The Chorus Conundrum

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Common sense has prevailed and we won’t see the government overrule the independence of the Commerce Commission any time soon.

While that’s good news for the long-term interests of both customers and the industry alike, it leaves us with the question of what to do about Chorus.

First, we have to determine whether there is a problem that needs fixing.

So far, we’ve been told that Chorus “could go broke” if the price of copper wholesale comes down.

I don’t buy that, and I’ve seen little evidence of that.

The numbers we’ve run are similar to Chorus’s own pronouncements in this area – that it will reduce profit (profit, not revenue) by about $80m to $100m a year. Coincidentally, Chorus pays out about $100m a year in dividend share.

To my mind, any infrastructure company that is rolling out a once-in-a-generation network wouldn’t expect to also pay a dividend at the same time. That money could and should be ploughed into the network in the interests of long term sustainable dividend payments in the years ahead.

My first preference, in that case, would be for Chorus to concentrate on the job at hand, get on with deploying the network and worry about dividend payments once the network is in place.

But Chorus has hinted darkly that there may be more afoot. If the final determination is allowed to stand, Chorus CEO Mark Ratcliffe says there will be two outcomes:

“We would have much less cash every year to invest and we simply will not be able to borrow the sums of money we need to make up to a $3 billion investment in UFB.”

This is an extraordinary situation. How can Chorus have bet so heavily on little or no change in the regulated price of its copper lines? How can they, and their investors, not have seen the writing on the wall when Minister of Communications Steven Joyce gave them a three-year delay to the introduction in order to get their house in order? That they’ve not used that time wisely is shocking and surely won’t go down well at the next board meeting, let alone the annual general meeting.

If that’s the case, the government must do something because the UFB deployment is too important to New Zealand to allow it to founder at this point.

Option 1: Do nothing.

If we do nothing, Chorus fails to deliver on its contract and defaults.

The Network Infrastructure Project Agreement (NIPA) between Chorus and the Crown is quite clear on this – default and there are penalties in terms of cash and repayments and an agreement that Chorus will relinquish control of the project to Crown Fibre Holdings, the government agency charged with overseeing the UFB deployment.

CFH would take direct control of the company and its contractors in order to see the project through to completion.

Option 2: Give Chorus more money directly.

I would need to see some clear evidence of Chorus’s problem before even countenancing this. Chorus is a private company that has bid for a contract and won. If it’s underbid, if it’s failed to secure adequate funding, if it’s failed to consider the obvious regulatory impact, then that’s it’s problem.

If we are to give Chorus more money we would be rewarding it for poor performance. That money would have to come with serious caveats on spending and should include a radical change in management, dividend policy and possibly the board as well.

Option 3: Go back out to market.

Chorus isn’t the only game in town in the fibre deployment world. If Chorus can’t do the job, perhaps Vector might like another shot at the title.

Vector missed out to Chorus on the Auckland bid – perhaps taking Auckland off Chorus and giving it to another provider might be the answer.

If Vector isn’t keen, what about the other LFCs? They’re cracking on, doing the job quickly and within budget. You don’t see them complaining that they need hundreds of millions of dollars more each year. Maybe Northpower Fibre could extend its network deployment capability down country and run the project for CFH.

Option 4: Provide bank debt assurance.

Probably the easiest thing for the government to do now is to guarantee Chorus’s debt to the bankers. I’m no financial guru, to put it mildly, and have no idea how any of this works but I’m told it’s the simplest thing the government could do with the least risk to the country. If Chorus can’t continue and make things work from there, we own them.

Option 5: Nationalise Chorus.

The share price is at its lowest point – perhaps the government should buy the company and run Chorus’s network as an open access national network, delivering service far and wide and without prejudice.

Potentially we could see one network across most of the country delivering service to ISPs and then on to users without too much overhead and red tape.

What am I saying, governments live for red tape. Much as I would like New Zealand to own its own infrastructure, I just can’t see this working. It’s in the list as a potential option but I suspect it’s unworkable.

Option 6: Cancel the UFB.

It’s all too hard, nobody really wants it, let’s walk away from the commitment. There you are, you “user groups”, you’ve got what you wanted, we’ve canned the UFB. On your head be it.

This would be a catastrophe for the country and is the furthest thing from “what we want” as users.

The UFB is essential to both New Zealand’s economic future and our social well-being. In ten years’ time, when it’s built and we’re looking at extending it into rural areas, the UFB will be a glittering jewel in our national crown and all this discussion will be dismissed as teething troubles and that’s as it should be. To abandon the project now is unthinkable and besides, I’m sure the opposition parties would have a field day and would make building the UFB into an election issue all over again.

 I don’t know what the government will decide from here. Much of it rests on the Ernst and Young report which comes out next month. From there we should get a better picture of whether there is a problem to solve and if so just what that problem is.

There is another option of course. Chorus can stop wailing, get on with the project at hand and cut its costs to be in line with international best practice and the kinds of costs we’re seeing from the other fibre companies. They can get better at digging ditches and stringing fibre from poles and concentrate on driving cost out of the business.

We can help with that – a major part of the rollout cost is eaten up in consents and legal fees, not to mention the delays, inherent in seeking permission to connect the network to each property.

This is a national upgrade programme that replaces an old network. Telecom used to have rights of access to property to deploy and replace network gear – we should make it easier and quicker for all the LFCs to do the same.

Rights of way, driveways, easements, multi-dwelling units, gated communities, new subdivisions, apartment blocks, business parks. All should be accessible by default. That would strip a huge amount of cost out of the business of deploying the UFB and that’s clearly not a bad thing.

RELEASE: Govt must resist Aussie corp bullying

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COALITION FOR FAIR INTERNET PRICING

MEDIA RELEASE

26 NOVEMBER 2013

GOVT MUST RESIST AUSSIE CORPORATE BULLYING OVER COPPER TAX

Prime Minister John Key must resist attempts by Australian-based fund manager Investors Mutual Ltd (IML) to bully his government into imposing a copper tax on every Kiwi household and business, the Coalition for Fair Internet Pricing said today.

In a letter last week to Mr Key, leaked to the National Business Review, IML’s senior portfolio manager, Simon Conn, says his fund will invest no more in New Zealand companies unless parliament legislates to override the independent regulator, the Commerce Commission, and imposes a copper tax on every Kiwi household and business.

IML’s website claims it had more than NZ$4.4 billion under management in February 2013 but it is not one of Chorus’s top twenty shareholders meaning it has less than NZ$5 million invested in the New Zealand copper lines monopolist.  Nor is IML reported to be a top twenty shareholder in Telecom New Zealand or any other Kiwi telecommunications company.

“Mr Conn seems not to know that in New Zealand, unlike other countries he may be familiar with, governments have traditionally respected the role of independent regulators and have not rolled over in the face of special-interest pleading from foreign fund managers, especially ones with so little invested in our country,” a spokeswoman for the coalition, Sue Chetwin, also chief executive of Consumer NZ, said today.

In his letter to Mr Key, Mr Conn said IML invested in Chorus because it was ‘attracted to the highly recurrent cashflows’ it generates from its copper monopoly, which ‘would enable Chorus to pay a regular and consistent dividend to shareholders’.

Last year, Chorus made monopoly profits of $171 million and paid $95 million in dividends to shareholders, of which up to $600,000 would have been paid to IML.  At the same time, Mr Key has told parliament that Chorus chair Sue Sheldon privately provided him with confidential information that indicated her company was at risk of going broke.  Despite this, the copper monopolist planned until recently to pay another $100 million to its shareholders in 2013/14 dividends.

Mr Conn’s letter also slammed the New Zealand Commerce Commission, saying it was acting unlawfully.  The NBR says he went on to attack Mr Key’s government, saying he had thought Mr Key’s election ‘heralded the return of sensible government where investments are not subject to adverse regulation and the rule of law is upheld’.

He criticised Mr Key and Communications & IT Minister Amy Adams for not immediately over-ruling the Commerce Commission and instead making ‘ambivalent’ statements about Chorus.

Ms Chetwin said Mr Conn’s letter and public comments were “arrogant and uncalled for, especially from a fund without a major stake in New Zealand or its telecommunications industry”.

“We don’t need an Australian fund manager like Mr Conn falsely claiming that our independent regulators are acting unlawfully and then going on to demand our prime minister and parliament impose extra costs on every Kiwi household and business to support his dividend flows,” she said.

“Kiwis have rejected the copper tax because it is unfair, inequitable, totally unnecessary to the completion of our new ultra-fast broadband network, and would simply be paid in dividends to people like Mr Conn.  Mr Key must resist this Australian corporate bullying,” she concluded.

Cash versus competition

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Say what you like about the mobile market in New Zealand, but competition has finally arrived and it’s been worth the wait.

With 2Degrees joining the fray, we finally have a market that’s beginning to deliver results in favour of the customers.

Roll over minutes, shared data, more realistic pricing for roaming – all of this has come as a result of 2Degrees entering the market.

Having three network operators has meant a healthy tension between parties. With one player you get ripped off. With two you get the cosy duopoly, but with three you have a natural balance that means the telcos can never sit back and relax but instead must always fight for market share.

So why has the government decided to give all that away in favour of raising a few million dollars more for the consolidated fund?

One of the key bedrock components of a mobile network is radio spectrum. If one network has a lot of it, they can jam more customers onto your network than a network that doesn’t have a lot of it.

It’s simple really – more customers or more speed or, if you’ve got enough of the stuff, both.

Currently the 4G wars are just starting out. Vodafone launched first, and Telecom has just jumped in as well. Both offer 4G services on existing spectrum, but both they and 2Degrees want to move to the holy grail of spectrum, the 700MHz range, as quickly as possible. Most of New Zealand would be considered “rural” in any other developed country and the lower the radio spectrum range, the further the signal propagates. That means 700MHz is much better for 4G than 1800MHz or 2600MHz or any of the other bands the telcos have bought.

Spectrum is sold in pairs and Vodafone and Telecom have both bought the maximum they could – 2x15MHz each. Newcomer 2Degrees has only bought 2x10MHz, which leaves 2x5MHz sitting there.

Instead of waiting till later to sell the chunk, the government has decided to allow Vodafone and Telecom to cage fight until only one is standing. And it will be a fight, because neither company can afford to allow the other one to have that advantage in the market.

Currently both have paid $66m for their chunks. Whoever wins this fight will have to pay considerably more per megahertz for the next block and that’s just stupid. That’s money that is better spent on the network itself not on a piece of paper.

Telecom has already said it would rather not fight over the remaining spectrum and supported putting it on the shelf. Vodafone, however, was happy to remain in the competition and since Vodafone has said it will bid, Telecom has kept its options open by saying it will as well, if forced to.

It means this government is quite happy with a 4G world where one player has double the spectrum of another player, with all the downside that means for the third entrant and for the customers as a whole.

Another way to look at the spectrum share is to consider the entire sub-1000MHz category. Telecom and Vodafone both have a huge chunk of the available spectrum and 2Degrees is battling along with only a fraction. This extra auction does nothing to address that imbalance, instead it exacerbates it.

It will be very difficult for 2Degrees to challenge the big two in the 4G world now. It was always going to be difficult because it’s late to the 4G party, has a smaller marketing budget and still needs to build out its network coverage. Now it has to win market share with a lesser allotment of spectrum as well.

From a competition point of view this is the worst outcome on offer.

Chorus 2.0

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The Terms of Reference (ToR) for the review of Chorus’s financial situation are out and Ernst & Young has been appointed to undertake the review.

The ToR are brief and to the point. The review will focus on the impact of the Commerce Commission’s UBA price determination on Chorus and its ability to take part in the UFB and RBI projects.

The review will also look at Chorus’s financial capability to deliver the TSO and abide by any standard Terms Determination (STD) that has been decided by the Commission.

Then the review will look at what Chorus could do to increase its “financial flexibility” including making changes to its costs, its debt facilities and any change to its dividend policy that may or may not take place.

The second half of this review is the key to this whole issue and to my mind it needs beefing up somewhat.

I don’t for a second believe that reducing the earnings from one part of the wholesale regime will cause the company the kind of trouble it claims. The numbers just don’t stack up and Chorus simply should have known this was coming. If it’s claiming that it didn’t expect the drop, questions must be asked about management’s ability to run the company. We all saw this coming, and by all I do mean all – even the Minister of Communications who introduced the bill knew the impact would be severe, and so built the three-year delay into the Act.

It’s not revenue coming in that’s the problem. If there is a problem,  it’s the costs going out at the other end of the business that is driving Chorus’s actions.

Currently, Chorus is paying more than double the amount it expected to connect each property and that’s after a project to reduce its spend.

Each property costs around $3000 to connect. By contrast, the OECD tells me that in Europe, fibre to the home costs tend to run at around EU1200 each, while B4RN in the north of England (a community-led project running fibre to rural and remote communities) spends around GBP1000 per premise connected.

We’ve all heard the horror stories of UFB connections that take days if not weeks, that involve teams of contractors standing around wondering what to do next. I’ve seen pictures of holes drilled in walls, of drive ways dug up and then re-dug. I’ve heard failure rate figures of up to 80% even after the connection is made, and that all adds up to two things: unhappy customers and huge cost overruns.

This is the problem that needs resolving. Forget about the Commerce Commission’s look at copper pricing, Chorus’s spend on fibre is the problem.

I’ve seen Chorus installations, and I’ve seen Enable and Northpower installations and there’s not a lot of difference on the surface.

Enable was drilling in a line down a drive way when I visited and the team of three were working efficiently and well.

Northpower was connecting via overhead lines and each two-man team can do three properties a day without too much hassle.

So where does the cost difference come from? Why is it that smaller LFCs can complete their builds ahead of schedule and at a reduced cost while Chorus can’t? That’s a question I’d like to see the E&Y review address – perhaps we can compare and contrast Chorus’s build with another company doing the same work here in New Zealand.

One thing all the UFB and RBI contractors would benefit from is a review of the laws regarding access to buildings.

This is a replacement network – it’s a once in a generation upgrade that will result in a new infrastructure for the country. It’s high time we treated it as such and stopped getting in the way of the fibre deployment.

I’d like to see the Telco Act reviewed to make it easier for companies to deploy fibre. Currently roughly half of the costs go towards getting the right stamp on the right piece of paper and that’s just unacceptable. We’re replacing like for like (well, fibre in place of copper) so let’s just treat it as such and stop all this nonsense.

On top of that, I’d like to see some real stats from Crown Fibre on the deployment itself. We get a national average of uptake and how many properties are now able to be connected, but how are the LFCs and Chorus tracking against service level agreements?

I’ve been hearing some shocking stories of delays in getting orders through to the start line (the clock doesn’t start ticking until orders pass through the design phase, apparently, and many of them are delayed at that point for months in some cases) and missed installation dates that are driving ISPs crazy. Remember, the ISPs are the customers here – Chorus and the LFCs don’t work for us, they work for them.

CFH has a major role to play in sorting out the mess at that end of the process and that’s something TUANZ would wholeheartedly support.

Radically changing the regulatory environment to overrule the Commerce Commission to change one price input at the other end of the process is a mistake on many levels, but perhaps most significantly, I don’t think it will get Chorus out of this hole.

Digital teachers

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On Friday I had a taste of the future. Point England Primary School, long a TUANZ favourite, is to become home to ten beginning teachers who are first wave in the new Digital Teaching Academy.

The Academy is run in conjunction with Google and the University of Auckland and graduates will come out with either an Honours degree or a Masters in Professional Studies, with a focus on digital learning environments.

Pt England, and now the broader Manaiakalani Education Trust, has been at the forefront of changing education in New Zealand for as long as I can remember.

The school has achieved so much with such limited resource, in thanks partly to its open source roots and partly to its Energizer Bunny principal, Russell Burt, who would spend his weekends putting up wifi antennas on students’ homes so they could connect to the internet via the school’s connection.

The ten teachers, chosen from over 150 applicants, will spend their time at a number of schools in the cluster – Tamaki College, Stonefields, Glenbrae, Tamaki Primary, Panmure Bridge and of course, Pt England Primary.

As one of the kids said at the launch, “We don’t want to wait for the teacher to learn the cool tools we use” and I couldn’t agree more.

Teachers are expected to wear so many hats today. Web designer, graphic designers, film producers, musicians, leaders, and yes, scientists, historians, literature critics, mathematicians and so much more. It’s important they have the same ability to use the tools as the kids they’re teaching, because otherwise you’ll end up with a classroom of kids who are bored and disengaged at a time when they should be learning about learning and falling in love with understanding.

And these kids really are something astonishing to see in action. I was shown around the school by Tui who is off to high school next year. Maybe I’m getting old, but I don’t remember ever being so confident at that age – and it wasn’t just her, all the kids were the same.

We saw learning environments, not classrooms. Forget the classes of old – these kids learn in huddles, in clusters, indoors and out. I came across two young lads doing something on a tablet sitting outside in the sun because, well, it was a sunny day. I found an entire class hanging out on the decking outside class working with their teacher and thought Mrs Dolbin of Alexandra Junior School in Wrexham would have had a fit, but I bet you those kids take more from their lessons than I ever did.

I also saw a cluster of four classrooms built around a central shared area and while Tui assured me they were doing maths, it didn’t resemble anything like the maths I sat through. No-one was wailing in anguish, for one thing.

Russell and Pt England have found the silver bullet to the biggest problem in New Zealand education – how to engage the long tail of kids, predominantly Maori and Pacific Island – who simply don’t learn well enough at school.

It’s not that they get a cool device (the netbooks they use were chosen because they are exceptionally uncool), it’s not that they get to goof off and sit on the deck, it’s not because they use the internet instead of paper books, it’s because the use of ICT is infused in every aspect of their education.

It’s not a case of a school buying a few iPads and hey presto! the kids are learning more.  Instead, it’s a case of using the tools that are right for the job and not being stuck with books that are 20 years old, with teaching aids that were designed in the 50s and having teachers who are confident and able to use the new tools to deliver the results – kids who learn, rather than kids who sit waiting to be taught.

Once this tranche of teachers comes through and go on to work in our schools the next big challenge will be to ensure that they find schools ready to make the leap and become digital schools. There’s no easy way to do that but up-skilling the principals and boards will be critical.

Russell’s wife, Dorothy Burt, spoke at the launch about her first day teaching at intermediate. Because she was fast-tracked through, she was only eight years out of intermediate school herself, and the books she used in her first lesson were the same ones she used when she was sitting in class.

How far we’ve come.

 

NOTE: Edit to include the full list of schools the teachers will be working at.

The Trans Pacific Partnership, Hurrah

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(with apolgies to Harry Harrison)

There’s good news and bad in the leaked Trans Pacific Partnership IP chapter.

As you may know, the TPP negotiations are not only being conducted in secret, but very few people beyond the negotiating team are allowed to see the various chapters. The IP chapter in particular has come under a lot of flak for having major input from big-name US corporations but which lawmakers around the world are unable to read in detail.

Thanks must surely go, in that case, to Wikileaks for publishing what appears to be a legitimate copy of the text. There’s a story on it in the New Zealand Herald, which is listed as a partner of Wikileaks on this story. Wired UK also has a story, because while the UK isn’t part of the Trans Pacific Partnership, its embroiled in a follow-up free trade agreement that is known as the Trans-Atlantic Trade and Investment Partnership (TTIP) which kicked off in January.

First, the good news. New Zealand trade negotiators are, apparently, standing firm against some of the more extreme measures introduced by the US in particular.

The Americans would like to impose restrictions on pharmaceuticals, so as to dampen down our ability to buy generic copies, increase the duration of our copyright term, revisit our newly revisited Patent Bill with a view to making software patentable and generally foisting what Wired calls “some of the worst aspects of US copyright law” on the rest of us.

Take the ability to make temporary copies of files, for example. That’s not allowed. Quite where that leaves the internet, I’m not sure, but I’d suggest it would make devices like iPads, digital projectors and many others almost unable to function.

What about blind or visually impaired readers? Will they still be able to have transient copies of works made so they can access the written world about them? No, is the short answer. Oh yes, there might be a carve out that allows them to do so, but the tools needed to develop newer versions of the software fall into the category of “circumvention tools” and so are illegal. Surely a trade agreement should allow blind people and others ongoing access to information by default, rather than by exception.

New Zealand is standing firm on a lot of this. We lead a relatively large group of countries that are opposed to most of the asinine clauses the US delegation (supported by Australia, Mexico and Singapore mostly) would like to include.

I find it interesting that Australia is in this position, because of course the Aussies signed their own FTA with America some time ago – and if the news reports are anything to go by have received little or no gain for their troubles. Clearly they’re now required to support the US approach on all of this. Perhaps the Americans will allow them to buy some more ground attack aircraft for their defence force as a result.

What does worry me, however, is that the negotiators will only take this so far. When deadlock is reached, it will all be handed over to our politicians to see it through the final stage and that’s where the bad news comes in.

Politicians may or may not opt to give away some of our intellectual property rights in return for a promise of access to US markets for our dairy industry, for example.

On the one hand, that’s great for Fonterra, great for the economy as it stands today and will surely win whoever signs it the next election. Access to the US market has been something of a ‘get out of jail free’ card for politicians since New Zealand began trading in the free markets of the world.

That assumes the US will actually allow New Zealand farmers access to the US market and that’s not going to be terribly easy. A promise of future access, of staged easing of restrictions will mean we, like the Australians before us, will no doubt sit on the sidelines waiting for the next few years while the cost of the transaction to New Zealand is introduced immediately.

The problem is, most of our politicians understand the benefits of dairying to our economy but haven’t the faintest idea about the benefits of the ICT industry, despite the best efforts of Rod Drury to build his billion dollar business from the beach.

They simply don’t get that New Zealand could become a world leader in terms of ICT production on a scale that would dwarf dairying, if only they got in behind the effort with more than the lip service we’ve seen over the past decade or so.

We could end up giving away our future economic prosperity to prop up our current economic model, and that would be very bad news indeed.

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Consultation

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Consultation is critically important whenever governments want to intervene in a business or market. Everyone involved needs to fully understand what’s happening, why and what the outcomes will be. 

Take the Commerce Commission process for example. I describe it as “tediously transparent” because the Commission is scrupulously fair about its interactions with all parties. 

For any determination process there will be a formulaic approach to consultation. The Commission will release a discussion document, will ask for submissions, which are made public by default, put out a draft determination and hold a conference, accept cross submissions, ask follow up questions and then publish a final determination..

Submitters are encouraged to mark commercially sensitive passages as just that and they are redacted from the public documents, but generally speaking we all know exactly where we stand at all times.

The Government’s telco review failed to deliver any such transparency.

To begin with, the discussion document listed three options, all of which resulted in the same outcome – an increase in price for copper broadband. Secondly, no attempt was made to outline what the actual problem was or why regulation was needed to resolve it. Thirdly, the status quo was rejected out of hand again, with no reason given.

We’re told the government received economic advice on the matter but that wasn’t made public at any stage. We’re told several government departments submitted on the discussion document, but we we still aren’t allowed to see the advice. Submissions were only made available after TUANZ and others put in Official Information Requests and even now we are waiting for a number of documents which have been delayed by MBIE.

Worst of all, the outcome of the discussion document was pre-determined and that is, I believe, why CallPlus has made the decision to seek a judicial review of the process. This was little more than consultation theatre designed to keep us all busy without producing any unwelcome changes to the government’s desired outcome. 

We still don’t know why Chorus didn’t see this coming. CEO Mark Ratcliffe worked exclusively on the UFB contract for several months before Chorus was spun off from Telecom. Steven Joyce wrote the Act and gave Chorus clear notice that the move to cost-based pricing would involve a dramatic change to its revenue stream by giving the a three-year delay in the introduction of the new regime. You don’t include a three-year moratorium on something you expect will have a minor impact. And quite what the market analysts were doing when analyzing the stock is anyone’s guess. 

We still don’t know what the impact on Chorus’s revenue will actually be. The Coalition has asked Professor Jerry Bowman from the University of Auckland to work out the impact and he says there won’t be one, but Chorus claims the company will all but go under if we all pay it $10 a month less. TUANZ welcomes the decision to independently review Chorus’s books to see what is really going on and looks forward to that report being made public. 

This is exactly what the government should have done before launching the consultation round because we’ve now wasted six months talking about a problem that may not actually exist.

 

ComCom decision a win for Government

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The Commerce Commission has released its final determination
on UBA pricing and the figure comes in at the high end of the range at $10.92 per
line per month.

That means the total any ISP will pay for wholesale service
is $34.44 per line per month, down from $44.98.

Chorus is very unhappy about this and will no doubt call for
a FPP (a Final Pricing Principle) review. That won’t stop this figure coming
into effect from December next year, but could result in a change to that
number by the end of the following year. An FPP process requires the Commerce
Commission to build an economic model to consider the actual costs to Chorus of
providing this service. Chorus will hope the number will be substantially
higher, but given we know how much it actually costs CallPlus to deliver the
same service in the market today, it’s just as likely to be much lower.

The government  has
said it will consider its options before making a decision on what to do next,
and that’s a sensible call to make. We’re coming into an election year and
trying to justify hiking the price of broadband from $34.44 a month to its
preferred range ($37.50 to $42.50) is going to take some explaining.

The good news is, it doesn’t have to. The Commission has
already given them exactly what they asked for.

UBA isn’t a single product – it’s a suite of products, and
the basic UBA service (BUBA) has indeed been priced at $10.92 per line per month.

BUBA has no contention ratio to speak of. It’s a low-cost,
entry level product that simply won’t do in this day and age for anything
beyond a basic service.

Enhanced UBA (EUBA, rhymes with tuba) offers a less
contended service. The CIR (Committed Information Rate) ranges from 40kbit/s
through to 180kbit/s for the aptly named EUBA180 product.

That level of CIR might seem woeful – and it is – but it
puts EUBA180 somewhat closer to the entry level 30/10 fibre product which the
government is using as its benchmark in the fibre world. Entry level fibre has
a CIR of 2.5Mbit/s which is a lot better than copper UBA provides.

The argument goes like this – if copper and fibre are
similar in terms of service they should be similar in terms of price, that way
customers will be able to migrate smoothly to fibre without any problem. You
won’t stay on copper because it’s just as good but cheaper – you’ll migrate as
and when you can.

EUBA180 is the closest UBA product to entry level fibre and
EUBA180’s price, as determined by the Commerce Commission today, is $14.85 per
line per month – well within the government’s price range.

The solution to both Chorus and the government’s problem is
simple – encourage all customers on to EUBA180 and the discrepancy is resolved.
Chorus will get its money, the government will get its fibre network, customers
have the pricing and capability they deserve and, most importantly in my view,
the Commerce Commission retains its independence and oversight.

Copper and fibre aren’t the same product any more than black
and white television is the same as colour. We all know that, and the service
specifications spell it out. But if we are comparing one with the other it’s
important we compare not just headline rates, but what’s actually being sold to
customers.

You could argue that EUBA180 is still less than a tenth of the CIR
of entry level fibre and that it should be one tenth the price – we’ll argue
that another day, but for now the government can claim victory and leave the
market to get on with providing better services at better prices.

 

Kiwis gain half a billion dollars

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KIWIS GAIN HALF A BILLION DOLLARS FROM COPPER DECISION

MEDIA RELEASE:

Kiwi households and businesses will pay $104 million a year less for copper broadband and voice services from November 2014 as a result of this morning’s decision by independent regulator the Commerce Commission, the Coalition for Fair Internet Pricing said today.

The total gain through to the end of 2019 is an estimated $522 million.

The Commission announced this morning that the fair price for copper broadband and voice services was $34.44 per line per month, down 23% from the current $44.98.  The Commission’s decision was made under rules legislated for by Steven Joyce in 2011.

 “This is a fantastic, early Christmas present from the Commerce Commission, which, from next November, will give Kiwi households and businesses over $100 million a year more to be pumped back into the economy through everything from new school shoes for the kids to new technologies to help companies become more productive,” a spokesman for the coalition, Paul Brislen, also chief executive of the Telecommunications Users Association of New Zealand (TUANZ), said today.

“Our view is that the Commerce Commission has applied Steven Joyce’s 2011 telecommunications legislation correctly and, at $34.44 per month, has come up with a fair price.”

Mr Brislen urged the government to let the benefits of the Commerce Commission ruling flow through to Kiwi households and businesses.

“Any price the government might now propose above $34.44 per month would represent an obvious tax on Kiwi households and businesses in order to subsidise Chorus, an already highly profitable monopolist.  Even $35.50 would transfer over a million dollars a month from Kiwi households and businesses to Chorus shareholders, to no benefit to anyone else.”

Mr Brislen said any suggestion today’s price decision could have an impact on the rollout of the government’s ultra-fast broadband initiative (UFB) was “plain wrong”.

“The government has contracts with Chorus and others to build the new world-class fibre broadband network. Ministers should tell them to just get on and do it.

“The 30% of New Zealanders who are expected to want UFB by 2020 and the 75% of Kiwis who will eventually have access to it want it built to contract, while those who will never access to it obviously don’t want to pay a copper tax,” he said.

Mr Brislen said it would be wrong for there to be further confidential calls between Chorus chair Sue Sheldon and the prime minister on the matter.

“There must be transparency in the dealings between regulated monopolists and the government.”

The Coalition for Fair Internet Pricing was founded by Consumer NZ, InternetNZ, and the Telecommunication Users Association of New Zealand (TUANZ) and is supported by CallPlus and Slingshot, the Federation of Maori Authorities, Greypower, Hautaki Trust, KiwiBlog, KLR Holdings, National Urban Maori Authorities, New Zealand Union of Students’ Associations, Orcon, Rural Women, Te Huarahi Tika Trust and the Unite Union.

A Covec study for the coalition, which has been peer reviewed by Network Strategies and found to be conservative, concluded that the government’s proposed copper tax would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019 over the price for copper broadband and voice services that Commerce Commission work indicates is fair.  More recent demands by Chorus would take this cost to Kiwi households and businesses to $979 million.

 

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Bonfire night

/in /by

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.