'Copper tax' D-Day tomorrow for Chorus, govt, ComCom - what's at stake, and the real problems with the UFB

Tomorrow will be a crucial day in the fight over the so-called "copper tax" [UPDATE: see the decision here.]

It will see the Commerce Commission release its final determination on Chorus' copper broadband pricing (or unbundled bitstream access or UBA). It's a decision that could defuse the situation for the government, or ratchet up the tension.

First, a quick recap:

The regulator's draft determination threw everyone into a tiz.

The Commission recommended Chorus [NZX:CNU] cut its wholesale pricing by up to 25% - which would mean savings of up to $150 a year off household broadband bills if retail ISPs pass on rather than pocket the cut (pressed by NBR, two said they would, but one ISP CEO later acknowledged the situation was tough).

Shareholders took fright.

So did the PM, saying on September 14, "Basically if the Commerce Commission ruling stands there's a chance Chorus will go broke, in which case the Ultra Fast Broadband [UFB] won't be rolled out."

Chorus is responsible for the lion's share of the public-private UFB, into which the government has tipped $1.35 billion of taxpayer money ($928 million of it non-voting Chorus shares and Chorus debt securities).

John Key said the Commission had got it wrong, too narrowly interpreting the Telecommunications Act. If necessary, the government would introduce legislation to over-rule the independent regulator. Chorus would not lose what he saw as financially perilous amounts of revenue; already sluggish UFB uptake would not be slowed further by cheaper copper broadband.

To wit, ICT Minister Amy Adams released a discussion paper with three possible options, all of which boil down to the government directly setting the price (putting it in the icky situation of being both investor in and regular of Chorus' monopoly pricing).

On September 16, the Prime Minister tempered his position, saying a law-change to over-ride the regulator might not be necessary. "The Commerce Commission may well come up with a new determination, and we may well accept that," the PM said.

The final price determination was due "late October." After a slight delay, the decision is now due out tomorrow.

It would certainly help smooth things for the government if the Commission comes around to the PM's way of thinking. 

It's important to note the regulator's draft determination was couched in careful language, with a lot "up to" qualifiers and so forth, so it actually has quite a lot wiggle room to fall into line with the government without changing its stance.

But if it is perceived to have made an about-face, or caved to political pressure, expect howls from the Coalition for Fair Internet Pricing - the lobby group that came up with the phrase "copper tax" for the half-billion-plus in extra revenue that Chorus if the government's much-more-modest cuts go through, vs the Commission's up-to-25% slash. It says the money won't be used to speed the UFB rollout; it'll go into Chorus shareholders' pockets.

There's obviously a degree of self interest from some of the Coalition members. CallPlus, Orcon and Vodafone (not a member, but the deliverer of the cutting "corporate welfare for Chorus" submission) would benefit from cheaper wholesale pricing.

But the Coalition - which also includes Tuanz, InternetNZ and Consumer, among others - also makes the excellent point that fibre should be made more attractive rather than the stick of keeping copper broadband pricing artificially high. Chorus - perhaps with a little government prodding - has come to the party here, recently proposing faster and cheaper UFB plans.

Another key element in making fibre more attractive: make video a killer-app by opening up Sky TV to competition. Unfortunately, the Crown has gone backwards on this front. The Commerce Commission recently found consumers would benefit substantially if Sky TV's near-monopoly was opened up to competition, and that its content agreements with internet service providers had likely violated the Commerce Act and inhibited new market entrants. However, it decided not to take any legal action (see some ideas on opening up competition here).

And the government needs to resolve the RMA hassles that mean people down right-of-ways or in apartment buildings can be left waiting months for fibre.

And it's just shabby for the government to change the rules part way through the game. National passed the Telecommunications Act, which includes a move from woolly "retail minus" to more real-world "cost-plus" pricing - something that was always likely to see UBA set at a much lower wholesale rate.

Costs more than thought
A key source of tension is that the UFB rollout (like every big infrastructure project ever) is costing more than initially thought. Chrous has already upped its initial estimate by $300 million.

The situation will get worse at the end of 2015 as the budget for free non-standard instals runs out. 

In Australia, Tony Abbott's incoming government has downgraded its equivalent project - the National Broadband Network (NBN) from fibre-to-the-home or business to fibre-to-the-node (the local neighbourhood). At some point our government is going to have to decide whether to up its investment, or go down the Abbott route.

In the near-term, don't expect a clear cut result tomorrow. The Commerce Commission might not move on pricing or at least not enough to satisfy John Key. Another phone call to the PM from Chorus chairwoman Sue Sheldon could well be made. But other factors come into play. We're dealing with a complex copper pricing equation of which UBA is just one component. There will also be a bunfight over unbundled copper local loop (UCLL) wholesale pricing. Collectively, copper line wholesale pricing might not be resolved until close to December next year when the new rates are due to kick in - or not, depending on how the government decides to intervene.

ckeall@nbr.co.nz