Hamish Fletcher 's Opinion

Business reporter for the NZ Herald

Broadband fight comes down to the wire

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In the final part of a four part series looking at the latest NZ broadband fight, Hamish Fletcher looks at the prospects of peace breaking out.

Workman Josh Brown feeds ducting for the ultrafast broadband network in Tauranga. The Commerce Commission is due to reveal a final decision on broadband pricing this week. Photo / NZ Herald
Workman Josh Brown feeds ducting for the ultrafast broadband network in Tauranga. The Commerce Commission is due to reveal a final decision on broadband pricing this week. Photo / NZ Herald

The "grumpiest" telecommunications debate in more than a decade could be all but settled next week.

But the prospects of peace breaking out won't be known until the Commerce Commission reveals its final decision on broadband internet pricing, expected next Tuesday.

If the commission sticks to its draft decision last year, and decides there should be big cuts in internet pricing, it will set the stage for the Government to over-rule the regulator and intervene in the market.

But if the commission backs away from those cuts, it may be enough to dissuade the Government from getting involved in broadband prices, and leave that job to the regulator.

The Government says it won't decide whether to become involved in the market until after the regulator's final ruling.

The commission's decision concerns how much infrastructure company Chorus can charge internet retailers such as Vodafone or Orcon for broadband services over the Chorus copper-line phone network.

In December, the commission suggested these prices should be cut by nearly 28 per cent.

But it is expected to opt for a smaller reduction in its final decision.

See previous stories in this broadband series here:
Part One -NZ's $450 million broadband battle
Part Two- Fair returns aim of internet plan
Part Three - Does NZ fast broadband need a carrot?

IDC analyst Glen Saunders says it is "common practice" for the commission to release a lower draft price, and then scale back the reduction.

Saunders also says there is a good likelihood the commission's final prices could be within the range the Government would set if it were to intervene.

"But we don't know what's been going on behind closed doors, we can only speculate on where it will end up," he says.

The Government has proposed that the wholesale price of a broadband connection over the copper network should be in the same range as the price of an entry-level package using the ultra-fast broadband (UFB) network, which Chorus is building the majority of, with the help of a $929 million taxpayer loan. Instead of copper, that network uses fibre-optic cables, which promise much faster connection speeds.

While the Government's proposal would result in copper prices falling by 5 to 17 per cent below the amount Chorus charges now, the price would be higher than it would be if the commission's draft decision is finalised.

Communications and Information Technology Minister Amy Adams says that even if the regulator's final decision is within the Government's desired range, pricing is only one of the elements being considered in deciding whether it should intervene.

"You still have the issue of whether there will a sort of happy acceptance by everyone and everyone goes off in their happy ways and there isn't long-term litigation," says Adams, who is the minister in charge of the proposed intervention.

She has argued that one advantage of intervention is that it would give price certainty to the industry as it navigates the switch from copper to fibre.

That is because whatever the commission announces next week, Chorus is able to appeal that decision through what is known as a "final pricing principle" (FPP) review - and that can take years to complete.

The commission's approach in working out copper charges since Chorus' split from Telecom used a benchmark of prices from countries similar to New Zealand.

The FPP process, however, would be much more complex.

Rather than benchmarking, it would involve a full analysis of the cost of Chorus building a replacement network from scratch, and working out prices from that.

"It requires a lot more in-depth work, basically looking at Chorus' books, to work out what the actual cost is," Saunders says.

If Chorus does go down that road, Adams says the industry would have no certainty during that time, and retail providers would be "highly unlikely" to pass on wholesale price cuts to consumers until the process was complete.

"I am still of the view that it would be a terrible waste of everyone's energy and resources to spend two or three of the next five years arguing the toss," she says.

"Because until those business models are set for wholesalers and retailers, we're going to see a real distraction and lack of focus on what we want them to focus on, which is rolling out products and services on those modern networks to consumers."

So does that mean government intervention is likely, regardless of what price the commission comes up with?

Adams replies: "I don't have a view of whether intervention is likely at this stage."

If the Government pushes forward with intervention, it is likely to introduce legislation to make the necessary changes early next year.

But even that may not be the end of the matter.

Labour leader David Cunliffe, a vocal opponent of the proposed intervention, has called on the Government to let the commission continue to regulate the market.

If the Government overrides the commission and sets prices itself, Cunliffe says, Labour would probably review the move if elected next year.

"We'd want to have a very close look at it and I think probably review that decision to see whether we should reach a different conclusion and that may require us to ask the commission to redo their work.

"Hopefully, there could be a quicker way through than that but we would certainly be likely to do some form of review in that case."

Any review would have to take into account any "private action" that could happen in the meantime, he says.

Sources say opponents could apply for a judicial review of the Government's approach to intervention. If successful, that would require the minister to start the process all over again.

Telecommunications Users Association chief executive Paul Brislen, who is part of a group against intervention, says there are a number of avenues which could be pursed and that TUANZ is keeping its options open.

And even when the fighting stops over this issue, there is sure to be plenty more to argue over when the industry considers how telecommunications is regulated once the UFB network is completed in 2020.

A wider range of issues than just prices is likely to be considered in this comprehensive review, including the availability of video and other content to UFB users.

Bid for 'certainty' could deliver the opposite

While Amy Adams suggests intervening in the market could bring certainty, interest groups and companies have raised a series of consequences which appear to be the opposite of what the Government hopes to achieve.

For one thing, research and public policy firm Covec says making copper prices similar to entry-level fibre prices could mean some people will take longer to move to the UFB network.

It claims weakened competition (because of intervention) together with higher copper prices will "suppress demand for internet services".

This is because broadband consumers climb "a ladder of consumption". They start off with basic services, see how they benefit from them, then demand more advanced services.

But Covec says higher prices will discourage people from climbing this ladder and delay some from getting on it at all. This would then reduce the rate at which they take up fibre.

Lines company Vector, which wrote to the Government on the proposed intervention, also says the move could have a negative impact on broadband.

"Consumers would face higher (than otherwise) prices. While this might result in some migration to fibre, where available, it could also dampen demand for broadband services," the company says.

As well, intervention would encourage Chorus to "go slow" on building the fibre network.

This is because if the Government sets copper prices that are the same as entry-level fibre (and therefore above cost), that would heighten the cost to Chorus when the UFB network cannibalises the customers using its older infrastructure.

"The incentive this would create would be for Chorus to roll out fibre no quicker than it is contractually obliged to, and to retain customers on its copper network. This would seem to Vector to be the exact opposite of what the Government hopes would occur as a result of intervening in copper access pricing," the company says.

While Adams has trumpeted how intervention would provide price certainty, Covec says the proposal will increase the unpredictability of regulation.

"It sends a signal to investors in competing technologies that the Government may shift the ground under their feet to favour the Government's investment partner," Covec says.

The firm expects the "regulatory uncertainty created by the Government's proposals" to have a "chilling effect on investment in new technologies", particularly 4G mobile networks in the same market as fibre.

"That will have long-term consequences for competition and innovation in infrastructure markets," Covec says.

The players

Chorus: Was part of Telecom; now a stand-alone company. Owns the network of copper lines which most consumers use to connect to the internet.

Internet service providers: Buy access to the copper system from Chorus, then sell their services to retail customers.

The Commerce Commission: Regulates the prices that monopolies - including Chorus - can charge their customers.

The Government: Can overrule the commission.

The big questions

How much should Chorus be allowed to charge its wholesale customers, the internet service providers? In turn, that affects the retail price everyone pays to use the internet. If the wholesale price is too high, internet users are penalised and Chorus makes a windfall. Too low, and Chorus won't have enough revenue to invest in infrastructure.

The fibre factor

While most users connect to the net via copper wires, a faster network is under construction - the ultra-fast broadband network, backed with about $1.5 billion from the taxpayer and mostly being built by Chorus. If connecting via copper is too cheap, Chorus fears, customers won't pay extra to switch to the new network.

The timeline

December 2012

Commerce Commission issues a draft decision, suggesting a 28 per cent cut in Chorus' wholesale broadband copper price. Chorus share price plunges and the company says such a cut will be a big blow to its revenue.

February

Communications & IT Minister Amy Adams put the commission's plans on hold, pending a wider review of telecommunications rules.

August

Adams suggests the Government intervene and set copper prices itself from 2015 to 2020. Her discussion document also suggests price cuts - but not as big as the commission's proposed cuts.

September

The new Coalition for Fair Internet Pricing calls the Government's proposal a tax on broadband users - money that will go to Chorus shareholders instead.

Next week

The Commerce Commission is due to announce its final decision on the price Chorus can charge.

Then what?

Whatever the commission decides, Chorus could appeal - a process that could drag on for years. If the commission raises its suggested price, closer to what the Government and Chorus would prefer, there could be a compromise. Or the Government could intervene, taking the commission out of the picture.

- NZ Herald

Hamish Fletcher

Business reporter for the NZ Herald

Hamish Fletcher has made a specialty over the last two years of covering court cases stemming from the collapse of finance companies after the Global Financial Crisis. A business journalist for three years, he is especially interested in commercial disputes.

Read more by Hamish Fletcher

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