FPP Round One: Chorus makes an offer, but it comes with caveats

Chorus’s submission to the Commerce Commission over how to proceed in its Final Pricing Principle (FPP) determination makes for interesting reading.

Chorus has commissioned one of the world’s leading economic agencies – Analysis Mason – to write a report that forms part of its submission. AM is a force not to be trifled with. It has worked for the UK’s Ofcom looking at BT’s own liabilities in this area among other things, and has worked in the New Zealand market for several years writing reports for all sides of the various debates.

Chorus proposes not bothering to model the costs at all.

Rather, it offers to allow the Commission to use its actual costs to build a picture of what a Modern Equivalent Asset (MEA) looks like, and would do so based on its existing copper infrastructure.

That’s an important point to note – the government’s Discussion Document presumed that any MEA would have to be based on the fibre to the home programme, since no telco would roll out copper today.

TUANZ has argued that in fact copper does form a major part of any modern telco network, as would a fixed-wireless offering, but let’s come back to that later.

Chorus’s proposal has some serious merits to it. First, and perhaps best of all, we would see what it actually costs to build and run the very network which we’re talking about. A copper-line based network, in New Zealand, operating today. Chorus would assist the Commission by opening its books just enough for the Commission staff to produce a result. I’m guessing the rest of the industry won’t be allowed such a detailed look – that detail would end up being redacted as being “commercial in confidence” which would make for an interesting debate.

And it’s a lot quicker than building a theoretical model – also something that should appeal to all parties, as having this thing drag on for years is problematic to put it mildly.

But there are downsides to this approach. Not least of these is that Chorus hasn’t always made the smartest decisions when it comes to its costs and that modelling these inefficiencies and ruling them out would have to go by the by. Chorus suggests the expense and time taken to model for these would be hopeless and so it’s an all or nothing approach – you can have the data, but you can’t remove the warts.

AM’s “Working Paper” on how this would all happen suggests making some small adjustments but basically there would be no comparison of an efficient network versus an inefficient one.

AM also suggests that only Chorus’s network would do for this study – no point looking at CallPlus’s experiences in this area because it’s too small a company, with too limited a range of customers and that would skew the model, it says.

That’s interesting because in the conference held last year on all of this, CallPlus pointed out that it sells a product identical to UBA in the market today and does so at less than the Commerce Commission’s draft price which Chorus soundly rejected.

AM would also very much like to ignore the lessons learned from the Canterbury earthquake, namely that putting all your cables underground is a very silly thing to do in a country that can shake itself to bits from time to time. AM suggests that Chorus’s currently model of ducting and tunnelling is the industry ideal, and that any MEA built today would involve extensive digging.

That’s simply not the case. Certainly, the blue rinse set of ladies who lunch do like to talk a good talk when it comes to urban beautification and the need to remove those unsightly poles, but most utility companies will tell you that putting stuff underground is expensive, time consuming and doesn’t add anything to the network’s efficiency. Northpower, for example, is building its fibre network entirely above ground where it can, going so far as to put the electronics on the poles as well as the cables.

While we welcome the suggestion that real-world costs be used, the model requirements are for an efficient network deployment and that avoidable costs should be just that – avoided.

It’s also interesting to note that the AM report rules out using fixed-wireless assets as part of this assessment. The report AM produced is quite damning:

“It is very likely that wireless solutions are also not capable of delivering the expected future average throughput required from fixed broadband connections at an economic level and with current constraints”

says the report. We would beg to disagree – the RBI deployment is not restricted to what the report terms “ultra rural” but is being used to service around 20% of the population. It is a far more efficient approach to delivering broadband to non-urban areas than laying fibre to each property, given the distances and population density involved.

TUANZ would like to see real world figures used. We would like to see prices modelled on an aerial deployment, not a costly underground deployment, and would like to see some comparison figures produced – potentially on the experiences of the LFCs or CallPlus as well as the RBI. By comparing and contrasting with these deployments, we should build up a picture of both what real-world costs actually look like and what costs can and should be avoided.

Chorus cannot expect the industry – and subsequently the users – to pay for its inefficiencies. This process is about determining what an efficient network operator would do, not one that has every reason to ratchet up the price.


EDIT: The Commerce Commission has now published the full raft of submissions.