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IPP vs FPP: What the High Court has to say about it all

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The High Court has ruled against Chorus in its battle to overturn the Commerce Commission determination on UBA pricing. The ruling can be found here.

This possibly won’t be the end of it – it’s unclear yet whether Chorus can or even will appeal the decision further – but for now we have guidance on how Section 18 of the Telco Act should be applied.

I’ve written about s18 and what it means for the industry elsewhere – in brief, due consideration must be made by the Commission to the needs of investors in new technology.

The Commission argued that it couldn’t go beyond the available evidence when considering its responsibilities under s18, that it couldn’t take in all the evidence, discuss the matter with the industry, work up a draft and then a final determination and then throw it all away because one clause of the Act says it should consider the needs of investors in new technology.

Chorus argued that the Commission should apply s18 at every step of the process and that by waiting until the end to apply s18, it had erred in its interpretation of the law.

“[Chorus argued that] s 18 is a mandatory relevant consideration, which must be applied at every point where a material judgment is made that affects the ultimate result. That would include process decisions, decisions of exclusion of eligible benchmarks, investment in further information gathering, decisions on the  range within which a price point would be selected (if there is any narrowing of options at that stage), and selection of the final price point.”

The Judge, the Honourable Justice Stephen Kos, disagreed with Chorus and said:

“In my view the statutory language is not prescriptive that s 18 is a consideration borne into (and interwoven through) the benchmarking analysis to be undertaken by the Commission, at the evidential stage. Indeed, I can see every reason why it would not be. That sort of external consideration does not seem to me to form a relevant part of the evidence-gathering exercise. Rather, it is relevant to what to do with the evidence once it is obtained.”

The Commission’s argument around s18 is that it can’t be used to move the determination outside the process laid down in the Act, and it’s that which swayed the Judge’s decision.

The whole issue has arisen out of the difference between the Initial Pricing Principle (IPP) and the Final Pricing Principle (FPP) and as the Judge points out, the very reason we have an IPP in the first place.

Conducting an FPP is a lengthy, laborious and costly task. It requires the Commission to build an economic cost model for the service being regulated, based on an efficient supplier’s costs.

Typically these things take a very long time to build, involve much shouting and wailing from all parties and are used only once or twice before being discarded, surplus to requirements.

Because of that, the recommendation (originally made way back in the Fletcher Inquiry of 2000) was that the Commission use a cheap and cheerful benchmarking exercise for the easy stuff. That is, instead of building expensive bespoke cost models, it would simply benchmark against countries that use a similar methodology to New Zealand.

In the past this has been enough for the parties involved. Until now, nobody has called on the Commission to conduct the full FPP process. We’ve looked around the world, found similar regimes and compared our price with theirs. It’s not perfect, but it’s supposed to be quicker and cheaper.

In this instance, the IPP found a benchmark set of only two countries, which certainly alarmed both the Commission and the telco industry. However, after conducting its usual tediously transparent process that included input from all the parties, including the users and investors, the Commission ran a cross-check against a wider group of countries that included a set that were excluded from the final group for various reasons. That range ran from $6.56 to $11.45, effectively bracketing both the draft determination and the final $10.92 price determined by the Commission. Nothing the Commission did fell outside the law.

Which raises an interesting question – if the IPP is supposed to be the quick version, how does the Commission think it can conduct a full FPP for not one but two services in ten months, when the IPP process took far longer?

But that’s a question for another time. For now, the High Court has handed down confirmation that the Commission’s process follows the law as it stands and even, at times, exceeds the expectation.

To quote the Judge once more:

“The Commission has exercised a judgment, as it is required to. It has done so following a process probably more extensive than Parliament had in mind. It certainly took longer than Parliament had in mind. It is worth reminding ourselves that the Fletcher Inquiry, the progenitor of this IPP pricing process, had in mind that New Zealand could simply piggy-back international evidence, and that the result would be a “quick and cheap” process compared to the FPP cost-based modelling approach.”

The Commission hopes to have the FPP decision completed and made public in time for the 1 December deadline. I’m no betting man but I think that’s optimistic and we’re more likely to see a result this time next year, if not later.

That final price? I’d say it will fall to below $10 per line per month.

 

TUANZ Needs You

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Yes, you.

You must be able to run a business, put on events, manage a blog and newsletters, book your own flights and accommodation, check your own spelling, drink vast quantities of coffee while retaining your ability to speak coherently, build presentations, present presentations, talk to journalists, front up on camera, on radio and online, read policy documents by the thousand, write policy documents by the hundredweight,

You must be able to cope with hundreds of pages of tedious economic theory and argument.

A sense of humour is quite important.

It’s quite a straightforward job. Is this (whatever this is) good for the consumer? If it is, then you support it. If it isn’t, then you oppose it.

It’s quite a complex job. What should the weighted average cost of capital be? What are your thoughts on TSLRIC as a model and how does section 18 of the Act apply in the real world? Does price elasticity really apply?

It’s quite a fun job too – you get to argue your case with people who really don’t want to hear from customers at all. You get to be a union representative for users everywhere, you get to be an economic development agent of change, helping to focus policy makers at all levels on the issue of communication at its most fundamental.

You will represent the customer at various industry groupings. That means you must be able to put up with countless hours of corporate speak, naked greed and sly sideways glances. Being able to roll your eyes discreetly is preferred, but not essential. Being able to yawn with your mouth closed is also a great help.

Multitasking is a given. Around 90% of your time will be spent on policy matters, a further 30% on reactive media calls, 30% on pro-active media calls, 70% on operating the business of the association itself and 10% on paperwork. Consequently you should be able to fill in your credit card receipts while sitting in a working party meeting, writing a blog post and replying to a media enquiry by TXT message without spilling your drink.

You’ll get phone calls from elderly customers who are being ripped off and don’t know who to turn to. You get to help them out. 

You’ll meet people who can help, meet people who can hinder and meet people who make a difference. Some of the job is about talking but even more of it is about listening. Mostly, your job is to communicate and that, oh the irony, is the toughest bit of being in the telecommunications industry.

If this sounds like you, or you want to know more, send me an email and I’ll pass it on to Pat O’Connell, chair of the TUANZ board. He has a position description that differs only somewhat from what’s written here.

Good luck to you all.

The value of the internet

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The internet is a powerful tool for business, yet for too long we’ve struggled to convince many people of this fact.

It’s all about pornography, stealing copyright material and playing games, they say.

I’m not joking about this – I’ve heard it from government ministers, leaders of business, academics and (most alarmingly) a retiring Telecom board member. Really.

Now, however, we can point to a report that is at the least impartial and well put together. Sure, we’ve had reports in the past of the economic benefits of broadband, but when they’re produced at the behest of companies like Ericsson or Alcatel, they tend to get tarred with the “of course you’d say that” brush.

Today’s release, “The value of internet services to New Zealand businesses” was commissioned by the Innovation Partnership, which consists of InternetNZ and Google among others, but is put together by the economists at Sapere, led by an old colleague of mine, Hayden Glass.

The upshot is, yes having broadband does increase your productivity, improve your bottom line and deliver on all the benefits we’ve talked about for years.

On the other hand, the report also highlights those sectors of the economy where broadband has not made much of a dent – most notably in the rural sector, where farms and farmers seem immune to the charms of having internet connectivity either because they don’t see the value or, more likely in my view, because they’ve never had it and don’t know what they’re missing out on.

A couple of years ago I spoke at a Federated Farmers Nelson branch AGM, and talked about the UFB and RBI proposals and how they’d impact on rural life.

At the tea break, one large burly farmer came over to tell me he saw no value in the internet at all. His wife overheard him, smacked him on the shoulder and called him names. We use the internet, she declared, when it works and we need more of it. The apprentices use it for their studies, the kids use it for theirs and we used it to get the seats to the Rugby World Cup. In fact, so poor was the connection that they nearly missed out because after choosing the seats on the handy online tool, the connection would time out and she’d have to re-book from scratch.

“We nearly missed out on the semi-final,” she told him and he was an instant convert. “We must have more of it,” he declared.

Of course, there’s more to farming’s need for broadband than tickets to the rugby. Irrigation schemes, weather reports, milk yield reports, ongoing education and training opportunities, GPS mapping, health inspections (both people and animals), animal ID tags and so on all rely on better connectivity and on farmers willing to use this new kit.

Every percentage gain in productivity we can deliver in rural New Zealand will have a huge impact on our overall GDP and if that was the only measure, we’d be strongly urging rural New Zealand to get online as fast as they can, but of course it’s not. There’s also the social need – rural society’s cohesion relies on good communications far more so than in the city where we’re face to face on a daily basis.

This is a fight that should shape the next election – finally we have the ammunition we need to direct policy makers in the right direction.

There’s plenty more in the report as well, so do take the time to have a look through it. Well done to all concerned with its production. It’s something we can all use in our ongoing debate about connectivity.

An announcement

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PRESS RELEASE

Thursday March 27, 2014

The Board of TUANZ regrets to announce that chief executive Paul Brislen is to leave the association after three and a half years at the helm.

Paul joined TUANZ in late 2010 and has overseen dramatic changes to both TUANZ and to the wider telecommunications market as well.

In that time we’ve seen the break-up of Telecom, the launch of a new Telecommunications Act and the roll outs of both Ultra Fast Broadband and Rural Broadband Initiatives, the introduction of new GCSB and telecommunications interception laws, the introduction of a new Telecommunications Commissioner and the start of the final chapter of copper regulation.

Under Paul’s leadership, TUANZ has fought against the introduction of a ten year regulatory holiday and the copper tax and has championed the needs of the user at every turn.

“We are sad to see Paul depart, but are proud of what TUANZ has achieved under Paul’s leadership over recent years. We part as good friends and wish him well in his new endeavour”, says TUANZ Chair, Pat O’Connell.

“The last three years have been a tremendous learning curve for me, and I’ve thoroughly enjoyed my time with TUANZ,” says outgoing CEO Paul Brislen.

“I want to thank the TUANZ board for all their support both of the organisation and of me personally and wish them well in the hunt for a new CEO. I’d like to especially thank those members who’ve supported the association through difficult economic times to ensure we’re still around to fight the good fight. The role TUANZ plays is unique in the New Zealand economy and it’s a vitally important one. Now is a good time to pass the baton on to a new CEO as we lead into the election cycle with all that entails,” says Brislen.

“There is clearly plenty we need to do; our search for a new CEO begins immediately”, says O’Connell.

ENDS

TUANZ is the Telecommunication Users Association of New Zealand and represents telco users throughout New Zealand. For more information see: www.tuanz.org.nz

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Why TUANZ?

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It’s membership renewal time here at TUANZ and worth reiterating the various things TUANZ does. I know you see me on the TV (sorry about that – the camera adds ten pounds you know), on the radio ruining your drive home or taking up column inches in the paper, but TUANZ is more than just me commenting on various issues.

TUANZ has three main roles. We lobby, we represent and we provide a networking forum for members.

Lobbying stems from our policy work and our approach is always the same – is this in the best interests of competition and the users. From that simple basis we form views on everything from the copper tax to mobile termination rates, from the TSO to submarine cables. Will it increase competition? Is it good for end users?

Currently we have three main issues we’re driving. Competition, access to better broadband and pricing.

Competition is obvious – if we have a competitive market then we avoid the excess fat of the cosy duopoly or monopoly situations. If we all have better access to broadband then we can all take part in the digital economy, and build billion dollar businesses from the bach. If prices are more reasonable, more customers can take up more services and do more with the network that’s there.

On top of that, we also represent users at various fora. We have a seat on the TCF board, making sure that the telcos don’t forget about customers whenever they meet to decide on new codes of practice. We turn up to various TCF working parties, such as the recent broadband product disclosure code, to influence the direction such codes take before they are set in stone.

We have a seat on the Numbering Administration Deed council, which oversees the basic numbering plan that governs the telco market.  Hopefully we can add value to the process and again remind the telcos that are involved that ultimately customers will need to buy their services so it probably pays to think about that up front.

We are also one of the consumer representatives, along with Consumer, on the Telco Dispute Resolution Service council. There we provide a balance to the needsof the telcos and ISPs in the tricky area of customer service, making sure that the process works for both telco and consumer alike.

Finally we represent New Zealand at the International Telecommunications UsersGroup (INTUG) board level. There we work with our sister organisations from around the world to influence regulators, help set policy and drive the agenda on behalf ofour members. As part of that work we regularly host an industry roundtable workshop at APEC’s twice annual telecommunications conference.

Then there’s the networking side of things and our bi-monthly TUANZ After Five series. Here we hope to bring you together to network, catch up with old friends and to hear from someone interesting from within the industry. We’ve had speakers from vendors, telcos, policy makers and the regulator and numerous other industry bodies speak to members on topics ranging from economic development opportunities, rural broadband programmes, international comparisons, the future direction of telecommunications itself and the ever present “next generation” of technologies.

We do all of this work on behalf of telecommunication users, but we couldn’t do anyof it without your support. Your membership fees are the main source of revenue we have and without you, we couldn’t be as effective as we are.

And we are effective. Last year we managed to rebuff the government’s attempts to overrule the Commerce Commission and raise the price of broadband services. We’ve driven the fibre to the home agenda and helped guide previous governments to build a regulatory regime specifically for telecommunications. We’ve seen increased competition and better products and services come to market as a result and that brings us back to what makes TUANZ what it is – the users themselves.
 

If you’re not a TUANZ member check out our JOIN TUANZ page and if you’ve got any questions, let me know.

Consideration must be given… Section 18 and Chorus

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I’m not at the High Court in Wellington so all I know about the case Chorus is bringing against the Commerce Commission is what I’ve read in the papers, but so far it’s quite fascinating.

Chorus’s argument hinges on whether or not the Commerce Commission misread the law with regard to its determination of the price of wholesale access to copper lines (known as the UBA service).

Chorus says the Commission chose too narrow a group of comparison countries and didn’t take into account the requirements of a new section of the Telco Act (section 18) which was added after we, among others, argued against having a regulatory holiday.

The first part is easily disposed of. There really aren’t too many countries around the world that have a similar regulator system to ours, and so in the end the Commission was stuck with just two – Denmark and Sweden.

That’s a problem – one the Commission acknowledged early on – but seeing that the determination has to be based on benchmarking, and that the law allows for a Final Pricing Principle if that’s not considered satisfactory, it’s hard to see how the Commission could have done anything differently. We’re benchmarking against two countries, if you don’t like it you can ask for an FPP. Chorus didn’t like it, so it did, and we’re working through that process now.

The second part is trickier.

For those with long memories, cast your minds back to the Telecommunications Amendment Bill introduction in 2010. You’ll remember it was pretty straightforward, including a number of provisions relating to the UFB deployment and the requirements for any winner to be a wholesale supplier only: no retail service was allowed.

The minister of the day, Steven Joyce, then introduced a Supplementary Order Paper (SOP) that ran to more pages than the bill itself and included a brief mention of a regulatory “forbearance period” which would free the winning company from having any Commerce Commission oversight for a period of ten years.

After having fought for many years to get a regulator to oversee the industry, and having seen how well the regulator could both encourage good behaviour and enforce it when needs be, TUANZ wasn’t about to stand idly by and let the regulator be benched for a decade.

Ultimately political manoeuvrings saw the clause struck out, but in its place Section 18 was introduced.

It’s not a long section – just four brief paragraphs. The first says the section is designed “to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand” through regulation.

That’s good – that’s in keeping with the role of the Commerce Commission and the Commerce Act and indeed with the Telco Act itself.

The second paragraph is dull legalese that says you must consider whether any regulation will result in, or block, the  “long-term benefit of end-users of telecommunications services within New Zealand”.

Good to see – we’re all about that as well, so I’m happy with that.

The third paragraph is the meat of this matter, however. I’ll quote it in full for you.

“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.”

I’ve bolded the important bit. Consideration must be given to those investors who are putting money in to new services. This is the first time the Telco Act has talked about protecting investors in this way – it’s untested until now and frankly, it’s not a lot to go on.

The Commerce Commission’s thinking around S18 is quite straightforward. Nowhere does S18 say the Commission must change its methodology. Nowhere does it say the Commission must override its existing processes and approaches to benchmarking and the like. It doesn’t say anything other than “consideration must be given”, not to the investors themselves, but to the incentives and risks those investors face.

Given that, the Commission looked at its benchmarked countries and chose the most expensive one instead of picking a point somewhere in between the two, as it would have done in the past. Section 18 doesn’t really have the detail that Chorus (and indeed that the government that introduced it) is saying it does. I don’t see any other approach that the Commission could have taken with so little guidance.

Chorus’s lawyer is also arguing that the Commission must surely have seen the writing on the wall when the share price began to fall – but that’s just a bit of theatre for the papers. Nowhere does the law require the Commission to consider a company’s share price as an input into this process and if it did I for one would be marching in the street in protest. It’s quite a strange measure of regulatory worth and really wouldn’t stack up against the rest of the Telco Act or the Commerce Act itself for that matter.

But it does raise an interesting question. Chorus clearly wasn’t expecting a price cut of this magnitude, despite all the signs (such as Steven Joyce giving the company three years to get ready for the introduction of the new price), and argues that it puts the UFB deployment at risk.

Yet when you look at another High Court ruling – this time in an appeal against a Commerce Commission ruling (Wellington Airport et al vs the Commerce Commission), you’ll find an opposing view from the court on such cross subsidisation.

“[1480] The idea that greater revenues produced by higher allowed earnings on past investments (ie on the initial RAB) provide the wherewithal for more future investment is contrary to rational investment choice. Those existing higher earnings, once earned, are a given. The source of funds for future investments does not influence the riskiness of future investments; nor, therefore, does it influence their attractiveness. If anything, an abundance of capital is likely to lead to wasteful investment.”

I take that to mean if you make money from one source, you can’t then cry foul in another arena if that funding dries up. Past earnings are not guaranteed and you can’t rely on them.

The whole case is quite fascinating, pitching the Commission against (in essence) every regulated utility you care to think about, and its role in the current fight will no doubt come out in time.

Today, the Commerce Commission’s lawyers will have their say and then it’s over to the court to determine what happens next. Either way I’m sure we’ll see an appeal and then probably an appeal to the Supreme Court itself.

All that will take time and drag this out for years to come – ironically proving the value of letting the Commerce Commission make the call on such things. Legal actions in the telco sector have in the past taken so long to resolve the products have long since been withdrawn. Sadly, all this is far from over.

Shuffling the cards, but no new hand for Chorus

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Chorus and Crown Fibre have announced several changes to the UFB contracts that should help Chorus better manage its costs.

There are a few changes that seem quite reasonable.

Chorus will have more flexibility about work within a candidate area and what order it does stuff. Apparently the original contract was quite specific about the process – Chorus now has some latitude to do things the way it would like to. 

That will leave 12,000 households without fibre in the short term when they were expecting it, but they won’t miss out entirely. They’ll just have to wait a bit longer.

EDIT: I’ve misunderstood that bit. This, apparently, relates to business areas where Chorus has an existing point-to-oint fibre footprint that pre-dates UFB. Previously they were required to dig a lateral to every premise boundary and make every area GPON-ready by December 2015 regardless of demand. Now they will be allowed to do these works on demand, provided all the work is completed by December 2019. Apologies for the mis-reading.

It also gets a more regular round of progress payments which should make it easier for the company to manage its cash flow. Having been involved in a building project last year, I know how hard it is for contractors to manage cash flow when customers want to see an end result before paying. Sharing that load out on a monthly basis will no doubt help Chorus tremendously.

And instead of having to replace perfectly acceptable Cat5e or 6 or even fibre deployments from a business park or apartment building or school, for example, Chorus will now be able to make use of existing networking gear, so long as it’s up to spec.

That’s all fine, but I can’t imagine any of it will make a huge difference to the costs of deployment.

There are a couple of issues that concern me, however. Chorus gets to use its existing fibre networks and simply upgrade them to UFB capability. In this case, ‘upgrade’ is something of a misnomer – it will run UFB over the top of point-to-point fibre. If that sounds familiar it’s because last week Vodafone suggested Chorus do just that with its fibre and HFC networks and both the minister and Chorus dismissed the option out of hand.

But Chorus’s own fibre is perfectly acceptable.

This is very interesting. It makes me wonder – again – why Chorus isn’t using existing fibre from other providers. It may well be doing so – ministry officials tell me Chorus is allowed to roll out UFB over existing infrastructure if it’s up to the job, but I haven’t found a single instance of that happening. Instead of signing deals with Vodafone or CityLink or Unison or Network Tasman, Chorus has overbuilt with its own network.

Now Chorus will be allowed to use its own existing fibre to compete with these outfits as well. Chorus will be paid to take on its competitors – paid by the government with public funds to potentially crush the commercial ventures that are in the market today.

If Chorus is going to use its own fibre assets, it should be required to use other companies’ fibre assets as well on a commercial footing. Otherwise we’re paying to remove competitors from the market and I’m not sure that’s the ideal outcome.

Finally we see Chorus’s marketing budget slashed in half – from a paltry $5m a year to a pointless $2.5m.

Currently Chorus’s efforts in this area have been woeful to put it mildly. Filming a TV commercial in New York to demonstrate the power of the UFB is a bizarre way to spend your money (what on earth does showing art on an electronic bill board in New York have to do fibre in New Zealand?) and the Gigatown campaign has created more noise than it has benefit.

I’d expect to see the government step up and promote its UFB initiative but there’s no sign of that happening. The onus is on the retail service providers to promote the UFB, but of course that ignores the all-important pre-sales role of telling customers what the UFB is all about. Nobody’s selling the sizzle – and the RSPs will only sell their products, naturally – and now we have Chorus to all intents and purposes withdrawing from that marketing campaign.

So what of the other players in this fibre deployment? Will the Local Fibre Companies also renegotiate their contracts? There’s nothing planned but I’d expect to see some of them come to Crown Fibre with a few changes they’d like based on this. I’m sure they also would like to avoid having to re-fibre a building that’s already got decent infrastructure and the like. The ball, apparently, is in their court to do so.

The changes as laid out in the press statement aren’t going to set the world on fire. Sure, they’ll enable Chorus to avoid some stupid costs and to better manage its cash flow, but unless something changes radically we’re not going to see Chorus bring down the price of each connection or increase the speed of the rollout. Northpower Fibre, by way of contrast, will finish years ahead of schedule and do so at a fraction of the cost per premise passed.

I’d rather hoped we’d see a radical overhaul of the way Chorus is doing business. Instead, this feels very much like a re-shuffling of the same cards.

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TUANZ welcomes Vodafone’s offer (but does Big Red understand what it’s saying?)

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I think it’s great that Vodafone has offered to let us use the cable network it got from TelstraClear as part of the UFB build. Just think of the cost savings it would deliver to Chorus, and of course Chorus would be freed up from working in Wellington and would be able to fibre up my house sooner rather than later.

Brilliant.

But I wonder if Vodafone has worked through all the ramifications of its offer, not least of which is that the UFB contracts were awarded on the basis that the winners have no retail business. Vodafone will, presumably, have to structurally separate to take up the mantle of UFB provider.

It would have to spin off its cable and fixed network assets into a separate business or, depending on which way you look at it, sell off its retail arm and mobile phone network. Then the fixed line business (let’s call it “Saturn” because that has a nice ring about it) would be free to pitch for the UFB business.

Interesting times.

Putting aside that approach, Vodafone’s suggestion does raise a very interesting question: why is Chorus overbuilding networks at all?

In the Hawkes Bay, Unison Fibre is an offshoot of the power company and has an extensive fibre network around the main centres. Yet Chorus has overbuilt it street by street.

In Nelson, I attended the opening of the UFB network build with the minister and the mayors of the region. The mayors were forced to point out to the minister that in fact the UFB wasn’t a bright and shiny new toy for them to play with, that they’d had fibre in the region for a decade or more and that a community initiative had built The Loop long before central government came knocking. Again, Chorus has overbuilt the network already in place.

Why is it that we’re seeing new fibre laid side by side with existing fibre (and yes, with existing cable) when Chorus should be working with these partners rather than excluding them? The UFB network deployment doesn’t require Chorus to build every kilometre of fibre in its region, but rather to provide a service at a certain service level. So why overbuild when there are places that don’t even have fibre?

I’m all in favour of infrastructure based competition, but not when there are still areas that don’t have access at all. Rather, we should build out the network and then see about building competing technologies.

I would hope someone at Crown Fibre Holdings is making this suggestion to Chorus right now, because it still has a lot of Auckland and Wellington to build and plenty of that already has fibre owned by FX Networks, CityLink and even Vodafone and Telecom. Leasing capacity is a lot cheaper than building, but of course Chorus wouldn’t then be able to reap the rewards of owning the infrastructure for the next hundred years.

It also raises another key question, that probably should have been asked before the “fibre to the home” project began. Should we have defined the technology we wanted or should we instead have demanded a certain level of service and been technology neutral?

I for one don’t care how the hole in the wall connects me to the world, so long as it’s blisteringly fast. If it’s copper or fibre or fixed wireless or 4G or bean cans on string, I really don’t mind so long as I get high speed, low latency and a consistent service.

A technology neutral approach would mean that Vodafone’s offer could be considered and that the model we are using for rural New Zealand would be applied to the entire country. We’d have more ultra fast broadband service offerings and more competition, and that’s not a bad thing. As it stands, however, we’re wedded to fibre and unfortunately cable isn’t fibre any more than copper is. 

I think Vodafone would be unwilling to structurally separate the company in order to deliver UFB over its cable network, but I do think Chorus and Crown Fibre Holdings need to take a close look at what’s already in the ground and whether or not UFB can be delivered over existing infrastructure. 

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Return on investment

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There’s a tension between companies being regulated and the people doing the regulating. This is as it should be – their goals are different and the tools to achieve those goals tend to be at odds with each other.

Companies are required by law to maximise their return on investment. Shareholders are nominal owners of the company and yet have very little power, unless they’re big enough to have a seat on the board or similar. I’m always amused whenever a company claims rousing success with some venture or other based on shareholder approval, most of which is gifted to the CEO or chair by way of proxy votes.

Regulators, on the other hand, are required to do what’s right for the long-term best interests of the customer. That’s often not as straight forward as we customers would like. Issues like passthrough of wholesale savings, demand for investment, even the time it takes to produce a result are all seen as roadblocks on the way to better pricing.

Given that companies don’t like being regulated, those that are often complain about trying to second guess the regulator, about having no certainty in the market. Chorus has certainly cried foul about the lack of certainty with regard to the regulation of its copper line monopoly, although seeking a judicial review of the Commerce Commission’s determination doesn’t exactly endear the company to the industry as a whole.

Consistency is key to a good regulatory regime. It’s the only way companies that are involved in a regulated sector can avoid uncertainty. The regulator should be able to demonstrate the logic that it uses and apply the rules consistently wherever possible.

Which makes Vector’s submission on the UCLL pricing so interesting. (NOTE: the ComCom website does not do well with actual linking. Instead, it operates a one-step removed model that includes breaking the basic tenet of the internet, so rather than linking directly, I have to point you to a page where you must in turn fossick about looking for the submissions you’re after)

Vector, of course, has a lot to do with the regulator in its day job in the electricity sector. It’s not often that Vector comes out and says anything nice about the Commerce Commission – it has the scars to bear of many encounters.

What’s intriguing is that Vector has looked at the Commission’s treatment of Chorus’s profit making in light of the way the Commission treats Vector and others in the electricity sector.

Over there, in (ahem) sparky land, return on investment is heavily regulated. There’s a library-worth of regulation, argument, angry shouting and tears (all in the legal sense of course) and whatever else you might think about the electricity sector (that Max Bradford’s reforms, for example, should be held up as a shining light for how not to regulate a sector), the process itself is as robust as it can be.

By putting Chorus’s public data through the Commission’s “Electricity Distribution Information Disclosure Determination” process from 2012, Vector has worked out that Chorus is seeking a return on investment of between 19% and 23%.

Vector’s return is significantly less – closer to 10% – and the other regulated industries are around the same mark. Chorus hasn’t challenged this in its cross-submission – indeed, it doesn’t mention it at all. Instead, I’m left wondering whether we can use Vector’s figures as a kind of cross-check on just what Chorus is asking for in terms of income.

After all, the role of Chorus’s management is to maximise returns on its investment. It has to argue vigorously for a higher price, regardless of what’s good for the industry or the user.

That’s why an independent regulator is so important, and that’s why TUANZ joined the Copper Tax coalition. We need to get these figures right. Set the price too high and we reward Chorus for being inefficient. We also run the risk of encouraging Telecom to simply unbundle on a massive scale – tens of millions of dollars’ investment in copper at a time when both Telecom and TUANZ would rather see that money spent on fibre and on services that attract customers up the food chain, not down it.

Consistency is important, and I think at the least we will need to compare Chorus’s regulated return with the rest of those regulated entities in New Zealand. Looking around the world you’ll see New Zealand’s wholesale service is at the expensive end of the range. Looking at an ROI of 19-23% I can see why.

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Media release: Cross submission asks ComCom to do the job right

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InternetNZ, TUANZ and Consumer’s submission on UCLL asks Commission to do the job right

InternetNZ (Internet New Zealand Inc), TUANZ and Consumer have today lodged a cross-submission with the Commerce Commission, requesting that parties take a careful and measured approach to setting the price of the Unbundled Copper Local Loop (UCLL) service as part of the Final Pricing Principle process now under way.

In its submission, the group says that getting this phase of the pricing review right is absolutely crucial. The submission states that if the Commerce Commission acts too quickly, “that may be regretted later.”

InternetNZ CEO Jordan Carter says that rushing now could find the sector back where it was last year – mired in confusion and frustrating debates that serve no purpose.

“The Commission needs to take the time to design the FPP process properly, and to minimise the areas of conflict within the industry. Taking the time to do so now will mean the process works better and gets to a faster outcome in the end.

“Everyone wants to see certainty, but that has to be based on reality. The alternative is further industry chaos, and the risk of wrong and higher prices for Kiwi broadband users.

The submissions released by the Commission already show that the industry is a long way from landing on a collective view for an ideal process and design. We need to get that right,” said Mr Carter.

“Our submission also notes that there are serious problems with the suggestion by Chorus that its own professional advisors do the initial modelling process for the FPP. The Commission has to do that work, to avoid the obvious conflict of interest in Chorus modelling a pricing structure it would be later be bound by through the FPP.

“The public interest in fair pricing for broadband is at risk if the regulated party designs its own cost model,” Carter says.

“We look forward to hearing the Commission’s decision on the next steps. We hope that it takes the views in this submission into account as it does so,” Jordan Carter says.

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