confirming the issues highlighted on this blog around a month ago.

In a submission to telecommunications commissioner Ross Patterson, Mr Bascand says the commission’s approach puts the success of the government’s ultra-fast broadband initiative at risk.

And could be a turn-off for foreign investors considering buying shares in partially privatised state-owned energy companies.

His comments follow what he describes as last month’s “policy shock” of draft regulations for the unbundled copper local loop – the traditional mainstay infrastructure of the national telephone system, which fibre-optic cable will replace as ultra-fast broadband rolls out nationwide.

The government’s $1.5 billion subsidy plan is intended to accelerate uptake of UFB, but the Commerce Commission’s approach suggests it “has a mandate to tilt the playing field back to copper” while using a flawed benchmarking approach to regulation, Mr Bascand said.

Don’t mention Sky TV, who received supposedly happy news from the ComCom only to have it all turn to dust when the Mad Dogs tacked on a paragraph about investigating Sky TV’s broadband relationships.

It also seems that Harbour Asset Management aren’t the only ones. In addition to Milford Asset Management, First NZ and  Forsyth Barr, Global firm Goldman Sachs also points out how government is about to get shafted by the ComCom.

However, last month’s draft decision had led Goldman Sachs to cut its forecast of UFB uptake by 10%, suggesting outcomes that “run entirely counter to government policy”, tilting the playing field in favour of copper and forcing Chorus to accept uneconomic returns on its copper network.

However the issue was handled, the government should be aware international investors now look askance at New Zealand regulators, making them wary of investing in partially privatised assets where regulatory risk remains high, such as the electricity sector.

The question this blog asks is this – who needs Labour and the Greens running interference on an asset sales programme when the Commerce Commission can do it just as easily for them?

ᔥ NZ Herald

It is excellent to see Paul Brislen, CEO of TUANZ rip into the Commerce Commission for their investigation of Sky TV’s telco relationships – describing it as a waste of time. Brislen notes that Sky TV’s telco relationships – its contracts, according to Brislen were about ensuring it gets the SAME treatment as any potential competitor. As for the rule that says Sky shouldn’t use its market power to deter competition, what kind of bullshit rule is that? Says Brislen:

“Proving that a powerful business has done something that any other business wouldn’t do in its shoes is almost impossible and in this case Sky TV can argue that these kinds of exclusive deals are simply the standard in the broadcasting world.After all, the commission says there’s no lessening in competition evident should Sky and TVNZ create a joint venture, despite one being the largest pay TV operator in the land and the other being the largest free-to-air TV provider. So that’s that.”

If it’s a waste of time, it’s also certainly a waste of money – with the Commerce Commission’s actions destroying around $150 million of Sky TV’s value in one day in mid May. What expensive costs will the ComCom run up to come back and say “err, actually, we didn’t find anything wrong”.

Brislen outlines the problem – a clash between how the law views Telcos and Broadcasters

Unfortunately, we have a heavily regulated telecommunications sector trying to do business with an entirely unregulated broadcasting sector and that’s beginning to chaff.

Set up a new business selling content online and you are treated as part of the telco regime, but call yourself a broadcaster and use a slightly different technology to deliver the exact same content and the world’s your oyster.

We currently have under way the Commerce Commission investigation into Sky TV, the Telco Commissioner’s study of barriers to uptake of the new ultrafast broadband network (UFB), the review of the media laws in New Zealand with a view to not only sorting out those pesky bloggers but also cyber-bullying (a strange pair of bedfellows if ever there was), a newly minted Copyright Act and attendant tribunal that’s yet to see a single complaint filed, a review of said Copyright Act’s fee structure, a Patent Bill that’s waiting to be passed into law that may upset our trading partner the United States because of its declaration that software cannot be patented in New Zealand, and secret trade negotiations that may or may not give away our rights in terms of intellectual property.

He also touches on a issue that this blog has dealt with – stickybeaking by the Commerce Commission into things they aren’t or shouldn’t be considering – policy (which should be the government’s prerogative)

The Commerce Commission can’t lead this work – it’s a regulatory body, not a policy arm, but without this kind of review we’ll continue shining our torch on disparate parts of the beast without realising we’re staring at the elephant in the room.

It’s time for the National Government to step in and assert policy as its role, and to stop the Commerce Commission wading into issues wrecking investments and company value. The question is, who is going to take responsibility for ruining $150 million of Sky TV’s shareholder value?

The other, sadly, involved more unexpected action by the Commerce Commission, with the effect of destroying wealth belonging to NZ KiwiSavers, people with money in funds, and direct investors.

This was in regards to Sky TV entering into deals with Telstra, Vodafone and Telecom over whether this might impact on competition on pay TV. (this after they cleared Sky TV going into partnership with one of its competitors on the grounds it wasn’t a big deal).

SkyTV are partnering with the companies that give it more options with the distribution of its content in anticipation of the big fibre rollout. Unsurprisingly, SkyTV want to ensure they get exclusive rights with the broadband retailers they partner with. This has caused the Commerce Commission to wade in and sniff around.

It’s a nonsense concern, because thanks to the Government rolling out fibre (in concert with Chorus) it will be cheaper than ever before for a new entrant to come to NZ, and offer set top boxes that plug into fibre connections for entertainment. Who needs expensive broadcast equipment anymore? It would be cheap for a new entrant to offer a broadband/fibre based TV package to consumers. (Just don’t mention how the Commerce Commission is going to disincentivise broadband users by artificially forcing down old copper prices!)

Sky TV’s shares were down by over 7% yesterday, or around $150 million in shareholder value lost.

Add to that the $180m of value lost in Chorus after the Commerce Commission unexpectedly proposed dropping copper wire broadband pricing by a large amount (and also involving the subsidising of rural users by town users), and you now have over $330m that got wiped away in the last two weeks – all thanks to the unexpected actions by a Government organisation.

If the National Party professes to respect property rights, then it’s now high time for the government to step in and re-write the Commerce Commission’s frameworks and guidelines, so as Bryan Gaynor so rightly put in the other day, the interests of shareholders and investors in NZ companies are considered in the mix as well.

Check out this substantial communication sent from the Office of the Auditor General to the Commerce Commission.

Auditor General Submission Draft ID Determination 13 March 2012

It gives the ComCom a big slap for the way they are attacking the electricity lines companies.

By way of background, the Office of the Auditor General is the most respected, and indeed the highest independent authority in NZ. We remember well the actions of Kevin Brady investigating Labour’s dishonest actions in the 2005 elections as a high water mark for the NZ Civil Service.

So this criticism from the Office of the Auditor-General is a substantial criticism of the Commission’s Mad Dog attacks, noting their misunderstanding of their role, engaging in “duty creep”, and in need of restraint.

To quote from the letter about the Commission’s overall approach:

“At this point, we have some difficulty in understanding the expectations of the Commission because of what appears to be contradictory statements in the 2012 Draft Determination and the accompanying Draft Reasons Paper.”

The OAG accuses the ComCom of imposing unreasonable costs on Electricity distributors, that may not even make sense. See here on page 2 of the letter

“Viewed one way, these expectations could result in a much more exacting audit, with consequent cost implications. Viewed another way, such an audit may be scoped at such a high level that may not meet the Commission’s expectations.”

Check out what the OAG says about the Commerce Commission’s attempts to define extra power for itself on page 3.

“We also question if the Commissioner has the statutory authority to require auditors to state if they have a duty of care to the Commissioner in the audit report.”

The ComCom is due for a mucking out at the top, we’ve pointed out a Commissioner who needed ten months of timeout to recover from self-inflicted alcohol abuse. (Which other government roles do people get 10 months of golf and book reading to recover from their addictions?)

But clearly there is a need for political intervention to ensure the culture of the Commerce Commission is also changed.

We need an authority that promotes competition and ends anti-competitive behaviour, such as price fixing by petrol companies or supermarkets.

We need an authority that stops the shady practices by financial corporates that hurt consumers, like Credit Agricole and the failed Credit Sails financial product.

We don’t need a Commerce Commission that uses anti-commercial approaches to impose extra costs on businesses for no good reason at all.

We don’t need a Commission that is confused and contradictory in its approach to New Zealand infrastructure and public policy.

We don’t need a Commission that is power hungry and seeking to expand its role.

The Office of the Auditor General is now ringing the alarm bells – and for good reason. This should be the signal that National needs to reform the Commission and bring them back into line.

Brian Gaynor, one of New Zealand’s top fund managers through Milford Asset Management (top equity funds firm for the last three years running), has warned of Commerce Commission interference and the issue of regulatory uncertainty in his weekly Herald column.

In his column “Shaky telco regulation spooks investors”, Gaynor tells us of the damage done to perceptions of NZ investment overseas.

“The commission’s latest announcement coincided with the annual Macquarie Australian Conference in Sydney, where more than 110 ASX-listed companies make presentations to investors.

The statement caused widespread concern among the New Zealand contingent in Sydney, as it is extremely infuriating when regulators release draft reports that create huge uncertainties and have a negative impact on share values.”

It was also frustrating because a number of Australian companies, including Telstra and Sydney Airport, told the Sydney conference that they now faced more stable and predictable regulatory regimes across the Tasman.

This is in stark contrast to the situation facing Chorus.

Gaynor notes the widespread impact of the Commerce Commission’s wealth destruction:

“…. Chorus is a good corporate citizen and a large number of the 1,917,300 KiwiSaver members have an investment interest in it. Thus, the sharp decline in Chorus’ share price over the past week has had a negative impact on the retirement funds of many New Zealanders.

This begs the question whether the uncertain regulatory environment does more harm than good, particularly for individuals who benefit from any telecommunications price decrease but also have an investment in Chorus through their KiwiSaver fund.”

Gaynor gets to the nub of the issue when he points out that the Commerce Commission does not respect property rights, and has a culture of being one-sided in its approach towards business.

“The commission’s latest 86-page report on Chorus, which was released last week, is almost totally focused on customers and makes no mention of the company’s shareholders or investors.

Our telco regulation regime has become far too one-sided against the Chorus/Telecom group.”

As already posted on this blog, the ComCom’s activities are creating barriers to investing in the government’s forthcoming SOE floats. As one of the investment industry’s leading players in New Zealand, Gaynor would not be joking when he sends a very strong message to the government:

“This gives investors ominous signals as far as the IPOs of Mighty River Power, Genesis Energy and Meridian Energy are concerned.

If the telecommunications industry, which has consistently reduced prices in recent years, is subject to more and more regulation what will happen to the electricity sector, which raises it prices year after year?

A stable electricity regulatory regime needs to be firmly established before, not after, the IPO of the state-owned electricity giants.”

This coming Monday, I will will publish a damning communication from one of New Zealand’s most respected and powerful government agencies to the ComCom, sent only two months ago. It will reveal a culture of power grabbing, anti-business attitudes and a confused attitude to public policy by the Mad Dogs.

But will the National government listen?

The third installment in the series about the Commerce Commission:

So then, who are some of the Mad Dogs at the Commerce Commission I’ve been writing about over the last few days?

Extra focus needs to be put on Dr Ross Patterson.

Patterson was appointed by the former Clark-led Labour Government as the Telecommunications Commissioner at the Commerce Commission.

However, there is a feeling within the Wellington beltway that Patterson has done his dash.

Curiously, there have been a series of advertisements in some newspapers for Dr Patterson’s job as Telecommunications Commissioner, which appears to be a bad omen for the incumbent since the ads don’t mention the incumbent wants the role again.

Patterson has been in the job for five years now, with some scrutiny over his abilities involving his standing down for ten months in 2008 due to alcohol related health issues. It is surprising that Patterson did not leave the role completely, but it may be that he had some strong support in high places from the former Labour Government.

Cactus Kate rightly pointed out in 2009 the following:

“It’s not a matter of whether Dr Patterson is now fit to go back to work, but that the world and government’s have moved on since he departed. The new administration seems to not want him. Ta ta. Dr Patterson is fit to work again but he’s not fit to work in this job if he is unwanted. Go find another.”

Now, Dr Patterson is a highly intelligent man, and as it is stated in the article, a professional.

But the government’s fibre policy is too important to be put at risk by someone who has other distractions, demons even.

The government is delivering a fresh start for New Zealand’s IT infrastructure. It should likewise ensure a fresh start at the Commerce Commission for it’s next Telecommunications Commissioner, and send a message to the other commissioners that while they are there to uphold competition, they are not there to be activist or interventionist against key Government initiatives or take decisions that massively ruin national wealth.

The continuation of a series of guest posts.

Yesterday Whaleoil kindly the first post in a series on the Mad Dogs of the Commerce Commission attacking Chorus through proposals to force down their copper wire pricing for broadband.

Today, I’m focusing on how the Commerce Commission is working against the interests of the National Government.

One of the main policy planks of National in 2008 and 2011 was the big step-change in ultrafast broadband through fibre-optic cable rollouts.

National proposed a hefty $1.5 billion taxpayer contribution to help accelerate the rollout. It was, and is a bold plan to make New Zealand a more advanced, productive and connected nation. The use of fibre to improve peoples lives through better connectivity would be profound.

That’s why the Commerce Commission’s proposal is crazy.

It is forcing Chorus to massively lower copper wire based broadband, when Government policy is to encourage people to uptake on fibre!

Now, I don’t know about you, but when $1.5billion of taxpayer money is being used to encourage people to use a better form of infrastructure, I don’t like it when another part of government is working to discourage the policy.

This absurd contradiction of official government policy by the regulatory arm of the state highlights a real challenge for the National Government?

Do they make the policy, and have the bureaucracy implement it for the good of the nation?

Or do they merely announce policy, and have the bureaucracy implement contrary actions?

Will the government go into the 2014 elections showing a piss-poor uptake of fibre, and then explain that taxpayers money got wasted because they failed to eliminate the contradictory proposals of their mad dog regulatory arm?

Or will they haul back the draft proposal and give a new set of guidelines to the Commerce Commission to prevent them from this kind of unexpected attack on businesses that NEED certainty in the regulatory environment.

The irony is, Australia has a more regulated environment. But the certainty around the regulatory environment is far greater than in New Zealand. Australian businesses don’t get nasty surprises from mad dogs like they do here in New Zealand.

A Guest Post Series from Mr A. Investor.