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How Chorus' costs can be reduced

Chorus [NZX: CNU] has a few tough decisions to make if Monday's financial reporting is anything to go by.

Where to prioritise its spending, where to make cuts and how to manage the regulatory process are all key questions the Chorus senior management will be asking themselves.

First things first, as you know TUANZ disagrees with Chorus on its handling of the regulatory process. The company should have seen the Commerce Commission UBA price point coming and had three years to prepare for it.

Fortunately, after a year of fluster from the government, we’re now back on track with a Final Pricing Principle (FPP) process to determine the costs of both UBA and UCLL components of the wholesale regime.

If I were Chorus I’d ditch the legal action against the Commission’s determination. It’s hard to see how that is anything but a delaying tactic at this point and could very well derail the whole process. Let’s just get on.

The good news is, regulatory issues aside, Chorus seems willing to do just that, focusing on the real heart of the matter – its cost structure.

Chorus has managed to bring the cost of each UFB premise passed to $3000. That’s a staggeringly high figure – in its bid process Chorus was estimating it would cost roughly half of that, and I have it from the LFCs that they pay significantly less per connection on average. This is the real problem and it’s good to see Chorus addressing it head on. Staff levels will have to fall, says CEO Mark Ratcliffe, and the company will have to consider how much and how it invests in copper lines.

This will be difficult for some customers – particularly those who are on the waiting lists for broadband. They may be years away from getting UFB and are hoping for more investment in the copper network to get them on to ADSL or VDSL in the meantime.

Unfortunately, not everyone is going to get copper broadband. Chorus’s main focus is on delivering the UFB and moving customers to that as quickly as possible. I suspect from here on in, it won’t be increasing the foot print of its copper network and will switch to maintenance only for most of us.

I’m in two minds about this. On one hand, customers need broadband today and as it’s now the 21st century we really shouldn’t be talking about people not being connected.

But on the other hand, copper is yesterday’s news and I want everyone (or as near as we can get) on fibre as quickly as possible.

Where Chorus must continue to invest in the copper realm is, of course, that quarter of the population that will never see a fibre connection under current plans. We need to make sure they don’t get left behind and I’m looking to the political parties to tell us what they plan to do about the digital divide.

The second point is Chorus’s ability to make money. As a regulated monopoly, it’s somewhat constrained in this. Chorus says it will be looking at new revenue opportunities and will be working with its customers (the ISPs) to determine what products it can come up with that they’ll actually be interested in buying.

When I first heard that, alarm bells rang. New ways to make money, eh? So you’ll be throttling everyone back to crawling speed and forcing the ISPs to buy bigger and better plans?

Chorus says no. In fact, to quote spokesman Ian Bonnar the company “categorically rules out” going for this so-called nuclear option.

I’m very pleased to hear that because the rumours among ISPs is that this is what was being planned. Certainly until yesterday I hadn’t heard Chorus deny it, rather it wouldn’t rule anything out. Now it has and that’s for the betterment of the industry as a whole.

So where can Chorus reduce its spend? I visited Northpower’s deployment last year and saw an overhead rollout moving swiftly and efficiently. Two-person teams connecting houses to fibre via overhead lines wherever possible. The record stood at just over an hour to connect one property.

We need more of that kind of approach deployed throughout the rest of the UFB network, I think, and it’s well worth looking to the other players to see what they’re doing well and what can be applied elsewhere.

But the single biggest thing that can be done to help Chorus, and indeed all the fibre companies, is to revisit this asinine resource consent process we currently have in place. [ICT Minister Amy Adams has ruled out making the UFB a designated service under the Resource Management Act, which would allow Chorus and the LFCs to lay fibre into a multidwelling unit or down a right-of-way without getting every owners' consent. Chorus has lobbied for such a change. Ms Adams told NBR readers it was nont on the table - see - CK].

Even though this is a government project for the betterment of all New Zealand, even though this is a once-in-a-generation network replacement that will see us right for the rest of the century, the fibre companies have to jump backwards through hoops to get consent from all involved.

It’s foolish, to put it mildly.

Why aren’t we treating this as a replacement for what’s already in place and allow the fibre companies to install without needing all the red tape? Northpower tells me it could double the footprint of its fibre network in Northland if it didn’t have to spend so much on consents, and Chorus and the other LFCs would likewise make a tremendous saving.

That’s a network I’d like to see – perhaps we can whittle down that 25% non-fibre number and solve the digital divide as we go.

One thing is obvious – the day will come when each area is completed and Chorus can switch off the copper network. That needs to be managed and planning should start now. Whangarei will be fully fibred this year – there’s no need for Chorus to continue maintaining a network that is surplus to requirements, yet no thought has been given to Chorus’s requirement to provide the network of last choice. Once fibre is available to all properties in an area, the copper can go. That’s something we need to plan for right now.

Paul Brislen is CEO of the Tuanz, the Telecommunications Users Association of New Zealand.

Comments and questions

being a shareholder in chorus I would be very upset if chorus dropped the legel action, as are they not duty bound to do whats best for the shareholders? Anyway sounds like you and internet nz are most worried about them taking this course of action

Chorus has said it wants certainty in the market. You don't get that by going to court to challenge a regulatory ruling.

As Chris Keall pointed out in another story, judicial reviews are something of a lottery. Telecom's 0867 numbering scheme took ten years of court time and a result came out long after the service ceased to be relevant.

Compare that with the Commerce Commission handling of Telecom's "loyalty" scheme which took around 18 months and saw a resolution to a very sticky problem in a timely fashion.

This is why having an independent regulator is so important. Someone who has the power to resolve these issues.

I have no problem with Chorus asking for a Final Pricing Principle (FPP) because that's in the Act and is a remedy any of the telcos can seek. Going to the High Court to demand it intervene is a very dodgy choice indeed.

I can see a massive opportunity to save money - take a long, hard look at the management.

In the long term, Chorus isn't concerned about the installation cost of fiber as it will receive a regulated return on its investment, whether wisely spent or not.

I also disagree with overhead installs - this isn't allow in many areas for good reason - it is an eye sore and once you allow it, it is hard to reverse.

Fixing the RMA issue is a no brainer and I do wonder why the government is resisting.

I don't even see overhead lines. I couldn't tell you (without going to look) what's in my street, and I suspect many people are in the same boat.

But there are other benefits to putting cables overhead - especially in a country like New Zealand where the ground can shift quite dramatically.

In Canterbury the first lines that were back up and running were the overhead lines. It's easy to see where the break is, easy to access the break and easier to fix than any underground component. It's also dramatically cheaper to repair overhead lines than underground lines.

But if the lines do strike you as an eye sore, and I'll accept that many people do think that way, then we should deploy UFB overhead where there are existing overhead lines, and move them underground as part of that programme of work.

That way we get the UFB deployed cost effectively and in a timely fashion and undergrounding is treated as it should be - as a separate project.

Another thing is that portions/regions of the copper network can't be simply switched off, without massive impact. There needs to be a customer proposition to entice customers onto fibre, even if cost neutral. Telecom need to come up with an alternative to their copper PSTN switches and associated provisioning/assurance/inventory platforms that are all tightly wedded together. It's complex. The "nuclear option" could just be Chorus offering to continue the same UBA service to ISPs at the same price today, and also offer the regulated spec UBA at the regulated price, then ISPs simply choose. Would shut down the 'copper tax' noise whilst not affecting service to users.