Fibre price doublespeak reveals policy fissures

CHALKIE - TIM HUNTER
Last updated 05:00 12/12/2012

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OPINION: Since 2008, Government sculptors have been chipping away at a massive infrastructure project, aiming to create the broadband equivalent of Michelangelo's David.

As rubble hewn from the rock of dense policy piles up around the edifice, an emerging shape can be discerned. It is not pretty.

Indeed, this David appears to be missing some important parts - a head, for example - and is festooned with carbuncles.

A particularly mis-shapen limb was unveiled on December 3, when the Commerce Commission issued two decisions affecting how network company Chorus could price its services. One was more financially significant than the other, but both revealed major design flaws in the Government's ultrafast broadband plan.

The less significant one was a final decision on how much Chorus could charge other telcos for access to its unbundled copper local loop (UCLL) - the wire connecting homes and businesses to an exchange.

The commission described the decision as a price reduction, but it is in fact a price increase for most customers affected.

The reason for the upside-down speak can be traced to Chorus's dual role as copper network owner and hand-picked installer of the subsidised ultrafast fibre-optic network in most areas.

In legislating to enable Chorus to split from Telecom, the Government mandated that UCLL access pricing would be the same throughout the country three years from separation day - ie, from December 2014.

This meant the existing prices of $19.84 a month in urban areas and $36.63 a month in rural areas would be averaged as $24.46 a month everywhere. Thus, in urban areas, where most UCLL connections are, the change amounted to a 23 per cent price rise.

Chalkie reckons the aim of increasing the copper price was to make fibre-optic cable's pricing look better in comparison.

The commission was not keen on this idea and said so in its public submissions in 2010, following with a draft decision in May recommending a new average of $19.75.

After industry consultation and a change of telecommunications commissioner from Ross Patterson to Stephen Gale, that figure has now been revised to $23.52 a month. Chalkie reckons it shows remarkable bureaucratic flexibility to come up with such a different number after a few months of jawing. It also neatly highlights the weakness of setting prices by decree.

However, there are only about 97,000 UCLL lines being used by other telcos, so in itself the price change makes a difference of about $4.4 million to Chorus's revenue. Small beer.

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The big beer was the commission's announcement on unbundled bitstream access, or UBA.

The UBA service provided by Chorus is a complete wholesale connection, the line plus electronics, allowing retail telcos to deliver phone and broadband to homes and businesses. In effect, it is UCLL plus.

The commission has been consulting on UBA pricing since issuing a discussion paper in July and has already reviewed submissions and cross submissions on what should happen.

The existing price of $21.46 a month was based on a "retail-minus" approach, which looked at what the old Telecom charged and deducted a margin - a best guess of retail profits. Under that process, a basic wholesale urban UBA service would have cost $19.84 for UCLL plus $21.46, or $41.30 a month.

Most broadband connections in the country are provided via some form of UBA - for example, Chorus had 619,000 basic UBA connections as of June - so the regulated price is an important number.

But since Telecom was carved in two last year, retail minus no longer works, so the commission was obliged by law to switch to a cost-plus calculation.

The potential implications were well expressed by a submission from Vodafone in August.

"Vodafone anticipates that the shift to cost-based pricing . . . should result in a reduction in the price.

"Indeed, the cost-based price should reveal the extent to which the current prices imbedded a monopoly rent for the integrated Telecom."

How right it was.

The commission's new process has come up with a UBA price of $8.93 a month, a huge cut on previous pricing.

At that level, the new wholesale price for a basic UBA service from December 2014 would be $23.52 for UCLL plus $8.93 for UBA, or $32.45.

This is a significant price point - not just because it is so much less than the old price of $41.30 a month, but because it is less than the entry-level ultrafast fibre price of $37.50.

Cue outrage and alarm from Chorus, institutional investors and the Government, which has committed $1.35 billion of taxpayers' money to installing fibre-optic networks throughout the country.

Prime Minister John Key and Minister for Communications and Information Technology Amy Adams hinted that the Government would not let the commission's view stand, while institutions railed about regulation wiping millions off Chorus's share price and conflicting with the goal of connecting most people in New Zealand to fibre.

Chalkie reckons regulated prices are about as predictable as blindfold dart-throwing, but this is a mess of the Government's making, not the regulator's.

What's more, Chorus's view of how this situation should play out seems nothing short of delusional.

Its August submission on UBA suggested the commission should consider how its decision would affect fibre uptake.

"We think the commission has the tools to consider how to facilitate outcomes for the long-term benefit of end users, including a requirement to consider the significant public private investment being made by Chorus and local fibre companies."

Wrong.

As the commission's discussion paper said, the review "is limited to making only those changes necessary to implement the new forward-looking cost-based benchmarking approach to unbundled bitstream access pricing."

Neither Chorus nor its shareholders had any reason to expect the commission would give a monkey's backside about the transition to fibre. If they had been paying attention, the possibility of a large UBA cut should have occurred to investors and been factored into the share price.

But the real problem here is that the Government has made a big bet on fibre, while giving not enough thought to how or why the populace would transfer from copper.

Technology moves at a furious pace and broadband speeds over copper are getting so fast that many users wouldn't perceive significant extra value in moving to fibre.

Meanwhile the costs of copper-based technology are coming down - hence the commission's international benchmarking is tending to pull prices lower.

Nevertheless, when fibre pricing looked cheaper than UBA and competitive with UCLL-based services, the transition to fibre might have gone smoothly.

Now that consumers know that copper prices should be much lower, the cat is out of the bag.

The Government now has two choices. One, force the commission to jack up copper prices and make fibre look better value or, two, suck it up and let customers choose the service they want.

Chalkie reckons on current form the Government will select option one. So when the final determination is released in June next year, the commission will, on reflection and after due process, have arrived at a price that makes UBA uncompetitive.

If it does, it will be an outcome worthy of a centrally planned economy run by party apparatchiks, which would be ironic coming from National.

Chalkie suggests option two would be no work of art, but it would at least look realistic.

- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.

- © Fairfax NZ News

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