Yesterday the Commerce Commission reached a significant milestone in the development of the regulatory framework for fibre services under Part 6 of the Telecommunications Act (Act), by releasing its consultation paper on how it proposes to design and implement price-quality (PQ) and information disclosure (ID) regulation.
A brief recap
The new regulatory regime for fixed line fibre services will take effect from 1 January 2022. It will replace the contractual framework between the Government and the network infrastructure partners that participated in the Ultra-Fast Broadband Initiative.
The new regime will see service providers regulated in a similar way to how the Commission currently regulates electricity and gas lines businesses, and certain airports under Part 4 of the Commerce Act.
PQ regulation will apply only to Chorus (at least initially). Under this form of regulation, Chorus will be subject to a maximum allowable revenue it can earn from regulated services, and must meet minimum quality standards when providing those services.
ID regulation will apply to all providers of fixed line fibre services, including Chorus.
Since the new Part 6 regime was introduced in 2018, the Commission has focused on the development of the fibre input methodologies (IMs), which will be an important component of the PQ and ID regulation that the Commission will now develop. This is because the IMs establish the rules for determining key regulatory building blocks such as cost of capital, asset valuation and taxation, which play a significant role in determining allowable revenue under PQ regulation, and assessing performance under ID regulation.
The Commission intends to finalise its IMs determinations on 13 October 2020, except to the extent they relate to the financial loss asset. The Commission expects that its final decision on the financial loss asset IM will be released on 3 November 2020.
The IMs determinations, but not the PQ and ID determinations to be developed, are subject to the merits review appeal provisions under the Act.
The consultation paper
Essentially, the consultation paper sets out the Commission's early thinking on how it intends to bring together all the component parts to reach final determinations for PQ and ID regulation. The following very brief summary of some key points in the paper risks understating the complexity and size of the Commission's task.
For information disclosure, the Commission proposes to:
- draw on existing disclosure requirements under UFB agreements, existing disclosure requirements under the Act, and requirements under Part 4 of the Commerce Act;
- have standardised spreadsheet disclosures, which could include regulatory asset values, financial performance (eg profitability), cost allocation, capital expenditure, and quality performance measures and statistics; and
- consider further report-based "special topic" disclosures, which could cover matters such as asset management plans, planned investment, prices and pricing methodologies, and stakeholder engagement.
For price-quality regulation, the Commission:
- explains how some matters will be established by IMs, so its focus in this process will be on matters covered by IMs that still require the Commission to exercise discretion, and matters not covered by the IMs at all;
- will therefore determine allowable revenue comprising building blocks revenue, pass-through costs and wash-ups by:
- applying the relevant IMs (eg asset values, cost allocation, WACC, tax, depreciation); or
- where there is no relevant IM, or where some discretion under the IM is required to be exercised, by applying discretion in accordance with the statutory purposes (eg opex, capex forecasts, revenue smoothing to avoid price-shocks, wash-up mechanism). An important aspect of this approach will be assessing information from Chorus that will be submitted under the capex IM and collecting information on opex so as to determine an "expenditure proposal"; and
- will develop a wash-up mechanism for over and under recovery under the revenue price path, as required by the Act.
A key focus for both forms of regulation will be to establish the initial regulatory asset base in accordance with the IMs, which will involve each regulated provider providing relevant information for assessment.
Submissions open
The Commission has indicated that it will publish draft decisions on PQ and ID requirements between April – June 2021, and final decisions in October – December 2021.
A copy of the consultation paper can be found on the Commission’s website. Submissions are open until 14 October 2020.