ITP Techblog

After a process that began with the introduction of a new Telecommunications Act in 2010 and included more plot twists than an episode of Mission Impossible, the Commerce Commission has finally revealed its final pricing determination for copper lines.

Predictably, not everyone is happy.

Most of New Zealand uses copper lines for broadband and as Chorus has a monopoly  on copper lines in New Zealand, it's a regulated service.

In the old days, when Chorus was an arm of Telecom, the model used to work out how much the service cost was known as "retail minus". That is, the Commission looked at the average price for Telecom's retail products, took off a margin and called it a wholesale rate.

But when Telecom was split in two - a retail arm and a network arm - that was no longer appropriate. Instead, the regulator was instructed to switch to a "cost plus" model. That is, it would work out the cost of delivering the service, add a margin and call that the wholesale rate.

The change was expected to be so great, the Act included a three year freeze on it to allow Chorus time to get its books in order.

It didn't and so when the first draft determination came out, Chorus howled in outrage (How Could Anyone Predict This Disaster?!) and the government launched on an ill-advised project to undermine the Commerce Commission's power to regulate. A discussion document was introduced that suggested either ignoring the Commission, overruling the Commission or telling the Commission what price to come out with - hardly the arm's length regulatory regime you would expect of a government that is also a major investor in the industry.

Thus was born the Copper Tax campaign - InternetNZ, TUANZ and IITP joined forces with Consumer and a raft of other activists (and indeed smaller ISPs as well) to fight the move and ultimately we were successful in getting the government to back down from its knee-jerk reaction. The government contracted an external agency to go through Chorus's books and discovered a raft of ways the company could save money and pay for the project it was contracted to deliver.

During the process, Chorus asked the Commerce Commission to conduct a "Final Pricing Principle" (FPP) investigation into copper pricing. That requires some explanation as the Commission's process is somewhat unusual.

An FPP is deemed to be an accurate and detailed assessment of the actual price being reviewed. Not the actual price Chorus pays for things, but an economic model based on a thing called a Modern Equivalent Asset (MEA). If Chorus was to build the copper network today, using the most effective and efficient service possible, what would it cost to build. Using that as a basis, the Commission would determine the price.

Because that's a lengthy and hopelessly convoluted process, the Act also allows for an Initial Pricing Principle (IPP) which is a supposedly much shorter process. In that, the Commission looks around the world to similar countries (similar in terms of geography, political structure, network topography and yes, even dirt), picks a handful, comes up with the average and uses that benchmark as a proxy for the real thing.

Most of New Zealand's telco determinations are based on IPP processes. Everyone grumbles but generally they're seen to be about right, although they take a lot longer than anyone would like. This is the first time anyone's asked for an FPP so it's a bit of an untested methodology.

Which brings us to today's announcement.

The Commerce Commission has determined that the price of copper lines will rise over the next few years. The final price will be $120 million higher than the determination set in the IPP benchmarking exercise of 2013.

The decision won't be backdated but that aside it makes for a poor Christmas present, as Spark's CEO Simon Moutter puts it in a press release on the matter.

Customers will end up paying a few dollars more each per month - assuming the telcos and ISPs pass on the cost rise - making New Zealand's copper line broadband services the only ones in the world to increase in cost, according to a release from InternetNZ.

The International Telecommunications Organisation (ITU) recently put out its annual benchmarking of telco services around the world, and while New Zealand fares well in most categories (typically in the top ten when it comes to speed, availability and so on), one category puts us in the bottom half: fixed-line broadband prices. That's not going to change any time soon.

Of course, a cynical person would say none of this is about copper lines at all and is designed to drive customers to switch to the shiny new Ultra Fast Broadband (UFB) service being rolled out around the country. UFB is fibre based and so does not have the same regulatory pressure that copper lines have. It's also being built by four companies, not one, although Chorus has the lion's share of the project and each Local Fibre Company (LFC) has, in effect, a regional monopoly.

UFB uptake has been low to date but ultimately it will be the network of choice for everyone who can get it. It is world class and, if we look at the Australian debacle, somewhat in a league of its own. But users shouldn't be forced to take it up it and for those who will never get it, the copper tax will be a cost they can't avoid.

And while all this is over for now, the entire Act is being reviewed and by 2020 a new regime will be in place - the fourth major overhaul since 2001.