A tale of two airports – part one

Amy Adams’ analogy of comparing competition in the telecommunications sector and the UFB build with airport competition and a new terminal build is almost correct - but the difference is important, and the analogy masks a fundamental change in policy.

The UFB isn't another terminal owned and operated by the same airport company to improve service for the same group of passengers. It's a new airport - that is what John Key promised us in 2008: a game changer - more and longer runways, handling bigger jets - taking NZ goods and services to every corner of the globe - quicker.  The new promised airport is already under construction and it is starting to compete for passengers with the old airport. The old airport may well decide to build a new terminal in the form of a VDSL service in order to compete with its flash UFB fibre competitor - but let’s not get the two mixed up. 

The Government has been absolutely clear from day one that the fibre network was intended to compete with the copper network. This policy fundamental is in stark contrast to Australia where the Government decided that the fibre network would replace the copper network.

There was clearly no problem with that understanding when Enable, Northpower and Utrafast Broadband won the contracts to build the fibre networks in Christchurch, Whangarei and Waikato. They knew they would be competing with the copper network owned by Chorus. Likewise until last week there was no reason to doubt that the Government's intention was for copper to compete with fibre in the Chorus UFB area.

That Chorus would be the owner of the existing copper network and the future fibre network in large parts of the country was a concern for many. How could the Government prevent Chorus from extracting monopoly profits when it owned both networks? The answer the Government came up with was relatively simple. The Chorus fibre network prices would be derived as part of the competitive UFB tender process and be fixed - the fixed fibre price and Chorus' share of the Government's $1.5 billion subsidy together mitigated the investment risks. Meanwhile the competing copper network's prices would be subject to independent price regulation, with the price based on the long run cost of providing those services.

Fast forward to Wednesday and Thursday last week, when a conference was held by the Commerce Commission as part of setting that regulated price for Chorus' copper services - based upon the cost, as the 2011 legislation required.

I sat through the two days of discussion. Throughout we saw Chorus argue on every possible dimension that the price of the basic regulated copper broadband service (UBA) should be a lot higher than the draft figure of $8.93 the Commission has proposed. The majority of other telecommunications firms - Telecom, Vodafone, Orcon, CallPlus and  InternetNZ, TUANZ, and Consumer - all confirmed that the $8.93 figure was about right. The telcos in particular should know - they are actually providing similar services around this price - albeit at a much smaller scale (which makes the idea of a higher price even more confusing).

Meanwhile in another part of town - another scene was going down.  Chorus and the telcos are said to have got together away from the oversight of the regulator or users to try to come to some other arrangement to find a price that they can agree on - rumoured to be $14, according to the newspaper reports. Evidently they couldn't reach agreement which is hardly surprising given the subsequent comments of many of those very-same telcos - around the $8.93 price point being about right. What really is surprising, if the reports are true, is that it was Chorus that would not agree on $14 - it wanted a higher price.

By this point, many eyebrows were in fully-raised mode. Going back to Amy Adams' analogy - the underlying cause of the wide disparity between Chorus and the other providers and users on the price of UBA is that Chorus saw UBA prices around the current level as a key cashflow generator for the business as it rolls out UFB.

In the analogy, it is as if Chorus wants to load the costs of building its new airport onto the passengers using its old airport. To be clear Chorus has received over $900 million of taxpayer subsidy to build a new competing airport - not a new terminal at the existing one.

If one was being unkind, one could liken the suggestion that it should use its control to tax passenger of the old airport to subsidise that new airport to taking two bites of the cherry.

In the view of user organisations such an approach is hard to reconcile with the best interests of competition or end-users.

In any case, there is one point on which almost everyone agrees. The Commerce Commission really has no choice in the matter - the legislation directs the Commission to set the UBA service at a cost based price. It separates the prices Chorus can charge for the old copper airport from the costs they face building the new fibre airport.  The law treats fibre and copper – the airports, old and new – as two separate markets, and so must the Commission.

If the government wishes to change that it needs to change the legislation. That is what the review of telecommunications regulation could lead to. If changing the legislation the Government would presumably start by telling the country whether it is changing its policy of fibre competing with copper to fibre replacing copper.  Such a significant change of policy, if that is what it is, has massive implications - covered in part two.

Reg Hammond is a policy consultant for InternetNZ and a former manager of the ICT Regulatory Group for the Ministry of Economic Development (now part of MBIE).