New Zealand media saw the Commerce Commission's final determination on regulated copper line charges as a win for Chorus. The decision means Chorus can charge $120 million a year more for customers to connect to its copper phone and broadband network.
Chorus CEO Mark Ratcliffe says the new price takes on board “the real world costs of building a network”.
“We have consistently said that the previous draft prices significantly underestimated the true value of Chorus’ network”.
Champagne for Chorus shareholders
Chorus shares jumped 24 per cent immediately after the announcement. This underlines the size of Chorus’ victory.
This may be good short-term news for Chorus investors, but it hides something. Sharechat quotes Paul Glass, executive chairman at Devon Funds Management: “From a capital markets point of view it is a regulatory debacle, a shambles”.
Glass says the regulator “almost broke the company and now they are almost over-rewarding Chorus. It almost makes regulated assets uninvestable.”
“We need a more mature approach to regulation that reflects the fact that these sorts of violent swings raise the overall cost of capital of regulated businesses,” he said.
Spark managing director Simon Moutter makes the same point from a business investment point of view:
“The massive swings in successive Commerce Commission decisions within a matter of months makes it extremely hard for any business to invest, plan and price its services effectively. We have now had two years of market disarray, with significant fluctuations at every stage of the process. The losers out of this are New Zealand consumers and businesses.”
The rest of the telecommunications industry did little to hide its anger. A press release from Vodafone quotes CEO Russell Stanners who says his company is “extremely disappointed”.
“The pricing set today is even higher than in the Commission’s draft decisions and is well out of step with international benchmarking”.
That international benchmark got a run from Juha Saarinen in an NZ Herald opinion.
Saarinen says Internet NZ points out that we are the only country in the world increasing the price of a copper connection. He says:
“We pay more for fixed broadband than most developed countries – research from the International Telecommunications Union (ITU) put us in the 60th place in the world.”Australia, hardly a poster boy for great, affordable internet access, is twenty places ahead of us, and New Zealand will drop even further down the rankings as pricing here goes up.”
Saarinen wonders about the signals this ruling give Chorus in terms of incentive. Taxpayers are funding the nationwide UFB fibre roll-out, Chorus has about 70 per cent of the contracts. The job is scheduled to be completed by 2019.
He notes that the copper network is a much bigger business for Chorus than fibre and now that it’s more lucrative: “You have to wonder how much incentive there is for Chorus to hurry up with the fibre rollout in the big cities over the next five years".
There’s a simple answer to that.
Chorus has a contract to deliver the fibre network by a set date and will be penalised if it misses the target. There will be a lot of egg on faces if it fails.
Of course, Chorus can lobby its way out of penalties. It appears to do this better than any rival. Yet by 2019 another government will be in power, possibly one less ready to listen to Chorus’ special pleading.
Consumers will pay
When there are winners there are losers. Saarinen says the money will come from New Zealand consumers.
Spark’s Moutter thinks along similar lines. He says: “We are now also forced to increase our retail voice and broadband pricing to take into account the significantly increased costs now faced from higher regulated Chorus line charges.”
You wouldn’t expect Tuanz, which represents telecommunications users, to be happy with a regulated price hike.
CEO Craig Young says:
“These prices will have a direct impact on users, and especially those users who are unable to take up UFB services. These include the 20 per cent of the population who live rurally, and who have no other fixed line options and will continue to rely on copper phone lines for the foreseeable future.”
Rural users cop it worst
This brings up an interesting point. Since telecommunications first arrived in New Zealand urban customers have subsidised rural users through something that came to be known as a universal service obligation. The idea is that everyone pays the same price for a connection regardless of how much it costs to run and maintain a line to their premises.
The point about this is in the past everyone got the same kind of phone line. That made sense with copper. It doesn’t make so much sense today where fibre can connect large clusters of customers and wireless services can link the most remote connections.
Telecommunications users still subsidise rural customers through a $50 million levy used to underwrite the government’s Rural Broadband Initiative.
So while the 20 per cent of rural users might feel cheated at having to pay more for their copper lines than urban customers pay for a better fibre service, they are still being subsidised. Subsidies are a political problem that need a political solution. If New Zealand decides rural users are a deserving case, it has to find the money to pay for their connections.
New Zealand First: “disgraceful corporate welfare”
Yahoo has a story quoting New Zealand First’s Tracey Martin who has gone in to bat for rural consumers. She says: “It’s disgraceful that government under-investment forces Chorus to raid the wallets of hard-pressed Kiwis as government approved corporate welfare”.
The story is a touch confused:
“Rural Kiwis will get hit hardest by the Commerce Commission’s decision allowing Chorus to charge its regulated copper line customers almost $8 a month more than New Zealand retail broadband providers, says New Zealand First.”
Chorus is a wholesaler, it can’t sell direct. The retail broadband providers do this. So that paragraph is meaningless.
Travesty and a barb
Some of the strongest language comes from InternetNZ which describes the decision as a “travesty”.
Chief executive Jordan Carter says: “The Commission has to ensure that they have delivered to the long-term benefit of end users. We are not sure that that test has been met today”.
He says: “We are the only country that InternetNZ is aware of that is putting prices up for legacy copper-based broadband services.”
And there’s a sting in the tail from Carter: “The extreme nature of these price rises will likely mean that some parties will be contemplating court action.”
Let us read that as “We’ve already asked our lawyers and we’re checking to see if anyone else has”. There’s a strong possibility this will end in court. The cost to big service providers like Spark and Vodafone will run into tens of millions a year, throwing a couple of million into the legal pot now could be a smart move.
Three years in the making
At ZDNet Rob O’Neill’s Chorus cheers, Spark jeers final copper broadband pricing points out: “After three years, regulator the Commerce Commission finalises its thinking over the price of legacy network services.”
Three years is a long time for investors to not know which way the dice would fall.
O’Neill quotes Newly-minted Labour ICT spokesperson David Parker:
“Today’s shock announcement of a 10 percent increase in the regulated wholesale copper phone line price will cost all households – particularly in areas where they are still waiting for ultra-fast broadband”.
That’s a good point. Many New Zealanders are not due to get UFB for years. Having to pay more for an inferior network makes it feel like they are doubly penalised.
Prices to rise
Writing for Fairfax’s Business Day, Tom Pullar-Strecker gets to the nub of the matter from a customer point of view in Price of phone lines expected to rise by about $3. Let’s put that figure in perspective, the price rise for the basic line cost is about 7 per cent at a time inflation is 1 per cent or thereabouts.
“The cost of a landline is set to rise by about $3 a month after a surprise ruling by the country’s competition watchdog that has put a rocket under Chorus’ share price.”
He goes on to mention a possible silver lining for Spark customers: “who may not have to pay more immediately, or who could be in for a one-off $40 refund.”
More threats of litigation
As we’ve already seen there’s a possibility the telecommunications companies will get lawyered up ready to fight this decision.
Pullar-Strecker says M2, which owns Slingshot, Orcon and Flip hints at a possible legal appeal: “M2 chief executive Mark Callander expected price rises of at least $3 for Slingshot, Orcon and Flip customers and said the Australian-owned company had not decided whether to go to court to challenge the commission.”
At the IITP Tech Blog Paul Brislen brings up another theme that has been in the background ever since the government announced it would build a fibre network: The business of moving people from copper to fibre.
He writes: “Of course, a cynical person would say none of this is about copper lines at all and is designed to drive customers to switch to the shiny new Ultra Fast Broadband (UFB) service being rolled out around the country.
“UFB is fibre based and so does not have the same regulatory pressure that copper lines have. It’s also being built by four companies, not one, although Chorus has the lion’s share of the project and each Local Fibre Company (LFC) has, in effect, a regional monopoly.“UFB uptake has been low to date but ultimately it will be the network of choice for everyone who can get it. It is world class and, if we look at the Australian debacle, somewhat in a league of its own. But users shouldn’t be forced to take it up and for those who will never get it, the copper tax will be a cost they can’t avoid.
Nobody mention the copper tax
We haven’t heard the term copper tax for a while. That’s not an accident.
Privately many in the telecommunications industry have told me they have been threatened with all kinds of sanctions by the government if that term gets another airing. Brislen and the IITP aren’t open to that kind of bullying.
“…while all this is over for now, the entire Act is being reviewed and by 2020 a new regime will be in place – the fourth major overhaul since 2001.
Which is a good point. It seems that once it gets started, a government can’t stop tinkering with telecommunications policy.
In the long run we’re all dead
There’s a huge amount of fuss over the copper tax. It’s not hard to see why.
Apart from anything else, it means the transfer of over half a billion dollars from taxpayers to Chorus shareholders. It might have been cheaper for the government to nationalise the business.
Cheaper, not better. This is, in effect, what happened in Australia with the NBN and we all know how well that is going.
But some perspective is called for.
Most of New Zealand either has fibre or soon will. Many of the last 20 per cent will get it eventually and a good number will have wireless alternatives.
In the long run only a small fraction of the population gets the rough end of this. And they were always going to suffer anyway. The per-user cost of maintaining a copper network will rise as the total number of copper lines dwindles.
Technology to the rescue
Yes, it looks bad for a small minority. What we tend to forget is how fast technology is changing. Five years ago when the Rural Broadband initiative was set up, the fastest wireless broadband used 3G mobile technology.
It didn’t sound that great at the time and it proved to be as bad as the pessimists feared. Then came 4G mobile. And suddenly farmers found they could get city-style fibre speeds from rural wireless towers at the kind of prices urban consumers were paying a couple of years earlier.
By the time 2020 rolls around the 4G technology will move to higher speeds and better performance. Not long after the industry will begin working on 5G networks.
Five years might seem like ages, but it isn’t. A decade from now the fuss over line prices and the copper tax will be ancient history.
Update: Greens blame Steven Joyce
The Green Party press release turned up after the original story was posted. It contains a couple more fresh perspectives on the ruling.
Green Party ICT spokesperson Gareth Hughes notes the confusion.
“The price-setting system clearly isn’t working because the process has resulted in so many draft pricing decisions that are so different from each other, which means the industry and consumers are kept in the dark about what the actual price will end up being.
This is in stark contrast to all the talk about “regulatory certainty”. This phrase crops up time and time again, often from Chorus. Yet it seems players are only happy with regulatory certainty when regulations swing their way. Otherwise, they send in their regulatory affairs team to unpick the last round of regulation.
Hughes has no doubt where the blame for these problems lie:
“Today’s price rise has its origins in Steven Joyce’s meddling with the Telecommunications Act back in 2010-11 when he was Minister, which created a mess that the current Minister Amy Adams is still trying to clean up.“I hope the current review of the Telecommunications Act can clear up all the uncertainty and disagreement and allow New Zealand to embrace a high-tech, high-skilled, low-pollution path to economic prosperity.”
There is something in this. The Labour Party’s Clare Curran has said much the same thing in the past.
If there was a problem it was that the government nailed the local fibre companies to contracts that were at best borderline and at worse unsustainable. The government got a lot more fibre network for its $1.5 billion investment. The fibre companies, particularly Chorus, had no option but to accept poor terms. Almost all the fuss since then has been a direct consequence of those contracts.