Editorial: Fibre subsidy unfair and dangerous to economy

Communications Minister Amy Adams. Photo / APN

The present Government has invested a great deal of capital - political as well as financial - in wiring the country with fibre-optic cable for ultra-fast broadband. When it did so, it was shamelessly breaking the rule that governments are not well placed to "pick winners" for the benefit of an economy. It was not much troubled by the question why, if fibre was a sure-fire winner, a telco was not already investing in it.

The Government gave the $1.5 billion project to the line company Chorus on extremely generous terms and expected the fibre to displace copper on its own merits. That clearly is not happening at a sufficient rate for fibre to pay its way, for now the Government has decided to let Chorus pay for the fibre from higher charges for copper than the Commerce Commission would permit. The decision is not only unfair to consumers, it is dangerous for the economy.

Consumer NZ has lined up with the Telecommunications Users' Association and a number of service providers and sector groups to form a "Coalition for Fair Internet Pricing". It is in the interest of the whole economy that their protest succeeds. Prices set by the Commerce Commission might not be ideal from an economic point of view but they are the best anyone can do for networks that form natural monopolies.

The commission can assess the costs of provision and add a reasonable return on capital to arrive at a price a competitive market might produce. It is not ideal because competition exerts constant pressure to reduce costs and gain efficiency. But the assessment of an independent commission is infinitely more reliable than that of a government with a political interest in the price.

When the Commerce Commission reviewed copper connection charges last year and issued a draft price in December, Chorus claimed the proposed price would undermine its profits and put the introduction of superfast broadband at risk. The company appealed to the Government and it responded quickly. It put off any new pricing for a year and announced a review of the Telecommunications Act, then barely a year old.

Last month, Communications Minister Amy Adams proposed a price for copper connections of $37.50 to $42.50 a month, comparable with faster fibre services and about $10 higher than the commission had recommended. The analysis by economists Covec for the protesting coalition has calculated the charge would amount to a $600 million tax on copper broadband users for the sake of the faster cable.

The coalition prefers to call this a $600 million subsidy to Chorus, which it is. The former Telecom subsidiary has reported flat earnings for its first year as a standalone business and has warned that an enforced price cut might make construction of the fibre networks uneconomic. The cost amounts to 85 per cent of Chorus' annual capital expenditure.

At $2935 for each premises the fibre passes, it must be wondered whether the fibre is worth it. With roll-out well under way it is too late to be asking the question, and perhaps in time it will pay off. But it is equally possible that wireless technology will have entirely displaced cable by then.

The coalition is calling on Ms Adams to reconsider her proposed price. Spokeswoman Sue Chetwin says, "We haven't seen this sort of thing since the 1970s and we are worried that it is an attempt to tax consumers to subsidise Chorus."

It is worse than that. "Think big" energy projects of the 1970s did not impose an artificial price on an existing service to subsidise a new one. Fibre and copper should each be priced on their cost so that consumers can tell us which offers better value.