Intervening to keep prices high

The Commerce Commission is pressing on with its
determination of copper wholesale pricing.

I’ve been asked why the Commission would waste everyone’s
time and money on this when the Minister, Amy Adams, has decided to ignore it.

The answer’s simple – it is legally required to undertake
the review. The Telecommunications Act was amended in 2010 by the current
government to include the move from “retail minus” pricing to “cost plus”
pricing for wholesale service.

The expected drop in price was considered enough of a risk that
it was outlined in both the Ministerial Regulatory Impact Statement and Chorus’s
own float prospectus
document (page 80).  On top of
that, the minister of the day, Steven Joyce, included a three year delay so as
to allow Chorus to get its house in order in plenty of time.

The difference in approach between the Commerce Commission
and the Beehive is quite extreme.

The Commerce Commission is comparing our pricing regime with
others around the world, benchmarking against those countries that have similar
approaches to wholesale. There aren’t many, only two in fact, but they are
pitched at about the same price as the Commission’s draft determination. That
is, somewhere in the $8 to $10 per line per month bracket.

The Minister has ignored international comparisons

The Commerce Commission then asks for submissions, puts out
a draft determination, holds a conference, accepts inputs from various parties
(including user group representatives as well as the various telcos and ISPs),
considers all the views and then comes up with a final determination.

The Minister has decided the cost of copper wholesale will
equal that of fibre.

One of the more compelling pieces of information to come out
of the Commerce Commission’s conference came from Graham Walmsley of CallPlus.

CallPlus is one of our tier two telcos – that is, it’s not a
Telecom, Vodafone or Chorus but is a leader of the next tier down.

CallPlus has spent a lot of money on unbundling Chorus
exchanges so as to better control the product that it delivers to end users but
also so as to build a wholesale business of its own. CallPlus sells access to
its network to a variety of other providers and is a very good proxy for Chorus’s
own network costs.

How much does CallPlus charge? It charges between $8 and $10
per line per month.

The Minister thinks that price should be between $13 and
$33.57 and if she chooses the lower price, she’ll increase the cost of an
unbundled line to ensure the overall total matches the price of a fibre line –
$40 a month.

The Minister has intervened in a legally required process in
order to ensure costs don’t come down for users.



When I started at TUANZ nearly three years ago we immediately jumped in to the debate around the government’s new Telecommunications Bill and its ten-year regulatory holiday for whoever built the fibre network.

We pushed hard for the Commerce Commission to have oversight of the industry. TUANZ and various other organisations had worked too hard to get a regulatory regime in the first place to let it get thrown away as a bargaining chip.

The reason we fought so hard is because the previous decade had seen government after government gamed by the incumbent to the point where investment was at an all-time low, competition was non-existent and customers were paying some of the highest prices for the poorest services in the world.

Direct government ownership of the industry had been replaced by complete lack of involvement, to the detriment of both competitors and customers alike.

Finally, in 2001, we saw an inquiry, a review and the introduction of an extremely light-handed regulatory regime that didn’t really work, but was a start. In 2006 the regime was beefed up and finally given the teeth it needed to ensure competition was robust but fair and that consumers were the beneficiaries of the telco sector rather than the victims.

Today, all that has been swept aside. The government has introduced three options for the regulation of the fixed-line copper network for the rest of the decade and all of them involve the Beehive setting the price for wholesale service.

In many ways this harkens back to the 1970s when MPs would debate the price of butter in the House, only this time there will be no debate. The price will be set by the executive and that’s that.

Chorus will be very happy about this. It ensures that the pesky Commerce Commission with its pesky “cost based” pricing model doesn’t get a look in. Instead of reducing the cost of copper broadband to ISPs, the price will remain roughly the same or drop by a couple of dollars.

Telecom will be happy because the government allows Telecom’s homeline service to continue as is, unmolested by change. That means other ISPs, that don’t own the PSTN (ie everyone else) will end up paying more for the same service. Telecom won’t have to unbundle because unbundling is deemed an inefficient use of resources but still gets to sit pretty while its competitors costs increase.

The smaller ISPs, CallPlus, Orcon and the like, who have unbundled will end up seeing their investment derailed completely. The government’s three solutions are a nightmare for these guys as the government will potentially put up the price of an unbundled line.

Customers see no change to their pricing whatsoever. No ISP will pass on a saving of a couple of dollars and that’s the best you could hope for out of this.

The government is the major investor in the UFB and has now usurped the role of regulator as well. Instead of having an arm’s length, independent Commerce Commission, we will have prices set by the minister or, at best a Commission that can only act in a manner that can only be described highly prescriptive.

Instead of an international benchmark, the Commission would only be allowed to set copper pricing by directly comparing with the UFB pricing model, putting aside any consideration of the different service speeds, capabilities, network age and all the rest. The price would be limited to a range set around the cost of the entry level fibre price and that’s that.

I wonder what Vector’s view of this sudden renegotiation of the terms will be. I wonder what international investors think of a government that is willing to usurp the regulator in such a stellar fashion. I wonder what our trading partners think of a regime that allows politicians to replace regulators at a time when the government is also the investor.

I wonder what customers think the outcome will be if we allow the needs of one company to override the needs of both the industry and the users.