Tuesday, 5 November 2013

And the wholesale price of your internet plan will be...

Today the Commerce Commission released its final decision on the UBA service (the wholesale cost a would-be internet service provider will have to pay Chorus to use the electronic gizmos that handle internet data).

The Commission based its decision on what the same service costs in some countries overseas ("benchmarking"), in practice ending up with the Swedish price, though the Danish price also went into the mix. The Commission settled on $10.92 per customer per month: add on the $23.52 the would-be provider needs to pay for access to the copper lines to the customer's premises (the 'UCLL' service), and the total wholesale cost of the line (UCLL) and the gear (UBA) will come to $34.44 a month.

Originally, in its draft decision last December, the Commission had suggested a lower total cost ($32.45, made up of $23.52 for UCLL plus $8.93 for UBA). This had turned the government incandescent: it looked as if the government-funded fibre-based network wouldn't get the uptake the government wanted, because copper would be so comparatively cheap. In August, in an update paper, the Commission had corrected some errors, as I described here, and the total proposed price had risen to $33.43 (still $23.52 for UCLL, but now $9.91 for UBA).

Chorus has taken it hard, but today's decision seems to me to be a highly sensible outcome.

For one thing, it's lower than the $44.98 a month Chorus charges at the moment, as it should be. The previous way of setting the price ("retail minus") tends to be over-generous to an incumbent owner of infrastructure. If that wasn't known to investors in Chorus - who have been peeved that its share price has been whacked by these regulatory developments - well, it should have been, or mostly should have been.

For another thing, it's lower, but not massively lower, than the entry-level wholesale price ($37.50) that would-be internet service providers will pay to access the fibre-based internet network, again as it should be. The fibre-based service is faster, and the slower copper-based service ought to be cheaper to buy. So far the government is saying very little, but if I were the government at this point, I'd be tempted to declare victory and go home.

I'm also pleased to see that the Commission flagged away the flakey idea it floated in its August update paper, when, they say today [52 - I'm quoting paragraph numbers here and later], they "set out an approach that would potentially extend the plausible range beyond the observed benchmarks". As they note today, "A number of parties were critical of this approach", which is putting it mildly: it was statistically naff.

The Commission has given it away, though, I have to say, rather begrudgingly. "The Commission remains of the view [they say at 53] that inferring a larger plausible range is a conceptually valid exercise of the IPP [Initial Pricing Principle, i.e. this whole exercise of benchmarking using overseas prices as a first stab], particularly where there are a small number of benchmarks" - well, no it isn't, actually, as professional statisticians who submitted to them pointed out - before finishing up with, "However, as we have not ultimately applied that approach in this determination, we have not responded to these aspects of submissions". Face saving? Sure. Got to the right place in the end? Absolutely.

I'm also pleased to see that three more countries (Belgium, Greece, Switzerland) were used as a rough and ready cross-check on the price set by using just Denmark and Sweden, even though the three countries did not strictly meet the criteria for being used as formal benchmarks themselves. There's a lot to to be said for being roughly right than precisely wrong.

And I thought setting the price point higher rather than lower within the benchmark range was right, too.

It's true that as Covec said [227], "the [adverse] effects on consumers [from a higher rather than a lower price] are certain but the effects on incentives to invest and incentives to migrate from copper
are uncertain". The Commission's answer [228] was that "We recognise the greater uncertainty of benefits but believe these uncertainties need to be considered against the potential negative consequences of setting the price too low. This could harm competition in the longer-term due to a loss in dynamic efficiencies", and [231] "we accept in principle that the risk to dynamic efficiency of a low access price is asymmetric and that the balance of risk favours setting a price that errs on the high side". This has been a central theme of all the regulatory telco decisions, and I think it's on the right track.

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