The Chorus copper kerfuffle

The announcement today of an independent review into Chorus will hopefully provide some answers to the next mess National has created around the roll-out of ultra-fast broadband and how copper pricing is now affecting it. I support Minister Amy Adam’s independent review announcement and believe it is the necessary first step before taking any further action.

New Zealand’s future prosperity lies in a smart green economy, with ultra-fast broadband (UFB) and a thriving ICT sector as a key part of this vision. However, National’s management of the $1.5b taxpayer investment into UFB has been a total mess. The Chorus copper kerfuffle is another on a growing list of National’s disastrous economic management record – think Solid Energy, the floats of Mighty River Power and Meridian, Novopay, and South Canterbury Finance.

The Standard has a good blog on the background to the issue  but even with this looming independent review, a number of important questions remain:

1. Why have Chorus and the National Government been caught on the back foot by the Commerce Commission’s determination to reduce copper broadband costs? This process was well signalled in 2010 and it was the National Government who subsequently wrote the UFB legislation and signed the contract with Chorus in 2011.

2. Why is the price of copper internet services so central to Chorus’ ability to roll out UFB? It’s not a smart way to run an economy by unfairly ‘taxing’ businesses and households through unreasonably high copper prices just to secure the UFB rollout.

3. Has the Minister sought advice as to whether New Zealand would be violating its commitments under the World Trade Organisation’s and General Agreement on Trade in Services which requires an independent regulator for all telecommunications services and measures to prevent telcos from “engaging in anti-competitive cross-subsidisation”?

4. Did Chorus underbid others in the tendering process to get the UFB contract in the hope the Government would ‘ride to the rescue’ when or if something went wrong?

5. Who in Government is going to take responsibility for this monumental stuff-up?

17 thoughts on “The Chorus copper kerfuffle

  1. VDSL will probably never be viable in rural areas. It would probably actually be more expensive than bringing you fibre, as to get VDSL speeds in a sparsely populated area you’d pretty much need your own cabinet, and each cabinet has a fibre back-haul anyway.

    Perhaps rural New Zealand could take a page from rural Britain (http://b4rn.org.uk/) and build their own private fibre network. I hear the install costs are much lower, because they’re going through their own properties rather than needing all the resource consents and access up the side of the road on council land.

  2. Just because the options I suggested aren’t currently open to Chorus doesn’t mean they can’t become open, this is the nature of politics.

    Sure. But that would require a law change. And we are talking about what is possible now.

    As for fibre/copper hybrid cables I believe your wrong, last I heard they were being considered for areas where local council regulations allow only one aerial cable

    Sort of. It’s a bit more nuanced than that, but fundamentally, the driver is where copper network exists and aerial drop is possible, a hybrid cable makes sense, particularly where there is no forced subsitution as a household may want both copper and fibre services – say copper voice from one provider, fibre data from another and a home alarm from a third.

    However, in some instances, there is still a case for some copper services in new subs. I’m just not sure what those rules are or how it is provisioned. Still being worked through I understand. In the end it really all depends on what type of cabinet is avalable – hybrid of fibre only.

    I should add that I’d be highly surprised if the scenarios I suggested don’t have to happen eventually anyway, the copper network will eventually be decommissioned.

    Certainly, but it’s not going to happen right now under the current regulatory environment. And yes, copper will eventually be decommissioned. It makes economic sense for Chorus to do so.

  3. I should add that I’d be highly surprised if the scenarios I suggested don’t have to happen eventually anyway, the copper network will eventually be decommissioned. The sooner the transition mechanisms are considered, the better.

  4. Just because the options I suggested aren’t currently open to Chorus doesn’t mean they can’t become open, this is the nature of politics. For example, the comcom is by law supposed to regulate copper prices, but the National government is interfering.

    As for fibre/copper hybrid cables I believe your wrong, last I heard they were being considered for areas where local council regulations allow only one aerial cable, and customers insisted on getting both. This would only be for suburbs with existing copper infrastructure, since copper infrastructure isn’t being built in most/all new suburbs.

  5. dbuckley – all valid questions but nothing I can comment on I’m afraid.

    However, I thought that I will leave you with is that it is not uncommon for communal infrastructue not to be self financing and for it to be paid for by people that dont use it – roads, hospitals and the like.

    The obvious difference in this case being one is a private asset where the others are public, but that is a whole other question.

  6. Gregor W:

    …undercutting the investment logic of UFB

    What you seem to be illustrating quite neatly is that there is no investment logic for deploying UFB.

    Either the benefits of UFB are compelling, and thus there is no problem deploying it, and it will be self financing, or…

    There is no business case, and the only way it can be financed is by charging people who are not using it for its deployment.

    In the wider context: deployment of a new technology is supposed to be a risk, and a proportion of the companies involved are supposed to go bankrupt trying. that is just the way it is. Established players are supposed to either innovate, or fail to keep up and wall by the wayside.

    This leads to the question that should a monopoly company like Chorus be (unfairly) protected from these risks?

  7. Anon – I’ll treat these individually.

    (i) refusing new copper connections in ufb enabled areas.

    Incorrect. Broadly, the UFB enabled areas already have copper. Further, Chorus cannot ‘refuse’ a copper connection if the copper exists. The order comes in froim the retailer and must be fulfilled under existing UCLL/UBA terms.

    (ii) forcing people off of copper

    Incorrect. As above, Chorus has no levers whatsoever to force UFB consumption where a copper alternative exists (by law).

    (iii) refusing to install copper in new suburbs (which is already happening).

    Partially correct. However, the some retailers often request that a copper connection is made available in new sub divs which is why Chorus is starting to deploy hybrid cable – essentially copper and fibre from the fibre cabinet. Not sure if this is all access leads or for aerial only.

    They can recycle existing equipment from disestablished areas to maintain areas that are still copper only, cutting down some costs of the copper networks that continue.

    As above, Chorus cannot compel substitution, there fore ‘UFB areas’ are really better classified as ‘UFB and Copper’ areas. Until the last copper user gets off the service – and this is particularly for services like home and medical alarms that requre a copper connection – the service must be maintained.

  8. They have other options to increase uptake, like refusing new copper connections in ufb enabled areas, forcing people off of copper, refusing to install copper in new suburbs (which is already happening). They can recycle existing equipment from disestablished areas to maintain areas that are still copper only, cutting down some costs of the copper networks that continue.

    Also plenty of the copper lines are getting old and could do with replacement, which now that they’re rolling out ufb they have no need to ever do.

  9. Anon – yes, Chorus has about 75% of the contract.

    However, by end of deployment, organic rate of uptake is still only expected to be about 20%. Chorus’ aim is 30% by that time. So assuming the aggressive uptake scenario – 30% of 75%, that’s about 400-450k connections to NZ homes and businesses by 2020.

    In effect UFB won’t be the ‘standard’ until demand makes it so, and demand is not driven by Chorus. It’s driven by content.

    Note that even with full adoption – 100% uptake across 100% of UFB areas – copper services will still support 600k connections. Also note that the industry, including Chorus, fully anticipates aggressive copper broadband retail price reductions getting closer to 2020 as once the network is built, there is a huge incentive to pull people across and retire as many copper connections as possible – fibre is far cheaper to support and maintain than copper.

    As I noted before, Chorus is in the unique position where it has to both service and maintain an existing network at a regulated price, while funding the build of a new one. So the early adopters arguement doesn’t really work, particularly when there are no imperatives to shift.

    In essence, the lower the comparative price of copper, the far less likely people are to adopt fibre, particulalry as technology keeps extending the life and marketability of copper services (VDSL and the like). This in turn will lead to sustaining investment in legacy copper, undercutting the investment logic of UFB.

  10. Chorus has what, ~75% of the ufb contract? With ufb set to become the standard within a decade chorus would seem to be a pretty low risk investment, with almost certain windfall profits for chorus and lenders in the mid-long term. I really can’t see how this hurts their borrowing potential.

    But I’m not a business man. All I really care about is why should I pay the same as those on ufb, when I won’t be able to access ufb for ~5 years. If they need capital for ufb, then let the early adopters pay for it, not those who have no choice.

  11. Anon – Northpower distributes power across a monopoly local network so is in a similar position to Chorus in terms of alternate revenue.
    Ultrafast fibre is a consortium of companies who already had network in the ground so they also have an existing revenue stream.
    Enable networks, formerly Christchurch city networks, in in a similar position to Ultrafast in terms of existing metro fibre.

    Further, you aren’t figuring in your analysis is the UFB zone distribution.
    Chorus is deploying over the largest area with the most diverse geography and population densities.
    While doing this, it also has to support and manage 100% of NZs copper network, which is quite expensive to maintain.

    So my extend my previous point, if your core business casflow is cut (something your competitors don’t have to contend with) and you are still required by regulation to provide service to all of NZ on an alternative network with a substitutable service while you build a new one (something your competitors don’t need to do), and you have no alternate product or market to offset this position, it will of course have an impact on your ability to borrow and invest.

  12. I disagree with you Gregor, for the simple fact that Chorus isn’t the only company rolling out UFB, and the others are managing to fund it without owning copper. Because everyone rolling out UFB has arrangements for capital from Crown Fibre Holdings Limited. So there is simply no need whatsoever for UFB to be funded by copper.

  13. A couple of points:

    2. Why is the price of copper internet services so central to Chorus’ ability to roll out UFB? It’s not a smart way to run an economy by unfairly ‘taxing’ businesses and households through unreasonably high copper prices just to secure the UFB rollout.

    The money has to come from somewhere. Without cashflow, you can’t borrow. Without borrowing, you cant invest.

    As Draco T points out, under an SOE model, “it would have been the rental on the copper that would have paid for the UFB roll-out.” Under a private model the same logic applies, but the imperatives are different to sustain the business – i.e. you must make the business attractive to stock and bondholders via returns as dividend, whereas government as the owner may be seeking a social good over returns and can afford to sustain that model via sovereign debt.

    3. Has the Minister sought advice as to whether New Zealand would be violating its commitments under the World Trade Organisation’s and General Agreement on Trade in Services which requires an independent regulator for all telecommunications services and measures to prevent telcos from “engaging in anti-competitive cross-subsidisation”?

    This situation proably doesnt apply as Chorus is not a retail Telco, and the network is open access. Cross subsidisation would only really apply for products that are complementary rather than substitutable (i.e. fixed/data/mobile packages rather than fixed/fixed)

    Draco T – it’s worth noting that while telecommunications fixed networks can be classed a natural monopoly fro a variety of reasons, telecoms services aren’t necessarily. It is an important distinction.

  14. I’m hoping that in Christchurch Enable will return dividends to the city, rather than big corporations and fat cat CEOs. However given our last council CEO, Tony Marryatt, that’s a rather ignorant hope.

    Either way I’m impatient for enables ufb, so that I can get off choruses degrading copper.

  15. all those tricks sound so familiar to those played in third world or developing countries where the govt is weak or/and corrupt…

    Let that favoured business win the bid no matter what, then all sorts of problems will become the excuses for the govt to bail out with tax payers money…
    Monorail contract will be another deep money pit if we let that go ahead; it’s not just wrecking our environment…
    DTG all the money they have wasted can be used to make so many people’s lives so much better…

    Has anyone worked out the total money been wasted by this totally incompetant and irresponsible govt yet?
    god bless NZ!!!

  16. It’s not a smart way to run an economy by unfairly ‘taxing’ businesses and households through unreasonably high copper prices just to secure the UFB rollout.

    If we’d kept Telecom as a government service rather than selling it off then the $17b in dividends that the private owners of Telecom have pulled out would have been used to roll out FttH. In other words, it would have been the rental on the copper that would have paid for the UFB roll-out. This is exactly the same as the rental from the analogue exchanges paying for the digital exchanges that we now enjoy.

    I’m not for Chorus getting any more of our money but just pointing out how business should work. Any surplus goes into improving the service.

    Of course, if we’d been rational we would never have sold Telecom or even deregulated as telecommunications is natural monopoly. Deregulation and the sale has cost us, as a country, billions more and it will continue to cost billions more as the UFB roll-out proves as the next time that the network needs upgrading we’ll have to be putting up taxpayers money to do it again while Chorus keeps all the surplus as dividends.

Comments are closed.