No certainty but uncertainty

The ICT minister, Amy Adams, has announced a full-blown review of the telecommunications industry that is supposed to engender investor confidence in the sector, but has instead destabilised the industry at a critical point in its history.

The Minister has called for three things to happen:

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

The TSO (Telecommunications Service Obligation) has been a bone of contention for more than a decade after it was introduced in a closed-door session between the government and Telecom in 2001. In it, Telecom convinced the government that the industry should pay Telecom to keep rural customers connected to the internet.

Today, the Supreme Court has ruled that the whole thing is a nonsense and the Commerce Commission should redo its sums and consequently Telecom and some of the industry have settled out of court.

TUANZ fully supports a review of the TSO and would like to see some kind of broadband-based universal service obligation that enables rural and remote customers to get online in as similar a way to their urban cousins as is possible.

Extending the UBA wholesale review puts the Commerce Commission and the rest of the industry in the awkward position of having to press on with the submissions, counter-submissions and engagement over the price of wholesale copper in the knowledge that the entire thing will no doubt be turfed out by the end of next year. Yet the Commission can’t NOT do it as it’s required to by the current Telecommunications Act.

While TUANZ has always supported the view that an ongoing review of regulation is vital in this ever-changing industry, dumping a three-year review in favour of a quickie one year review as a knee jerk reaction to one issue is not the way to do it.

We’ve seen no terms of reference for this review, we don’t know the process or who’s going to be leading the review and we don’t know what the goal of the review is.

What we do know is what the minister has said so far and it doesn’t make for good reading for anyone except Chorus shareholders.

Why these announcements now?

The spark to all of this activity is the Commerce Commission’s draft determination on the price retail ISPs should pay Chorus for access to its wholesale copper product, known as UBA.

In years gone by the price of this regulated product was governed by a “retail minus” pricing principle – that is, the Commission took Telecom’s (as it was then) retail prices, averaged them out, removed a small amount as margin and reverse engineered a wholesale product.

As was evident at the time, all Telecom had to do was maintain some hideously expensive retail plans and so skew the price to the point where the country’s most popular plans were actually more expensive at a wholesale level than they were at retail. Telecom maintained its control over the industry for many years until the government of the day called its bluff in 2006.

Chorus does not have a retail arm and so a retail minus solution is no longer viable. When the current government came to power it began work on the Ultra Fast Broadband (UFB) project and required any company bidding for the contract to be structurally separated – that is, to only do network stuff, not retail as well. If Telecom wanted to take part it would have to split in two – something it eventually agreed to and the latest Telecommunications Act was introduced in 2010 reflecting that state of affairs.

In the Act it clearly states that the wholesale price of copper services would be assessed by the Commerce Commission on a forward-looking cost based model. There really is no other way of doing it.

The Commission began its work last year and came out with a draft determination that reduced the price for UBA. There are a raft of components that go into the retail price point but the wholesale input we’re talking about here would drop from $21.46 to $8.93 per line per month.

Chorus immediately howled with outrage. This would strip $160m a year from its revenue stream and would mean terrible things would happen to its fibre rollout plans. The government immediately came out in support of Chorus and muttered darkly about interfering in the Commerce Commission process – something that prompted the former Commissioner Ross Patterson to write a stern editorial in the Dominion Post on the matter.

There are a couple of things to consider in all of this. Firstly, this is a draft determination by the Commission, with the emphasis on draft. Typically we would then all sit down, with our economists, and explain why the Commission is wrong. There would be submissions, cross submissions, a conference, final notes and then eventually a final determination. Plenty of time in which to explain why the price point should be higher, lower or managed in a completely different way.

Most of the ISPs I’ve spoken to expected that price point to come back up to the mid-teens – $16 per line per month is the most quoted figure I’ve heard.

Chorus caught on the back foot?

Putting aside all of that for a moment, the more important point is how did Chorus not know this was coming?

The Act makes it clear – a cost-based model was written into legislation by this very government and the Act was part of the reason Chorus was created in the first place. Since Chorus was floated it’s been there and we’ve all known about it.

Either Chorus management (and investment advisors) are incompetent and didn’t notice or they knew about it and are playing a very good PR game which clearly has won the government over.

The problem is, while it might be fine for Chorus investors (shares have hopped back up since the announcement) it’s incredibly difficult for both competitors and consumers alike.

Implication for New Zealand

Imagine if you will a local telco that has invested in local loop unbundling. With the prices up in the air, will they be able to continue investing? Should they abandon any future investment in favour of wholesale or just not do anything until the UFB is rolled out?

And what about the customers? We want faster broadband and if the UFB isn’t coming to residential areas for another three or more years, are we going to be stuck paying higher copper prices in the meantime just to force us to migrate once the fibre arrives?

The Minister is quoted in NBR as saying she’s more interested in fibre uptake than cheaper prices on copper.

“I don’t think the over-arching criteria in this is ‘what is the cheapest option?'” she told BusinessDesk. “If that was the case, we’d be sticking with dial-up. I don’t think you’d find any consumer saying ‘if dial-up’s cheaper, let me have that’.”

That’s a bold statement from a minister. In effect she’s saying fibre uptake is the most important factor in the industry today. More important than short term copper pricing, more important than customer benefit, more important than returns on investment to shareholders of other companies.

What she’s not taking into account is that fibre isn’t the only technology on offer. It isn’t the only technology capable of delivering faster speeds.

Copper itself can offer much faster speeds – VDSL2 for example – and we should be leveraging that investment in the short term.

And what about 4th generation mobile technology – LTE? I’ve just come back from a trip to see Huawei’s rollout in Hong Kong and saw tremendous speeds on handsets in the wild. If Telecom and Vodafone decide not to sell UFB but to focus all their energies on LTE, what would that mean for uptake? Would she then intervene to force them to sell UFB services?

That’s a tad extreme, but not unprecedented. In Australia in the mid-2000s, Telstra decided not to build a fibre to the node network but to concentrate on mobile and build the NextG network. Investment in the landline infrastructure was so chilled the government was forced to step in and pay A$12bn to buy the copper network off Telstra. Is that on the cards for New Zealand?

TUANZ wants to see a fibre network built. We think it would be good for our economy in the long term and good for customers. But we’ve long maintained that how we build this network is as important as getting it done and we opposed the government’s regulatory holiday as a result.

My fear is that with a minister hell bent on fixing one aspect of the industry, we run the risk of upsetting the rest of the industry in a way that will cost us dearly in the long run.