Crossing lines: how much information should monopolies disclose?

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February 11, 2014

…had Chorus been obligated to complete a Part 4 Information Disclosure template, the Government may have been in a far stronger position to make and / or justify its assessment for the Telecommunications Review.

In the 2013 Telecommunications Review discussion paper, the New Zealand Government considered that Ultra Fast Broadband (UFB) policy objectives were unlikely to be met without early intervention to prevent reductions in copper wholesale pricing. Specifically the Government feared that Chorus, the largest local fibre company (LFC), would be hard pressed to meet its fibre rollout commitments with the reduction in copper access revenues implied by recent Commerce Commission decisions on unbundled bitstream access and unbundled copper local loop access services. Although Chorus is a private company, Government has made a substantial financial investment in the UFB project and so the ability of Chorus to deliver on its contract is of public concern.

A number of submissions to the discussion paper were critical of a dearth of financial data relating to Chorus’ financial position, leading to claims of a lack of transparency available to those parties potentially adversely affected by any Government intervention to override the Commerce Commission’s copper wholesale pricing process. Furthermore, some parties contrasted the lack of financial data with the Information Disclosure obligations applied to electricity companies under Part 4 of the Commerce Act. Amongst other uses, the information disclosed by the electricity companies forms an input to the Commission’s regulatory activities in the electricity distribution sector in New Zealand. Note that these same obligations apply to gas distribution and transmission businesses and also services at certain airports.

So why are there Information Disclosure requirements for these businesses and how extensive are they?

According to the Act, Information Disclosure requirements ensure that sufficient information is readily available to interested persons to assess whether the Part 4 purpose is being met – that is, the promotion of long-term benefits of consumers in markets with little or no competition (and little or no likelihood of a substantial increase in competition). This purpose is consistent with provisions of the Telecommunications Act 2001 which also seek to promote the long-term benefit of consumers, through the promotion of competition. The Part 4 purpose may be achieved if outcomes are consistent with those that would occur in competitive markets, including:

  • no excessive profits
  • incentives to improve efficiency
  • incentives to innovate and invest
  • consumers reap some benefits from efficiency improvements, including both price and quality.

Accordingly the Commerce Commission considers that both historical and forward-looking financial information should be disclosed for businesses regulated under Part 4 of the Commerce Act, together with information on investment, prices and service quality. Historical financial data is used by the Commission to estimate the return on investment of the regulated businesses, facilitating an assessment of whether economic returns are comparable with those achievable in a competitive market. This calculation is based on a Regulated Asset Base (RAB) approach which involves allocation of relevant asset values, capital additions, and opex to the appropriate regulated service. The rules for asset valuation, allocation of common costs and the treatment of taxation are encapsulated in the Commission’s published input methodologies.

While it is clear that the Information Disclosure requirements are substantial for electricity distribution and gas pipeline businesses, it is also apparent that the Commission and other interested parties have invested considerable effort in the implementation process. In an iterative process, the Commission has provided comprehensive well-designed templates available for data entry.

These completed templates indeed make important information readily available to interested persons attempting to assess the implications of electricity and gas businesses’ performance, pricing and plans on the long-term benefit of consumers. Note also that the Commission has published its own summary and analysis of the disclosed information.

By contrast, as an access provider Chorus has no obligation under theTelecommunications Act to disclose financial information or information on asset values for regulated copper services. Indeed, had Chorus been obligated to complete a Part 4 Information Disclosure template, the Government may have been in a far stronger position to make and / or justify its assessment for the Telecommunications Review. Presumably there is no need, either, for secrecy since Chorus has no competitors!

Under the Telecommunications (TSO, Broadband, and Other Matters) Amendment Act 2011 LFCs are required to disclose annually to the Commerce Commission a range of financial and non-financial information relating to “costs and characteristics” of LFC fibre networks and services “to inform the Commission’s statutory processes and determinations”. Relevant services are defined as wholesale telecommunications services “provided using, or that provides access to unbundled elements of, an LFC fibre network”. Note, however, that the Commission has no price-setting powers with respect to UFB services as these have been specified in LFC contracts.

At face value the LFC disclosure requirements appear to be similar and as extensive as those applicable to businesses regulated under Part 4 of the Commerce Act. Given the cross-over we might expect a similar reporting regime to be implemented. The Commission published its Determination for this in 2012, and in fact the indicated reporting requirements appear far less comprehensive than the Commission’s implementation of the Part 4 requirements. Nevertheless it is early days and it was indeed clear that the Commission’s intention was to engage in an iterative process with the LFCs’ early reports, none of which have been made publicly available to date. The Commission will deliver a summary and analysis of the information for the first time in 2014. This won’t give information about copper access services, nor will it deliver the RAB calculations we get from the electricity and gas disclosures, but it will be a step towards improving transparency of the performance of a monopoly enterprise’s partnership with Government.