More thoughts on copper pricing

September 26th, 2013 at 3:00 pm by David Farrar

I remain puzzled by what the Government is proposing (or consulting on possibly doing) around the price of copper . I blogged in detail on this issue two weeks ago.

I genuinely don’t know why the Government is proposing to change the law in a way which will deliver a huge amount of extra money to (note it is more money compared to the draft Commerce Commission determination, but is less money than they currently get), because they seem willing to gift this money to and not actually get anything in return for it. That is what baffles me.

If you compare the proposed actions here, with other interventions by the Government, the other interventions are easy to understand in terms of benefits (even if one may disagree on them). They are:

  • Sky City – in return for some pretty minor regulatory changes, Auckland gets a $400 million convention centre. A great deal for taxpayers.
  • Warners – in return for a slightly increased subsidy (for all productions) and some minor employment law changes, we retained not just The Hobbit in NZ, but also a viable film industry, protecting thousands of jobs and also a huge tourism gain.
  • Rio Tinto – while I personally did not support this deal, I understood the rationale – if Rio Tinto abandoned Tiwai point it would be a huge loss of jobs in Southland, so the deal was to guarantee they remain operating Tiawi Point for at least the next few years.

But the proposed law change to benefit Chorus is, well bizarre, because neither taxpayers nor consumers will receive any benefit from it. Chorus is already contracted to deliver to their portion of 75% of NZ homes. The proposed law change will not require them to deliver one extra centimetre of to anyone.

I really can not work out why the Government thinks this is a good idea. And if I, a pretty passionate supporter of the Government, can’t work it out – then I think most people can’t.

There have been two major rationales put up for the proposed law change. They are broadly:

  1. Chorus may go broke without it
  2. We don’t want the price of copper to undermine uptake of fibre

Taking the first rationale, let me say if there is a chance that Chorus could go broke under the draft determination, then of course that would be a concern. I am a shareholder of Chorus. I don’t want them to go broke. But what I am surprised about is that the evidence for Chorus being unable to be profitable under the draft determination is based on no official analysis. If the motivation for this law change is to stop Chorus going broke, then I would expect Treasury to be involved, just as they are with Solid Energy.

But of course the taxpayer owns Solid Energy, and does not own Chorus. I am unsure how you can justify bailing out Chorus, yet not bailing out Solid Energy.

But the reality is that Chorus would not go bust under the draft determination. They do not say they will. The market analysts do not say they will. Yes the draft determination will adversely impact their profitability and dividends, and that is bad for Chorus shareholders like myself. But that is one of the risks of investing in regulated monopolies.

My concern is that if No 1 reason is the rationale for the Government, then they will set a precedent that will come back to haunt them. If all you have to do is tell the Government that a (draft) decision by the Commerce Commission will affect your profits, and you get a law change, well the queue to the Beehive door will be long. Think Vector, Auckland Airport and others.

So let us look at the second rationale, which is we do not want the price of copper undermining the price of fibre. I personally am unconvinced the relative prices will be a major factor, but for the sake of debate am happy to concede the point that this could be undesirable. However what I can’t get is why you would just gift the extra money (being the gap between the proposed price and the price the Commerce Commission says should be charged in its final determination) to Chorus in return for, well nothing.

Chorus has signed a legally binding contract with the NZ Government to roll out fibre to their portion of the 75% of NZ target. Steven Joyce and his team did a great job negotiating that contract. There was no requirement in that contract for copper to be at a particular price. It was well understood that the price of copper would be set by the Commerce Commission (as it has been for decades) under a cost plus calculation (instead of retail minus).

So again I honestly do not understand why the Government is proposing what it is proposing. If someone from the Government can explain it to me, and others, that would be good. While there are some commercial players involved in this debate who of course have financial motivations – most of the people I talk to on this say they are genuinely baffled. They support the fibre rollout, but don’t see how the proposals advanced will be beneficial to anyone but Chorus.

Adding to the confusion is the fact that the Government appears to be contradicting itself with its own arguments. We have been told the major rationale for this law change is to stop the price of copper dropping (in line with the Commerce Commission determination) as this will undermine fibre uptake. Yet the Government has also argued that if the wholesale price of copper drops, then the retail ISPs will not pass the savings on, and hence consumers will not benefit.

Well I’m sorry, but pick one of those arguments, but you can’t pick both. You can’t argue this proposed law change is to stop the price of copper dropping significantly, and then also argue that the price of copper won’t in fact drop as the ISPs will not pass on the savings.

So you see why I am confused.

I don’t think the Government has any bad motivations around this. I just don’t understand what benefits this will bring, as opposed to all the other deals where the benefits (a convention centre, jobs, tourism) have been well understood.

I was chatting to someone on this yesterday, and he had what I thought to be a good suggestion as a compromise.

  1. Wait for the final Commerce Commission determination
  2. If the price recommended is at a level that the Government thinks could undermine fibre uptake, then proceed to set a minimum price for copper
  3. However have the difference between the Commerce Commission price and the Government price go to Crown Fibre Holdings rather than Chorus.
  4. Have Crown Fibre Holdings use the extra revenue to extend their fibre programme to more New Zealanders – go beyond 75% to 80%, boost rural broadband, help with access in more deprived areas etc.

While this compromise still has elements that I regard as undesirable, it would at least have the advantage of there being benefits in return for keeping the copper price higher than recommended. And while Chorus would of course rather get the extra money directly, they would still benefit by no doubt winning additional tenders by Crown Fibre Holding to extend fibre even further than the current 75%.

But as I said at the beginning, I just can’t understand why a law change is being promoted that simply would deliver more money to Chorus (compared to the Commerce Commission determination) that doesn’t deliver any benefits to consumers, taxpayers and Internet users. The proposals are just a consultation, so I hope that the Government takes the feedback as constructive and seriously looks at if there is a better way to achieve what they want – which is a fibre connected country.

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14 Responses to “More thoughts on copper pricing”

  1. Jaffa (103 comments) says:

    What on earth makes you think any savings will be passed on to the consumer?

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  2. virtualmark (1,306 comments) says:

    Jaffa,

    Absolutely. The reason outfits like Vodafone are barracking against this is because they can see huge transfer of value from Chorus’ shareholders to their shareholders. And little or no transfer of value from Chorus’ shareholders to the consumer.

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  3. bhudson (4,741 comments) says:

    It’s a rock and a hard place.

    I’ll take a stab…

    – the $1.3bn does not pay for UFB. As a conservative industry estimate it is about 1/3 of the total cost of delivering UFB
    – so what the govt put in place is a deal to provide an incentive for LFCs to spend their own capital
    – as I recall the $1.3bn was to be used as a fund the LFC could draw from if uptake and consumption were too low to sustain the investment [which was expected in the short term]
    – if the underlying costs or benefits change (it costs more to deploy or uptake is undermined) then the incentive for LFCs to spend capital is weakened
    – if so, then there is a very real risk that UFB deployment would falter and not achieve anything like the coverage desired

    I would not be surprised at all if the contract doesn’t actually oblige the LFCs to roll out UFB to x%, but instead makes available a portion of the $1.3bn according to the % of homes and business able to connect to their service.

    I haven’t seen the contracts, so that is speculative, but it has logic based on public statements/documents prior to the signing up of the LFCs and would provide an explanation as to why the proposal is what it is.

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  4. leftyliberal (651 comments) says:

    @Jaffa/virtualmark: There’s a heap of companies competing in the retail of broadband. The smaller ones will welcome a chance to further-undercut the bigger players, forcing the big players to also reduce costs (the big players already being more expensive than many of the smaller players).

    There is a certain amount of inertia to overcome in terms of with contract lengths and the like, but I would expect the bulk of the reduction in wholesale costs to be passed on to the consumer in one form or another.

    This paper provides some data:

    http://ec.europa.eu/information_society/policy/ecomm/doc/library/public_consult/cost_accounting/44_Telefonica_ANNEX3.pdf

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  5. Jack5 (5,291 comments) says:

    No worries, Cunners will fix this and root the Chorus share price.

    Perhaps Chorus shareholders can sue those who lobbied so hard for fibre to the door, which is proving to be a white elephant (no offence to the darker coloured jumbos).

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  6. James Stephenson (2,268 comments) says:

    I would not be surprised at all if the contract doesn’t actually oblige the LFCs to roll out UFB to x%, but instead makes available a portion of the $1.3bn according to the % of homes and business able to connect to their service.

    That’s effectively it, CFH shells out a certain amount per premise passed, but I think there are penalties for not keeping to the build schedule.

    I’m reasonably well connected into the industry, and it seems pretty clear that the Com com has no idea of the true costs of running and maintaining a copper network, especially to the standard required for VDSL2. I don’t get how Chorus is expected to get less per copper line at the same time as needing to maintain them to a higher standard plus upgrade their core to cope with the extra data that all the extra high speed connections are going to drive.

    I have no clue why Chorus are pushing the price v UFB argument, other than maybe they think it’s easier to pressure the government via a pet project, than make complicated arguments about whay their actual costs are.

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  7. PaulL (5,454 comments) says:

    Or the govt isn’t really considering this. They’re pretending to consider it, defending it badly, and waiting for the inevitable public outcry so they can drop it and say “we tried, but public opinion was against us.” If my awesome conspiracy theory is correct, then those on the left can also freely assume that DPF is part of that conspiracy. :-)

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  8. seerob1946 (24 comments) says:

    The whole business has got Steven Joyces sticky fingers all over it…..

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  9. Anthony (768 comments) says:

    The current $75 price for voice plus broadband retail bundle which nearly all the retailers offer is not really sustainable unless there is a reduction in the copper price. So it’s not really a matter of will the price reduction be passed but more whether consumers want a price increase to support Chorus shareholders?

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  10. wreck1080 (4,002 comments) says:

    I haven’t read much of the above (DPF’s comments or others)…but…my understanding is that UFB is in jeopardy of failing.

    Most kiwis seem happy enough to pay less for copper and good enough broadband. Due to this, we will have a strongly subscribed copper network and a multi-billion dollar ufb white elephant.

    Look at Tauranga for example — I don’t know a single person who has connected to UFB, yet all of the streets around me are ufb enabled. I do ask people too. Why would they? They don’t need fast internet to email / facebook / youtube.

    Internet products are designed cater for the lowest common speeds . This was evidenced by the early stage of adsl where websites were designed for dialup connections until a certain level of adsl connections was acheived. For UFB to become truly powerful requires mass saturation .

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  11. gazzmaniac (2,306 comments) says:

    At least in NZ the fibre network is getting rolled out equally everywhere.
    My street is last on the list in Aussie, despite only having access to DSL1 (not DSL2+ like most other metro areas), which means you have to pay for a phone as well as internet (naked DSL is only available on DSL2 subscriptions) – it was to be upgraded but Telstra decided not to after the government decided to pay for fibre to the door. We weren’t to get the NBN since we’re in a safe Liberal seat (no political gain for Labor). I’m glad that Abbot shit canned the fibre network. I connect through Optus 4G, which is faster and cheaper than DSL1 and a phone line even for months when I exceed my data allowance.

    In short – I think the government should have stayed out of telecommunications altogether.

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  12. OECD rank 22 kiwi (2,760 comments) says:

    It’s pretty simply isn’t it? Intervention X 2

    The Government spunked a load of taxpayer money on a fibre network there was no demand for. Up take is poor because it’s too expensive for the New Zealand market.

    The Government is now looking to jack up the price of copper in its second attempt at market intervention, all to cover its own political embarrassment. Typical Tory wet playbook. Problem is it won’t work. Any equation that makes broadband, and now all internet connections more expensive is a political fail playing right into the hands of Labour.

    At least in Australia Tony Abbott promised the bare minimum in terms of Fibre during the Election.

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  13. orewa1 (410 comments) says:

    James -“The Comcom has no idea of the true cost of running and maintaining a copper network.”

    Bollocks! The Commision has conducted a decade of deep analysis of first Telecom’s, and now Chorus’s books. In the unlikely event they have got this one wrong, this will emerge during their consultation process.

    The Commission’s job is to analyse and regulate in the long term interests of the end user/consumer.

    Chorus’s job is to build the network in accordance with its contractual terms – just as Ultrafast and Northpower are doing uncomplainingly.

    Key’s and Adams’ job is to let the regulator get on with its statutory role, not engage in Muldoon-like divine intervention nor meddle in commercial deals.

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  14. James Stephenson (2,268 comments) says:

    Bollocks! The Commision has conducted a decade of deep analysis of first Telecom’s, and now Chorus’s books. In the unlikely event they have got this one wrong, this will emerge during their consultation process.

    No, they haven’t. They used to chop what they considered to be an acceptable margin off Telecom’s retail price to arrive at the wholesale price they should offer, the current determination is based on a benchmarking process versus international examples.

    There is no analysis of costs at any point.

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