Does Chorus really need regulating?

A parliamentary select committee is about to consider legislation that will impose new price regulation on Chorus like that imposed on electricity lines companies. It is likely to be an expensive mess that ends up achieving nothing.

Price regulation is generally required for natural monopolies, like electricity lines companies, otherwise consumers can get price gouged. Electricity lines companies are natural monopolies because it is only worth rolling out one set of local power lines, and once rolled out they have no competition (until maybe self-generation becomes economic).  

It is debatable whether Chorus’s local fibre network is a natural monopoly. In CBD areas there are usually other fibre networks providing a competing service, and in many other areas there are now 4G fixed wireless services available that provide enough data for at least small-to-medium users. The massive increase in fixed wireless broadband subscribers from around 30,000 to around 120,000 in the year to 30 June 2017 is evidence of the latter point. In future 5G wireless services may well be able to compete with Chorus in more areas and supply consumers with larger amounts of data at higher speeds.

Electricity lines companies are regulated using what is called the building blocks approach. It is called that because putting together various ‘input blocks’ gives the ‘allowed’ revenue regulated entities can earn. The building blocks approach is proposed for regulating the local fibre prices of Chorus.

You would hope the new regulatory regime for fibre would be cost effective and timely. However, this is very unlikely. You need only look at the track record of the Commerce Commission in regulating electricity lines companies. It took a small army of staff years of work, producing thousands of pages of documents at a cost of tens of millions of dollars to get to a point where the building blocks regulation was settled.

To attempt to set the ‘ground rules’ for using the building blocks approach for electricity, the Commerce Commission after over two years of work issued an Input Methodologies Reasons Paper that ran to 646 pages! From the Reasons Paper, the actual input methodologies to be used were specified in numerous, ongoing papers.

Yet electricity distribution is a much simpler industry than telecommunications. You have one product, one way of delivering it, no competition and long-lived, stable assets.

The telecommunications industry nowadays operates in a fast-changing environment where there are multiple ways of delivering multiple products by multiple providers using multiple rapidly advancing technologies! Some providers are vertically integrated and some operate only in particular geographic areas. Some technologies are offered only in a limited number of geographic areas, some are relatively widespread and some, like satellite, can be offered virtually anywhere.

The idea that building blocks regulation of Chorus is going to be easily implemented and keep up with the real world, yet be stable and predictable is fanciful at best! It will be an expensive mess that ends up not being needed.

Requiring the geographic averaging of fibre prices is also problematic. It is meant to promote ‘fairness’ but is misguided as it ignores the fact low-income city dwellers pay a higher price in order to subsidise multi-millionaires wanting a rural lifestyle (which includes many farmers). The geographic averaging of the copper broadband prices now sees over a hundred thousand urban copper lines lying unused because consumers have opted for a lower-priced fixed-wireless service that is likely to have a higher actual cost to the economy.


-Name withheld by request

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A guest post submitted to Whaleoil and edited by Whaleoil staff.

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