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Advancing Telecommunications Services for New Zealand in the 21st Century

This document is a draft submission developing InternetNZ’s views on a path ahead for the regulation of the telecommunications sector over the next few years. Once finalised it will be lodged with the New Zealand government as a statement of where the Society would like to see change in the current regulatory framework in the sector.

Advancing Telecommunications Services for New Zealand in the 21 st Century: A draft Submission on Options for Regulation, for discussion by InternetNZ members and stakeholders

20 January 2006
range of issues are canvassed. Readers should note that this is a draft
paper and does not represent InternetNZ’s position at this point.
paper will be discussed by members and stakeholders at meetings in
Wellington and Auckland on 25 and 26 January respectively. Feedback is
welcome at those meetings, or by email to
will be incorporated into a final version of this document (if received
by 30 January), which will be forwarded to the Government at the end of
the month.
Any questions should be directed to David Farrar, Vice President and Chair of the Public Policy Committee, by email at
Advancing Telecommunications Services for
New Zealand in the 21 st Century

Submission on Options for Regulation
by InternetNZ

InternetNZ is the not for profit organisation that manages the .nz
domain name space, and has the overarching objective of an open and
uncaptureable Internet for NZ. As convergence between traditional
telephony, IP and other digital media occurs, InternetNZ wishes to
proactively engage with the Government in creating an environment for
telecommunications which encourages the pursuit of our overarching
Key in this is the requirement for a more
competitive environment for telecommunications. New Zealand’s
regulatory framework is extraordinary by international standards for
its light-handed nature. This has delivered major advantages over time
to the incumbent telecommunications network owner, but has led to very
poor outcomes in broadband take-up and the development of advanced
telecommunications services for New Zealanders.
If the
Digital Strategy’s ambition of New Zealand emerging into the upper
quartile of OECD countries for broadband is to be achieved (from 22 nd
for broadband rollout and XX for telecommunications costs), a range of
extensive changes are required. Light-handed regulation has not
delivered; the challenge now is to develop solutions that will
encourage the outcomes that New Zealand needs, if we are ever as a
country going to achieve international competitiveness in this arena.
submission develops InternetNZ’s evaluation of the state of the market
today, and proposes a range of changes to the regulatory framework
designed to take New Zealand ahead.
This submission is
intended to concisely summarise the proposed changes and to develop a
roadmap for the implementation of them. There are vast quantities of
research available in depth explaining the rationale behind each
proposal which can be forwarded on request; the submission does not
canvass the substantive debates for and against each change.
InternetNZ’s key concern is in Internet access, our focus is on how
regulation can improve Internet access – particularly broadband access,
and bearing the challenges of convergence in mind.. While we
acknowledge the range of other smaller providers attempting some quite
novel solutions and platforms in bringing broadband to market, our
focus here is on the national situation and the large players for the
sake of convenience.
This draft paper sets out the
initial views developed by the Public Policy Committee and Secretariat
of InternetNZ. The following sections cover: a brief outline of the
current regulatory framework; perceived consequences of this framework;
a summary of proposed areas for change; some detail about each proposed
reform, and finally a broad conclusion.
The current regulatory framework

The telecommunications industry in New Zealand is covered by aspects of
the Commerce Act and Fair Trading Act, as well as general statute law.
It is subject to specific regulation through the Telecommunications
Act, passed in 2001 and currently being reviewed (an implementation
review only) by government. Regulation is implemented by a
Telecommunications Commissioner, part of the Commerce Commission.
framework is remarkably light-handed by international standards, in
keeping with most other areas of regulation in New Zealand as developed
in the 1980s and 1990s.
The incumbent carrier, Telecom
Corporation of New Zealand (TCNZ hereafter) is subject to a universal
service obligation and price caps on retail line rentals via the
Telecommunications Service Obligation, successor to the Kiwi Share.
These obligations are funded by all carriers.
obligations are imposed under the 2001 Act, including the mandated
provision of an Unbundled Bitstream Service (uplink 128kbps) in place
of local loop unbundling, and a range of matters relating to number
portability, interconnection etc. The framework is now four years old.
spectrum, which features briefly below, is regulated differently under
the Broadcasting Act and other acts, with such regulation administered
in the Ministry of Economic Development.
Under the
current regulatory framework, TCNZ remains the dominant fixed line
provider of telecommunications services. For Internet a range of other
platforms and providers exist, but there is no equivalent of the North
American example of widespread cable infrastructure as a separate
platform; nor is there any likelihood of such a comprehensive
alternative platform developing in the near future. As such, access to
TCNZ’s network is arguably the key issue in the future of regulation for the sector..
Consequences of the current framework
The consequences of the light-handed regulatory framework can be summed up as follows:
TCNZ remains the dominant provider of broadband services due to its monopoly over the local copper network.

TCNZ remains vertically integrated; access competition is limited to a
flawed UBS, with options for deeper LLU considered and rejected by the
Cabinet in 2004.
TCNZ’s market share is far higher
than that of any incumbent telco in any other country where competition
has been mandated by regulators – over 85% of broadband services are
provided by Telecom. The next highest comparative country shows
approximately 25% (BT in the UK) ..
The public
debate about the broadband future is strongly influenced by TCNZ’s
occasional threats to halt network investment if more competition is
required, and is focused on services which use broadband technology but
are not true broadband (e.g. the very slow uplink speed for most
broadband services).

In essence, Telecom
remains the dominant incumbent many years after privatisation, and the
regulatory framework has not created a competitive market for
telecommunications users. The consequence is high prices, poor services
and artificial volume and speed limits, just as is always the case
where monopolies present problems. The key requirements for driving
competition – access to the network, and appropriate investment
incentives for the players – are not present.
this assertion is borne out by the latest deal between TCNZ and
TelstraClear Ltd, where a commercial agreement between the two
companies followed closely the framework that had been developed by the
Commerce Commission for a regulated service. TCNZ retains very
significant control over what services are offered and at what price.
This follows TelstraClear’s announcements last year that it would
retrench from wide spread offerings, to become a niche player.
the TCNZ network will be pivotal for many years to come, other
technical and commercial developments, exciting though they are, simply
won’t solve the problem. The only way to resolve this situation is the
phased development and implementation of a different regulatory
framework, more in line with OECD best practice, which will encourage
competition by resolving the two key problems – access, and investment
incentives – identified above.
InternetNZ’s suggestions for a way ahead

The following matrix summarises InternetNZ’s proposed stages of reform.
Together it outlines a package of policy and legislative reform and
public investment. This is designed to generate a step-change in New
Zealand’s broadband prospects, and is therefore an ambitious programme.

If followed, such a programme would ultimately assist
with the government’s objectives to increase the rate of sustainable
economic growth. Small businesses would have access to reliable
high-speed broadband services at affordable prices; the uses of
broadband could be explored and expanded, benefiting communities across
New Zealand.
The columns in the table below represent
the following areas: “Investment” is a direct role for government;
“Policy” are matters government can affect through its executive
actions; “Regulation” changes can be made under existing statute; and
“Legislation” is for initiatives that will require parliamentary time.
Each proposed reform is then detailed in the next section. The timing
proposed below is ambitious but in our view, achievable (though it may
put pressure on MED’s policy resources).







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

2 - Review network building by Crown organisations
3 - Investigate a structural separation of Telecom
4 - Review spectrum availability for community wireless broadband platforms

5 – Initiate a Schedule 3 investigation of a true UBS

6 - Local Loop Unbundling reconsidered by the Cabinet
(5 - implementation of a true UBS, by way of legislation instead of Schedule 3)


7 - Investigate investment requirements for a national FTTN / FTTH network

8 - Re-organise BCL if required


9 - Legislation to require Telecom split introduced and passed.

2008 – 2015

10 - Implement FTTN/FTTH network




Detail of InternetNZ’s proposed reforms

Each area as named in the table above is discussed below with rationale
for why it is required, with priority InternetNZ attaches to it, and
the likely outcomes of making the required reform.
1 – Increase funding for the Digital Strategy’s Broadband Challenge

Budget 2005 announced the government’s commitment to a range of funding
initiatives including the Broadband Challenge, a fund designed to
assist with community infrastructure build for broadband networks. We
understand that the Fund has been heavily over-subscribed, and that
good projects have not been funded. It would be a simple matter to
expand the Fund to allow more such projects to get off the ground.
Doing so will increase the competitive pressure on incumbents, and give
more networks the opportunity to test a range of business models which
might later be adopted on a wider scale. It is an “easy” reform to
undertake, requiring no policy or legislative change.
Proposal: Add another $60m to the Broadband Challenge fund in Budget 2006, to expand the rollout of community broadband networks.
Priority: High – demonstrates government commitment to this area, and will provide tangible improvements in smaller centres.
Outcomes: A larger number of community broadband projects will be undertaken, leading to better broadband services in more communities.
More private and local government investment will be leveraged by the larger fund.
2 – Network Building by Crown organisations

BCL is the wholly-owned subsidiary of a state-owned enterprise, with
historic commitments to delivering broadcast communications in New
Zealand. It has diversified into other communications industry areas
including telecommunications. Details of BCL’s current activities are
available on its website at
a government-owned corporation with an existing communications network
and the associated infrastructure assets, BCL could be required by
government to expand its network and develop a nationwide network to
deliver high-speed Internet. Obviously a broad-ranging investigation
would be required to examine the viability of such a step and the
demand for it, but such a review would be relatively easy to instigate
and could provide a useful component in pressuring other market players
to modify their behaviour.
Such a review could also
take into account the communications assets and interests of other
government organisations – e.g. the Government Shared Network, the
developing Advanced Network, TransPower, OnTrack etc. It may be
plausible for cross-government cooperative use of existing assets to
deliver very useful services.
Conduct a review of BCL and other Crown entities to investigate the
potential for them to engage with the development of a national
broadband network (unless the Crown decides to fund activities by the
Crown entities for this and/or other purposes (for example, to fund the
Crown entities to deliver Government Shared Network capability: that
network becomes the anchor customer, enabling other customers to be
Priority: High –
demonstrates government commitment to this area, and innovative use of
public assets, without major expense implications.
A clear understanding by government of the available options for a
publicly owned company’s engagement in delivering better broadband
Pressure on incumbents to modify their
behaviour to avoid any proposed actions by government which might
emerge from the review.
3 – Investigate a structural separation of Telecom

One of the key economic problems in delivering a more competitive
telecommunications industry is the vertically integrated nature of
TCNZ. This integration means that the revenue and costs of the local
loop are not publicly available and cannot be ascertained by regulators
or interested parties – for very sound commercial reasons, of course.
is a problem because it makes it very difficult to develop good
incentives for investment by Telecom in the local loop. It is also a
problem because TCNZ would effectively be in breach of its duties to
its shareholders, were it to pursue the public interest. Delivering a
fair access regime to the local loop would increase competition on it,
and this would presumably involve lower profits for TCNZ. Yet such
competition would be in the national interest. As TCNZ cannot
legitimately deliver such competition on its own, a structural change
could solve this problem.
If TCNZ were required to
structurally separate the operations of the local loop from their
retail business of delivering telecommunications services, the
following benefits would be available:
transparency of revenue and costs on the local loop – which will assist
with calculating the costs to be shared for TSO obligations
Fair – equitable – treatment of all 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
The current incentives on the local
loop’s manager (to minimise competitive access to enable maximisation
of profits) will be changed – the incentive for the separated operator
will instead to be to maximise revenue by maximising the use of the
local loop by a range of service providers.

and others may argue that such regulation would interfere with their
property rights. This is not the case. TCNZ shareholders own the assets
of the company; they do not have any rights in the current or future
regulatory framework applying to the company. Changes of regulation in
the public interest are commonplace across industrialised nations;
property rights are not at issue as no confiscation of assets is
Any review could lead to legislation as
described below. InternetNZ’s view is that such a split is the only way
to ensure the local loop operator has the correct incentives in place
which would allow reasonable competition to develop in this area.. As
with all proposals, the prospect that the Crown (or the Commission) may
take steps could be enough to apply sufficient commercial pressure for
desired outcomes, as has happened with the separation of the BT
Proposal: Commission a
review of TCNZ’s business, charged with investigating whether there are
grounds to require a structural split of the local loop from Telecom’s
retail business. Ownership could remain with Telecom but structural,
not operational, separation would be cleanest.
High – if legislation is to be developed, a review will need to be
commissioned soon. Due process will need to be followed giving
interested parties time to be properly consulted.
A sound base of knowledge regarding the advantages and disadvantages of
requiring a structural separation of the local loop business from
retail TCNZ operations will be available to decision-makers.
4 – Review spectrum availability for community wireless broadband platforms
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 license 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
New Zealand’s geography – specifically, the
significant distances from point to point – 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 militate against other solutions.
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 of this
area, to look at options available for non-commercial use of spectrum
for community purposes.
Investigate spectrum licensing options, to provide for community access
to spectrum for broadband platforms, to increase competition with
fixed-line providers.
Priority: Moderate.
Development of alternative platforms for broadband services,
particularly of benefit in rural and remote regions which are isolated
or have low population densities.
5 – Initiate a Schedule 3 Investigation into true UBS

When the Commerce Commission recommended UBS instead of LLU, the
service created had a restricted upstream link speed of 128kbps. This
was designed to protect incentives for Telecom to invest in their core
broadband network.
In 2006, it is clear that the
128kbps limit is a major road-block on the path to better broadband
services. As new technologies become available (e.g. ADSL2) and as the
use of the network by the public changes, the upstream speed limit
becomes less and less tenable. The larger carriers should face
competition for the expensive higher-speed data circuits they currently
provide, which can now be matched by DLS-based services. Small
businesses, the backbone of the New Zealand economy, should not have to
pay enormous prices for good quality services that are much more
affordable elsewhere.
The Telecommunications Act
provides for the government to request a Schedule 3 investigation,
which should lead to the designation of a new UBS service without the
upstream link restriction. To future-proof any such service, it should
not define a downstream or upstream maximum speed, though consideration
could be given to providing for useful minimum speeds and other
relevant performance criteria (PIR, SIR etc). DSL rather than ADSL
should be specified, so providers can choose to offer a synchronous
service where viable. Rather than being based on use of Telecom DSLAMs,
the Schedule 3 request should be revolve around other operators being
able to install their own DSLAMs in Telecom exchanges (as is happening
successfully in England and Australia, for example).
Direct the Telecommunications Commissioner to commence a Schedule 3
investigation into a new Designated Service, providing for access
seekers an Unbundled Bitstream Service via non-Telecom DSLAMs (and/or
DSL that does not have a cap on upstream speed).
High – this is a simple request for government to make, and would
provide a way for much improved services to be made available to access
seekers in a relatively short space of time.
Outcomes: A UBS that allows delivery of broadband services that are not crippled by a slow uplink speed.
6 – Local Loop Unbundling reconsidered by the Cabinet

Unbundling the local loop is a critical component of delivering a more
competitive telecommunications environment. By allowing competitors to
install DSLAMs into roadside cabinets and into Telecom’s exchanges, LLU
would provide more choice for consumers and downward competitive
pressures on the pricing of the incumbent.
rejected by Cabinet in 2004, a key argument was that overseas
experience showed little gain from LLU. However things have moved on
from then and LLU has strongly developed. Installing other suppliers’
DSLAMs in the incumbents’ exchanges is growing rapidly and delivering
major gains in the UK and Australia – over 1m lines were expected to be
unbundled by the end of 2005 in the UK. It is also emerging as OECD
best practice – indeed Mexico is the only other OECD country which has
not provided for unbundling. It is therefore timely for Cabinet to look
at the issue again with up-to-date information on the benefits LLU is
delivering in other jurisdictions.
LLU – even if
restricted only to access to TCNZ roadside cabinets and exchanges for
the installation of DSLAMs – complements the more equitable wholesale
access regime that would be delivered by a structural separation of
TCNZ’s local loop business. Wholesale access provides options for
competitors who do not wish to make the capital outlay to invest in
their own equipment; UBS provides a lower-threshold for entry by
competitors. LLU goes a step further, in providing for market players
who do have capital to invest to operate their own facilities, largely
independent of the incumbent network operator.
should, if agreed by Cabinet, be imposed on Telecom by legislation to
ensure that the policy intent is not undermined or delayed by Telecom
or any other party during the alternative Schedule 3 process. It is a
clean method of making a very direct statement of Government policy,
with an outcome in line with virtually every other country. Importantly
the solution does not mean that Telecom is at an inappropriate
commercial disadvantage: the appropriate price for access to the
network can be set by a fair process (the most obvious being that the
Commission establishes the appropriate price to reflect the relevant
Proposal: Re-commit local
loop unbundling to Cabinet following an appropriate departmental policy
development process, to allow Cabinet to consider the issue again in
light of developments since mid-2004, when the issue was last
canvassed. If appropriate, limit legislative change to allowing other
providers to instal and utilise DSLAMs and associated infrastructure in
Telecom premises (exchanges and cabinets).
Priority: High – this is a key component of delivering a more competitive telecommunications market.
Cabinet consideration of the issue, and if evidence and policy
direction supports this, directions to PCO to develop legislation
implementing a form of LLU.
7 – Investigate investment requirements for a national FTTN/FTTH network

Vision is a key component in developing a new framework for broadband
in New Zealand. The copper local loop is the existing main platform to
deliver broadband, but over time it will reach speed capacity
constraints inherent in all copper networks If we want to lead the
world in the availability and uptake of very high speed Internet in the
longer term, there is little alternative to the development of a
national fibre network – either to the nearest node (FTTN – Fibre To
The Node) (e.g. roadside cabinets and exchanges) or direct to the home
(FTTH – Fibre To The Home).
InternetNZ does not have a
policy position on who should deliver or fund such a network, but a
first step to examining its viability would be an understanding of the
costs involved. A number of approaches are possible:
Commissioning an incumbent to build a new network
Using a crown entity (e.g. BCL) to build a new network
Mandate an incumbent to replace copper with fibre over time
Establish ground rules to encourage development of a number of community networks to interoperate
Encourage a new network provider to develop such a network

a network could also be built via a phased development, with FTTN a
first step and then FTTH a subsequent step. It would in all cases need
to be a data network, allowing the public to choose the services
provided over the network.
While potentially a major
investment – e.g. Sweden has decided to roll out such a service through
public investment, at a presumed cost of USD5 billion – it would be a
major national infrastructure investment that would deliver significant
benefits for New Zealand over time. It would be a step that ensured we
would not fall behind again in the Internet world, as we have done
This investigation should be conducted by a
reference group appointed by the Minister of Communications, comprised
of industry and consumer representatives and officials with the
required skills to conduct the review. It could be supported by the
relevant department (MED).
Proposal: Appoint a reference group to investigate investment requirements for a national FTTN/FTTH network.
Moderate – it is proposed this policy work could commence next year, to
give government good information for future decisions as outlined
Outcomes: Clear understanding
of the costs and benefits of developing such a network, and canvassed
options about how it might be progressed and by whom.
8 – Reorganise BCL (if required)

This is contingent on the outcomes of Proposal 2 above. If BCL is to
have a role it may require reorganisation or new public investment.
Such plans may be relevant or may not.
9 – Legislation to require Telecom split introduced and passed

The rationales for this are described above in Proposal 3. Legislation
should be passed in 2007 if the proposed investigation leads Government
to decide such a split would be in the public interest.
10 – Implement FTTN/FTTH network
See Proposal 7 above. Implementation would take some considerable time, and be a major commitment of public resources.

The steps above would deliver strong competition in the New Zealand
telecommunications sector. For households and businesses, prices would
fall and services would improve. TCNZ would lose some advantages it has
enjoyed since privatisation, but the advantages to the community would
vastly outweigh this loss.
Unbundling the local loop,
providing access to a good UBS and requiring a structural split of the
local loop from the rest of TCNZ would repair the major problems in the
market today – a lack of competitive access to TCNZ’s local loop, and
poor incentives on TCNZ to behave cooperatively with other market
participants as owner of the network.
Expanding the
Broadband Challenge and expanding the spectrum available to community
providers of broadband infrastructure would provide alternate platforms
tailored to the requirements of small communities around New Zealand,
who currently get a very raw deal indeed from the incumbents. The
status quo stifles innovation, and means service offerings are created
on TCNZ’s terms – as illustrated by the recent deal between TCNZ and
TelstraClear Ltd and TelstraClear’s withdrawal from major market
A national project to develop a fibre network
to the home over time, and the potential use of state companies in
delivering 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.
major initial requirement to make any of these things happen is
political will, and a 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 could clearly
deliver better services, would deliver such potential gains to the
country that it could attract political support from around the
Parliament – and community good-will towards the politicians who proved
able to deliver it.
January 2006

Keith Davidson, Executive Director, 021 377 587

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