Why UBA pricing threatens the UFB project

At first sight Chorus’ submission to the Commerce Commission on the price the company can charge ISPs to deliver broadband over the copper network is business as usual.

The regulator wants to cut unbundled bitstream access (UBA) prices. UBA is the wholesale price service providers pay to use a copper line. Chorus argues against the move saying it could wipe up to $160 million from its annual profit.

Fair enough, the government did a deal with Telecom to spin-off the Chorus network division. It is only natural for the new businesses’ managers and shareholders to fight to protect their investment.

Chorus' submission to the Commerce Commission goes on to argue cutting the UBA price ISPs pay to use the copper broadband network undermines the UFB fibre network. Chorus is only one of the four companies building the fibre network with the help of a soft government loan, but it faces greater regulatory oversight than the others.

Delaying tactic?

Chorus has also requested a full review of the costs of delivering copper broadband. If nothing else  this will delay any ruling to cut prices.

And that’s where things get difficult for the government and Chorus.

If the UBA price falls, making copper broadband cheaper, it becomes more attractive to customers. In other words: more attractive than the UFB fibre network Chorus is helping to build.

Things get complicated because the roughly $1 billion dollars interest free loan the government is giving Chorus isn’t anything like enough to finance its share of the project. When the project was designed, there was a mechanism to plough back money from the built parts of the fibre network to finance the later part of the project.

Optimistic forecasts

Early forecasts of how many customers would buy fibre services were optimistic. Numbers were quoted that are higher than in other countries with similar projects – planners fell into the “New Zealand will be different” trap. The government hoped to see 45 percent uptake. Its contract with Chorus is for a minimum of 20 percent.

There’s now a question mark over that figure. Cheaper copper broadband—the inevitable result of lower UBA prices—isn't going to help.

And that planning was done well before mobile data took off. Indeed, it didn’t take improvements in copper delivered broadband performance.

Prime Minister John Key has already talked of further government intervention – most likely a policy change to stop the Commerce Commission from regulating lower copper prices. An alternative would be to throw more government money at the project: that’s tax dollars.

A billion here… a billion there, soon you’re talking real money

The cost is peanuts compared to the money spent on roads. And there’s always a possibility Chorus will collapse. Although the current government is unlikely to let that happen under its watch, it could be out of power by the time things reach crisis point.

Many taxpayers will be unhappy about subsidising shareholders who knew they were taking on a risk. Others will be just as unhappy if the government allows the pension fund and Kiwisaver money locked up in Chorus to whither away. Yet more could be annoyed if the project changes so that they are forced to pay more for copper broadband while watching their neighbours enjoy the benefits of fast fibre broadband – especially if the project timetable drags out.

Shadow of Australia’s NBN?

Whatever happens next, the UFB project could yet become a political nightmare for the government. You only have to look across the Tasman at Australian to see how that could play out. Among other things we could see electorate politicians taking a close look at the UFB construction maps and cutting deals about which areas get built next.

Labour communications spokesperson Clare Curran wasted no time blasting the government earlier today. She said: “Chorus’s deliberate delay tactics with the Commerce Commission are a blow to Kiwi consumers and must be condemned by the government”.

Curran accused the government of playing favourites with Chorus. That’s possible. Or perhaps Chorus has the government by the balls on this. And as Reg Hammond writes at InternetNZ there’s also the matter of dealing with the companies who didn’t win UFB contracts because their price was too high. Where will all this leave them?

Editor's Note: This analysis was written in February 2013, nine months before the Commerce Commission's November 2013 UBA ruling. For the full story of what happened next, see the 2013-2015 regulatory crisis timeline.