Regulating the price of copper in New Zealand
Martin Cave1
I, Martin Cave, am a visiting professor at Imperial College Business School and a deputy chair of the
UK Competition Commission. I was BP Centennial Professor at the London School of Economics for
2010-2011, and from 2002 until 2010 I was professor and director of the Centre for Management
under Regulation at Warwick Business School at the University of Warwick. I was formerly professor
of economics and vice-principal at Brunel University. I am a regulatory economist specializing in the
communications sector. As well as academic writing and research I have advised several
governments and regulators on communications: these include the Governments of Australia,
Canada, France, New Zealand and the UK; competition regulators such as the European Commission;
and telecommunications regulatory authorities in Armenia, France, Germany, Greece, Ireland,
Jordan, Singapore, Thailand, and the UK. A brief curriculum vitae is appended as an Annex.
I have been asked by Chorus to address the following questions:
“First, in light of the ongoing FTTP deployment in New Zealand, and having regard to the
regulatory objectives of promoting efficiency (including productive, allocative and dynamic
efficiency), what is your opinion of the proposal by the New Zealand Commerce Commission
(in its draft determination of 4th May 2012) to reduce by 19% the access price which will
apply to all Unbundled Copper Local Loop (UCLL) lines in New Zealand from December 2014?
Second, is the connection of customers via UCLL in response to a fall in its price likely to play
an important ‘bridging role’ between copper and fibre services, and should regulation seek in
this period to promote facilities-based competition by encouraging copper access-based
competitors to climb the so-called ladder of investment?” 2
1
Imperial College Business School, London. [email protected]
See TelstraClear Ltd, Submission to the Commerce Commission on The Revised Draft Determination on the
Benchmarking Review for the Unbundled Copper Local Loop Service, 1 June 2012, paragraphs 9 and 51-52.
2
1
Introduction
The ‘price of copper’ has always been a key issue in telecommunications regulation,
especially in jurisdictions where unbundling has taken a firm grip on the market place for
fixed voice and data services. In such circumstances, regulating the price of an unbundled
loop, together with the linked decision about how to price bitstream access, is essentially a
proxy for retail price control for broadband.
The debate about the regulated price of copper has also embraced its cost. In some
jurisdictions, the connection between price and cost has been loose and variable. For
example, in the UK in 2006, for reasons apparently unrelated to considerations of cost, BT
cut the price of an unbundled loop by 40%, simultaneously with its agreement operationally
to separate its access network. One or other of these changes (or both in combination)
precipitated an epidemic of unbundling.
Part of the difficulty stems from differences in the approach to capital valuation. The
regulators’ freedom to price copper almost at will derives from the fact copper investment
is effectively sunk. As a consequence, the valuation of copper networks (and the price of
copper) can fairly freely be changed. A variety of different approaches have been applied to
costing copper.
This practice explains the difficulty experienced by the Commerce Commission in finding
appropriate forward looking estimates of the costs of UCLL services. Even when a regulator
maintains the same forward-looking methodology over time, it depends on detailed costing
decisions which are unlikely to be internationally consistent.
As if these complications were not bad enough, the emergence of a fibre access network
which rivals the copper network (itself in many areas transformed into an FTTC network by
‘cabinetisation’3) has added further difficulties. These essentially arise because it is
inevitable, or at the very least highly likely, that fibre in some geographies will progressively
but ultimately fully supersede copper. This process will take place at least in part under the
supervision of, or subject to intervention by, the regulator, which has the duty to set the
price of copper during the process of transfer from copper to fibre.
3
In this paper, I place a ‘fibre to the cabinet’ network in the copper rather than the fibre category.
2
How to deal with this issue is the theme of the present paper. Section 1 briefly describes the
relevant aspects of the legislative, policy, contractual and regulatory positions in New
Zealand. Section 2 briefly examines what is done in other jurisdictions. Section 3 examines
the ways in which the various types of economic efficiency can be pursued in these
circumstances, and Section 4 concludes.
Section 1. The position in New Zealand
Fixed access services in New Zealand are now predominantly provided by Chorus, which
demerged from Telecom New Zealand in December 2011 as a condition for participating in
the Government’s fibre or ultra fast broadband (UFB) initiative. Chorus owns both copper
and fibre to the cabinet (FTTC) networks, including DSLAMs, exchanges, cabinets and come
regional backhaul networks. It provides both bitstream and unbundled local loop services.
The UFB initiative is designed to bring fibre to 75% of New Zealand homes. Chorus was
successful in a competitive tendering process in winning 70% (by area covered and funding)
of the contracts available. I call this Area A. The remainder of the tenders were won by
other companies; I call the area covered by these contracts Area B. The two areas differ in
the important respect that in A, copper and fibre networks are co-owned, while in B they
are owned by competing operators.
The contracts require the chosen operator to roll out fibre over the period to 2019, and
impose penalties for failure to do so. The services which Chorus (and other successful
tenderers) must provide and the prices they can charge for them are set out in the contract.
They include both unbundled fibre and bitstream, but the latter is expected to predominate
in the early days of the fibre roll out.
The prices for relatively low speed fibre bitstream are set in fashion which makes them
marginally more attractive than the price (before the amendment currently proposed) of
the equivalent copper product, the unbundled bitstream access (UBA) service, which
includes (or will include from 2014) a charge component for the copper loop equal to the
UCLL price.4 The contract is premised on fibre being prioritised – which precludes Chorus
4
See Chorus, Submission in response to the Revised Draft Determination on the benchmarking review for the
Unbundled Copper Local Loop, June 1, 2012, Appendix D.
3
from making further investment in copper, but the contract contains no specific
requirements for migration from copper to fibre. Nor does it contain provisions for or
restrictions on the switch-off of the copper network.
A range of copper services are regulated, including fully unbundled copper loops and
bitstream. The prices adopted in 2007 for UCLL were based on bench-marking against a
group of countries setting their own prices based on forward-looking costs. Separate urban
and non-urban rates were set, but a single average price is now mandated. Currently about
90,000 lines are unbundled. Bitstream prices are based on retail minus, and in respect of
existing bitstream services, are now frozen until 2014.
There is further important context for this review. The Government reset the regulatory
regime in order to ensure the fibre deployment could be a success. The decision was taken
to change from de-averaged urban/non-urban pricing to a nationally averaged UCLL price.
This meant that the urban price, where most unbundling had occurred, was to increase from
$19.84 to $24.46. In order to allow access seekers to recover investments in DSLAMs, the
averaged price for UCLL would not apply until Dec 2014, after a three year transition period.
However, the averaged UCLL price was to apply with immediate effect to the UCLFS service
(copper lines which have not been unbundled) which are taken primarily by Telecom and
which make up a significant proportion of Chorus’ revenue.5
The Commerce Commission is now completing a review of UCLL prices, and has published a
revised draft decision lowering by 19% the average UCLL price which will apply from 2014,
from $24.46 to $19.75. The Commission must also conclude a cost-based review of
unbundled bitstream access by the end of 2012.
Section 2. The debate elsewhere
Most countries with high levels of penetration of copper-based current generation
broadband have adopted policies in favour of the development of high speed broadband,
which implicitly require the replacement of copper with fibre in the network. 6 The plans are
5
See Chorus, Submission in response to the Revised Draft Determination on the benchmarking review for the
Unbundled Copper Local Loop, June 1, 2012, Appendix D, paras. 87-89.
6
Or a roughly equivalent upgrade in cable networks.
4
driven by a widely held concern that without access to such high speed broadband, a
country or a region will lose out in the competitive struggle with its neighbours. Appeal is
frequently had to the notion that the spill-overs from or network effects associated with the
spread of current generation broadband, for which evidence has been found, will be
repeated with the transition to high speed broadband. The acquisition of high speed
broadband is thus necessary for prosperity.
A good example of such a plan is the European Digital Agenda, developed by the European
Commission and adopted by other European Institutions for implementation in the 27
Member States of the European Union. This has set the following targets:
-broadband coverage for all by 2013
-access for all to broadband at 30 Mbps by 2020
-50% of all broadband subscribers to have speeds in excess of 100 Mbps by 2020.
A summary of progress to date has recently been published. 7 Many other countries have
equivalent plans. Indeed the ITU has called upon all countries to develop them.
The installation of fibre access networks requires substantial investments. Where the
relevant firms are in private ownership it will require the agreement of the Boards of
Directors to approve such investment plans. They will normally do so only if they expect
them to enhance shareholder value.
Broadly there are three routes to be taken in eliciting such investments: competition,
regulation and contract. Where the telecommunications operator faces competition, no
further stimulus may be necessary. Competitive forces may encourage an investment race.
Casual observation suggests that this has occurred – especially where upgraded cable
operators or rival fibre networks have spurred the telecommunications incumbent to invest
in fibre.8
7
COMMISSION STAFF WORKING DOCUMENT ON THE IMPLEMENTATION OF NATIONAL BROADBAND PLANS,
SWD(2012) 68 final/2, 23 March 2012
8
The scope for such competition is likely to depend upon on the size of the market, and for this reason it may
be harder to achieve in New Zealand than elsewhere.
5
Attempting to evoke the desired investment by regulation presents complex problems in
areas where there is only one fixed network and any competition is access-based. In these
circumstances the potential investor in fibre is likely to be the incumbent operator of the
copper network. To make the investment, that operator has to be bought out of the option
of simply sticking with the wholesale and retail revenues it is deriving from copper. Before it
sinks the fibre investment, the operator will want to know the regulatory arrangements that
will govern access to both networks, since they are linked by the customers’ likely
adherence to one or the other. This will be the case whether the access operator is
separated, or vertically integrated with retail and other network functions. In sum, it is
difficult to elicit investment in fibre from an incumbent copper operator via regulatory
incentives.
Some regulators have tried to encourage fibre deployment by imposing on the access
provider less stringent access obligations than have been imposed on it with respect to the
(already sunk) copper network. 9 However, as discussed below, giving access seekers less
favourable terms on the new fibre network than on the old copper one creates its own
problem – that the access provider will build the fibre network but the access seekers will
not come.
The problem of eliciting the investment can be finessed by switching from a regulatory
modus operandi to a contractual one.10 This approach, first employed in Singapore, has
subsequently been adopted in New Zealand (see above) and, more dramatically, in
Australia, where the fixed access network has been taken into public ownership and turned
into a monopoly. The contractual approach solves the problem of determining the network
coverage and technology and procuring the investment at one fell swoop. It does so by
using the instrument of public subsidy.
In practice, the above-noted three methods (competition, regulation and contract) often
coexist within a given jurisdiction. Thus in several countries, there is inter-network
competition in some urban areas, while in more sparsely populated areas there is a mixture
9
In Europe, these include the granting of a regulatory holiday on access to high speed wholesale products
(Spain) and switching the pricing rule from cost orientation to retail minus (UK).
10
See Jon Stern, ‘The relationship between regulation and contracts in infrastructure industries: regulation as
ordered renegotiation’, Regulation & Governance, forthcoming, 2012, and the references cited therein.
6
of reliance on regulatory incentives and contracting by national, regional or municipal
agencies. Providing equal access to contracted (subsidised) facilities solves one problem of
such mingling of approaches. But unless the decisions implemented under regulation and
contracting are co-ordinated, there may be unintended consequences. This is illustrated
most acutely by the issue of how harmonise the approaches adopted towards pricing access
to the copper and the fibre networks during the transition between them.
In the European Union, this has led to a heated debate between on one hand the
incumbents, which generally favour a high cost of copper, and alternative networks, which
generally favour a low cost of copper.
In a regulatory context in which fibre investment is not assured, the conflict between low
broadband prices and incentives to invest in fibre is an acute one. Thus a low copper price,
which depresses the network owner’s wholesale and retail revenues, is seen as making fibre
investment more attractive to that operator. But, given the likely high demand-side
substitution between copper – and fibre-based broadband services over the next few years,
and assuming effective competition among broadband retailers, a low price of copper
leads to low retail prices, which cap the price of fibre broadband at a level which may not
justify the necessary investment. One way of solving this problem of deficient returns is to
allow the network operator speedily to switch off the copper network and force access
seekers and end users to switch to more expensive fibre products. But it may be
commercially infeasible for the fibre owner to impose an unpalatable ‘price shock’ of this
kind, or politically unacceptable for the regulator to allow it.
Unfortunately, the opposite approach of a high copper price might make it more profitable
to keep the copper network than to build a fibre one. This problem can theoretically be
resolved by imposing a tax on the price of copper which makes it expensive to access
seekers but unprofitable for the access provider. 11 The European Commission has floated
the alternative policy of allowing an incumbent investing in fibre to charge a high copper
price, while an incumbent not making such an investment would get a low price. Both of
these approaches appear to face legal obstacles. And neither of them addresses the
11
A tax of this kind was proposed by the last UK government in 2009, but not implemented. See Digital Britain:
final report, Cm 7560, June 2009.
7
problem that investment in fibre appears to be inconsistent with low broadband prices,
currently based on low prices for ‘sunk’ unbundled copper loops.
The European Commission, having published a questionnaire on how to price copper in late
2011,12 has commissioned consultants to prepare a report on the question, which has been
delivered. The Commission is expected to announce its conclusions in July 2012. 13
As noted above, the problem of eliciting investment in fibre has been be dealt with in New
Zealand within a contractual framework. However, if the plan is going to succeed, there
must equally be a consistent approach to copper pricing. Failure to adopt such an approach
may put in jeopardy the benefits of the fibre investment. This is discussed further in the
next section.
Section 3. Seeking efficiency during the transition
Section 18 of the Telecommunications Act 2001 imposes on the regulator legislative
obligations as follows:
“(1)
The purpose of this Part and Schedules 1 to 3 is to promote competition in
telecommunications markets for the long-term benefit of end-users of
telecommunications services within New Zealand by regulating, and providing for
the regulation of, the supply of certain telecommunications services between service
providers.
(2)
In determining whether or not, or the extent to which, any act or omission
will result, or will be likely to result, in competition in telecommunications markets
for the long-term benefit of end-users of telecommunications services within New
Zealand, the efficiencies that will result, or will be likely to result, from that act or
omission must be considered.
12
European Commission, QUESTIONNAIRE FOR THE PUBLIC CONSULTATION ON COSTING METHODOLOGIES
FOR KEY WHOLESALE ACCESS PRICES IN ELECTRONIC COMMUNICATIONS, 03/10/11.
13
In a presentation to a conference on May 30, 2012, one of the consultants announced the conclusion that
lowering the price of copper would discourage fibre investment. http://pr.euractiv.com/press-release/etnototal-telecom-regulatory-summit-eu-telecoms-sector-change-needed-relaunch-growth-.
8
[(2A)
To avoid doubt, in determining whether or not, or the extent to which,
competition in telecommunications markets for the long-term benefit of end-users
of telecommunications services within New Zealand is promoted, consideration must
be given to the incentives to innovate that exist for, and the risks faced by, investors
in new telecommunications services that involve significant capital investment and
that offer capabilities not available from established services.]
(3)…..”
In this section, I deal in turn with the effects on productive, allocative and dynamic
efficiency of the Commerce Commission’s proposals to cut the price of UCLL by 19%.
Productive efficiency
This aspect reflects the goal of minimising the costs of producing a given quantity of output.
In practice an intervention designed to enhance productive efficiency will also probably
change the level or composition of output, leading to some allocative effects as well. In this
paper, allocative efficiency will be considered below.
The goal of productive efficiency has a strong connection with the issue of copper pricing, in
circumstances where there is one owner of fixed infrastructure, and that owner uses two
networks when the final outputs of both could be generated with one alone. This is the case
in Area A, as defined above, where Chorus has been chosen as the local fibre company and
also owns the copper network.
Having the same firm run a legacy copper network side by side with a new fibre network is
costly. Each network individually has strengths. Fibre has increased capabilities and low
running costs; copper requires no significant new investment. Running them together
diminishes both strengths – through imposing a combination of high capital and high
running costs.
The obvious solution is to shut the copper network down. Are there any objections to this?
It is possible that some end users might suffer, if this led to an increase in their service price.
If the standard adopted is the very exacting Pareto criterion – the requirement that no
single individual should suffer from a change, then the shut- down would not go ahead in
9
these circumstances. But according to the more normal welfare test – that the welfare
change in aggregate is positive - then it should go ahead.14 This happens in unregulated
markets where a transition from one technology to another (say, from audio cassettes to
CDs to downloads) will inevitable cause some customers to lose out.
In any case in practice, it should be possible to ensure that the price charged for lower
speeds on fibre is broadly the same as on copper. As noted above, the fibre bitstream prices
set out in the LFC contacts had the effect of giving a competitive edge to fibre over the
expected (prior to the current proposal) price of the equivalent copper bitstream product,
UBA (of which the UCLL price will be a component). And fibre bitstream is likely to be
Chorus’s principal fibre wholesale product (at least before 2020).
It is also the case that the prices under discussion – UCLL prices and bitstream prices for
both copper and fibre – are not end user prices but prices to access seekers. The latter can
be seen as agents of their end user principals, but may interpose their own objectives which
may involve a preference for copper. Hence it is service providers, not end users, who have
to be switched from the copper network before it is shut down. They must accordingly be
offered a means, as the switch occurs, of retaining the retail customers whom they have
acquired, probably at considerable cost. As a practical matter, if the copper network
operator is going to switch off the copper network, access seekers will have to be
reasonably satisfied with the position which that places them in vis-à-vis their retail
customers.
An obvious corollary of the above is that a reduction in the price of copper loops is likely to
have an adverse effect on productive efficiency, unless it is accompanied by a similar
reduction in fibre prices, simply because it makes copper more attractive to both customers
and their suppliers.
I am aware that there is an argument that customers getting their current generation
broadband via unbundled loops may subsequently be more susceptible to a later fibre
14
This approach has been extended by the ACCC in Australia by its recent approval of the intention of the
newly created NBNCo to enter into an agreement requiring the closing down of a rival network owned by
Optus, in the interest of avoiding duplicated running costs. See ACCC, Draft Determination, Applications for
Authorisation lodged by NBNCo Limited, 28 May 2012.
10
offer. 15 While a ‘demand stimulation’ effect cannot be ruled out, there is also likely to be a
‘supply-side impairment’ effect from such a policy, operating in the following way. An
unbundler which has sunk investment in building out to the exchange or cabinet will face a
low marginal cost in supplying its customer with a UCLL-based, as compared with a fibre
bitstream product. It will therefore have an incentive to keep the customer on the copper
connection, rather than promote a switch to fibre. This aim can be achieved by cutting
prices selectively to potential switchers, or simply by not promoting fibre.
The presence of a large number of unbundled customers will create a stronger constituency
of access-based retail service providers which will vigorously oppose switching off the
copper network and delay the efficiency gains associated with that outcome. The risk is
particularly great when Telecom itself become eligible to unbundle after 2014.
This underlines the importance of a regulatory commitment to allow the closure of the
copper network, possibly after a specified notice period. 16 Absent such an explicit
announcement, unbundlers may seek to rely upon a legitimate expectation of continuing
service.
Allocative efficiency
The logic in general of access prices which reflect forward looking costs is that they allow
cost recovery by an efficient access provider, are competitively neutral across access
seekers, and (to the extent feasible under the prevailing cost conditions) lead to allocatively
efficient end user prices. 17
As forward-looking prices, they are usually based upon the proposition that existing assets
will be (or would be) replaced by similar assets (that is, a copper-based loop). But that
necessary foundation for TSLRIC access pricing does not hold in light of the contractual
implementation of fibre roll-out in New Zealand. It is likely that suppliers and customers in
15
See TelstraClear Ltd, Submission to the Commerce Commission on The Revised Draft Determination on the
Benchmarking Review for the Unbundled Copper Local Loop Service, 1 June 2012, which states at para. 9 that:
“UCLL is also likely to form an important “bridging” role between allowing customers to experience higher
speed and capability copper based products in this interim period while fibre becomes available.”
16
The European Commission recommends a notice period for copper switch off of five years, or less if
equivalent access is provided. See European Commission, Recommendation of 20 September 2010 on
regulated access to Next Generation Access Networks (NGA) 2010/572/EU), para. 39.
17
See Mark Armstrong, ‘The theory of access pricing and interconnection’, in M Cave et al. (eds.) Handbook of
Telecommunications Economics, Vol. 1 Elsevier, 2002, p. 334.
11
the market place have adjusted their expectations to take account of fibre as the technology
of the future. If this is the case, then the whole justification for pricing UCLL at the TSLRIC of
a copper-based loop is undermined.
In normal conditions, where incentive regulation has promoted productive efficiency and
where innovation is incremental in nature, it makes sense to focus access pricing on the
attainment of allocative efficiency. In present circumstances, however, there is no clear
characterisation of an allocatively efficient price, and the clear risk of deficits in productive
and dynamic efficiency.
An alternative approach is for the Commerce Commission to take full account of all the
dimensions of economic efficiency. These include the productive efficiency gains associated
with bringing forward copper shut down where the copper and fibre networks are coowned. A second major consideration, both in Area A and in Area B where copper and fibre
compete, is the impact, discussed below, of a reduced copper price on the risks borne by
fibre investors. This approach requires a difficult balancing act by the regulator – but one
which seems unavoidable. 18
Dynamic efficiency
The procedures for establishing which conditions support dynamic efficiency, let alone the
degree to which they do so, are subject to less agreement than those relating to productive
and allocative efficiency. Yet the New Zealand legislation explicitly requires that
consideration be given encouraging investment in new services.
Fibre-based high speed broadband falls naturally into this class. Moreover, since broadband
is often regarded as a ‘general purpose technology,’ the possibility that the benefits of high
speed broadband might penetrate into all aspects of the New Zealand economy cannot be
disregarded, however difficult it may now be to quantify. If such evidence is accepted, it
would be appropriate to give retail service providers an incentive to invest in and retail
18
Thus I do not agree with Vodafone’s Submission on the revised draft determination on the benchmarking
review for the unbundled copper local loop service (UCLL), 1 June 2012, where it states (para. 13, page 8), that
the benchmark prices which the Commission has chosen have already given full weight to economic efficiency
issues. In my view, those prices are not calculated to take into account the full range of relevant efficiencies
considered in this section.
12
customers an incentive to purchase new fibre services, as opposed to ‘current generation’
copper services.
As far as dynamic efficiency and incentives to innovate are concerned, the Commerce
Commission seems to face conflicting pressure in making its draft decision to cut copper
prices. Doing so is likely to cut the retail price to end users of current generation broadband
users, but it seems inescapable that it will weaken the prospects for and augment the risks
assumed by fibre operators which are “investors in new telecommunications services that
involve considerable capital investment and that offer capabilities not available from
established services.”19
In Area B, where LFCs compete with Chorus’s copper network, the pricing outcome will
depend upon a combination of regulation and competition. The competitive edge would
generally rest with the copper network, where the assets are sunk and have a finite
remaining life, but one which is capable of being extended both by continuing
developments in copper’s capabilities and by a regulator-determined cut in prices. I
understand that Chorus has a policy of not pricing unbundled loops below the regulated
price. If that price fell by 19%, as is proposed, Chorus would be forced to cut its price. If it
did so, the position of the competing LFC would be weakened, whether it maintained its
own prices or matched the copper price cut. Given that the competition for contracts was
fairly intensive, there is unlikely to be much slack in their budgets. 20
I am aware that it has been suggested that it is a tenet of the ‘ladder of investment’21
approach to broadband regulation to encourage access seekers to maximise their
infrastructure investments, in the interests of more intense competition and a greater
degree of product differentiation.22 However, ladder-based policy implications have to be
19
Telecommunications Act 2001. 18 [2A].
For evidence that the tender process was robust and competitive, see Chorus, Submission in response to the
Revised Draft Determination on the benchmarking review for the Unbundled Copper Local Loop, June 1, 2012,
Appendix B, paras. 85-87.
20
21
See M Bourreau et al. ‘A critical review of the “ladder of investment” approach’, Telecommunications Policy
34 (2010), pp. 683-696.
22
According to TelstraClear Limited, 1 June 2012, Submission to the Commerce Commission on The Revised
Draft Determination on the Benchmarking Review for the Unbundled Copper Local Loop Service, paras 51-52,
prices for UCLL and UBA should be configured to encourage take-up of the former: “The regulatory “design
principles” are clear here – a UCLL price lower than UBA encourages facility-based competition as Access
13
amended when the copper ladder is first put side-by-side with, and then replaced, by a fibre
ladder, which is likely to have a different configuration, given the much greater transmission
limits of fibre than of copper, and hence different rungs.23 The introduction of the possibility
of horizontal as well as vertical movement on the ladder changes things. Given that the fibre
access point in New Zealand is likely to be a bitstream product,24 it is unlikely that New
Zealand end users will be benefitted by encouraging investment which first takes the retail
service provider very close to the customer and then back again. This ‘Grand Old Duke of
York’25 strategy is likely to raise costs, if it leads to the premature scrapping of equipment,
or to defer the use of fibre, if it postpones the date for switching off the copper network. It
is not to be recommended.
Summary on the efficiency effects of a reduction in copper loop prices
As far as productive efficiency is concerned, the biggest win available from copper pricing
seems to be associated with the speedy shut down of the copper network in Area A. A fall in
copper prices is likely to delay this. In Area B, competition may lead to greater pressure on
the competing operators to search for efficiency, so that the benefits of a copper shut down
are balanced against the benefits of extended rivalry.
Establishing allocatively efficient prices is difficult, if it is accepted that pricing UCLL at the
TSLRIC of a copper-based loop is now anachronistic.
As far as dynamic efficiency is concerned, it is hard to see how a cut in the price of UCLL will
not slow down the take up of fibre and damage the prospects of the local fibre companies,
including both Chorus and the local fibre companies which compete with Chorus.
It seems inescapable that the Commerce Commission balance these different dimensions.
Seekers climb higher up the ladder of investment. Our proposal enhances the build/buy decision by further
incentivising Access Seekers to unbundle rather than simply take UBA.”
23
For more detail, see M Cave, ‘Snakes and ladders: unbundling in a next generation world,’
Telecommunications Policy, 34 (2010), pp 83-84.
24
The principal access method for the UFB network will be bitstream until at least 2020, and Chorus is not
obliged to offer unbundled point to multipoint services on the UFB network before that year.
25
According to the rhyme, the Duke (probably Prince Frederick, Duke of York and Albany) ‘had 10, 000 men; he
marched them up to the top of the hill, then he marched them down again.’ This manoeuvre was conducted
just before the defeat of the British Army in the Battle of Tourcoing in 1794.
14
Section 4: Conclusion
This paper is a contribution to the thorny subject of how to price copper wholesale services
(UCLL and bitstream) in the transition to fibre. It takes it as given that the regulator (the
Commerce Commission) has a duty to promote efficiency and to maintain incentives on
networks to innovate and invest. In present circumstances, a major form of investment is in
ultra high speed fibre networks.
In New Zealand, the roll out plan and wholesale prices of fibre network operators have been
resolved contractually. However, the pricing of copper continues to be done in the
regulatory sphere. In the past, this has relied upon benchmarking price emerging in
countries whose regulators employ a forward-looking method to set copper access prices.
It has been argued above that it is inappropriate or even illogical to set copper access prices
(or in this instance to lower them) on the basis of the costs of replacing the existing copper
network, when it is foreseeable that the copper network will itself be superseded by a fibre
network. It does not promote productive efficiency when that goal is best served by limiting
the period of dual operation of parallel networks in the same ownership; it does not
promote allocative efficiency when there is no need for substantial further investment in
copper, and hence copper’s opportunity cost is no longer its replacement cost. And lowering
copper prices fails to promote dynamic efficiency and maintain incentives to invest and
innovate, since it impedes migration to fibre and puts additional pressure on local fibre
companies.
In my opinion, the Commission should seek to balance the effects of reducing the price of
copper on the above-noted three dimensions of efficiency. I also believe that if it does so, it
is likely that a cut of the magnitude proposed would not seem to be the preferred outcome.
MARTIN CAVE
13 June 2012
15
Annex
Curriculum vitae of
Professor Martin Cave, B.A., BPhil, DPhil, OBE
Date of birth : 13 December 1948
Education
BA, First Class, Philosophy, Politics and Economics, Balliol College, University of Oxford, 1969
BPhil in Economics, Nuffield College, University of Oxford, 1971
DPhil, Nuffield College, University of Oxford, 1977
Principal Academic Employment to Date
1974 to 1989
Lecturer, Senior Lecturer and Professor of Economics, Brunel University.
1989 to 2001 Dean of the Faculty of Social Sciences, Pro-Vice Chancellor and Vice-Principal
(Deputy Vice Chancellor), Brunel University.
2001 to 2010
Professor and Director, Centre for Management under Regulation, Warwick Business
School, University of Warwick
2010 to 2011 BP Centennial Professor, London School of Economics and Political Science
2011 - 2013 Visiting Professor, Tanaka Business School, Imperial College, London.
Principal UK Public Sector Advisory and Other Activities
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Deputy Chair, Competition Commission, January 2012 - 2014
Appointed by the Secretary of State for Transport to chair an expert panel on airport
regulation, 2008-9
Appointed by the Chancellor of the Exchequer and Secretary of State for the Environment,
Farming and Rural Affairs to review competition and innovation in the water sector, 2008-9
Regulatory adviser to Hooper review of Royal Mail, 2008
Member, UK Payments Council, 2006-2011; Acting Chair, Nov 2009-April 2010.
Appointed by Secretary of State for Communities and Local Government to undertake an
independent review of the regulation of social housing, 2006-7.
Appointed special adviser to European Commissioner Reding on the reform of European
telecommunications regulation, 2006.
Appointed by Chancellor of Exchequer to conduct an independent audit of major spectrum
holdings, December 2004 - November 2005.
Adviser to Lord Chancellor’s Department on reforms in legal regulation 2004-5.
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Economic Advisor to OFCOM, 2003 to 2006.
Non-Executive Advisory Director at OFWAT, 2001 - 2005.
Appointed by Chancellor of the Exchequer and the Secretary of State for Trade and
Industry to undertake an independent review of spectrum management, 2001 / 2002.
Member, MMC/Competition Commission, 1996-2002.
Economic Adviser, part-time, at HM Treasury, 1986-90.
Selected Recent Publications
Recent books and reports
(with R. Baldwin and M. Lodge) Understanding Regulation, Oxford University Press, 2nd edition,
2011.
(edited with R Baldwin and M Lodge) Oxford Handbook on Regulation, Oxford University Press,
2010.
Independent Review of Competition and Innovation in the England & Wales Water Industry, 2009.
(with C. Doyle and W. Webb) Essentials of Modern Spectrum Management, Cambridge University
Press, 2007.
(edited with S Majumdar and I Vogelsang) Handbook of Telecommunications Economics, vols. 1 and
2, Elsevier, 2002 and 2005.
Recent articles and chapters in books
‘The price of copper and the transition to fibre’ Communications & Strategies, No 85, 2012.
(with Janet Wright) ‘Benefitting business without harming households: the impact on consumers of
upstream market reforms in the water sector’, Utilities Law Review, 19 (2) 2012, pp. 43-50
(with William Webb) ‘The unfinished history of usage rights for spectrum’, Telecommunications
Policy, 36 (2012) pp.293-300.
‘Policy and regulation for next generation networks’, in G R Faulhaber et al. Regulation and the
Performance of Communication and Information Networks, Edward Elgar, 2012, pp.115-139.
(with Peter Crowther) ‘Regulating access to content in the European Union’, Journal of Law and
Economic Regulation, 4 (1), 2011, pp 133-150.
(with Pietro Crocioni) ‘Net neutrality in Europe’, Communications and Convergence Review, 2011,
pp. 57-71.
(with Tony Shortall) ‘The extended gestation and birth of the European Commission’s
Recommendation on the regulation of fibre networks’, INFO, 2011,13 (5) pp. 3-18.
(with Matthew Corkery) ‘Regulation and barriers to trade in telecommunications services in the
European Union’, in V Ghosal (ed), Reforming Rules and Regulations: Laws, Institutions and
Implementation, MIT Press 2011, pp. 195-214.
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(with Ian Martin) “Motives and means for public investment in nationwide next generation
networks” Telecommunications policy, 34 (2010) pp 505-512.
“Anti-competitive behaviour in spectrum markets: analysis and response” Telecommunications
Policy , 34 (2010) 251-261.
‘Snakes and ladders: unbundling in a next generation world’ Telecommunications Policy, 2010 pp 8186.
‘Transforming telecommunications technologies: policy and regulation’ Oxford Review of Economic
Policy, 2009 (4) pp 488-505.
‘La regolamentazione delle reti di nuova generazione’, mercato concorrenza regole, (3) 2009, pp543558.
(with Jos Huigen) “Regulation and the promotion of investment in next generation networks- a
European dilemma” Telecommunications Policy, Vol 28, no11, 2008, pp713-721.
‘Market-based methods of spectrum management in the UK and the European Union,’
Telecommunications Journal of Australia, November 2007, Vol 58, No 2-3, pp 24.1-24.11
‘Encouraging infrastructure competition via the ladder of investment,’ Telecommunications Policy,
April 2006, pp 223-237.
‘Six degrees of separation: operational separation as a remedy in European telecommunications
regulation’, Communications and Strategies, No. 3, 2006
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