Time to change UFB horses?

Following the Government’s announcement of a telco policy review, much of the reaction has been from a Chorus vs. consumers perspective. In any case, no one is really buying the line that the title of the press release tries to push, “Review to provide certainty to consumers, industry”. I suspect that angle is squarely aimed at Chorus’ major investors who’ve badly miscalculated.

My own view is more along those expressed by my former colleagues in calling for a wider discussion, “The problem lies in rolling out a $5bn fibre network with only $1.5bn available.” To me the policy review is essentially a way for asking the question, “Who is going to pay for Chorus’ fibre to the home rollout?”

The issue of who is going to pay is related to fibre uptake (and the associated migration path from copper to fibre) but separating out the issues makes it easier to look at the core problem of how NZ is going to fund its fibre future. And yes, rolling out fibre remains a critical enabler of that future.

It has always been clear that the Chorus deal was substantially different from those the Government signed with the three Local Fibre Companies (LFCs). With almost a $1 billion to cover about 70% of the UFB areas, the Government needs Chorus to succeed if its UFB leap of faith is to work. The chances of it ditching Chorus for another partner is very unlikely (though I argue below that it is a viable option) so when Chorus came calling for help, the Government really had no choice.

Meanwhile, the 3 LFCs, with no legacy copper and everything to prove are busy getting on with the job.

What went wrong

At the time the UFB deals were stitched together, then Minister Steven Joyce was stuck in a hard place. His Government was in no mood to put in more money than that set aside. The global financial crisis was in full swing and the NZ Government was more focussed on cutting expenditure and borrowing than pumping in money into infrastructure. At the same time, most people were probably telling the Minster that the Government wasn’t going to be able to meet its stated goals on a flagship promise with the money available.

So Minister Joyce pulled a rabbit out of the hat with the Chorus deal. It met the dollars ceiling but papered over major cracks. At the first sign of turbulence, the duct tape covering the cracks has come off. The ‘too good to be true’ comparison with what Australia is spending on the NBN, on a population adjusted basis, shows how fragile the deal was.

Clearly Chorus, and possibly the Government, didn’t fully think about the package put together. Moving from a ‘retail minus’ to a ‘cost plus’ regulatory pricing for Chorus’ copper services flows directly from structural separation. Everyone knew that Telecom was gaming the regulatory system by keeping prices under the ‘retail minus’ artificially high. Moving to a ‘cost plus’ approach was going to blow that apart. How did Chorus not factor that in? In addition, did Chorus over-estimate fibre uptake in the early years?

Effectively, Chorus is now saying it won’t be able to come up with its share of the UFB investment if it can’t continue to over-charge customers like Telecom did for years. With the Government dependent on Chorus, the policy review stalls the Telecommunications Commissioner while it kicks the issue into touch.

Radical options

Reviewing telco policy and stalling the price cuts for Chorus seems to be the least-worst option for Government. However, it is founded on straight line thinking, i.e. try to keep going down the path that Minister Joyce set out in the face of problems faced by its parter Chorus, even though it should now be obvious that the fundamental flaws make it inadvisable to do so. All it does is heighten the uncertainty, precisely the very thing that the Government intends to dispel.

So what are the other options?

My view is that the Government should let Chorus walk away from the UFB contract or default. Chorus should focus on copper services, competing with fibre based on the lower cost-based regulatory prices set by the Telecommunications Commissioner.

In place of Chorus, give the 3 LFCs first dibs on extending their coverage areas on the same terms. For the balance, bring in others, like the electricity companies, who can do the job without the legacy copper baggage.

What about fibre uptake you say? Will it not suffer if low cost Chorus copper competes with new fibre? No. The main issue stopping fibre uptake today is not the cost differential between copper and fibre services. This will be so even if the cost differential increases as per the draft revised regulatory prices. The problems are the main ISPs (Telecom and Vodafone) not offering retail services and customer demand.

New Zealanders are putting in money via the Government into Chorus. We will be paying for using fibre services (and 25% will pay for copper, wireless or satellite services as they get no fibre). We shouldn’t be asked to meet some of Chorus’ share of the investment by over-paying for copper-based Internet access. If Chorus now finds that it can’t meet its part of the deal, let’s give the job to those who are willing and able. But to try and paper over the cracks again via a policy review is simply continuing to go down a path that isn’t getting New Zealand to our fibre future.

At the moment, the Government’s view seems to be that ‘the best long term interests of telecommunications users’ is equal to moving to fibre is equal to helping Chorus invest in rolling out fibre to home in 70% of the UFB area. Surely that’s what we should be questioning?

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