NETWORK NEUTRALITY AND COMPETITION ISSUES

PLAYING THE TELECOMMUNICATIONS GAME IN THE EVOLVING STORY OF TELECOMMUNICATIONS PUBLIC POLICY IN NEW ZEALAND

Murray Milner, Milner Consulting Limited

IN THE BEGINNING ... New Zealand’s first telecommunication service arrived in 1862, when an electric telegraph line was established between Christchurch and Lyttelton, over a distance of 20km. After this event, the number and variety of both private and military transmission facilities expanded rapidly across New Zealand. The first telegraph service with Australia was launched in 1876 and this was followed by the first manual telephone exchange in 1881, with 30 customers connected. At this time, the New Zealand Post and Telegraph Department (NZPTD) was established to train and employ the country’s first public telecommunication operators. By 1930 the NZPTD had successfully connected all the main centres in New Zealand with a toll and telegraph network serving some 125,000 customers. Automatic telephone exchanges were introduced into the emerging network in the early 1900s, based on electro-mechanical switch technologies. This type of exchange evolved through until the late 1970s. A limited form of subscriber toll dialling (STD) service was introduced in 1953, but the real advances in long distance calls came with the provision of a national backbone of microwave radio technology installed in 1959. Throughout this period, various submarine cables were deployed to link New Zealand with Australia, North America, Europe and the South Pacific. The international capacity and route diversity was greatly enhanced with the introduction of a satellite earth station at Warkworth, North of in 1971, using the INTELSAT satellite network (Newman 2008). The pace of change of technology and the take-up of service accelerated through the 1960s and 1970s. Crossbar switching technology was introduced in the early 1970s to cope with the growth and by the late 1970s this technology was being replaced by the first generation of elec- tronic switches. By the early 1980s the provided services to over 95% of homes and businesses in New Zealand, and most of these homes had access to automated telephone service to anywhere in New Zealand and throughout the world. Furthermore, businesses could access a variety of sophisticated data services to meet their special needs for communication.

TELECOM NEW ZEALAND LIMITED IS BORN In the mid 1980s, the New Zealand Government began a major programme to corporatise gov- ernment departments. The New Zealand Post Office was one of the departments in their sights and in 1987 was broken into its three component parts: New Zealand Post, PostBank and Telecom New Zealand. The Telecom Corporation of New Zealand (TCNZ 2009) was incorporated as a State Owned Enterprise on 1 February 1987 and assets valued at NZD3.2B were transferred to the new organisation as at 1 April 1987. The new Telecom was charged with operating as a

TELECOMMUNICATIONS JOURNAL OF AUSTRALIA, VOLUME 59, NUMBER 2, 2009 MONASH UNIVERSITY EPRESS 26.1 commercial organisation, in a commercial environment. It would be required to make a profit, and it would have to do this by providing the standard and range of services New Zealanders had a right to expect. As at 1 April 1987, some deregulation of the telecommunications market in New Zealand was introduced with competition in the provision of Customer Premises Equipment. However, a timetable was put in place so that by April 1989; the telecommunications market in New Zealand would be fully liberalised. By this time, Telecom New Zealand Limited was doing business in one of the most open telecommunication marketplaces in the world. Anyone could enter the market operating under the existing commercial and fair trading legislation applicable to all enterprises in New Zealand. Initially in order to meet the emerging competitive market, Telecom broke itself up into a new organisation structure based on Regional Operating Companies (ROCs), while retaining only a very small corporate office in Wellington. The ROCs were given a mandate to deliver excellent customer service to their regions while a national company provided connectivity cov- erage of the entire country.

TELECOM NEW ZEALAND GOES UNDER THE HAMMER On 12 September 1990, the Telecom Corporation of New Zealand was sold by the Government to a consortium headed by two United States based companies: Bell Atlantic and Ameritech. The other founding members of the consortium were Freightways Holdings Limited and Fay Richwhite Holdings Limited, both New Zealand owned companies. The sale price was NZD4.25B. Associated with the sale of Telecom was a single “Kiwi Share”. The Kiwi Share involved the provision of certain guarantees written into Telecom’s Articles of Association. Known as the Telecom Pledges, these guarantees ensure that:

1. Local free calling will remain available to all residential customers, 2. The Standard Residential Rental for a phone line will not rise faster than the cost of living, unless Telecom’s regional operating company profits are unreasonably affected, 3. Phone line rentals for residential customers in rural areas will not be higher than those in the cities, and residential service will remain as widely available as it is at present (12 September 1990), 4. There would be one or more public share offerings over the first three years of private ownership.

Initially, the new Telecom New Zealand Limited continued to operate with its regional oper- ating company structure. However, in 1991, this was reviewed and a more centralised national structure was introduced. This move coincided with the first significant moves by well-funded competitors into the then fully deregulated market in New Zealand.

COMPETITION ARRIVES IN THE TELECOMMUNICATIONS MARKET From the early 1990s, competitors to Telecom New Zealand began to appear in the market. Initially these came in the form of toll bypass service providers. During the decade, this evolved into both wired and wireless competition across all aspects of the telecommunications market.

26.2 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES Two separate consortia initially began separate interconnection negotiations with Telecom in December 1989, but by May 1990 had decided to merge their interest to form Clear Commu- nications. Within six months the companies had confirmed their investment in the venture and by April 1991, Clear Communications was able to offer domestic and international toll bypass services. Clear Communications was owned equally by British Telecom, MCI International, Television New Zealand Ltd and Todd Corporation Ltd. By the mid 1990s, Clear Communications employed approximately 1000 staff, and had invested more than NZD250M in fixed assets in New Zealand. Clear Communications and Telecom agreed on 25 actual points of interconnect (POI) and 19 notional points of interconnect in 42 different localities (or separate free calling areas) throughout the country. In localities served by a notional point of interconnect, Clear's customers' toll calls were trunked to the nearest Telecom exchange with billing facilities, at which point they are physically handed over to Clear. Using these facilities, Clear Communications achieved approximately 22 percent of market share in the provision of domestic toll services in New Zealand by 1994. Clear's operations were profitable during the latter half of the 1990s. This achievement exceeded the results attained in many other countries that permitted telecommunic- ations competition, with a similar start-up period. In September 1995, Clear reached a new heads of agreement on local service interconnection with Telecom, which culminated in a formal local telephone service interconnect agreement in March 1996. This agreement also included new toll bypass interconnection arrangements. Clear then announced the availability of its business telephone service in the Auckland, Wellington and Christchurch central business districts and introduced a range of value added services, such as 0800 freephone. In 1992, Bell South acquired spectrum in the 900MHz band and started to deploy a national GSM based cellular network in direct competition to Telecom’s AMPS based cellular network, operating in the 850MHz band. BellSouth struggled to gain market share against Telecom, largely due to its smaller coverage footprint than Telecom. In the New Zealand market, it appeared that coverage was the largest driver of consumer choice. BellSouth was eventually acquired by in November 1998 for a sum of about NZD750M. Vodafone (Vodafone 2009) expan- ded the coverage of its network and has never looked back since. By 2005 Vodafone surpassed Telecom in terms of market share for mobile services. Saturn Communications started life as a cable TV company with operations on the Kapiti Coast, just north of Wellington. Saturn Communications, owned by Australian company Austar, made its entrance into the local market by acquiring the former Kiwi Cable company (formed in 1994). Saturn then expanded its cable TV services into the Wellington and Christchurch areas, and added phone and Internet services into the mix. New Zealand was set up in 1996 by Telstra as part of Telstra's international expansion. Competing with both Saturn Communications and Clear Communications, Telstra New Zealand initially focused on providing services to top tier international organisations, who were already Telstra clients in Australia. This was a direct parallel to the approach being taken by Telecom New Zealand in Australia with its New Zealand based customers in Australia. Telstra slowly expanded its operations in the business market, bundling Telecom New Zealand services distrib- uted as a reseller with its own network services. It installed a switch in Auckland to manage in-

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.3 coming and outgoing international traffic and maintained an interconnect agreement with Telecom New Zealand and with other companies, such as Clear Communications. Then at the end of 1999, Telstra surprised the market by entering into a partnership with Saturn, promising to invest NZD1.2B on a nationwide broadband network covering 65 per cent of homes and 80 per cent of businesses in New Zealand. The renamed TelstraSaturn promised to lay fibre loops in the main business centres, and wireless links to outlying regions and to leverage independent local and international undersea cables with a capacity of 120Gbit/sec ca- pacity. At last it looked as though there was a formidable opponent to Telecom and that true competition would at last arrive in New Zealand. Cabling New Zealand’s most densely populated regions for data and pay TV was not a new notion. Telecom tried to lay its own hybrid-fibre coaxial (HFC) cable between 1995 and 1997, investing close to NZD100M before aborting its FirstMedia project. Some commentators have claimed that the termination of Telecom’s FirstMedia project had more to do with making the books look good before corporate raiders Ameritech and Bell Atlantic took their money and ran, than claims it had found a cheaper alternative in digital subscriber line (DSL) technology. However, it was also true that by 1999 Telecom was deploying DSL technology across its copper access network, with a cost structure for the provision of high speed Internet services significantly lower than that which could be achieved using HFC. In addition, Telecom did encounter significant difficulties with the acquisition of content, which also limited the ability for an HFC network to deliver a sound return on investment. In November 2001, TelstraClear (TelstraClear 2009) was created by the merger of Telstra's operations in New Zealand, TelstraSaturn Limited and Clear Communications. At this time, Clear Communications had a staff of about 770 and the transaction was completed at a cost of NZD435M. Austar United Communications held an initial investment of 42% in TelstraClear before selling it back to Telstra in 2002. At the end of 2001, the consolidated TelstraClear was valued at about NZD900M, with an asset base with Net Book Value of around NZD450M and annual revenues of around NZD300M per annum. TelstraClear operated the Hybrid Fibre Cable pay television network developed by TelstraSat- urn Communications in Wellington, Kapiti and Christchurch. The network infrastructure included twisted copper pair cabling, which was used for the provision of residential and business local telephone service. Across all three regions, the network passed about 150,000 residential homes. In 2004 TelstraClear began offering residential line HomePlan services, including broadband outside those areas where it had its own network, reselling a wholesale product from Telecom New Zealand. In 2005, the entire network was upgraded to a fully digital transmission network.

LIGHT-HANDED REGULATION During the 1990s, the telecommunications market in New Zealand was regulated on a light- handed basis under the existing Telecommunications and Commerce Legislation. Telecom was the dominant player in the market and typically played “hardball” with all new entrants to the market. By the end of the first half of the decade, interconnection arrangements for all forms of telephony were bedded down, but not without several interventions by the Commerce Commission. Then the focus moved onto the wholesale regime for the wide range of data services that were evolving at that time, and especially focus on “data tails”. The emergence of the Internet

26.4 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES phenomenon in the second half of the decade then brought the spotlight on dial-up Internet connections and the opportunity for “free ISP” services, through the use of the call sink charac- teristics of the dial-up Internet calls and the ability to arbitrage the telephony interconnection charges through this mechanism. Telecom profits were significantly dented by this phenomenon, until it introduced the 0867 service for dial-up Internet in 1997. This caused considerable con- troversy for a couple of years and only in 2008 was the last court case resolved in relation to this matter between the Commerce Commission and Telecom New Zealand. The late 1990s saw the rapid emergence of broadband access capability using DSL technology. This was the start of a new era of evolution for the telecommunications industry in New Zealand and with it the emergence of a new regulatory regime.

ENTER THE TELECOMMUNICATIONS REGULATOR As the market for broadband services rapidly grew around the turn of the century, it became increasingly evident that the existing telecommunications regulatory framework in New Zealand was not going to be adequate to deal with the myriad of emerging issues. Hence in 2001, the Telecommunications Act was amended by the Government to include a specific telecommunica- tions industry-based Commissioner, as part of the Commerce Commission (NZCC 2009a). The new Telecommunications Regulator, Douglas Webb was appointed in 2002 and immediately commenced a series of investigations into areas of the telecommunications market, which were purported to be suffering from market dominance by Telecom. One of the prime areas of concern was Telecom’s dominance in the fixed access market and hence dominance of the emerging broadband market. The key issue was whether Telecom should be forced to unbundle its local loop, so that competitors could install their own DSLAMs into Telecom exchange buildings in order to use Telecom’s copper access network. The proceedings associated with this issue commenced late in 2002 and were finally concluded in November 2003, with the Commissioner deferring a decision on unbundled local loop. The prime reason for the deferral was that few industry players in the New Zealand market at that time wanted to imple- ment unbundled local loop. Most of the players in the market at that time were much more in- terested in using Telecom’s wholesale bit-stream services. As part of this decision, Telecom committed to achieving a broadband take-up of more than 250,000 residential customers by 31 December 2005 and of these connections, over 33% was to be delivered via wholesale channels. In addition, Telecom also committed to improving the performance of these products, including the deployment of Fibre-to-the-Node (FTTN) during the same period. These two commitments were critical components of the decision to defer un- bundled local loop. During 2004 and into 2005, the Commerce Commission explored the characteristics of the Telecom wholesale bit-stream services in more detail. TelstraClear in particular was pushing hard to ensure that these products were as unconstrained as possible and were offered at the lowest possible wholesale price. After considerable debate, it was declared that Telecom should offer all wholesale bit-stream products with unconstrained downstream line synchronisation rates. In other words, the downstream speed should be the maximum that a given copper access line would support, and this was to be independent of the technology deployed. At the same

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.5 time, the upstream could be constrained, if so desired – to limit the performance of real-time and peer-to-peer type applications. Under this decision, any value that might be placed on peak speed was removed from the wholesale market. Individual service providers could choose to constrain the speed of their retail products, but this feature was seldom used and rapidly all bit-stream products across the New Zealand broadband market become unconstrained on the downstream. Options for constrained upstream remained in the market, for the lower priced wholesale broadband bit-stream products. Another key feature of the wholesale bit-stream services that was investigated at the same time was the minimum throughput characteristic. It was claimed that this performance parameter should be defined even for so-called “best efforts” broadband services. After much debate again, it was agreed that all wholesale bit-stream services should exhibit the following characteristic: The minimum throughput shall be greater than 32Kbps when averaged over any 15 minute period. While all the debate was progressing around the wholesale bit-stream services, it appeared that Telecom lost sight of its November 2003 commitments. Until the characteristics of the wholesale bit-stream services were defined, TelstraClear did not actively market the Telecom wholesale bit-stream services. Hence although Telecom did reasonably well in driving retail broadband volumes, towards the required 250,000, the proportion of wholesale services was lagging badly. In addition, the discussions around bit-stream performance and especially the single wholesale price independent of downstream speed, made Telecom hesitate on the deploy- ment of any form of Fibre-to-the-Node. Why would one invest in improving the performance of broadband services, when there was little potential to charge higher wholesale prices for the resulting products? Hence by the end of 2005, Telecom had made no progress on the deployment of Fibre-to-the Node and it had not met its commitment with respect to broadband services de- ployed across the market.

THE MINISTRY OF ECONOMIC DEVELOPMENT STOCK-TAKE At the end of 2005, the Commerce Commission, the Ministry of Economic Development (MED 2009a) and the Minister of Information and Communications Technology recognised that Telecom had not delivered on its commitments from November 2003. At the same time, New Zealand was identified by the government of the time, as lagging behind most of the developed world in terms of broadband capability and penetration (placed 22nd in OECD rankings). Hence the Ministry of Economic Development was tasked with undertaking a Telecommunications Stock-take (MED 2006). This culminated in the presentation of a comprehensive report and subsequently a paper to Cabinet on 3 May 2006. This paper concluded that:

• New Zealand’s geography, population distribution, market size, dependence upon primary sector exports, and lack of competing broadband technology infrastructure were generally disadvantages, but that similar countries such as Denmark and Finland had overcome these disadvantages, • If New Zealand was to overcome the tyranny of distance from markets and transform its economy into a high skill, high earning, knowledge economy that a starting point would be reform of the telecommunications regulatory framework to reduce costs and monopoly

26.6 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES profits, increase competition, drive new innovative services and spur infrastructure investment, • Telecom had not met its targets for broadband penetration or Wholesale market penetration by year end 2005, • New Zealand was languishing in the third quartile of OECD Nations in terms of broadband penetration and capability, • Telecom had delivered very little in terms of improved broadband capability, including FTTN since promising to do so in 2003, • Many companies questioned about their investment intentions under various regulatory scenarios identified a strong willingness across the industry for investment, under the right conditions, • The ladder of investment concept was considered to be feasible for the New Zealand market, but regulatory reform alone would be insufficient to drive an optimum outcome.

Regulatory reform was seen to be necessary, but not sufficient to bring about the government’s objectives and in conjunction with regulatory reform more was required, including:

• Increased investment in broadband infrastructure, supported by central and local government, • A holistic and whole of government approach to ICT infrastructure availability, user capab- ility and generation of valuable NZ content (i.e. the Digital Strategy (NZ Govt 2008), • Commitment and vision from communities, business and government agencies, (i.e. the Di- gital Strategy), • Government intervention in areas of market failure or government intervention to accelerate ICT activity in areas where it might otherwise be delayed due to lack of competition and at- tractive market dynamics, • Technological advances and the underpinning laws of physics indicate that for the next decade at least, fibre optic technology will be the most cost effective and therefore dominant telecom- munications infrastructure technology to enable the delivery of high speed broadband for the majority (85%) of New Zealand’s population and 95% of its business users.

All of these conclusions led to a series of Government interventions into the telecommunica- tions market in New Zealand over the subsequent years.

TELECOMMUNICATIONS REGULATORY REFORM Given the results of the stock-take, the Government decided that regulatory reform was essential. This was undertaken through substantial amendment to the Telecommunications Act. This process was undertaken quickly through the remainder of 2006. The Select Committee hearing process was very robust with different points of view being expressed. However, the outcome was the Telecommunications Act 2006, which was passed into law on 22 December 2006. The key elements of the amended Act are as follows:

• Introduction of a local loop unbundling service (UCLL) in Telecom exchanges (full loop unbundling) and cabinets (sub-loop unbundling) with forward-looking cost-based pricing,

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.7 • Amendment of the existing regulated unbundled bit-stream services (UBS) to remove the constraint on the upstream speed and the prohibition on supporting any function that relies on real-time network capability, • Amendment of the existing regulated UBS to clarify that the existing regulated service can be purchased as “naked DSL” without a requirement to purchase the analogue telephone service, with the pricing principle being “retail minus”, • Introduction of a regulated co-location of equipment service and two backhaul services for the UCLL service. • Review the application of “retail minus” pricing for UBS and consider alternatives, • Review the provisions of the Telecommunications Act 2001 to ensure enforceability of regu- lated supply arrangements, • Empower the Telecommunications Commissioner to undertake telecommunication sector reviews, • Amend the Act to empower the Telecommunications Commissioner to implement operational separation for Telecom New Zealand.

These changes to the Act had far reaching implications for Telecom New Zealand, the Regu- lator and the industry as a whole as indicated below.

OPERATIONAL SEPARATION OF TELECOM NEW ZEALAND The Telecommunications Amendment Act passed on 22 December 2006. The Ministerial Determ- ination on Operational Separation of Telecom New Zealand was released on 26 September 2007 (MED 2009c). The Operational Separation model adopted by the Minister was based on that for BT in the UK, but with some important differences, mainly to reflect differences between the two markets, including size. The aim of the operational separation model is to better ensure non-discriminatory access to the bottleneck (monopoly) elements of the network. One of the aims is to provide an environment in which Telecom assesses the economics of (for example) fibre closer to the premises on the basis of total potential demand for services that can be delivered over that (open access) fibre rather than just demand for services provided by Telecom itself. Telecom released their initial Undertakings relative to the Determination on 25 October 2007. Public submissions were received on 22 November 2007. The public submissions were wide reaching and highlighted many of the advantages and disadvantages of the proposed separ- ation requirements. Based on this feedback, Telecom released their revised Undertakings on 19 December 2007 and the Minister released an amendment to the Determination on 24 December 2007. The revised Telecom Undertakings were out for further public comment until 25 January 2008. This round of public comment highlighted a small number of issues critical to the wider industry and again Telecom was requested to amend its Undertakings to properly reflect these concerns. After considerable negotiation, the final Operational Separation Undertakings were released at the end of March 2008 (MED 2008). The most critical element of the Operational Separation is the separation of Telecom into three arms length groups:

26.8 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES • Access Network Services (now Chorus), • Telecom Wholesale, • Telecom Retail.

There is a requirement for these three groups to operate on a stringent arms length basis, with clearly defined non-disclosure requirements between the groups. Then each of Chorus and Telecom Wholesale must implement Equivalence of Input (EOI) requirements for Access Seekers and Telecom Retail for all Relevant Services, where Relevant Services include Unbundled Copper Local Loop (UCLL), Unbundled Bit-stream Access (UBA), Backhaul services, Co-location services, etc. Many of these Relevant Services are also subject to the Commerce Commission Standard Terms Determination (STD) process (see description below), which then makes them Regulated Services. The Determination gave Telecom an option to either make all legacy regulated services EOI compliant or, withdraw all regulated legacy services over time and introduce new EOI compliant services based on their new Next Generation Network (NGN) capability. Telecom chose to do the latter, which implied the need to redesign many of the existing wholesale services, including the associated operational support systems. This represents a major piece of work, which in turn, drove the full EOI compliance out to the end of 2011 and beyond for a few services. However, this approach was considered by both the Government and Telecom to be a much better outcome for both Telecom and the industry as a whole. Given this choice, all new services are to be made partially EOI compliant by 31 December 2009, where the partially refers to the outward appearance that services are EOI compliant, but with back office systems still limiting the ability to deliver true EOI. This limitation must then be corrected by 31 December 2011 for all new services, but with a few exceptions. A few legacy services will remain in service beyond this deadline, based on the need for customers to transition to new products. This particularly applies to the new Telecom Primary Line Voice (PLV) service which will be launched well before 31 December 2011 in an EOI compliant form, but it will still take several years to migrate all of Telecom’s customers onto this new product and subsequently close down the legacy PSTN. This task must be achieved by 2020 at the latest. Along with the commitment to transfer Primary Line Voice to a VoIP based platform, Telecom committed to the deployment of Fibre-to-the-Node (FTTN). This was largely driven by the need to achieve Primary Line Voice with satisfactory performance over broadband to an Analogue Telephone Adapter (ATA) located in the customer premises. The specification defined for the FTTN was based on having greater than 80% of all Telecom copper access lines engineered to have a maximum line loss of 60dB at 1024KHz. This resulted in the selective deployment of FTTN, leaving around 50% of copper access lines still terminated on the local exchange MDFs. The agreed FTTN deployment plan, as contained in the Undertakings has more than 1500 DSLAM equipped distribution cabinets installed by 30 June 2010 and more than 3500 DSLAM equipped distribution cabinets installed by 31 December 2011. Using this approach, by 31 December 2011, greater than 80% of Telecom copper access lines will be designed to support downstream line synchronisation rates of better than 10Mbps. Actual downstream DSL line synchronisation rates experienced in any given premises will depend on house wiring, modem quality, etc.

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.9 Telecom is now well on the way towards meeting the requirements of the Undertakings, having achieved the milestones to date with minor exceptions. Several hundred street side cabinets have been deployed and the design of the new operational support systems to achieve the EOI requirements is well advanced. Telecom is also progressing the development of the new range of EOI compliant wholesale services, including the implementation of PLV. Progress is also being made on one further commitment from the Undertakings, which is to deliver a new Relevant service for IP Interconnection. This service is required to ensure that VoIP and VPN based services can be interconnected across multiple service provider boundaries.

COMMERCE COMMISSION STD PROCESS In parallel with the Ministerial Determination, the Commerce Commission has been progressing its Standard Terms Determination (STD) process (NZCC 2009b) for a range of services as illus- trated in Table1.

Table 1: Timetable for the definition and delivery of new Regulated wholesale services by Telecom. Commerce Commission website.

All of these services are being launched in accordance with the associated STD timelines, but are also subject to the Operational Separation EOI requirements as indicated above. To date many of these services have been launched in their regulated form as indicated in Table 1. The Commerce Commission is currently focusing on the issues associated with regulated sub loop unbundling. An essential component of the STD process is the definition of the wholesale prices to be used for the Regulated services. Some examples of the published prices for regulated wholesale services are shown in Table 2. All of these regulatory reforms are predicated upon a concept known as the ladder of invest- ment, whereby regulated access is provided to Telecom’s network for other service providers to install equipment. Telecom is then able to secure a fair rate of return for the access it provides to these service providers, thereby incentivising it to continue to invest in infrastructure. The hope is that the new entrants will, over time, increase their own investment in infrastructure. A critical component of this model is the correct setting of the regulated price for access in order to maintain incentives on both Telecom and the new entrants to invest in infrastructure and an ability to stop Telecom discriminating against the entrants in favour of its own retail service

26.10 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES providers. To this end the regulatory reforms also introduced accounting separation as part of the operational separation requirements on Telecom to reduce the opportunity for discrimination. The jury is still out as to whether the expected investment by access seekers is actually being made in the New Zealand market. Certainly some investment has been made in UCLL, but rel- ative to the entire market investment in telecommunications, it is very small.

Table 2: Some examples of regulated wholesale prices currently available in the New Zealand market (the bit rate figures indicate the bandwidth allocated for priority traffic, such as that which might be used to support real-time voice). Commerce Commission Website.

It should be noted that under the revision of the Telecommunications Act in 2006, the oppor- tunity for the industry to form a consultation body was introduced. This body is known as the Telecommunication Carriers Forum (TCF) (TCF 2007) and includes as members all of the Tier 1 carriers in New Zealand and many of the Tier 2 carriers. The TCF was formed during 2007. Today, both the MED and Commerce Commission rely heavily on the advice provided by the TCF as consistent and robust input to their various considerations, especially those relating to technical matters. The industry parties represented by this body are strongly encouraged to resolve issues to the greatest extent possible, either in conjunction with or as substitution to regulation. The input from the TCF has been widely used in the development specification of the above regulated wholesale products. However, in recent months, there are signs that this body is struggling to reach a consensus on really challenging issues, especially where they have substantial impact on one or more of the Tier 1 players or impact on the Tier 2 players relative to the Tier 1 players. Time will tell if this industry structure will deliver against all of its expectations. Cer- tainly there are strong indications of fragmentation into a variety of common interest groups. A further aspect of the regulatory reforms being undertaken by the Commerce Commission is that related to Regulatory Audit of Telecom New Zealand. As part of the operational separation

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.11 Telecom is required to keep separate accounts for each of its separated entities. This includes the appropriate allocation of costs and revenues to the various regulated and relevant services. In order to ensure that this is being done to a high standard, the separated accounts are subject to an annual regulatory audit under conditions defined by the Commerce Commission (NZCC 2009c). Telecom is currently in the process of selecting its preferred regulatory auditors.

THE TELECOM SERVICE OBLIGATIONS The rural sector is an important contributor to the New Zealand economy. Approximately two thirds of New Zealand’s total merchandised exports are from the agriculture, horticulture and forestry sectors, most of which is produced in rural areas. Further, approximately 64% of the value of agricultural, horticultural and forestry primary production is generated in remote rural areas. Remote rural areas comprise some 86% of New Zealand’s land area and 8% of the pop- ulation. Overall, approximately 14% of New Zealanders live and work in rural areas. Under the provisions of the Local TSO, rural users have access to Telecom’s fixed network telephone services that must also support a mandated minimum dial-up data capability to all users and can also provide a limited broadband service (~1Mbps with some higher speeds) to around 30% of users. It should be noted that since the Kiwi Share obligations were instituted, Telecom has continued to provide connections to its fixed network in both urban and rural New Zealand, including in high cost areas. Consequently, Telecom’s fixed network coverage is very comprehensive, even in remote parts of rural New Zealand. However, this infrastructure has been designed to deliver good telephony service and not broadband service. Independent expert advice raised concern about Telecom’s level of reinvestment in the rural telephone service network. In particular, Telecom has not invested in upgrading rural backhaul network infrastructure at levels comparable with the depreciation allowances available under the taxation rules, or at rates comparable to international best practice. Consequentially there is little fibre backhaul infrastructure in rural New Zealand, which in turn means that broadband capability in rural areas is limited. This in turn means that broadband capability in rural areas is limited in both coverage and performance capability. This is why new technology wireless access systems have little prospect of addressing rural broadband infrastructure inadequacies because they do not necessarily address backhaul constraints. Satellite based broadband service is available to all New Zealanders, including those in remote areas. However, satellite pricing is an issue for some potential users and broadband performance can be impeded by the latency inherent in satellite based platforms when applied to some applic- ations. Significant expenditure would be required in rural fibre backhaul, requiring larger cabinets, to substantially improve terrestrial based broadband. For example, approximately NZD300M would be required to achieve 5 Mbps downstream for approximately 65% of rural users and 1 Mbps downstream for approximately 80% of rural users. This investment would primarily be in fibre optic based backhaul, as opposed to new access networks; as such upgrades would enable existing copper access circuits to be used to provide fast broadband services. Alternatively, the same fibre based backhaul could be used to deliver high performance broadband over wireless using modern technologies, such as WiMax or LTE.

26.12 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES In August 2008, the Ministry of Agriculture and Food (MAF) commissioned research regarding urban and rural attitudes to the provisioning of telecommunication services to rural New Zealand. As illustrated in the diagram below, the research found that there was strong support for providing services to rural areas regardless of the cost across urban and rural New Zealanders, and that there was strong agreement that “everyone in New Zealand should have reasonable access to services regardless of where they live and how much it costs to provide”. Telecom’s fixed network telephone service is in the vast majority of cases provided at the so- called PSTN grade quality of service. This is not necessarily the case with other operator’s tele- phone services such as cellular network telephone service based offerings and Internet based VoIP telephone service offerings. In general cellular systems use voice compression technologies to encode the speech channel and consequently the speech quality is significantly reduced relative to PSTN grade. In general cellular systems speech quality is inferior to PSTN grade, but the ac- tual performance is determined by a range of factors, including the quality of coverage. Both Vodafone and Telecom have announced intentions to use 3G cellular technology to provide cel- lular calling services and potentially wireless-based broadband services in rural areas. However, the performance offered by the options will depend greatly on the quality of wireless coverage and the availability of high capacity backhaul into the wireless base stations.

Figure 1: Summary of the results of a survey relating to the provision of telecommunication services to rural New Zealand. Source: New Zealand Ministry of Agriculture and Fisheries.

All these factors are part of the review which is currently in progress to determine a new form of Telecommunication Service Obligation for rural New Zealand. This review includes a variety of factors, including:

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.13 • The minimum performance for local telephony service, • The minimum performance for broadband data access, • The approach to be used to distribute any form of rural subsidy, both from the government and between the service providers.

The review of the TSO (MED 2007) is still in progress. The Telecommunication Carriers Forum (TCF) has been engaged to assist with the preparation of a new Code of Practice to replace the existing TSO agreement between Telecom and the Government. One option being explored is to establish such a Code and then to auction the regions of rural New Zealand to Service Providers, who would then each attract the rural subsidy inherent within the TSO. However the approach has not yet been finalised and there is still considerable debate over the details of the approach to be taken.

OTHER REGULATORY INTERVENTIONS As indicated above, the government was not convinced that Regulatory Reform alone would create the right conditions to ensure that the telecommunications market in New Zealand would achieve a performance, which benchmarks well against the top quartile of OECD nations. Hence further interventions have been undertaken to stimulate increased investment in broadband in- frastructure. This commenced in the early part of the decade with the PROBE initiative, which provided subsidies for the provision of improved broadband service into rural regions of New Zealand. This programme was particularly focused on the delivery of a minimum standard of broadband performance into all schools across New Zealand. By any measure this initiative was only a partial success. By the middle of the decade, this programme evolved into the Broadband Challenge, which was specifically focused on the deployment of fibre infrastructure into New Zealand cities. The central government provided up to 50% funding for the deployment of fibre capability around up to 15 cities in New Zealand. It was intended that this be the start of a wider deployment of open access fibre infrastructure in New Zealand and certainly this has been the case in a few cities such as Hamilton, Nelson and Christchurch. As an example, Christchurch City Networks Limited now has almost 100km of fibre deployed with around 150 dark fibre premises connec- tions. The network is based on open access principles and dark tube and dark fibre, point to point services only are sold today. This model is working well and the shareholders are pleased with the results to date. This programme was due to be extended in late 2008, through the Broadband Investment Fund, but the change of government at the end of 2008 has forced a change in direction as indic- ated below. During this period, the government interventions were not only limited to supply side initiat- ives. The Government also took an active role in some demand side initiatives. The major demand side initiative was to leverage the aggregation potential around Government entities, especially those relating to education and health. Most government sites are now mapped onto a publicly accessible website and all such government agencies are encouraged to use their purchasing power

26.14 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES to encourage the deployment of fibre optic access to serve these sites. Other demand side initiatives are also in train.

A NEW GOVERNMENT FOR NEW ZEALAND AND FIBRE-TO-THE-PREMISES The general elections held in November 2008 brought a new Government into power in New Zealand. One of the key planks of the National Government’s policy was the provision of fibre- to-the-home (FTTH) for 75% of New Zealanders living in urban New Zealand. This was to be achieved over a 10-year period with the initial focus for 6 years on connecting up businesses and government agencies, especially education and health facilities. In order to achieve this outcome, the Government was willing to invest NZD1.5B of its money into suitable vehicle(s) along with an appropriate amount of private investment to achieve the end outcome. This policy proposal is based on the potential for substantial growth and productivity im- provement in the New Zealand economy. The potential for such development has been researched by several parties with national benefits to be derived on an annual basis estimated to be in the range of NZD1.4B to NZD4.4B (NZ Institute 2007). Given that the risks associated with these benefits are high, especially on a “build and they will come” investment model, it was determined by the government that no private investor would be willing to invest in these outcomes on its own and hence some form of government assistance is required. Hence the National Government is looking at the deployment of fibre to the premises as a strategic infrastructure investment for New Zealand. At the same time, they want private investment contributions to be made alongside their investment. The most optimistic estimate for the cost to deploy fibre passed 75% of premises located in urban New Zealand is more than NZD2B, with an upper bound of around NZD4B. Connecting this number of premises would be additional to the premises passed cost, amounting to an addi- tional sum of anything from NZD2B to NZD3B. Hence it is obvious that the private investors still need to front up with a serious amount of money on top of that offered by government. Given the risks associated with the demand side of the investment equation, there is some doubt as to whether suitable investors will front with their share of the required funds. On 31 March 2009, the Government released a consultation document on its proposed ap- proach to implement the urban FTTP network (MED 2009b). The consultation closed on 27 April. The proposal in brief is that:

• the government will establish a Crown-owned investment company (CFIC) which will function as the vehicle for investing the government’s NZD1.5B, • The CFIC will invest alongside private sector investors in regional fibre companies (LFCs) that will deploy and provide access to fibre optic network infrastructure in the 25 cities and towns covered by the initiative, • The CFIC will operate an open, transparent and contestable process to select partner share- holders for LFCs, • The LFCs will deliver open access dark fibre services on a wholesale only basis to retail service providers. • The ownership of the LFCs will be such that only a minority holding can be held by a service provider delivering retail services into the market.

PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES 26.15 The aim is to establish the CFIC by mid June 2009 and appoint an initial selection of LFCs by January 2010. One important deficiency in this proposal is that it does nothing for the 15% of premises located in rural New Zealand. Given the importance of the rural sector to the New Zealand economy, the proposal has come under some criticism for not being complete. The Government has committed NZD48M to help develop rural broadband in an unspecified manner. It is likely, but not made explicit that this will be combined with the TSO review initiatives.

LOOKING AHEAD As with all countries, New Zealand has travelled a long journey, over more than 100years when it comes to telecommunications development and the public policy related to this key component of a modern national economy. For New Zealand the journey has already taken a large number of twists and turns, and more are on the way. It is certain that the next segment of the journey will be equally as exciting as all of those that have gone before. With the most recent initiatives by the New Zealand Government, we have almost turned a full circle in terms of Government policy. As it was in the beginning, at least parts of the telecom- munications network in New Zealand will be back in government ownership and control, within a few years. This situation is expected to last for at least the next couple of decades. Is this cycle of public and private ownership for telecommunications infrastructure surprising? In many respects it should not be so, as large strategic national infrastructures, where return on investment is highly uncertain, usually fall to the government for funding. This was true 100 years ago when the first telecommunications infrastructures were deployed and it is also true today as we embark on the deployment of the next generation of access infrastructures with fibre to the premises. The strategic importance of such an infrastructure is readily recognised, but the path to commercial success is far from assured, especially in the early 10–15 year timeframe. This is the type of investment where government intervention is required. The New Zealand Government is strongly of the belief that a first class broadband infrastruc- ture is essential for sustainable economic growth and productivity gains over the long term. Hence it has been very proactive over several years in working towards this goal. However, the biggest step in this journey to a widely available fibre to the premises access infrastructure is about to commence. The details of this next step are still being formed as this article is being prepared. The next 10 years will show the results of this initiative and whether it will achieve all of the benefits anticipated.

REFERENCES

Ministry of Economic Development, 2006. Telecommunications Stocktake. Accessed 10 May 2009. Available from: http://www.med.govt.nz/templates/ContentTopicSummary____20266.aspx. Ministry of Economic Development, 2007. Telecommunication Service Obligations (TSO) Review, 2007. Accessed 10 May 2009. Available from: http://www.med.govt.nz/templates/StandardSummary____296.aspx. Ministry of Economic Development, 2008. Telecom’s Approved Separation Plan. Accessed 10 May 2009. Available from: http://www.med.govt.nz/templates/StandardSummary____34435.aspx. Ministry of Economic Development, 2009a. Information and Communication Technology. Accessed 10 May 2009. Available from: http://www.med.govt.nz/templates/StandardSummary____98.aspx.

26.16 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES Ministry of Economic Development, 2009b. New Zealand Government Broadband Investment Initiative. 31 March 2009. Accessed 10 May 2009. Available from: http://www.med.govt.nz/upload/63958/Final-broadband-initiative-consultation-document.pdf. Ministry of Economic Development, 2009c. Operational Separation of Telecom. Accessed 10 May 2009. Available from: http://www.med.govt.nz/templates/ContentTopicSummary____26310.aspx. Newman, Keith. 2008. Milestones: a timeline of telecommunications and computing, July 2008. Accessed 10 May 2009. Available from: http://www.wordworx.co.nz/Telecommhist.html. The New Zealand Government, 2008. The Digital Strategy 2.0. Accessed 10 May 2009. Available from: http://www.digitalstrategy.govt.nz/upload/Documents/Digital Strategy 2.0 FINAL.pdf. The New Zealand Institute, 2007. Defining a Broadband Aspiration: How Much Does Broadband Matter and What Does New Zealand Need?, September 2007. Accessed 10 May 2009. Available from: http://www.nzinstitute.org/Images/uploads/Broadband%20aspiration%20Sept%202007.pdf. New Zealand Commerce Commission, 2009a. Telecommunications Overview. Accessed 10 May 2009. Available from: http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/Overview.aspx. New Zealand Commerce Commission, 2009b. STD Overview. Accessed 10 May 2009. Available from: http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/StandardTermsDeterminations/Overview.aspx. New Zealand Commerce Commission, 2009c. Accounting Separation of Telecom. Accessed 10 May 2009. Available from: http://www.comcom.govt.nz/IndustryRegulation/Telecommunications/AccSepofTelecom/reportingrequirements.aspx. Telecommunication Carriers Forum, 2007. Accessed 10 May 2009. Available from: http://www.tcf.org.nz/content/default.html. Telecom NZ, 2009. Telecom History and Quick Facts. Accessed 10 May 2009. Available from: http://www.telecom.co.nz/content/0,2502,200633-1548,00.html#20013062. TelstraClear, 2009. Accessed 10 May 2009. Available from: http://www.telstraclear.co.nz. , 2009. Accessed 10 May 2009. Available from: http://www.vodafone.co.nz.

Cite this article as: Dr Murray Milner. 2009. ‘Playing the telecommunications game in New Zealand: The evolving story of telecommunications public policy in New Zealand’. Telecommunications Journal of Australia. 59 (2): pp. 26.1 to 26.17. DOI: 10.2104/tja09026.

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