Congrats - you are subsidising Chorus shareholders by $100s of millions

Forums › New Zealand Broadband › Congrats - you are subsidising Chorus shareholders by $100s of millions

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giollarnat

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#895194 13-Sep-2013 13:25

Paul Brislen on the Chorus subsidy debacle

The golden age of the Telecommunications Commissioner looks likely to have been 2006-2012, where decisions were made, industry hotheads calmed and fears assuaged. For six years we had a stable and progressive environment that enabled 2Degrees to launch its mobile service, that saw Telecom kept in check whenever it stepped over the line and where investment in the sector climbed steadily.

That all changed when the Prime Minister said the draft ruling on how much we pay for broadband services was "problematic" and that if push came to shove he'd ignore the Telco Commissioner and just change the law.

The problem the PM wanted to fix is that Chorus was going to earn less from its copper network than the privately-owned monopoly wanted. The Commission had issued a draft price that saw wholesale rates move from $44.98 per line per month to $32.45 per line per month.

The thing is, Chorus knew this was coming. It's known for three years because Steven Joyce had built it into the law. Chorus knew about it because it was spelt out in advice from the ministry on the newly introduced law. Chorus even mentioned it in its own launch prospectus as a risk to the share price.

So great would the drop be that Joyce built in a three year delay to give Chorus time to get its act together.

That didn't happen and instead we now face a situation where the Minister of Communications Amy Adams wants to usurp the role of the Telecommunications Commissioner and decide what the price for broadband should be herself.

She's decided that you should all pay more than the Commerce Commission suggests.

Why? I honestly don't know. Chorus hasn't said it's in danger of not fulfilling its role as builder of the fibre network. Far from it - Chorus has posted a 25.5 cents per share dividend, up from 14.6 cents the year before, and has made a $171m profit for the year.

So what will this extra investment - we calculate it will run to $600m over the rest of the UFB build period - buy for New Zealand?

Nothing. Not a thing.

Chorus won't build the network any faster. It won't be a larger network. It won't be a better network. Chorus will simply build the network it's already been paid nearly over $900m to build.

We don't think that's fair.

sbiddle

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#895275 13-Sep-2013 14:41

UreKismet: I would have thought what they are campaigning against is fairly obvious, that is The Telecommunications Commisioner, an independent arbitrator appointed by Parliament has made the decision he/she believes will be best for Aotearoa, then a self interested mob of stock market investors (I.E. the national cabinet) has chosen to overrule the independent arbitrator's decision resulting in an increased cost to kiwis and increased profits for shareholders in Chorus. Some of the government MP's will hold shares in Chorus and will directly profit from this decision. I call that corruption what do you call it. "The cost of doing business" or something equally facile, cliched or sound-bitey?

Not entirely.

The Commerce Commission were told to come up with a cost plus pricing model after years of ripping us all off with a retail minus model that was fundamentally flawed due to the calculations they used. The problem is establishing a true cost of providing a copper service isn't easy with varying pricing models out there all leading

It also needs to be made clear that this is not a price increase as some people seem to think it is, especially with the reference to a tax. A price reduction will already occur, this reduction would have simply been greater is these cheaper costs are passed on. Whether these costs would ultimately be passed on to the consumer however is another story entirely - you only have to look at the MTAS saga to realise the MTR rate is now 3.72c yet many landline to mobile calling prices are still 10x this. With the residential ISP market being a blood bath now with very low margins I guess the big question is whether we would see all of these costs passed on.

giollarnat

138 posts

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#905584 1-Oct-2013 10:18

David Farrar, National Party supporter, on why the Chorus subsidy makes no sense

"I genuinely don’t know why the Government is proposing to change the law in a way which will deliver a huge amount of extra money to Chorus (note it is more money compared to the draft Commerce Commission determination, but is less money than they currently get), because they seem willing to gift this money to Chorus and not actually get anything in return for it. That is what baffles me."

"So let us look at the second rationale, which is we do not want the price of copper undermining the price of fibre. I personally am unconvinced the relative prices will be a major factor, but for the sake of debate am happy to concede the point that this could be undesirable. However what I can’t get is why you would just gift the extra money (being the gap between the proposed price and the price the Commerce Commission says should be charged in its final determination) to Chorus in return for, well nothing.

Chorus has signed a legally binding contract with the NZ Government to roll out fibre to their portion of the 75% of NZ target. Steven Joyce and his team did a great job negotiating that contract. There was no requirement in that contract for copper to be at a particular price. It was well understood that the price of copper would be set by the Commerce Commission under a cost plus calculation (instead of retail minus).

So again I honestly do not understand why the Government is proposing what it is proposing."

"I just can’t understand why a law change is being promoted that simply would deliver more money to Chorus (compared to the Commerce Commission determination) that doesn’t deliver any benefits to consumers, taxpayers and Internet users."

hamish225

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#905751 1-Oct-2013 15:06

sbiddle:
PaulBags:
It's really hard to tell what's actually going on with no current/soon to be available maps, just an address look up, but so far I've found more fibre access available/coming soon in blatantly residential only areas of the west side than near even business/school areas in the east. Between a primary and an intimidate school in Shirley (and down the road from the shopping centre)? Not even coming soon. In Oaklands/Halswell, houses no-where near schools or businesses have fibre already. Near eastgate shopping centre in Linwood? No idea. A cul de sac in Papanui? Soon, not 'very soon', but still soon.

In fact the only addresses that give any indication that fibre is coming are on the west.

If you're really only talking about Christchurch you really need to take your issues up with Enable since it's not a Chorus UFB area. The Chorus maps are very good with coverage maps now showing up to June 2016.

is there anyone on here from enable?

do they have twitter or facebook?

not from what i can find.

*Insert big spe*dtest result here*

NonprayingMantis

6434 posts

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#905754 1-Oct-2013 15:19

sbiddle:
UreKismet: I would have thought what they are campaigning against is fairly obvious, that is The Telecommunications Commisioner, an independent arbitrator appointed by Parliament has made the decision he/she believes will be best for Aotearoa, then a self interested mob of stock market investors (I.E. the national cabinet) has chosen to overrule the independent arbitrator's decision resulting in an increased cost to kiwis and increased profits for shareholders in Chorus. Some of the government MP's will hold shares in Chorus and will directly profit from this decision. I call that corruption what do you call it. "The cost of doing business" or something equally facile, cliched or sound-bitey?

Not entirely.

The Commerce Commission were told to come up with a cost plus pricing model after years of ripping us all off with a retail minus model that was fundamentally flawed due to the calculations they used. The problem is establishing a true cost of providing a copper service isn't easy with varying pricing models out there all leading

It also needs to be made clear that this is not a price increase as some people seem to think it is, especially with the reference to a tax. A price reduction will already occur, this reduction would have simply been greater is these cheaper costs are passed on. Whether these costs would ultimately be passed on to the consumer however is another story entirely - you only have to look at the MTAS saga to realise the MTR rate is now 3.72c yet many landline to mobile calling prices are still 10x this. With the residential ISP market being a blood bath now with very low margins I guess the big question is whether we would see all of these costs passed on.

many of the articles refer to the total value of the difference but do not reference the actual likely impact to the NZ consumer.

The comcom proposed a UBA price of $12. The government wants it at around $16. (current price is around $21)
This means that the difference between the comcom proposal and the governments desire is around $4.

that doesn't mean that every connection would get $4 cheaper though. It would have no impact on Cable or unbundled connections which make up roughly 25% of the market (I think) so the average impact would be somewhere around $3 per connection per month. and that is assuming that ISPs will fully pass through the saving they make. Again, this is unlikely. they would mostly turn around and say "we already built the reduction into our prices ages ago" (which, like sbiddle said, is exactly what 2Degrees did after MTAS, despite claiming it would mean lower prices for Nzers)

I think if the public realised the smallness of the effect to them, rather than looking at the total impact to Chorus, they might be a little bit more "meh" about the whole thing.

ajw

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#905886 1-Oct-2013 18:35

http://www.scoop.co.nz/stories/BU1309/S01091/estimates-of-copper-tax-conservative-says-peer-review.htm

Network Strategies advises the New Zealand Ministry for Business, Innovation and Employment, the New Zealand Commerce Commission and the Australian Productivity Commission on telecommunications issues. Its report is available online at http://www.digitl.co.nz/1002/covec-chorus-independent-review.

The Covec analysis, released last week, estimated the government’s existing proposals for copper pricing would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019. The analysis went on to report that the latest demands by monopolist Chorus, which owns the copper network, would take the total cost to Kiwi households and businesses to $979 million.

ajw

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#905898 1-Oct-2013 19:18

Vodafone slams 'corporate welfare' for Chorus

http://www.nbr.co.nz/article/vodafone-slams-corporate-welfare-chorus-copper-tax-ck-p-145972

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sbiddle

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#905944 1-Oct-2013 19:47

I'd still love a response from Orcon, Callplus or Vodafone stating what price they would wholesale a UBA equivalent service at if they were able to do so.

NonprayingMantis

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#906122 2-Oct-2013 08:17

sbiddle: I'd still love a response from Orcon, Callplus or Vodafone stating what price they would wholesale a UBA equivalent service at if they were able to do so.

they are, aren't they? I mean Callplus has a wholesale business for broadband, and, I think, so does Orcon.

giollarnat

138 posts

Master Geek

#908027 4-Oct-2013 17:56

ajw:

http://www.scoop.co.nz/stories/BU1309/S01091/estimates-of-copper-tax-conservative-says-peer-review.htm

Network Strategies advises the New Zealand Ministry for Business, Innovation and Employment, the New Zealand Commerce Commission and the Australian Productivity Commission on telecommunications issues. Its report is available online at http://www.digitl.co.nz/1002/covec-chorus-independent-review. The Covec analysis, released last week, estimated the government’s existing proposals for copper pricing would cost Kiwi households and businesses between $390 million and $449 million between 1 January 2015 and 31 December 2019. The analysis went on to report that the latest demands by monopolist Chorus, which owns the copper network, would take the total cost to Kiwi households and businesses to $979 million.

Apparently, the Chorus subsidy as calculated by Covec was grossly underestimated (Network Strategies independent report)

Those estimates relied on the assumption 45%of customers will have switched to UFB by 2020 (even chorus contract is only for 20% by 2020)

So quite possible that this underhand transfer to Chorus and its shareholders from the NZ public will be a half $billion plus.

giollarnat

138 posts

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#916955 18-Oct-2013 11:27

Vector slams Govt copper internet intervention

Chorus would get "windfall gains" and have an incentive to "go slow" building the ultra-fast broadband network if the Government intervenes in the copper internet market, says Vector.

Over ruling the Commerce Commission would "create regulatory uncertainty and interfere with [the] development and evolution of the broadband market", Vector said in its submission.

"The Government's willingness to overrule a regulator's decisions with new legislation sets a dangerous precedent," Vector said.

"The Government should hold Chorus to its contractually agreed commitment to roll-out of fibre, without additional subsidy or regulatory relief."

Rather than favour the fibre network, Vector said intervention could to be "detrimental to the UFB initiative and make consumers worse-off".

By Vector's own calculation, intervention would allow Chorus to extract 20-25 per cent return on investment from its copper network between 2014 and 2019.

"No other regulated entity is permitted returns of this size," Vector said.

Vector responded to this in the submission released today and said that Chorus, which is responsible for about 70 per cent of the UFB build, would be encouraged to "go-slow on the fibre rollout" if the Government intervenes in the way proposed.

A higher copper price equivalent to the entry-level fibre prices would "heighten the cost to Chorus of its new fibre network cannibalising its copper network's consumer base".

"The incentive this would create would be for Chorus to roll-out fibre no quicker than it is contractually-obliged to, and to retain customers on its copper network. This would seem to Vector to be the exact opposite of what the Government hopes would occur as a result of intervening in copper access pricing," Vector said.

old3eyes

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#917001 18-Oct-2013 13:08

giollarnat: Vector slams Govt copper internet intervention

Chorus would get "windfall gains" and have an incentive to "go slow" building the ultra-fast broadband network if the Government intervenes in the copper internet market, says Vector. Over ruling the Commerce Commission would "create regulatory uncertainty and interfere with [the] development and evolution of the broadband market", Vector said in its submission. "The Government's willingness to overrule a regulator's decisions with new legislation sets a dangerous precedent," Vector said. "The Government should hold Chorus to its contractually agreed commitment to roll-out of fibre, without additional subsidy or regulatory relief." Rather than favour the fibre network, Vector said intervention could to be "detrimental to the UFB initiative and make consumers worse-off".

By Vector's own calculation, intervention would allow Chorus to extract 20-25 per cent return on investment from its copper network between 2014 and 2019. "No other regulated entity is permitted returns of this size," Vector said.

Vector responded to this in the submission released today and said that Chorus, which is responsible for about 70 per cent of the UFB build, would be encouraged to "go-slow on the fibre rollout" if the Government intervenes in the way proposed. A higher copper price equivalent to the entry-level fibre prices would "heighten the cost to Chorus of its new fibre network cannibalising its copper network's consumer base". "The incentive this would create would be for Chorus to roll-out fibre no quicker than it is contractually-obliged to, and to retain customers on its copper network. This would seem to Vector to be the exact opposite of what the Government hopes would occur as a result of intervening in copper access pricing," Vector said. X

Vector sounds like a sore loser as they lost out to Chorus. Now if they would just start complaining about the high price of their own power delivery system that goes up by about 5%+ each year they may be on to something..

Regards,

Old3eyes

sbiddle

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#917124 18-Oct-2013 17:06

giollarnat: Vector slams Govt copper internet intervention

Is this the same Vector who tried to take the Commerce Commission to court over it's attempts to bring down gas and power transmission costs?

Sounds like some hypocrisy within the company.

PaulBags

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#917145 18-Oct-2013 17:58

Sure, attack the messenger. Anyone got an attack for the message?

Ragnor

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#919251 21-Oct-2013 15:47

The wholesale price going from $21 to $16 instead of $12 is still a good reduction, I don't think the sky is falling here.

While as a consumer I'd like to see it lower I can appreciate the government is playing it better safe than sorry with Chorus's profitability and the copper vs fibre incentive balance.

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