Why the price of copper broadband should be lower

September 12th, 2013 at 12:30 pm by David Farrar

Stuff reports:

An alliance of internet and consumer groups will today launch a campaign claiming Kiwis are paying $12 a month too much for , through a government subsidy for network company .

It’s not a government subsidy. It’s a proposed government law change that would see the price Chorus charges for copper broadband not fall as much as the Commerce Commission has said it should.

Rural Woman and Consumer New Zealand will stand alongside the likes of Internet New Zealand and internet service provider Orcon to launch the “axe the ” campaign.

It will argue that Chorus is effectively being given hundreds of millions of dollars in subsidies on the amount it charges broadband providers for the old copper-based communications network.

The subsidy is effectively from Internet users on DSL broadband packages.

Sources said last night that some members of the consortium had already been placed under political pressure not to publicly criticise the Government’s position.

However, it is understood that David Farrar, the National Party’s own pollster and the man behind the National-sympathetic Kiwiblog, is still a sponsor of the campaign.

I am, and no one has asked me not to be involved. The reason I’m involved is simple – on this issue I don’t agree with what the Government is proposing. This is not a exceptional thing. I blogged at the end of last year a list of over 50 times in 2012 I disagreed with or criticized the Government.

Like most people, I have a mind of my own. I support the Government overall strongly, and agree with probably 90% of what they do. But no-one ever agrees 100% – even Keith Holyoake once said he only agreed with 80% of what his own Government did. Mind you, I imagine Muldoon agreed 100% with what his Government did :-)

In the Internet space, I have been and remain a massive fan of the policy to roll out to the home to 75% of New Zealanders. It is world leading. I’m in Shanghai at the moment as a guest of Huawei, and talking to them has made it clear very very few countries are taking all the way to the home as NZ is. It’s a great forward looking policy, and I’m proud National campaigned on it in 2008 (Labour did not commit to it), and have implemented it.

I also think they way the police has been implemented has generally been excellent. The regional tenders worked well, and the requirement for open access by regional fibre providers led to the structural separation of Telecom into Telecom and Chorus, which is a huge boost for competition.

Also I very much admire the negotiating skills of the Government, led by then Minister Steven Joyce who managed to get contracts signed for 75% of NZ’s population for under the $1.5 b funding package. That was a pretty remarkable achievement when you consider a similar policy in Australia was budgeted to cost $43 billion!

So what is this current issue, and why am I against what the Government is proposing. It is important to note that the Government has not actually made any decision in this area of copper pricing. They have a review document out for consultation. I hope that the consultation will lead them to decide not to change the pricing principles for copper. Anyway, here’s the background. It is a fairly complex area, so bear with me.

When Chorus was part of Telecom, The wholesale fee for copper broadband products was determined by the Commerce Commission on a “retail minus” basis. Basically they looked at the charge Telecom had for copper broadband, and deducted off their certain retail costs to determine the fair wholesale price. You can argue that the Commerce Commission shouldn’t be involved at all, but the reality is that monopoly utility charges (especially in ) are regulated in pretty much every country on Earth. The Commerce Commission is independent of the Government, and makes decisions based on lengthy hearings of law, economics and engineering. Their job is to be the independent regulator under the Acts passed by Parliament.

Once Chorus was split off from Telecom, a “retail minus” pricing calculation was impossible. So the Government and Parliament changed the law to have the Commerce Commission determine the price another way, a sort of “cost plus” methodology. You look at what the actual costs of the copper network are, the appropriate return on capital and determine the price that way. Part of that involves international benchmarking.

The Commerce Commission did its job and came out with a draft determination that the price of copper broadband should drop by around $12 a month. The draft determination meant, if finalised, that ISPs would pay a lot less for copper broadband service, and with competition you should see fees drop for consumers.

Now Chorus, one can appreciate, didn’t like a draft determination that would see its revenue drop significantly. They, and the Government, have criticized the draft determination. It is important to note that any criticisms of how the Commission has done its job can be made in the consultation on a final determination (which is ongoing), and if people think they have interpreted the law wrongly, then you submit that to them. You can even appeal to the Courts on matters of law. That is how independent price regulation should work – draft determination, final determination, court appeals if necessary.

If people really thought the Commerce Commission had got it wrong, then they’d wait for the final determination, and if necessary take court action. But instead what is being proposed is a law change.

The law change (discussion document is here) basically says that the cost of copper services should be much the same as the cost of fibre services. There are two arguments for this. One is that the cost of a network should be calculated on the cost of the replacement network (fibre) and the other is that you don’t want cheap copper broadband resulting in few people taking up fibre. I’ll deal with those two points in turn.

The Government is quite right that generally the cost of a utility should be priced on the cost of its replacement network. You do this to ensure the utilities have enough money to fund the replacement network. This is how pricing works in electricity generation for example.

However this overlooks the major difference. Chorus have been given a significant Government subsidy through the contract with Crown Fibre Holdings to deliver their portion of the fibre roll-out to 75% of New Zealanders. They now have a contractual obligation to deliver that fibre for the contracted price to so many people. That contract means that the argument you need to price copper at the same price as fibre is not a valid argument, as far as I am concerned.

The contract was signed in the knowledge that the Telecommunications Act was going ot price copper under a different methodology. There was no provision in the contract that Chorus will be guaranteed a certain price for copper.

Now there have been stories of price over-runs at Chorus, and that they basically signed up to deliver the fibre at too cheap a cost, and are struggling to do it. Well, in a nutshell, tough bikkies. And I say that as a shareholder of Chorus.

They bid in a competitive tender for the right to build the fibre network with the Government subsidy (actually a loan). They had competitors such as electricity lines companies also bidding. The lines companies would not have been relying on income from copper to fund their fibre build. They were bidding on income from the fibre services themselves.

If Steven Joyce was such a good negotiator that they bidded too low to win the contract, that is not a good reason to increase the price of copper. If their lawyers were not up to scratch and they failed to get a guarantee of a minimum copper price in the contracts, then again why is that a reason for a law change?

So the existence of the contract means I can’t accept the argument that the price of copper should be based on the price of fibre to fund the fibre network. That argument only holds if they had not signed a piece of paper agreeing to do so, in return for most of the $1.5b subsidy.

That brings us to the second argument, which is should we keep copper prices higher than they would otherwise be, in order to encourage consumers to switch to fibre.

Reasonable people can disagree on this second argument. I’m personally sceptical of it, as I don’t think over-charging people for a product is a good way to encourage migration. I think some people will want fibre and happily pay more for it (like me). Others won’t need it, and having them pay $10 a month more than they have to is unfair. It is important to note that the Government is not looking to put the price of copper up from the status quo. They are looking to change the law so the price of copper broadband doesn’t drop by as much as the Commerce Commission has calculated it should.

But in terms of this second argument, the major problem for me, is that even if you accept there is justification for charging copper users more, to encourage people onto fibre, why would you effectively gift that money to Chorus? Chorus have, again, signed a contract requiring them to establish in most parts of NZ a fibre network. They must build this regardless of the copper price.

If the Government truly thinks it is necessary to have the price of copper much the same as fibre in order to promote fibre uptake, then don’t gift what could be up to $100 million a year to Chorus. Be upfront, and call it a fibre development levy, and have the Government collect it and use it to fund fibre outreach for the 75% of NZ not covered by the current UFB project. It could fund ultra-fast broadband in rural areas, or economically deprived areas.

Note that I am not advocating per se for an Internet development levy. I am saying that if you are determined to have the price of copper and fibre the same, then it is better to have the Government spend that money on actually getting more people onto fibre. If you just allow Chorus to have a higher wholesale price for it than justified under the law, that won’t result in one extra home getting fibre.

So that is why I’m not supporting the proposed changes in the Telecommunications Act Review. Copper users should not be over-charged or taxed to fund the fibre development.

I have no commercial interest in the outcome. I just want what is best for Internet users in New Zealand, and to my mind that is the status quo. I think the major beneficiary of the proposed changes would be Chorus, and I don’t believe in corporate welfare – for Rio Tinto or Chorus.

Technically I am arguing against my own self-interest as a (very minor) Chorus share-holder. But for me it is about the public interest.

InternetNZ is also involved in the campaign, and I am a former office holder and chair their policy group. But that doesn’t mean I always agree with them. On the GCSB bill for example, I had a much more benign view of the law change.

In my role as Kiwiblog, I am a official sponsor of the Axe the Copper tax campaign. It wasn’t InternetNZ that asked me to join. The campaign co-ordinator did, and after reading the campaign proposal, I decided to do so on the basis I agreed with its aims. I am reluctant to join a campaign which is asking the Government I support to change course but I will do so when I don’t believe they are on the right track.

My hope is that the Government will conclude that the status quo (which was put in place by them!) is working, and allow the price of copper to drop to whatever the Commerce Commission determines it should be under the law passed by Parliament. In the cases where we do have price regulation (a necessary evil as I see it), the prices should be set by independent regulators after hearing all the evidence, not by politicians. They should make the law for setting the price, and not second guess the Commerce Commission. If the Commission gets it wrong, their decisions can be appealed in court on matters of law.

UPDATE: A much more readable opinion piece on this issue is at NBR by Paul Brislen.

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27 Responses to “Why the price of copper broadband should be lower”

  1. geoff3012 (68 comments) says:

    That post was too short….please make it longer next time

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  2. freemark (564 comments) says:

    Boradband..is that something from kazakstan>

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  3. swan (659 comments) says:

    Well done DPF.

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  4. Hiro Protagonist (17 comments) says:

    “we keep copper prices higher than they would otherwise be, in order to encourage consumers to switch to fibre.”

    This is particularly onerous for those who CANNOT switch to fibre.

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  5. Ross Nixon (559 comments) says:

    Why would I want to go onto fibre at a higher price?
    VDSL2 gives me 36/10 (megabits/s). I’m not going to be uploading 4K videos any time soon, if ever.

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  6. xy (182 comments) says:

    Nice post.

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  7. George Patton (348 comments) says:

    Good God Almighty…

    How could David Farrar put his name to such a misleading campaign.

    There is no tax. The price of broadband is NOT going up by $600m. It will in fact be coming DOWN.

    The price of broadband will come down regardless, it just depends on whether its based on the huge discounts suggested in the appallingly bad methodology of the Commerce Commission, or the much lesser discounts from political intervention to help promote the $1.35B of fibre taxpayers have funded.

    Even worse, there is EVERY chance that this becomes the Coalition for Supernormal Profits, as they seek to have wholesale prices cut, without ANY regulation to keep down their own retail pricing. Slingshot, Orcon et al could simply pass on SOME of the price cut, not all of it. Of course, they will do whatever they can to extract as much benefit from a wholesale cut.

    The government should be really putting an end to this nonsense by saying either:

    1. Chorus can disconnect copper wire, dig it up and recycle it 2 years after a property gets fibre
    2. Retailers should be regulated as well as wholesalers, because we must make sure consumers get cheap copper broadband, and it would be unfair for only wholesalers to be forced into keeping prices down. Bet the ISPs would like that….

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  8. Alan Wilkinson (1,868 comments) says:

    The UFB project is a dog that should never have been unleashed. This regulatory mess is exactly what happens when Governments have a conflict of interest between political misuse of taxpayers’ money and impartial regulation.

    At least Abbott in Oz has had the sense to implement fibre only to the cabinet and allow for multiple, competing and appropriate connectivity from there. The cost of connecting every home with fibre is massively uneconomic relative to the benefits.

    Effectively poor people who can’t afford fibre will be subsidising rich people who can. Not only insane but immoral.

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  9. swan (659 comments) says:

    George,

    Ah, what is wrong with the CC methodology specfically?

    With regard to retailers, the CC will keep an eye on this market too no doubt. However there is plenty of competition in the retail space – difficult to see much potential for monopoly rents in this market.

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  10. Hamish_NZ (46 comments) says:

    It seems to me that the govts proposals to change the methodology for price setting is a solution looking for a problem, something more akin to labour party policy.
    Chorus obviously knew the regulatory environment at the time the negotiated the ufb contract, to put on the tears now is stupid. If chorus is worried about shareholder fallout, then they should have thought about that when negotiating the contract. Really the reasonable course of action of chorus would be to go to their shareholders and say look we stuffed up, the costs of providing ufb is higher than we anticipated, and our earnings will be lower than anticipated.
    What they’re doing in their asking of the govt to change the goalposts is really not much different to some of the treaty negotiation settlements. Reneging on a previous deal and trying to get a better one in the future. Its pathetic.
    Good on dpf for saying it how it is.

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  11. burt (8,206 comments) says:

    Perhaps Chorus could threaten to pull out of NZ and the gummit could give them millions of extra dollars to stay in NZ and hold the price up a few more years …….

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  12. bhudson (4,736 comments) says:

    If the Government truly thinks it is necessary to have the price of copper much the same as fibre in order to promote fibre uptake, then don’t gift what could be up to $100 million a year to Chorus. Be upfront, and call it a fibre development levy, and have the Government collect it and use it to fund fibre outreach for the 75% of NZ not covered by the current UFB project. It could fund ultra-fast broadband in rural areas, or economically deprived areas.

    This is a ‘between a rock and a hard place’ problem to try to resolve. There is arguable merit for and against when you take into account the committed $1.5bn public money investment.

    I don’t think there is a perfect answer, however I think this one is the most palatable compromise as it does not line the pockets of Chorus and would help to speed up fibre availability for those paying he levy. (No it doesn’t help those who might argue that they don’t need or want fibre, but that is as much a relitigation of UFB as it is a debate over copper services.)

    This is in line with the compromise idea I put here on KB a few months ago when this first raised its head.

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  13. Alan Wilkinson (1,868 comments) says:

    “There is arguable merit for and against when you take into account the committed $1.5bn public money investment.”

    Yes, let’s throw good money after bad. So we support a bad business case by funding completely impossible business cases.

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  14. bhudson (4,736 comments) says:

    @Alan Wilkinson,

    That presupposes you disagree with the original UFB plan. Not everyone does by along stretch

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  15. Jack5 (5,015 comments) says:

    Alan Wilkinson is correct: the fibre project is a stuff-up. It ran ahead of demand and has been caught out by the surge in smart phone and tablet internet access, which relies either on wireless through the cellphone networks, or otherwise provides a slowish but sufficient WiFi wireless link in the chain.

    TUANZ, the misleadingly named Telecommunications Users Association NZ – it should be the telecomunnications suppliers association, pushed for the state-led spend-up on fibre, so it’s good to hear it now opposing the copper tax.

    You can have some sympathy for Chorus/Telecom. Its original strategy of fibre to the cabinet has been justified by the smart phone/tablet trend. The politicians, their tech-bedazzled advisers, and industry pressure groups put the pressure on Telecom and Chorus. They almost ridiculed Telecom and Chorus for the cabinet strategy.

    Now we are being saddled with fibre to the home, could there be a case for keeping the fibre price high and the copper price low to moderate? To be a luxury item worth a premium speed fibre will need priority feeding through the oceanic bottleneck(s). If everyone gets fibre and hogs five video channels at a time how many transPacific cables will we need? How can they be economic?

    I say let the wealthier folk among the couch potatoes pay their fair share of the cost of fibre to the home and a fair share of the oceanic video autobahns.

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  16. Alan Wilkinson (1,868 comments) says:

    @bhudson, it doesn’t matter whether you agree or disagree with the original UFB plan – it didn’t have a business case which is why it is costing the taxpayer $1.5B.

    @Jack5, exactly right.

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  17. RightNow (6,975 comments) says:

    Totally agree with Alan and Jack5. UFB was a solution to non existent demand. But now it’s committed I agree with DPF we shouldn’t artificially hold copper pricing high to encourage uptake. Let the players involved take it on the chin.

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  18. orewa1 (410 comments) says:

    Well articulated, David. Its a complex issue but you have set it out well. And congratulations on having the political courage to cross the floor of the blogosphere.

    This is a flashback to the 1990 s when Telecom – the Chorus-like monopolist of those days – hoodwinked a gullible Minister into handing them obscene favours.

    The sad thing is that Amy Adams may suffer political damage from this, for not doing her homework.

    I hope the Campaign succeeds.

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  19. wreck1080 (3,863 comments) says:

    Sorry, I do not have time to read all this so I may be totally misinterpreting.

    However, only having a few people connected up to fibre is like only having a few people connected to the public phone network. There is not much benefit for the overall population.

    In effect, the whole is greater than the sum of individual parts. But, that will never be realised if copper is cheaper than fibre.

    The two must be equalised in some way, either by reducing fibre cost, increasing copper price, or both.

    Otherwise, the gains from UFB may never be realised. As it is , even if UFB were cheaper then customer inertia will still mean slow update of fibre.

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  20. Alan Wilkinson (1,868 comments) says:

    “having a few people connected up to fibre is like only having a few people connected to the public phone network. ”

    Evidence? Sounds like utter rubbish to me. Most traffic will be streaming downloads as far as I know.

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  21. Viking2 (11,371 comments) says:

    Problem is that there is thousandfs of miles of copper in the ground that is way past its useby date. Sooner or later its going to collapse and the cost to repair then enters the equation.

    Those moaning over $10.00 would moan if they won lotto.

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  22. bhudson (4,736 comments) says:

    Most traffic will be streaming downloads as far as I know.

    Therein lies the greatest risk – that UFB becomes the electronic equivalent of ‘plain brown envelopes’ in the mail.

    And largely that will come down to the ICT industry players. They will sell businesses the merits of ICT in helping their businesses grow and build competitive advantage, or the outcomes will be sub-optimal to say the least.

    UFB will pay its way through consumer consumption – downloads as you say Alan, and most of that being money going offshore which also increase credit card debt balances – but our economy will only reap real benefit if UFB leads to more effective – transformative, in fact – use of ICT to improve business performance.

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  23. Alan Wilkinson (1,868 comments) says:

    “there is thousandfs of miles of copper in the ground that is way past its useby date”

    Evidence?

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  24. cha (3,935 comments) says:

    Evidence?

    Water intrusion into ageing positive pressure cables across the network.

    http://www.airtalk.com/primer1.html

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  25. leftyliberal (642 comments) says:

    Good on you DPF for standing up publicly in this case even though it’s against your team. If only more people (parliamentarians included) were willing to do so in the same way.

    I agree entirely that the Government should not be doing what they’re planning. There’s no reason for it. Chorus don’t need the extra cash – they knew exactly what they were signing up for, and if incentive needs to be placed, then the Government should be the one to do it.

    Personally I don’t see why incentive is needed. More and more content is moving online, and it won’t be long until ADSL2 downloads just aren’t up to scratch. A couple of 8mbit/s videos and you soak it up even in the best-case scenario. With fibre you get the bandwidth as advertised – you don’t often get that with A/VDSL.

    It’s also a bit of chicken and egg: Only once the speeds are up will higher quality streaming be put in place, yet it’s those higher quality streams that can help convince consumers to switch.

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  26. Floyd60 (92 comments) says:

    Chorus is obviously still considered to be ‘too big to fail’ so the Gnats have had to move to maintain a playing field topography more suited to its needs. They are also signalling that they will protect large utility/service sector businesses from competition. They want to show potential investors they the NZ Govt will protect their interests as well. Crucial for the next round of asset sales.

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  27. jmacg (1 comment) says:

    As someone from the wilds of South Wairarapa who didn’t qualify for UFB, I’d been concerned for a while that I might be a have-not subsidising the haves in this debate. Thinking I should do more than just moan to my family and friends, I sent a letter to the DomPost. The very next day the Coalition for Fair Internet Pricing campaign started. Great! The DomPost published my letter the day after, and I decided to write more about it on my own blog, Musings from Martinborough. See http://jmacg.com/2013/09/15/have-nots-paying-for-the-haves/

    I followed it up by copying my letter to South Wairarapa mayor, Adrienne Staples, asking what her council was doing about it. That led to some appalling political nonsense from her and from our local MP, John Hayes. I was forced to chronicle that as well: http://jmacg.com/2013/09/26/political-duckshoving-on-broadband/

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