Don’t cry for MEA – why modern equivalent assets are so important

There’s a term we’re going to hear a lot this year as the arguments about wholesale price of access to Chorus’s network reach fever pitch – modern equivalent asset (MEA).

Before you can decide what ISPs and telcos should pay for a service, you have to work out what it costs to deliver that service.

The Commerce Commission has already done that, based on benchmarking against other similar countries. It considers a raft of appropriate measures and issues, thins down the list of potential countries to those with similar regulatory regimes (among other things) and produces an “Initial Pricing Principle” (IPP).

It’s a quick way of working out what the local price should be; quick being relative of course. This is the Commerce Commission so it takes about 12 months. It involves picking a range and then, in years gone by, choosing the 50th percentile mark on that range. That’s moved somewhat and recent decisions have moved to the 75th for a variety of reasons.

But it is just a compare/contrast exercise and when there’s enough unhappiness, the Commission can be asked to conduct a Final Pricing Principle (FPP) wherein it’s supposed to work out what the service actually costs to deliver.

However, the Commission is run by lawyers and economists, not engineers, so don’t get too excited about the phrase “actual cost” because it’s not. Instead of pricing up network build costs and determining what the actual “actual cost” is, the Commission must build an economic model that takes into account how much it costs to raise the money to build a network (sigh), efficient costs but not inefficient costs and so on. As part of that, the Commission must determine the MEA of a new network and use that for the basis of its pricing.

If that seems a little odd (“I have based the sale price of my 1978 Triumph TR7 on the current equivalent which is of course the Aston Martin DB9…”) that’s because it is. It’s very odd to consider building an economic model for the price of one product built over the past century by looking at the price of a similar asset that would be built today. Not every country considers MEA to be appropriate and there’s a good outline of the various issues and complexities associated with this kind of exercise on the Ofcom website, “Alternative methodologies for the valuation of BT’s duct assets” which is as thrilling a read as you’d expect from a title like that.

So what would a modern network look like? The government, in its long tarnished discussion document, suggests that the obvious MEA is a fibre to the home network such as the UFB. It even points to the European Commission where the regulator says as much in a press release:

“the appropriate ‘modern equivalent asset’ for calculating copper access costs seems to be a fibre network: after all, no operator would today build a copper network”

But there is a lot of disquiet about that position. BEREC (the Body of European Regulators for Electronic Communication) suggests that using a UFB network as the MEA adds new problems, not least of which is a high price for copper services for those that are left on copper and will never see fibre deployed.

If we are to go down this MEA model route, and we are because those are the FPP rules, then we need to very carefully consider the question of the technology itself.

First you need to consider what the asset was built for, as well as what a modern asset would be designed to do, which brings us to Murray Milner’s mushroom model.

Milner, a long-time Telecom stalwart who has since moved on to board roles with Crown Fibre, among other luminaries, described the mushroom model to me many years ago. Telcos will build high density capacity in areas of high customer density, medium capacity in areas of medium demand and so on.

That means in CBDs you get fibre, the suburbs get copper and rural New Zealand gets wireless.

That still holds true today: compare, for example, our UFB and RBI projects.

Any MEA used to price copper must use a technology-neutral approach to working out what a modern asset looks like. It’s not as simple as declaring fibre to be the winner. The MEA for a 1978 Triumph isn’t an Aston Martin at all, it’s a small car or a bus pass or a scooter or any of the modern choices we have available.

A modern asset model must consider the modern world and modern uses, in all their various options. Anything else simply doesn’t stack up