The #coppertax conundrum - Part 2

This post is the second in a three-part post by InternetNZ CEO Jordan Carter untangling the copper tax dilemma. The previous post set out the background to the arrival of the CopperTax campaign, and set out three possible drivers for the Government's intervention. 

The previous post in this series ended with an explanation of three drivers of the Government's desire to review the telco policy framework, including the imposition of the CopperTax. Those were the economic viability of Chorus (and impact on the UFB rollout), a concern with migration to UFB from copper broadband, and a somewhat arcane debate about whether it's right in principle to price copper and fibre broadband network services the same.

As I said in the previous post:

A frankly bizarre and economically untenable argument is proposed as to why copper and broadband services should be priced similarly that rests on two legs: that a modern network is a fibre network, and that we know the cost of a fibre network because we are building one for the UFB. Taken together, these two legs are argued to mean that the prices of copper and fibre broadband inputs should be the same.

It is important to be very clear and very direct about this: neither leg of this argument stands up. The modern equivalent of Chorus’ FTTC copper/fibre network is just such a network, not the UFB one. And even if the right equivalent was UFB fibre, the prices are set in completely different ways. The detail matters, so here it is…

The modern replacement network isn’t a fibre network – it's a fibre to the cabinet network of the type Chorus already has. If a fibre network was the modern equivalent, Chorus would be building one over time anyway, without the need for a $900+m interest free loan and $400m of pricing subsidies from the government. The Europeans say FTTC is the modern replacement, but the government’s review document wrongly claims they say that fibre is. 

The other point is equally flawed. Even if a fibre network was the right network to base pricing on, the idea that commercially negotiated prices for the new network translate into regulatory costs for the old network is like comparing apples with laptop computers. The UFB is a commercially driven build. Chorus wants a quick payback. The Government was very sharp on entry level pricing to help drive migration – free installs and a low basic service price. Everyone knows the true cost of basic UFB service is far higher than $37.50 a month. So the logic of pulling the copper price up to that subsidised level makes as little sense as pulling it up even higher – especially when the cost of the old copper network, everyone agrees, is lower.

I won’t go into even more obscure arguments about the lack of a national policy framework for infrastructure under the RMA, or trying to shift relative prices through means other than those that give a windfall gain to Chorus, or any of myriad others that policy specialists could get into.

I’ll just make one final point. If Chorus is viable, and the real concern is migration, then the Government and the industry should be singing the success of the UFB so far, not trying to change the regulatory framework. Migration is proceeding well – as Chorus contractors get used to UFB installs, they are going faster; retail providers are rolling out UFB plans; new services are becoming available (Vodafone TV is one of the newest). The key constraint so far is the speed at which Chorus can connect people. So the concern about migration is hard to understand.

Why are people so grumpy?
So despite what looks like quite good news in many ways, there is a level of tension and annoyance in the debate. In fact,tThis is the grumpiest debate in telco policy I can remember, and I’ve been following the sector since 2000. The reason is hinted at above: nobody can quite see what the Government is trying to achieve. Or to put it another way, the Government and the sector are talking past each other to the degree that there’s mutual incomprehension on an epic scale, leading to the tetchiness.

Recall from above that there’s no public evidence of economic crisis looming for Chorus, and that migration is proceeding well. Yet the only options presented in the review document lead to a big boost in the price of UBA or of the underlying copper network service (known as UCLL), leading straight to a big boost in Chorus’s coffers at the expense, in the end, of everyone buying a copper broadband service.

The Commerce Commission’s proposed price for the UBA is being seen by most who follow these things as ballpark right. The regulatory framework the Government put into law in 2011 seems to be delivering what was intended: competition driving migration from copper to fibre, and a stripping out of monopoly profits by regulating price at cost for UBA.

But that status quo hasn't been deemed worthy of careful analysis by the government. All of its options point in the same direction – a wealth transfer nobody can understand, and which no analysis seems to justify. The other concerns about migration or about Chorus viability aren’t analysed, and if separate analysis of those claims has been done, the government hasn’t released it.

A rule-book only two years old appears to be about to be torn up. Months of uncertainty since last December look set to be followed by years more of the same, all caused by the Government’s own policy review – which, in a marvellous piece of Orwellian language, was talked about in terms of creating certainty for this six-billion-dollar sector of the economy. It is doing precisely the opposite.

It’s not surprising, really, that there’s a bit of ill-temper in the debate. If something else is going on, something that justifies this huge transfer of wealth, then it’s probably about time to talk about it. 

The next post digs into where we might go next.

Jordan Carter is InternetNZ CEO