Wednesday, 6 November 2013

Sunlight is the best disinfectant

The Commerce Commission did its job well yesterday, determining a price for copper broadband services at the top of the range of its benchmarks. They picked the highest benchmark price
to minimise the risk to investment and to avoid the dynamic efficiency losses that could arise from incorrectly setting a price below the forward-looking cost for the UBA service
Fair enough.

I didn't expect Chorus or the government to like this decision, but the extreme nature of the response was a surprise, including these gems from Chorus
$1billion funding shortfall....
Without the proposed Government intervention, ... very negative consequences for Chorus’ funding ability.... simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.
no guarantee this proposed reduction in wholesale prices would be passed through to consumers 
Chorus is ahead in its UFB build programme....but unless the Government intervenes, it is likely that the benefits for New Zealand will be significantly compromised,

So basically: "we're screwed unless the government helps us out. Oh and by the way, the price cuts won't be passed through to consumers".

Right on cue, the government picked up these talking points with the PM noting the funding shortfall, risk to the UFB rollout and the idea that price cuts won't be passed through. The ever helpful Minister added that the whole thing was a complete surprise "No analysts or companies saw that coming, no one priced it in."

Notice the role of uncertainty here. Chorus is said to be financially challenged and this might be due to the Commission's decision. The roll-out might stall. Some of the price cut might not be passed through. Investors might have been surprised.

This is not a factual basis for legislating over the top of an independent Commission, or for the government to take an equity stake in Chorus. On the basis of what we know so far, Chorus should just get on with raising new equity so they can finish the job. New equity was always going to be needed anyway, though the board has never admitted it.

Alternatively, if the government is seriously considering such extreme actions, the first step is surely an independent, transparent and factual analysis of Chorus' financial position and the reasons for it.

Without independent and transparent inquiry, this is just a big company that has deliberately loaded itself with debt, scored a big contract from the government, trousered a $929m interest-free loan, and is now returning to the well for more concessions.

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