Local Fibre Companies, (LFCs) the public/private partnerships that will be set up to manage the $1.5 billion fibre broadband roll out, will enjoy a 10-year regulatory holiday to get their product pricing in order under the ultra-fast broadband initiative.
The government signalled earlier this month that the invitation to participate in the partner selection process has been amended, so that the Commerce Commission couldn't recommend regulation of fibre services immediately. Now the full extent of the changes have been revealed in documents posted to the Ministry of Economic Development's website.
IDC market analyst Rosemary Spragg says the changes are aimed at driving uptake by retail providers such as telcos. “Ten years without regulation gives certainty to investors. That should bolster the investment case. The industry would like an even longer period,” she says.
Fibre prices will be set by commercial contract to be negotiated with Crown Fibre Holdings (CFH), the entity set up to evaluate the 33 bids from 18 companies vieing to partner with the government on the network. These include national proposals by Telecom and Axia NetMedia and regional proposals under a loose alliance known as the New Zealand Regional Fibre Group.
Spragg says the underlying assumption of the amendments seems to be that copper will act as a competitive restraint. “Mandating that LFCs also provide layer 2 services again bolsters the business case,” she says. “The LFCs can offer a much wider range of services. It boils down to very limited government funding. They can’t go it alone. They have to accommodate the business interests.”
The amendments were driven by analysis of proposals and discussions with bidders, service providers and other industry stakeholders. CFH identified several challenges associated with the current model.
These included: the limited ability for the LFCs to offer differentiated products and to meet the requirements of a range of service providers; the cost and complexity in the model that were unnecessary for the early growth years of the LFC business; the potential for competition bottlenecks to emerge in layer 2 and in downstream retail market; and the need for greater regulatory certainty on fibre pricing.
By revising the ITP model, CFH believes the government’s target of 75 percent connection for business and residential premises in 10 years can be achieved.
The government has agreed to the following amendments to the business model for LFCs.
* The LFC must provide layer 2 services across all parts of the network as well as certain layer 1 services (point to point) that are particularly suitable for business customers, but which will be provided to any end user seeking premium quality services.
* For an initial period till December 31, 2019, it will not be mandatory for LFCs to provide unbundled access to ‘point to multipoint’ layer 1 services, though these services must be provided from that date forward. The LFC may provide unbundled services, but it is not mandatory.
* Before 2019, LFCs have to supply all of their services to a ‘non-discrimination’ open access standard. After that date, they will be required to supply their layer 1 services to an ‘equivalence of inputs’ standard.
* From the beginning of operations, LFCs must deploy network capability to support ‘equivalence of inputs’ from December 31, 2019 by ensuring there is sufficient space in ducts (and/or additional dark fibres) to accommodate additional access seekers; ensuring the LFCs’ operational support systems/business support systems and capable of providing ‘equivalence of inputs.
The final detailed requirements will be included in a Deed of Undertaking by the LFC, which will be enforced by the Commerce Commission.
Spragg says ‘equivalence of input’ appears to be about limiting the ability of each LFC to discriminate in favour of itself. Non-discrimination prevents LFCs discriminating between access seekers.
“If an LFC had to self-consume, it would have to price layer 1 very cheaply. If dark fibre thus became very cheap it would attract other contenders, such as telcos, to come in, then offer cheaper layer 2 services.”
The Telecommunications Act 2001 will be amended to provide that prices for LFCs’ fibre access services will be set through commercial negotiations and the Commerce Commission's ability to recommend price and non-price regulation won’t apply until 2020 at the earliest.
ICT Minister Steven Joyce told an industry conference last month he expects to announce the successful bidders in October.