Fibre 101 with Steven Joyce

Don't know your dark fibre from your lit? These terms matter when $1.5 billion of taxpayer money is going to be spent on broadband over the next 10 years.

In this (unedited, uncorrected) transcript of a June 24 meeting of the Commerce Committee, Communications and IT minister Steven Joyce schools his fellow MPs, and reveals some of his thinking.

It's good to see the minister is clued up on the technical definitions, and the economic rationale around investing at different layers.

If I had to bet my life right now, I would say that the minister is learning toward a compromise between Telecom and Vodafone's respective proposals for a national fibre network, and his original discussion document and its proposal for 25 regional fibre companies. That is Chorus - or Vodafone's mooted Fibre Co (in which the big three telcos and the government would hold quarter shares) would build a dark fibre network countrywide, with local players kicking in at the retail level (see also Joyce offers ray of hope for Telecom and Vodafone).

It's also worth noting that Mr Joyce repeatedly says that a number of the mooted 25 regions can be lumped together under one IFC.

I've also included a segment form later in the meeting, in which Labour's IT and Communications spokeswoman, Clare Curran, needles the minister on an alleged faction fight in cabinet over broadband, and the two-month delay - which, she discovers, applies to the Crown Fibre Investment Company as well as the submissions process.

Anyhow, take it way, Steven:

LOTU-IIGA: Broadband; I mean, the vast investment, obviously in the vote for broadband, you talked about the feedback engagement with industry groups - 105 submissions. Can you talk about some of the themes that came out of the feedback that you’ve received?

JOYCE: One of the bigger things was around the provision of dark fibre, and what level of services. I don’t know how familiar committee members are, but there’s basically a range of levels that companies can provide, and the focus for the Crown I think, should be to provide its investment at the lowest possible layer to facilitate as much competition above that. Where we see that, particularly in the mobile area—you can see that the market generally does provide. So we’ve talked about providing dark fibre, primarily—

DALZIEL: I’m sorry, I’m going to own up—we’d like a definition there.

JOYCE: OK, these are the layers.

Your most basic layer is just put the ducts in the ground and don’t put anything in them, and you could, for example, lease those ducts to people. That’s your first.

Your second layer is dark fibre, which is literally you lay a fibre cable and don’t do anything else with it.

Then somebody comes along and puts electronics at each end and lights some of the fibres. That’s the next layer up, which is somebody actually lighting those fibres. What that means is that they basically put the electronics at the head end and then at the house end and you actually have the data potentially flowing between the two.

Then the next layer above that, of course, is your ISP so you manage your access to the wider internet.

So there are all these layers of activity that occur when you have a fibre system.

So one of the challenges for the Crown is: at which point do you invest?

Because, of course, the further up the chain you go, the more you create a monopoly in the overall exercise, and also the more expensive it gets.

The further up the chain you go, you’re doing more of the cost - although I’d have to say the largest part of the cost is at the infrastructure and dark fibre layer.

It’s actually the cost of laying, and literally having people out there laying fibre, which is quite expensive.

So those are the sorts of parameters you’re working with, and what we determined was that we want to be down as low down that chain as possible, because that will facilitate investment by companies above that.

We went out and proposed primarily a dark fibre service. So one of the themes coming back from organisations such as CityLink in Wellington, and some of the other companies that are involved in this already, was that while it’s good in theory to just restrict everybody to dark fibre with the Crown investment, in practice there aren’t enough wholesalers out there to do the next bit for the demand to be there.

So they wanted the ability to wholesale - not actually sell necessarily direct to customers but to wholesale services above that dark fibre layer. We didn’t prohibit that in the initial investment proposal but we perhaps didn’t make it as positive and clear as we could have, and certainly that’s been one of the strong feedbacks. So there’s people that are concerned that they lay fibre and they don’t get enough immediate uptake. So that was one of them.

The second one is the investment model and there’s been some interesting perspectives on that. It’s all about bridging the gap between what will be a commercial service and what it is right now.

So people are looking at - you know, they’ve requested perhaps cap and collar rates of return on the investment. In other words, perhaps one instance is that the Crown doesn’t necessarily put all the money in as an equity partner but they actually do the work with the Crown and guarantee some form of return. That’s one of the issues that have been raised by a number of companies.

Basically a number of them have come back and said: “Well actually we’re prepared to do a fair bit of this ourselves, but in the initial stages anyway we might need more confidence about the return to be able to invest.”

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CURRAN: Well, it appears that the choice - because you are making a choice- ppears to be between a national approach, which could be a Telecom-led rollout, or a regional approach, which is the coalition of electricity lines companies and the regional fibre group approach. But I guess what I’m hearing are the questions around: what is the choice that you’re making, and is there an internal division happening around this?

JOYCE: No. There’s no internal division happening around this.

CURRAN: No internal division? Well, then, two questions: what is the essence of that choice that it’ll come down to? And -

JOYCE:  You mean in terms of Telecom versus the rest? Well, I think it’ll come down to a number of things. As you know Telecom has put forward a different proposal, which officials have been fleshing out with Telecom before we decide we’d look at that more seriously. But in terms of the investment plan that we’ve come up with, there’s not necessarily any choice, because I’ve made it clear that we can aggregate regions together if it makes sense for the sector to do so. So I think you’ve got two parameters to look at. One is maximising the effect of the Crown’s investment. I think it’s really important on behalf of taxpayers to get the best results we can. The second one is obviously facilitating competition in the industry to the extent that you can. So those are the two things that you’ve got to work with. That’s going to be the focus of the decisions.

CURRAN: Can I ask you a fairly specific question then? Do you think that there will be an issue in the Crown providing soft equity to privately controlled local fibre companies that will then be free to set different prices for their fibre connections, which, whether it’s short-term or medium-term, would be mainly sold to Crown-owned entities such as schools and hospitals? And would this be affecting whether you would steer towards a more commercial deal with Telecom that’s got a more agreed fixed price?

JOYCE:  I think every arrangement you look at would be based on all the parameters that it came up with. I think you’re trying to pre-guess what we’re actually deciding. The decisions haven’t been made yet—

CURRAN: Well I’m asking you a specific question.

JOYCE: The decisions haven’t been made yet, so it’s a bit hard to say.
Curran Well, I’m asking you, then: is that an issue?

JOYCE:  Just rephrase for me again, is what an issue?
Curran The Crown providing soft equity to privately controlled local fibre companies that means that they can then set prices for fibre connections that could be different?

JOYCE:  You mean, this is the Allan Freeth argument that you end up with a Crown competitor who’s competing in the market place at lower prices because they’ve got softer equity options? Is that your concern?

CURRAN: Yeah, and so that the regions would be competing, perhaps, with each other and that, therefore, you would want a fixed price across the nations?

JOYCE: I don’t think that’s really going to be the issue. I don’t think the regions will end up necessarily competing with each other. I think the point around, if you like, soft equity from the Crown is that actually the process is going to be setup with the Crown, or do RFPs and tenders with operators, which means existing telcos can participate as much as anybody else. I think the role for CFIC will be to determine the best result for the Crown, and therefore for the country. But I don’t think that there’s a simple choice which says this particular parameter will determine whether we went nationally or locally. I think it would be just overall what’s best for the Crown and therefore for the country in terms of its decision.

LEE: Supplementary on that, you mentioned CFIC. What are the advantages of going for a joint venture model through an entity like CFIC rather than getting in dealing with power companies directly?

JOYCE: I think it’s a much better arms-length relationship with the Crown. You’ve got a more focused entity that is an investment-based entity. You get a board together which has the skills to make these decisions, and I think it’s important that politicians and officials stand back for that, because ultimately you’re also the regulator. So it’s important to get that separation. I think that model will work pretty well.

LEE: What is CFIC—I believe there’s a timetable as to when CFIC is set up; is that right?

JOYCE:  That’s right, yes, but it will slip through the 2-month period that we’re talking about.

CURRAN:  Sorry, I didn’t hear that. Did you ask when?

JOYCE: When will CFIC be set up? And I said the whole timetable slipped the 2 months.

CURRAN: The whole timetable has slipped? Because CFIC was supposed to be set up in mid-June?

JOYCE:  Well, it hasn’t been yet has it?

CURRAN: No.

JOYCE: So, therefore, it has yes. It’s about 2 months. We’re taking an extra 2 months in the process.