Chris Barton: How did Chorus get into this mess?

Rolling out fibreoptic cable cover. Photo / Glenn Taylor

Hurrah for democracy. Hurrah for independent regulators. And bloody good job by the parties who gave a collective "no" to National Party cronyism.

Last week's decision by Government support partners the Maori Party, United Future, and Act to come out against legislation to override broadband price cuts recommended by the Commerce Commission deserves at least three cheers, probably more.

The slap in the face to John Key is particularly significant, because it was the PM who hatched the corporate welfare plan to artificially inflate copper access prices to subsidise Chorus. When I first wrote about it in January I was surprised by the level of public reaction against Key's proposal. But I was cynical about the prospects of anything changing. With Key personally promising to help Chorus out, I imagined National, with the support of its compliant coalition partners, would bulldoze on, deaf to the public outcry.

What, then, was it about this issue that galvanised John Banks and Peter Dunne to change from preening lapdogs to watchdogs with bite? Especially considering on other, potentially more important issues such as the New Zealand International Convention Centre Bill and the Government Communications Security Bureau Bill both were acquiescent to National's bidding.

The answer is probably Matthew Hooton. Having a right-wing lobbyist behind the scenes of the Coalition for Fair Internet Pricing's campaign to halt Key's market intervention is now looking like a stroke of genius. With Hooton there, not to mention other telcos which had made significant investment in an unbundled, competitive market, this was a campaign that couldn't be dismissed as left wing bleating.

But great as the outcome is for New Zealand consumers, the copper tax debacle reflects three disturbing trends. The first is the aberration of democracy that sees two minority politicians holding so much decision-making power on issues affecting us all. The second is that influencing this government seems directly correlated to financial muscle, and while on this occasion Chorus's buying power was circumvented by a collective consumer will, the situation suggests a corruption of democratic process. Thirdly, you have to ask whether, without the Coalition's campaign, any of the information needed to reveal the truth about Chorus's and the PM's claims would have been exposed.

On this front, the story is far from over. Look at what the PM said in September - that if the Telecommunication Commissioner's wholesale pricing ruling stood, there was chance Chorus would go broke. We now know that wasn't entirely true.

Chorus's predicament has nothing to do with reduced copper prices. The process followed by our Telecommunications Commissioners to determine fair pricing of a monopoly asset opened to competition is transparent and rigorously follows regulatory best practice. What's more, all telecommunications companies here - especially Chorus - have known for a considerable time this coming price reduction was likely, and all have financially modelled the effect in various scenarios.

The real problem resides with Chorus's part in the fibre-based ultra-fast broadband (UFB) network and the utter hash Chorus has made in its deployment and in grossly underestimating costs. The public-private partnership with Chorus involves the government giving Chorus what is essentially an interest free loan of $929 million to dig up the roads and run fibre by 830,000 homes.

That works out at $1,119 per household, with the total cost at the time of signing the deal with Crown Fibre Holdings estimated to be between $2,250 and $2,750 per premises. But that's not what it's actually costing Chorus, which, for the first half of 2013, was an average of $2,935 per premises passed. That's not all. Chorus also has to pick up the cost of connecting homes, initially estimated at an average of $1380 per premises connected, but currently running at $1600 and up to $2250 for more difficult installations. In other words, a cost blow-out of significant proportions.

The question shareholders should be asking is how did Chorus's management create such a mess and get its costing so seriously wrong? Shareholders should also seek answers as to why Chorus's deployment and connection costs are so much higher than the other Local Fibre Companies - Northpower Fibre, UltraFast Fibre and Enable Networks.

The question taxpayers should be asking is how did Crown Fibre Holdings end up with a business partner this inept? And what's the Government's Plan B if Chorus defaults? In the real world such a stuff-up would cause heads to roll. Taxpayers could rightly point the finger at Chorus's chief executive, but also Steven Joyce the architect of the UFB and the Chorus partnership. But rather than accountability, we get: "Oh dear, we'll have to bail Chorus out."