Thank God it is over

November 27th, 2014 at 3:00 pm by David Farrar

The ODT reports:

An ear-splitting shriek of joy and relief rent the air at Dunedin’s Gigatown office last night as the city was named the winner of the Gigatown competition.

The win came after a massive online push from residents and supporters that lifted the city above its five competitors to the top of the competition.

Seconds after the annoucement, Mayor Dave Cull was at the podium in Wellington accepting the prize he said would have a real effect on Dunedin residents.

”This will affect their lives, it will affect their children’s job prospects, it will affect their educational possibilities, it will affect their medical services, it will affect their retail, it will affect every aspect of our lives.

”This will enhance the possibilities for our whole community.”

 

Thank God I never have to see another #giga tweet in my life.

Congrats to Dunedin for winning though. Having all residents with access to a gigabit connection will be cool.

Tags: ,

Chorus v Telecom

July 28th, 2014 at 4:03 pm by David Farrar

Stuff reports:

Chorus has returned fire over a complaint Telecom laid with the Commerce Commission over a new copper broadband product.

Telecom said Chorus planned to impose an “artificial cap” of 250 kilobits-per-second on the average throughput of its regulated copper broadband service in order to make new “premium” products it announced in May more attractive.

Telecom said the move would significantly degrade the performance of regulated copper broadband services, the price of which is set by the Commerce Commission.

It has laid a complaint against Chorus, saying the proposals breached the Telecommunications Act and were also a “breach of good faith”.

The commission said it would investigate the complaint and revealed CallPlus had also voiced concerns about Chorus’ changes.

This shows what a good idea it was to separate Telecom and Chorus. In the old days, this may have just happened without dissent. It is a good thing to have the interests of the largest competitive provider separate to the interests of the monopoly infrastructure provider.

Tags: ,

New fibre plans from Chorus

May 16th, 2014 at 7:00 am by David Farrar

Very impressed with the new fibre plans from Chorus. Less impressed that I phoned Vodafone three days asking to be switched to fibre and they have not yet ring me back, despite saying they’d do so in 20 minutes.

Anyway here’s the plans now available at a wholesale level:

  • Fibre 100/20 $40
  • Fibre 100/50 $45
  • Fibre 100/100 $50
  • Fibre 200/20 $55
  • Fibre 200/50 $60
  • Fibre 200/200 $65
  • Fibre 1000/1000 $275

The 100/100 plan looks very attractive to me.

Great to see Chorus responding to demand.

Tags: ,

Fibre on poles

May 5th, 2014 at 4:00 pm by David Farrar

20140502_082031-lighter1A

 

A reader e-mails:

Here are some photos of the double telephone poles in Oamaru. I notice now that the fiber does not seem to be strung from pole to pole, but rather is undergrounded and goes back up each pole where it is terminated in some sort of junction box – see photos for details.

It seems the copper wires will be brought over to the new fiber pole and the old copper strung pole will be removed at some stage. This seems to have happened to some other double poles that until recently were like this down another nearby road. I am guessing the reason for replacing the old telephone poles is that they are quite old anyway. You can see they are gum tree trunks and no one has used gum tree telephone poles since the 1970s I think.

So now each street has a set of poles for electricity, copper and fibre. Wouldn’t it be nice if they could all share? Good to see the roll-out happening though.

Tags: ,

Some tweaking for Chorus

March 12th, 2014 at 1:00 pm by David Farrar

Amy Adams announced:

Information and Communications Technology Minister Amy Adams has welcomed the agreement by Crown Fibre Holdings and Chorus on the first tranche of amendments to the companies’ Ultra-Fast Broadband contract.

Chorus has details of the changes:

  • More flexibility over deployment timing, so long as still finished by agreed completion date
  • Can use Cat 5e cabling within apartment buildings rather than fibre to each apartment
  • A charge for Greenfields reticulation to developers

The changes look relatively minor, and a pragmatic response to the funding shortfall Chorus has.

Tags:

Options for Chorus

December 15th, 2013 at 12:00 pm by David Farrar

The Herald reports:

Chorus could cut its funding shortfall for the ultra-fast broadband project from $1 billion to $200-250 million if the embattled-lines company introduced savings initiatives, changes to dividend policy and debt headroom, says an independent report released today.

Chorus said last month that a Commerce Commission ruling to cut wholesale internet prices could lead to a $1.07 billion funding shortfall for its portion of the ultra-fast broadband scheme.

It’s not a funding shortfall for UFB. It is a funding shortfall for Chorus. Chorus does more than UFB. They have signed a contract committing them to UFB in return for a subsidy by way of loan.

The Government then commissioned Ernst & Young (EY) Australia to investigate how the cuts would impact on Chorus’ ability to deliver on its UFB contracts with the Crown.

This report was released today and said Chorus could reduce this $1.07 billion funding shortfall to between $200 and $250 million by introducing “cash-flow savings initiatives”.

Possible revenue, operating expenditure and capital expenditure initiatives could reduce the funding gap by $400 to $450 million, the report said.

The report said that another $290 million of the funding gap could be reduced if Chorus made changes to its dividend policy.

The report suggested that if a two year “dividend holiday ” was introduced and then payouts made of 12.75c per share until 2020, the funding gap would come down by another $290 million.

As well as this, changes to debt headroom could reduce the shortfall by $130 million, the report said.

Even if these changes were made, EY said there was still a risk Chorus might breach its agreements with its banks.

The report is here. It is excellent. They note:

In FY13 Chorus’ return on equity was  29.7%, which is significantly higher than other infrastructure businesses which have average returns of 12.5% (New Zealand peers) and 11.2% (Australian peers).

Even with the Commerce Commission determination, Chorus remains a profitable company. They do run into problems around their debt ratios and these can be a serious issue for them.

Chorus and CFH have already begun the discussions about possible changes to UFB contracts to help close the funding gap.

In releasing the report today, Communications Minister Amy Adams said the Government expected Chorus to meet a “significant part” of the funding shortfall itself.

“The Government will be monitoring closely the progress of discussions between CFH and Chorus,” she said.

This is as it should be. I have said all along that government intervention should be the last resort, not the first.  Chorus needs to do internally what it can to stay within its debt agreements. If after that there is still a shortfall, then some tweaking to the UFB contracts (such as longer repayment times) may well be appropriate.

Tags:

Where to for Chorus

December 3rd, 2013 at 9:00 am by David Farrar

The decision by every other party and MP in Parliament (and the Conservatives outside it) to oppose legislating to overturn the Commerce Commission decision on the price of copper broadband was both bad and good for the Government.

The bad is that legislation was obviously a preferred option for the Government, even though the Telecommunications Review was only a discussion document. It is true that they had some weeks ago started to back off that route, and look at other options, but their statements up until then had quite strongly been in support of legislation.

I think it is a fair criticism that the Government should have talked to other parties at an earlier stage about whether they would support legislation, rather than fairly forcefully support it, and then realise you can’t do it.

So while the political management hasn’t been optimal, the upside is that having Parliament assert its right to say no to the Government, does actually assist the Government. It removes the legislative option off the table, and will I believe lead to more constructive dialogue between all parties on where to go from now. The members of the Coalition for Fair Internet Pricing (Kiwiblog is a member) will I believe be keen to engage constructively not that the risk of over-riding the independent regulator is gone, and Chorus can’t demand the Government do something it is clearly incapable of doing.

The decision by Amy Adams to have an independent financial review of Chorus was an excellent one (and something I had called for), and the way I see it is there are four steps ahead of us on resolving this issue They are:

  1. Does Chorus have financial problems under the current settings, and the Commerce Commission determination?
  2. If the answer to 1 is yes, Are there changes Chorus can make to solve those problems themselves?
  3. If the answer to 2 is no, then what are the factors that got Chorus into this state?
  4. If the answer to 2 is no, then taking account of 3, what options are open to the Government, and which are preferred

We will soon get the answer to No 1. I am sure it will be a comprehensive report. I’ve had a financial modelling expert take me through what they expect the report will find, and that it will conclude on current settings Chorus will breach their debt financing agreements – specifically the acceptable ratio of debt to EBITDA. The Commerce Commission determination will increase debt and decrease EBITDA and this means the banks could withdraw their loans to Chorus which could plunge it into an Air New Zealand type situation.

Note that this does not mean Chorus will be bankrupt or even unprofitable. The report could well conclude that over the next six years or so Chorus will still make small profits, and even have marginally positive cashflow. The issue is likely to be mainly around debt and timing of cash requirements.

So if the answer to 1 is yes as the Prime Minister has (correctly it seems) warned, then we get to whether Chorus can make changes themselves to prevent a breach of their debt agreements, or can renegotiate their financing.

Obviously one change is a reduction of dividends. I say this with sadness as a Chorus shareholder, but if you have a debt problem, then you can’t expect to pay out dividends. Once you are getting the full benefits of the fibre investments, then they would resume I expect. I note Chorus has already started to head down this path by saying their proposed dividends are likely to be reduced.

It is unlikely that change would be enough. So the report needs to also look at whether other changes will be enough to prevent a debt default. Can opex be reduced. Can capex be delayed.  With that in mind we note the story yesterday:

Network company Chorus is flying about 200 staff from Wellington to Auckland today for an annual get- together – despite “crying poverty”.

Mr Bonnar said Chorus had twice been recognised as one of the best employers in Australasia, “and a big part of that is once a year we get all our people together”.

“It’s to hear from the senior people in the business where the organisation is at, where it’s going, what its strategy is and how what they do fits in with it.”

Now I don’t have a problem with Chorus doing this as a private company. But if you are sticking your hand out for Government assistance, then decisions like this will face public scrutiny. The cost is minimal to their overall opex, but taxpayers will expect Chorus to be as fiscally frugal as possible, before any additional taxpayer money is considered.

But what happens if the report concludes that Chorus does both have a debt problem, and can’t solve it internally. Well then I think you need to identify the factors that got Chorus into this state. I don’t mean a blame game, but identifying what contributed. Obviously the Commerce Commission determination is a significant factor, but is it the only factor? Have there been UFB cost over-runs? Was Chorus too close to the debt rations anyway, regardless of the determination?

Then after you have identified the factors involved, do you look at potential outcomes for the Government and Chorus. Off the top of my head, they include:

  • Chorus defaults on its debt (highly undesirable)
  • Chorus defaults on the UFB build (highly undesirable)
  • Chorus renegotiates the debt (would banks agree?)
  • The Government guarantees the debt for Chorus (the banks may call it in immediately)
  • The Government makes the repayment schedule for the UFB build financing longer (will it make much difference?)
  • The Government loans Chorus more money
  • The Government slows down the UFB build (undesirable)
  • The Government takes a stake in Chorus

I’m not against the last option. In fact the Government already has some preference shares in Chorus as part of the UFB contract. When it comes to commercial trading companies, I believe the Government shouldn’t own any shares at all. I’d sell 100% of the power companies etc. However just as I can accept the state should own Transpower as the national electricity grid, there is a case that the national fibre and telecommunications grid should be a government utility also.

Put it like this, if you were back in 1987, knowing what you know now, you would have split NZ Post telecommunications division into a Telecom and a Chorus on day 1, and have sold Telecom and kept Chorus. You sell off the competitive elements and own and regulate the monopoly.

So I’m not ideologically against the Government taking a stake in Chorus. It also would mean that both current Chorus shareholders and the Government would both share in the pain of getting Chorus out of its debt problems – which is preferable to it being just the Government (or worse Internet users as originally mooted).

To a degree, I’m getting ahead of myself. Let’s see what the report says on 1, 2 and 3. Then we can focus on the “least bad” option for ensuring Chorus can deliver on the UFB project and 75% of New Zealand homes get fibre access to ultrafast broadband.

Tags: , , , ,

A Chorus of one

November 28th, 2013 at 3:38 pm by Jadis

New Zealand First, United Future and the Maori Party have all stated their position that the Government should listen to the Commerce Commission on the Chorus and Copper tax issue. It appears to have been a highly coordinated campaign where each Party stated their position in quick succession.

What does this mean for the Government? Well, the silver lining is that they can ditch a proposal that was fairly unpopular and work on alternative arrangements for assisting Chorus that doesn’t involve internet users paying more and undermining the Commerce Commission.

 

Update: ACT and Mana Party have also added their support. I understand Greens and Labour Party will follow in the next hour.

Tags: , , , , , ,

A suggestion for the Government

November 5th, 2013 at 3:00 pm by David Farrar

Stuff reports:

Chorus says it could default on its loans and may not be able to complete construction of its share of the ultrafast broadband network, following a ruling by the Commerce Commission this morning.

The NZX-listed company issued the dire warnings after the commission released a “final determination”, which ruled that the company should be allowed to charge $10.92 a month for its copper broadband connections.

Its shares have plunged 8 per cent this morning, and were trading down 21 cents at $2.42 within minutes of the NZX opening at 10am.  

Chorus has a contract with the Crown to complete its work on the UFB network by 2020 but the company said that if the Government didn’t intervene, it would be left with a $1 billion “funding shortfall”.

Chief executive Mark Ratcliffe said Chorus would “simply not be able to borrow the money we need” to complete its UFB contract.

The company had notified its bank lenders that unless the Government intervened, the ruling would have a “material adverse effect” on the firm.

“If this did occur lenders would be entitled to trigger an event of default,” the company said in a statement.

Chorus would also “discuss with the Crown whether Chorus is still a credible UFB partner” and how it might still deliver on its contract, the company said.

No one wants to see Chorus bankrupt or defaulting on its loans. But wise politicians would do well to remember the words of Mandy Rice-Davies who basically said “Well he would say that, wouldn’t he?”

The price set by the Commerce Commission is almost half way between the draft determination and the price the Government indicated in its discussion document it might set.

Now I can totally understand that the Government doesn’t want the UFB project derailed, or worse Chorus to go bankrupt or default on its loans.

But please please please I hope they don’t just take Chorus’ words for it, and make a decision based on a press release. This is not to suggest that Chorus is wrong. Just to say, that a very high level of certainty should be required before you intervene. It should be the last option, not the first option.

If the Government really thinks there is a risk of that magnitude to Chorus, then it should hire the best accountancy or financial analysis firm in New Zealand to go into Chorus, and do an independent review of its income, spending, profitability, debt and the like and have them report back on whether they concur with what Chorus has said. Release that report publicly and allow people to peer review it.

As Chorus is asking the Government for a special law change, that would benefit it by hundreds of millions of dollars, surely they could not object to an independent review?

I understand the Government is stuck between a rock and a hard place. They have to make a decision. My plea is for them to make a decision based on the best independent data there is, not on the basis of a press release from a monopoly provider.

Also the Government could do worse than play a bit of hardball themselves. If Chorus is going to threaten the Government by saying it may default on the UFB project, then maybe the Government should open talks with Vector and other UFB bidders and see if they would be willing to step up if necessary. Use the same tactics that Steven Joyce used with Novopay – keep the pressure on the company, by looking at backup options.

Personally I think it is almost beyond belief that Chorus would seek to default on its UFB contracts, considering that would leave the company with almost no long-term future – being a copper provide only in what is a fibre future world.

Maybe the price recommended would cause them issues with their debt. If so, let’s have the details.

As I said I understand the difficult position the Government is in. But this is a decision they should take great care about. Both because it may set a precedent, and also because it will affect almost every Kiwi household.

Tags: , , ,

New fibre prices

October 24th, 2013 at 3:00 pm by David Farrar

Chorus has announced new fibre products and/or prices. The details are:

  • Entry level going from 30 Mb/s down and 10 Mb/s up to 50/20 – price remains $37.50/month
  • Mid level of 100/50 dropping in price from $55/mth to $45/mth
  • Business package of 100/100 going to 200/200 – price remains $175/moth
  • A new top end package residential package of 200/200 for $65/mth
  • A 100/100 package for $50/month

This is a great move by Chorus, and very welcome.  I’d probably go for 100/50.

Tags: ,

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 broadband. 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 Chorus (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 Chorus 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 fibre to their portion of 75% of NZ homes. The proposed law change will not require them to deliver one extra centimetre of fibre 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.

Tags: , , ,

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 broadband, through a government subsidy for network company Chorus.

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 copper tax” 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 fibre 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 fibre 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 telecommunications) 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.

Tags: , , , ,

Barton on broadband cost

September 5th, 2013 at 12:00 pm by David Farrar

Chris Barton writes in the NZ Herald:

The PM further fuelled the uncertainty flame following the release of the commission’s report saying: “It has significant implications both for [Chorus] and for UFB. It substantially reduces the income of that company and its capacity around broadband.”

Here’s what John Key might have said: “Well, thems the breaks. The Commission has arrived at its determination after careful consideration. The determination was signalled in 2010. The process has been in law since 2011 and we’ve been expecting it since before Chorus was formed, following the de-merger with Telecom. No one, including the analysts, should be surprised by this. If they are, then they haven’t done their homework.”

To which an enquiring journalist might have asked: “What about the extra cost Chorus is facing on the UFB?

Key: “Well that’s a bit rich. We’ve given Chorus $929 million interest free for 14 and half years, making it a loan worth about $1.2 billion, to build its part of theUFB.

That’s a pretty generous deal agreed by both parties on commercial terms. That’s business. For Chorus to be moaning about extra costs – well that’s its problem – we acted in good faith.”

Journalist: “So you’re not at all worried that Chorus could fail and the UFB won’t get rolled out in time?”

Key: “Not at all. Look, 18c per share is still a good dividend. Chorus is still a good business with a captive market. It has until 2020 to get just 20 per cent of users onto its part of UFB and has from 2025 to 2036 to repay the loan. That seems quite doable. Meanwhile it has a guaranteed revenue stream from its existing copper network. Nothing to see here.”

But of course John Key didn’t say that. Instead he set in train Adam’s intervention to hold copper broadband prices artificially high.

I think the planned intervention is not well justified.

Even if one accepts that it is in the public interest (not that I do) to have higher (than they would be if no intervention) copper prices so that people migrate to fibre, I don’t understand why you would gift the extra revenue to Chorus – rather than use it to fund further fibre roll-out – or rural broadband.

I’m a Chorus shareholder, but I don’t want Chorus to benefit from regulatory changes that are not good for consumers.

I quite accept that there are legitimate issues over how to price the copper network, and should it be based on its current cost, or the cost of the replacement network – as it is in electricity.

But the complicating factor is that the future network is being delivered by way of government contract and subsidy through contracts with Crown Fibre Holdings. So the investment decisions shouldn’t be based on revenues from copper (well not for 75% of the country).

By coincidence, I was at a Chorus announcement last night, and it was an exciting one. They announced that they will connect an entire town in New Zealand up to 1 GB/s fibre. And they are effectively having a competition where towns will say what they would do with it, how they would market themselves, and the winning town will be chosen, and made the fastest town in the Southern Hemisphere when it comes to the Internet.

That’s a great initiative to get communities involved in thinking about their fibre future, and will attract lots of attention. I suspect, sadly, Thorndon doesn’t qualify as a town :-)

Paul Brislen writes more about the Chorus announcement:

Chorus has launched a promotion that will give one town in New Zealandgigabit speeds on the Ultra Fast Broadband network.

One gigabit per second is fast. OECD rankings suggest that only four countries in the world offer national 1Gbit/s plans – Turkey, Slovenia, Sweden and Japan (this was in 2011 so there may be more by now) and that most top out at about half that speed.

We’re talking about 1000Mbit/s. Today I get 15Mbit/s download so to call it a step change is something of an understatement. My upload speed is barely 1Mbit/s.

We tend to get complacent about the fantastic advances technology makes each year. A doubling of capacity, a tripling of speed, these numbers become run of the mill and users are blasé about them. But a thousand fold increase in my upload speed would be startling to put it mildly, so good on Chorus for trying this out.

The economic potential of offering such a service is astonishing. Think what having such a speed would do to the way we think about remote working or having to live in the main centres. Think about what access to the world at those kinds of speeds would mean for start-up software developers and to our migration patterns. Software companies should be lining up for our cheap housing and staff with no fear of us being too removed from the world.

I am excited about a fibre future. But I also want copper not over-priced during the transition to fibre.

Tags: , , ,

The copper tax

August 9th, 2013 at 11:00 am by David Farrar

Hamish Fletcher at NZ Herald reports:

Smaller telcos are seething about Government proposals they say would make wholesale copper internet prices artificially high, hinder competition and hurt innovation.

A discussion document released this week by the Communications and Information Technology Minister, Amy Adams, suggests Chorus’ wholesale charges for copper line services should be set between $37.50 and $42.50 a month.

This is up to $10 higher than the Commerce Commission’s proposal last year for monthly wholesale charges and follows complaints from Chorus that if copper prices are too low, it could inhibit the uptake of fibre services being rolled out as part of the Government’s $1.5 billion ultra-fast broadband scheme.

Smaller internet retailers which pay these wholesale charges have loudly opposed the Government paper proposals. Slingshot and CallPlus chief executive Mark Callander said the move would keep copper prices artificially high and amounted to a levy to bolster the rollout of fibre lines.

They’re right. Effectively it is a tax on copper. But even worse, the money goes to Chorus. The price of copper lines should be as determined by the Commerce Commission under the Telecommunications Act, not set by Government.

Tags: ,

The Chorus deal

November 2nd, 2012 at 11:00 am by David Farrar

Stuff reports:

Today’s confirmation that Chorus will provide free ultra-fast broadband connections to many residences with awkward access is good news, a telecommunications commentator says.

Network provider Chorus announced in partnership with the Government today that it would contribute $20 million towards the cost of connecting “non-standard” homes, in an effort to encourage greater uptake of high-speed broadband.

Up to 30 per cent of homes within the UFB rollout zone are thought to have fallen into the Chorus “non-standard” category.

Paul Brislen, of the Telecommunication Users Association of New Zealand (TUANZ), said many urban houses were more than 15m from the street, Chorus’ previous limit for free fibre.

So today’s announcement that Chorus would extend that limit to 200m was “tremendous”.

“That captures 99.3 per cent of the [UFB network] population, possibly even more …That means everybody that can get connected will be able to without extra cost.”

Excellent.

However, Brislen said there was a drawback in that the offer only lasted until 2015, by which time only about a third of the network would be completed.

“Most of the connections for residential customers won’t take place until after 2015, so we need to use this to get the ball rolling and then revisit it rather quickly.”

I suspect come 2015, things may get extended – time will tell.

Chorus, which has contracts to provide 70 per cent of the Government’s UFB network, has so far rolled out 1500km of ultra-fast fibre, enough to connect 72,000 customers.

But to date, only 700 have signed up.

Brislen said the problem was that speed alone was not enough to encourage many customers to switch to UFB. Overseas, penetration of ultra-fast broadband was about 38 per cent and a good uptake in New Zealand was important to justify the expense.

Absolutely few will sign up for speed alone. What will push uptake is when companies such as Sky roll out TV and movies on demand services that work far better over fibre. A killer home video-conferencing app that works through your TV set and is as simple to use as a TV remote will also get people flocking to it.

Tags: , ,

Cheaper copper

May 5th, 2012 at 12:41 pm by David Farrar

The Herald reports:

In a draft determination, the Commerce Commission indicated it wants to reduce the geographically averaged unbundled copper local loop (UCLL) service to $19.75 a month from its current price of $24.46 over two years.

UCLL lets Chorus’s competitors use the copper network between an exchange and an end-customer’s premise to offer their own voice and broadband services. The current urban price only has to come down $19.81, and the biggest access gains would be in non-urban areas, which are sitting at $36.63. …

Wholesale prices for access to the copper lines were averaged as a result of legislation enabling Telecom to carve out its Chorus unit last year, something that rankled with rival telecommunications companies who claimed it would lift their costs. The de-averaged urban and non-urban prices are $15.82 and $29.19 respectively, the regulator said.

It is a pity the Government decided to require an averaged price, as it means urban users are subsidising rural users. Instead of urban users getting a wholesale price drop of $3.99 and rural of $7.44 the drops are $0.06 for urban and $16.88 for rural.

But still good to see overall wholesale prices heading in the right direction.

Tags: ,

The Telecom Split

June 20th, 2011 at 9:00 am by David Farrar

Tom Pullar-Strecker at Stuff reports:

Telecom is likely to split evenly into two parts, with shares in its retail arm and Chorus worth similar amounts, financial analysts believe.

Telecom shareholders will be given a share in Chorus and another in the yet-to-be-named retail business for each Telecom share they own, if they approve the company split, which is a condition of Telecom’s government contract to build the bulk of the ultrafast broadband network.

Really? Equal value?

I am not a financial analyst and this should not be taken as financial advice.

But personally I will be looking to buy lots of shares in Chorus, and no shares in Telecom Retail. I think Chorus has a very good future, managing both the copper and fibre.

I am not at all convinced that Telecom’s culture is well developed enough to compete on the retail level, without the integrated vertical monopoly. I hope they do, but at this stage I wouldn’t invest money on it.

A look at the annual regulatory accounts shows that the profit from Chorus as a percentage of turnover is much much higher than for Telecom Wholesale or Retail.

Tags: ,

Telecom split confirmed

August 2nd, 2010 at 7:22 pm by David Farrar

Stuff reports:

Telecom has confirmed plans to split into two businesses in a bid to take part in the government’s ultra fast broadband scheme.

The company said today it proposed to create a new company, “Chorus2” as a separate standalone entity through a demerger – a process giving existing shareholders pro rata stakes in the new company.

I have been a long-term proponent of structural separation, and believe it will be good for shareholders and good for the country.

While on separation day, the shareholdings of the two companies will be the same, over time they will attract different profiles of shareholders. The main Telecom will be a competitive business paying higher dividends, but with more risk involved.

Chorus will be an infrastructure company, paying lower dividends, but with much guaranteed business. In time I would expect companies like Infratril to seek stakes in it.

While the Government will claim the decision is nothing to do with them, the reality is that by setting rules around ownership for the fibre to the home initiative, the Govt has been the catalyst for this decision which will correct a major problem of the last 20 or so years – a vertically integrated monopoly. The removal of vertical integration means we will get better choice and competition at wholesale and retail levels.

Telecom’s decision to split Chorus off will significantly increase its chances at winning some or even all of the regions for the fibre initiative. However it does not mean they are automatically the preferred choice. Companies like Vector may be able to do it cheaper in Auckland because of their existing infrastructure.

Structural separation is a pre-condition to full involvement in the fibre initiative, but it is not a guarantee of success.

There may be options out there though, such as Chorus gaining the nation-wide contract and sub-contracting companies like Vector and Citylink where they already have assets. Or Chorus could buy a company like Citylink.

Alternatively the Regional Fibre Group could get ambitious and aim to buy 51% of Chorus. It is going to be an interesting two to three months.

Tags: , ,

Structural Separation Options

May 31st, 2010 at 9:00 am by David Farrar

Tom Pullar-Strecker writes:

The proposal that the Government take a direct stake in Telecom’s network arm Chorus is alive and well, after briefly being misdiagnosed with an acute case of “copper-poisoning”.

Telecom chief executive Paul Reynolds was leaning towards a full demerger of Chorus when he briefed analysts on options for the possible breakup of Telecom on Thursday, the idea being that Telecom shareholders would be issued with shares in Chorus, which would become a separate listed company.

But the two options are not incompatible. The Government could take a stake in Chorus and the remaining shares could be distributed to Telecom shareholders. Indeed, that may be the best outcome. Nor is there a reason why Telecom shouldn’t be allowed to retain a minority stake in Chorus under that or any other scenario. The more investors the merrier.

I am supportive of structural separation of Telecom. And I believe the preferable way to do it, is to issue all existing share-holders direct shares in Chorus. Over time they would attract infrastructure investors seeking lower but safer returns, while Telecom would attract investors in a competitive higher profit arena.

I would place a limit of any “customer” of Chorus owning more than a certain percentage – say 5% or 10%.

It makes no sense for the Government to set up a separate fibre company to partner with a demerged Chorus to lay fibre to three-quarters of New Zealand under its ultrafast broadband (UFB) investment initiative. After talking to Mr Reynolds following the investor briefing, it is clear that is not what he is suggesting.

“We see a demerged business, somewhat related to the existing Chorus, containing both copper and fibre into which the Government and Crown Fibre Holdings could invest on a nationwide basis and with which others could partner. The concept is you are building one national access business that has copper and fibre in it.”

This is certainly an option. One could put the $1.5 billion into Chorus as capital, with special shares not requiring a dividend (for example).

However one has to also be careful with assuming that even a structurally separated Chorus is automatically the most efficient and effective provider of fibre to the home in all areas.

From what I have seen (including a detailed study of the likely costs), electricity lines companies (such as Vector) will be able to roll out fibre to the home considerably cheaper than telecommunication companies due to their existing assets and resources consents. Vector for example has a strong case in Auckland.

There may be a win-win though if Chorus sub-contracted work in certain areas to companies such as Vector and Citylink, if they can do the job more efficiently. Maybe Vector would even want to take a stake in a separated Chorus?

We also have Axia from Canada in the fray, with considerable experience in rolling out fibre. They also may be offering a cheaper or better option than a separated Chorus. I don’t know, not having seen their bids.

I regard it as a major plus, that the process to date has led to Telecom willing to go down the structural separation path. However that does not mean they are automatically the successful bidder.

The decisions in this area will have a profound impact on NZ infrastructure for the next 30+ years. For my 2c the Government should not rush into a decision. It is much more important to get this right, than to worry about whether or not the actual roll-out starts on schedule.

Tags: , , ,

Options for Telecom

September 21st, 2009 at 11:00 am by David Farrar

In light of the Government’s fibre to the home proposal, there seem to be three distinct paths forward for Telecom. They are:

Structural Separation

If Chorus is sold off, then Chorus would be in a very strong position to effectively gain most of the $1.5 billion on offer, by partnering with the Government to set up many of the regional fibre companies – or even one national fibre company.

The likely sucess in gaining most of the $1.5 billion would increase the value Telecom would get by selling Chorus. Also Telecom might not have to sell all its shareholding in Chorus – it could, I beleive, still retain a minority stake as an investment.

This would leave Telecom with its wholesale and retail arms. They would probably immediately have most of the current obligations imposed on them, such as equivalence, dropped.

With much reduced capital expenditure needs, and a cash inflow from the sale, Telecom should be in a position to increase the dividends it pays.

The downside will the inability to leverage the advantages of also owning the existing infrastructure. They’ll be paying an outside company to utilise their lines – the same as everyone currently has to do to Telecom. They will also be more at the whim of the market. If they lose market share to competitors, they won’t have the compensation of the fact the competitors are still paying them access fees.

Infrastructure companies tend to be safer, but have lower dividend returns. Competitive companies are a more risky investment, but can produce higher returns.

Participate as a minority partner

If Telecom do not structurally separate, then they are deemed a “partner” that owns a retail operation. This does not preclude them in any way from full participation in one or more local fibre companies (or even to still propose they be a partner in a national fibre company).

The key restriction is that will not have the right to appoint a majority of Directors to the Board of the LFC, and the Chair of the LFC Board must be agreed unanimously by all shareholders.

I’m not sure how important control of the Board of an LFC will be to Telecom. The initial partnership agreement with CFH setting out terms of investment and how extensive a fibre build will be is arguably the more important factor.

It is quite possible Telecom could decide to participate and invest in one or more LFCs. This will also help protect their investment in current legacy assets.

Do not participate

The third option is for Telecom not to bid to be a partner for any LFCs, or they do bid and are unsuccessful.

If this is the path chosen, then Telecom will be in a fairly strong position to ask for some of the current requirements imposed by operational separation to be removed. There would be issues over timing, of course.

It is likely Telecom would not undertake any more major infrastructure investment (such as further cabinetisation or further upgrades to VDSL2) beyond their current commitment of $1.4 billion. This would save them money in the short term, and in the long term they would become a customer of the LFCs for their higher speed products.

Telecom could do quite well relieved of the need to keep rolling out faster and nearer infrastructure. For many of their customers, the current speeds will be adequate for some time.

It is possible that they might keep up an aggressive investment programme to try and compete with the local fibre companies, and even drive them out of business. That would be a very ballsy call though, considering the firm policy of both major political parties is that the future fibre infrastructure must be open access and not part of a vertically integrated monopoly.

Telecom’s decision is going to be one of those really big ones – on much the same scale as which mobile phone technology to go with. The wrong call can cost a lot of money. The senior staff and board have an unenviable task looking at their company, considering its strengths and weaknesses, and deciding on the best path forward.

Tags: , , , ,