Govt's Chorus intervention a step beyond Sky City, Rio Tinto, Hobbit deals

David Farrar

I remain puzzled by what the Government is proposing (or consulting on possibly doing) around the price of copper . I blogged in detail on this issue two weeks ago.

I genuinely don’t know why the Government is proposing to change the law in a way which will deliver a huge amount of extra money to  (note it is more money compared to the draft Commerce Commission determination, but is less money than they currently get), because they seem willing to gift this money to  and not actually get anything in return for it. That is what baffles me.

If you compare the proposed actions here, with other interventions by the Government, the other interventions are easy to understand in terms of benefits (even if one may disagree on them). They are:

  • Sky City – in return for some pretty minor regulatory changes, Auckland gets a $400 million convention centre. A great deal for taxpayers.
  • Warners – in return for a slightly increased subsidy (for all productions) and some minor employment law changes, we retained not just The Hobbit in NZ, but also a viable film industry, protecting thousands of jobs and also a huge tourism gain.
  • Rio Tinto – while I personally did not support this deal, I understood the rationale – if Rio Tinto abandoned Tiwai point it would be a huge loss of jobs in Southland, so the deal was to guarantee they remain operating Tiawi Point for at least the next few years.

But the proposed law change to benefit Chorus is, well bizarre, because neither taxpayers nor consumers will receive any benefit from it. Chorus is already contracted to deliver  to their portion of 75% of NZ homes. The proposed law change will not require them to deliver one extra centimetre of  to anyone.

I really can not work out why the Government thinks this is a good idea. And if I, a pretty passionate supporter of the Government, can’t work it out – then I think most people can’t.

There have been two major rationales put up for the proposed law change. They are broadly:

  1. Chorus may go broke without it
  2. We don’t want the price of copper to undermine uptake of fibre

Taking the first rationale, let me say if there is a chance that Chorus could go broke under the draft determination, then of course that would be a concern. I am a shareholder of Chorus. I don’t want them to go broke. But what I am surprised about is that the evidence for Chorus being unable to be profitable under the draft determination is based on no official analysis. If the motivation for this law change is to stop Chorus going broke, then I would expect Treasury to be involved, just as they are with Solid Energy.

But of course the taxpayer owns Solid Energy, and does not own Chorus. I am unsure how you can justify bailing out Chorus, yet not bailing out Solid Energy.

But the reality is that Chorus would not go bust under the draft determination. They do not say they will. The market analysts do not say they will. Yes the draft determination will adversely impact their profitability and dividends, and that is bad for Chorus shareholders like myself. But that is one of the risks of investing in regulated monopolies.

My concern is that if No 1 reason is the rationale for the Government, then they will set a precedent that will come back to haunt them. If all you have to do is tell the Government that a (draft) decision by the Commerce Commission will affect your profits, and you get a law change, well the queue to the Beehive door will be long. Think Vector, Auckland Airport and others.

So let us look at the second rationale, which is we do not want the price of copper undermining the price of fibre. I personally am unconvinced the relative prices will be a major factor, but for the sake of debate am happy to concede the point that this could be undesirable. However what I can’t get is why you would just gift the extra money (being the gap between the proposed price and the price the Commerce Commission says should be charged in its final determination) to Chorus in return for, well nothing.

Chorus has signed a legally binding contract with the NZ Government to roll out fibre to their portion of the 75% of NZ target. Steven Joyce and his team did a great job negotiating that contract. There was no requirement in that contract for copper to be at a particular price. It was well understood that the price of copper would be set by the Commerce Commission (as it has been for decades) under a cost plus calculation (instead of retail minus).

So again I honestly do not understand why the Government is proposing what it is proposing. If someone from the Government can explain it to me, and others, that would be good. While there are some commercial players involved in this debate who of course have financial motivations – most of the people I talk to on this say they are genuinely baffled. They support the fibre rollout, but don’t see how the proposals advanced will be beneficial to anyone but Chorus.

Adding to the confusion is the fact that the Government appears to be contradicting itself with its own arguments. We have been told the major rationale for this law change is to stop the price of copper dropping (in line with the Commerce Commission determination) as this will undermine fibre uptake. Yet the Government has also argued that if the wholesale price of copper drops, then the retail ISPs will not pass the savings on, and hence consumers will not benefit.

Well I’m sorry, but pick one of those arguments, but you can’t pick both. You can’t argue this proposed law change is to stop the price of copper dropping significantly, and then also argue that the price of copper won’t in fact drop as the ISPs will not pass on the savings.

So you see why I am confused.

I don’t think the Government has any bad motivations around this. I just don’t understand what benefits this will bring, as opposed to all the other deals where the benefits (a convention centre, jobs, tourism) have been well understood.

I was chatting to someone on this yesterday, and he had what I thought to be a good suggestion as a compromise.

  1. Wait for the final Commerce Commission determination
  2. If the price recommended is at a level that the Government thinks could undermine fibre uptake, then proceed to set a minimum price for copper
  3. However have the difference between the Commerce Commission price and the Government price go to Crown Fibre Holdings rather than Chorus.
  4. Have Crown Fibre Holdings use the extra revenue to extend their fibre programme to more New Zealanders – go beyond 75% to 80%, boost rural broadband, help with access in more deprived areas etc.

While this compromise still has elements that I regard as undesirable, it would at least have the advantage of there being benefits in return for keeping the copper price higher than recommended. And while Chorus would of course rather get the extra money directly, they would still benefit by no doubt winning additional tenders by Crown Fibre Holding to extend fibre even further than the current 75%.

But as I said at the beginning, I just can’t understand why a law change is being promoted that simply would deliver more money to Chorus (compared to the Commerce Commission determination) that doesn’t deliver any benefits to consumers, taxpayers and Internet users. The proposals are just a consultation, so I hope that the Government takes the feedback as constructive and seriously looks at if there is a better way to achieve what they want – which is a fibre connected country.

Political commentator David Farrar posts at Kiwiblog.

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7 Comments & Questions

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Key is a contradiction - sell the family silver, subsidies rubbish
The epitome of real modern living

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Look deeper David. Think GCSB angles.

The communications infrastructure has become much more than just another facet of the economy. It is now a vital 'national security' component that enables broad surveillance and monitoring by the govt. of its citizens that the Stasi could only dream about. Chorus fiber network is going to be the backbone of this new system that forms a part of a global network of information gathering.

The Govt. sees possible benefits that are broad and go well beyond economic considerations. Encouraging people to adopt usage of the new fiber system "voluntarily" mean people are giving up their information flows and private data willingly as free citizens.

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Great summary David. This is indeed a baffling proposal. The scary thing is that the Minister's scorn towards those saying so makes it sound more than just a proposal. Time for some cool heads at the beehive.

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With regards to ISP's passing on any potential cost savings there is a blindingly obvious question not being asked.

If copper inputs cost ~$44 (for POTS and UBA) and entry level fibre costs $38... why are ISP's (like Telecom with 50% of the market) charging $10 more for the UFB service?

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...because the input cost is only on for many costs relating to the final price. There are to ther, higher, costs of delivering ufb as an ISP over and above the input price.

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It is a good summary David, maybe the answer to this, is that the average NZ citizen does not need fibre to the home and everyone involved in the fibre rollout is worried that most of the public are going to ignore fibre unless it is financially cheaper to install and use in the household than thier existing copper fixed line. Leave it a few years and 4g mobile will be giving real competition to fibre in terms of coverage, zero install costs, user mobility and hopefully - data pricing.

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Maybe the lesson, David, is that the government should have not have interfered with the telecommunications market at all. Now Mr Key has got himself in a pickle as how to manage the transition. Lower the copper access price and only a minority will shift to fibre - making the whole project questionable financially and the National government look like fools. Raise the copper price and all the self-appointed self-interested watchdogs will start barking and howling.

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