Joyce unveils Telecom regulatory relief package

Photo / Greg Bowker

Fundamental changes to telecommunications regulation tabled in Parliament this morning are giving Telecom its first look at the trade-off being offered in return for splitting itself into two separate companies.

Telecom is offering to structurally separate its wholesale infrastructure arm, Chorus, from its retail services arm in return for being allowed to participate in the government's $1.35 billion ultra-fast broadband initiative.

Telecom this morning reacted cautiously to the release of a proposed new regulatory framework that would come into force if the company separates.

Concerned as much as anything to prevent any perception of a "done deal" while it continues to negotiate with the government's UFB vehicle, Crown Fibre Holdings, Telecom said only that the proposals followed the Ministry of Economic Development's consultation process and that the company would "participate actively, along with other industry players, in the select committee process."

"Telecom remains focused on its on-going intense commercial negotiations with Crown Fibre Holdings," the company said.

The package unveiled today is intended to ensure Telecom can't build a dominant position in the telecommunications environment that will emerge as fibre-optic cable and wireless services gradually replace today's copper-based telephone networks.

Telecom's share price was unchanged at $2.24 in early NZX trading today.

The proposed amendments seek to preserve protections for end-users and competitors, reduce unnecessary costs and complexities, and ensure Telecom is "neither unduly advantaged nor disadvantaged by de-merging in areas such as tax and land access," said Communications Minister Steven Joyce.

Telecom has potential involvement in about 85 per cent of the proposed UFB urban roll-out, and for the $300 million rural broadband roll-out, in a joint-venture with Vodafone.

However, at this stage, Telecom's involvement has not been confirmed. It awaits the outcome of negotiations with Crown Fibre Holdings, the government's vehicle for UFB negotiations.

If successful, Telecom will then put proposals for structural separation to its shareholders.

If unsuccessful, or if shareholders were to reject structural separation, the proposed regulatory changes will not occur. Telecom made clear last year it needed substantial regulatory change because current rules reflect the telecommunications environment as it has been in the past, rather than as it will be when UFB is in place.

The company has yet to respond to the Supplementary Order Paper to the Telecommunications (TSO, Broadband and Other Matters) Bill, tabled today, but has previously indicated it could not advance structural separation without this detail.

The two biggest changes outlined in the SOP are to vital aspects of the Telecommunications Service Obligations, which require Telecom to ensure "affordable basic telephone services for all New Zealanders" and have been in place, with modifications, since Telecom was privatised 20 years ago.

However, the SOP also says that there will be a broader review of the Local Service TSO arrangements by the end of 2013, "looking at issues such as whether the current funding arrangements are sustainable."

The first major change proposed is to regulated pricing for copper-based "layer two" services, which currently deliver the platform for non-fibre, fast internet. This will change from a "retail -minus approach to a cost-based approach," according to Ministry of Economic Development notes on the SOP.

This is required because a separated Chorus, delivering such services, would not be offering retail products, so no "retail-minus" price could be deduced.

The second major change is to the way prices for telephone services are regulated nationally under the TSO.

The so-called UCLL (unbundled copper local loop) service would change from calculations based on regional differences, where rural services are more expensive than urban because of lower population density and higher costs of supply in rural areas, to a single, nationally averaged price.

This change would not occur until three years after Telecom structurally separated and is "intended to ensure that the TSO can be delivered on a sustainable basis."

"The TSO requires Telecom to deliver an averaged retail price for a home phone line across all of New Zealand. This means the price a rural household pays is the same as an urban home. Under structural separation, this obligation would remain on the separated retail arm of Telecom," the MED notes say.

However, the TSO could prove unsustainable if Telecom's retail arm was forced to offer a single national price, while its wholesale arm continued to be calculate prices for copper lines on the current basis, where true costs of delivery to urban versus rural households are reflected.

Consistency between wholesale and retail pricing was therefore desirable.

The package also envisages one-off tax law changes to neutralise tax liabilities that would be triggered by structural separation.

This was not a "windfall" for Telecom, but intended to "ensure that structural separation itself does not advantage or disadvantage or its shareholders."

The SOP contains measures that will impose a nationally consistent approach to resource consents for mobile and wireless infrastructure, and grant these technologies the same rights as currently exist for the installation of fixed wire services.

Also included is capacity for Commerce Commission "authorisations" that will allow potentially anti-competitive arrangements to be considered and permitted where public benefits outweigh the downside.

This is intended to prevent court action delaying the UFB roll-out.

A more fundamental review of telecommunications regulation is envisaged in 2018, with a view to adapting to the new commercial environment that the UFB roll-out is expected to create.