More copper price talks needed

Over the past couple of weeks I've been pondering whether Chorus, internet providers and regulators could be forced back to the negotiating table to hammer out a deal on Chorus' wholesale pricing.

The contents of a Commerce Commission discussion paper issued this morning has convinced me that they should, and probably will be.

With Chorus seemingly painted into a corner, the Coalition for Fair Internet Pricing triumphant and politicians popping shots at each other, the prospect of friendly discussions on copper pricing might seem remote. I realise I have a lot of explaining to do.

Don't worry, I am not going to enrage anyone by suggesting Chorus shareholders deserve a break. I'd observe that investing in Chorus and Telecom has been a fairly unhappy experience over the last decade.

But given the economic and social importance of the ultrafast broadband network, which is only going to grow as it becomes a key means of delivering health and education services, I don't think it would be a bad outcome for taxpayers if Chorus was driven to the brink just as it completed the network and was then renationalised for a dollar.

Back to the matter at hand: I have been canvassing a few industry leaders on the prospect of talks on copper pricing over the last week and some of their comments may surprise.

Although the Commerce Commission has ruled the combined price of a copper phone line and broadband connection should fall by $10.54 from next December, that could change as a result of the "final price principle" reviews ordered by Chorus.

The commission said today it would try to find a way to streamline those reviews, but warned they could take "some years".

It also confirmed it was unclear - and it is now clear it will remain unclear - whether the prices could be backdated to December next year.

The importance of that cannot be overemphasised. It would be a disaster for internet providers - small ones especially - if the wholesale price cuts came into effect in December next year and the forces of competition forced them to pass on the savings to consumers, only to find the cuts were reversed and they had to repay tens or even hundreds of millions of dollars to Chorus some months to many years later.

Internet provision is not a high-margin industry and if small internet providers are stung by backdating, they could be wiped out, leaving consumers with a Telecom/Vodafone duopoly.

Backdating may sound like a side issue but CallPlus chief executive Mark Callander rightly described it as a "substantive" one.

Two factors will determine the quantum of the overall risk; the likelihood of the Commerce Commission raising wholesale prices as a result of the "full price principle" (FPP) reviews ordered by Chorus and the chance of FPP prices being backdated.

I'll deal with the prospect of higher prices first.

Although the recent crisis over Chorus really blew up after the Commerce Commission suggested setting the price of copper broadband connections at $10.44 last month, few people in the industry, even Chorus I think, really believe there is much chance of the FPP review moving that by more than a few dollars.

The cost of providing those broadband connections isn't very difficult to work out because many internet providers have been doing just that when they "unbundle" Chorus' exchanges and put in their own internet access equipment.

But the price the commission will eventually set for copper phone lines is a different kettle of fish. The price will be based on a methodology (the acronym is TSLIRIC) that involves the commission working out what Chorus could reasonably charge to get a return on its investment if it were to build a whole new copper access network. That is a pretty difficult calculation given no-one is actually building such a network anywhere in the world; hence why the commission expects it would take its many boffins "some years".

The commission has expressed some reservations with Communications Minister Amy Adams' claim that the price Chorus agreed to charge for entry-level ultrafast broadband is a good proxy (her argument was it didn't make much difference, cost-wise, whether a new network was copper or fibre).

Without going into detail, in its submission to Adams' August discussion paper, the Commerce Commission indicated there were a few reasons why using entry-level UFB as the benchmark might result in higher pricing than TSLRIC.

But those considerations may be dwarfed by the fact Chorus' copper network is a nationwide network, whereas UFB is only being built in towns and cities where average network deployment costs are cheaper.

The upshot is that it is extremely difficult to forecast the price the commission will settle on for copper line pricing. Internet providers would be cavalier in the extreme to dismiss the possibility of a price hike.


The risk of that price being backdated might not go away at all for a decade or more. The commission is consulting on whether FPP prices should be backdated to December next year and is acutely aware of the ramifications.

Commerce Commission regulation manager John Hamill said this morning the decision could have "a significant impact on parties".

But ultimately it may not be the commission's call.

Hamill noted "the Court of Appeal's observations favour backdating".

That should be a massive jolt to internet providers. The point being that even if the commission decides against backdating, there is every chance Chorus could then go to the courts.

The decision on whether copper prices should be backdated could quite conceivably end up in the Supreme Court in 10 years, by which time perhaps $1 billion or more could be at stake. That is one reason why talks now seem inevitable.

Internet providers tried to get Chorus and the Government around the negotiating table once before. In May, six companies: Telecom, Vodafone, CallPlus, Snap, Kordia and Compass Communications all suggested the Government fix the combined price of a copper phone line and broadband connection at $37.50 a month, about $3 more than the commission is now proposing, but Chorus rejected the offer.

Word of the talks leaked and was reported by Fairfax in June. The secret letter was finally released by Adams in September in an effort to relieve some of the heat she was coming under from the (CallPlus-inspired) Coalition for Fair Internet Pricing.

With its share price tanking and its ability to pay any dividends under threat, Chorus might be more inclined to talk now. But what do some of the other key players have to say?


CallPlus's Callander was somewhat circumspect when I asked him on Monday. Callander noted the industry had tried to broker a deal once before in May and "that wasn't successful".

The climate had worsened and talks could now only be successful if people came together in an "open and transparent manner", he said.

"I think it is exponentially harder now. 'Transparency' and 'trust' are the two key words and both of those aspects are now missing."

But he did observe the industry appeared to be "going backwards again" with all of the discussion about regulation rather than innovation and products and services.

Orcon chief executive Greg McAlister appeared receptive to dialogue, saying he believed talks were "quite possible".

"At the end of the day, the industry needs healthy players and if a major player like Chorus is shown to be in a really bad state, the industry needs to react jointly to that," he said.

First, the report by Ernst & Young Australia into Chorus' finances, that was ordered by the Government, needed to be published, he said.

"I would anticipate we get the Ernst & Young review, we have a bit of a think over the Christmas holidays, and if there are any talks they will be happening in the first quarter of next year.

"Orcon, and all the other internet providers, I think, are always open to conversations about how we can make this thing work together."

Telecommunications Users Association chief executive Paul Brislen believes any round-table discussions should be co-ordinated by the Commerce Commission.

"If there were to be any conversations at this point, they would need to be carefully managed, preferably through the Commerce Commission process itself," he said.

"I don't like the idea of all the telcos sitting down and coming up with a price they are happy with because it invariably means customers end up paying more and it does smack of 'price-fixing'.

"But I think if the industry collectively went to [the Commerce Commission] and said 'we need to have these conversations out in the open and we'd like you to facilitate' ... I'd be happier with that process."

Brislen believed internet providers were drawing up battle lines and "hunkering down for the long haul".

"The idea of them talking to each other is probably the furthest thing from their mind at the moment."

Not for much longer, I'd predict.

Fairfax Media