Chris Barton: Key's stance on broadband decision gob-smacking

John Key is proposing to trample on the Commerce Commission's regulatory independence, says Chris Barton. Photo / Mark Mitchell

It beggars belief, really. Not to mention beggaring consumers. Prime Minister John Key's willingness to overrule the Commerce Commission's reduction of wholesale broadband pricing is gobsmacking. Let's count the ways.

First, because it doesn't acknowledge the Commission's draft decision in December is as a direct result of legislation (the 2011 Amendments to the Telecommunications Act) put in place by his own government.

Secondly, for its refusal to concede that the wholesale price reduction from $21.46 a month to $8.93 a month is just and fair and actually fixes a long time rort perpetrated by Telecom, and now Chorus, to extract monopoly rents from the hapless telecommunications consumer.

Thirdly, because what it really reveals is the pig's ear the government has made of its ultra-fast broadband project, by not having a proper migration strategy from copper to fibre broadband in place.

Yet the PM proposes to trample - likely in breach of New Zealand's commitments under the World Trade Organisation (WTO) General Agreement on Trade in Services (GATS) - on the Commission's regulatory independence. Key justifies his position, as reported in the Dominion in December, thus: "It [the Commission ruling] substantially reduces the income of that company [Chorus] and its capacity around broadband."

Give us a break, John. Chorus has capacity to burn and the reduction of $12 a month per customer is the monopoly rent that Telecom has plundered for so long. When your government structurally separated the vertically integrated Telecom into a wholesaler (Chorus) and a retailer (Telecom) in order to embark on its $1.35 billion ultra-fast broadband rollout, you knew the monopoly rents had to go. That's why the 2011 amendments signaled a cost, rather than retail-minus, basis for wholesale pricing - which is exactly what the Commerce Commission has done.

It was perfectly predictable. Chorus, now a wholesaler not a retailer, had to set its prices on a cost basis. The Ministry of Economic Development knew it. So did Crown Fibre Holdings, Chorus and its investors. All would have modeled the outcome and arrived at a number very similar to the Commission. For all of them to now feign shock and horror is disingenuous to say the least - a collective brain fade to rival the PM's legendary amnesia.

The PM also seems to show considerable disdain towards the idea of regulatory independence. Key's response in parliament to questions from Labour MP Clare Curran on December 11 went like this:

Curran: Does he believe that it is a fundamental principle of our telecommunications regulatory regime that the regulator is independent to carry out its role without interference or undue political influence?

Key: Of course. They are free to go about their work. The Government then is free to decide whether it wants to adopt that.

Pressed as to whether he would rule out legislation if the Commission comes back with a final decision that his Government does not agree with, he replied: "Definitely not."

Key's cavalier attitude to legislative process has already caused him grief with the Waitangi Tribunal. Here, he could be in for a whole lot more - especially if his proposal is found to be violating New Zealand's commitments under the WTO's GATS. Under the agreement New Zealand is required to maintain an independent regulator for all telecommunications services that is separate from, and not accountable to, any telecoms supplier. It must also maintain measures to prevent a major supplier (such as Chorus) from engaging in anti-competitive practices.

So John, as I'm sure you know from your Trans Pacific Partnership negotiations, you're not free to change the rules willy nilly.

But the real kicker is that GATS requires New Zealand to ensure interconnection to foreign suppliers is at "cost-oriented rates" and on "reasonable terms". Simply stated, Key's proposal to encourage users to move from copper to fibre would do the opposite - raise the wholesale price of copper services above cost. In other words charging monopoly rents so that Chorus investors can make monopoly profits.

Shareholders first, consumers second - a recurring refrain in our telecommunications industry. It was there following the 1991 sale of Telecom for $4.25 billion when deal broker Alan Gibbs and others in the consortium made a killing on their shares.

Remember Spot the Jack Russell terrier who advertised Telecom's cheap calling weekends in the mid 90s? That was because toll calls were incredibly lucrative with virtually no additional cost for calls once the infrastructure was in place. As Gibbs tells it, Telecom gained two dollars in revenue for every dollar it gave away on price. Capacity to burn.

It was there too in the late 90s when the government was considering more regulation and the Ministry of Commerce estimated "deadweight losses arising from monopoly rents in telecommunications" to be between $50 million and $250 million each year. Struggling competitor Clear (now Telstra Clear) said the figure was more like $400 million.

Those "deadweight losses" on the economy have always been there, which is why Telecom has always been such a blue chip investment and why New Zealand consumers have always paid too much for their telecommunications services.

If you are concerned about the slow uptake of fibre, John, there are plenty of ways to encourage uptake without making us pay more. How about making it easy for users to get paid access to internet TV and movies, for a start? Or putting in place a phased shut down of the copper network as fibre reaches our doors? Don't make us pay extra for the average services we already have. We've paid enough.