The debacle surrounding the government’s flagship ultrafast broadband programme and the roll out by Chorus rumbles on. The government’s heavy-handed response to a well-signalled decision by the Commerce Commission to review and drop the price of copper broadband has resulted in a year of uncertainty for the telco industry and turmoil for the future of the fibre scheme.
Both the government and Chorus have insisted they had no idea that the Commerce Commission would decide that copper prices should fall following a review based on international benchmarking on a cost-plus basis, despite this being what the legislation written by former Minister Steven Joyce told them to do (Section 78 page 100).
In this post I have provided two pieces of evidence that both the government and Chorus knew very well back in 2011 what would happen with copper prices, even if they didn’t know what the end price determination would be. The disingenuity of both players around this is staggering and has led to speculation that there was some kind of backroom guarantee to Chorus from the government via the Ministry that “she’ll be right”.
Clearly “she’s not right”. And the only place the finger can be pointed is back to Steven Joyce, the original architect of the legislation which demerged Telecom to create Chorus, which was then handed the UFB contract on a plate. It was Joyce’s legislation and his contract. And as should be clear below, both the government and Chorus knew what the deal was with copper pricing.
On Tuesday 5 November, the day the Commerce Commission announced its final decision on copper broadband prices, Amy Adams was reported in the New Zealand Herald as saying:
Communications Minister Amy Adams said the commission’s rulings had come as a surprise to everyone involved.
“No analysts or companies saw that coming, no one priced it in. When we entered into the UFB contracts this was pored over by all the players and people with a very high level of understanding if anyone was going to foresee it, it would have come up then and it certainly didn’t and frankly no one’s on record as predicting a drop on this scale.
Certainly there was some small drop expected and everyone was very aware of that.”
On 6 November I asked John Key in parliament:
Clare Curran: Why is he, his former Minister Steven Joyce, and his current Minister for Communications and Information Technology, Amy Adams, so surprised at the Commerce Commission’s decision to drop the copper price given that Steven Joyce’s 2011 telecommunications company legislation clearly stated that there would be a 3-year moratorium before the move to a cost-plus model for wholesale copper pricing, which the Commerce Commission is now implementing, and that Chorus’ first prospectus clearly stated this as a risk, as did the regulatory impact statement for the Government’s only 2011 law?
Rt Hon JOHN KEY: Firstly, I think it is very fair to say that no one back in 2011 actually predicted that there would be such a dramatic fall in copper prices. In fact, my understanding is that the member believed that copper prices would go up, not actually go down. So that fall has certainly caught the market by surprise. There were many, many analysts who looked at the situation as a result of the legislation that was brought in, and, in fact, at the contract that Chorus signed, and not one analyst actually noted that there was a significant likelihood that there would be such a dramatic decrease in the copper price.
1. Chorus’ first prospectus released on 13 September 2011 contained several paragraphs under a section on page 204 headed Regulatory and Government risks. It said:
Future regulated copper and fibre prices
The prices New Chorus can charge for most of its copper-based network products and services will be regulated for the foreseeable future, and the prices for most of its fibre-based products and services are subject to a contractual agreement with CFH until 31 December 2019, and are likely to be regulated thereafter.
The framework for setting the prices of New Chorus’ regulated copper-based products and services is described in section 3.6.6. There is a risk that the regulator will set prices that do not provide New Chorus with an adequate return on its assets.
In addition, if the prices that the regulator sets for copper-based products and services are significantly below the prices for comparable fibre-based services, fibre uptake may be negatively affected (see section 9.2.1).
In the event of disagreements with the regulator over pricing, considerable resources and management attention may be diverted to dealing with disputes with the regulator.
2. A regulatory impact statement prepared for the 2011 Telco legislation drafted by Steven Joyce’s Ministry titled: Regulatory issues resulting if Telecom becomes a partner in the Ultrafast Broadband initiative stated the following:
48. The following set of criteria was applied to determine which areas require specific transitional measures, or can be implemented immediately on separation day:
a) allowing access seekers to recover sunk investments in UCLL;
b) ensuring Service Tel is economically viable and competitive during the transitional period;
c) ensuring that Chorus is economically viable during the transitional period and has time to adjust to cost-based USA;
d) giving the Commission time to implement the cost-based USA pricing principles; and
e) providing the industry with stability during a time of considerable structural change.
49. A constraint in terms of analysis is that the industry has not yet been consulted on some of the detail of the proposed transitional measures. MED seeks views on this matter at the Select Committee stage.
50. The three key aspects of the transitional measures are:
a) the currently determined price and non-price terms for the USA service will be frozen, and the USA competition test put into abeyance, for 3 years from separation day (although the Commission will be able to conduct clarifications under section 58 of the Act);
b) ServiceTel will be restricted from purchasing Chorus’s unbundled copper local loop network service until three years from separation day, and the requirement to average the UCLL service geographically will not take effect until 3 years from separation day; and
c) the determined price for naked UBA will be averaged on separation day.
Freezing UBA terms
51. The key transitional provision proposal is to freeze the UBA regulated service for a period of 3 years from separation day, with the intention of allowing a transition to cost-based UBA retail services where they are more economically viable. A 3 year period for the transitional provisions was chosen on a qualitative basis based on the estimated replacement period for exchange equipment (DSLAMs) deployed by access seekers. A more detailed analysis of likely depreciation values was not carried out
52. Consultation noted that “freezing UBA prices for an interim period” could be included as a transitional measure, but the length of time of the price freeze was not the subject of consultation.
Delay in averaging UCLL price
53. The delay in averaging UCLL will disadvantage ServiceTel which, for the period of 3 years, will be required to buy a stand-alone voice input service priced at the UCLL price, including the higher price in rural areas. However, MED considers that this delay is essential to protect access seekers who have invested in UCLL and their customers during the transitional period. ServiceTel will be protected itself by the averaging of naked UBA on separation day.
The following is an extract from the transcript at a Commerce Commission conference to consult with the industry on the draft copper price in June 2013. The Commerce Commissioner is referring to the extent of the Government’s and Chorus’ fore knowledge of the price review.
COMMISSIONER DUIGNAN: Yes, just that the one source for the indication of the purpose of the three year freeze is the regulatory impact statement which was released, I haven’t actually got the date here, but it’s the one described relating to the cabinet paper described, or with the title “Regulatory Issues Resulting If Telecom Becomes A Partner In The Ultrafast Broadband Initiative”.
Para 48 of that paper says, “The following set of criterias was applied to determine which areas required specific transitional measures, or can be implemented immediately on separation date”.
Has a list: (a) is allowing access seekers to recover sunk investments in UCLL; (b) is ensuring service teller’s economically viable and competitive during the transitional period; (c) is ensuring that Chorus is economically viable during the transition period and has time to adjust to cost based UBA, and other documents are more explicit about the adjustment.
So, that’s the source, para 48 of that document.
I note the reference “time to adjust to cost-based UBA” implies that some adverse economic effect was clearly expected as a result of this adjustment.
Numerous industry participants have commented on the knowledge of both Chorus and the government that this review of the copper prices was coming and that there would be a material impact. To say otherwise is just nonsense. Fortunately, I think this message has got through. The big question now is what will the government do next and how will it dig itself out of the hole Steven Joyce, the great “Mr Fixit” has created.