If this supposition is correct, then there can be no justification for this political interference. Only if this supposition is wrong, can the direct involvement of Key and Joyce be understood.
It’s a sure sign of serious trouble when the big guns come out into the open.

John Key first stepped in to Chorus’ broadband pricing debate back in December.  He said then that the Commerce Commission’s draft determination on wholesale pricing was “very problematic” and that the government would not rule out legislating to get the outcome it wants.

That is a threat and Amy Adams followed up on it last month when she released a discussion document on broadband wholesale pricing.  She made it clear that the only matters up for discussion were how she would get the pricing outcome she wanted.

She gave two reasons to justify the Prime Minister’s threat.

The first, removing pricing uncertainty, has some justification but holds to ransom the more than 25% of rural consumers who will never have access to UFB services.

The second, ensuring that consumer’s best future-interests are met, is an absolute crock.  It is in no-ones ‘best’ interests to be forced to pay a surcharge over what the regulator deems a fair price for an inferior level of broadband service.

Price uncertainty arises from the Commerce Commission’s role in setting a fair wholesale price for monopoly services provided by Chorus.

That role was written in to law by Mr Key’s government consequent on Chorus being separated from Telecom.  It sensibly changed the pricing principle for monopoly services from a price-minus basis, to a cost-plus basis.

Actually there are two pricing principles in the Telecommunications Act.  The Initial Pricing Principle defines the methodology that the Commerce Commission must follow and it is the Commission’s preliminary view on this, that was published in December.

The Final Pricing Principle defines a different methodology that must be followed in the event that the Initial Price is not accepted by any party to the wholesale agreement.

Despite overwhelming evidence in support of the draft initial price (and some evidence for a greater price reduction), Chorus have signaled that they would invoke the Final Pricing Principle approach if that price is confirmed.  That final method is complex and could take years to settle.  Chorus would gain by continuing to receive its monopoly price until the issue is settled.

So the Commerce Commission did its work, according to the rules the government set for it, and came to the conclusion that the wholesale price was too high by 28%, or $12.53 per month.

The Telecommunication Act provided for Chorus to retain its monopoly price for three years with the new regulated price applying from 1st December 2014.  So there remains more than 15 months to work through the complexities of the Final Pricing Principle approach.

Big-gunsDespite this, big guns John Key and Steven Joyce again stepped in to the issue last week.

Key claimed, without justifying his arguments, that Chorus could ‘go broke’ and that the Commerce Commission broke the law.  And Steven Joyce successfully persuaded would-be participants in the ‘Axe the Copper Tax’ campaign against the government’s interference, to not take part.

The big question is, why are the big guns involved?

Let’s explore a supposition.

Suppose that the contract for installing 70% of the government’s UFB initiative was awarded to Chorus without any pre-conditions attached.

That is, for Chorus, the investment was financially sensible and would earn a reasonable return without the need for significant cross-subsidisation from their copper network activities.  It seems a fair assumption since Chorus CEO Mark Ratcliffe, who led Telecom’s UFB bid, would have been well aware of the level requirement to move to a new method for calculating the copper price.

And for the government, the nearly $1 billion paid to Chorus did not have a contingent liability around the uptake of UFB broadband nor around maintaining the regulated price for copper services.  This assumption may be more difficult to justify given then Minister Steven Joyce’s insistence on a ‘regulatory holiday’ to assure Chorus of price certainty.  He is a very pragmatic person and his rapid backing down from that concept in 2011, may have been based on another way of achieving the same outcome as a regulatory holiday.  Certainly the Commerce Commission’s draft UFB price unexpectantly took away some revenue certainty from Chorus.

If this supposition is correct, then there can be no justification for this political interference.  Nor can there be any need.

Only if this supposition is wrong, can the direct involvement of Key and Joyce be understood.