Where next? The Chorus submission on broadband pricing

04 Feb 2013

By Reg Hammond - InternetNZ Policy Contractor

Following John Key's statement that the Government would not rule out legislation if the Commerce Commission decision on broadband pricing wasn't to its liking, I blogged that the Government had a problem that had been apparent to many of us ever since his pre-election announcement in 2008. The problem is: how to build a fibre network for 75% of New Zealand at a cost of $1.5 billion when all estimates of the cost were around $3 to $5 billion.

Plan A was to get Local Fibre Companies to deploy fibre using government money in the early years in those areas where take-up was most likely. Then, as Retail Service Providers effectively moved their customers onto the fibre service in those areas,the revenue the LFC derived from the RSPs would be ploughed back into deploying more fibre in the remaining areas.  Plan A was partially successful in that the 3 or 4 original LFCs are currently deploying fibre in a few parts of the country using the Government's money. As to what will happen if that money runs out and up-take isn't anywhere near sufficient to fund the next phase of deployment - who knows?

Plan B, which applied to the majority of the country (as Chorus wouldn't, or couldn't, participate in Plan A), was to hope that Telecom (at that time a single company) would be so desperate to structurally separate that it would enter into a highly financially risky contract. This too was partially successful. The Government gave Chorus an interest-free loan of $929M to roll out fibre to the rest of the UFB catchment and, as long as Chorus's existing copper business provided mega - profits on top of the $929M, there was hope that the fibre would be deployed.  Plan B failed, as most people said it would, because the independent Commerce Commission, which regulates the price of those lucrative copper services, was instructed by the Government to re-price them. Most analysts and commentators saw that the re-pricing would bring the price of copper services down hitting Chorus with a double whammy. Chorus's mega-profits would take a big hit from the drop in copper services price. But, on top of that, the price of those services to RSPs - and then end users - would also drop, making copper broadband a lot more attractive to residential customers than fibre. This would stymie fibre uptake.

Plan C was almost dead before it started. The vain hope was that the Commerce Commission would have a brain fade. The government, through legislation, had directed the Commission to base the new copper price on cost which would bring the price of copper down. It also said the Commission should consider a couple of elements that might put the copper price up. This was the political equivalent of the Monty Python - nudge, nudge, wink, wink, sketch - except nobody was laughing.The Commission obeyed the law.

That brings us to Plan D - not yet announced - but today's statement to the stock exchange by Chorus that it intends to seek a price based upon the final pricing principle (FPP) gives us a good idea what it will be.  Chorus had to notify the stock exchange because seeking a final price is tantamount to them telling the Government that the risky financial aspects discussed in Plan B will someday come home to roost. In stark summary, the Chorus submission to the Commerce Commission implies "we have tried Plan B - we told you it wouldn't work - it hasn't, will you now scrap your incoherent policy and draft some new legislation so we can roll out the fibre without going broke in the process?"

The big problem for the Government is unfortunately still the same problem it faced in 2008 - where does the money come from?

The Chorus submission indicates it should come from copper customers, but they’re saying it should be explicit this time - no more nudge, nudge, wink, wink.

Many people think that as the UFB was portrayed as a whole of economy initiative then the funding gap should be funded out of tax applied across the whole economy - e.g. income tax.

Others think that the user pays model should apply - those that want fibre pay the true price for it - no cross subsidy from copper or the taxpayer.

As a future recipient of fibre I might reluctantly accept that I should contribute to the future cost before I get it - but how do I know I will ever get it? And how do I know that my money won't be siphoned elsewhere rather than on fibre to my home? And why should I pay in advance for something I won't get for five years when people 100 metres away got it on day one without making any advance payment? And why should I underwrite the Chorus shareholders' risk taking?

More to the point - what about the ~ 700,000 households in NZ that will either never be able to get fibre to their homes (mostly rural) or that don't want/can't afford broadband, never mind fibre? Why should they contribute for me and others to get it?

Or we could say - let’s wait and see what final price the Commission comes up with. And let’s wait and see if it really looks like Chorus might go broke - but also let’s see what dividends it is paying to its shareholders and what salaries it is paying to its management and how it compares to other efficient network companies.  And perhaps while we are doing that an apology could be made to those companies that bid for the UFB contracts and didn't get them because their price was too high - or too realistic.

Reg Hammond

4 February 2013

InternetNZ is analysing the submissions made to the Commission and will be releasing further comment in the coming days.