Saturday, 10 August 2013

The price of your broadband (2)

As explained here I'm posting a series of background pieces about the current telecommunications policy review, which is looking in particular at the prices people will be paying both for their current copper-based broadband and the new fibre-based 'Ultra Fast Broadband'. It's an important issue, but to grasp it you need some building blocks.

Here's the next one - how the Commerce Commission currently sets the regulated prices for access to telecom infrastructure. If you are a new phone company that wants to provide broadband, for example, the Commission has set the price you will pay if you want to put your equipment into one of Chorus's exchanges, and have the copper lines running from a customer's home connected to your gear at that exchange. Or if you don't want to buy your own gear, you can save some money, and pick up the customer's traffic after it's reached the exchange and been handled by Chorus's equipment. This saves you the capital cost of having to install your own gear, but on the other hand, you have to pay a charge set by the Commission for renting Chorus's gear at the exchange.

And so on - the Commission ends up setting a lot of these wholesale prices charged by one telco to another. In turn, these prices form a substantial part of what the telcos will ultimately charge their retail customers (you and me), so they're of real, practical importance to the choices we are offered, as well as facilitating competition and choice in the first place by unblocking what would otherwise be crippling impediments to new telco businesses.

Now to the guts of it: how does the Commission set those prices?

In the first instance, by looking at the prices that other countries have set for a particular service, a process known as 'benchmarking'. The logic is that  overseas prices will act as a relatively quick proxy for the likely New Zealand costs. It's a bit more complicated than that: only those countries that set prices on a particular basis are included in the comparison. Overseas regulators can (and have) set prices on all sorts of weird and wacky bases, some designed to favour incumbents, some designed to favour new entrants, some hit-and-miss, some very sophisticated. You wouldn't want prices set in New Zealand on such an arbitrary collection of overseas prices, so the countries selected are chosen on the basis of whether they use a reputable, sensible approach to setting their prices. Typically, this is a 'forward looking, cost based' approach - the price you'd pay for a new service today (as opposed to what you'd pay for something built in the 1980s), if that price was based on the actual costs genuinely involved, and not some arbitrary amount greater or smaller than the real cost.

There is provision for not using the benchmark price, and using a detailed modelling of the actual costs incurred in providing the service in New Zealand instead. If people were to go down that route, though, then they would be starting a complex, lengthy and expensive exercise. Typically people haven't, and have lived with the benchmark-based prices instead.

So there you have it. The typical price is based on overseas prices, as an approximate close-enough-is-good-enough stab at what it would likely cost here, and there's a back-up of calculating the actual New Zealand costs, if necessary.

I appreciate that this is all rather dry stuff, so the next post will be a practical example of how this benchmarking process has actually worked out.

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