Chorus needs to do the job, not push for a copper tax

Chorus signed a deal with the government to build most of the Ultra Fast Broadband (UFB) network in return for an interest free loan of just under $1 billion.

In order to win that contract, Chorus had to do two things.

Firstly, it had to split away from its retail arm, Telecom.

The government quite rightly said that if a telco wanted to be part of the UFB project it couldn't be both retailer and wholesaler of capacity.

Too many years of Telecom being both provider and competitor made the government very wary and we wholeheartedly agree. From 0867 numbering in 1999/2000 right through to the "loyalty" offer for those that didn't compete, Telecom had mastered the art of playing one side off against the other, to the detriment of users throughout the country.

Secondly, it had to outbid Vector. The electricity lines company thought it was in with a chance and ran a series of TV commercials touting its ability to roll out a fibre network and was seen as something of a white knight ready to ride in to the telco industry and save us all from a rapacious Telecom.

After much soul searching, Telecom agreed to split in two and put a deal together with the government that Steven Joyce signed off in 2011. A new Telecommunications Act was introduced and the era of "Telecom in charge" was at an end.

Part of the deal, and the new Telecommunications Act, was that the Commerce Commission would have to rejig how it regulated the copper wholesale market.

Chorus owns the national broadband network and because it's a monopoly it's heavily regulated. The Telecommunications Commissioner sets the price for wholesale broadband services - known as UBA - and for the past half dozen years has done so by looking at retail prices charged by Telecom, taking off a margin and telling the industry the resulting number is how much they'll pay.

But if Telecom and Chorus split up, Chorus won't have any retail prices to use for this calculation, and so Minister Joyce wrote in the Act that the Commissioner must move to a "cost plus" model. That is, the Commissioner works out the costs of providing broadband on the copper network, adds on a margin and produces the new wholelsale rate.

Clearly there's a huge gap between retail minus and cost plus. The minister knew this, so he built in a three year delay so that Chorus would have time to get its house in order.

Chorus itself knew this - it's listed as a risk in its launch prospectus.

The Ministry of Economic Development (now MBIE) knew this - it devotes several paragraphs to the matter in its regulatory impact statement to the Crown.

However, when the Commissioner began his work and produced a draft number (dropping the price from around $20 per line per month to about $8 per line per month), Chorus cried foul and ran to the government asking for a bail out.

At which point you would presume the hard-nosed Steven Joyce would have told them they signed the contract, get on and do the work.

Instead, the PM said clearly this wasn't acceptable and he directed the Minister of Communications Amy Adams to sort it out.

Adams has produced a discussion document that lists three alternatives to how to solve this problem, although quite what the problem is isn't defined.

• Option one: the minister sets the price.

• Option two: the minister sets the price using a different methodology.

• Option three: the minister tells the Commerce Commission what price to set.

Regardless of which 'option' is selected, the price will be a lot higher than the Commerce Commission has proposed.

We estimate that it will be worth about another $600 million to Chorus and that money will come out of the back pockets of broadband customers in New Zealand.

Remember, Chorus signed this contract.

It knew the terms of the contract three years ago, before Chorus existed as a separate entity.

It knew what it was getting into when it signed the contract and it should now get on a do what we've paid it to do.

Instead of doing the work for the agreed price, Chorus is getting a 60% increase in revenue.

This won't result in us getting a bigger network. It won't be a better network, and it won't be built any faster. All that extra $600 million will get us is exactly what we've already paid for.

Chorus is a profitable, privately-owned monopoly.

Last year it made a profit of $171m and posted a dividend of 25.5 cents per share, up from 14.6 cents per share the year before.

We are calling on the Minister to let the Commerce Commission do the job it's required to do - regulating monopolies - and to tell Chorus to get on and build the network we've paid a billion dollars for.

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