Bonfire night

So what’s it to be – a sky rocket or a damp squib?

Tomorrow is November 5 and for most people of UK decent that means Guy Fawkes, gunpowder, treason and plot and, of course, the burning in effigy of a 400 year old terrorist.

This year, November 5 is also the day the Commerce Commission comes out with its final price for the regulated UBA service – that is, the price ISPs pay for part of the wholesale service they buy to sell us broadband.

The draft determination knocked almost 25% off Chorus’s UBA price and that apparently was a surprise to all concerned. It wasn’t, of course – we were expecting more than that given how much CallPlus can sell its wholesale service for – but both Chorus and the Prime Minister were apparently gobsmacked by it.

Chorus says the reduction will take $160m off its annual revenue and will require a major rethink in terms of how it operates. Well, yes – that’s probably why the Telco Act included a three year moratorium on the in introduction of the new regime in order to give Chorus time to do just that.

The Prime Minister says Chorus will go broke, although Chorus was quick to deny this and the stock markets in both Australia and New Zealand were happy enough with Chorus’s comments about its ability to function as a business.

The Minister pulled the review of the Telco Act forward from 2019 to now and decided rather than reviewing the entire piece of legislation she would focus with laser-like precision on one problem: how to make sure Chorus doesn’t have to reduce its income from copper lines.

Tomorrow the Commission will announce its final price and, if it’s high enough, the government will put its review away and we can go on about our business. If it’s not high enough, then Chorus will call for a Final Pricing Principle (FPP) review of the Commission’s workings which will take a couple of years and will likely result in the price falling even further, so I’m told by the economists who look at this kind of thing. The government will declare that it has consulted broadly with all interested parties and that given the choice of three options (all of which see the price of copper wholesale rise well above the draft determination) it will pick one and introduce new legislation before the next election.

How on earth did we get to such a stupid point? It really is quite remarkable – we spent the better part of the 1990s with no regulation at all and as a result fared quite poorly on all counts. Even when regulation was introduced in 2001 it was so weak we managed to avoid doing anything useful for five years and it wasn’t until 2006 that the Commission was given the teeth it needed to do the job properly.

Now, after what must be seen as a brief but golden era, we are back to the position of the minister trying to set prices in closed-door meetings with providers with no transparency, no independence and no thought given to the ramifications of these decisions on the broader market.

It all boils down to Section 18 of the Telecommunications Act.

S18 is short but quite incomprehensible.

To avoid doubt, in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services.

In essence, so far as I can tell, what it says is that while the Commerce Commission must act in the long term best interests of the consumer, it must also give consideration to the risks faced by investors in new technology. Quite what “consideration” must be given isn’t spelled out, nor does the Act describe how the Commission must decide what is a new technology and what isn’t.

How would the Commission differentiate, for example, between fibre as a new technology (it isn’t) versus LTE as a new technology (it is). We’ve had fibre for years, but LTE is brand new and clearly can compete with copper lines if not with fibre itself.

The Commission has left LTE out of its determinations but has been told to include fibre because the government is investing heavily in UFB and therefore we should consider it. Let’s not worry about Telecom, 2Degrees or Vodafone’s billion dollar investments in LTE because that’s different, somehow.

It’s all rather vexing.

The Commission did the only thing it could really do in the circumstances – point out that S18 doesn’t really seem to have any real bearing on the UBA determination, which is entirely about copper lines don’t forget, and move on.

The government would like the Commission to benchmark the UBA costs against the UFB deployment costs on the basis that it’s a “modern equivalent asset”. Today, they argue, you wouldn’t deploy a copper network, you’d deploy a fibre network and we know exactly how much that costs because we’ve just run a tender process for one so that’s the price you should use.

Even the Europeans have backed away from this view. The government’s discussion document hinges in large part on a draft policy decision from Europe that does indeed say you should rely on the price of a fibre to the home rollout, but the final version changes that to a comparison with a fibre to the cabinet rollout – in effect, the network that Telecom completed before it was structurally separated.

When the Telco Act was being introduced in 2010 I met with the minister responsible for its creation, Steven Joyce. He joked that so far we had changed the governing legislation three times in a decade and that was no way to run an industry. I couldn’t agree more, but now we’re up to four times in a decade and that’s just hopeless.

Tomorrow the Commission will either move the price enough to satisfy the government, but in doing so betray the consumers of New Zealand, or it will stick to its guns and face being regulated by the government of the day.

Either way the industry loses, and the country as a whole will continue to look at telecommunications as some kind of high farce, although from where I sit it’s more like a tragedy than anything else.