Chris Barton: Fibre rifts and rancour

Photo / HBT

Rumour has it our Commerce Commission is currently riddled with rifts and rancour - not just between commissioners and staff but also between commissioners. The angst apparently stems, not surprisingly, from differing views on our vexed telecommunications regulation.

The latest stoush is over the Commission's plans to fast track its final price determination of the monthly amount other companies should pay Chorus for access to its copper network so that you and I have a choice in the internet providers we use. Talk on the outside says the fast track process can only lead to one thing - the price going up and yet again favouring Chorus shareholders at the expense of New Zealand consumers.

In its cross submission on the latest Commission madness, InternetNZ speaks for many when it reminds the Commission of its duty - that it is "expressly appointed as the guardian of consumer welfare interests," as outlined in section 18 of the Telecommunications Act. "The Commission has received strong submissions from all submitters except Chorus that a rushed determination by 1 December is highly problematic and will lead to poor outcomes," says InternetNZ ominously.

You would think that after two decades of telecommunications regulation, culminating in the structural separation of the Telecom monopoly, we might finally be getting to the hang of things - allowing competition to breath and giving consumers decent choice in their telecommunications services. But just when we're on the verge of actually having reasonable internet services and plenty of choice, our Commission looks set to stuff it all up and hand back control to the new monopoly Chorus which is rapidly becoming just as rapacious and litigious as its predecessor Telecom.

But it can't be easy being part of the Commission in the current environment. On the one hand these civil servants know very well their job is to be independent arbiters and upholders of the law. And the law - the Telecommunications Act - is clearly and unequivocally aimed at encouraging competition between providers to benefit consumers.

They know it is deliberately targeted at encouraging unbundling of the monopoly copper network. And that it encourages use of copper network as a competitive tension on the new ultra fast broadband (UFB) fibre network. But while the civil servants can recite the mantra of the Act - competition is good and the more we have the better - they do so amidst government ideology that says the opposite.

So while the Commission is in the process of properly driving the price of copper access down, it's getting a barrage questions designed to weaken its resolve. Questions about the relationship of copper prices to fibre prices; about the wisdom of running parallel networks; about the need to get everyone onto fibre as soon as possible; about keeping the price of copper artificially high to encourage users to move; about regulation and the implication for SOE sales; and about the effect on investment in New Zealand.

So in the face of such sustained pressure, it's little wonder that the Commission might be sacrificing its independence and casting around for ways to jack up copper prices within the constraints of the Act, even though that's totally against the Act's logic.

To engage with the Commission's process is to talk in awful acronyms, economic guesswork and flip flops - all spoken with utter sincerity by the armies of lawyers, economists and other consultants involved. The current furore is over the "Final Pricing Principle" (FPP) stage of the process to set access pricing - something that has come about because there have been appeals against the "Initial Pricing Principle" (IPP) stage which had reduced the price of access from $21.46 to $10.92 per month.

But while users were delighted at the prospect because it would mean significantly lower internet prices, Chorus and the government were not. Chorus is fighting tooth and nail because it stands to lose a lot of monopoly rent revenue. But it has already had a significant knock back losing its High Court case against the Commission and others about the legality of the IPP decision.

The government is fighting tooth and nail because it's worried about its $1.35 billion investment in the new UFB fibre network, the bulk of which has gone to Chorus as a $929 million interest free loan. Because of the reduction in monopoly rent revenue Chorus is now bleating about the cost of finishing its part of the UFB and the government seems hell bent on crony capitalism tactics to help the bungling Chorus out.

To cut a long story short, a FPP process is enormously complex and usually takes at least a couple of years. It involves creating a model of the total service long run incremental cost (TSLRIC) of providing internet access services in New Zealand. To do that, the Commission selects a "modern equivalent asset" (MEA) - a hypothetical network that a sensible competitor would build if it was to compete with Chorus.

Once it has the MEA it then gathers empirical data about all the costs involved, adds in other variables like the cost of capital, and works out the TSLRIC, from which the access price is then determined. Mad, I know, but that's more or less how it's done in regulated network markets all over the world - except that elsewhere they tend to use the building block and regulatory asset base methodology rather than TSLRIC, which tends to favour monopoly incumbents.

When the government last raised the spectre of the MEA it said "the modern equivalent asset to the copper network is a fibre network" and that the wholesale prices for that - the UFB - should be the benchmark for keeping copper prices high.

It was a flawed logic because the wholesale prices are prices agreed by contract and are not prices established by a TSLRIC methodology. By now I expect you're running screaming from the room, but the significant point here is the flip flop that has occurred.

Chorus has always argued the MEA should be fibre to the node (FTTN) but now most of the access seekers are all arguing for fibre to the home (FTTH). The Commission appears to be favouring FTTN, which has got access seekers screaming that such a decision could jack up the price of access by $7.30 a month.

The access seekers are alarmed that in the the rush to meet its self imposed December FPP deadline, the Commission is not exploring all MEA options properly and, worse still, isn't seeking empirical modelling data from existing MEAs - such as NorthPower's just completed modern FTTH network in Whangarei and 2degrees' or Vodafone's relatively modern cellular networks.

If the Commission did speak to Northpower chief executive Mark Gatland he could provide it with some sage advice, reminding them, as he told me in 2012, that it was Northpower that showed the government how it could build a good network at low cost.

"People were saying it was far too expensive to build the last mile [to homes] in fibre. That was the incumbent's view and that's the mould we broke." He also pointed out that like any infrastructure business, Northpower Fibre runs at a loss initially and recovers its investment in later years. Profitability arrives when uptake reaches 40 per cent.

If the Commission continues on its current path, it's very clear the only losers will be us, the internet consumers, once again taking a backseat to shareholder demands. One trusts the Commission will come to its senses. It's one thing for a government to be peddling its political agenda, but for the Commission to be perceived as colluding with that agenda is a compromise of its independence that's deplorable.