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Submission to the Minister of Communications and IT on Regulatory Reforms

February 2006.

InternetNZ

(The Internet Society of New Zealand Inc.)

InternetNZ is the not for profit organisation that manages the .nz domain name space, and seeks to protect and promote the Internet in New Zealand.

Public Version (there is no confidential version)


 

    Executive Summary

  • InternetNZ welcomes the opportunity to provide input into the future direction of telecommunications regulation in NZ and related issues with the aim of addressing many of the shortcomings in the NZ Telecommunications marketplace - which is characterised by the failure of the current regulatory regime to deliver meaningful competition and choice for NZ businesses and consumers across a wide range of telecommunications services.
  • The main focus of this submission is directed to overcoming the economic bottlenecks which affect the broadband supply chain; specifically local loop access issues.

  • New Zealand’s low broadband uptake and high end user costs have been well publicised and debated over many years. In 2001, at the time the Telecommunications Act was passed, New Zealand ranked 16th out of 30 OECD countries for broadband uptake.

  • Fast forward to 2005. New Zealand now ranks 22nd out of 30 in broadband uptake in the OECD. Only 10.9 per cent of NZ households have broadband, half the OECD average of 21.2 per cent. We have gone backwards.

  • There is near-universal agreement that broadband is to the 21st century what roads and rail were to the 20th
    century – critical infrastructure. Advanced telecommunications services are a key enabler and economic driver for a knowledge-based economy in order to compete successfully in the global economy. The Screen Council, for example, has continually repeated a call to action; warning that the entire film industry is at risk due to the lack of affordable high speed data services.

  • This submission outlines a series of policy initiatives and regulatory reforms to address structural issues that are impacting on the current telecommunications marketplace, in which the incumbent Telecom has been able exercise its near monopoly in the local loop to dictate the pace and development of broadband services

  • Notwithstanding InternetNZ’s particular concerns with the state of the NZ broadband marketplace, InternetNZ submits that any debate for regulatory reform should be guided by a set overarching objectives or principles.

  • Specifically the outcomes of a regulatory review should:

    • provide increased competition to drive down the costs of services to consumers and businesses.

    • support innovation through the growth of new applications and services from a range of existing industry players and new entrants.

    • provide regulatory certainty for service providers and investors.

    • re-focus regulation toward swifter remedies to tackle anti-competitive behaviour with a structure of real penalties and incentives;

    • remove regulation wherever competition is effective.

    • help ensure the necessary level of consumer protection through a combination of codes, sanctions and effective consumer information.

  • The current telecommunications environment in New Zealand is characterised by a single company that exercises SMP (significant market power), which inhibits any meaningful competition and stifles investment opportunities.

  • Encouraging competition and investment in advanced telecommunication services requires a regulatory structure that is flexible and forward-looking.

  • To better serve business and consumers, a new regulatory approach is required that provides full equality of access (equivalence) to Telecom’s network infrastructure while promoting innovation and investment in the telecommunications sector.

  • This review comes at a critical juncture in which the outcomes from this stocktake and associated consultations, will likely dictate the pace of telecommunications investment and technology deployed for the next decade.

Recommendations

  • Outlined below is a table containing a summary of recommendations and roadmap that underwrite the necessary reforms to address both the market and regulatory failure that characterises the NZ telecommunications marketplace.

  • These recommendations are based on the proposition that when all reliable indicators point to market failure(s), the onus is on Government to intervene and take decisive action to correct those imbalances where self-regulation or the powers of the Telecommunications Commissioner are unable to provide effective relief to resolve industry disputes or create a regulatory climate which rewards competition and innovation.

  • There is no single silver bullet. None of the proposed measures by themselves deliver any significant change to the status quo. The roadmap is designed to deliver short term, medium term and long term outcomes.

Year

Local Loop Network

Other Proposals

2006

  • Initiate a Schedule 3 investigation of a true UBS

  • Full Local Loop Unbundling reconsidered by the Cabinet, and implemented by legislation (or by Schedule 3 investigation)

  • Investigate TCNZ wholesale / retail services separation options

 

  • Increase funding for the Digital Strategy’s Broadband Challenge

  • Public Sector telecommunications investment review

  • Spectrum utilization review to support community broadband wireless initiatives

 

2007

  • Implement TCNZ wholesale / retail services separation

  • Implementation of spectrum utilization and Public Sector telecommunications investment reviews

  • National FTTH Task Force

 

2008 – 2015

  • TCNZ Structural separation

  • National FTTH / FTTN rollout

Introduction

  1. This submission has been developed in consultation with InternetNZ members including public meetings in Auckland, Wellington and Christchurch in January 2006. A range of experts in New Zealand and overseas have also contributed.

  1. The major theme which underwrites this brief is how to achieve a true split of Telecom wholesale and retail services which treats all comers in an equal fashion beginning with access the local loop i.e. LLU and going forward into the future, fibre / NGN networks.

  1. The “access issue” needs to be considered from two perspectives; the first being how do third parties gain get access, on non discriminatory terms, to Telecom’s network for providing services via unbundled local loops. The second is how to ensure investment in local access can keep pace with bandwidth demands of next generation broadband applications and services.

  1. Local loop unbundling should not be seen as the panacea for the perceived structural failures in the NZ access market and is unlikely to lead to the levels of access network investment that will make advanced broadband services more widely available in the future.

  1. Upgrades of ADSL to ADSL–2 and VDSL are likely to require deeper deployments of fibre, which could lead to additional problems for LLU implementations.

  1. The access issue also requires detailed examination of a range of non Telco structural options including an aggressive expansion of community open access fibre networks (Broadband Challenge); access and use of alternative civil infrastructures (rights of way); power utility infrastructure; divestment of duct assets by Telecom and new-build / greenfields FTTH developments.

  1. True wholesale services can only be accomplished from a fundamental restructuring of Telecom. The issue is not if, but how. Should organisational restructuring and change of behaviour by Telecom be best accomplished by operational or structural separation?

  1. An overriding test that has been applied elsewhere i.e. operational vs. structural separation is net cost benefits. In the UK and Australia the decision favoured operational separation.

  1. InternetNZ will argue that because of the peculiarities of the New Zealand marketplace the only viable option in the long term is for structural separation of Telecom.

Context

The Digital Strategy

  1. InternetNZ has noted the following in the Digital Strategy

We must respond to two challenges of connection:

  • New Zealand has high Internet usage, but low broadband uptake

  • New Zealand’s small market inhibits investment and limits competition.

Being connected by broadband matters. Affordable, high-speed Internet access drives productivity and economic growth. It is a prerequisite for a 21st century economy – and for all the other goals in this Strategy. 

Connection”, Digital Strategy, 2005

  1. If the ambitious targets for deployment of “true” broadband and advanced network services outlined in the Digital Strategy including being positioned in the upper quartile of OECD countries for broadband uptake are to be realised, (currently 22nd for domestic broadband rollout, 27th for business broadband,) a shift from the “light-handed” regulatory approach is required.

Consequences of the current regulatory framework

  1. The New Zealand regulatory framework is considered to be light-handed by international standards, promoting self-regulation in preference to government intervention.

  1. Except for mobile, Telecom has continued to consolidate its dominant position in the marketplace. The net result has been well documented – not only in relation to broadband but in relation to a range of telecommunications services i.e. high cost cellular services, all of which can be directly attributed to the lack of competition. The flow on effect has resulted in the lack of incentives and confidence for new entrants to invest in the NZ marketplace.

  1. The decision in 2004 to introduce a heavily constrained UBS (with a commercial UPC service) in lieu of local loop unbundling has not delivered any of desired outcomes that were anticipated at that time. Smaller players continue to lose market share. Businesses and consumers continue to be denied innovative broadband applications and services.

  1. Going forward, access to TCNZ’s local loop network continues to be a key issue. There is general agreement among industry analysts that alternatives to the copper local loop for last mile access, utilising emerging new technologies such wireless, will only at best occupy a small niche in the marketplace.

  1. Telecom's 128kbps uplink speed restriction that governs ADSL broadband services in New Zealand falls well short of any definition of broadband and means that users cannot enjoy any of the benefits of true broadband.

The Way Forward

  1. Two series of measures are outlined below. The first series deals with access to the local loop network. The second series includes regulatory and other initiatives to stimulate broadband competition by new entrants.

  1. The following table includes a timeline which summarises InternetNZ’s proposals. The table is divided into two columns following the two major areas discussed in this submission – proposals relating to the local loop network, and other proposals to expand broadband services.

Year

Local Loop Network

Other Proposals

2006

  • Initiate a Schedule 3 investigation of a true UBS

  • Full Local Loop Unbundling reconsidered by the Cabinet, and implemented by legislation (or by Schedule 3 investigation)

  • Investigate TCNZ wholesale / retail services separation options

 

  • Increase funding for the Digital Strategy’s Broadband Challenge

  • Public Sector telecommunications investment review

  • Spectrum utilization review to support community broadband wireless initiatives

 

2007

  • Implement TCNZ wholesale / retail services separation

  • Implementation of spectrum utilization and Public Sector telecommunications investment reviews

  • National FTTH Task Force

 

2008 – 2015

  • TCNZ Structural separation

  • National FTTH / FTTN rollout

Access to the Local Loop Network

  1. Access to TCNZ’s local loop network in which Telecom enjoys a natural monopoly remains the focus for reform. Last mile access to the customer in the next 15 years and possibly 25 years will continue to rely on copper. Greenfields FTTH and NGN rollout including FTTN will do little to alter the continued reliance on copper to deliver high speed data services to homes and businesses in the foreseeable future.

  1. InternetNZ proposes the following reforms:

    1. A revised UBS offering

    1. Local Loop Unbundling

    1. Wholesale / retail services separation, by agreement or otherwise, of TCNZ’s local loop network and wholesale product operations from the rest of its business.

  1. It should be stressed that these are not alternatives. InternetNZ urges the government to pursue these three courses of action in parallel, in order to provide a range of access options to the local loop and to remove the existing incentives to deliver poor service.

  1. Each of these proposals is considered in more depth below.

Recommendation: A revised UBS offering

InternetNZ proposes a Schedule 3 investigation with the aim of establishing a revised specification for UBS service.

Alternatively, legislation arising from the Implementation Review of the Telecommunications Act could provide a mechanism for the Commission to implement a revised specification for UBS.

This must be given the highest priority and can be implemented within the next 12 months.

Discussion

  1. The Telecommunications Act provides for the government to request a Schedule 3 investigation, which could lead to the designation of a new UBS service based upon TCNZ’s currently deployed DSL service and offered at an up and downlink speed that is unconstrained.

  1. When the Commerce Commission recommended UBS instead of LLU, the service was restricted to an upstream speed of 128kbps. The Commission’s determination accepted Telecom’s argument to limit upstream speed so as not to disrupt future investment plans such as Telecom’s rollout of NGN.

  1. To future-proof any unconstrained UBS service, both downstream and upstream speeds needs to be defined as “unconstrained”; that is, provided at the highest speed technically feasible. DSL rather than ADSL should be specified, so providers can choose to offer a synchronous service where viable. Any UBS specification also needs to ensure adequate performance standards to avoid a situation where an unconstrained line speed has no service benefits due to bandwidth constraints imposed further up the network.

Recommendation: Local Loop Unbundling

InternetNZ proposes that Government reconsider local loop unbundling. Since 2004 developments in New Zealand and overseas have provided further evidence that will support the case to implement LLU (or, if that is not possible, referring the matter to the Commission under Schedule 3 of the Act).

Discussion

  1. The “local loop” is a vital component of the broadband value chain. The LLU ‘access issue’ needs to be considered from two perspectives; how do third parties can get access, on non discriminatory terms, to Telecom’s network for providing services via unbundled local loops. Second, how can investment in local access keep pace with demands for next generation broadband services and applications?

  1. When rejected in 2004, a key argument against LLU in a finely balanced decision was the fact that overseas experience suggested very little had been achieved by way of implementation. This conclusion is no longer valid. Consider the following: in Australia LLU has delivered 4 national broadband networks. In the UK over 2 million lines are now expected to be unbundled by the end of 2006.

  1. In light of the market experience in other countries, it is imperative that the government act promptly and decisively to introduce LLU. Detailed arguments in favour of LLU are attached. See Appendix 1.

  1. Also noted is COVEC research commissioned by MED which did not concur with the Commission’s conclusion regarding LLU.

  1. Process would favour the use of legislation, i.e. more expedient than a request to the Commerce Commission to review LLU by way of Schedule 3.

  1. The UK experience with LLU requires detailed examination. For example Ofcom introduced an innovative process for cutting through some of the complex issues associated with LLU by setting up the Office of Telecommunications Adjudicator (OTA). The Adjudicator was designed to be in a position to lead and guide the process of LLU implementation while also having the right to resolve disputes brought to him formally.

Recommendation: Separation of TCNZ’s wholesale and retail services

InternetNZ proposes an investigation that would bring forward recommendations to achieve a separation of TCNZ wholesale and retail services.

Discussion

  1. InternetNZ’s preliminary view is that a full structural separation of TCNZ is the only long term option. InternetNZ does however recognise the challenges that structural separation presents (i.e. could take up to 5 years to implement) so there is likely a need to consider a staged process that delivers more immediate benefits in the short to medium term.

  1. Options include the following:

    1. Internal reorganisation: i.e. a wholesale division. Overseas experiences have proven that this is not workable in terms of delivering true equivalence of supply.

    1. Operational separation: a short to medium term solution which has been favoured in Australia and the UK. Ofcom agreement with BT that has resulted in the creation of BT OpenReach, a 30,000 employee company launched in January 2006 is seen as model for operational separation. See Appendix 2: Undertakings between British Telecom and Ofcom.

    1. Structural separation: with a separate company owned by TCNZ formed to manage the new network/wholesale business,

(A variation on structural separation would be for the Crown to take a strategic or controlling interest in the wholesale business i.e. network ownership including the local loop.)

  1. If TCNZ were required to structurally or operationally separate the operations of the local loop network and wholesale services provision from their retail services, the following benefits would be available:

  • Full transparency of revenue and costs on the local loop – which would assist with calculating the costs to be shared for TSO obligations

  • Fair and equitable treatment of all local loop network access seekers – TCNZ retail would be treated exactly the same as any other access seeker

  • Regulation of line rentals and access to services, universal service obligations etc could be made with better knowledge of the costs involved

Shifting the Goalposts: Alternative Broadband Infrastructure Initiatives

  1. The following section deals with initiatives to stimulate broadband competition by focusing on options that could assist or encourage new entrants into the marketplace.

  1. InternetNZ proposes the following reforms, in no particular order:

    1. Increase funding for the Digital Strategy’s Broadband Challenge

    1. Maximise synergies from public sector investment in telecommunications network infrastructure and services

    1. Review spectrum availability for community wireless broadband platforms

    1. National strategic plan for the development of next generation broadband network services including FTTH (fibre-to-the-home)

Recommendation: Increased Funding for the Broadband Challenge

InternetNZ recommends an additional $60m be allocated to the Broadband Challenge fund in 2006, to further expand the rollout of urban open access fibre community network initiatives.

Discussion

  1. Budget 2005 announced the government’s funding commitment to implementing Digital Strategy initiatives including the Broadband Challenge, a $24 million seed fund to assist the development of urban open access fibre networks.

  1. Broadband Challenge expressions of interest to date indicate that the Broadband Challenge, a four-year funding programme may be already be fully subscribed in year one.

  1. Additional funding is essential. InternetNZ is recommending that an additional $60 million be allocated to the Broadband Challenge fund which could include a mix of seed funding and a loan facility. At a minimum approx $250 million of private capital investment will be required if the target of 15 urban fibre networks is to be met. A loan facility would assist to mitigate private sector investment risk, thereby driving increased investment.

  1. It is argued that the future of telecoms in general and the Internet in particular will be driven by open access networks. The importance of continued Government support for the development of open access fibre networks through the Broadband Challenge cannot and should not be underestimated.

Recommendation: Review of Public sector investment in Telecommunications Infrastructure

InternetNZ recommends a review of public sector investment in telecommunications and related infrastructure initiatives with the aim of fostering more competition in the telecommunications marketplace.

Discussion

  1. A challenge for central government is how to maximise the potential synergies resulting from a number of public sector telecommunications and related initiatives.

  1. These include the Government Services Network (GSN), Advanced Network (REANNZ) and the Broadband Challenge. In addition central government through an SOE, BCL, owns a national telecommunications infrastructure company which is well positioned to develop a national high capacity backbone to service regional and rural networks.

  1. Also, central government will in the near future be asked to make investment decisions regarding digital broadcasting, the options for which are becoming more complex as a result of convergence and the shift to distribution of all forms of digital content and entertainment across IP networks.

  1. An example of a Government ability to leverage its purchase of telecommunications services to achieve wider economic and social goals is in the Australian State of Victoria, which in May 2005 announced as part of the State’s wider Telecommunications Purchasing and Management Strategy (TPAMS), the SmartONE project, a $89m fibre network linking all government schools within four years and “enabling businesses in rural and regional Victoria to have access to the best available broadband infrastructure on offer.”

Recommendation: Spectrum Availability for community wireless

InternetNZ recommends a review of spectrum management, specifically the establishment of a community framework for spectrum utilization which provides for community based and / or non-commercial broadband wireless initiatives. Wireless broadband networks are examples of how public spectrum is used by local communities looking to establish affordable broadband public access.

Discussion

  1. In the past, allocation of radio spectrum has specifically included certain frequency ranges which are marked as unlicensed, meaning that they can be used by anyone without a specific licence from the Government. Examples of such unlicensed spectra include the 900MHz band used by CB and portable telephones, the 2.4GHz bands used by 802.11b/g-based computer systems for wireless networking, and the 5.3/5.8GHz bands used in next-generation wireless (802.11a) computer networking.

  1. New Zealand’s geography – specifically, the significant distances between population centres – mean that wireless-based networking solutions are going to become increasingly significant over time, their growth matching or exceeding copper and fibre-based broadband network growth. Wireless-based broadband offers access to high-performance networking in many environments where the distances or existing cable resources reduce the utility of other solutions.

  1. Unfortunately, many of the unlicensed spectrum allocations were made before the current explosion of growth in the network marketplace, and a number of them (especially the 2.4GHz ranges) are now heavily saturated. To compensate for this, InternetNZ would like to see a review to look at options available for non-commercial use of spectrum for community purposes.

Recommendation: National FTTH Task Force

InternetNZ recommends the appointment of a task force, comprised of industry and consumer representatives and officials, to investigate the options for delivering fibre to the home in a reasonable timeframe, with task force appointments to be made no later than September 2006 and a preliminary report to be tabled no later than June 2007.

Discussion

  1. Sweden, whose population base and geography are very similar to New Zealand’s, has already achieved a national fibre rollout covering 90% of the population and is delivering affordable 100mb services to consumers and businesses. The total cost represents a total public / private sector investment of US$5 billion.

  1. Initial planning needs to begin now on how a national fibre network could be developed (as in the example of Sweden) with a goal that FTTH would be available to up 90% of the population.

  1. Planning begins with a vision. A task force would be asked to create that vision and generate discussion, costs and options on how New Zealand will create a telecommunication infrastructure that will serve the country well into the 21st century.

  1. FTTH is a long term goal, a phased development with active participation of the private sector and industry stakeholders vital to its success. The sooner the planning begins the sooner services can be made available.

Convergence: Regulating the future

  1. In considering the future of the telecommunications regulatory framework, convergence is a critical issue. The following quote speaks for itself:

  1. The development of new technologies, new services, issues such as convergence, and the implications that new voice services may have on universal service, all raise new important regulatory issues. The shift by operators to the “next generation network” may create further pressure to have a single regulatory structure which deals with electronic communications networks and services. New technological developments now allow communications services which historically were regulated differently to appear identical from the consumer point of view. This underscores the regulator’s need to be mindful not only of issues related to companies, but also with the concerns of consumers. An independent regulator with the habit of interacting and learning from consumers will have an advantageous perspective on markets as different technologies vie for new or different regulatory actions.”

  1. The development of new network structures may well, over time, result in the need for a review of existing regulatory structures and their responsibilities, in addition to a change in the regulations themselves. But many of the changes taking place in networks and applications are evolutionary, even though the changes may be rapid, rather than revolutionary. This requires that regulators are structured so as to manage rapid change in the industry and flexible enough so that their internal structures can change to be able to accommodate changes in the communications sector. In turn, regulators need to ensure that on the policy side changes are also being made which will meet the needs of users and the industry.”

P 34.35 .TELECOMMUNICATION REGULATORY INSTITUTIONAL STRUCTURES AND RESPONSIBILITIES 11-Jan-2006

OECD DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INDUSTRY
COMMITTEE FOR INFORMATION, COMPUTER AND COMMUNICATIONS POLICY

Working Party on Telecommunication and Information Services Policies

http://www.oecd.org/dataoecd/56/11/35954786.pdf

  1. Convergence will present a regulatory challenge: how to establish a framework that focuses not just on regulating today but arrives at a set of rules which will regulate future technologies.

  1. IP next generation networks such Telecom’s NGN will significantly change the competitive dynamic of the telecommunications marketplace. The issue becomes (in those services where the Telecom NGN exercises SMP) how to go about establishing an environment which will allow competitors (including non-traditional players) equality of access to the network, to offer applications and services.

Conclusion

  1. The programme of reforms outlined in this submission focused on two main areas for reform: access to the local loop network, and other initiatives to develop New Zealand’s broadband infrastructure.

  1. A piecemeal approach to regulatory reform will only deliver limited benefits – but taken together, the reforms outlined here could provide the necessary step change in the delivery of competitive telecommunications services in New Zealand.

  1. Improving competition on the local loop through better wholesale services, local loop unbundling and a separate wholesale operation for the loop would remedy the major problem in the market today – a lack of competitive access to the local loop network, and poor incentives on TCNZ to behave cooperatively with other market participants as simultaneous owner of the network and retailer of its services.

  1. The other options to explore development of alternative platforms for broadband development are vital to driving innovation and leading edge application and service development on the broadband network. They complement the focus on improving local loop network competition.

  1. The eventual rollout of fibre to the home over time, and the potential use of state network resources in delivering elements of such a network, would represent a major future-proofing of New Zealand’s information and communications infrastructure. Once again we could lead the world in the provision and takeup of such services.

  1. The major initial requirement to make any of these things happen is political will, and the capacity by government to put the long term national interest ahead of the commercial interests of current market players. A soundly argued package of reforms that would clearly deliver better services would deliver such obvious benefits to the country that it would attract serious popular and political support.

InternetNZ

February 2006


Attachments

Appendix 1 – Rationale for the re-consideration of Local Loop Unbundling

Appendix 2 – Undertakings between British Telecom and Ofcom


Appendix 1

Rationale for the re-consideration of Local Loop Unbundling

  1. While InternetNZ recognises that marketplace and regulatory certainty is an important factor, it is only one of many factors to be considered. It should not drive outcomes when marketplace failure is apparent. InternetNZ considers there should be a Schedule 3 review, or legislative intervention, even though just over 2 years have elapsed since the Commission’s LLU/PDN decision.

  1. In any event, there have been a number of significant changes since the Commission’s LLU/PDN Report and the subsequent review by the then Minister. We outline some of these changes below. They amply justify a Schedule 3 review or legislative intervention. In any event the Schedule 3 review can include consideration of whether change is warranted, in the face of one of many factors: the desire for marketplace and regulatory certainty.

  1. As the Minister pointed out when deciding to accept the Commission’s recommendations (that there would not be full ULL, but there would be a 128kpbs upstream UBS service, coupled with Telecom’s UPC undertaking), his decision was a line call.1 That this was a line call is highlighted by:

    1. The fact that New Zealand stands unusually, only with Mexico in the OECD in not adopting LLU.

    1. The Commission’s draft determination for full LLU, and then the reversal in the final Report;

    1. The Commission’s Final Report is finely balanced, and heavily reliant on qualitative and impressionistic analysis, particularly as to the assessment of dynamic efficiencies (especially investment in Telecom’s proposed NGN network);

    1. MED’s view that the Commission should be asked to review its decision.2

    1. The expert consultant who peer-reviewed the Commission’s decision for MED concluded that fundamental errors had been made by the Commission. 3 Having noted the considerable time pressure that the Commission was under to meet its December 2003 deadline (presumably to suggest why there were errors), he considers that, among other things:

      1. the Commission under-estimated the benefits of unbundling, particularly with reference to its cost-benefit analysis, and conclusions that it drew which could not be supported.

      2. the UBS solution (the 128kpbs upstream service) was too narrow (and didn’t address key issues), and the Commission placed undue weight on potential investment by Telecom.

    1. The Minster’s reversal of his initial decision to ask the Commission to reconsider UBS and full LLU, after other Ministers raised concerns. 4

  1. An important factor in the Minister’s final decision to accept the Commission’s recommendations was that sending it back for review would be likely to lead to considerable delays to broadband competition.5 However, he noted that he would watch developments closely, “taking particular note at how quickly and successfully Telecom moves to promptly facilitate the delivery of higher-speed, more competitive broadband in New Zealand.” sup>6 Of course, any service with an upstream speed limited to 128 kbps simply does not come anywhere near to being “broadband”, even on the widest of interpretations (as the Commission noted in its LLU Report, Telecom stated as to its own 128 kbps services that they were not “broadband”). The Minister also noted in the same statement7: “I understand that Telecom intends to exceed the recommendations for bitstream unbundling set by the Commissioner. The extent to which this is achieved will influence any future decision I may make on whether to refer these issues back to the Commissioner.”

  1. There are 2 key issues that flow from the Minster’s approach at the time:

    1. Getting the regulated service up and running quickly, at the time, outweighed the delayed broadband roll-out, in referring the matter back to the Commission. Now that the regulated service is up and running, that is no longer an issue: the need for enhanced unbundling can be revisited without that same degree of timing pressure.

    1. History has shown that Telecom has not done what the Minister expected. Far from it. There is every sign that this will continue unless something is done to fix the situation. TelstraClear’s experience illustrates the point (there are other examples). Telecom refused to provide, commercially, to TelstraClear the minimum service that the Commissioner ultimately determined in December 2005 (unlimited downstream speed, single price UBS). The service commercially offered to TelstraClear (and the commercial service offered to other access seekers) fell far short of that (ie: far short of the Commission’s minimum service). TelstraClear therefore applied to the Commission for a regulated UBS service: the country’s largest provider (outside Telecom) will have been kept out of the DSL market for around 2 years by the time a service is made available to it. TelstraClear announced, when they concluded the commercial settlement this month, that they couldn’t wait any longer and would compromise and take a service that is inferior to the service as determined by the Commissioner. Far from acting to “exceed the recommendations for bitstream unbundling set by the Commissioner”, Telecom fell far short of the minimum service in accordance with the regulations. Its commercial offerings to other ISPs also fell far short of the minimum service that the Commission ultimately ordered (and fell far short of the commercial service agreed between Telecom and TelstraClear). This situation with TelstraClear has led to marked delay in “broadband” roll-out (the very thing the Minister was trying to avoid). That is so even assuming that a 128kbps-limited service qualifies as broadband; it does not, and so the Minister’s desire for Telecom to proactively help deliver true broadband has still not been met. It is of considerable concern to InternetNZ that the regulatory regime is still only tinkering with a service that falls well short of “broadband”.

  1. We now turn to the Commission’s LLU/PDN Report. There have been highly significant changes since that Report, which point to a need for change. First, in its executive summary of its Report8, the Commission noted a key reason for its decision to limit unbundling to the 128kbps UBS service (coupled with Telecom’s UPC undertaking): “The experience of a range of other countries with regulated local loop unbundling does not lend weight to the case for New Zealand to follow suit. The levels of uptake of unbundled loops are small in relation to the number of available lines….”. In the body of its report (see particularly Para 752) the Commission relies on the low installation by new entrants of DSLAMs in incumbents’ exchanges as a reason for not implementing LLU. This lack of uptake of LLU appears to be a particularly important reason underlying the Commission’s decision (for example, it is one of the few discernable reasons, supporting the decision, that are articulated in the executive summary to the report).

  1. Overseas, there has been a large shift since the LLU Report, when utilisation of LLU opportunities was low. Installation of new entrants’ DSLAMs in incumbent locations (exchanges and cabinets) is increasing exponentially, and the number of lines served by LLU is doing the same. The UK and Australia as examples.

  1. In the UK the number of unbundled lines has been increasing during 2005: 40,000 at 31/3/05,9 70,000 at 30/6/05,10 120,000 at 30/9/05,11 and 210,000 lines at 31/12/05.12 Ofcom is confident that growth in full LLU lines will continue to accelerate, passing 1.5m lines by the end of 2006. 13

  1. In Australia14, it is expected that three major ISPs (Optus, Primus and iiNet) will have installed DSLAMs into around 200 exchanges, delivering up to 24mbps broadband services to up to 200,000 customers by the end of the year. Macquarie forecasts that these three ISPs will have 1.63m DSL ports available by 2010 through LLU, comprising 28% of retail and wholesale broadband connections by that date. This is from a low base – 50,000 LLU lines in June 2005.

  1. Line sharing was dismissed as an option by the Commission (and MED) as no-one sought it (see Para (vi) of the executive summary to the LLU Report). Line sharing involves access seekers getting only high frequency access to the local loop via the access seekers’ DSLAM. Low frequency voice telephony is excluded. Given the subsequent rapid increase in installation of third party DSLAMs in other countries, access seekers may, as an alternative to full LLU or high speed UBS, utilise a line sharing option now, with its triple-play functionality. This appears to be a major change since the Commission’s Report. The option can be the subject of Schedule 3 review or legislative intervention.

  1. Of significance is that the Commission, in the recent TelstraClear determination, ended up with a final UBS determination which had the effect, out of the options available to the Commission, of going virtually as far as it could to provide the best possible service (including as to service metrics and a single price), subject to the unavoidable 128kpbs upstream speed.

  1. It is also worth noting that local loop unbundling offers services considerably superior to those available with the current – or any other – implementation of bitstream access. The 2004 decision to provide an Internet-grade service, specifically designed to not allow real time access, was a decision based on the Commission’s extensive modelling, cost benefit analysis and submissions from stakeholders of the effects on investment (among other things) should further unbundling proceed. While the Commission was less concerned about the impact of LLU on investment, it was highly concerned about a more unconstrained bitstream service’s effect on investment – presumably because the latter would provide lower barriers to entry and thus more competition.

  1. It should be remembered that in telecommunications markets, technology and market conditions do change. What was the case in 2004 – comparable experience overseas, investment plans, and so on – arguably no longer holds true. Particularly from a dynamic efficiency point of view, taking a long term perspective, the costs to the broader economy of not allowing competitive delivery of high speed services are higher than they were years ago, as applications for such services continue to develop. They will continue to multiply, and New Zealand will continue to fall further behind, if the decision not to unbundled remains in place. The tradeoffs inherent in the previous decision need to be re-assessed in light of the current situation.

  1. There is a further major change in the regulatory environment since the LLU Report. That Report, in parallel with its predecessor LLU determination, carved out of contention 5 ESAs in Auckland and Wellington, on the basis that competition in those wholesale markets was not limited.15 Strikingly, 2 determinations last year, addressing similar market issues, concluded that there is a national market (in which competition is limited) and the 5 ESAs were not carved out. These are the UBS and the Private Office Networking/One Office decisions16. At Para 760 of its LLU Report the Commission noted that “The competitiveness of the relevant markets will, however, change over time.”. While that may be so here, and it may be that the relevant markets and services are different, it is difficult to discern why there is the change, other than an evolution in the Commission’s thinking. This move to national markets, away from separate regional markets, is a significant change in the regulatory landscape.

Appendix 2

Undertakings between British Telecom and Ofcom

The principal features of the undertakings are as follows:

Access Services Division

The establishment of a new 'Access Services Division' by BT. This new entity will include some 30,000 BT staff and nearly all its access infrastructure and facilities, including the copper local loop, local exchanges, and associated ducts and other civil infrastructure. It will deliver a comprehensive suite of the access products on which wholesale customers rely including:

  • All forms of Wholesale Line Rental (WLR);

  • local loop unbundling (LLU) products incorporating both full and shared;

  • fibre access products including Wholesale Ethernet Service (WES) and Partial Private Circuit access products;

  • Ethernet and SDH backhaul products and sub-loops specific wholesale backhaul services which are critical to effective competition including Ethernet backhaul.

The ASD will be organised as a separate business unit with its own management structure and substantial operational independence. The management board of ASD will have a clear remit to deliver Equality of Access and will establish an annual operating plan including plans and targets for adhering to the undertakings. BT has agreed that the ASD headquarters management team staff will be moved to a separate physical location to other BT staff, and BT will develop separate operating and trading systems used by ASD from those used by other parts of BT. Remuneration will be based solely on ASD's performance. BT will develop a revised long term incentive plan (LTIP) for use within the Access Services Division as soon as reasonably practicable, which will sever the link between the triggering of an award and the performance of BT Group plc's shares.

BT has also agreed that the ASD should have its own distinctive brand (name and format to be confirmed) which reflects its operationally separate status from other BT business units.

Equivalence of Input

BT commits to deliver equivalence of input for the following products to the following timescales:

  • LLU - ready for service June 2006;

  • WLR on the PSTN - ready for service mid 2007, migration complete June 2010;

  • WLR on ISDN2 - ready for service September 2007, migration complete end-March 2009;

  • WLR on ISDN30 - ready for service December 2007, migration complete December 2009;

  • IPStream - ready for service end-December 2005, migration complete end-December 2006;

  • Wholesale Ethernet Service ( WES), and Backhaul Ethernet Service (BES) - ready for service September 2006, migration complete March 2007.

In addition, if BT does not have WLR equivalence of input ready for service by the end of 2006, with a financial rebate to operators of 25p per month per line for any month beyond December 2006. The same financial rebate applies in the event that the June 2006 ready for service date for LLU is not met.

Obligations for other products

BT's undertakings also give commitments to resolve outstanding issues in relation to Partial Private Circuits, Carrier Pre-selection and ATM interconnection.

Other issues of governance and compliance

The undertakings also address the question of the relationship between BT Wholesale and BT Retail, providing greater clarity on the organisational separation of governance of these business units.

BT will separate out those product management teams in BT wholesale which provide SMP services from non-SMP services. Similar remuneration and incentive changes as those within ASD will apply to the teams responsible for product management of SMP products.

The Equality of Access Board's remit will cover compliance with the undertakings across the whole waterfront of SMP products. It will have five members, three of whom will be independent, and a BT non-executive board director who will chair the EAB — providing a direct link in terms of accountability to the BT Group Board. It will have independence, resources, powers and teeth. The EAB will also have a legal duty to inform Ofcom of any non-trivial breaches of the undertakings. Any trivial breaches will be recorded in the EAB's minutes which are sent to Ofcom.

21st Century Network

BT's undertakings set out some clear principles on which BT will base its future design, procurement and roll-out decisions for the 21st Century Network. These include:

  • BT to ensure that the 21CN design supports competition, by allowing other operators unbundled network access;

  • BT to design the 21CN in a way which will support Equivalence of Input;

  • BT's charges to reflect a network that is efficiently designed for the above purposes;

  • BT to launch retail products only when equivalent wholesale products are available.

These principles are underpinned by a commitment by BT to work in a transparent and multi-lateral process with other operators and service providers to manage the transition to NGNs, and to participate in a new adjudication process for disputes that may arise.

Source:

http://www.parliament.the-stationery-office.co.uk/pa/cm200506/cmselect/cmtrdind/598/59805.htm

2 See MED’s Report to the Minister of Communications of 5 May 2004: http://www.med.govt.nz/pbt/telecom/llu-investigation/ministry-report/index.html

13 Macquarie Research Equities report on Telstra Corporation, dated 9 November 2005.

14 All data in this paragraph from Macquarie Research Equities report on Telstra Corporation, dated 9 November 2005.

15 See Para 760 of the LLU/PDN Report

16 Commission Determinations 563 and 568

 
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