Copper local loop prices for ISPs are increasing by 26.5% overnight! ($23.52 to $29.75). This is going to be a real kick in the guts for service providers who have invested millions of dollars in copper local loop unbundling.

The Commission’s task was to set prices which promote competition for the long-term benefit of end-users, while balancing the need to promote investment in infrastructure. This change fails on all three accounts: it will push up the costs to consumers, undermine incentives for infrastructure investment and penalise competitors who invested in deploying their own telecommunications infrastructure. It essentially knocks out the middle rungs on the Ladder of Investment philosophy promoted by the Commerce Commission for many years.

Chorus’s competitors will be under a real price squeeze as their copper costs skyrocket and Chorus use the extra cash to subsidise its own fibre network build. Many ISPs already operate on slim margins and this is likely to send many ISPs to the wall. There are not that many ISPs (or businesses in general) that could survive a 26.5% overnight increase in costs to their business. It’s not as simple as just putting the price to consumers up either. Prices for Chorus fibre network services essentially put a cap on what ISPs can sell an often slower copper based service for.

The ComCom argues that they needed to increase the copper cost from the draft price because of the amount of trenching required to physically lay the network. But these are not real world costs, or even theoretical copper network costs. They are hypothetical costs of building an efficient modern day fibre network replacement. This is the basis of the TSLRIC pricing model used.

The Comcom admits that this is the most complex and extensive economic model the Commission has ever been tasked with creating. There are so many variables that could be tweaked, so many levers to adjust that can have a major overall effect on the modelled output price. For example, if they were thinking like an efficient competitor building a network would think, they could have changed the ratio of overhead to underground connections to reduce trenching costs.

Or, they could have also just as easily chosen a 3G/4G mobile network model, or a heterogeneous network like the real world NBN that the Australians are building as the basis of “efficient modern day copper network replacements”. These would have provided several other (most likely lower) “cost based” prices that would have been just as valid.

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