Opinion: Telco regulation - where to next?

InternetNZ considers the government's review of telecommunications regulation

Telecommunications is one of the more competitive industries in New Zealand.

In this environment there is huge technology change going on. Bold policies adopted by the Government following the 2008 election are pushing out fibre broadband in the cities, alongside faster copper and improved wireless broadband in rural areas. The government is a funder and investor of much of this change, partnering with private companies following a competitive tendering process.

Until this month, the basic framework of a competitive industry with underpinning regulation to promote competition was taken by most players as a given. The transition from today’s copper to tomorrow’s fibre broadband, rolling out over a decade, was to play out with fibre wholesale prices agreed by contract (and probably set below cost), and copper wholesale prices determined by the cost of provision. Migration would, in the main, be driven by fibre’s better performance.

Chorus is a leading partner for government in rolling out fibre. It received the use of almost $1billion of taxpayer money in 2011 to contribute to the costs of the rollout. It separated from the old Telecom under a negotiated package that saw the most recent major re-write of telco law in New Zealand happen in 2011.

The 2011 rewrite said no retailer would pay more for wholesale copper broadband services than what it costs to provide them. This was a change from earlier approaches that let Telecom earn big profits on wholesale copper broadband. Fibre prices, as mentioned, were agreed by contracts between Crown Fibre and the fibre providers. This change meant lower costs for copper – everybody including Chorus knew that. The changes to the law that allowed for this were known before Chorus signed up to build fibre broadband.

Last December, in an extraordinary few days, the Commerce Commission released its first draft of the new price for wholesale copper broadband that would apply from the end of 2014. Chorus declared itself shocked by the draft price. It said it would cost it $160 million a year once fully implemented (in the context of on-going dividends exceeding that amount) and Chorus and the Prime Minister said the price could put the fibre rollout at risk. It’s hard to credit Chorus with failing to model the likely copper broadband prices that a cost-based formula would deliver – or that they didn’t take the range into account when they signed up for UFB – but that seems to be where we are.

Fast forward to February. Submissions were due. Another few extraordinary days followed. Chorus said the whole of the telco policy regime needed to be looked at, to guarantee fibre’s future. Amy Adams, the communications minister, announced she would bring forward two reviews of telco policy – one focused on the TSO, the other focused on the whole telecommunications regulatory framework. She also said the government would legislate so that whatever price the Commission ended up setting for wholesale copper broadband, it wouldn’t come into effect until November 2015 – eleven months later than today’s law requires.

Both Chorus and the Minister said that these reviews would increase certainty for investors. It’s difficult to see how a review increases certainty for anyone – at least in the short term.

What’s done is done, as they say. A broad review of the whole telco framework is nonetheless on the cards. Here are some initial suggestions as to how it can best work to minimise the uncertainty now created, and to support better broadband services for New Zealanders:

1. Make sure the whole review is open and transparent, so everyone knows what’s happening.

2. Focus some attention on assessing Chorus’s claims that the Ultra Fast Broadband scheme is threatened. Run a ruler over their numbers. Find out why they signed up to an agreement that only 18 months later they now claim is unworkable.

3. Encourage the Commission to complete its copper (UBA) price determination as quickly as it can, so that the initial price is known rather than just the draft.

4. If the Commission keeps the price as is, and if running the ruler over Chorus’s numbers shows they are right in identifying a problem, be open-minded about what the solutions might be. Don’t prejudge the outcome in other words.

5. Do nothing to encourage suspicion that the government wants to second guess the Commission. Viable competition needs a strong independent regulator.

6. Keep to the principle that competition drives investment. Don’t fall for special pleading that the relationship is reversed. Maintain a neutral framework for regulation too – don’t break the framework to specifically favour fibre.

7. Consider earlier work by the Commission that video content is a key driver for UFB uptake. The economic boost promised by fibre can’t happen until most households have it. If more access to video is needed, include that as part of the policy review.

These are starters for ten. We welcome feedback about about InternetNZ’s approach. Telco is vital to the future of the internet – and above all, New Zealand needs a workable approach to building the next generation of broadband infrastructure.

With a review under way, everyone needs to help get an outcome that works.

Carter is Chief Executive (Acting) and Chalmers is Policy Lead at InternetNZ.

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