Herein lies a solution to the time-wasting, costly and non-productive process that the court cases and pricing disputes represent.
As 2013 comes to a close, the costly stand-off on copper broadband pricing between the government and Chorus on the one side, and the rest of the industry on the other side, does not look close to a resolution.

Caught in the middle is the Commerce Commission whose regulatory function, defined by statute, has been called in to question by the government and by Chorus.

The pricing role of the Commission was set by the then Minister Stephen Joyce, when he amended the Telecommunications Act.  That change required the Commerce Commission to set the regulated wholesale prices for copper-based broadband services using a “forward-looking cost-based” methodology.

Previously, wholesale prices were set on a “price-minus” approach.

The change was a necessary one given the separation of Chorus from a vertically integrated Telecom, to become a near-monopoly infrastructure company.  It does not make any sense for the separated Chorus’ wholesale pricing to be based on another, separate company’s retail price.

As a proxy for the complex modelling necessary to enable the required pricing method, the Commerce Commission must first benchmark the pricing of other countries that use a forward-looking cost-based approach.  This is the Initial Pricing Principle, or IPP.

Because it is only a proxy for the required method, any party to the determination may request a review of the prices set by that IPP.  Both sides of the pricing issue have done that.

So the Commerce Commission now have to apply the Final Pricing Principle (or FPP).  This requires the development of a complex, full cost model, a process that could take two years to complete.

The significant conflicts we see today are a direct consequence of that convoluted process written in to law by Stephen Joyce.

These conflicts are the, perhaps unintended, consequences of the political processes of the time.

But they were avoidable consequences.  It appears that the choice of regulatory process (forward-looking, cost-based) was made without any “what-if”  analysis – what if the UCLL+UBA regulated price dropped by 10%? 30%? 50%?

Mr Joyce mitigated the loss of his ‘regulatory holiday’ proposal by fixing UFB prices in contracts, but seemingly forgot to blunt the impact of anticipated falls in copper pricing, the cash flows from which are under-pinning the UFB roll out.

It is not sufficient to say that hindsight is good at identifying issues after the fact – the fact remains that by not doing an in-depth “what-if” analysis, the government stuffed up.  And therefore, the resolution of the issue is for the government to find.

A solution is not, as Mr Key and Ms Adams wants, to impose a higher than justifiable price on non-UFB broadband users.

A second reason for this stuff up may be that when the Act was changed, discussions on the problem that price regulation was intended to solve were not evident.  If regulation addresses the wrong problem, then unintended consequences are likely to follow.

So.   What do the various stakeholders want?  And is there any conflict between those wants?

Consumers want minimal broadband pricing.

Telcos want price certainty.

Chorus wants to ensure a reasonable return to their shareholders.

There are no conflicts between these wants.

chorusWhich leaves only what the government wants.

To me, they should be focused on what broadband technologies really need to be about – improving the prosperity and quality of life of the people they represent.  Instead they seem to be focused on having the regulatory and policy settings right to support and incentivise investment in broadband technologies.

This focus is most evident in Amy Adams’ discussion document on the review of the Telecommunications Act.

That document does not consider whether the current regulatory framework is appropriate – it proposes instead a subversion of that regulatory framework to assure a pre-determined outcome that favours a public company.

In their detailed submissions in support of Ms Adams’ discussion document, Chorus made some pertinent arguments.

One was that “… the focus on forward-looking cost-based prices is no longer fit for purpose.”  That purpose they argue, was to foster competition between retail service providers and a vertically integrated Telecom.  It does not fit with today’s separated Telecom/Chorus environment.

They also argue that a different regulatory regime is needed once the UFB project is completed in 2020.

So here we are, caught betwixt what was and what will be needed from a regulatory regime.

Herein lies a solution to the time-wasting, costly and non-productive process that the court cases and pricing disputes represent.

First let’s identify the present and future problems that regulations need to solve.  That is to provide for an orderly transition to the future fibre broadband world.

And then let’s just get on with job of building future-proof broadband networks that meet the promise of improving our prosperity and quality of life.

Instead, the government has now signalled their intention that “…New Zealand’s regulatory regime will be placed under internal scrutiny.”

Which is not a bad thing.  When the All Black’s don’t perform, they review what the team are doing well and what could be done better.  Instead, Mr English’s review is aimed at the referee (Comcom) and the justification is the appeasement of one group of spectators (Chorus’ shareholders).  It needs to be aimed at the team (his government).

But back to finding a solution.

The problem is that the uptake of UFB services was expected to be slow, resulting in Chorus needing to rely on copper revenues to maintain the UFB build program.

Legislating to maintain existing copper revenues is the wrong solution and contrary to the evidence that our copper prices are too high.

Mandating the early uptake of UFB services is the right solution.  Upgrading households to a fibre connection at the time fibre cables are laid in the street would return revenues to Chorus higher than those from copper, and give them an incentive to complete the roll out as early as possible.  To incentivize homeowners to upgrade at that time, make the existing free connection offer conditional on their upgrading at the time Chorus are there.

In the long run, this would save Chorus money through avoiding the costs of multiple truck rolls to an area for ad hoc fibre connections.  In the short term, this would increase Chorus’ need for working capital which is where the government can assist and atone for its stuff up.

Seems simple to me.