Member log in

ACT, United oppose Chorus 'copper tax', sealing anti-govt majority

"COPPER TAX" NUMBERS

For
National: 59 MPs
Total: 59

Against
Labour: 34 MPs
Greens: 14 MPs
NZ First: 7 MPs
Maori Party: 3 MPs
United Future: 1 MP
Mana: 1 MP
ACT: 1 MP
Brendan Horan (Independent)
Total: 62

UPDATE: It's no longer an option for the government to change the law to over-ride the Commerce Commission on Chorus pricing.

John Banks' press secretary Chris Diack tells NBR the sole ACT MP will vote against any government move to over-rule the regulator's decision to slash Chorus' copper pricing - sealing an anti-government majority against such a move.

Mr Diack said ACT would not participate in the orchestrated series of press releases sent by other parties at 15 minute intervals from 3pm yesterdaty afternoon.

But he revealed that on October 31, as the Commerce Commission made its final determination to slash Chorus' copper line wholesale pricing by 23%, Mr Banks told the Prime Minister he would not support any legislation that would over-rule the independent regulator.

The revelation that Mr Banks opposed legislative help for Chorus weeks ago helps to explain recent events.

After the Commission's final price determination on October 31, Chorus supports expected the government to act immediately on its promise to over-rule the regulator.

Instead, Prime Minister John Key and ICT Minister Amy Adams made unexpectedly ambivalent statements, and Ms Adams called in EY Australia to to run an independent review.

The parade of anti "copper tax" press releases this afternoon included one from Peter Dunne - a signature loss for the government given the UnitedFuture leader supported National on recent contentious telecommunications legislation.

Cheaper broadband?
On paper, today's developments should ensure the Commission's cuts go through - but it's still an open question whether ISPs pocket some or all of the 23% wholesale price cut.

After some nudging by NBR, Coalition for Fair Internet Pricing members Orcon and CallPlus have pledged to pass on the savings, due to kick in December next year - and if two mainstream players, do, others will have to follow.

But Orcon boss Greg McAlister has also emphasised retail ISP margins are extremely tight, and that a home or small business user's monthly broadband bill is made up of several elements.

NBR's guess: some or all ISPs will offer you more on the service front (such as more data each month) rather than shaving your monthly bill - echoing what happened in the mobile market after 2degrees prevailed in the spat over network interconnection costs at the wholesale level.

What next?
The Crown has already committed $1.35 billion to the 10-year Ultrafast Broadband (UFB) rollout, investing $929 million of that total in Chorus (in the form of the Crown buying non-voting shares and interest-free debt securities). 

The government has to now decide whether to inject more money  or loan more funds to Chorus (whose estimated UFB costs were already running $300 million over budget before the "copper tax" imbrolio) - although there are other alternatives. Across the Tasman, the incoming Abbott government has scaled back the National Broadband Network from fibre-to-the-premise to fibre-to-the-node (or neighbourhood level, with copper retained for the last leg).

Telecommunications Users Association CEO Paul Brislen has raised another option: re-tendering Chorus' leg of the UFB (Chorus is responsible for around 70% of the rollout). Vector was among those who missed out on the original tender. Earlier, Sydney-based telecommunications analyst Paul Budde told NBR that Chorus was the only option for the bulk of the project, as no other company had the necessary scale.

Late Thursday afternoon, Ms Adams said the government would wait for EY Australia to complete its review of Chorus (expected by year's end) before deciding on its next move.

Investors react
Chorus shares [NZX:CNU], which have trough from above $3 in August, were up 2.19% to $1.87 as the first political party announcements were made this afternoon.

In late trading, they were down 1.91% to a new low of $1.79.

By First NZ Capital's reckoning, the stock may be close to bottom, regardless of Thursday's news. 

First NZ Analyst Greg Main says Chorus is worth $1.84 even under the worst-case scenario (for Chorus) of the full copper price cut going through, and 20% UFB fibre uptake by 2020 (see more analyst opinion here).


EARLER: NZ First says it would not vote for legislation in support of the so-called "copper tax" - or the government over-ruling the Commerce Commission's October 31 decision to slice Chorus' wholesale copper broadband pricing by 23%.

National, which has 59 MPs in the 121-member Parliament, will need the support of minor parties to alter the Telecommunications Act to over-ride the regulator.

NZ First's 3pm announcement was followed by another at 3.15 by United Future, which also said it would oppose such legislation. 

Minutes later came a release from the Maori Party saying it would also refuse to support such a bill. Then came a release from Mana, plus a tweet from independent MP Brendan Horan indicating he was opposed.

With Labour and the Greens already firmly opposed to the "copper tax", al eyes are on ACT. NBR understands the news will be bad for the government.

NZ First says the government would be surrendering to foreign shareholder pressure if passed such regulation - a possible reference to comments made by an Australian fund manager to NBR earlier this week.

Prime Minister John Key says the Commission's reading of the Act was too narrow; that Chorus "could go broke" if the 23% copper price chop goes through, and the UFB fibre roll-out put in jeopardy.

The Coalition for Fair Internet Pricing - which includes Orcon, CallPlus, InternetNZ, Tuanz and Consumer - says the Commerce Commission's decision should be allowed to stand. It calls the difference between the regulator's 23% price cut and the government's much more modest price cut proposal "the copper tax." It maintains the revenue that would otherwise have been lost to Chorus will go into shareholders pockets rather than subsidise the UFB rollout.

NZ First picked up on this theme in a press release today, saying it would not support any legislation that helped foreign shareholders.

ckeall@nbr.co.nz

More by this author

Comments and questions
48

So for Peter Dunne we say bye bye Peter your seat in Oharaiu will become National next time. Once a renegade, Peter always a renegade Peter,

Now that legislation is off the table, what’s the Coalition’s solution if Ernst & Young conclude Chorus can no longer build UFB? Is the Coalition going to rejoice that UFB is cancelled/delayed or demand a taxpayer bailout?

Let Chorus go bust if it can't honor its contract to build the UFB, which never promised excessive pricing of copper! Someone else would buy Chorus's assets at good price - maybe someone with a bit more idea about how to build UFB economically. NorthPower is connecting up homes at a fraction of the cost Chorus is incurring!

Nonsense. The govt subsidy to Chorus is LESS per house than all the other fibre providers. Also with Chorus, the money has to be paid back.

Because Chorus was using profits from it's copper network to replace it with fibre, it was the cheapest option for taxpayers.

The whole problem ism caused by the Commerce Commission coming up with a bizarre way to set priving. It has nothing to do with what it costs to run and replace the copper network in NZ - nothing at all.

But instead uses the pricing from another country on the other side of the planet who currently have a very weak currency, and where millions of people live in apartments - not spread out in individual houses like NZ.

Unfortunately we have a bunch of idiot polititians who want to screw any Kiwi who has invested in NZs future with fibre, want to screw any Kiwi who has invested in NZs future with renewable generation (with the Labour Green power plan), but after having chased away NZ investors, will no doubt winge and whine for the next decade about lack NZ investment and too much foreign investment

But it isn't "caused by the Commerce Commission coming up with a bizarre way to set pricing".

The Commission is applying the pricing criteria set in legislation by the current Government. Chorus knew that the current copper pricing methodology was going to move from "retail minus" to "cost plus" and that that cost plus price would be based on international benchmarks.

To feign surprise when that doesn't now work out well for them strains their credibility. And if investors were silly enough to not read these very public investment cues, I see no reason why I should bail them out with paying higher prices.

If there is a problem with Chorus's costings around the UFB rollout, then that needs to be addressed.

What should not happen, and today's round of releases would suggest I'm not alone in thinking this, is that the government be allowed to overrule the independent regulator on a matter that's been expected for three years.

What were Chorus management and sharemarket analysts doing when the prospectus came out? Did they not see the minister's gift of a three-year delay (a regulatory holiday) as proof that the drop would be significant, because the rest of the industry certainly did.

The next step is to identify whether there is a problem or not. If there is, how best to address that problem.

If Chorus's spending is so out of control (currently $3000 per premise passed when it should be about $1200-$1500) then something needs to happen.

Several options present themselves:

1: Re-tender the Chorus work. Vector bid for the work - perhaps they've had time to assess whether they can sharpen their pencil and do it for less than Chorus.

2: Direct injection of cash into Chorus. This would fly in the face of
Chorus's contract with the Crown which says that shouldn't happen, but if the govt decides to go down that track I'd expect to see some very significant caveats put on the use of that money.

3: Direct govt control of Chorus in exchange for bailing it out. Ultimately, if we're to spend this much money on one company, we should own it. A single open access provider for the national telecommunications market could radically change the way telecommunications works in this country.

(the alternate version of this is to do nothing, let Chorus go broke, buy the assets for a song, build a national open access network.)

4: Get one of the LFCs to run Chorus's UFB project. The LFCs are proving they can build networks faster and more cost effectively - put one of them in charge.

There are plenty of options out there that don't involve overriding the regulator, messing up the rest of the industry and sending the wrong signals about independence to the investment community.

Thank you Paul.
I am all for some sanity here.
A highly profitable company like Chorus does not need further help to continue building a second monopoly infrastructure. Sure, there is competition in the market, but primarily in the main centres. Everywhere else in the country there is a premium of $10 added to plans as things sit right now. The reason? No competition in other regions. Sound fair and reasonable? Not from my point of view as a consumer in one of those regions.

If you cut the CEO's salary by half, stripped out the now-redundant marketing department and all associated middle management and reduced the tiers of outsourced contractor work, you would have a good start on that per-premises cost.

Why are Chorus continuing to market to end-users via TV and Times Square billboards? Their customers are RSPs.

I imagine because they have a contract that we all demand they live by which includes promoting awareness of fibre in NZ?

Or a substantial investment into Chorus by Vector, who would then take over delivery of things in Auckland.

Shame, didn't they just get downgraded yesterday because of impending regulation?!!

So Paul, will you campaign next December for consumers to actually benefit from this? I believe the telcos in your Coalition promised they would cut retail prices by $10. Someone needs to publicly shame them if they do not follow through.

I for one can already hear their excuses - "we've doubled data caps instead", "we need to wait for the Commission's final pricing principle", "our costs have gone up elsewhere..."

Where are all the numbers coming from? I swear the cost of connecting homes gets higher every time someone talks about Chorus.

"Currently $3000 per premise passed when it should be about $1200-$1500" Wasn't it $2000 last time? Where is the cost - time spent running around getting neighbours to approve it?

I would bet good money that if the government nationalised Chorus, next thing you know there would be complaints that it all costs too much and is inefficient. From the same people who were crying out for the government to fix the networks a few years before. Surely there would have been more sense in waiting to hear what EY Australia have to say before shutting off options to fix this mess.

The costs are straight from Chorus's annual report. The price per premise passed has come down to $3000 - it was higher - but that's still well above international best practice or the estimates Chorus delivered to investors at the start of the process.

So, ACT votes against property rights and lines up with the looters.

Um, I think ACT has lined up in favour of property rights against the Muldoonists.

ha ha. Ok. The government might be Muldoonists in this scenario but the Commerce Commission are still looters.

Looters? Really?

They become looters because they are implementing the pricing construct set in legislation by this same national government?

That same pricing construct that was publicly notified as being a move from retail-minus to cost-plus based on international benchmarks, on exactly this timeframe?

That same pricing construct that Chorus and their investors either disregarded or wilfully chose to ignore in making their bid for the UFB?

Jeez Damien, if this makes the Commission looters then surely you agree that Chorus and their investors are complete morons for walking straight into that looting!

Baron; Looters in the sense of Atlas Shrugged, which should explain al you need to know about my world view.

Chorus own the copper. They should be allowed to sell access to it at whatever price they like, but the Commerce Commission is imposing a price control on them. which is costing them millions of dollars.

If the government came to you and told you that, by law, you must work for a lower wage than you are on now, you would be bleating like a baby lamb.

However, someone else is being looted, so you are okay with that.

Damien,

I know the references you're making. The analogy doesn't really work.

Rearden didn't know the Government "looters" were coming after his steel when he designed it. They caught him by surprise and stole it from him, which sucks. So he blew it up.

Chorus knew the Commission was going to reset pricing against international benchmarks well before they made their bid. To plow on regardless makes them either duplicitous or moronic, and either way hardly paragons of Galtian supremacy.

I otherwise don't have time to dismantle your worldview, and realise its probably futile to try ;) That said, I look forward to Chorus rigging their network with dynamite if they don't get their way...

Baron,

Yes, I do agree with you there. Those who invested in Telecom, now Chorus, knew it was a regulated business. They made good money for a long while so I don't have any sympathy for them.

You are right Damien - your world view makes complete sense as I can distinctly recall the mighty atlases of Chorus out there with shovels digging trenches and laying copper cables just last year! Not to mention single-handedly inventing copper based communications technology some years earlier.

It is theirs and theirs alone to determine who has access to the network and prices to charge accordingly for without them we mere mortals are doomed to live in a world completely devoid of telecommunications much like the electricty and railway networks in Atlas Shrugged.

I think the point Daniel is making, is ACT are so inconsistent with their voting its time the general elections take care of them; rather than artifical life support from the National government.

All the general public ask of government is consistency, but rarely get it.

This whole UFB process with Chorus is a fiasco. From the legislation through to the implementation.
1. Can Chorus survive to do the job? (Yes, it's just that some management won't get their bonus...).
2. Are they using the taxpayer funds efficiently to do so? (No, if they estimated 1.2k/household and are at 3k!)
3. Irrespective of the above, are the NZ public actually getting a world-class UFB service to deliver all the benefits the government espoused? (No, based on independent test results).

The Government have done quite nicely out of the bailout of Air New Zealand, here's another one....

Either Mr. Ratcliffe was depending on government intervention or he didn't foresee this scenario unfolding. Both demonstrate failed judgment. Time for him to go. Shareholders unite!

MMP at its finest.

Finally (some) Kiwis are starting to get it.
1: Chorus massively underpriced their work in the UFB project.
2: Why do current operators like Orcon have to pay the price of restricted
access to the existing Chorus copper network, just so Chorus can
continue to pump profits off-shore while pleading poverty to the NZ
government.
3: There are alternatives to the government's UFB plan as it stands
which would cost the taxpayers of this country hugely less money.
4: Look at what the telco's in Europe are doing with their existing
infrastructure. These guys are no fools (unlike us).

... no more Gigatown hashtags? We can only hope ...

"NorthPower is connecting up homes at a fraction of the cost Chorus is incurring!"

Very easy when you have a network that's almost entirely overhead and you own all the power poles so don't have to negotiate access rights.

Northpower does have to negotiate access to sites, just as all the LFCs do, including Chorus.

Chorus is doing as much overhead work as it can and undergrounding where it can't - just as all the LFCs are.

The difference lies elsewhere in the cost models. I'm told Chorus didn't finalise negotiations with its sub-contractors at the time of the bid. If that's the case, Chorus bid without knowing costs and Crown Fibre/the government accepted the bid without knowing its costs.

If that is the case, the problem has nothing to do with the poles.

"3. Irrespective of the above, are the NZ public actually getting a world-class UFB service to deliver all the benefits the government espoused? (No, based on independent test results)"

I assume you mean the flawed tests conducted by a company who seemed unaware that testing a L3 speed test on a product that's dimensioned at L2 can only deliver 90% of the speed they thought it could and then seemed surprised that very few tests were over 90% of the maximum speed?

I'm not clear that they are flawed. They measure the speeds that households on UFB are actually getting. They then compare that to what they have been sold by Chorus (via the RSP's). That seems like a pretty useful comparison.

Without any majority support from most NZ political Parties, most Chorus shareholders should start selling now before it is too late.....cut losses before anything salvageable is left behind.

Surely with how low they are you would just sit tight in the hopes that someone bails them out?

Give away a few dollars today, or lose a few dollars/make plenty more in the future.

Telecom had two choices at the time of the UFB negotiations

1. Demerge
2. Compete

I was always a fan of the latter. FTTN extended fibre to the last mile. The compete model would have extended fibre to the corner and utilize VDSL from there. LFCs would have struggled to compete with an incumbent incrementally increasing the fibre reach and leveraging the existing copper network. This also gave TNZ the of cherry picking areas based on presumed uptake. Fibre still remains a technology that is simply not required at the domestic end user premise now, or within the next ten years.

EY will report back that cu pricing can't drop based on fundamentals. chorus will continue to build the network and the winners are those that buy shares in chorus now knowing a period of pricing certainty will prevail.

The other option is too scary to contemplate.

Surely the solution is simple. Let the coalition keep the reduced copper prices as proposed by the Comcom which they seem so keen on having, they can then continue to happily sell ADSL over copper wires, and let Chorus establish a retail arm where it can sell its UFB over fibre direct to customers. That increased revenue stream can then be plowed back into rolling out the fibre network, hopefully this time to the suburbs that want it and that can afford it (in contrast to the focus at present which is on poor suburbs and those that largely don't want it as they are happy with ADSL).

Chorus has a monopoly on copper lines. It's been regulated since before Chorus was created, first as an operationally separated division within Telecom and then as a stand alone company.

We've known about the drop in pricing since 2010 when the Minister built the change into the bill (it became law in 2011). So great was the expected drop that he gave Chorus a three year holiday from it in order to get itself ready for the new pricing.

That Chorus didn't prepare and instead chose to ignore the impending change is hardly the fault of the ISPs or New Zealand customers.

Horrible in its simplicity, and back to the bad old days of a vertically integrated telecom and no retail competition.

Oh no, that is not a solution at all, simple or otherwise.

The "simple" solution is to allow copper prices to be set according to international benchmarks, and have fibre builders stick to their bid prices.

There would be plenty of retail competition there, between the copper and fibre networks - or is this not really about that? Has this now become all about how much money the ISPs can screw out of Chorus at Chorus' expense, first with copper and then later with fibre?

If the ISP's want copper so much, let them have it.

I seem to recall that Labour quite happily did a deal with VF and Telecom on mobile termination rates in 2007 rather than follow the recommendation of the Commerce Commission. Were Labour and Vodafone quite so concerned about end-users getting the best possible price cut back then?

Its funny how people don't realise this money wont go to consumers, Chorus is a wholesaler so the money goes to the likes of Telecom and Vodafone. They won't pass it on. Just looks like a value transfer at the expense of shareholders. Wonder who will have the guts to ask the question?

It will be very difficult for any ISP not to pass on savings to customers or increase the data caps (for example) at certain price points.

This comes into effect in December next year. We will be keeping a close eye on pricing between now and then to make sure customers get what they deserve. We didn't engage in this process in order to move money around the industry - it belongs to customers.

Orcon and Slingshot have already said they will pass on 100% of the $10 saving, which will result in a $7.50 saving to consumers.

Work that one out.

Funny how Chorus expects everyone's support when they run to install fibre to new houses, skipping old neighborhoods which have been making them declare profits from the copper network.
They should run the network to all surbabs, get everyone onto the fibre network, make the current ADSL price the same as entry level Fibre, it shouldn't be a choice but a must for everyone to change.

I'd like to see all RSP's come out and provide in writing a guarentee that they will pass on the savings to their customers - this should be 100% of the wholesale cut, as I can't see how the wholesale price being lower would drive any additional cost into their business.

Oh I'm sure they'll do that, at least initially. And then watch them over the coming years slowly claw it all back in price increases tarted up as all sorts of confusing plan improvements.

Everyone needs to bear in mind that the previous retail minus (based on Telecom's high retail charges) principle for regulated wholesale access pricing artificially inflated Telecom and later, Chorus revenues.

That's the main reason broadband was so expensive in NZ - it wasn't in Telecom's interest to drop retail prices, for obvious reasons.

Retail-minus is the real "Copper Tax" that we've all been paying for many years now.

I'm confused, if we're paying so much for broadband why is the Australian broadband prices so much higher? http://www.accc.gov.au/media-release/accc-finalises-wholesale-prices-for-broadband-services-on-telstra%E2%80%99s-copper-network. Their price is around $24 which is higher than Chorus's now? How do we reconcile the $10 vs $24 and what's so different about NZ?