ComCom on Chorus prices

December 3rd, 2014 at 1:00 pm by David Farrar

The Herald reports:

Spark New Zealand has warned that prices could rise following the announcement by the Commerce Commission of a proposed new wholesale rates that Chorus charges retail service providers, including Spark.

“Today’s announcement is unexpected and we are now facing costs approximately $60 million a year higher than we previously anticipated. These higher costs will affect all our fixed services, not just broadband services,” said managing director Simon Moutter.

I see no need for price increases. The price announced by the Commerce Commission is around $4 a month more than its earlier determination, but it is around $6 a month less than what had been the status quo.

Moutter said intense market competition meant the anticipated reduction in wholesale broadband charges (signalled by the Commerce Commission as far back as December 2012), had already flowed through into retail broadband prices.

“For instance, what you get in our basic $75 broadband plus home phone plan today would have cost you $105 three years ago. In that time, our wholesale costs have barely moved until the new charges came into effect yesterday.”

Comparing any plan today to what it would have cost a few years ago is not very insightful. 20 years ago a broadband plan with 100 GB data would probably cost $5,000 a month. Data is always dropping in price.

As a consumer I would have liked the Commerce Commission to set the price lower, but their job is to work out what is the proper price for a monopoly utility service based on the cost of providing it. They’ve done that job now, and we should respect their independence.

However it would be useful if they had made a decision on whether the price level is backdated. ISPs do need certainty.

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High Court rules in favour of Commerce Commission

April 9th, 2014 at 4:00 pm by David Farrar

Stuff reports:

A consumer group has welcomed a High Court ruling on copper broadband prices, saying it should eventually deliver lower prices for telecommunications users.

The court said today that Chorus had lost its challenge over cuts to copper broadband prices by the Commerce Commission.

This is not a surprise.

The commission had decided Chorus could charge only $10.92 a month for copper broadband connections, down from $21.96.

Brislen said lower prices were not expected soon as a drawn-out process to establish final prices for the sector was continuing.

Not as drawn out as it could be. A final price may be set by year end.

In a judgment released today, Justice Stephen Kos rejected Chorus’ appeal.

“The simple fact is that the commission did not accept Chorus’ submissions,” he said.

“Despite the combined intelligence and force with which Chorus’ submissions were delivered, I am left unpersuaded that the commission erred in law.

“In my view, submitters were plainly aware that a price point above the confines of a more limited benchmark range was a possibility. The commission, in my view, was also open to that possibility.

“In my view, the commission has done just as Parliament had prescribed.”

This is a key point. Parliament passed the law. The job of the Commerce Commission is to interpret and implement it. Those who don’t like the outcome shouldn’t have attacked the Commerce Commission for just doing their job.

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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.

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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.

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Sky TV gets a competition warning

October 9th, 2013 at 10:00 am by David Farrar

The Herald reports:

Sky TV has been issued with a warning that its contracts with telcos were likely to have previously harmed competition, says the Commerce Commission.

However, market developments mean those particular parts of the contracts are unlikely to have that effect now or cause harm in the future, says commission chair Mark Berry.

As such, the commission issued Sky a warning and said the pay-tv provider was on notice that the regulator would continue to monitor its contracts.

The Commission said it will take no further action right now over what it called “historical breaches”.

“We believe that Sky entered into historical agreements with RSPs [retail services providers] that had the purpose, effect, or likely effect of substantially lessening competition,” Berry said.

“However due to market developments, the key commitments Sky has with RSPs are unlikely to continue to have the same effect. For example the new sports pay TV product from Coliseum and the recent exemption granted by Sky to Telecom to market this product,” he said.

“As a consequence, a warning letter and notice that we will continue monitoring Sky’s contracts and conduct was the prudent course of action,” Berry said.

I’m very keen to see market developments that get us more competition and choice.

It also said Sky’s contracts with content providers were not likely to have breached the law.

“There appeared to be sufficient content of all types available outside of Sky’s exlusive contracts to put together an appealing pay TV package,” a statement from the commission said.

My preference is for contracts to be non-exclusive. By this I mean of course a contract for a TV series will exclude another TV channel showing that series – but they shouldn’t restrict other outlets such as DVDs or Quickflix from being able to offer the material in different mediums.

Labour have said:

Sky should consider itself extremely lucky today. The ruling is a cop out from the Commission. A monopoly as powerful as Sky should not be able to get away with uncompetitive behaviour. It is a kick in the guts to consumers.

“The Commission appears to have decided not to take any action because a case would cost too much and take too long. That’s not good enough. It should do its job as a regulator,” said Kris Faafoi.

I do wish Labour would think about the internal consistency of their public positions.

How can you argue that the Government should not second guess the Commerce Commission when it comes to copper broadband pricing, yet jump in yourself and claim they got it wrong in this case and should do what politicians say in this area.

Effectively Labour have now undermined their own arguments on the copper pricing issue. It’s an own goal, and an annoying one, because as people know I’m one of those saying leave the Commerce Commission process on copper pricing alone.

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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.

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Would this have been legal?

June 13th, 2013 at 11:00 am by David Farrar

Tom Pullar-Strecker at Stuff reports:

Chorus made an expensive gamble in rejecting a deal that would have seen it paid just under $14 a month for wholesale copper broadband connections, according to sources close to the failed negotiations.

Chorus’ share price has been on the slide since the Commerce Commission proposed slashing the regulated price of wholesale copper broadband connections by about $12 a month to $8.93 in a draft decision in December.

But the company is understood to have chosen to take its chances persuading the commission to set a higher price or on government intervention.

It is understood all major telecommunications retailers agreed on the compromise price and Communications Minister Amy Adams, who would have had to regulate it over the head of the Commerce Commission, was informed.

The compromise was brokered by the Telecommunications Forum, whose chief executive, David Stone, declined to comment.

I’m not  lawyer, and welcome comment from lawyers who work with competition law. But I thought competitors couldn’t all sit down together and try to negotiate an agreed price level.

It didn’t eventuate in this case, but I think the possible precedent is somewhat alarming. The Commerce Commission is the appropriate body for pricing of monopoly utility services, not a private gathering of retailers with no input from consumers.

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The wrong decision

February 9th, 2013 at 1:00 pm by David Farrar

The Herald reports:

The lowest price of broadband internet access is less important than ensuring consumers move as quickly as possible to high-speed fibre-based services, says Telecommunications Minister Amy Adams.

I disagree. I’m a huge fan of the fibre roll-out but you don’t force people onto fibre by artificially keeping the cost of copper high.

“I don’t think the over-arching criteria in this is ‘what is the cheapest option’,” Adams told BusinessDesk. “If that was the case, we’d be sticking with dial-up. I don’t think you’d find any consumer saying ‘if dial-up’s cheaper, let me have that’.”

I don’t accept that comparison. The difference between dial-up and broadband is massive. My laptop effectively freezes on dialup. The difference between dial-up and DSL is like the difference between a wheelchair and a car. While the difference between DSL and fibre is more like the difference between a Lada and a Porsche. And for some people a Lada is fine.

Her comments followed her announcement the government would accelerate its timetable for reviewing the regulatory regime for telecommunications services. The decision effectively neuters the Commerce Commission, which issued a draft determination late last year that could favour a longer life for the existing copper wire network by pricing it highly competitively with new fibre services.

That draft determination, which Adams described as a “curve ball”, sparked protest from the key players in the ultra-fast broadband roll-out, including NZX-listed Chorus, whose share price recovered 12 per cent today, immediately following Adams’s announcement.

I think it is disappointing that the Government has intervened in this way. The Commerce Commission is doing the job set down by statute. If it has made an error, then that can be challenged in the submissions on the draft and if need be in court. I’ve not see any suggestion the Commission has got the law wrong.

“Carrying on the way it was would have changed the landscape in the way telecommunications services were priced and delivered and we saw some real risks around that in terms of market uncertainty and the market not looking to develop and promote high speed fibre products,” said Adams.

I think the market works better when the Government doesn’t artificially push the price of one product up.

“What became very clear is that this sort of uncertainty and decisions coming out that have really taken everyone by surprise are the last thing that anyone needs in this space.

Not at all. I am not surprised that the Commission found out copper services were over-priced.

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The price of copper

December 14th, 2012 at 11:00 am by David Farrar

Tom Pullar-Strecker at Stuff reports:

Communications Minister Adams has declined to shed light on whether the Government is considering intervening over broadband pricing because of concerns about copper-based competition to ultrafast broadband, or Chorus’ ability to fund the UFB roll out.

Adams said claims that consumers would lose out if the Government overruled a Commerce Commission move to drop the wholesale price of copper broadband connections by as much as $12.53 a month were exaggerated.

It “was highly unlikely that retail service providers would fully pass through any wholesale cost savings”, she said.

I’m quite dismayed that the Government’s response to the Commerce Commission’s draft copper pricing determination has been to threaten to legislate to overturn it, if they persist with it.

Lower prices are a good thing. Unless the Commerce Commission has misinterpreted the law they operate under, they should be applauded for looking after the interests of consumers.

And while it is right that retailers may not pass on the entire $12.50 a month saving, I am confident they would pass on the vast majority. If you think they won’t, then you are saying we do not have a competitive retail market and that is a far bigger issue.

I have been a huge supporter of the fibre roll-out to 75% of New Zealanders. But you don’t get people onto fibre, by artificially inflating the price of copper.

To be blunt the Government should shut the hell up on the Commerce Commission’s draft determination. There are some aspects of the Commerce Commission’s work where they refer to to Ministers for a decision, such as mobile termination rates. In those areas it is entirely appropriate for Ministers to express a view – as they are the decision making.

But in this area of setting copper access prices, it is purely a decision for the Commerce Commission, under the law passed by Parliament. The only response by Ministers should be that these pricing decisions are a matter for the Commission, and they support its independence.

 

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Don’t subsidise fibre with copper

December 4th, 2012 at 11:00 am by David Farrar

Stuff reports:

The price of broadband could fall by about $12 a month in two years’ time if internet providers pass on swinging cuts to Chorus’ charges that were proposed yesterday by the Commerce Commission.

Good.

But Scott Bartlett, the boss of New Zealand’s fourth largest internet provider, Orcon, is doubtful. He said Telecommunications Commissioner Stephen Gale already seemed to be signalling “almost in code” that the commission would back down from the steep cuts when it finalised its decision on wholesale pricing in June.

Prime Minister John Key signalled that the Government was concerned about the effect cheaper copper-based broadband could have on the fibre-optic ultrafast broadband network, in which the Government has agreed to invest $1.3 billion.

He did not rule out using legislation to overturn the proposed price cut yesterday.

I think that would be a bad thing. The Commerce Commission should be left alone to set the price of copper access based on existing competition law.  I’m a huge fan of the fibre rollout, but we shouldn’t try and get people to move to fibre by having copper priced artificially high.

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A little knowledge is a dangerous thing

October 31st, 2012 at 9:00 am by David Farrar

Stuff reports:

The Commerce Commission has unconditionally approved Vodafone’s purchase of TelstraClear, a decision the Green Party says will reduce options and push up prices.

Co-leader Russel Norman noted the terms of the $840m takeover included a clause that would prevent Telstra re-entering the New Zealand market for an undisclosed period.

“Make no mistake – Vodafone’s move is about eliminating competition,” he said.

“We’ve seen it in the banking sector, the insurance sector, and now it’s happening in the telco sector. Vodafone’s takeover of TelstraClear will inevitably lead to higher prices for end-users, businesses, and government.

“It’s not in the long-term interests of the New Zealand economy for our primary competition regulator to be eliminating competition in the telecommunications industry.”

Oh Good God, now Russel wants to be the Commerce Commission also. Let politicians decide on the basis of a five minute chat to their staff, rather than you know months and months of legal and economic analysis.

However, the commission said it did not find any significant business overlap between Vodafone and TelstraClear in the provision of either mobile phone services or fixed line services to large businesses.

Exactly. It would be vastly different if it was a Telecom and Vodafone merger. That would be bad for consumers. But many in the industry think that the TelstraClear acquisition by Vodafone will actually enhance competition as it means there will be a fully fledged competitor to Telecom. Individually neither TC nor Vodafone could effectively compete with Telecom in all aspects. Together, they can.

With David Parker having declared that Ministers (not shareholders) should determine who can buy F&P shares, and Russel Norman declaring who can buy TelstraClear, it is becoming clear that in a future Labour-Green Government the way to get sales approved will be to cosy up to Ministers.

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The Telecommunications Commissioner

July 5th, 2012 at 2:00 pm by David Farrar

Computerworld reports:

 Labour ICT spokesperson Clare Curran will ask the Auditor General to investigate the appointment of Stephen Gale as telecommunications commissioner.

Gale’s appointment, announced today, confirms industry rumours that the incumbent Ross Patterson would not be re-appointed. 

First of all I want to say that I think Ross Patterson did a very good job as the Telecommunications Commissioner. If he had been re-appointed, I would have regarded that as a good thing. I think the determinations made by the Commission were generally the right ones, and helped promote competition.

Telecommunications is always a challenging regulatory area, for two reasons. The first is that inter-connection issues are huge. It doesn’t matter (for example) if you have VHS and Beta video recorders and tapes that are not compatible. However it does matter if you are unable to call a Vodafone mobile from a Telecom mobile (for example). Could you imagine the Internet if one could not e-mail people at another ISP?

The other issue, is that the “last mile” network tends to almost always be a monopoly as it is not economically efficient to have multiple sewerage pipes, multiple electricity lines, multiple phone lines etc into every residence.

So the Commission has to balance up competition, investment, consumers and providers. It is not an easy job, and as I said I thought Ross Patterson did a good job.

I look forward to Dr Gale hopefully also performing so well.

I want to deal with some myths around the appointment though. The first is that Patterson was not re-appointed at the behest of Sky TV. I don’t know who invented this fantasy, but it simply is not true. I happened to be talking to some Sky TV people a few weeks ago, and I asked them about this. They told me that Sky TV had never expressed a view on who the Telco Commissioner should be to anyone in Government, or at all. The Official Information Act would disclose any communications – there has been none.

As it happens, the appointment of Dr Gale was recommended by an independent panel consisting of Brent Layton (chair of the panel), chairperson of the Electricity Authority, Liz Sinclair, deputy commissioner at the State Services Commission and Mark Steel, deputy secretary of the Ministry of Business, Innovation and Employment’s economic development branch. There were 44 applicants for the role, and they recommended Dr Gale. I think it is unfair to those three officials, plus Dr Gale, to push conspiracy theories with no evidental basis about his appointment.

As I said, I would have been very happy for Patterson to be re-appointed. But I don’t think there is some sinister conspiracy involving Sky TV around him not being re-appointed.  It is possible that his 10 month absence from the job for an alcohol-related illness was a factor – I heard there was a run in with the then Commerce Commission Chair, which won’t have helped.

Labour ICT spokesperson Clare Curran will ask the Auditor General to investigate the appointment of Stephen Gale as telecommunications commissioner.

Curran claims that a “new direction taken by the telecommunications commissioner role is to focus on the interests of investors, rather than consumers.”

In today’s announcement, ICT Minister Amy Adams specifically mentioned investors while congratulating Gale on his appointment. “Dr Gale impressed the panel with his wide range of experience in regulated industries and his ability to articulate the role of the regulator to promote the interests of consumers through encouraging competition and ensuring that investors have the incentives to invest over the long-term,” she wrote.

It is simply incorrect to say the Minister’s press release represents a new focus on investors over consumers. The Minister is simply quoting from the Telecommunications Act 2001 that Labour passed. S18 says:

(1) The purpose of this Part and Schedules 1 to 3 is to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand by regulating, and providing for the regulation of, the supply of certain telecommunications services between service providers.

(2)In determining whether or not, or the extent to which, any act or omission will result, or will be likely to result, in competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand, the efficiencies that will result, or will be likely to result, from that act or omission must be considered.

(2A)To avoid doubt, in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services.

So no there is nothing sinister about the Minister summarizing the Act, and it does not represent a new direction.

Labour ICT spokesperson Clare Curran will ask the Auditor General to investigate the appointment of Stephen Gale as telecommunications commissioner.

“It is my understanding that the appointment of his (Ross Patterson’s) successor – Stephen Gale – may have breached public sector requirements, specifically around the appointment process and description of the appointment. To that effect I will today request that the Auditor General investigate this appointment,” Curran says.

When the role was first advertised in March it contained basic errors – for example it mentioned one of the responsibilities of the Commissioner as overseeing operational separation, even though that ended last year. 

As far as I know, you can’t get the Auditor-General to investigate an appointment, just because you wanted someone else to be appointed. Yes an advertisement had an error in it, but decisions are made on the full job description, not on newspaper advertisements. With 44 applicants. it is not as if an ad without that error would have meant someone was put off applying, who would have been better than the 44 who did apply.

I think this complaint to the Auditor-General comes closes to being vexatious. Now I’ve worked as a staffer in Opposition. I understand the reality, that most of the time when the Opposition complains to the Auditor-General they know they will probably not get an investigation. They are doing it, just to get the headline about a request for an investigation. National did it, Labour does it, the Greens do it. Opposition MPs of course have the right to ask the Auditor-General to investigate anything.

However I would submit that there should be at least a modicum of belief that your complaint may succeed. I don’t think anyone can seriously think that the recommendation of an independent panel with 44 applicants, should be over-turned by the Auditor-General because there was an error in a newspaper advertisement (which has been known about for three months anyway).

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Fibre, copper and telcos

March 23rd, 2011 at 9:00 am by David Farrar

There’s been a number of news stories on the Government’s Telecommunications Amendment Bill, which is currently before the Finance & Expenditure Select Committee. A typical story is this one at Computerworld.

The telecommunications sector is always somewhat controversial, but this bill has attracted criticism from just about everyone – telcos, ISPs, the Commerce Commissions and user groups. This post is aimed to explain what the debate is about, and reflects my views.

It is worth noting that most of what is in the TAB is not controversial, and is generally well supported.

Three aspects which are controversial are:

  1. a “regulatory holiday” for the local fibre companies until 31 December 2019.
  2. “re-averaging” the costs of local loop unbundling and unbundled bitstream, which will lower the wholesale cost in rural areas but increase the wholesale cost in urban areas by around 20%
  3. possible structural separation of Telecom if they win the majority of regions for fibre rollout

In this post I will leave (3) for now as that little baby is so complicated it needs its own post. I want to focus on (1) and (2) and these will apply (if passed) regardless of whether Telecom wins most of the regions for urban fibre, or the lines companies led by Vector win most of the regions.

You may ask why would the Government consider giving the future fibre companies an exemption from the normal regulatory oversight of the Commerce Commission? Well the short answer is because the companies bidding to be future fibre companies have asked for it.

Okay well companies ask for lots of things from the Government. Many companies would like to be exempt from the Commerce Commission until 2010. Why would the Government agree to this?

The answer is because then the bidders will make better bids. They value having a regulatory holiday, so they will agree to roll out more fibre for the same subsidy. It is what Sir Roger Douglas (very perceptively) said was a regulatory subsidy instead of a greater direct financual subsidy.

Now before we talk about the pros and cons of this approach, you need to know the background. In the 2008 election National pledged $1.5b towards having ultra-fast broadband rolled out to 75% of NZ over the next decade. This was a lot of money (Labour committed only $300m – 1/5th of what National did) and it was in my opinion a great policy.

Work done by the NZ Institute concluded that investing in ultra-fast broadband, would result in significantly higher economic growth, and there is evidence from other countries to back this view up.

Now the cost of rolling out fibre to 75% of NZ is hard enough to estimate, let alone what the direct commercial returns will be on doing so in ten years time. The amount of subsidy needed to achieve the 75% target was estimated at $1.5 billion, but this was an estimate. An opposition does not have the resources available to get a precise projection, and even when you do have access in Government to Treasury, even then projections can be wrong.

To some degree one was never going to know until the actual commercial negotiations conclude, whether $1.5b was enough. InternetNZ did try to get some idea of how much it would cost to reaach the goal of 75%, and what would be the best way to go about it. They (which includes me)  commissioned a report from Network Strategies, a specialist economics consulting firm, which is here.  It was published in 2008.

The report concluded that the cost of fibre to 75% of NZ was around $3.3b if one utilised existing utility companies for at least half of it, and that the government’s contribution would need to be around $1.75b. So the $1.5b was a pretty good estimate, but may be not quite enough.

So this takes us back to why the Government is seeking to legislate a regulatory holiday – it makes it more attractive to its potential commercial partners, and helps close the gap. So the motivation is good – to save the taxpayer money.

However that does not mean it is the right decision. If there is a funding gap between the 75% target and what you can achieve with $1.5b, I would rather it be dealt with directly, not indirectly by way of regulatory holiday. Options are to increase the $1.55b on offer, or to reduce the coverage area from say 75% to 70% or push out the timeframe from say 10 years to 12 years etc.

The concern over the regulatory holiday is that whomever wins the contract, will be exempt from the Commerce Commission regulating access to their services until 2010. The Government will be relying just on the contracts they had to regulate the price, However this places Crown Fibre Holdings in the unenviable dual role of being an investor and a regulator. Also 2020 is almost nine years away, and that is a lifetime in the Internet world. The costs and prices of fibre and data may have changed massively in that time. Many people are very nervous about what could happen in the next nine years. This is partly because of the lessons from the past with Telecom (note again they may not be the fibre companies).

Now the Minister has pointed out that as the local fibre companies can not be owned by a company that will provide retail services over them, then it is less likely there will be a need for regulation, as the fibre companies should operate on an open access platform to all providers. But a lot of devil is in the detail. For example you could have Chorus (if they win) saying it will operate a volume discount scheme that only Telecom Retail will qualify for due to its size.

The Minister also says that as the fibre products will be competing against the regulated copper and that the challenge will be ensuring uptake, which will keep prices down also. I suspect Steven is right on the prices – but from my thinking why remove the safety net of the Commerce Commission, in case you’re not.

Now the other major change is that the calculation of costs and hence prices for the current copper based broadband services is to change from deaveraged to reaveraged. At present the costs and prices reflect the fact it is cheaper in urban areas than rural areas. The Government is proposing to legislate to change this, which means the price of broadband over copper will increase in urban areas. The estimate I have seen is by 20%.

So again why would you do this? The answer is the same. It means those bidding for the fibre contracts will be motivated to invest more money into them. Because if the price of broadband over copper increases, then you can be confident that more customers will switch over to broadband over fibre.

So again the rationale is quite understandable, but again that does not mean it is necessairly a good thing. It means people in urban NZ will pay higher prices than they should for broadband over copper for the next six years or so. Should the Government be effectively tilting the playing field to favour fibre over copper?  Again I’m in favour of tilting the field by way of Government subsidy, but not in favour of tilting the field by interfering with a regulatory regime that actually has worked very well in the last few years.

As I said, in a separate post, I’ll cover the possible structural separation of Telecom, and how this may result in a really great outcome or a really lousy outcome, depending on how the structural separation is done. And the consequences of getting it wrong will reverbate for a couple of decades. This is not something to rush.

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Price fixing physios

August 4th, 2010 at 6:48 am by David Farrar

The Herald reports:

The New Zealand Society of Physiotherapists is under fire from the Commerce Commission over claims of anti-competitive behaviour.

The industry body has been warned by the competition regulator after it sent a letter to one of its members accusing it of undercutting other physiotherapists by not introducing patient part-charges.

How stupid (or venal) are they? That is clearly illegal.  The Commission should take action to make it quite clear that such actions are not allowed.

Physiomed, which has clinics in Wellington, Christchurch, Oamaru and Dunedin, decided not to charge a co-payment and absorb the cost itself.

The decision prompted a rush of complaints from members to the society.

The society responded by writing a letter to Physiomed last year expressing its “disappointment” at the decision. …

Yes how dare they show that you can remain profitable on the ACC payment, without a part-charge.

“The profession as a whole will suffer if we do not value the services we offer and charge accordingly,” the letter says.

“We should not be trying to undercut other physiotherapy practices by aggressively advertising our fee structure or ‘free physiotherapy’.”

That is exactly what physios should be doing – competing on price, on quality and in what ever other way they want to.

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Own goal confirmed

May 12th, 2010 at 10:54 am by David Farrar

My prediction that Vodafone’s new calling plan for on-network calls was a massive own goal, has been proven correct. Launching the plan just days before the Minister was due to decide on the recommendation not to regulate mobile termination rates will go down as arguably their biggest stuff up to date.

To be fair, their competitor Telecom, has many to choose from – CDMA, XT, AAPT etc etc.

The Herald reports:

Vodafone’s latest marketing deal has pushed the Commerce Commission to backtrack on an earlier decision and it is now recommending the Government regulate mobile phone ‘termination rates’. …

In a draft report out today, the commission says earlier undertakings offered by Vodafone and Telecom would not address competition concerns.

Considering the Minister asked the Commission to reconsider its 2-1 recommendation to accept commercial undertakings rather than regulate, what is the chance he will now turn down the new recommendation to regulate? I’d say close to zero.

If Vodafone had held off their new pricing plan for a couple of weeks, I reckon there was an 80%+ chance the Minister would have gone with the recommendation to accept the commercial undertakings.

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A possible own goal

April 21st, 2010 at 8:02 am by David Farrar

The Herald reports:

Vodafone’s new Talk plan for pre-pay customers has raised a red flag for the Commerce Commission on whether mobile termination rates should be regulated.

In February, the commission recommended Communications Minister Steven Joyce accept Vodafone and Telecom’s proposal as an alternative to regulation on the basis the final undertakings would address its competition concerns. The proposal is to reduce rates to 6c per minute by 2014.

But Vodafone’s new Talk pre-pay plan, launched last week, has raised questions whether an industry solution will hinder smaller companies.

The Talk plan offers customers 200 minutes on its network and to landlines for $12 a month on certain pre-pay plans. This works out to about 6c a minute.

It costs 89c per minute to call a Telecom phone from a Vodafone phone. The current termination rate between the networks is 14.4c.

2degrees chief commercial officer Bill McCabe said Vodafone’s new plan made it 15 times more expensive for a Vodafone customer to call a 2degrees phone than to call its own network.

Telecommunications commissioner Ross Patterson said it was the commission’s initial view that the Vodafone Talk plan may be material and have the potential to affect the basis for its recommendations in the final report.

Joyce said: “I wrote to the commission to ask them their view on whether Vodafone’s new Talk Add-on offer to its prepay customers is material to the decision on mobile termination access services. They replied that it may be the case.”

Vodafone’s move may be one of the more stupid commercial decisions in recent times. The Government is days or weeks away from making a decision on mobile termination rates. The Commerce Commission was split 2 to 1 on its recommendation not to regulate, so it is a close call.

And then Vodafone comes out with a plan which absolutely undermines their commercial offer on termination rates. They set a retail price for on-network calls which is half the current wholesale termination rate between networks and will be higher or equal to the termination rate even in 2014, under the commercial undertakings.

If you asked me to sit in a room and think up a stunt that is most likely to push the Commerce Commission and Government away from accepting the commercial undertakings, and towards regulation – this is what I would come up with.

The fact the Minister has written to the Commission and said “Does this changes things” and that the Telco Commissioner has already said “Yes” is significant – especially that the Commissioner was one of those who voted not to regulate.

If the Government does now decide to regulate, they only have themselves to blame. I’m amazed they didn’t hold off any pricing changes until after the Minister made a decision.

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Gifford on Mobile Market

February 24th, 2010 at 9:00 am by David Farrar

Adam Gifford writes in the Herald:

It’s crunch time for the mobile phone market.

Will the Government step in and create a competitive environment that benefits New Zealand customers and businesses, or will it continue to let giant foreign-owned companies set the rules that allow them to gouge the economy?

I think we can conclude Adam favours regulation.

What has become the commission’s main concern, and quite rightly so, is how on-net pricing has distorted the New Zealand market.

In some countries on-net pricing is illegal. Here it has become the incumbents’ main marketing strategy. When users pay almost nothing to text someone on the same network, and far far more to text to a competing network, is it any wonder that more than 80 per cent of mobile to mobile voice traffic and more than 90 per cent of texts are on-net?

Mazzoleni doesn’t believe the problem will be fixed by letting the two major telcos set the rules.

She says there will continue to be a barrier to competition in both the mobile to mobile and fixed landline to mobile markets as long as mobile termination rates stay too far above the total service long run incremental cost, which is the tool the commission uses to assess price gouging.

The result of this lack of competition is that two-thirds of mobile customers pay some of the highest rates in the OECD.

And as I blogged yesterday we use our mobile phones far less than other countries, as we can’t afford to.

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Mobile rates to come down

February 22nd, 2010 at 11:33 am by David Farrar

The Commerce Commission has decided (by a rare 2:1 split) not to recommend regulation of mobile termination rates, as the undertakings by telcos is deemed satisfactory.

The Government is consulting on the recommendation. Regardless of whether it goes with commercial undertakings or regulation, it means prices should drop. The mobile termination rate is the rate charged to receive and terminate a call to a mobile phone, so it acts as a floor on charges.

The mobile termination rate is 17.53c a minute for Telecom and 17.90c for Vodafone. Under the final undertakings these will drop to 10c in 2011, 9c in 2012, 8c in 2013 and 6c in 2014.

That is good for consumers, but not so good for competition as it means it is not until 2014 we get them to 6c. If they recommended regulation then one might get to that level in 2011.

As for text message termination rates, the final undertakings are to move to bill and keep (ie no termination rate) so long as traffic is balanced within 7%.

Reading the executive summary, I was interested to find out that 80% of all voice calls and 90% of all SMS traffic is on the same network. This is much higher than in other OECD countries, and is a result of the high MTRs we have had.

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Mobile termination rates

October 5th, 2009 at 12:00 pm by David Farrar

As usual, Chris Keall has the best summary of what the offers are on mobile termination rates:

Commerce Commission proposal
Voice calls: immediate halving of MTR on voice calls from 14 cents to 7.5 cents. Glide path to 3.8 cents by 2015.
Txt: immediate cut from 10 cents to 3.8 cents. Further cuts to 0.5 cents by 2015.

Vodafone
Voice: Looking to head off regulation with offer to cut MTR on voice calls to 12 cents per minute from April 2010, with glide path down to 73 cents a minute by 2015.
Txt: 1.2 cents from April 2010.

Telecom
Voice: cut to 12 cents per minute from January 2010. Glide path down to 7 cents per minute by 2015.
Txt: no offer
Expresses support for bill-and-keep, an alternative to MTR that sees the a phone company whose network initiates a call pay all costs.

2degrees
Wants MTR scrapped on all voice calls and txt. Prefers bill-and-keep model (initiating caller’s telco pays all cost). If that’s not possible favours immediate drop to 6.54 cents per minute for voice, falling to 3.45 cents by 2015.

So let us look at voice calls first. In 2010 the rate would be 7.5c under the Commerce Commission proposal, 12c offered by Vodafone, and 12c offered by Telecom.

By 2015, the rate would be 3.8c under the Commerce Commission proposal, 73c offered by Vodafone, and 7c offered by Telecom.

For text messages in 2010 the rate would be 3.8c under the Commerce Commission proposal, 1.2c offered by Vodafone, and 10c offered by Telecom.

By 2015, the rate would be 0.5c under the Commerce Commission proposal, 1.2c offered by Vodafone, and 10c offered by Telecom.

It is good to see Vodafone offering a more tempting package, with the huge drop in termination rates for text messages.

Also interesting to note:

Telecom’s numbers are close to those of its previous submission. More noteably, the telco has also expressed support for bill-and-keep – an alternative to MTR in the US and elsewhere that sees the phone company that initiates a call paying all costs.

I don’t think that is explained right. With bill and keep there is effectively a zero interconnect fee or termination rate. It is pleasing to see Telecom moot that. I think it is a superior model.

Think how retarded the Internet would be if ISPs charged each other 10c an e-mail?

Also pleasing has been that the Minister has ruled out any last minute negotiations with telcos on the proposed regulation. Trevor Mallard fell into this trap of privately negotiating a deal. Steven Joyce has said that any commercial offers have to go to the Commerce Commission, not him. And then once the Commerce Commission makes a recommendation, he will either accept it or not accept it – but won’t get into a game of considering ever increasing (or decreasing) commercial offers every few days.

It will be interesting to see what the final Commerce Commission recommendation will be.

Note that my company has done some market research for Exceltium Ltd on the issue of mobile termination rates, but all views are my own.

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Drop the Rate, Mate

August 11th, 2009 at 11:24 pm by David Farrar

Curia did some polling for the Drop the Rate, Mate campaign, and the full results of the polling are on curiablog.

The eight organisations behind the campaign are not ones you would normally see agree on much. You have Federated Farmers and the Unite Union. You have the Consumers Institute and the Federation of Maori Authorities. You have NZUSA and TUANZ, plus the new mobile carrier 2degrees and Airnet.

They are calling on the Government to accept the recommendation of the Commerce Commission and reduce the termination rates telcos charge each other as these rates keep competition out, and keep costs higher.  You can sign the online petition on the campaign website.

The Commerce Commission previously recommended the rates be lowered speedily by regulation, but Trevor Mallard on behalf of the then Labour Government rejected doing this, in favour of a deal with the two big telcos for smaller slower voluntary reductions (with a guarantee the reduction in the wholesale fee would be reflected in their retail fees). The Commerce Commission has concluded these did not go far enough and has recommended more dramatic drops. It is thought the current termination rate for a text message is around ten times greater than the actual cost of receiving a text message and passing it onto a phone.

I’m not surprised to see NZUSA supporting the campaign, as I found out first hand what a hot issue this is for both secondary and tertiary students. We had a couple of focus groups with students aged from around 16 to 24 and I was astonished by how passionate they were about their dislike of the current billing arrangements caused by the high termination rates.

Many said that their choice of mobile phone provider has nothing to do with personal choice, but totally dependent on who all their friends are with. Hence in Wellington most students are Telecom and in Auckland most are Vodafone. Again many of them simply will not text (or call) someone on a different network due to the cost.

I sometimes wonder what a mess we would have if ISPs charged a termination rate for e-mails. Imagine having to pay 7c to e-mail someone on a different ISP. You’d end up with only a couple of ISPs probably as no-one would want to send e-mail to people at a different ISP. This might explain why up until recently we have had only two mobile phone providers but many dozens of Internet service providers!

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Broadband performance

June 16th, 2008 at 8:14 am by David Farrar

The Commerce Commission report on broadband performance in Q1 of 2008 is here.

The retail market shares are:

  1. Telecom 65%
  2. TelstraClear 11.5%
  3. Vodafone 9.7%
  4. Orcon 7.2%
  5. Slingshot 6.5%

The best city in terms of broadband performance was Hamilton with Auckland and Dunedin 2nd=, then Wellington and Christchurch. Here are the top five for each city in order:

Auckland

  1. TelstraClear DSL
  2. MaxNet
  3. Kiwi Online
  4. Inspire
  5. WorldxChange

Hamilton

  1. Orcon
  2. Compass
  3. WorldxChange
  4. Telecom
  5. Slingshot

Wellington

  1. TelstraClear Cable
  2. MaxNet
  3. Inspire Net
  4. TelstraClear DSL
  5. Actrix

Christchurch

  1. TelstraClear Cable
  2. Snap
  3. MaxNet
  4. WorldxChange
  5. Inspire Net

Dunedin

  1. Orcon
  2. Compass
  3. Telecom
  4. WorldxChange
  5. Vodafone

They do not just mention speed, but a variety of performance indicators.

My home connection in Wellington is with Ihug, now Vodafone. They are third lowest in Wellington and I do have to say since they were taken over I have found the performance disappointing. I love their mobile products, but may look at moving my home connection at some stage.

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