Feedback sought on approach to determining financial loss asset for new fibre regulatory regime

The Commerce Commission is seeking feedback on its approach to determining the value of the financial loss asset for the new regulatory regime being developed for fibre service providers.

The financial loss asset compensates Chorus and the local fibre companies (LFCs) for the financial losses incurred during the initial period of operating Ultra-Fast Broadband (UFB) networks before demand met supply. The financial loss asset forms part of the regulatory asset base on which fibre service providers are able to earn a return once the new regulatory regime is implemented in January 2022.

The Commission’s consultation includes the methodology for calculating the financial loss asset, including the risk-free rate, and the treatment of investments that pre-date the Government’s UFB initiative.

“Our proposed changes involve adopting a discounted cash flow approach, rather than the building blocks approach previously proposed in our November 2019 draft decision,” Telecommunications Commissioner Tristan Gilbertson said.

“The discounted cash flow approach on its own delivers broadly similar outcomes to the building blocks approach. However, we prefer this approach because it is easier to understand and more familiar to investment analysts. This, in turn, promotes transparency of the calculation, which is an important part of the new regime.”

“We are also consulting on our treatment of pre-UFB initiative assets because we received a number of submissions on our draft decision on this issue and wanted to provide more detail for further consultation.”

The Commission’s draft decision was to include pre-UFB investments in the financial loss asset to the extent these were employed to provide UFB services. This remains unchanged.

“However, we think it is important that the allocation of shared assets to UFB mitigates the risk of windfall gains or over-recovery, so as to promote the purpose of Part 6 of the Telecommunications Act. Our draft decision set out a number of measures to ensure an appropriate cost allocation of pre-2011 investments to the UFB initiative.”

“Before we make our final decision, we want to hear from stakeholders about whether our proposed safeguards around cost allocation for pre-2011 investments are sufficient and any further measures that may be required.”

“It is important we get the upfront design of the new regulatory regime right to ensure it is enduring,” Mr Gilbertson said.

The consultation paper includes an illustrative model for the financial loss asset calculation. The paper and information about how to provide submissions is available on our website.

Submissions are due by 3 September 2020. Cross-submissions are due by 24 September 2020. The Commission plans to publish its final decisions on the design of the other elements of the new regulatory regime on 13 October 2020, and its final decisions on rules for determining the financial loss asset on 3 November 2020.

Background

The Government’s UFB initiative aims to achieve fibre-to-the-premises to 87% of the population (including 1% private fibre) by 2022. Rural areas of New Zealand are covered by the separate Rural Broadband Initiative. These new fibre networks will provide faster and more reliable voice and broadband internet services to consumers.

The Government’s Crown Infrastructure Partners contracted with four companies to build these fibre networks: Chorus, and three LFCs – Northpower Fibre, Ultrafast Fibre and Enable Networks.

Under the new regulatory regime in Part 6 of the Telecommunications Act, the Commission will set the maximum revenue that Chorus can earn from its customers and the minimum quality standards it must meet. This is referred to as price-quality regulation. Additionally, all four fibre service providers will be required to publicly disclose information about their performance, such as on their profitability, revenue, and capital expenditure. This is intended to shine a light on their performance for stakeholders and consumers.

The regime first requires the Commission to determine input methodologies (IMs) which are the upfront rules, requirements and processes underpinning the regulatory regime.

This new regime is similar to how the Commission regulates energy networks and airports under Part 4 of the Commerce Act.

What is the financial loss asset?

Chorus and the other LFCs were expected to incur financial losses during the initial period of operating the UFB networks. This is because they were required to make investments ahead of consumer demand and revenues recovered were not sufficient to meet their costs. Section 177(2) of the Telecommunications Act recognises the financial losses that were incurred during the period before implementation of the new regulatory regime. The Act requires the Commission to capitalise these losses and to treat them at the implementation date as an additional asset (financial loss asset) to be included in the fibre service providers’ regulatory asset base.

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