Cost based modelling

The Commerce Commission has made the only decision it could regarding the UBA wholesale price determination process – it will continue to work towards a final determination due before the end of the year.

Sadly the government has already said the Commission’s work is irrelevant because it will introduce a review and a new Telco Bill that will supersede the determination before it comes into effect in 2014. The Commission’s work, vital as it is, will be completely sidelined in the process.

Chorus has also indicated that it’s likely to ask for a “final pricing principle” on the UBA price alongside the UCLL (that’s the unbundled service) FPP it’s already asked for. An FPP is a major piece of work whereby the Commission works out how much the service actually costs (I know, I agree it’s a bit odd that it doesn’t do that as standard but when you’ve sat through as many economists’ presentations on cost models as I have you realise that the Commission’s true role is to keep economic lecturers employed) and is likely to take quite some time. The Commission has indicated that it may miss the December 2014 timeframe and slip into 2015 because of that.

Actually I don’t mind the Commission doing the FPP work. I think it makes sense to know exactly what we’re dealing with. The problem is, the government doesn’t want to know what it actually costs to deliver broadband over copper lines, it wants to make sure Chorus can continue to build the UFB and as Chorus has said it won’t be able to if the price of copper drops (for reasons I’ll get to in a minute) the government won’t have a bar of an actual price point.

This is a shame because the review of the telco act could do with a dose of facts, to put it mildly.

Currently the government is being led by Chorus’s world view. Any reduction in wholesale rates will reduce Chorus’s income stream and therefore jeopardise its ability to pay for the UFB deployment. On top of the losses to copper line revenue, Chorus also faces a huge blow-out in terms of UFB deployment costs to the tune of $300m in the first year alone, and so logically, obviously, you can’t possibly inflict even more of a loss on the company or it might go out of business/not deploy UFB/all end in tears (delete where applicable).

There’s only one word for this and as we’re a family-friendly website I can’t use it, so let me just go for “hornswoggle” instead.

I know this to be true because Chorus is still talking about paying out 25 cents per share as a dividend, possibly the largest dividend payout in New Zealand this year and a rate (given the current share price of $280) that I haven’t seen since the early years of Telecom’s privatisation where the US parent consortium took out more money than it paid year after year till the coffers ran dry.

If Chorus can afford that level of dividend it can cope with a Commerce Commission determination in the $8-$12/month mark and can spend a bit of effort on sorting out its installation process so it doesn’t cost $3500 per install.

Several things need to happen and a review of the Telco Act isn’t one of them.

Firstly, the government needs to step back and let the market figure out what’s going on. This random intervention model doesn’t work and just scares the investors (let’s remember, Chorus’s investors aren’t the only ones in this game).

Secondly, Chorus needs to figure out how to install UFB without it costing the earth. The other LFCs can do it – so can Chorus.

Thirdly, the Commerce Commission needs to get on and deliver us a wholesale price that uses actual cost and not retail-minus as it is supposed to.

Fourth, those government departments that are pushing Chorus not to do anything useful with VDSL should butt out and let the company offer the services its customers want – in the interim while we gear up for UFB, that’s fast fibre. It’s going to be at least another three years before most of us start to get UFB – that’s three years of training us up to demand UFB speeds and the best way to do that is with faster copper products.

And if the government insists on pushing ahead with its review (of an Act it introduced, let’s not forget) then it should use the Commerce Commission’s work as a benchmark. After all, if we know what it actually costs Chorus to deliver these services, isn’t that going to be just a little bit important?