Cross Submission on the Telecommunications Act Implementation ReviewMarch 2005
March 2005.
The Internet Society of New Zealand Inc (known as InternetNZ)
Cross-Submission in relation to the Ministry of Economic Development Discussion Paper: "Implementation Review of the Telecommunications Act 2001".
INDEX
1 Introduction
2 Reference Offers
3 Undertakings
4 Disclosure of Information
5 Monitoring
6 Effective Date of Pricing Review Determination, and Sunset Provisions
7 Amendment of Section 22(a): Restriction on Application for a Determination when a Seeker has an Agreement for the Supply of the Service
8 Difficulties Around Commercial Negotiations
9 Application of SAPs from the outset, and other backdated incentives
10 Technology Neutrality
11 Commission’s power to instigate determinations
12 Compulsory mediation
13 TSO: Introduction
14 "Liable Person" Definition
15 Net Revenue or Retail Revenue Model?
1.1 There is a great deal at stake on this review in view of the impact of the telecommunications sector, and its regulation, on the economy. Some quibble with the detail and statistics around reports and data such as that referred to at paras 17 and 20 of the TelstraClear Submissions, and paras 1-6 and 64-67 of the TUANZ Submissions. However, even if the impact of a fully functioning telecommunications market (including broadband) is considerably less than those reports indicate, the impact on the economy is still highly material to GDP (and thus to section 18 outcomes).
1.2 Against this background, as TUANZ and others identify, it is greatly regrettable that:
1.2.1 the current review is limited to implementation issues; and
1.2.2 in particular, those with commercial interests to protect, push for a limited approach to this review, including a limited interpretation of its scope.
1.3 The review should not be unnecessarily rigid and limited. It should seek to achieve strong section 18 outcomes. The review process should be extended to address wider issues, including those identified by submitters (and most submitters have in fact identified additional areas even where an incumbent benefiting from the regime (eg: Telecom and Vodafone) maintain that the review should be narrowly ring-fenced).
1.4 Some submitters maintain that any change must be supported by evidence. However, submitters generally face the difficulty of providing clear evidence, in part for the very reasons the review is taking place, namely, limited availability of Access Provider’s information and limited monitoring by the Commissioner. Further, there is difficulty in distilling some issues into clear empirical evidence given, for example, the complexities, and that all relevant information is not available to those that are submitting. For example, negotiations with Telecom generally take place with the Access Seeker having signed a non-disclosure agreement. Additionally, some issues are not capable of distillation into quantitative empirical evidence, yet change as a matter of policy remains appropriate. Lack of clear cut, “empirical” evidence should not stop desirable change taking place, particularly where the benefits of change are self-evident.
1.5 InternetNZ considers that the Commerce Commission Submissions in particular makes responsible and balanced points and suggestions for change. InternetNZ endorses most of the recommendations that are made.1
1.6 The Commerce Commission note, at paras 7 and 8 of their Submission, the trend towards new technologies (such as IP). This gives "… rise to new access scenarios less well served by application of the current framework". Paragraph 8 notes a trend away from bilateral determinations (which of course are predominantly TelstraClear- Telecom determinations) to multi-lateral scenarios. This key feature (migration to a multi-lateral environment) affects the wider internet community, including section 18 stakeholders.
1.7 In this respect, the major industry participants say that the Commissioner should not be able to instigate a determination for a designated multi-network service, as this is in practice not necessary. InternetNZ agrees with the Commerce Commission that multi-lateral determinations, including as to designated multinetwork services, will be a key feature going forward, and that this should drive change in the legislation. There has been many years’ delay in resolution of local number portability and there remains an apparent lack of impetus in this area, which has all the signs of continuing (despite TCF involvement). This demonstrates the need for appropriate legislative incentives and controls in such areas.
1 The main exception is the proposed establishment of an industry funded complaints resolution facilitator. InternetNZ, for the reasons outlined in its own submissions, considers this is not appropriate, in line with the views of the majority of other submitters. In any event, TCF is to develop a code, and this should be given a chance to work before there is legislative change in this area.
1.8 An example of why multi-lateral issues remain relevant is the recent departure of Telecom and TelstraClear from existing peering arrangements with ISPs, and the prospect that this and the internet transit arrangements and agreements between (a) TelstraClear and/or Telecom; and (b) ISPs, could one way or another become the subject of a multi-lateral determination. This has happened in Australia, where the ACCC is in the process of a review (and there are overlapping reasons why it might happen here). We return to this topic below.
2.1 In its Submissions, InternetNZ highlighted the importance of, to achieve section 18 goals:
2.1.1 facilitating greater and cost-effective access to the Commission’s processes; and
2.1.2 legislative change to at least ameliorate the “take it or leave it” problem that Access Seekers (particularly smaller Access Seekers) face when dealing with Access Providers (recognising that no solution is perfect).
2.2 The recognition by the Commerce Commission that bilateral resolution of issues is not optimal (and that this is increasingly the case, with multi-laterals assuming greater significance), points to the Reference Offer option, as a cost effective mechanism. This also helps address imbalance (see for example Commerce Commission Submissions paras 11-12, 20 and 26).
2.3 Telecom says that this adds another (and unnecessary) layer to the regulatory process, it leads to greater regulation, and moves away from a “primacy of commercial resolution” model, with no particular problem identified.
2.4 The problems of imbalance, the need for multi-lateral resolution, etc, are noted by the Commerce Commission. The benefits of Reference Offers (and their possible structures) are noted elsewhere, including by TelstraClear and InternetNZ.
2.5 InternetNZ considers that Reference Offers will in fact reinforce the primacy of commercial negotiation rather than lead to additional regulatory activity overall. The Reference Offer is another incentive on the Access Provider and the process for all parties to resolve matters commercially. It can be expected, particularly over time, that the content of Reference Offers will be largely resolved commercially. It is a mechanism to redress imbalances and thereby better achieve section 18 outcomes: smaller players are better able to participate. As now, the parties will assess their options at each stage (eg: whether it is better to agree issues or go to the regulator). The Reference Offer allows this to happen earlier.
2.6 TelstraClear’s application for a determination as to UBS, and its focus on the detailed terms of the UBS service, telegraphs a move towards parties increasingly having to resolve details such as this, rather than high level principles. Reference offers fit well with this move. Contrary to Telecom’s approach, the fact that a standard Reference Offer is available earlier in the process allows focus on resolution of key issues, the detail having been resolved earlier, and this should speed up and improve resolution overall.
2.7 One way or another, the regulatory process needs to have a way of resolving detailed terms of supply (akin to TelstraClear’s UBS application noted above). The benefits of the Reference Offer significantly outweigh the disadvantages. The primacy of commercial negotiation remains and indeed is enhanced.
3.1 Having considered the various submissions for and against allowing undertakings (and in turn whether an undertaking regime should be legislated), InternetNZ agrees with the Commerce Commission conclusions (paras 46-48). There is currently a legislative basis for undertakings. To further regulate this could be counter-productive. However, it is particularly important to have legislative clarity to ensure that the Commission can reopen matters if, for example, the undertaking is not met, there is some relevant change, etc. MED will be aware of Access Seekers’ concerns around the handling of undertakings last year. InternetNZ considers that it is very important for there to be a clear path (whether by an enforcement mechanism and/or by a straightforward and quick ability to bring the matter back before the Commission) to enable problems with undertakings to be sorted quickly and effectively. If that cannot happen, undertakings should not be permitted as part of the regime.
3.2 The Commission is subject to judicial review, and therefore any failure to adequately consult in relation to undertakings is reviewable. Whether or not justified, there are the concerns that have been expressed about whether the Commission has adequately consulted in the past in relation to undertakings: while this is a matter for the Commission, clearly there needs to be adequate consultation before accepting something as significant as an undertaking (because of the impact an undertaking may have on multiple parties), and failure to do so is reviewable.
4.1 Having transparency and sufficient information is fundamental to achievement of section 18 outcomes. In the absence of adequate information, an Access Seeker can be hampered in making an application (and TelstraClear identify their concerns in this regard). In addition to the desirability of having sufficient information for applications themselves, this is essential also for adequate monitoring going forward (which InternetNZ (and for example, TUANZ) considers is pivotal to the success of the overall telecommunications regime). We expand on this below when dealing with monitoring. But we note here that any solution as to information provision should accommodate availability of information for the purposes of monitoring.
4.2 The Commission’s Submissions (paras 49-51) focus on confidentiality aspects. We consider that is not the correct primary focus. The primary focus instead should be on appropriate availability of the information, so as to have sufficient transparency, and thereby meet section 18 outcomes. Underneath that primary focus is the Commission’s point: availability of the information to whom and in what form (whether available at all, to the Commission only, to other parties that have signed an NDA, or the general public etc). Those confidentiality issues can be accommodated either within new legislation or, more likely, by Commission resolution as to confidentiality, as is happening at present with the Commission’s current enquiry into confidentiality.
4.3 The Commission’s current powers to obtain information are inadequate. There is a simple and readily available solution, which facilitates the interest of all parties (including Access Providers’ concerns around disclosure of excessive information). That is the information disclosure regime for the electricity industry in Subpart 3, Part IVA of the Commerce Act 1986. The electricity sector, being a network industry, of course raises similar issues. It is difficult to see why one network industry would have a significantly more comprehensive regime and another would not.
5.1 InternetNZ sees adequate monitoring as pivotal in the development of a properly competitive telecommunications market under the Act (this being the monitoring of items such as the provision of services to meet SAPs, review of Access Providers’ performance in respect of its own retail channels, performance of service level metrics, etc). Telecom correctly points out the reality that this should be a focus for the parties themselves, rather than the Commission. But that does not mean that the Commission does not have a role here.
5.2 Indeed, in undertaking monitoring, the Commission will be heavily dependent upon the parties (seekers and providers) in providing information to it. However, while the position will remain that it will be largely up to the parties to monitor, there are aspects where it is difficult to do so without a centralised mechanism via the Commission (for example the difficulty or inability of parties to combine information, and the difficulty for parties in getting sufficient information from another party, which can be achieved instead by the Commission itself). Current levels of monitoring by the Commission are very low compared to what is optimal. InternetNZ recognises that resourcing is a problem and further responsibilities on the Commission will take the focus away from other matters such as determinations. However, monitoring is such an important facet to achieve section 18 outcomes, that those problems should be resolved and legislation should clearly mandate and encourage monitoring, leaving the discretion as to approach, what is monitored, etc, to the Commission.
5.3 One significant advantage of an enhanced monitoring regime is that the Commission will be more able to get information to make and implement better decisions. The ACCC uses its monitoring powers to assist it with its decision making, for example. This is a particularly powerful way in which the interests of the ultimate beneficiaries (the end users of telecommunications services) can be met better. It is difficult for smaller Access Seekers to become actively involved in respect of monitoring, and again enhanced monitoring powers for the Commission provides a useful mechanism to promote greater monitoring by smaller players.
5.4 Whether directly between the parties or via the Commission, the parties will still remain actively involved in the monitoring process. Organisations such as InternetNZ can fulfil a useful role in this regard (such as by way of co-ordination of provision of information to the Commission).
5.5 There is one significant issue both in the discussion paper and in the submissions (particularly Telecom at para 48) which, in InternetNZ’s view, clouds and confuses matters. The monitoring regime is linked in that material closely with enforcement rights, including the concept that the Commission might be able to enforce instead of (or as well as) the High Court.
5.6 InternetNZ considers that it is particularly important to treat these two issues (monitoring and enforcement) separately. While monitoring can obviously provide a platform (whether directly or indirectly) for enforcement, there is also an appropriate role for monitoring in a way which is not closely entangled with the enforcement function. Information produced from monitoring may ultimately lead to decisions and/or a regime which can support enforcement but the two are not inextricably and necessarily linked. A recent internet related example is the monitoring of internet peering/transit in the current ACCC investigation of internet peering and transit services in Australia. There, monitoring and information gathering took place to facilitate getting better information to enhance ACCC decisionmaking (ie: not for enforcement).
5.7 In short, enforcement should be addressed as a separate topic.
6 Effective Date of Pricing Review Determination, and Sunset Provisions
6.1 InternetNZ had initial reservations (for a number of reasons) around retrospectivity to the degree sought byTelstraClear, and the dates upon which determinations expire. However, having now reviewed the submissions on these points, InternetNZ considers the problems identified in those submissions, and the solutions, are compelling and legislative change as proposed by TelstraClear is appropriate. While one of those issues is currently before the High Court, it should be resolved by legislation to clarify the matter (unless of course the Court has confirmed retrospectivity in the meantime).
7 Amendment of Section 22(a): Restriction on Application for a Determination when a Seeker has an Agreement for the Supply of the Service
7.1 The two major incumbents (Vodafone and Telecom) oppose change, with Telecom for example noting that any change upsets the balance of the regime overall (with its focus on the primacy of commercial negotiation ahead of regulation).
7.2 InternetNZ recognises the validity of this point but also notes that no solution in this area is perfect including section 22(a): the regime is not functioning well at all as a result of s22(a) and there should be change.
7.3 In any event, the transition away from bilateral to multilateral resolution signalled by the Commerce Commission indicates that the appropriateness of section 22(a) is greatly reduced.
7.4 In its submissions, Telecom has used the commercial introduction of UBS as an example of where commercial negotiations within a regulatory context are working well. TelstraClear (having taken the track of seeking a determination rather than agreeing commercial terms, as other ISPs have done) disagrees strongly. Because of section 22(a) TelstraClear faced the choice of going with a less satisfactory commercial offering. It must consider that the commercial offering is less satisfactory than a likely regulated outcome (or a negotiated outcome in the context of an application for determination). This implies of course that the commercial UBS offering from Telecom falls well short of that which the regulation obliges and what can be expected to be achieved in a determination context, given, as we note elsewhere, there is no advantage in an Access Seeker gaming delaying resolution of issues. TelstraClear is losing a great deal by standing by, and watching its competitors (Xtra and other ISPs) get first mover advantage of as much as a year or two. It must have concluded therefore that the commercial offering is well short of what the regulation requires and a regulator would determine. It is not appropriate that Access Seekers should be penalised for seeking intervention by the Commission with respect to terms that are inconsistent with the Act. Removal of section 22(a) would address this problem.
7.5 Other ISPs on the other hand have signed up to the commercial terms. Anecdotally, there is dismay at Telecom’s suggestion that this reflects healthy commercial negotiations in play. Those ISPs consider they faced a take it or leave it situation. The cost and delays in the current regulatory model in themselves rule out an approach by them, as taken by TelstraClear (applying for a determination rather than agreeing commercial terms). Additionally, they consider that they had no choice but to take the terms as offered to reduce Telecom’s first mover advantage (and the first mover advantage of other ISPs that take up the offering). They consider that the “take it or leave it” terms of the offer are unsatisfactory (individual ISPs simply cannot negotiate to any significant degree with Telecom).
7.6 Having now reviewed the Telecom submissions on this point, and, in particular, as there will soon be a sufficient history of dealings between ISPs and Telecom in respect of UBS, InternetNZ intends to look at whether it is possible to obtain and provide consolidated data to MED of a more empirical nature in relation to the position that ISPs found themselves in, having taken the track of a commercial offering, in contrast with TelstraClear’s election to apply for a determination.
8 Difficulties Around Commercial Negotiations
8.1 Difficulties around commercial negotiations have been a feature of many submissions including those of InternetNZ. Vodafone has highlighted the importance that evidence should be provided to support any change to the legislation. In view of the complexity, and in view of non-disclosure agreements, it is difficult for Access Seekers to set out, in great detail, evidence underlying points made by, for example, TelstraClear, in respect of the alleged gaming of the process by which it is said that commercial negotiations are drawn out and unreasonable positions taken, leading generally to the perceived need for regulatory intervention. Having said that, one only needs to look at the result of the Commission’s determinations to date. All have resulted in regulatory intervention necessary to deliver a fair price, improved terms or simply providing access to the market for the Access Seeker. This surely is “evidence” of commercial negotiations with the Access Provider failing.
8.2 There is an important point to be made on this, which is self-evident, yet seems lost in the “noise” of some submissions. There is no reason for an Access Seeker to game the situation by creating delays and difficulties in commercial negotiations, thereby leading to the cost and delay of a regulatory application. The Access Seeker is heavily incented to quickly negotiate satisfactory terms so that it can get the service as early as possible. Until it does, it is out of the market, while others get first move advantage. Under the current regulatory model (and as a matter of pragmatic commercial sense), the Access Provider is heavily incented (particularly given the substantial sums involved) to draw out the process, to take unreasonable positions, and to then allow matters to run through a regulatory process with its inherent delays. The history reported by Access Seekers reflects this outcome. Because of the important point we make, there is a strong inference that the current regime facilitates gaming by Access Providers, not by Access Seekers.
8.3 While this is the position for major participants, it is also a very significant problem for the smaller Access Seekers who would simply be burnt off in that process. They don’t stand a chance.
8.4 We note incidentally that the application by Ihug late last year is not a particularly good example of how matters can be resolved quickly. This was an application in very short form which was resolved quickly and commercially – within the added “incentive” of a pending regulatory intervention. It dealt with a very small and specific issue which is not comparable with the position faced by a smaller Access Seeker endeavouring to pursue a determination of wider proportions (which is almost invariably the case before the Commission). Lastly ihug is likely to have determined that the more complex issues of supply and price would be settled in its favour through the TelstraClear action.
8.5 The point, as was made in the initial InternetNZ submissions, is that the review should move actively to redress the balance of power so far as possible, even if that means departure from theoretical policy-based structures. For example, it is accepted that there are policy advantages in section 22(a), and there are the issues in that regard raised by Telecom. But those are significantly outweighed by the failure of section 22(a) to function well in practice. InternetNZ considers that section 22(a) is a major barrier to fulfilment of section 18 objectives.
9 Application of SAPs from the outset, and other backdated incentives
9.1 Submitters seek regulation which has retrospective effect, such as the imposition of backdated terms. This may for example involve payment of monies by an Access Seeker (or Access Provider) in respect of services already provided, and automatic and immediate effect given to SAPs (that is, prior to a determination).
9.2 Some submitters correctly identify difficulties around retrospective imposition of terms, etc. However, in parallel with overseas regimes, the ability to do this can be given in a way which minimises or does not create unfairness. In this way a regime can meet the concerns of a provider, such as the supply of services which, when the final determination is made, proves to be unnecessary.
9.3 In this respect, there may be benefits if the Telecommunications Act adopts the approach of the Commerce Act. Under that Act, the parties generally must make an assessment in advance as to whether their activities may or may not breach the Commerce Act. If they consider there is a likelihood that, for example, a proposed merger may be in breach, they might place their proposed action before the Commission for approval, prior to actually taking the action (of merging). In contrast the Telecommunications Act generally imposes or enforces an obligation only once an action has been taken and a determination has been sought and made. There should be greater focus on a Commerce Act type of approach (with the Access Provider at risk if it breaches the “upfront” obligations) rather than an “ after the event” Telecommunications Act approach.
9.4 Take an example of this point: the submission that the SAPs for a designated service should become immediately effective (rather than await implementation via a determination). InternetNZ’s initial view was that the difficulties of such an approach were outweighed by the advantages. Having considered the various submissions (in particular the commercial and regulatory imbalance, and the considerable delays created by the current regime (including in particular the imbalance between Access Providers and Access Seekers)), we now consider that the proposed solution that SAPs have immediate effect (ie: before determination) can and should be adopted.
9.5 There is a significant point in this. An Access Provider will say (as Telecom do) that it will not know (a) the specific shape of the designated service that would be determined by the Commission (if indeed it would be determined at all), (b) to which markets the designated service would apply, etc. However, the key point is that the Access Provider (in alignment with parties entering transactions affected by the Commerce Act) can make an assessment of the likely determination by the Commission and proceed accordingly. For example the Access Provider can assess whether the market (eg; an ESA) will be one that the Commissioner will decide is to be regulated. Now the Act has been in force for several years, and many precedents are established, this can be assessed with a high enough degree of accuracy (as Telecom note in their submission). In any event, a Provider’s decision should be well within an acceptable level of commercial risk.
9.6 Far from creating greater difficulties and regulation, this is likely to drive better and quicker commercial negotiations and outcomes. The provider will face a disincentive to running through an extended negotiation/regulatory track, with the inherent problems and gaming opportunities noted above. Importantly, the market power imbalance noted by the Commerce Commission and others can be ameliorated, including in respect of smaller participants (again to the benefit of section 18 outcomes).
9.7 In parallel with adopting such a Commerce Act mechanism, it would be valuable to have a regime equivalent to the Commerce Act’s authorisation and clearance processes for mergers, etc. In this way, and in appropriate cases, one or more of the parties can seek authorisation in advance (this would encompass reference offers).
10.1 TelstraClear rightly identified in paragraph 264 of their submissions that a number of the Act’s concepts (such as PSTN and PDN) are outmoded and that this should be changed. InternetNZ agrees (and this is highlighted by the rapid transition of the telecommunications systems to IP generally). However, any change does impact on the overall structure of the Act. If MED is considering change in this area (which in our view it should), InternetNZ seeks an opportunity to make further submissions in respect of the consequential obligations of any change toward a technology neutral approach.
10.2 Of course at a technical level, there are differences (eg: there are technical issues around local-mobile-VOIP number portability). But, like the Electronic Transactions Act, the legislation can and should be technology neutral, leaving open technical solutions where possible (and disallowing them where not technically possible). The two aspects should not be confused and merged in the way put forward by Telecom.
11 Commission’s power to instigate determinations
11.1 There is no strong industry support for this, but nonetheless it remains one issue on which MED should take care to try and hear the voice of the end users (who are not making submissions), rather than running with the preponderance of views from the telecommunications providers. The world-beating delays over local number portability are self evident and in themselves demonstrate a need for the Commission to be able to instigate activity.
11.2 Contrary to submissions that have been made, there are likely to be further multi-lateral scenarios that arise (we have already given the example of internet peering and transit arrangements). The ability of the Commissioner to intervene does not at all erode the primacy of commercial negotiation, and does not have the Commissioner entering the dust of the arena any more than is appropriate. These points have been identified in our initial submissions. The Commissioner can be expected to use this power very reluctantly and rarely, as a weapon to encourage commercial resolution (and so it forms part of the overall “commercial resolution first then regulation” regime.
11.3 It is particularly concerning that the industry is opposing intervention by the Commissioner when the industry has done such a poor job of local number portability. The Commissioner no doubt would only exercise its right as a last resort and after consultation with parties. Compulsory third party intervention might have achieved a different outcome many years ago in respect of local portability.
12.1 InternetNZ dealt with this quick and inexpensive process in its submissions. Lack of support (and opposition) by other submitters should not be taken as an indication that this solution is inappropriate. Compulsory mediation internationally is on a roll, it is successful, and it can help redress the balance particularly for smaller players. For further information see UK Mediation - The International Picture at http://www.mediate.co.uk/news/full.html. While the observations are in a Court context, they apply also to this relatively small and closed group of sophisticated participants. Compulsory mediation gives smaller players a real chance of practical involvement in the process.
12.2 InternetNZ considers that the Commission should be empowered to order compulsory mediation at any appropriate step in the process, including after an application for determination has been filed.
13.1 InternetNZ considers that, as with the rest of the review, the restraints on the ambit of the TSO Review are too limited. In particular, the overall TSO principles and wider issues are precluded from the review. Directly or indirectly, the TSO has a substantial impact upon the internet community. This is well illustrated by the analysis undertaken by TelstraClear for the purposes of the 2002/2003 TSO Conference, in respect of UBS. The potential impost on providers of UBS (if the TSO obligation is to be extended that far) is between 1.95% and 3.99% of UBS revenues, depending on the model that is used (“retail revenue” or “net revenue”). UBS is supplied on a “retail minus” basis which is 16%. Obviously between 2 and 4% of that 16% being potentially taken up by TSO payment has considerable impact. InternetNZ considers that the TSO regime ought to be revisited comprehensively for this and other reasons.
13.2 As InternetNZ observed in its initial submissions, it is in some ways premature for any party to make submissions in relation to the TSO issues raised in the discussion paper, given the imminent release of the final TSO determination for the 2002/2003 year, where the majority of the TSO issues in the discussion paper are squarely raised and have been canvassed at length between the parties. Consideration of TSO issues will be significantly informed by what the Commission has to say. InternetNZ seeks to reserve the opportunity to make further submissions after the Commission has released its final determination, as do other parties. However, it is already apparent that, in some respects, there ought to be amending legislation to clarify particular issues (one of the more obvious examples lies around the meaning of “revenue” in section 88(b)(i)).
14.1 TelstraClear seeks a major change to the “liable person” definition which will expand to cover many outside the current definition, and will create considerable uncertainties as to where liability starts and stops. That TelstraClear’s suggested wider solution would create uncertainty is apparent from the exchange on the point, between the Commission and TelstraClear representatives, during the 2002/2003 conference (page 440 onwards of the transcript of the 2002/2003 TSO Conference).
14.2 As InternetNZ noted at the outset of its submissions, it is particularly concerned about not only the way in which the discussion paper is limited to particular issues, but also the way in which some parties are seeking to further limit the ambit of the review in their approach. InternetNZ must, of necessity, (in line with the position taken by the major parties) point out that the wide-ranging changes put forward by TelstraClear are strictly speaking outside the review, given the restriction stated at para 6 of the discussion paper. With that as background, the TelstraClear primary solution (of radically altering the “ liable person” definition) is a sledgehammer to crack the CallPlus nut. No submitter is suggesting that the splitting of retail and transport businesses to enable avoidance of the TSO obligation should be countenanced. Those that comment on this have recommended the same minimum solutions (and TelstraClear has suggested a viable solution based on the Electricity Reform legislation). For present purposes, it is neither necessary nor appropriate to go further, contrary to para 160 of TelstraClear’s submissions to MED. If later a party proposes some way around legislation that clarifies the position around related parties, the situation can be revisited then.
14.3 While dealing with this topic, we note the prospect of a party doing a “ CallPlus” to get around the “revenue” definition as well: again this is capable of solution by clarifying the position as to parties that are related to each other.
14.4 There are two further important reasons why the liable person definition should not be so extensively revisited as part of this review. First, the liable person issue is integrally linked to the revenue definitional issue. If “liable person” is to be addressed, it must be dealt with in the context of an appropriate overall review, to include the inter-related liable person-revenue aspects.
14.5 Second, if the liable person net is to be extended to parties that would never have been captured in the first place, the TSO regime as a whole should be revisited. They would not have expected to be affected and would not have taken the opportunity to provide input. It is ironic that Telecom makes such a point about TSO being a private agreement with the Crown (and thus not a matter for others) when TSO has such wide impact beyond those two parties. This is even more reason why any extension of the regime to others should revolve around review of the structure overall.
15 Net Revenue or Retail Revenue Model?
15.1 As noted above, this issue will greatly benefit from the Commission’s final 2002/2003 determination and, like the other parties, InternetNZ welcomes the opportunity to make further submissions to MED then. In summary, it may then be apparent that legislation (other than legislation to deal with the point in the previous paragraph) is unnecessary, the Commission having dealt with the issue on an appropriate basis.
15.2 However, if it then appears that legislation is required, InternetNZ considers that the “net revenue” model is the most appropriate in that it is the fairest between parties and ultimately that which most closely meets section 18 drivers (which, despite the specific aims of Part 3 of the Act, remains material to TSO allocation). InternetNZ has undertaken a review of the material provided not only to MED for the purposes of this paper but also in relation to the TSO hearings. Rather than repeating the points made, InternetNZ adopts the submissions in both places (the Commission and MED) made by TelstraClear (and makes specific reference to the exchanges between the Commission and TelstraClear and Vodafone representatives (particularly Dr Hamilton and Mr Allen) at the latest TSO conference). It notes in addition the following points.
15.3 At the start of this section of the cross submissions we noted the comparable impact on UBS (which is at the heart of New Zealand’s broadband regime) of the choice between the retail revenue and net revenue approaches (namely, a 2% and 4% impact respectively where margins on a retail minus basis are 16%). This is summarised in the following table extracted from the so-called “Allen Paper” tabled with the Commission by TelstraClear. Leaving aside the complex economic arguments, this is a starkly compelling illustration of why a retail revenue methodology is inappropriate.
Effective Tax Rates for UBS and Residential Resale
| UBS | Residential Resale | |
| Retail Price (retail revenue) | $49.95/mth | $34.87/mth |
| Access payment | $25.50/mth | $34.17 |
| Gross Margin (Net Revenue) | $24.45/mth | 70c |
| TSO Tax | ||
| Retail Revenue | $0.97/mth | 68c |
| Net Revenue | $0.48/mth | 1c |
| Effective Gross Margin | ||
| Retail Revenue | $23.48/mth | 2c |
| Net Revenue | $23.97/mth | 68c |
| Effective TSO | ||
| Tax Retail Revenue | 3.99% | 97% |
| Net Revenue | 1.95% | 1.95% |
15.4 It appears that a major impediment to either model is said to be the prospect that the TSO “tax” will not pass-through to end users depending on which model is implemented (and for this reason, the Vodafone-sponsored retail revenue model is said by them to be the most appropriate). No solution of course is perfect, but the preponderance of evidence and policy, in InternetNZ’s view, overwhelmingly supports a net revenue model. The retail revenue model has significantly more detractions than the net revenue model, including in relation to this pass-through issue. As to the latter, the empirical evidence supporting the Vodafone view is sparse and not at all clear-cut. Vodafone have highlighted in their submissions how important such evidence is, yet it is curiously absent here.
15.5 If the Commission feels compelled to introduce a retail revenue model, it can be expected that InternetNZ, depending of course on the Commission’s reasons, would seek legislation which replaces it with a net revenue-based model.
