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Comcom 2 Chorus 0

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This morning the Court of Appeal rejected the Chorus appeal of the High Courts earlier ruling upholding the Commerce Commissions process interpreting the 2011 Telecommunications Act.

In a nutshell this means that the whole process of moving to ‘cost plus’ based pricing for wholesale, regulated copper broadband services just got 1 step closer.

We’re glad to see this happen, but we really just want to see Chorus get on with it. 

This saga has come to represent why New Zealand needed to move from the old privatised ‘monopoly utility’ to a structurally separated, regulated, open access model. that required a move from the old ‘retail minus’ wholesale model to a genuine and non-discriminatory ‘cost plus’ model. 

The reason for this was simple, retail minus simply cannot exist in a structurally separated model, Spark (Telecom) must have the same input costs as everybody else or the only possible result is a market of ‘stunted dwarves’ whose margins and profitability are set at the whim of the dominant player. 

Tune out the spin and you’re left with two conclusions, firstly the Government actually got the 2011 Act pretty much right and secondly that the day must come when Chorus investors must seriously question the board and management as to the wisdom and cost of the strategy they have chosen to follow. 

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Will Telecom unbundle?

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The Ernst & Young Australia report into Chorus is not a review of Chorus’s financial position, despite some media reports that would suggest that’s what’s happening. Rather it’s a review of the impact the Commerce Commission’s UBA and UCLL determinations will have on “key Chorus financial indicators”.

The short answer is, naturally enough, yes it will.

I know of no business, regulated or otherwise, that wouldn’t have some impact with a reduction in its incoming revenue.

On top of that, the review is explicitly barred from looking at Chorus’s own “strategic choices” especially those that “may have led to higher capital expenditure than initially forecast.”

That’s quite a limiting factor – especially if you think that Chorus’s problem is largely nothing to do with the Commission’s determination but rather is a matter of cost blow-outs in the rollout itself.

So what will the review look at, because without all of that it’s going to be hard to come up with any result beyond “OMG, the ComCom is to blame”.

One of the main factors in the report will have to be the counter-factual Ernst and Young comes up with.

The counter-factual is the “what if?” scenario. What would have happened if the Commerce Commission hadn’t reduced the price? With the counter-factual to hand, we’ll be able to determine the net difference in pricing regimes.

Incidentally, the government isn’t waiting for this and has already directed Crown Fibre and Chorus to sit down together to renegotiate the UFB deal.

That may be the right thing to do at this point. I’m hard pressed to support yet another closed-door secret back room deal (they tend to have severe unintended consequences for the industry and the users, to put it mildly) but given the government isn’t looking to reduce its requirements or increase the money being paid out, I presume the discussions will revolve around payment schedules, bank guarantees and the like.

I trust any such agreement comes with severe caveats around both the Final Pricing Principle review and the high court legal action Chorus is taking, not to mention certain performance criteria and a new dividend policy, but that’s just me.

Let’s look at the counter-factual and the elephant in the room that nobody has mentioned.

On December 14 next year, Telecom will be allowed to unbundle Chorus’s network.

(EDIT: An earlier version of this post said Telecom could unbundle at the end of the year)

As part of the separation agreement, Telecom has been excluded from being able to unbundle Chorus’s network.

Telecom retains the lion’s share of the fixed line broadband market and the belief was that Telecom would be able to sweep in, unbundle on a massive scale and undermine Chorus’s ability to earn any money from the UBA component of its copper network.

The issue of whether Telecom wants to unbundle or not remains a key consideration for both Ernst and Young and Chorus.

If the UBA price is too high, Telecom will spend the money and unbundle, dramatically cutting Chorus’s earnings. Never mind the impact of the Commission’s determination, if Telecom took its 50% market share to an unbundled service, Chorus would lose everything.

Telecom doesn’t necessarily want to blow $50m or more on the copper network when it’s gearing up to fight a fibre war. It would rather spend its money on content and services that drive customers to the fibre network and reap its rewards in the longer run.

The question for Ernst & Young is: how high is too high? At what point would Telecom have moved to unbundle? It will have to work that out to produce a counter-factual that actually makes sense. If it just takes the existing regime and compares that with the new UBA price, it will have failed in its mission to provide a comparable counter-factual because despite the rhetoric from both Chorus and the government, there’s no going back to the old numbers.

The retail-minus model has always produced results that mean New Zealanders pay too much for broadband. Moving to a cost-based model was always going to be a shock to the system but nothing like the shock that could still come from half the market moving to an unbundled provider.

The report is due out shortly and we’ll be able to see what E&Y make of all this. Hopefully the negotiations between Crown Fibre and Chorus will result in an amicable agreement and we can put this sorry year behind us and get on with rolling out the future in a more rational, sober way.

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

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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.

 

The Copper Tax

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This month’s After Fives saw the Telecommunications
Commissioner tell us about the state of the industry, revenue trends,
investment and what the future could hold for the industry.

Unfortunately, I’m less sure the future of the
Telecommunications Commissioner role itself.

The government’s stunning move to make pricing decisions in
the Beehive means the role of the Commissioner is, to all intents and purposes,
surplus to requirements, at least as far as the government is concerned.
Suddenly it’s the 1990s all over again.

For close to a decade the government of the day dithered
while Telecom (as it was – Chorus now) sent most of its earnings offshore to
its US shareholders, failed to invest in basic infrastructure, blocked
competitors coming into the market (remember Clear taking them to the High
Court?) and generally offered a very poor service to its customers.

The change in government saw regulation introduced for the
first time, albeit at the light end of the scale. Eventually we empowered the
Commission with teeth to do the job at hand and the industry has flourished
ever since.

More importantly, the consumer has also benefited. We’ve
seen prices tumble as speeds and data caps increase. Increased investment means
we have three cellphone network operators each with extensive networks and more
to come. We have a fibre network deployment underway to satisfy pent up
customer demand. We are addressing rural New Zealand’s broadband needs, and
while I’m clearly in the “more, better, faster, sooner” camp, we are heading in
the right direction.

Unfortunately the government and in particular minister of
communications Amy Adams has derailed all the good work of the past decade with
one announcement.

Chorus’s shareholders’ needs 
are now the key driving force behind the government’s approach to
telecommunications, not consumers.

The side-lining of the Telecommunications Commissioner means
we have no way of ensuring users’ needs are first and foremost in our
regulatory landscape. In effect, the minister will be setting the price of
service directly, with little or no regard for either international
benchmarking or the contract her government signed with Chorus.

The fibre rollout will only ever reach 75% of the population
and most of those users won’t be signed up until after 2020. That means the
quarter of the population who won’t get fibre will forever more be subsidising
fibre users. It also means that most of us will be paying the Chorus tax for at
least the rest of the decade.

This, then, is the heart of the matter – we have a contract
with Chorus that has now been renegotiated without input from the rest of the
industry, without reference to international best practice, without even a
tender process to see what’s available in the market today.

The minister is now entirely responsible for the regulatory
regime in which the telcos operate without the safety net that the
Telecommunications Commissioner brings to that regime. Not only is the
government the investor in the network, it has now taken over as regulator and
that’s an appalling position for the industry to be in.

What next? Will she decide that Vodafone’s 4G network is a
threat to uptake rates on the UFB and regulate Vodafone? Will she decide that
the price of UFB is too low to ensure returns to the shareholders and put up
the price? Will she allow Chorus to pocket price in areas where the other LFCs
are building our network? Will she encourage Chorus to buy up those LFCs on the
basis that having one network operator is better than four?

Governments that invest in infrastructure should stay out of
the business of regulating the same investment. They can’t wear two hats, they
can’t be both investor and regulator. They can set policy directions and try to
encourage investment all they like but if they’ll also regulate to protect
their own investment the whole thing will come apart at the seams.

We now face a monumental struggle to ensure the Chorus tax
is repealed, that the government reinstate the Telecommunications Commissioner
as the regulator and that the Beehive stops introducing more uncertainty into
this sector. It’s too important to leave it up to the politicians.

 

Managing Expectations

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I’m writing this from the Commerce Commission conference into the cost of wholesale services delivered by Chorus.

This service is regulated as Chorus is a monopoly provider. It is really the only provider of copper lines in the country and as a monopoly it is regulated accordingly.

The pricing principle underlining the Commerce Commission’s approach has changed. In 2010 a new Telco Act was introduced that foresaw the split of Telecom into Telecom and Chorus. As part of that split, the government realised it could no longer rely on a “retail minus” pricing model as Chorus would no longer have any retail products. Instead, the Telco Act says the Commission must move to a “cost plus” model. That is, instead of taking the retail prices in the market and taking off a regulated percentage to deliver a wholesale price point, the Commission would look at the price of delivering the service at the base level and add a margin to that.

You may remember the debate around the introduction of the new Telco Act. It focused almost entirely on the ten-year regulatory holiday the government slipped in to the Supplementary Order Paper that came with the bill. Indeed, the SOP was larger than the bill itself and led to many thousands of words being written by journalists around the country on this unusual approach.

As the debate ground on, with little sign of victory for those of us that supported the Commerce Commission’s role and the need for an independent regulator, the one redeeming feature of the bill was this decision to move to a cost-plus model.

Eventually we won the day with regard to the regulatory holiday. Backroom political machinations saw the government drop the clause, although the level of political interference in the regulatory regime since then has been alarming, to put it mildly.

All that happened before Telecom split in two. Indeed, all this took place before Chorus was incorporated and floated on the stock exchange. It should have been no surprise to anyone, least of all Chorus or its shareholders – especially given the inclusion of a three year delay because of the impact this change to the pricing model would have on both Telecom and Chorus.

We expected a major drop in wholesale price. Telecom CEO Simon Moutter says he also expected a similar drop and today we heard from CallPlus’s Graham Walmsley about his experience installing copper equipment and selling as a wholesale player to ISPs. Graham says his experience is that the UBA draft price is far too high and that he is selling a product that includes voice capability at a price point that is lower than the draft price today.

For years, Telecom managed to keep the price of wholesale services high by managing its suite of retail products so as to retain one or two highly-priced products. That way the “wholesale” price was artificially high.

As I write we’re hearing from economists who (with a straight face) are suggesting they didn’t expect any drop in terms of price with the move from retail minus to cost plus. They’re earning their money today.

If anyone at Chorus, or at any of its investors, was caught by surprise by the drop in price, they need to find a new line of work. It was obvious even to a non-economist, non-lawyer like me.

The solution for Chorus is simple. Any price drop can be offset by launching other products that aren’t regulated and which offer a higher return on its investment. Failing that, it should take a close look at its dividend to shareholders which currently sits at 25 cents per share.

More to follow.

Cost based modelling

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The Commerce Commission has made the only decision it could
regarding the UBA wholesale price determination process – it will continue to
work towards a final determination due before the end of the year.

Sadly the government has already said the Commission’s work
is irrelevant because it will introduce a review and a new Telco Bill that will
supersede the determination before it comes into effect in 2014. The
Commission’s work, vital as it is, will be completely sidelined in the process.

Chorus has also indicated that it’s likely to ask for a
“final pricing principle” on the UBA price alongside the UCLL (that’s the
unbundled service) FPP it’s already asked for. An FPP is a major piece of work
whereby the Commission works out how much the service actually costs (I know, I
agree it’s a bit odd that it doesn’t do that as standard but when you’ve sat
through as many economists’ presentations on cost models as I have you realise
that the Commission’s true role is to keep economic lecturers employed) and is
likely to take quite some time. The Commission has indicated that it may miss
the December 2014 timeframe and slip into 2015 because of that.

Actually I don’t mind the Commission doing the FPP work. I
think it makes sense to know exactly what we’re dealing with. The problem is,
the government doesn’t want to know what it actually costs to deliver broadband
over copper lines, it wants to make sure Chorus can continue to build the UFB
and as Chorus has said it won’t be able to if the price of copper drops (for
reasons I’ll get to in a minute) the government won’t have a bar of an actual
price point.

This is a shame because the review of the telco act could do
with a dose of facts, to put it mildly.

Currently the government is being led by Chorus’s world view.
Any reduction in wholesale rates will reduce Chorus’s income stream and
therefore jeopardise its ability to pay for the UFB deployment. On top of the
losses to copper line revenue, Chorus also faces a huge blow-out in terms of UFB
deployment costs to the tune of $300m in the first year alone, and so
logically, obviously, you can’t possibly inflict even more of a loss on the
company or it might go out of business/not deploy UFB/all end in tears (delete
where applicable).

There’s only one word for this and as we’re a
family-friendly website I can’t use it, so let me just go for “hornswoggle”
instead.

I know this to be true because Chorus is still talking about
paying out 25 cents per share as a dividend, possibly the largest dividend payout
in New Zealand this year and a rate (given the current share price of $280)
that I haven’t seen since the early years of Telecom’s privatisation where the
US parent consortium took out more money than it paid year after year till the
coffers ran dry.

If Chorus can afford that level of dividend it can cope with
a Commerce Commission determination in the $8-$12/month mark and can spend a
bit of effort on sorting out its installation process so it doesn’t cost $3500
per install.

Several things need to happen and a review of the Telco Act
isn’t one of them.

Firstly, the government needs to step back and let the
market figure out what’s going on. This random intervention model doesn’t work
and just scares the investors (let’s remember, Chorus’s investors aren’t the
only ones in this game).

Secondly, Chorus needs to figure out how to install UFB
without it costing the earth. The other LFCs can do it – so can Chorus.

Thirdly, the Commerce Commission needs to get on and deliver
us a wholesale price that uses actual cost and not retail-minus as it is
supposed to.

Fourth, those government departments that are pushing Chorus
not to do anything useful with VDSL should butt out and let the company offer
the services its customers want – in the interim while we gear up for UFB, that’s
fast fibre. It’s going to be at least another three years before most of us
start to get UFB – that’s three years of training us up to demand UFB speeds
and the best way to do that is with faster copper products.

And if the government insists on pushing ahead with its
review (of an Act it introduced, let’s not forget) then it should use the
Commerce Commission’s work as a benchmark. After all, if we know what it
actually costs Chorus to deliver these services, isn’t that going to be just a
little bit important?

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TUANZ submission on wholesale pricing

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Unbundled Bitstream Access (UBA) Service Price Review

The Telecommunications Users Association of New Zealand is a membership-based, not-for-profit organisation that represents business users of telecommunications in New Zealand.

Established in 1986, we work to encourage investment in the New Zealand telecommunications market, better regulation to deliver increased competition and improved access for all New Zealanders.

We thank you for the opportunity to submit on the matter of wholesale pricing for copper services. For the purposes of releasing to the public, none of this submission should be deemed commercial in confidence.

Executive Summary

TUANZ has long argued for certainty in regulation; increased investment and lower prices for users of broadband.

TUANZ submitted on the amendments to the Telecommunications Act introduced in 2010, arguing strongly against the so-called “regulatory forbearance period” and in favour of a level playing field for all investors, overseen by the Telecommunications Commissioner and the Commerce Commission.

Comments made by both the Minister of Communications and the Prime Minister would seem to undermine that independence in favour of the company charged with building most of the country’s Ultra Fast Broadband (UFB) network.

TUANZ is gravely concerned by the level of political interference in the Commerce Commission process. The Prime Minister won’t rule out changing the law to ensure the draft determination from the Commerce Commission doesn’t become a final ruling and the Minister of Communications has also voiced her concerns over the draft determination.

The Commission is required to follow the law which clearly states the Commission to set a forward-looking cost-based price for UBA. The industry as a whole has known about this part of the Telecommunications Act, and has discussed it at some length, since it was enacted and it should come as no surprise to either government or industry participants.

TUANZ shares the Commission’s view that benchmarking against such a small group of comparable countries is problematic, but is entirely opposed to the idea that the Commission’s final determination be treated as some kind of recommendation to the government, rather than the legally binding determination that it is.

The government is, of course, entitled to introduce a new Telecommunications Bill to parliament and to make changes to the way in which the law works, however under the current law, the Commerce Commission has little choice in the matter but to use a cost-based model as it has in the draft determination.

TUANZ believes that wholesale UBA services will diminish over the next few years being replaced initially by VDSL services and ultimately by fibre – however, it is vital we get the settings right for both retail service providers and network operators, for investors and users of the service.

Submission

The Telecommunications Act

The Telecommunications Act makes it quite clear in section 77 just what is required of the Commerce Commission in this instance.

Review of standard terms determination for unbundled bitstream access service before expiry of 1 year from separation day

•    (1)The Commission must make reasonable efforts to do the following before the expiry of 1 year from separation day:

o    (a)review the standard terms determination for Chorus’s unbundled bitstream access service under section 30R for the purpose of making any changes that may be necessary in order to implement the initial and final pricing principles applicable after the expiry of 3 years from separation day; and

o    (b)give public notice of the result of the review.

(2)To avoid doubt, no variation of, addition to, or deletion of terms specified in the standard terms determination as a result of the Commission’s review in accordance with subsection (1) may take effect before the expiry of 3 years from separation day.

The Act goes on to explicitly define the methodology which the Commerce Commission must use to reach thisdetermination:

The price for the designated access service entitled Chorus’s unbundled copper local loop network, plus benchmarking additional costs incurred in providing the unbundled Bitstream access service against prices in comparable countries that use a forward-looking cost-basedpricing method  

Schedule 1 goes on to require the Commission consider its pricing for UCLL (Unbundled Copper Local Loop) service when assessing the price for UBA:

The Commission must consider relativity between this service and Chorus’s unbundled copper local loop network service (to the extent that terms and conditions have been determined for that service)

The Commission released its final determination on LLU pricing on 3 December 2012.

So the rules by which the Commission must work are clearly outlined – UBA must be determined on a forward-looking cost-based assessment, and benchmarking with similar regimes around the world must be taken into account. The starting point for pricing must be based on the price already determined for UCLL.

There is no room, in TUANZ’s view, for the Commission to deviate from this model. Any changes to this model must be made at a political level rather than by the regulator.

Consequently, TUANZ supports the Commission’s approach and its draft determination. 

UBA price

TUANZ supports the Commission’s conclusions on price, based as they are on both cost-based services and its benchmarking efforts with regard to similar jurisdictions overseas.

Unfortunately, as the Commission has pointed out, with only two countries to compare ourselves against, the result is less than ideal. TUANZ would support the Commission broadening its brief or potentially looking to model costs rather than compare, given the limited nature of the market. That will, however, require a change to the Act itself.

Copper versus fibre

 Section 19 (A) of the Telco Act says:

In the exercise of its powers under Schedule 3,  the Commission must have regard to any economic policies of the Government that are transmitted, in writing, to the Commission by the Minister.

In this instance that must surely mean the Commission must consider the government’s Ultra Fast Broadband (UFB) project. Much has been made of the need to migrate customers from the existing copper network over to the fibre-based network once it becomes available.

Chorus is the lead network partner on the UFB project, as well as being the owner of most of the country’s copper lines, and so is placed in the interesting situation of having to earn its income predominantly from copper lines at the same time as it rolls out a replacement network.

Clearly this economic tension must lie at the heart of the government’s concern over dramatic changes to the price for copper services. Chorus has stated that the Commission’s draft determination would, if introduced into practice, lower its revenue by $160m a year, equal to 40% of its earnings.

TUANZ has to believe that Chorus must have known about the UBA review for as long as TUANZ has known and that any move to a cost-based model would result in the sort of drop in revenue seen here. Chorus investors must have been aware of the potential for this kind of move in a similar time frame.

Similarly, if TUANZ and Chorus both knew such a review was forthcoming, surely investors in other telcos would have known as well, and priced their investments accordingly.

TUANZ is very concerned that political interference at this point in the process will lead to yet more instability in the market as investors see long-signalled intentions cast aside at the last minute. TUANZ would like to see more investment in telecommunications in New Zealand and a robust regulatory regime is critical to that investment. Changing the rules when they become unpalatable simply isn’t acceptable.

Additionally, TUANZ does not see the copper network competing with the fibre network beyond the transition period.

Currently speeds over the copper network are constrained by the nature of the technology involved. ADSL (the family of technology deployed on Chorus’s network and which UBA uses) is “asymmetrical”. That is, the upload speed is only a fraction of the download speed. 

While home users generally don’t upload that much content, although that is changing rapidly, business users do and require much faster upload speeds than are found on the ADSL services, such as UBA.

The UFB rollout is scheduled to continue for most of this decade and most New Zealand homes won’t be able to be connected until 2016 at the earliest. Internationally, uptake rates of no more than 20% are the norm for fibre rollouts of this type and so for the foreseeable future New Zealand’s broadband will be delivered predominantly over copper lines.

TUANZ fully expects to see new DSL services rolled out in the months ahead, especially VDSL-based services, which provide a much faster upload and download speed over short-run copper. Chorus’s existing “fibre to the node” network means far more New Zealand households are within  reach of a fibre-fed cabinet than ever before and TUANZ is confident New Zealanders will avail themselves of faster speeds when they become available.

Rather than stopping the migration to fibre, TUANZ believes faster copper services will help drive that demand.

Today a home user connected via ADSL will see relatively modest speeds – 12Mbit/s download and 1Mbit/s upload would not be uncommon.

For an individual user that is quite acceptable in today’s broadband world, however as we connect more devices to our business and home broadband services, as more of us use broadband more frequently, that level of speed will rapidly become unacceptable. Ironically, connecting schools and businesses to the UFB first will help spur on families and employees who are used to fibre-like speeds at school or work and will want more at home.

In the next three to five years TUANZ expects most of Chorus’s income will continue to be received from customers of its copper network, but the vast majority of those won’t be UBA customers but rather VDSL customers. This interim migration– from basic broadband to faster speeds – must be considered as well as the migration from copper to fibre. Indeed, TUANZ believes the move to faster DSL services will encourage customers to take up fibre in much greater numbers when it finally does become available. 

None of that will eventuate if the price of copper services in New Zealand is kept artificially high in order to satisfy the needs of one company’s income stream – even a company as important to the future of telecommunications in New Zealand as Chorus.

Conclusion

The Commission has acted appropriately with its UBA determination process, following the law as it’s written.

TUANZ is gravely concerned that political interference in this process will undermine the good work of the regulator and impact on future investment in the telecommunications market.

TUANZ is also concerned that putting the earnings of one company ahead of the reduction in price will see consumers (both business and home users) disadvantaged.

TUANZ does not believe the impact on Chorus’s business model will be as severe as indicated in the press, as customers will predominantly move to faster copper speeds and so be migrating away from UBA in the short term. In the longer term they will, of course, be encouraged off copper and on to fibre anyway.

TUANZ thanks the Commission again for allowing us to comment on the draft determination. If the Commission does hold a conference to discuss these matters, TUANZ would like to be involved.

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Initial Pricing Principle

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The Commerce Commission is coming in for considerable flack
for its role in determining the price of Chorus’s wholesale service and it’s
worth reviewing what the Commission is required to do and why it’s doing it.

The Commission is governed by several acts of parliament not
least of which is the Commerce Act itself, which has been since 1986 and has
flaws enough but which allows for the creation of the Commerce Commission
itself.

A relatively new part of the Commerce Commission is the
Telecommunications Commissioner’s role, something which was created in 2001 to
oversee the telco sector in New Zealand. Prior to that, we had no industry
specific regulation, no regulator and for those of you with a long memory, no
real competition in the market.

The Telco Commissioner was required to conduct periodic
reviews into a number of areas, one of which was the price Telecom charged its
competitors for using its network. This service, unbundled bitstream access
(UBA) was assessed on a “retail-minus” basis. That is, Telecom told the
Commission what its various retail plans were, the Commission took an average
number from those plans, removed a margin and presented Telecom with its
wholesale price. This price was reviewed regularly but generally speaking it’s
been the primary product most ISPs in New Zealand re-package and sell as their
own broadband service.

In effect, for many years we had no choice but to buy the
Telecom product, either from Telecom or from an ISP that simply changed the
name and re-sold the same product.

I’ve long argued that this isn’t wholesale per se – it is in
fact resale. The ISPs had limited control over the product, couldn’t specify
changes they’d like to see introduced, couldn’t really differentiate at all.

In 2010 the newly appointed Minister of Communications
Steven Joyce introduced a new version of the Telecommunications Act (the third
in a decade) as part of the sweeping changes the government would be
introducing. The main plank of the policy was the introduction of the UFB
project and the promise of government funding to any provider that built the
network.

The minister also introduced a Supplementary Order Paper
that added in a few caveats including the infamous regulatory holiday for the
company that built the UFB, but as part of that SOP the Minister also required
the Commission to do two other things: firstly, to average the price of
unbundled services between rural and urban New Zealand (previously we had two
prices) and to stop this constant round of assessing the price of wholesale service.

The Minister ordered a change to the “initial pricing principle”
(IPP) which governs the way the Commission must assess pricing. Out went retail
minus and in came “cost based” pricing. To quote from the Telecommunications Act itself (Part 2 –
Designated Services):

Initial pricing
principle: Benchmarking against
interconnection prices in comparabl countries that result from
the application to networks that are similar to the access provider’s fixed PSTN of— 

(a) a forward-looking cost-based pricing method

Bearing in mind this is in the law itself – there’s no room
for the Commission to say “we don’t think this is a good idea”. Far from it –
the Commission has expressed its concerns about retail-minus as a model for
many years, as has TUANZ. The ability for any incumbent to game the system by
introducing a handful of very expensive plans and so skew the average was
always too much to endure and we saw ISPs complaining bitterly that some of the
retail plans Telecom offered were priced below the wholesale cost to its
competitors.

As I said yesterday, there’s no way to use retail minus when
your network operator is structurally separated and has no retail arm. What
would you do – assess prices right across the board from all ISPs and work
backwards from there?

The only option is to move to a cost-based model, and as that’s
what the law requires, that’s what the Commission has done.

I’ve called the Commission on mistakes in the past: the original
TSO decision was a travesty that lumbered the market with an utter nonsense for
nearly a decade. The decision not to unbundle in 2003 was poor and did not
serve us well.

I even question the price point for LLU services announced
yesterday – it seems odd to me that prices for connectivity haven’t fallen by
more than $4 in five years.

But on the matter of using a cost-based analysis to
determine the wholesale price of service from Chorus, the Commission has no
choice – it is the law.