Chris Barton: Copper tax debate continues

Workers installing fibre optic cable in Wanganui. Many argue that if copper and fibre prices are closely aligned users will be much more encouraged to move to the new network. Photo / Stuart Munro

The copper tax debate has created some strange bedfellows. On the one hand there's right-winger Matthew Hooton promoting the Coalition for Fair Internet Pricing. On the other former telecommunications commissioner Ross "Mr Competition" Patterson, is now batting for the monopolist. Such is the nature of New Zealand telecommunications regulation and its hired guns, happy to flip and flop as long as they are getting paid.

While Hooton's role as PR strategist for the Coalition is perhaps more easily explained, it's still weird to watch him marshalling forces against the government and the PM. But then John Key has been saying outrageous things about the Commerce Commission's recent draft ruling to cut the cost of copper broadband services.

"Basically if the Commerce Commission ruling stands there's a chance Chorus will go broke, in which case the Ultra Fast Broadband (UFB) won't be rolled out," Key told TVNZ last month. The problem with such a statement is that if it were true Chorus should have signalled the potential disaster to the Stock Exchange and analysts would have been piling in saying the same. But as commentator David Farrar points out: "The reality is that Chorus would not go bust under the draft determination. They do not say they will. The market analysts do not say they will."

So what gives? I put the question to Ross Patterson who, as both a former telecommunications commissioner and now expert legal consultant for Chorus, ought to know. I suggested that claiming Chorus could go bust was a preposterous statement that didn't tally at all with what analysts like Deutsche Bank had been saying. "It doesn't tally with Chorus either," Patterson told me. "Chorus has never said that."

Patterson also rejected the PM's other claim that the Commission was "interpreting the law incorrectly" and it was "going away to have a look at that."

He referred me to minister of communications and information technology
Amy Adams' speech introducing her Telecommunications Act discussion document.

"Let me make it quite clear that this process is not about whether the Commerce Commission was 'right' or 'wrong' in its determinations," says Adams. "The Commission quite rightly followed the prescribed process mandated under the Act and came up with the positions they did." Or as Patterson puts it: "She basically said effectively the Commission got it right. They didn't make a mistake. That's what the law required them to do."

In other words the Prime Minister is wrong on both counts. So what's his game? Is he misinformed? Or deliberately spreading misinformation? Questioned in parliament, Key is sticking to his story.

Patterson says the real problem is the regulatory framework - our Telecommunications Act and its amendments made by this government when it decided to structurally separate Telecom and to spend $1.35 billion rolling out the UFB fibre network. "It's perfectly proper for a government to say: 'When we introduced these reforms, we messed up and we have got to fix it.' That's totally OK."

But it's not OK to say such a thing without the empirical evidence to back it up. In essence Patterson, who as commissioner worked tirelessly to drive competition into the broadband market for "the long-term benefit of end-users", is now singing from the monopolist's song book - that consumers will be better off if the price of copper broadband is artificially inflated.

Why? Because as Patterson, Chorus and the government are arguing, if copper and fibre prices are closely aligned then users will be much more encouraged to move to the new fibre network.

But as Vodafone points out in its submission on the government's discussion document "inflating wholesale copper pricing is a copper tax on consumers by stealth".

A proposal that amounts to "taking money from New Zealand consumers and paying it to Chorus shareholders." Vodafone also says there is no evidence to suggest the UFB objectives are at risk and that the proposal acts on a whim to deliver "unnecessary corporate welfare to Chorus, at the expense of all consumers". Consumers who will pay more for telecommunications services, especially those in rural areas who will never get the UFB.

The extraordinary aspect of Patterson's new found love of monopoly is the Houdini-like contortion he does to get to his new position - especially when you consider how scathing he was of government interference in the Commission's independence. In December last year Patterson wrote: "It is a fundamental principle of our telecommunications regulatory regime that the regulator is independent, and is left to carry out its statutory role without interference or undue influence from the Government."

Today Patterson no longer seems to see such strongly held principles as valid in the running of our telecommunications market. Instead he advocates for the government rather than a regulator to set prices and the Commission's independence to be usurped by the needs of Chorus shareholders.

In the same article Patterson outlined the fundamental policy behind the legislation - "that copper will be a competitive constraint on fibre, with uptake determined by market forces". As he pointed out, if copper prices are set above cost to encourage fibre uptake, they will no longer constrain fibre prices, and uptake will no longer be market driven.

"Furthermore, a moment's consideration shows that a policy of artificially increasing the wholesale UBA price to encourage fibre uptake is doomed to fail." Today he argues such a policy will be a roaring success.

Put it to him that such a flip flop beggars belief and Patterson blithely asserts that was then, this is now. "The reality is I don't resile at all from what I wrote. I think I still am 'Mr Competition' and I think this is great outcome for consumers and actually it will make New Zealand a world leader."

The problem with Patterson's and the government's view is its acute myopia - seeing the copper price as the only reason why consumers might migrate to fibre. There are plenty of other demand-side ideas they could open their eyes to:

• Make fibre services much faster. It would be easy to offer much better speed over fibre - such as 100 Mbps in both directions - which would be significantly better than what is possible with copper ADSL or VDSL,. Research highlighted by Covec shows that a doubling of the speed of fibre will increase uptake by around 40 per cent.

• Make fibre services uncapped and compelling. Fibre offers a quantum leap in bandwidth compared with copper and can provide so much more. A simple way to differentiate between the two is to make sure fibre services are jam-packed with premium content (eg first-run movies, TV series and live sports) and with gigantic (ideally unlimited) data caps.

• Make fibre services cheaper. While wholesale fibre prices have been capped to 2019 on a sliding scale beginning at $37.50 and rising to $42.50 a month, service providers are free to offer lower prices if they wish. Indeed the policy intended competition between the fibre and copper. Logically, in a competitive market if wholesale copper prices decrease so should fibre.

But no, rather than look at the big picture, our government comes up with the bright idea of raising the wholesale cost of copper above cost. A moment's consideration would show that such a policy is doomed to fail.