Chris Barton: Something rotten in our Commerce Commission

Something is very rotten in our Commerce Commission. In setting the price for access to Chorus's copper wholesale network, it's maintaining a price $12/month higher than comparative countries. It seems to think consumers should pay $12/month more than they should have to for broadband.

What's particularly galling here is that the Commission has lost sight of its prime directive contained in the Telecommunications Act - to "promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services."

Instead, by a curious combination free market ideology and caving to political pressure, it's promoting monopoly power and a haughty "let them [the end-users] eat cake".

The fascinating twist in this arcane saga of ridiculous acronyms - UCLL, UBA, HEO, MEA, TSLRIC - is that the company shouting the loudest that the Commission has gone troppo is Spark. Yes, the former Telecom, the company that for so many years rorted New Zealand consumers and is the reason why we have a Telecommunications Act, has seen the light.

Telecom, I mean Spark, is highlighting the obscene monopoly rents it once enjoyed and has now passed to its structurally separated sibling, Chorus, which is continuing the tradition of rorting New Zealand consumers. The following graph shows just how out of whack the Commission has got on its proposed pricing for unbundled copper local loop (UCLL) services - i.e. what internet providers pay Chorus to get physical access to the copper pair in the local loop exchange.

As Spark points out, the Commission's draft UCLL price is 80 per cent higher than the median price for the same service in the countries we compare ourselves against and 60 per cent higher than the next most expensive country. The outrage is because when the Commission took its first stab at UCLL pricing at the end of 2012, it picked $23.52/month, but then upped it at the second determination in December 2014 to a whopping $28.22/month.

This is in stark contrast to the price the Commission set for the unbundled bitstream access (UBA) services - Chorus's wholesaling component of broadband services. Here, in its first take, the Commission dramatically reduced the UBA price from $21.46 to $10.92/month and then, in December 2014, slightly reduced it again to $10.17. Chorus wasn't happy and contested the finding all the way to the Appeal Court, where it lost.

How, in the face of this, can the Commission justify keeping copper prices artificially high while maintaining this is "for the long-term benefit of end-users"?

By now your eyes have probably glazed over, but the important point to realise here is that these wholesale prices should all be coming down by a considerable margin to put right a terrible wrong. What the graph really shows is that Telecom and now Chorus have for decades been making extortionate profits at the consumers' expense. Finding a fair price for these services so that Chorus makes a reasonable profit and competition for broadband service can flourish with multiple internet providers is what this UCLL and UBA price determination is all about.

It's not rocket science, but does require careful modelling of the costs involved to get the right result. And it's here that the Commission has made such a hash of things - using wrong assumptions and trying to rush a process that can't be rushed.

What is the right price? The benchmarking graph gives an indication of where prices should fall, but each country is different so models are used to factor in the specifics. Research by WIK-Consult and Network Strategies, hired by Spark to independently review the Commission's draft models, show prices for UCLL and UBA of $16.64 and $7.83 respectively - a long way south of the Commission's $28.22 and $10.17.

Spark says this divergence from past estimates and overseas prices would have the effect of "transferring between $500 million and $1.5 billion dollars from New Zealand end-users to Chorus over the course of the next five years." How, in the face of this, can the Commission justify keeping copper prices artificially high while maintaining this is "for the long-term benefit of end-users"? Because, says the Commission, "predictability" and "investment incentives" trump lower prices.

In particular there seems to be a concern that low copper access prices will slow migration to the new ultra fast broadband (UFB) fibre network. Quite how the Commission arrives at this position is difficult to ascertain as Consumer, TUANZ and internetNZ - "the guardians of consumers" - point out in their submission: "We cannot understand how higher payments to Chorus are justified by the Commission on the basis of investment incentives as to UFB, on quite briefly stated high level grounds, when clearly Chorus has no need for such incentives. It was contractually committed years ago to deliver UFB. We cannot understand why there is no reference to such essential facts in the analysis."

The lack of any full empirical assessment based on evidence as to why the Commission wants to keep prices high is a recurring refrain of many of the submissions. It's hard also not to read an implied threat - that if the Commission doesn't get its act together and remedy its shoddy process, it will soon be staring down the barrel of court action. Without clear evidenced-based justification for its actions - to show high prices will benefit consumers in the long run - you'd have to say that's a battle the Commission is going to lose.

It's impossible not to discount the spectre of political interference in this process - especially considering the PM's threats in early 2013 to step in and overrule the Commission.

It's hard also not to read an implied threat - that if the Commission doesn't get its act together and remedy its shoddy process, it will soon be staring down the barrel of court action.

That was followed by Minister for Communications Amy Adams who agreed copper prices needed to stay high because of "the destabilising effect lower prices that could have on the transition to fibre."

A concerted campaign against such corporate welfare saw the proposal shot down when it came to passing the legislation - dubbed the copper tax - in parliament. Thank goodness.

But with the independent Commission now also promoting artificially inflating copper access prices to subsidise Chorus, one can't help thinking something is rotten in the state of telecommunications in New Zealand.