Regulatory Forbearance replaced

May 18th, 2011 at 10:00 am by David Farrar

I blogged back in March on the Telecommunications Bill going through Parliament, and some of the issues around it which were causing concern.

has just announced:

Regulatory forbearance on wholesale prices for the ultra-fast broadband network will be replaced with contractual mechanisms that would apply if the Commerce Commission regulates prices lower than those contracted, Communications and Information Technology Minister Steven Joyce announced today.

In announcing the move, Mr Joyce says that he had listened carefully to industry concerns in regards to the plan for regulatory forbearance over the 8 ½ year build period of the contract.

“While I think their concerns are more theoretical than real, given that pretty much everybody has been happy with the very competitive prices announced by CFH to date, we have been able to find an alternative solution which will give the infrastructure builders confidence to stay committed to their low capped prices, and customers confidence that they are will continue to get the best prices over that 8½ year period.”

This is an excellent outcome, and congrats to the Minister for devising it. It retains price certainity for investors (which means we get more laid for $1.5b) but also leaves in place the security of the Commerce Commission to ensure consumers are not being over-charged.

If for some reason the Commerce Commission found prices should be lower than contracturally agreed (which is unlikely but predicting the future is difficult in such a innovative industry), then the Government bears the risk as the entity that entered into the contracts with the local fibre companies.

The Minister get big kudos for making the decision. I think it is also worth handing out kudos to the various ICT groups and Opposition MPs who pressed for changes. Both Labour and ACT MPs on the Select Committee were very receptive to pushing for changes.

I had been concerned that all the good work the Government was doing in investing the $1.5b into fibre would get over-shadowed by the arguments over the proposed regulatory forbearance period. This decision means all eyes will now go to whom will get the contract for the 85% of areas not yet allocated.

That decision is due in a matter of days, maybe weeks. And after that then there’s going to be a lot of work for people in digging up roads, putting in trench, laying fibre etc. The combined public and private spend will probably be $4 to $5b over the next eight years or so.

As we head towards fibe connected homes, I think we will see significant changes in society – many more professionals working from home, virtual offices for some firms, video-conferencing as common as TV,  movies and TV on demand etc, mass storage on the cloud etc. It’s an exciting future.

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12 Responses to “Regulatory Forbearance replaced”

  1. Trevor Mallard (245 comments) says:

    So the taxpayer underwrites Telecom’s risk on technology. Thought Muldoon died years ago.

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  2. Rural Connect (10 comments) says:

    Mr Joyce’s announcement this morning about the change to the regulatory holiday provisions is a fair compromise.

    His press release confirms that the regulatory holiday was about maintaining a higher wholesale price. It also confirms that it was about ensuring CFH and the UFB winners having a guaranteed return on investment. The new provisions now build that guarantee in to the contractual arrangements with CFH.

    If ComCom believes that prices should go lower, and regulates for that, then as Mr Joyce says, “the government wears the risk, not consumers”. Which means that the government will pay to maintain the investors’ return on investment. That may be okay because the alternative was that the government pay this upfront through a higher UFB subsidy. The money would come from the $1.35Bn UFB budget.

    If Telecom win the UFB bid, then that guarantee will likely be triggered because the artificially high wholesale price opens a door to competition.

    If the lines companies win the UFB bid, then the guarantee is irrelevant because the wholesale price will have to drop to match Telecom’s certain competition via their FttN plus DSL service.

    The Minister’s change overcomes the investment uncertainty aspect introduced by Labour’s announcement that it would repeal the legislation. In lending more support to Telecom, Mr Joyce has therefore signaled that Telecom has already won the bidding.

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  3. Rural Connect (10 comments) says:

    I am concerned with the number of industry commentators who so conveniently forget about rural users.

    We are not heading towards fibre connected homes under this government’s policy. The change to the wording in recent press releases from the Minister about the RBI (adding ‘peak’ to ‘minimum speeds of 5Mbps’) indicates to me that we will be fortunate to have actual average speeds of around 1Mbps if the peak to average ratio (1:10) of my existing 3G mobile broadband connection is anything to go by.

    Rural users, at least in Franklin, have the same Internet penetration as urban users but have a significantly higher level of dissatisfaction with their service. That is because too many rural users are forced to remain with dial up connections. The RBI will improve broadband connectivity for rural people, but only to the extent that urban people now take for granted. The UFB will deliver up to 100Mbps to urban users. This is 100 times faster than what rural users will get.

    Considering that rural users number about 25% of the country’s population and that around 66% of our productive exports come from rural areas, ultra fast broadband has the potential to do so much more for NZ’s economic productivity, social cohesion and environmental sustainability if it were applied in rural areas. But, by government policy, it is not and so the digital divide between rural and urban users can only increase.

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  4. Jeff (47 comments) says:

    @Trev

    What did Labours 2008 pledge card call for, $340 million on broadband? Guess no one in the caucus understands that for every 10% increase in broadband penetration, there is an expected increase in GDP of around 1-1.5%.

    I fail to see how labours piddle sticks investemnt was going to cox out the telcos to invest in broadband of their own volition.

    Worse yet, if someone had taken a punt on laying fibre, Labours think tanks for regulating the digital economy would have come up with the same crap that lead to section 92A.

    Time to retire mate and stop the hollow cries of wolf.

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  5. Mick Mac (1,091 comments) says:

    Its a tension isn’t it, getting the cheapest price for the consumer (business and personal) in such a tiny market, that is an effective duopoly.

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  6. berend (1,673 comments) says:

    Hurray for more government solving another non problem.

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  7. mjwilknz (612 comments) says:

    I agree berend. I reckon it’s a very brave call for DPF, or any commentator familiar with technology, to claim that Government-funded broadband is going to change the world. If and when better internet speeds become available over the mobile phone networks, why would any one give a crap about wired broadband?

    Attempting to foresee human ingenuity is a very dangerous game. For example, any one remember how much Concorde changed the world?

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  8. RRM (9,638 comments) says:

    Next for the chop: Regulatory Truthfulness and Regulatory Compassion…

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  9. Viking2 (11,260 comments) says:

    Heard Joyce today praising the MP for helping them to solve the issue.
    Underlying message. ACT no longer figure in the National Party’s plan in Govt.
    Sooner them racist seats are gone the better.

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  10. orewa1 (428 comments) says:

    A good decision. Its heartening to see a Minister display the intellectual honesty to backtrack on a decision that with better information over time, has proved the wrong one.

    UFB and RBI will have a profound positive impact on our economic and social future. Handing them mostly to Telecom (which may yet happen) is one thing; coccooning the successful tenderer in regulatory cotton wool is quite another.

    But for heaven’s sake – when are these vital decisions going to be announced? Its more than three years since Key announced UFB as National’s first major policy announcement for the 2008 election. The world is not sitting back waiting for New Zealand. Lets stop talking and begin digging.

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  11. dion (95 comments) says:

    > I think we will see significant changes in society

    I’m sorry, but I’m failing to see why any of these changes justify the government spending $1.5b during a time of record budget deficits.

    That’s unless National has adopted the economic growth strategy that Helen Clark campaigned on in the 2008 election, which admittedly is not beyond the realms of possibility.

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  12. ben (2,414 comments) says:

    The entire project is an outrage. No business case has been prepared on that $1.5 billion spend. Nobody can therefore have any idea if the $1.5 billion could have been better spent.

    Officials who have no idea about anything, apparently, cite as a benefit of the fibre rollout the ability to switch on appliances at home before leaving work and the ability to have four way video conference calling as justification. These of course can be done now, almost nobody does them, which says something about the value of them to most people (zero), and above all they are private goods – what business does government have providing them??

    I have had one official tell me, with a straight face, that the business case for the $1.5 billion spend was National’s election victory.

    David, if this money was for almost any other product I suspect you’d have kittens. I am sad to see principle so quickly abandoned when its the ponies you like that are being rolled out.

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