The #coppertax conundrum - Part 1

Last week marked two months since Communications Minister Amy Adams launched the review of the Telecommunications Act. An early-morning breakfast launch at the Beehive marked the beginning of a sense of confusion and paralysis across the telecoms and Internet sector, and has seen an ill-tempered and difficult policy debate under way ever since.

This three-part post picks out the main points of concern, as the Ministry continues to analyse submissions and as the Government indicates it won’t make any policy decisions before a Commerce Commission decision due late October.

Part One looks at the background to the debate and critiques the apparent drivers of the Government’s position

Part Two further critiques those drivers, and tries to explain from my point of view why the tone of the debate so far has been fairly grumpy.

Part Three looks at what might extract all parties from the grumpiness now prevalent, providing there’s an openness – on all sides – to changed approaches.

What is going on?

For newcomers to this debate, here’s what you need to know:

• When Telecom agreed with the Government to be a partner in the Ultra-fast Broadband Initiative in late 2010, it agreed to separate into two companies – Telecom and Chorus.
• As part of the separation, pricing rules for a key broadband service on the copper network – UBA or unbundled bitstream access – were changed from referring to Telecom’s retail prices, to the actual cost of providing the service.
• This pricing rule is the same as other regulated services in telecommunications.
• The new cost price for UBA was to come into effect three years after separation, in November 2014, to give Chorus a cash flow cushion (since quantified at around $400m).
• The industry expected the cost of the UBA service to fall substantially under the new rules. These rules were designed to end the monopoly rent the old prices had been delivering to Telecom.
• The Commerce Commission, which sets prices in this area, announced its first draft price for the service in December last year, at $8.93. 
• Chorus said this would affect its prospects, and the Prime Minister said intervention would follow.
• Amy Adams announced the telco policy review in February, and also announced that the price freeze on UBA would be extended by a further year.
• A Commerce Commission conference on the UBA pricing review in June saw every part of the industry (except Chorus) agree the Commission’s draft price was an accurate reflection of the cost of delivering the UBA service, if not slightly on the high side.
• The Minister launched her discussion document for the first phase of the review of the Telecommunications Act in August. It proposed three options, all three seeing the Government take control of setting the UBA price away from the independent regulator, and all mandating much higher prices than that proposed by the Commerce Commission. This would lead to a major wealth transfer to Chorus for no gain to anyone else.
• The status quo wasn’t considered as a relevant option. No cost/benefit analysis was presented.
• A broad-based coalition – the Coalition for Fair Internet Pricing – launched in September (InternetNZ is a founding member), arguing two key points: that the Commerce Commission, not Cabinet, should set the UBA price; and that a multi-hundred-million-dollar transfer to Chorus was not justified by any analysis presented by anyone.

Two months since the launch of the document, I remain puzzled as to what the government is trying to achieve. Everyone understood the need to review the Telecommunications Act in 2016 once UFB was well under way. Nobody seems to understand why it’s being done now.

What’s the Government trying to achieve?
There seem to be three main impulses driving the Government. 

• a concern with Chorus’s underlying economic viability – and the threat posed to the UFB if Chorus goes bust. 
• a concern with migration – a fear that a cost-based price for slow copper services will impede the uptake of fast fibre services on the UFB network.
• a concern with an arcane comparison as to what the copper price should be based on – in the mumbo-jumbo jargon of the sector, what the “modern equivalent asset” is on which the regulated prices should be based.

The first of these concerns is invisible in the policy review paper, but all too visible in comments by the PM in Parliament and in the media in the past few weeks. We don’t think it stands up, and we can’t find anyone in the industry who knows about these things who thinks Chorus is at financial risk. Chorus CEO Mark Ratcliffe has denied there is a problem with the ongoing viability of his company, and I have no reason to think him wrong. No analysis in the Government’s review documents substantiates this as a concern that the Government needs to address.

The second concern – migration – is in the discussion document in spades, but very narrow spades indeed. The review paper argues that the main driver for migration from copper to fibre broadband services is the relative price of the network input. There is a claim that the expected outcome of the Commission’s UBA pricing review would be rough parity between copper and fibre prices, and that if copper is $5/month cheaper than fibre, nobody will move. None of the other drivers of migration are covered in the paper, and no evidence is presented as to why this single driver (which I think is marginal at best, given that most fibre plans earn more for retailers and give far better service to consumers, regardless of a copper price at $32 or $40) should be treated so seriously.

The third concern – the pricing comparator for the copper network – is woven through the document. A frankly bizarre and economically untenable argument is proposed as to why copper and broadband services should be priced similarly that rests on two legs: that a modern network is a fibre network, and that we know the cost of a fibre network because we are building one for the UFB. Taken together, these two legs are argued to mean that the prices of copper and fibre broadband inputs should be the same.

Jordan Carter is InternetNZ CEO