Consideration must be given… Section 18 and Chorus

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.

The industry left in limbo

The minister has announced a major change to our telecommunications industry with a view to ensuring certainty for investors.

In her announcement, the minister has made three decisions:

1: Bring forward the TSO review to start immediately;
2: Bring forward the review of the regulation to start immediately;
3: Extend the UBA wholesale review (in effect freezing it until after this review takes place).

TUANZ has always supported an ongoing review of the regulations that bind our industry. Having seen the massive changes in technology and customer use over the past five or six years it would be foolish not to. Our regulation must reflect both the industry and our users’ needs, so ongoing review is essential.

We also support a review of the TSO – that pernicious beast has caused more trouble than it’s worth and it’s high time we implemented a universal service obligation that focuses on end users rather than network builders.

Extending the UBA review means we have a half-house regulatory regime in place until after this new review has been completed and that troubles me.

In December I wrote about the regulatory process and why it’s important to ensure politicians don’t meddle in an ongoing process. Regulatory certainty only comes about via an arm’s length process where investors can be sure the rules of the road are dictated by the regulator and not by the politicians of the day with one eye on the polls.

All this has come about because a rule the government put in place when it last revamped the Telecommunications Act has proved unsavory. Chorus makes its money today from wholesaling copper services, yet by the end of the decade it will have built a fibre network that makes its copper lines surplus to requirements. Chorus (and Telecom before it) knew the rules going in. In exchange for separation, Chorus would win the UFB project and would expect to have the copper regulation set once and for all and left alone. That regulation would include moving from “retail minus” pricing to “cost plus” and that’s exactly what the Commerce Commission has introduced.

The government has chosen in effect to freeze that process and to leave the industry in limbo. We don’t have new pricing for wholesale services and we now face an intensive round of lobbying on our new regulatory process, something which in an ideal world would be as bloodless and clinical as possible but which now will no doubt be rather more exciting than that.

Whither VDSL?

The UFB rollout is slated to take until the end of the
decade and arguments about whether that’s 2019 or 2020 aside, for most of us
it’ll be years before we see the fibre van roll up outside our homes.

For the foreseeable future, we’re locked in to a copper
world here in suburban New Zealand. While I fully support schools, hospitals
and businesses getting access to fibre as a priority (SME businesses stand to
gain the most from the UFB rollout and New Zealand will benefit from the
increased efficiencies that will bring) it does mean there’s a balancing act to
be maintained and unfortunately home users are on the wrong side of it.

But that’s OK because the advances in technology in the
copper world mean we should be able to see better services on our copper networks
in the meantime.

Over on Computerworld, a comment from Malcolm Dick (he of
CallPlus/Slingshot fame) caught my eye. Malcolm points to a recent announcement
regarding VDSL 2+ with vectoring:

“which gives download speeds of
100[Mbit/s] and upload speeds of 40[Mbit/s] on copper runs of 400metres long –
I would guess that covers around 800,000 households in New Zealand.”

Even standard VDSL as it exists today would be great – not
so much for the download speed but for the upload.

Currently, as you know, I’m running TUANZ from home – I have
a very good ADSL2+ connection and regularly get in excess of 15Mbit/s down.
This is fine for my uses for the most part, but the upload speed of at best
1Mbit/s is a killer. I’d be much better off with a 50Mbit/s down, 30Mbit/s up
speed which, given my location (less than 600m to the Mt Roskill exchange),
should be readily attainable.

Except there are very few VDSL sellers out there and worse,
the data caps are so incredibly low. It would cost hundreds of dollars a month more
to connect to a VDSL port, for no apparent reason.

Today, each VDSL port costs a premium of about $20 over and
above an ADSL port. Why? Because that’s the price the Commerce Commission has
set.  It’s a premium service, so it needs
a premium connection price, goes the theory.

Given the difference isn’t in the card in the slot but in
the backhaul and in the contention rates and so on , this is an artificial
price which keeps the retail price too high to be of interest to either
retailers or consumers.

Retail ISPs keen on selling VDSL will need to increase both
backhaul capacity and make sure the service delivers a higher level of quality
than ADSL2 does in order to attract customers. I get that, but an artificially
high price point that simply delivers extra cash to Chorus doesn’t really cut

And then there’s the “copper versus fibre” model. The
argument goes like this – ISPs should not be wasting their time and money
investing in copper because fibre is coming and copper is a competitor. We
should artificially inflate prices on copper to ensure customers are
“encouraged” to take up fibre instead.

That’s all well and good if we all have access to fibre
(which we don’t) and if there is absolutely no other incentive in making the
leap to fibre (there will be plenty of incentives) but that’s not the case.

Instead I would suggest faster copper speeds serve as an
enticement to fibre – that a customer who has already moved up to 30Mbit/s is
more likely to want 50Mbit/s or even 100Mbit/s when that becomes available.
They’ll have discovered the apps they need to make such speeds worth their
while and their service providers will also have figured out which services
customers want. All of that is good for the fibre rollout because when it
finally arrives at my doorstep I’ll have an incentive to move – an incentive
other than “copper’s so expensive now I might as well”.

The telcos I’ve spoken to are all keen to rollout VDSL
services. They see the upside to it as they’ve seen the upside to unbundling
the copper lines today. They get increased margin, customers get better
service, they win more custom as word gets around and everyone’s happy. There’s
investment, there’s competition and there’s a dynamism in the fixed line market
that we simply wouldn’t have believed only three or four years ago. We were
late to unbundling, yet it’s still delivering results.

If we are to hike the price of copper lines to encourage
migration to fibre, we run the risk of snuffing out the nascent competitive
market in our fixed line world – that at a time when two of the three largest
players are about to join forces. That would be a tremendous leap backwards for
the industry and we, the customers who can’t get on to the UFB fibre, would pay
in terms of service and price.

Copper isn’t a competitor to fibre today. It might be once
the UFB is built but for the next seven years or more, it’s simply the only
choice we have for bulk broadband services. It’s important we get the regulated
price settings right.