Spark New Zealand [PDF 573KB]

Review of the Telecommunications Act 2001

Submission | MBIE 3 November 2015

Contents

Executive Summary .............................................................................................................. 1

Introduction ........................................................................................................................... 4

The telecommunications sector ............................................................................................. 4

Sector growth, investment and competition ....................................................................... 4

Telecommunications sector investment ............................................................................. 6

Government policy must focus on promoting investment across all platforms .................... 8

The regulatory framework: challenges .................................................................................. 9

The proposed focus on the regulatory framework review ................................................... 9

Regulatory policy issues that are not a key focus ............................................................ 10

Fibre regulation and pricing from 2020 ................................................................................ 11

LRIC and BBM models comprise a set of internally consistent choices ........................... 12

Options for implementing a BBM model for fibre services ................................................ 13

We prefer nationally averaged pricing, and recommend the Commission be responsible for a wash-up between Chorus and LFCs to provide for this ................................................. 18

Transitioning to a new fixed network regulatory model ........................................................ 19

The mobile market and radio spectrum ............................................................................... 20

MVNOs ............................................................................................................................ 22

Infrastructure sharing ....................................................................................................... 23

Response to questions in the discussion............................................................................. 24

Goals, principles and challenges ..................................................................................... 24

Pricing for fixed line access services ............................................................................... 27

Mobile competition and radio spectrum ........................................................................... 34

The regulatory toolkit ....................................................................................................... 36

Attachment A: Economic Insights report.............................................................................. 44

Telecommunications Act review 2015 Public version 1

Executive Summary

Introduction

1. Spark is one of a number of telecommunications providers making significant investments in our sector. As a retail service provider (RSP) and mobile operator, these investments are in new technologies that support next generation mobile services, media and content services, cloud computing services, and broadband services.

2. Our investments are not without risk. They are not one-off. They are not subsidised by Government, and they are not guaranteed a return. They are made in a sector where the investment business case is particularly challenging. Industry revenues and retail prices are declining at a much faster rate than our key costs (fixed wholesale services and bandwidth costs associated with the rapid growth in end-users’ data usage), and wholesale fixed access providers are taking an increasing share of those industry revenues.

3. The discussion paper represents a comprehensive review of New Zealand’s telecommunications regulatory access framework, and seeks views on a large number of potential changes to that framework. This being the fourth major legislative review of the regulatory access framework within the last 15 years, we agree that changes to that framework should only be made where a clear policy problem or gap is identified. The simplest way to deliver a certain and stable regulatory framework is to minimise changes to the legislation underpinning it. For that reason, we do not support any of the more fundamental changes to our regulatory framework considered in the discussion paper. Changes to the purpose statement of the Act, changes to the Act under which fixed regulated services are priced, and changes to the role of the Commission will introduce uncertainty to our markets, without any clear countervailing benefit.

4. Similarly, Government involvement in the migration of services and customers from copper to fibre is likely to create more issues than it solves: we are a long way from knowing what that migration will look like, and whether there will be any policy issues created by it.

5. The principal policy gap today is how fibre services will be regulated and priced from 2020 on. There is an opportunity for policy makers to provide important clarity on that issue now, to enable the industry to prepare in advance for the transition from today’s contracted pricing model.

UFB pricing model from 2020

6. The discussion paper indicates a Government preference for regulating fibre services using a building blocks methodology. Under this approach, a valuation for the starting asset base of Chorus and the LFCs would be set, with actual capital and operating expenditure added to this base over time. This approach provides access providers with increased certainty they will achieve an acceptable return on their actual investments as opposed to a return on a set of hypothetical investments that do not align with their asset bases. It also gives access seekers and end-users increased certainty that access providers will not be able to extract excessive profits from them.

7. We agree that layer 1 and 2 fibre access services should be regulated, and we support a transition to a BBM approach with a starting asset valuation based on the asset that Chorus and the LFCs will have in place come 2020.

8. Our preference is for:

a. A BBM approach for fibre services, with starting asset values set using a depreciated actual cost (“DAC”) methodology;


b. A consistent approach to copper and fibre pricing. Whatever model is used to price fibre should be used to price copper;

c. Government to be clear about whether it wants to control copper:fibre pricing relativities, and how it wants that control to be achieved in its pricing models for copper and fibre services;

d. A price cap model, rather than a revenue cap model; and

e. Nationally averaged pricing.

9. This model would represent a complete shift away from today’s LRIC-based regulatory pricing framework for fixed access services, to a DAC BBM pricing framework. While it may well not be needed, we consider it would be prudent for the Act to also provide explicit power to the Commission to implement price smoothing measures – by way of price glide-paths – to help manage this transition should that be in the long-term benefit of end-users.

10. We do not support a BBM approach with a starting asset valuation based on the Commission’s FPP LRIC model for UCLL and UBA services – what the discussion paper describes as the ‘line in the sand” variant. We see fundamental flaws with this variant, which mixes a hypothetical starting asset base with actual ongoing investments and so results in a model that is neither a sensible hypothetical network model nor a reflection of Chorus and LFCs’ actual networks. The parallels to the current TSLRIC model – complex, unpredictable valuation rules and models, and hypothetical asset bases – are clear, and will be equally unwelcome in 2020 as they are in 2015.

11. It is increasingly apparent that the current regulatory framework results in end-users paying Chorus twice for fibre investments: once through the UFB and RBI subsidies, and again through monthly TSLRIC prices for UCLL and UBA. Any future pricing framework will have to ensure this situation is not repeated.

The mobile market

12. The mobile market in New Zealand today is characterised by:

a. Intense infrastructure competition: Mobile networks are not natural monopolies. Spark and Vodafone have deployed nationwide mobile networks, and 2degrees is well advanced in achieving the same. Infrastructure competition, which for so long has been the illusory objective of fixed line regulations, already exists for all mobile services.

b. World class technology capability: All three mobile network operators are investing in cutting edge technologies without Government subsidy. We are currently deploying 4G technology across each of our networks, and that 4G investment has resulted in New Zealanders enjoying the fastest 4G speeds of any country in the world.1

c. Wide coverage: Mobile network operators are investing in rural New Zealand. New Zealand is a challenging environment for mobile network operators: when NZIER surveyed New Zealand operators’ costs in 2014, it found that network investment in New Zealand costs 17% more per person than it does in the United Kingdom.2 Despite this, we routinely invest in rural coverage that, in other countries, would be deemed uneconomic. In the same report, NZIER found that, if the coverage targets

1 OpenSignal “The State of LTE”, September 2015, https://opensignal.com/reports/2015/09/state-of-lte-q3-2015/ 2 NZIER, Mobile industry in New Zealand, performance and prospects, October 2014, https://www.sparknz.co.nz/content/dam/telecomcms/sparknz/content/news/NZIER-Mobile-Industry-in-NZ.pdf

https://opensignal.com/reports/2015/09/state-of-lte-q3-2015/

https://www.sparknz.co.nz/content/dam/telecomcms/sparknz/content/news/NZIER-Mobile-Industry-in-NZ.pdf


set in the United Kingdom for mobile coverage were applied to New Zealand, we would only have mobile networks that covered 60% of our population.

d. Internationally competitive prices: The mobile market is delivering excellent prices to New Zealanders and New Zealand businesses. The Commission’s June 2015 price benchmarking study illustrates the stark contrast between New Zealand’s mobile phone prices (which are below OECD averages by between 8% and 62%) and fixed line pricing (where we have above-average prices in more categories than we have below-average pricing).

13. By any measure, New Zealand’s mobile sector is delivering outstanding results to customers and to New Zealand. In this context, we can see no evidence of market failure that might justify regulatory intervention, and no evidence of how any intervention will produce better outcomes for end-users in the long-run.

14. If there is a policy challenge in the mobile sector, it is how to achieve expanded 4G coverage in rural New Zealand – coverage in areas where it is simply uneconomic for mobile networks to go. In the context of the strong competition outcomes already being delivered in mobile markets, the Government should focus on identifying ways to incentivise further investment in rural infrastructure by mobile network operators.

15. The Government is already consulting on design principles for the next round of RBI, and considering national environmental standards for telecommunications facilities that – depending on their design – may lower deployment costs for rural mobile infrastructure. Commercial infrastructure sharing provides another option to achieve the same. We encourage Government to continue its focus on developing policies that can reduce deployment costs for mobile infrastructure.


Introduction

1. Thank you for the opportunity to comment on the Government’s Review of the Telecommunications Act 2001 discussion paper (discussion paper).

2. Our industry is a critical enabler of productivity in New Zealand’s economy and of our country’s social connectivity. We invest significant amounts every year in new technology, and the services we provide form the foundation for innovation and growth in New Zealand. Recognising the sector’s importance to our country’s success, the Government has recently announced an ambitious policy objective to enable 99% of New Zealanders to have access to 50Mbps broadband speeds by 2025.

3. Achieving this objective will require transparent policy processes and objectives, and a stable and certain regulatory framework, to ensure market participants have the confidence and incentives to invest in the places and quantities necessary to support Government’s aspirations.

4. In this submission we:

a. Comment on the sector background and propose that, in addition to fibre prices post 2019, the key challenge is ensuring wider ongoing industry investment;

b. Comment on proposed changes to the fixed network regulatory framework;

c. Respond to the options described for mobile and spectrum regulation; and

d. Address specific questions posed in the discussion paper.

5. Attached is an Economic Insights report addressing the proposed policy framework and implementation matters.

The telecommunications sector

Sector growth, investment and competition

6. The telecommunications sector has made significant investment in infrastructure over the past 10 years. This has seen upgraded core, mobile and urban fibre networks, and service providers investing in a production line of new products and services.

7. This investment has been made to support the massive growth in customer demand for broadband services, and data usage across those services. Video now makes up 72% of Spark fixed network traffic at daily peak times. We are making significant investments in core and wireless access networks to support this growth. This level of increase is likely to be sustained for a number of years.


Figure 1: Expected data growth3

8. The increasing customer demand for data requires access networks to be architected to facilitate this level of growth, and ongoing investment by retail service providers in caching, backhaul, international connectivity and service experience enhancements.

9. But industry revenues have not been sufficient to support investment at the levels necessary to meet government aspirations, and as a result the Government has funded accelerated investment in urban fibre and to redirect industry revenue, via the Telecommunications Development Levy (TDL) into rural broadband infrastructure.

10. This gap between the levels of investment industry can commercially support and the levels implied by Government and public aspirations underpins the principal policy issues the Government must address in this legislative review:

a. How to price the fibre infrastructure that has been funded by Government subsidies after the contracted pricing expires at the end of 2019;

b. How to ensure that the funding contributed by Government and end-users’ for this infrastructure is recognised in any regulatory pricing model for fibre access services; and

c. How to create the correct pricing incentives on fixed access network operators to invest in fibre in rural New Zealand.

11. The Government has also recently announced an ambitious vision that would see by 2025:

a. 99 per cent of New Zealanders able to access broadband at peak speeds of at least 50 Mbps (up from 97.8 per cent getting at least 5 Mbps under RBI);

b. The remaining 1 per cent able to access to 10 Mbps (up from dial up or non-existent speeds).

3 From Spark NZ investor day presentation October 2015.


12. Rural communities are set to benefit most under the new targets which mark a ten-fold increase on the current target peak speeds of 5 Mbps under the Rural Broadband Initiative (RBI).4

13. This target implies considerable new investment in rural New Zealand in the next 10 years. The current policy review will need to ensure the legislative framework adequately supports these targets and provides correct incentives to market participants to invest in the right places at the right levels.

14. Regulatory certainty for wholesale fixed access providers will be important. Those providers should have confidence that regulation will ensure they receive a return on their investments that is equivalent to that they might expect in a competitive market.

15. Equally important, though, will be regulatory certainty for fixed RSPs and mobile network operators. Those parties should have confidence that regulation will ensure the prices they pay for wholesale fixed access services are cost reflective and do not permit wholesale fixed access providers (their competitors in many markets) to earn excess returns.

16. A number of potential legislative changes canvassed in the discussion paper would permit returns in excess of long-run cost. The Government’s entry into telecommunications markets as an investor in wholesale fixed access networks has distorted competition in a number of markets – that is unavoidable. But it must avoid further distorting competition further by granting that same sliver of the market above-normal returns.

Telecommunications sector investment

17. There will be significant ongoing investment requirements to meet demand and to implement Government policy objectives. To meet the Government vision alone would require upgrades for a minimum of 250,000 households5.

18. While a significant investment challenge, at current investment levels the challenge looks achievable. The Commerce Commission reports industry investment of over $1.6B for the 2014 year.

Figure 2: Telecommunications sector industry investment6

19. However, there are worrying signs when this high level picture is broken down. While overall investment is high, a significant proportion of that investment is due to Government

4 See Minister’s announcement 6 October 2015. 5 Being the number of households estimated in 2011 to not having broadband coverage, and also the number of households upgraded to 5Mbps through the Vodafone RBI programme. 6 From Commerce Commission TDL levy reporting.


funding. All of the recent growth in fixed network investments can be attributed to the UFB and RBI programmes, and these programmes fall away over time.

Figure 3: Telecommunications sector investment by platform and source7

20. Beyond those programmes of Government-subsidised investment, the empirical evidence we see suggests industry investment levels will fall in the future:

a. Wholesale providers of fixed services, RSPs and mobile operators are each investing another $400M per annum, while the Government is providing around $300M per year in UFB and RBI subsidies.8 The result is total annual investment of approximately $1.5-$1.6 billion in what is a $5 billon market, or a capex:revenue ratio above 30%. This is an unsustainable level of investment for a market that is not growing;

b. Industry revenue is declining as “over the top” services increasingly compete with traditional telecommunications retail services such as voice calling. The Commerce Commission reports that industry revenues are falling by over 2% per year, and IDC forecasts industry revenue to continue to decline year on year;

c. Last year we reported a $70 million decline in fixed calling revenues. IDC reports an 8% year on year decline in voice only access and calling over the 2013-15 period9;

d. There is already low industry profitability. Statistics NZ Annual Enterprise Survey data released in August 201510 suggests that in the 3 years to 2014 the sector11 earned an average 2% return on its assets, compared to an all industries return on assets of 3.4% over the same period; and

e. We are investing proportionally more of our revenue than every other OECD country bar one, while receiving less revenue per subscriber than the OECD average.

21. The OECD reported the average investment to total revenue ratio across the OECD of around 15%, at the same time as New Zealand investment is running at over 30% of total revenues.

7 From Commerce Commission industry reporting and Government UFB/RBI reporting. The Commission started to split out investment by platform from 2009. 8 From Commerce Commission survey data and Government UFB and RBI reporting. 9 See our 2015 strategy day briefing for more information on market trends. 10 http://www.stats.govt.nz/~/media/Statistics/Browse%20for%20stats/AnnualEnterpriseSurvey/HOTP14/aes14-nzsioc-level4-tables.xlsx 11 ANZSIC06 groups J580, J591, J592, J601, and J602


Figure 4: Telecommunications sector investment by platform and source12

22. These figures do not support continued industry investment at present levels. We should expect our investment to, at the least, return to OECD average levels. We reported a FY15 capex to sales ratio of 11.8%13.

23. And as investment falls, competition for each investment dollar will increase: getting a business case through will be harder. With geographic averaging of prices mandated by legislation and expected by New Zealanders, this will make rural investment business cases all the more difficult to justify, as costs are higher, but revenues the same as in urban areas. Rural investment is the investment most needed to deliver the Government’s broadband aspirations.

Government policy must focus on promoting investment across all platforms

24. The discussion paper identifies a need to ensure the telecommunications regulatory framework delivers certainty to providers of wholesale fixed access services. We support this objective, and recognise that it will create improved investment incentives on that platform (fixed access networks). But the same objective must be applied equally to other platforms.

25. While the focus of framework proposals in the discussion paper, wholesalers of fixed access contribute less than half of industry investment. Commission data indicates that investment in the sector is across a number of platforms by a number of parties; fixed wholesale providers, fixed line RSPs and mobile operators are each investing $400M or more every year.

12 From Commerce Commission industry reporting and Government UFB/RBI reporting. The Commission started to split out investment by platform from 2009. 13 See strategy day briefing and full year results presentation. We are targeting annual capex of below $400M per annum. Spark will report lower than the OECD average as the OECD includes typically more capital intensive vertically integrated providers.


Figure 5: Investment by source14

26. Of these platforms, there is least uncertainty about that occurring in fixed access networks. Much of the fixed access investment in the next five years is already committed, while no RSP or mobile investment is. Further, fixed access network operators face less intense competition, and have weaker incentives to invest in upgrading their infrastructure, than either RSPs or mobile network operators. And of these platforms, it is fixed access networks that are expected to grow their share of industry revenue.

Figure 6: Fixed service revenue and wholesale charges percent share15

27. So while we support consideration of how investment certainty can be provided to fixed access network operators, we consider it arguably even more important to ensure the same for fixed RSPs and mobile network operators.

The regulatory framework: challenges

The proposed focus on the regulatory framework review

28. The policy issues we believe need to be addressed, and those that we consider MBIE should focus its process on, are:

Fibre regulation and pricing in the period post-2020

29. As we have noted, there needs to be a regulated access and pricing framework for fibre access services, and we agree that it makes sense for Government to consult now on what

14 From Commerce Commission TDL levy reporting. 15 IDC, Commerce Commission TDL levy reporting and proposed regulated prices.

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

2011 2012 2013 2014

Industry investment by platform

Fixed RSP Fixed wholesale Mobile Crown


that framework should be. As we have also noted the Government’s policy objections should place equal importance on fixed RSPs’ interests as it does on its UFB partners’. Fibre pricing must be certain, and it must also be cost-based.

Ensuring that the same infrastructure investments are not paid for twice by TDL and

Government funds and monthly copper and fibre prices

30. Fixed infrastructure is currently funded by the industry through regulated TSLRIC monthly prices for UCLL and UBA, the TDL (which funds RBI) and by Government through UFB subsidies. In this model, based on the Commission’s draft FPP decisions, it is likely that end-users will compensate Chorus for the same fibre infrastructure twice: UFB and RBI subsidies will pay Chorus for fibre infrastructure that the TSLRIC prices for UCLL and UBA also pay Chorus for.

31. Addressing this risk, and ensuring that Government policies do not ask end-users to pay for the same investment twice in the future, should be a key policy objective of this review. We have identified a risk that one of the fibre pricing models proposed in the discussion paper (the “line in the sand” approach) could result in end-users paying for such infrastructure three times over.

Assuming a continued Government preference for nationally-averaged fixed line

pricing, how can Government ensure investment occurs in rural New Zealand

32. It will take significant investment to meet increasing rural expectations, yet nationally averaged line pricing means that business cases for rural investment will get harder to justify. Further, the current UFB approach and the lack of competition in wholesale fixed access markets encourages fixed access network investors to defer investment in rural New Zealand by creating an expectation that government will ultimately fund fixed line rural investment.

33. A conventional BBM, using a DAC-based starting asset valuation may create sufficient incentives on wholesale fixed access network operators to invest in rural New Zealand by permitting capital expenditure on rural assets to be added to the asset base. But a BBM model that uses a TSLRIC-based starting valuation – where fixed access network providers will already be given a return on hypothetical rural fibre assets they have not actually invested in - will create the opposite incentives, exacerbating the current weak investment incentives on those providers.

Regulatory policy issues that are not a key focus

34. The policy issues we do not believe this review should continue to focus on are:

The role of the Commission, exporting fixed access pricing to the Commerce Act,

and price-only regulation

35. We do not agree with fixed access providers’ characterisations of the level of uncertainty created by the current framework, or its cause.

36. Reflecting these characterisations, the discussion paper incorrectly focuses on Commission processes and pricing, indicating this is where risk is derived and considers a number of changes to these processes going forward to reduce this risk.

37. The primary cause of regulatory uncertainty in our market has been, and remains, regular legislative change. The Government made major policy announcements or implemented major legislative changes in 2001, 2006, 2008, 2009, 2011 and now 2015. If there is


anything these changes have told us, it is that changes to the regulatory framework have significant risks and can result in unpredictable outcomes.

38. Our conclusion is that there are no structural problems with our regulatory access framework. All the industry needs is stability. Therefore, in the absence of any identified problem, we do not support any of the more fundamental changes canvassed in the discussion document.

The copper-fibre migration

39. The discussion paper asks for comment on whether there are legislative barriers that might impede a sensible copper-fibre migration, and whether Chorus should have to meet any requirements prior to the withdrawal of copper access services. We are not aware of any such legislative barriers.

40. We also consider it much too early to be talking about mandated requirements for such a migration. A large-scale migration is some time away, and the industry should be capable of managing it in a way that ensures consumers interests are protected, and consumers retain confidence in the services they receive. As an industry we are experienced in closing down legacy systems and networks. In the absence of any evidence to suggest the industry is not capable of managing this migration itself, Government mandated requirements are likely to unhelpfully distort an orderly migration, rather than assist it.

Fibre regulation and pricing from 2020

41. The discussion paper correctly concludes that Chorus and the Local Fibre Companies (LFCs) networks have natural monopoly characteristics and, with high barriers to entry, are unlikely to be subject to sufficient competitive pressure to constrain price and drive innovation. There will therefore be a continuing need for sector-specific regulation of fixed networks.

42. It then considers a range of possible regulated pricing models for these networks, with the clear indication that a shift to “utility-style” pricing models of the sort used in Part 4 of the Commerce Act is likely.

43. The characteristics of fixed access networks - and UFB subsidies – mean that a substantive proportion of customers cannot feasibly be served by alternative networks. However, there are also potentially competitive elements of the markets served by these networks - the competitive provision of layer two services over shared passive fibre access, for example, or the competitive provision of access services by mobile operators in some areas of the country.

44. This is where telecommunications diverges from the industries currently regulated under Part 4 of the Commerce Act. We operate in a dynamic sector with:

a. Differentiated end user needs;

b. Multiple operators with investments in fundamentally different technologies;

c. A mix of national networks and regional networks, and a policy of nationally averaged pricing constructs in wholesale and retail markets; and

d. A mix of competitive, potentially competitive and effective monopoly elements.


45. These characteristics make setting the regulatory framework difficult. Fixed access telecommunications networks may not, in aggregate, prove to be enduring natural monopolies. Some parts of them may be, while other parts may not be. The market conditions today may be very different from those that prevail in 2020 when the proposed regime applies.

46. This makes the choice of regulatory pricing model for fibre access services more complex than is currently envisaged by the discussion paper.

47. As we set out below, Spark has a preference for:

a. A BBM approach for fibre services, with starting asset values set using a depreciated actual cost (DAC) methodology;

b. Copper and fibre pricing to be regulated in a consistent way;

c. Government to be clear about whether it wants to control copper: fibre pricing relativities, and how it wants that achieved in its pricing models for copper and fibre services;

d. A price cap model, rather than a revenue cap model; and

e. Nationally averaged pricing.

48. Finally, we note that finalising a coherent pricing model for fibre (and potentially copper) services will be a complex exercise, and should not be rushed. We expect Government will need at least one further round of industry consultation specifically on the details of any proposed BBM model before preparing legislative drafting, and we request early guidance from Government as to the consultation process it intends to follow from here.

LRIC and BBM models comprise a set of internally consistent choices

49. The discussion paper concludes that Government should set out now how fibre will be regulated in the post 2020 period. We agree with this conclusion.

50. The key regulatory pricing models considered in the paper are Long Run Incremental Cost (LRIC) and rate of return Building Block Methodology (BBM) models.

51. Each of these regulatory approaches aims to maintain the existing service capability intact, enable market participants to respond to changing demand and make efficient new investments, and ensure regulated firms achieve an acceptable real rate of return on efficient investment. However, as noted in the discussion paper, they do this in different ways: 16

a. The LRIC approach aims to set an efficient “benchmark” price against which the access provider, access seekers and end users can make efficient decisions. The regulatory price is based on a hypothetical efficient operator’s costs that would occur if the market had been competitive. The costs used are the current costs of building facilities to provide existing services, and thus LRIC is considered to represent a “forward looking cost rule”;

b. The BBM model seeks to reflect the efficient costs actually incurred by the regulated access provider. The regulatory price is based on an initial valuation of the actual

16 The concept of forward-looking and backward looking cost rules, and the different theories underpinning them, is helpfully set out in Guthrie, Small, Wright, Pricing Access: Forward versus Backward Looking Cost Rules.


assets in use by the provider, and efficient new investment is added to the asset value over time. The costs used are the actual efficient costs of the actual access provider to provide the existing services, and thus BBM is considered to represent a “backwards looking cost rule”

52. As the LRIC model reflects a competitive market, it is more sensitive to changes in underlying technologies and market demand and this means LRIC models are generally considered to be more durable in dynamic markets. However, it requires a regulatory authority to identify the benchmark market price, and prices do not necessarily mirror access provider costs, which generates uncertainty for the network operator and its customers.

53. A BBM model better reflects actual access provider costs and provides greater certainty of revenue, but can leave the access provider essentially indifferent to market signals and the effective price can be susceptible to unexpected changes in the market (such as the emergence of competition and/or disruptive technology.

Options for implementing a BBM model for fibre services

54. The Government has multiple policy objectives, including avoiding distorting competition and investment and preventing excessive profits. These objectives have led the Government to a preliminary view to prefer an adjusted BBM model to a LRIC one.

55. We support this conclusion, with several riders which we set out in more detail below:

a. A LRIC starting asset valuation cannot logically be used in a BBM pricing model

b. The same pricing approach (LRIC or BBM) must be used for regulated copper and fibre pricing models to ensure an internally consistent regulatory access framework; and

c. Price caps, not a revenue cap, should be used to regulate fixed access network operators.

A LRIC starting asset valuation cannot logically be used in a BBM pricing model

56. The discussion paper identifies several key benefits arising from use of a BBM model rather than a LRIC model:17

a. More predictable pricing outcomes;

b. A direct link to access providers’ actual efficient costs gives them certainty they will receive a return on those costs, and other parties certainty they will not receive an excessive return, or generate excess profits from them;

c. The availability of verifiable information about actual UFB build costs provides a superior means of valuing network assets than using hypothetical costs of an efficient operator; and

d. UFB suppliers will have incentives to invest in expanding their networks.

57. We agree that a BBM model can deliver these benefits, but only if it is implemented in a coherent, internally consistent way. The “line in the sand” model referenced in the

17 Ministry of Economic Development, Regulating communications for the future, Review of the Telecommunications Act 2001, pp75,76


discussion paper – essentially a mix of a LRIC starting asset valuation applied within a BBM pricing model - is incapable of delivering any of these benefits.

58. This “line in the sand” model mixes forward-looking costs of a hypothetical provider with backwards-looking costs of an actual provider, leading to an impossibly complex and inconsistent regulatory model that is open to gaming and delivers less certainty than either a pure LRIC approach or a pure BBM approach.

59. Applying inconsistent cost parameters across regulators can have significant implications. For example:

a. Incompatible starting asset base and actual operating costs: the LRIC model implies a high asset value as it captures all forward looking replacement investment, but this also implies the lower operating costs of a new modern asset. Whereas, as a broad comparison, Chorus’s actual asset costs are significantly lower with higher operating costs. Under BBM, those higher operating costs would be expected to be added to the RAB as they occur. If the LRIC asset value were applied as the starting value asset value of an unadjusted BBM pricing model, as illustrated in figure 7 below, this effect on its own could lead to an increase in regulated prices of around $18 per month from 2020.

Figure 7: Illustrative outcome of LRIC asset value and Chorus opex to a BBM model without adjustment18

b. Incompatible starting asset base and capital expenditure: Similarly, the LRIC model assumes that the hypothetical operators has already deployed fibre to the premises to almost all of the country, when in actuality Chorus has not. A BBM model would expect to add efficient Chorus or LFC investment in new fibre assets to the asset base, but in almost all cases those fibre assets would already have been assumed in the starting asset valuation. This incompatibility would either lead to significant excess profits, or to significant uncertainty as a result of an extremely complex set of rules for when actual new investment is deemed to be truly new investment that is additional to the hypothetical starting asset base.

60. In fact, the level of fibre investment assumed in the Commission’s FPP LRIC models means that, in practice, their use as starting asset bases in a BBM model would mean that no conceivable Chorus or LFC investment in its access network in the foreseeable future could be classed as incremental investment to the LRIC-based starting asset base. This would create very weak investment incentives for Chorus and the LFCs.

61. The fundamentally different assumptions and objectives of the BBM and LRIC regulatory pricing models means that they cannot sensibly be mixed, without very complex regulatory

18 Illustrative only drawing on broad brush figures from the TSLRIC model and Chorus annual report (net of provisioning cost that is charge separately).


mechanisms that would, in our view, undermine the policy objectives outlined in the discussion paper. The Government or regulatory authority will need to identify BBM input parameters that support the regulatory objectives. Where the model borrows from the existing LRIC model assumptions, these need to be adjusted to avoid excessive prices.

The regulated copper and fibre pricing models must be set using the same pricing

approach

62. Ultimately, the proposed pricing approach must support the Government’s principle policy goals in relation to pricing decisions:

a. The regulatory framework should be predictable and provide network owners with clear incentives to innovate and invest; and

b. Network owners should be limited in their ability to extract excessive profits.

63. The discussion paper also reiterates a further key Government policy that will influence the choice, and design, of the regulatory pricing model for fibre access services: the Government’s desire to encourage a rapid migration to fibre services.

64. The Government has invested in fibre to the premises networks, and sees significant economic and social value in migrating customers onto these networks. In a pure economic sense, regulated pricing models (and markets) are typically most efficient where they accurately reflect the long-run costs of the underlying assets. So if the long-run costs of copper access services are much lower than for fibre, the regulated pricing models for these services would be expected to reflect this, and to lead to consumers making purchasing decisions based on those divergent costs.

65. This would not, however, be consistent with a rapid national migration from copper access services to fibre. We interpret Government policy to prefer a rapid migration over truly cost-reflective relativities in copper and fibre prices, and we agree that this policy will deliver long-term benefits to New Zealand. In other words, copper and UFB price relativities are important and the regulatory pricing framework must permit consideration of pricing relativities to ensure they support policy outcomes. This leads us to conclude that any regulated fibre pricing model will need to be consistent with the regulated copper pricing model. Either:

a. If Government wants copper and fibre pricing to be aligned: Copper and fibre assets should be combined into a single asset base and pricing model, with a single set of prices arrived at. This could be a single LRIC model, or a single DAC BBM model; or

b. If Government wants a set relativity between copper and fibre prices: The copper and fibre regulated prices should be set using separate pricing models that apply the same methodology (LRIC or BBM) and an explicit cross-subsidy between the two should be managed to arrive at the preferred relativity.

66. As set out in the Economic Insights report, it is not possible to achieve multiple policy objectives within a regulatory pricing model (which seek to provide efficient signals). A BBM regulatory pricing model reflects the actual costs of providing the services and, therefore, can result in a potentially significant margin between copper and fibre prices. If there is an efficient relativity beyond technical network cost relativity, then an additional policy instrument or instruction will be required to ensure the pricing model(s) chosen are capable of explicitly considering cost relativities rather than leaving them to lie where they fall.


Price caps, not a revenue cap, must be used for regulated fixed access providers

67. When applied under Part 4 of the Commerce Act, BBM models typically produce revenue caps under which regulated entities must operate. In telecommunications, revenue caps will not work:

a. Layer 1 services are substitutes for layer 2 services: Regulated fixed access products are typically provided at layer 1 (physical or logical unbundling of the access network) and layer 2 (unbundling of a data stream across the access network). Access seekers make investment decisions about which layer to purchase service at which involve trade-offs between cost, complexity and control: layer 1 services offer them greater potential for innovation and better end to end control of customers’ service experience, but require them to invest in more complex service and IT system infrastructure. Access providers require price certainty (and therefore price caps) for each of these services in order to be able to make efficient investment choices between them. Under a revenue cap model, that certainty would not exist.

Today, the preponderance of the fibre services purchased are layer 2 services. Layer 2 services are, understandably, more expensive than layer 1 services. Under a revenue cap model, if an access seeker chose to migrate its customer base off those layer 2 services onto layer 1 services, the access provider would see a significant reduction in revenue below what it was allowed to earn under the revenue cap model. Its options for addressing this revenue shortfall would be to (a) increase layer 2 prices, driving the cost up to all other access seekers; or (b) more likely, increase the layer 1 price – stranding the access seeker’s layer 1 investments.

b. Fixed access networks are subject to bypass, and are best able to manage that

risk: As discussed above it is possible, indeed likely, that fixed access networks will be subject to infrastructure-based competition in some areas of New Zealand. Where this happens, as in all competitive markets, the access provider should be expected to respond to that competition by reducing price or increasing quality. Access seekers, and end-users, of that access provider should be beneficiaries of this competition. Under a revenue cap model, the simplest response for the access provider to this new competition is to raise prices in other parts of the country where it is not subject to competition to compensate for the lost revenue in the competitive areas. This would inefficiently shift the risk of competitive bypass from the access provider to its customers. It would also inefficiently discourage access seekers on the access provider’s network from undertaking that competitive bypass themselves.

68. Therefore, any regulated pricing model for fibre access services should set price caps, rather than a revenue cap.

69. With these riders, then, we see the following BBM options for Government to consider:

a. Apply a BBM model with a LRIC-based starting RAB to both copper and fibre

based services: In this option, new regulated service or services would be added to schedule 1 to the Act for fibre services. The pricing principle used would be BBM, with a starting asset valuation based on the Commission’s FPP LRIC model for UCLL and UBA. The UCLL and UBA regulated services would also be amended to add the same pricing principle.

As the forward-looking MEA used by the Commission in this model for the copper network is a fibre network, the LRIC assets are likely to be the same for both copper and fibre. This may lead to these services being priced at exactly the same level.


A complex set of rules would need to be established to ensure that, in Chorus’ case, actual investments made that are duplicative of investments that were already assumed to be made in the LRIC-based starting RAB, are not added again to that RAB. As the starting asset base would assume fibre to the premises has been deployed to almost all premises nationwide, the very large majority of any actual access provider investment would likely need to be excluded somehow. Similarly, a complex set of rules would be needed to ascertain what of Chorus’ actual operating costs are “efficient” in light of the optimised, modern network assumed in the starting RAB. These rules would need to be set out in the pricing principle for the services, if the industry is to avoid another five years of complex regulatory debate.

These complex rules seem likely to replicate those used by the Commission in its current TSLRIC pricing exercise: we conclude that a BBM model with a LRIC starting RAB will in practice produce results, incentives, and uncertainties, very similar to a TSLRIC pricing principle. The only differences would be:

i. The model would not be susceptible to revaluation risks from technological evolution; and

ii. The model would produce extremely weak investment incentives for Chorus. In particular, because Chorus would not see any increase in its RAB from investment in an expanded fibre network (because the starting RAB already assumes an expanded fibre footprint) it would have little incentive to undertake this actual investment. Perversely, it would be incentivised to defer this investment until the relevant assets of the starting asset base had been fully depreciated. If this model is adopted by Government, it will need to implement explicit measures to ensure expected investment in rural broadband infrastructure by Chorus and the LFCs occur.

We are uncertain whether, and if so how, the Commission’s FPP LRIC model could be sensibly de-averaged to reflect the geographic areas served by the LFCs.

We do not recommend this option, and would not support its implementation.

b. Continue with the existing LRIC based model for copper and introduce a DAC

BBM based model to fibre (with a DAC starting RAB). In this option, the existing copper regulated pricing would continue to be administered using the Commission’s TSLRIC FPP model. A new regulated service or services would be added to schedule 1 to the Act for fibre services, with a pricing principle requiring a BBM pricing principle, with a starting asset valuation based on DAC.

This model would again require a set of complex rules to be included in the pricing principles to avoid consumers paying twice for fibre investment (without adjustment, the LRIC copper model would compensate Chorus as if it had invested in a nationwide fibre to the premises network, and the DAC BBM fibre model would compensate Chorus again for investments made in the same fibre to the premises assets).

Under this mixed model copper and fibre prices will rapidly depart over time as investment and demand changes over time. For example, while there is minimal copper investment, demand is also declining. Fibre is subject to the reverse drivers. There would be significant changes to the prevailing prices and relativities over time.


Similarly, DAC-based prices for Chorus and the LFCs would be likely to diverge as well.

If Government decided it wanted to control these price relativities, it would need to explicitly provide for this in schedule 1. Very clear legislative drafting would be required to provide sufficient certainty to the Commission and the industry as to the outcomes sought by Government in this respect.

Forward and backward looking regulatory pricing approaches are designed to achieve policy outcomes in fundamentally different ways. Mixing the two will result in a range of distorted incentives, most of which we are unlikely to be able to predict. For this reason we do not recommend this option, and would not support its implementation.

c. Apply a BBM model with a depreciated actual cost (DAC) starting RAB for

both the copper network and the fibre networks. In this option, new regulated service or services would be added to schedule 1 to the Act for fibre services. The pricing principle used would be BBM, with a starting asset valuation based on DAC. The UCLL and UBA regulated services would also be amended to add the same pricing principle.

Using DAC for the starting RAB means it is determined explicitly by reference to the actual assets being operated by the regulated access provider. This ensures a consistent, predictable approach can be taken to adding future investments to the asset base. It gives access providers certainty that they will receive a reasonable return on their actual investments and assets, and access seekers and end-users certainty that excess profits will not be extracted from them. This is the cleanest model, with the least adjustments needed, that is available to the Government.

We acknowledge that this option represents a step away from the forward-looking LRIC pricing model that has underpinned our fixed access regulatory framework for some time now. While we do not expect this to be necessary, under this option the Government could include specific provision for the Commission to implement regulated price smoothing – by way of regulated glide paths) to ensure the transition from forward-looking pricing to backwards-looking is managed in a way that best delivers long-term benefits to end-users.

If the Government proposes to control copper:fibre pricing relativity considerations, then it should apply a single DAC BBM model across both services. In which case, the allocation rules within the model can maintain the pricing relativity that meets policy objectives while avoiding unwarranted costs for consumers.

This is our preferred option – it avoids the need to make difficult and complex ongoing adjustments, provides greatest certainty to market participants and permits a planned relativity between copper and fibre services.

We prefer nationally averaged pricing, and recommend the Commission be responsible for a

wash-up between Chorus and LFCs to provide for this

70. The discussion paper asks for views on whether nationally averaged prices are desirable. Spark provides copper and fibre services in every geographic market in which they are available to us. We have spent the past five years rationalising and simplifying our pricing structures, including removing an increasing number of geographic pricing differences. Nationally averaged pricing offers significant benefits to us, which our customers share in. These include:


a. Simpler plans. Having to design and market differing price points for geographic markets makes our plans more complex for us to support, and for our customers to understand;

b. More efficient marketing: Nationally averaged pricing is much easier to advertise, as we are able to market single price points that apply nationwide. Price is a critical driver for customers, so removing it from marketing collateral reduces the transparency and effectiveness of our marketing for customers;

c. Simpler and lower cost website: The same applies to our website: if we have to tailor our webpages, and the prices they advertise, for regional markets, this results in a more costly, and less intuitive website.

71. We therefore support a continued Government policy in favour of nationally averaged pricing. We believe the simplest way to achieve this is to require the Commission to set averaged price caps that reflect the overall national costs of the regulated services, and to oversee a wash-up between those providers to the different cost-bases of Chorus and the LFCs.

72. In the absence of a process such as this – in which case RSPs will see separate price caps for each of Chorus and the LFCs - separate retail prices reflecting those price caps will become inevitable: competition from regional RSPs will drive national RSPs to this outcome.

Transitioning to a new fixed network regulatory model

73. The Government shouldn’t under-estimate the time and complexity associated with implementing a new regulatory framework. It will take 3-5 years to bed down substantive changes.

74. It has signalled complex regulatory policy objectives and for these to be achieved – i.e. providing predictable outcomes over time, limiting Chorus’ ability to extract excessive profits and encouraging investment – will require careful implementation.

75. Implementing BBM requires a number of choices. The transition issues are discussed in more detail in the Economic Insights report, but at a high level decisions will need to be made relating to:

a. The number of RABs and starting valuation(s);

b. The approach to and basis for depreciation allowances;

c. The basis for the allowable operating expenditure;

d. The basis for the allowable capital expenditure;

e. Dealing with over or underspend in opex or capex at the end of the regulatory period

f. Determining the regulatory cost of capital;

g. Allowances for other risk elements;

h. The basis on which demand will be forecast and the resulting levelisation of the revenue allowance will be determined for the different services;

i. Dealing with variances between forecast and actual demand;


j. Incentive schemes to promote efficient forward looking investment; and

k. Any price smoothing that may be required to transition between the old pricing framework and the new.

76. Each of these decisions will have multi-million dollar implications and there is a lot at stake. Accordingly, we should expect and extended and detailed transition process.

77. For example, the Australian experience with the BBM model is mirrored by the New Zealand experience with the Final Pricing Principle process using the TSLRIC approach in some important ways. In both cases, the perception of many market participants was that the process was very information and data intensive, that the duration of the process and reviews was excessive, and that there were significant transactional and opportunity costs incurred in the regulatory processes.

78. Similar to a TSLRIC implementation, a key issue with a BBM model is the difficulty and importance of determining the efficient costs of the Access Provider19. However, while the parties had different positions over the adequacy or not of proposed prices, assessing an efficient price is a key incentive aspect of a BBM implementation. The New Zealand Government’s policy objectives include providing incentives for investment in performance improvement. Further, implementing the BBM had significant information requirements.

79. Overall, implementing a new regulatory pricing model will take an extended period, be complex and likely result in further conflict and uncertainty. It will be contentious and take a lot of work.

80. It is for this reason that we support the TCF proposal that the industry be given the opportunity to agree an approach to setting fibre prices that can be put to Government. The proposed approach would need to demonstrably achieve the Government policy objectives, and be seen to result in outcomes that are in end-users interests. While reaching agreement is not certain, given the alternative path for implementing a new pricing framework, we believe it is worth attempting. This industry process can continue in parallel to Government policy development process.

The mobile market and radio spectrum

81. The discussion document correctly recognises that mobile services are increasingly important to New Zealanders and to New Zealand businesses, that strong infrastructure competition exists between mobile network operators, and that the key policy challenge in the mobile sector is how to ensure continued investment in new coverage and capabilities in rural New Zealand.

82. In contrast to our fixed line networks, New Zealand’s mobile networks:

a. Competition: Are not natural monopolies. Spark and Vodafone have deployed nationwide mobile networks, and 2degrees is well advanced in achieving the same. Infrastructure competition, which for so long has been the illusory objective of fixed line regulations, already exists for all mobile services.

b. Capabilities: Are investing in cutting edge technologies without Government subsidy. New Zealand’s mobile network operators are “fast followers”. We invest relatively early in new technologies, and are currently deploying 4G technology across each of

19 Ref tbc from the Australian document record


our networks. That 4G investment has resulted in New Zealanders enjoying the fastest 4G speeds of any country in the world.20

c. Coverage: Are investing in rural New Zealand. New Zealand is a challenging environment for mobile network operators: when NZIER surveyed New Zealand operators’ costs in 2014, it found that network investment in New Zealand costs 17% more per person than it does in the United Kingdom.21 Despite this, we routinely invest in rural coverage that, in other countries, would be deemed uneconomic. In the same report, NZIER found that, if the coverage targets set in the United Kingdom for mobile coverage were applied to New Zealand, we would only have mobile networks that covered 60% of our population.

d. Price: Are delivering excellent prices to New Zealanders and New Zealand businesses. The Commission’s June 2015 price benchmarking study illustrates the stark contrast between New Zealand’s mobile phone prices (which are below OECD averages by between 8% and 62%) and fixed line pricing (where we have above-average prices in more categories than we have below-average pricing).

83. By any measure, New Zealand’s mobile sector is delivering outstanding results to customers and to New Zealand. In this context, we can see no policy justification for further changes to the mobile regulatory access framework of the sort canvassed in the discussion paper – deeper regulation of national roaming, co-location, and MVNO access. We see no evidence of market failure that might justify regulatory intervention, and no evidence of how any intervention will produce better outcomes for end-users in the long-run. Rather, we fear that regulatory intervention markets without clear policy rationale in a market characterised by strong infrastructure competition, high technology innovation and low prices, will compromise one or more of those characteristics.

84. The challenges the mobile sector currently faces are fundamental:

a. Industry health: Mobile data traffic volumes are increasing exponentially, which is driving significant new investments by network operators in more efficient access technologies (4G, 4.5G, 5G), denser access networks (more cellsites), higher capacity backhaul and switching infrastructure, and international bandwidth.

20 OpenSignal “The State of LTE”, September 2015, https://opensignal.com/reports/2015/09/state-of-lte-q3-2015/ 21 NZIER, Mobile industry in New Zealand, performance and prospects, October 2014, https://www.sparknz.co.nz/content/dam/telecomcms/sparknz/content/news/NZIER-Mobile-Industry-in-NZ.pdf

https://opensignal.com/reports/2015/09/state-of-lte-q3-2015/

https://www.sparknz.co.nz/content/dam/telecomcms/sparknz/content/news/NZIER-Mobile-Industry-in-NZ.pdf


Figure 8: Mobile traffic volumes

As a result, investment in, and use of, New Zealand mobile networks is increasing dramatically. Revenues, though, are not. Prices are not. While this equation suggests significant value for end-users, it raises equally significant questions for network operators as to how sustainable current practices are. Mobile network operators in New Zealand will need to identify new revenue streams in order to justify continued capital investment at the levels New Zealand needs, but those new revenue streams remain, for now at least, uncertain.

b. Rural 4G coverage: The benefits of high quality mobile network coverage are well understood. New Zealanders see these benefits in their everyday lives, and are using 4G networks and data at rapidly increasing rates. As its importance increases though, the contrast between those areas of New Zealand that have 4G coverage and those that do not becomes ever more stark.

While New Zealand mobile network operators have and continue to invest in areas that many would deem uneconomic, this is still not enough to meet end-user demand. There appear to be significant social and economic benefits available from further expansion of 4G networks that private network operators cannot capture, but that New Zealand as a country needs to find ways to realise. Satisfying New Zealanders’ 4G coverage expectations will require significant co-investment from the mobile sector, Government and communities.

85. In short, on current trajectories, the mobile sector will not achieve sufficient revenues to fund the capital investment in rural 4G coverage our country wants. Government initiatives such as the RBI will help in this regard – but we must not forget that the RBI is wholly funded by the very operators that cannot afford these investments in the first place. Whatever way we look at this problem, it is clear that significant further investment will be required from a number of parties, including network operators. The regulatory interventions canvassed in the discussion paper will undermine network operators’ aggregate capability to fund that investment. We encourage Government to focus its efforts on policies that increase investment incentives, and decrease costs for mobile network operators.

MVNOs

86. The discussion document suggests that:


a. New Zealand has a low number of MVNOs;

b. There is a clear trend towards fixed/mobile bundling; and

c. The inability of some fixed line service providers to provide a reasonable mobile offering could limit competition in fixed markets.

87. We take a very different view. Spark today supports 9 MVNO partners on our network [ ]SPKCI, serving all customer segments – the residential postpaid and prepaid markets, SME markets and Enterprise markets. We see MVNOs as a valuable channel to market, capable of growing our share of mobile revenue and traffic, and of growing the market overall. MVNO as a market segment is growing, and we see ourselves as the leader in it. We are positive about the opportunities it presents, and the success it has delivered already.

88. As the discussion paper notes, one of our MVNO partners is M2, which is the third largest fixed line retail service provider, but does not operate its own mobile network. M2 has recently launched a fixed+mobile bundle that offers broadband customers mobile plans that are up to 47% cheaper than the comparable Spark plans.

89. In this context, we find it hard to see how anyone could reasonably believe that the current MVNO market does not permit fixed line service providers to provide reasonable mobile offerings in competition with mobile network operators.

90. We note also that, whereas MVNOs are typically cited for their effect in lowering retail prices, New Zealand is already well served in this respect. Both 2degrees and Skinny have targeted price leadership as core to their proposition, leaving little room for discount MVNO operators to deliver further meaningful price innovation.

91. If we already have intense retail competition for mobile services, clear evidence of ongoing price innovation and a healthy MVNO market that permits fixed line retail service providers to compete with fixed+mobile bundles, this leaves little available policy rationale for MVNO regulation.

Infrastructure sharing

92. The discussion paper also seeks respondents’ views on the value of encouraging infrastructure sharing, and whether greater infrastructure sharing could be incentivised through the regulatory regime.

93. The discussion paper correctly identifies that mobile network operators currently have strong commercial incentives to:

a. Compete, including through infrastructure, in large parts of New Zealand. Network performance (in particular, data performance) is increasingly important to mobile users, and a key differentiator for mobile network operators; and

b. Share infrastructure, in particular in rural areas where the costs of deploying networks are higher and sharing of towers, backhaul, power and access roads can substantially lower those costs.

94. Mobile network operators continually have to balance these incentives. As the discussion paper notes, there is a “line” in rural New Zealand at which it becomes inefficient for mobile network operators to deploy duplicate, competing infrastructure, and to compete using common infrastructure instead. There are strong indicators that we have reached that “line” in many parts of New Zealand already. The majority of additional coverage rural


sites being deployed today are funded by the Government’s RBI and feature co-location of at least two mobile network operators. Further, mobile network operators are increasingly co-locating on sites together [ ]TSPKCI.

95. In particular, Spark considers passive infrastructure sharing to be a rational cost saving strategy that it expects will increase in incidence through normal commercial incentives. Importantly, passive infrastructure sharing enables mobile network operators to retain network differentiation. In contrast, active infrastructure sharing (such as RAN sharing) removes much of the network differentiation that underpins today’s mobile market competition model.

96. Accordingly, we support (and continue to advocate for) Government initiatives that encourage commercially sensible passive infrastructure sharing. In our experience, the biggest inhibitors to commercial passive infrastructure sharing are central and local government restrictions on the deployments of telecommunications infrastructure. The Government is currently consulting on National Environmental Standards for Telecommunication Facilities. Permitting easier, quicker deployment of larger co-locatable towers is the simplest way Government could encourage efficient infrastructure sharing.

97. We do not, though, support Government making any changes to the telecommunications regulatory access framework to artificially “incentivise” infrastructure sharing. This would create false incentives on mobile network operators which, we expect, would prove to be unsustainable and thus inefficient in the long-run. Trying to predict how technology and consumer behaviour will change infrastructure requirements is difficult enough for market participants, let alone Government or the regulator. Government should allow time for commercial infrastructure sharing to develop organically.

Response to questions in the discussion

Goals, principles and challenges

1. Do you have any comments on the Government’s:

a. long-term vision for communications markets; and

b. regulatory principles?

98. The statement of the Government's long-term vision for communications markets is consistent with an overall consumer welfare approach which recognises the importance of efficiency. The discussion paper refers to the provision of services for all New Zealanders, and regulatory settings which promote and support competition, innovation, and investment in communications networks for the long term benefit of end users.

99. We agree the sector needs to meet the needs of end users and support efficiency and economic growth. In practice, this means continuing to invest to ensure there is sufficient capacity available to meet growing consumer demand.

100. Regulatory pricing frameworks seek to establish efficient cost based prices. As set out in the Economic Insights report, if the Government has other, wider policy objectives such as a specific customer migration, then these should be transparent and a specific policy instrument is likely to be required.

101. In short, the use of pricing policy and of other more specific regulatory instruments should only be considered where necessary, and the regulatory environment within which they are implemented must be clear and predictable. The objectives of price regulation


should be to benefit the long term interests of end users, even if the nexus between those externalities which benefit the wider economy and the long term interests of end-users is weaker. The use of explicit subsidies for the UFB and RBI projects are examples of explicit interventions of this kind.

102. The Government proposes that fixed wholesale regulation will need ongoing ex ante regulation. We agree, this is the pragmatic view. To remove regulation now will just result in years of uncertainty until it is applied.

2. What is your view on creating an overarching ‘Communications Act’ to consolidate economic regulation across the communications sector?

103. The discussion paper suggests that there are some boundary issues associated with the scope of the existing Telecommunications, Radiocommunications and Broadcasting Acts.

104. We agree that there are border issues relating to, for example, current practice where competition issues associated with allocating spectrum are considered in the allocation process and Commerce Act, and that there is technically increasingly little difference between broadcasting and telecommunication networks. It is an anomaly that infrastructure should be exempt simply by the broadcasting nature of the content and applications it carries.

105. We agree these particular proposals are worth considering, and can be achieved through amendments to the Telecommunications Act. However, some other proposals set out in the discussion paper currently fall short of an integrated communications market regulatory framework. Proposals to remove the broadcasting exemption may bring like infrastructure in to the same regulatory framework, but would not, in our view, constitute a material change to the current telecommunications based framework.

106. If the Government were to implement an overarching Communications Act, we think that there are a number of issues that have not yet been considered and which would need to be reviewed more comprehensively. Government would need to consider the wider communications markets framework with evidence of actual and likely market based principles and/or problems that can be solved consistently across the market.

107. One way to get greater alignment between telecommunications and content regulation may be to provide the Commission with an expanded monitoring role across content and connectivity markets, and amending the relevant definitions in the Act so that it is clear that Commission powers apply to both content and telecommunications markets. That would leave the Commission with time to evaluate markets and propose further regulation as necessary.

108. The Telecommunications Act regulates those services that are not subject to workable or effective competition, and accordingly seeks to promote efficient competition and the outcomes expected in workably competitive markets. Positions of enduring statutory, technological or other de facto market power in broader communications markets could equally be subject to similar regulatory oversight under an expanded Communications Act.

109. Overseas policy makers have concluded that content and service markets have characteristics that mean market power can become a concern which we think justifies, at least, a watching brief by the Commission.


3. Have we identified the main challenges facing communications regulation as we move beyond 2020?

110. The Review correctly identifies a number of dynamics of the current communications sector: convergence of technologies and markets, the regulatory framework keeping up with the rate of change, and national borders breaking down. We agree that regulatory frameworks inevitably struggle to keep up with rapidly changing technologies and end user demands.

111. This means there is significant risk in locking in particular regulatory settings in legislation without providing regulators with the flexibility to move with the times.

112. The discussion paper concludes the key regulatory issues currently are focused on the need to provide pricing certainty for fixed wholesale providers, and that competition in mobile markets relies heavily on maintaining regulatory oversight of mobile termination regulation, and the potential need for regulation of national roaming services despite the high level of national coverage by all three operators and the significant market share held by 2 degrees as the delayed third entrant. There is a high degree of infrastructure competition flowing through to market share and prices.

113. We have a different view on the key challenges in relation to the fixed access network however. The uncertainty we face in this area hasn’t primarily arisen from Commission decisions or the processes they follow. Those are robust, contested, consultative and inquisitorial processes which are conducted in a manner consistent with best practice. The uncertainty we face in this area hasn’t primarily arisen from Commission decisions or the processes they follow. Uncertainty has arisen from the statutory changes which triggered a review of regulated pricing in the first place. The change from retail minus to cost-based UBA pricing created the most significant change to Chorus’ revenue base. That was not unexpected.

114. Significant statutory changes will result in real uncertainty for a period of years as they are implemented. Changes in regulatory frameworks have significant implementation and opportunity costs for operators, which also flow through to the delivery of, and investment in services for end users. For example, Spark wrote off $257M of investment to implement the 2008 operational separation policy packages, which were superseded by revised Government policy in 2009 (structural separation).

115. In our view, the key regulatory framework issue facing the telecommunications industry are is the pricing of regulated services from 2020 when current fibre arrangements expire.

116. In terms of addressing key regulatory framework issues, the Government should:

a. If it has specific policy objectives relating to the copper to fibre migration, make these objectives transparent early rather than leave to subsequent pricing processes;

b. Consider the scope for a watching brief and flexible regulatory tools to impose targeted and appropriate ex ante obligations across communications markets that are not workably competitive.

c. In all cases, the regulatory framework should avoid creating scope for regulatory gaming, windfalls to access providers and double compensatory mechanisms; and

d. Identify the most efficient and specific policy tools to address its policy goals. Regulatory pricing is an effective way to remove monopoly rents but a blunt tool to


incentivise rural or uneconomic investment. Creating oblique uplifts to pricing to facilitate more distant objectives adds to the lack of regulatory predictability. Other more targeted tools should be used to achieve such goals.

117. We consider that competition in mobile markets is working and effective and unlikely to be vulnerable.

Pricing for fixed line access services

4. Do you agree with our policy objectives for the price regulation of fixed line infrastructure?

118. The discussion paper proposed that the pricing approach must support the Government’s proposed policy goals in relation to pricing decisions that:

a. That the regulatory framework should be predictable and provide network owners with clear incentives to innovate and invest; and

b. Network owners should be limited in their ability to extract excessive profits.

119. The discussion paper also sets out further initial policy positions: that the regulatory regime should encourage the network owner to invest in higher quality and innovative services over time; there should be geographic averaging, to promote innovation through fibre unbundling, and the access and pricing regime will be based on a holistic view of the interdependencies between UFB and copper networks22. In other words, copper and UFB price relativities are important and the regulatory pricing framework must permit consideration of pricing relativities to ensure they support policy outcomes.

120. In many case, these policy objectives reflect current policy settings. For example, the Government has provided for layer 1 unbundling in UFB arrangements and this is due to occur from 2019. The discussion paper notes that it is unclear whether GPON unbundling is economic. While technically possible, the costs of churn at the splitter likely make it questionable. If this proves to be the case, the Government should consider options like wavelength unbundling, shared splitters or moving to point to point as means of providing the innovation benefits. .

121. However, to be sustainable, the policy objectives must be tested against careful cost-benefit analysis and be seen to be in the interests of end-users. For example, a policy initiative that results in network owners extracting excessive profits – i.e. departing from provision of a normal return – would only be sustainable over time where it results in benefits to end-user over time through additional innovation or performance.

122. Economic principles and regulatory practice strongly support the basic principle that prices should be set to recover the costs of efficient investment including a return on the capital employed. This approach to financial capital maintenance in effect means that the present value of all expected efficient costs over the life of the network investments should equal the present value of the revenues that the network investment is able to generate when discounted back at a normal commercial rate of return. This is also known as the NPV=0 principle.

123. In particular, the use of the TSLRIC asset valuation as the opening value for the RAB is an issue of concern for us. As discussed above, the TSLRIC approach, like the DORC

22 The latter being to avoid sending conflicting signals or competing objectives (i.e. pricing that encourages large scale copper investment in UFB areas while encouraging copper investment in non-UFB areas, relative prices inefficiently providing inefficient incentives for RSPs or network operators to delay migration to UFB).


approach ignores the actual efficient capital expenditure undertaken by an operator, and the allowed depreciation recovery on that expenditure. Instead, TSLRIC is based on a forward looking long run notional replacement value of the assets by a hypothetical efficient operator, assuming a given level of optimisation and recognition of notional depreciation flows on those hypothetical assets. In a BBM model, the TSLRIC approach essentially ignores the impact of replacement asset valuations on actual profits and investment incentives in the presence of sunk costs. This means that the use of a TSLRIC asset valuation in a BBM model will violate the requirements of the financial capital maintenance condition. In other words, this valuation delivers an outcome under which the NPV=0 approach does not hold true if you have a starting RAB value which exceeds the depreciated actual cost level.

124. The regulatory pricing framework should also promote efficient pricing. Where the Government has wider policy objectives, this should be explicitly provided for rather than left to be inferred in to regulated prices. For example, it is Government policy that regulated wholesale prices are geographically averaged and this is appropriately set out as a specific requirement in the Act. .

5. Is it feasible to move to technology neutral service descriptions? How would this work in practice?

125. It is unlikely that providing technology neutral service descriptions will make any practical differences. While the service description in the Act might be technology neutral, the practicalities of specifying the regulated service means that the Commission will still need to define the technical features of the services through the standard terms determination. In which case, we do not see significant benefits to defining a single service description in the Act over the current approach. The Government will also need to develop new service descriptions for bitstream fibre and unbundled fibre services.

126. As discussed below, it is likely that a single view of costs will sit across copper and fibre services. The services are in practice supported by the same network and, with a forward looking perspective, copper network costs are determined by a fibre network. However, even in this case, the Commission can apply a single model that applies across multiple regulated services.

127. A technology neutral service description would work, however, if the regulatory framework were based on the analysis of markets and regulation on the basis of those markets. In which case, the service description would provide guidance on the nature of markets, leaving the Commission to identify market power and efficient remedy and regulatory pricing principle for that market.

6. Do you consider utility-style regulation may now be more appropriate for fixed line communications services? If so, what elements would be most effective?

128. Our preferred regulatory pricing framework is discussed above. Generally, telecommunications infrastructure regulation requires different treatment to utility regulation. We think the monopolies need not be as enduring and accordingly competition should remain a goal for the regime. That said, we note that BBM pricing rules have been used to regulate telecommunications pricing without applying the “utility-style” regulatory approach.

129. To the extent, though, that the shift from TSLRIC forward-looking cost rules to BBM backwards-looking rules is characterised as a shift from an uncertain regulatory environment to a certain one, we disagree with this characterisation.


130. Spark supports and values regulatory certainty and predictability. But what we have found emerging in recent regulatory debates is a range of views on what exactly regulatory certainty means. There have been also been threats that unless greater regulatory certainty is provided by government, investment in the sector will be jeopardised.

131. We have reviewed:

a. The extent of investment in the telecommunications sector in New Zealand;

b. New Zealand’s international ratings on regulatory predictability and regulatory quality23; and

c. The academic literature on threats to postpone investment in light of regulatory uncertainty,

and found that on these measures, within the current regulatory environment, there has been a high level of industry wide investment – well ahead of the OECD average; it has provided a high level of regulatory certainty and predictability – Studies by International Organisations rate New Zealand’s regulatory environment very well internationally; and academic studies show is that while it is entirely conventional for regulated entities to threaten to delay investment without regulatory certainty, such delays are unlikely.24

132. Regulatory certainty means different things to different people . For example,

a. Prescription vs discretion - a more prescriptive regulatory regime may be considered to provide greater regulatory certainty when compared to a regulatory regime that provides for greater discretion in implementation. New Zealand’s telecommunications regulatory environment has become progressively more prescriptive since 2001. Our regime is more prescriptive than Australia, the European Union and the USA yet a number of commentators appear to have expressed more concern about regulatory certainty in New Zealand telecommunications markets than in other markets. Australian and European regulators by contrast have greater discretion to implement regulatory pricing mechanisms which best deliver higher level competition-oriented outcomes. That has enabled them to ensure that LRIC based pricing methodologies can be adapted or reformed to better implement policy. Treasury’s observation that the regulatory regime lacks flexibility / durability could probably be alleviated if the regime was less prescriptive and more flexible and enabled our already well performing regulator to implement policy appropriately.

b. Central control v delegated authority – a regime typified by a strong controlling central government to specify regulatory outcomes may be considered to deliver better regulatory certainty than leaving the final form of regulation to an independent sector regulator. Central planning is subject to parliamentary debate but in our Westminster system not subject to judicial review or appeal to the Courts. Risks of a central control regime do arise if government has commercial / economic / investment interest in the sector that conflict with their governance obligationsor if prone to capture by regulated entities.. Once captured the checks and balances available to government are weakened. It becomes more difficult to take corrective measures to remedy any distortions to policy that may arise.

23 World Bank WGI 2015 Governance index places New Zealand in the 99th percentile for Government Effectiveness, Regulatory Quality and Rule of Law in 2014. 24 See for example, Volker, Trautmann and Hamprecht, Regulatory Uncertainty: A Reason to Postpone Investments? Not Necessarily, Journal of Management Studies 46: 7 November 2009.


c. Legislative change vs litigation – stakeholders debate whether litigation, in the form of judicial review and appeals produces greater regulatory certainty than legislative change in response to unpopular regulatory decisions. In New Zealand we have observed that complex regulatory processes implemented by the independent regulators such as the Commerce Commission can be accompanied by considerable uncertainty for a period of time, sometimes years. Litigation in the form of appeals and judicial reviews of those decisions can then add significantly to the period of regulatory uncertainty. But once appeals are exhausted or judicial clarity is provided the litigation route is capable of providing regulatory certainty. The Input Methodology appeals against the Commerce Commission decisions in the case of Wellington

Airport and Others v Commerce Commission is an example. Aftr a numbe of years of regulatory processes and lengthy appeals the IMs are now well understood and regulatory updates are comparatively efficient. In other words litigation can lead to a degree of acceptance among industry participants that they have achieved the best possible outcome available within the existing legal framework. Legislated changes, by contrast, tend to bring with them their own bedding down period of uncertainty, instability, and a lack of regulatory predictability.

133. To us regulatory certainty means having open, transparent and independently implemented regulatory processes with clear governance across institutions.

134. It does not mean guaranteed revenue streams, or returns on assets, and no amendments in pricing principle can or should change that.

7. Would maintaining the status quo for UFB services be effective post-2020?

135. We don’t support the “status quo” option set out in the discussion paper.

136. As set out in the discussion paper, Chorus and LFCs are unlikely to face sufficient competitive pressure to ensure efficient pricing post-2020. Further, Government policy is to facilitate layer 2 innovation through fibre unbundling. If this to occur it is important that services are priced, using the BBM model if that is appropriate, with strict adherence to the principle that there not be excessive profits and the model does not permit the access provider to undermine competition.

137. The status quo options would result in an extended period of uncertainty and ineffectual, inevitably delay the expected Government policy benefits.

138. We support the TCF proposed approach whereby the industry be afforded the opportunity to agree a way forward that avoids a long, uncertain and controversial pricing process. If this is not possible, should set out Government policy and the proposed regulatory pricing framework for the post-2020 environment. In other words, the Government should set out a clear regulatory framework and objectives, minimising uncertainty relating to subsequent Commission processes.

8. If the Government was to specify the pricing methodology that would eventually apply to UFB services, what methodology would be preferable?

139. Our preferred regulatory pricing framework is discussed above.

140. Details on how to implement such an approach are provided in the Economic Insights report in section 6 and the Annexes.

141. But with either pricing principle being considered, legal uncertainty could be mitigated by providing the Commission with flexibility in the way in which the pricing principle is


applied. A key issue in the UCLL and UBA price review process is whether the Commission is constrained to apply a legacy TSLRIC approach that was common in the late 1990s. Parties submitted that a rigid approach had been rejected by overseas regulators (due to unintended distortions) and either applied a different TSLRIC approach (such as in the European Union) or moving from TSLRIC to BBM (such as in Australia). This could be improved.

9. What is your view on UFB access services being regulated immediately from 1 January 2020, compared to a backstop regime whose application would be triggered by a Commerce Commission recommendation?

142. As noted above, the Government should set the regulatory framework and Commission be in a position to implement the revised framework from 1 January 2020. The alternatives will simply result in an extended uncertain period and conflict.

143. It is important to ensure there is regulation of both layer 1 and layer 2 services for both copper and fibre network services to ensure flexibility for users and facilitate competition at the retail level.

10. If the Government were to legislate for the price regulation of UFB services from 1 January 2020, do you have any initial thoughts on the scope of such regulation? Should a different approach be taken in LFC areas?

11. If the Government were to introduce a backstop regime for UFB services, do you have any initial thoughts on:

a. tailoring the traditional Schedule 3 investigation into whether UFB services should be regulated?

b. the need for transitional measures that might apply prior to the possible price regulation of UFB services?

144. At this stage, we can’t identify an approach preferable to agreeing the regulatory pricing framework early so that it is ready to implement from 1 January 2020.

145. We consider that backstop regulation is not sufficient to provide regulatory certainty in regard to fibre pricing after 2020.

146. However, if the Government decides to consider a backstop regulatory option, the Ministry should, in its request to the Commission to commence a Schedule 3 investigation:

a. Provide the Commission will all of the relevant information obtained during this Review, to satisfy the Commission that there are reasonable grounds for an investigation into regulating fibre services.

b. Specify that layer one and layer two regulation of fibre services should be considered;

c. Indicate that it considers the Review has produced evidence that price regulation is warranted;

d. Set out the pricing model that it considers most appropriate (e.g. BBM) and why;

e. Set out how it considers subsidies should be treated in pricing; and

f. Specify any other policies which it thinks the Commission should consider be given effect as part of the regulation of fibre services.


g. Provide the Commission with scope to consider whether to impose regulatory obligations on LFCs (other than Chorus) or not.

147. In addition, as noted in the responses to question 7 and 9 the Commerce Commission should have the flexibility to choose the best regulatory approach given the government’s objectives (which need to be made more explicit as explained in this submission and the Economic Insights report).

12. Is there a case for change to the regulated copper access services pricing methodology? If so, what pricing methodology should apply post-2020?

148. Our preferred regulatory pricing framework is discussed above. The copper access pricing regime will need to sit, and be considered, alongside the fibre pricing regime.

149. There are transitional issues that need to be addressed in moving from a TSLRIC methodology to an effective BBM. Options for transitional arrangements are set out in Section 6 of the Economic Insights report. The key issues are how the starting point RAB should be valued if a BBM approach is adopted and how to set the starting point prices and subsequent price profiles for copper and fibre (while maintain the NPV=0 principle).

13. If a BBM pricing methodology were put in place for UFB services, how would that impact the choice of a copper pricing regime? Should consistency be an important consideration?

150. Our preferred pricing approach is set out above.

151. Further, as noted above, and detailed in the Economic Insights report, there are strong economic and efficiency principles for:

a. Applying a NPV=0 approach to setting regulated prices. The NPV=0 principle is essentially an ex ante zero (no excess) profits condition. The pricing approach would need to look across both copper and fibre services to ensure that this condition is met, i.e. by applying a DAC valuation to copper and fibre networks; and

b. Cost reflective pricing. This principle of cost reflective pricing is recognised in the Telecommunications Act 2001 and the Commerce Act 1986 (when references are made to efficient investment or dynamic efficiency) and given relatively greater weight by the Commerce Commission when considering trade-offs.

152. However, this approach is likely to mean different unit costs for copper and fibre network services over time. While a uniform price for copper and fibre may support specific or implied fibre targets, there are efficiency costs and would not necessarily be in the long term interests of end users. The approach could imply over-recovery of the asset base for copper, entail an implicit tax on copper where it is used to cross subsidise fibre and reduce competition and the utilisation of the network as a whole. Economic Insights detail this issue in its report, attached.

153. More generally, the discussion paper leaves open the Government view on the migration to fibre, and this leaves significant uncertainty relating to efficient pricing principles. This can be addressed by giving greater clarity to what is meant by efficient migration and why and when it should be achieved and by the specification of a separate policy instrument.


14. If BBM were introduced for UFB and/or copper services, should this be done under Part 4 of the Commerce Act or through a similar model under the Telecommunications Act? What would be the costs and benefits of each option?

154. We don’t support regulating, in part, through Part 4 of the Commerce Act. We can see significant implementation difficulties regulating the sector through different legislation is likely to be complex (from a regulatory process perspective), and likely result in inconsistency and distortions. For example, how differing purpose statements could be applied to the same market?

155. Further, it’s unclear how Part 4 would efficiently address the competitive aspects of the telecommunications sector. For example, to provide efficient signals for investment in competing layer 2 platforms and services. We don’t support this option.

15. What is the right balance between providing predictability through legislated pricing requirements and ensuring the Commission has flexibility to respond to a changing environment? How might this be achieved?

156. Predictability is not necessarily an overarching objective but one of several important objectives for best practice regulation. Flexibility is also required to ensure that changing circumstances can be effectively responded to with appropriate policy or regulatory changes.

157. A clear and predictable regulatory pricing framework is one which is not changed by successive governments on a regular basis. Once the regulatory framework is in place (such as one that calls for cost-based pricing) predictability is achieved if the independent regulator conducts a comprehensive, robust and contested process to best identify cost-based prices that are consistent with the purpose of the regulatory change they were instructed by Parliament to implement.

158. Regulators should also have a measure of flexibility to achieve the policy objectives they are required to give effect to. Overly prescriptive statutory provisions may well make it difficult to achieve the real policy goal. Attempting to regulate for every eventually through legislation may well result in a range of interpretations which become subject to legal challenge. Predictability and certainty will then be achieved once the Courts have expressed a view.

159. However, it is considered that there are some critical economic efficiency principles that need to be adhered to and that in particular priority should be given to the NPV=0 principle.

160. There is also broad acceptance that the best practice approach to specifying objectives that conflict with the NPV=0 principle is to clarify and rationalize the objective, separately cost it and ensure efficient funding.

161. It is suggested that the application of these two principles will ensure the optimal balancing of predictability and flexibility.

16. Please comment on the implementation issues we have identified for moving to BBM for UFB and/or copper access services, including identifying any other material issues that you think would need to be addressed.

162. For consistency, predictability and efficiency in economic regulation of telecommunications markets we consider it preferable for economic regulation of telecommunications services to be implemented under the Telecommunications Act.


163. The Economic Insights comments on the implementation issues in sections 3 to 6 of its report, and in more detail in the supporting annexes. The key implementation issues being:

a. The number of RABs and initial valuation(s). There should be consistent approach to Chorus and LFC RABs, recognition of separate prices for services (i.e. layer 1 and 2 access), and DAC valuation to promote efficient outcomes;

Where the RAB is based in part on replacement cost, then an adjustment should be applied to reflect that Chorus would already have been compensated for the capital expenditure in advance of it actually occurring. The adjustment to avoid the double counting s unlikely to be transparent and complex given long asset lives and a dynamic technologies and asset enhancements.

b. Assessing efficient operating costs;

c. Setting price caps for individual services, particularly for layer 1 and potentially competitive layer 2 services in order to not distort access seeker business decisions and investment. A revenue cap approach is not supported;

d. Providing cost minimising and efficiency incentives through, for example, setting the duration of the regulatory period, efficiency sharing mechanisms, tuning price quality paths, monitored and management, and the criteria for admission of new expenditure to the RAB;

e. Consideration of other incentives and mechanisms to, for example, promote investment and innovation in a BBM (the model itself generally provides limited cost reduction incentives);

f. Mechanisms to address information asymmetries in implementing a BBM model.

164. These parameters and settings need to internally consistent in order to achieve the efficiency enhancing outcomes.

165. The Government indicates in the discussion paper that a further consultation on implementation issues is planned. We support this approach – many of the efficiencies and policy objectives will be gained (and lost) in the approach to implementation.

Mobile competition and radio spectrum

17. Is the current regulatory framework for mobile services effective? Will it continue to support both coverage and competition objectives in the future?

18. If changes are needed to regulation of mobile services, what should we consider? For example, is it worth actively promoting infrastructure sharing?

166. Mobile services are increasingly important to New Zealanders and New Zealand businesses. The mobile service providers are operating in a highly competitive market, and the sector delivering great results in terms of new services, pricing and deployment of modern technologies. In this context, we can see no policy justification for further changes to the mobile regulatory framework or evidence of market failure that would justify regulatory intervention.

167. The key challenge for the sector is finding sufficient revenues to fund investment in rural 4G coverage that our country wants. Government initiatives such as RBI will help in this regard, but RBI is wholly funded by operators through the TDL. The interventions


canvassed in discussion paper will undermine further network operators’ aggregate capability to fund that investment.

168. The discussion paper suggests that New Zealand has a low number of MVNOs and trend towards fixed/mobile bundling. This is not the case, we see MVNOs as a valuable channel to market and we already support 9 MVNO partners on our network. MVNOs are launching fixed and mobile bundles that lead the market.

169. As noted in the discussion paper, mobile network operators currently have strong commercial incentives to compete through infrastructure in large parts of New Zealand, and share infrastructure where deployment costs are high. We expect passive infrastructure sharing to increase over time as a rational cost saving strategy. We support Government initiatives that encourage commercially sensible infrastructure sharing, but would not support Government initiatives with the objective of incentivising infrastructure sharing what is commercially sensible.

19. What are your views on the options for reform in spectrum allocation?

a. How could the overlap between spectrum assignment by government and consideration under the Commerce Act be managed?

b. Should there be any requirements on government to consult or establish objectives for spectrum assignments in legislation?

170. We consider that the current process requires reform. The process that MBIE runs to determine appropriate conditions for successful spectrum purchasers should be the only regulatory process bidders are required to undergo. The Commerce Commission should not be required to provide clearance under the Business acquisition provisions of the Commerce Act. The role of the Commerce Commission undermines the very point of the auction conditions, the spectrum caps and the implementation requirements. The conditions contained in spectrum management rights agreements are designed to determine the most efficient allocation of spectrum to achieve Government policy objectives. Competition safeguards should be built into the spectrum conditions and the Commerce Commission should be consulted on and assist with the development of these conditions.

171. In any event, when new spectrum is made available and implementation obligations require new investment and new productive capacity there should be very little need for considering whether the acquisition is likely to lead to a substantial lessening of competition. It is simply the acquisition of a productive asset which requires further investment to deliver more to consumers. It does not create any horizontal overlaps between actual or potential competitors.

172. The current process is untidy: we have two agencies with overlapping mandating and different policy tool kits and this creates significant uncertainty for bidding parties.

173. The Government addresses policy issues (including competition matters) during the spectrum policy development process, and has a wide range of policy instruments open to it to address any concerns. For example, the Government has split bands, implemented shared parks and imposes use it or lose it obligations, all to promote competition outcomes.

174. It then makes little sense for an additional consideration to occur part way through the spectrum allocation via an overlay Commission process (which by its nature can only consider a limited range of factors).

175. Nonetheless, the Commission can provide a valuable perspective in to policy setting process. The Government should remove the overlap, removing spectrum allocation from the Commerce


Act. This is the only means of removing the statutory double up. At the same, it should provide for the Commission to be consulted on competitive implications prior to an assignment process starting (but not on the policy response – this is a Government policy maker role).

176. The Radiocommunications Act should be amended by deletion of the section that deems spectrum allocated by management rights to be an asset / business for the purpose of merger control under the Commerce Act. That is because in most cases original spectrum allocations deliver new productive capacity. The real counterfactual is (for example) no 5G service vs 5G service by the party/parties prepared to buy the spectrum.

177. In the allocation process MBIE considers factors that include use and implementation and the highest economic value of the asset. It’s possible to include generic competition-style obligations in the auction catalogue – which may influence the value). That’s enough ex ante management rights allocation. A separate merger clearance requirement is unnecessary. Ex post competition law keeps people relatively honest if they have accumulated spectrum assets and use them for anti-competitive purposes (of to create a SLC).

178. Clarifying the consultation requirements could enhance the transparency of the process and thus the government’s ability to attract a broader range of interested parties to spectrum auctions

179. Government could also create transparency in regard to secondary spectrum trading market by including conditions to manage competition and location issues without the need to get competition clearance.

20. Is an undertakings regime needed to set and enforce spectrum assignment terms and conditions? Where would this sit within the existing legislative framework?

21. Should the Ministry of Business, Innovation and Employment or an independent agency monitor and enforce assignment conditions?

180. Spark agrees that more flexibility could be provided than is available within current Deeds. Being able to, for example, agree sensible amendments to deployment conditions to reflect changes in international use of spectrum bands would be useful. To the extent that a shift from Deeds to undertakings would facilitate this, we would support that.

181. More important to us, though, is the question as to who should monitor and enforce compliance. We would be very concerned if Government proposed to split responsibility for allocation of spectrum from compliance monitoring and enforcing of spectrum rights and obligations. We have experienced in other areas of our regulatory framework the uncertainty that can arise where different arms of Government are responsible for policy design and implementation. Spectrum is an extremely valuable asset that mobile operators pay significant sums for and that delivers billions of dollars of value to our country. In the absence of any clear benefit to a shift in responsibilities, we do not support any such shift.

The regulatory toolkit

22. Is there a need to update the current purpose statement in the Telecommunications Act for the communications access regime? What are your views on the suggested changes?

182. The Review proposes that an appropriate purpose may be

“… to promote competition, or outcomes consistent with outcomes in competitive markets, for

the long term benefit of end users…” (page 95).


183. We consider that section 18(1) already provides for both the promotion of competition and competitive outcomes. The purpose of regulating telecommunications in New Zealand is to limit distortions likely to arise in access markets where workable competition has not yet developed. Firstly, regulation of these markets must remove market power rents – which are almost inevitable on monopoly networks. Secondly it should promote efficient conduct by regulated suppliers. And thirdly it should promote competitive entry to regulated and adjacent markets and competitive conduct within them.

184. The primary focus of the purpose statement should therefore remain the promotion of competition … accepting that where efforts to promote competition are unlikely to result in readily observable competitive effects (within the short term), it may be necessary for a regulatory instrument to go further towards emulating the outcome expected in a competitive market, such as by setting prices at an efficient level (that would likely emerge in a competitive market).

185. We therefore consider that the purpose statement in section 18 of the Telecommunications Act 2001 (Act) remains appropriate. The current purpose seeks to promote competition in telecommunications markets for the long term benefit of end users (LTBEU) in New Zealand. In doing so it seeks to regulate bottleneck assets to ensure that competing downstream suppliers (RSPs) are able to obtain access to services (provided using those bottleneck assets) at efficient, competitive and sustainable prices.

186. The way in which the current competition purpose is framed seeks to provide for regulatory settings that facilitate the flow through of the benefits of competition to end users that these structurally concentrated markets do not readily achieve without intervention. Because local access copper and fibre networks (for example) retain significant natural monopoly tendencies and are difficult to reproduce efficiently in competition with an established incumbent, competitive and efficient entry can be readily thwarted by targeted monopolistic predation which would stifle efficient investment and competition. Accordingly regulation should seek to set prices at the competitive level, while simultaneously ensuring that services are competitively constructed and keep up with demand, maintenance and innovation that consumers require and have a right to expect.

187. And for downstream markets in which RSPs operate to be effective it is not acceptable to simply accept a competitively neutral input price at any cost. Only an efficient input price will deliver efficient outcomes in downstream markets. Inefficient access prices may stimulate investment in inefficient by-pass by downstream operators, which in turn may reduce the capital available for other investment an innovation, thereby softening the strength of competition in downstream markets across the board.

188. That said, the “promotion of competition” as provided for in section 18 of the Telecommunications Act has important differences to the “promotion of consumer welfare in markets where there is little chance of competition” as provided for under Part 4 of the Commerce Act 1986 (Part 4). But promoting competition for LTBEU achieves more than the Part 4 purpose.

189. In our view, the telecommunications markets are more dynamic, multi-service, multi-sided and multi-faceted than the markets regulated pursuant to Part 4. Accordingly a distinct regulatory purpose statement is appropriate.

190. Although competitive entry into telecommunications markets is difficult due to incentives on incumbents to block entry, that sort of market failure is different to the failure arising from pure natural monopoly assets. We are of the view that even access level competition is possible in communications markets and it remains important to facilitate greater opportunities for competition (while regulating for efficient pricing and normal returns on investment).


Outcomes consistent with those of a competitive market

191. We think the Section 18 test – when applied to the TSLRIC pricing model – already requires the outcomes of a competitive market. TSLRIC is based on setting an efficient benchmark against which parties can make efficient decisions, and this means a price that would be the outcome of a competitive market. This is the only price that doesn’t distort downstream and other competition, i.e. promotes competitive conditions by minimising distortions.

192. Nonetheless, if the Government thought it wasn’t clear or has advice from the Commission that it’s not clear, then we think the Government could make the change.

Investment and innovation

193. The Review also proposes the addition of a second part to the purpose statement -

“ … to promote growth, innovation and investment in communications markets for the long term

benefit of end-users.”

194. Spark supports the promotion of growth, innovation and investment in communications markets. However, we do not see a role for such a dual purpose in pricing determinations. Such a purpose is likely to reduce certainty and predictability of regulatory pricing. It is entirely unclear how and to what extent these words actually add to the existing s18 purpose statement: we consider these concepts already to be at the heart of s18, so believe the addition of the proposed words could only add uncertainty.

195. We do not support a change to the second leg of the purpose statement to provide greater prominence for investment and/or innovation. Efficient investment occurs in competitive markets. Innovation occurs in competitive markets. And the Act already directs the Commission to consider efficiencies when applying its decision-making powers. We question, therefore, whar the addition of this proposed second leg to s18 would achieve. Does it mean investment and innovation need to be considered twice by the Commission – in both legs? Does it mean they are more important considerations than other elements of s18 – such as competition? Promoting investment (for its own sake) certainly does not need to be a purpose of the regulatory regime. By focussing on the promotion of competition, investment will be facilitated and better market outcomes achieved. A competition-oriented regulatory regime is more likely to be proportionate, recognising a role for markets to drive

196. The promotion of competition for the LTBEU itself requires appropriate consideration of efficient investment to ensure that LTBEU is met. Elevating investment to a secondary purpose creates the risk of over-valuing investment by regulated entities. The Commission has consistently made it clear that it considers LTBEU will be best delivered through dynamic efficiency, which includes investment and innovation

197. Accordingly, we don’t think any change of this nature is a good idea.

23. Are there any other barriers to withdrawal or switch-off of copper services which are not addressed here? For example, are there any services based on the legacy copper network for which a replacement product is required, and is not available in New Zealand?

198. We are not aware of any legislative barriers to an orderly commercial migration.

The TSO

199. The discussion paper asks whether the TSO or other instruments impede the copper to fibre migration.


200. We are disappointed that the Government has not taken the opportunity to conduct a more in-depth review of the legacy fixed line TSO which has become increasingly outdated. The TSO dates back to the privatisation of Telecom and was a protection put in place at a very different time, when retail services were extremely limited and when Telecom operated in a very different market structure. While the TSO was arguably an appropriate remedy for an incumbent operating in a newly liberalised market, it is no longer appropriate for the competitive retail environment we are operating in today.

201. Spark is now RSP like others in the market. It makes no sense from a policy perspective for Spark alone to bear the burden of the TSO service deed. We request further consideration by Government of the removal of retail TSO obligations, replacing them with either a remote area USO obligation on all telecommunications voice service providers, or a contestable remote area TSO funding model.

202. We agree with MBIE that there is no need to introduce a broadband TSO service as the Government’s preference is for open access broadband capability to be rolled out through initiatives like the RBI, which will result in improvements to the availability and affordability of broadband services. The same argument can also be applied to fixed voice service which also rely on third party access inputs.

24. In your view, should Chorus have to meet any requirements to protect consumers prior to withdrawing copper services or switching off the copper network within the UFB footprint?

a. What requirements should be met?

b. How should these requirements be given legal effect?

203. It is far too early to even consider Government-mandated requirements for a migration such as this. There is no evidence that Chorus and its customers cannot and will not manage this migration themselves in a way that ensures consumers’ interests and protected and confidence is retained in the services we provide them.

25. Is there a need for a mandatory codes system for providers of telecommunications services in New Zealand? How would this work in practice?

204. The current model where the TCF creates Codes is a good one as it allows industry to be nimble in how it addresses issues. Codes are designed by industry participants who have detailed knowledge of the processes and technology which underpin the industry. Codes are created to address particular consumer or industry needs, often as an alternative to formal regulation. Industry Codes can be updated relatively easily to reflect changes in market conditions if required. The TCF process for implementing and amending Codes ensures accountability without introducing a large administrative overhead. Compliance with TCF Codes is enforced through the TCF Code Compliance Framework.

205. The review notes that the TCF regime for non-regulated Codes is limited in that only those members who sign up to a Code are bound by it. However, the main industry operators are members of the TCF and the majority of these members sign up to the Codes which are relevant to their business. They sign up because it is the right thing to do for their business and they see the benefit in terms of their corporate reputation.

206. The discussion paper asks whether legislative backing should be introduced so that Code can be applied to all participants. This is likely to increase the regulatory and financial burden on all operators, particularly where the cost of policing compliance is considered. The benefits of more operators being required to comply is likely to be more than offset by the wider costs on industry.


We suspect even a mandatory solution would lack universal compliance from operators who are not already complying, unless significant resource is allocated to enforcement.

207. On balance we consider the benefits of a nimble self regulatory regime outweigh the possible benefits of legislatively mandated Codes and the status quo should prevail.

26. Do you think there are current net neutrality issues in New Zealand?

27. Do you think the regulatory regime is capable of addressing net neutrality issues if they arise in New Zealand? If not, what approach should we consider?

a. Are there elements of the rules and expectations introduced in the European Union and United States that would be useful to have in the New Zealand regime?

28. What do you consider is acceptable traffic management and what is not acceptable? Please provide specific and realistic examples. For example, should telecommunications providers:

a. be able to block or deprioritise lawful content, applications, or services?

b. be able to enter into commercial agreements with content providers to prioritise certain traffic?

c. be able to prioritise certain types of traffic when their network is congested (such as voice traffic or emergency services calls)?

29. Are there other net neutrality matters you consider should be considered in a regulatory context (for example, peering or certain content distribution practices)?

208. We do not see any Net Neutrality issues in New Zealand that would require specific net neutrality legislation to address.

209. As is noted in the discussion document, the telecommunications market in New Zealand is competitive and we already have an adequate product disclosure regime which require providers to clearly explain their traffic management policies alongside other features of their fixed broadband services. If a consumer does not like the traffic management policy or commercial arrangements of a particular RSP they can vote with their wallet and choose a different provider.

210. The Network Neutrality debate emerged in the US where it seeks to address the symptoms of a market structure which consists of a small number of vertically integrated providers. Consumers have little choice over provider, particularly for higher speeds . The US Department Of Commerce noted this trend in its Competition Among U.S. Broadband Service Providers (December 2014) report:

“For example, only 37 percent of the population had a choice of two or more providers at speeds of 25 Mbps or greater; only 9 percent had three or more choices. Moreover, four out of ten Americans did not live where very-high-speed broadband service –100 Mbps or greater – is available. Of those with access to broadband at this speed level, only 8 percent had access to two or more providers; 1 percent had access to three or more. Only 3 percent of the population had 1 Gbps or greater available; none had two or more ISPs at that speed”.

http://www.esa.doc.gov/reports/competition-among-us-broadband-service-providers

211. The lack of competitive pressure on US providers allows them to exploit their market power by favouring their own upstream services above those of their competitors. Consumers are not able to respond by changing to another supplier if they don’t like their provider’s policy. US Net


Neutrality legislation attempts to protect consumers against this specific harm and cannot simply be transposed to other jurisdictions.

212. New Zealand has a very different market structure: consumers can chose from a range of RSPs who compete vigorously for customers. Where the access network is a bottleneck (eg Chorus’ legacy copper access, UFB fibre, RBI infrastructure) there are existing remedies in place to ensure these facilities are offered on an open access wholesale basis.

213. RSPs differentiate their service in a variety of ways including those that promote their services based on the quality of their networks. If an RSP degrades traffic to a service that its customers want to access then those customers will choose another ISP who does not have this policy.

214. Many RSPs have a range of different broadband products, with prices varying depending on the data cap chosen. Data caps allow end users to select a plan which is right for them – low data users can choose a 40GB plan while those who need more data may go unlimited. In the same way RSPs could in future differentiate their product offerings based on traffic policy so that, for example, people who do not stream much video content could pay a lower monthly rental to reflect their lower data usage, or gamers may be prepared to pay a premium for a lower latency service to improve their gaming experience. Ultimately it should be the consumer who decides if these types of products are attractive enough to be worth paying for rather than stifling them by unnecessary regulation.

215. The government’s role should be to encourage continued innovation so that consumers benefit from a range of products in the market. Government already has the necessary tools to deal with any market abuses through the Competition Act and the Fair Trading Act. Specific Net Neutrality legislation is not needed in New Zealand.

30. Do you have any suggestions for encouraging deregulation as part of the regulatory process?

216. At a principle level we support deregulating in markets where there is effective competition.

217. We also support the principle that the scope and extent of regulation should be proportionate to the harm it seeks to address and should go no further than necessary to achieve that.

31. Do you support the Commerce Commission having the flexibility to:

a. implement price-only regulation?

b. adopt either a one- or two-stage pricing process?

218. We do not support the concept of price-only regulation. Non-price terms are becoming increasingly important in our structurally separated market structure, making the concept of price-only regulation less relevant than it might have been in the past.

219. We are attracted to the possibility of a one-stage pricing process resulting in faster regulatory processes that deliver earlier certainty. However, we are also mindful of past history: in almost all cases, quicker IPP processes have been accepted by industry and longer, more costly FPP processes avoided. We suggest providing flexibility to allow the Commission to determine whether to apply an IPP or move immediately to an FPP.

32. Do you have any comments on the current arrangements for consumer representation?

220. There are a range of bodies and organisations which act as consumer advocates today such as Telecommunications User Association of New Zealand, InternetNZ and Consumer NZ.


privately-funded consumer groups operate in a market the same way we do. If consumers do not see sufficient value in existing bodies to continue to fund them, then that suggests that competition in telecommunications markets is working. It also suggests that artificially subsidising these organisations would risks inefficient outcomes as those groups will have no incentive to manage costs and will continue to advocate for outcomes that may place heavy costs on industry but may not actually be of great value to consumers.

221. In common with other industries, consumers have a stronger direct voice than ever before as companies seek to engage with consumers via social media such as facebook and twitter. Online forums such as geekzone facilitate discussion between more technical advanced consumers. Issues in the telecommunications market are also regularly raised in editorials and comments in the main stream media as well as technology publications. Media stories are often informed (and quote) social media discussions.

222. Finally, Government funds a variety of statutory bodies which have existing obligations to ensure consumers’ interests are advanced and protected. As an example, the Commerce Commission has both Fair Trading and Consumer Guarantees Act oversight.

223. Taken together we conclude that consumers are adequately represented in New Zealand. It is unnecessary to create a new formal statutory consumer advocacy role.

33. In your view, is there justification for the Government to make it clear in legislation whether or not backdating will occur?

224. In most cases there will be no justification for backdating a purchase or selling price. However, where a party acts on an incentive to delay reducing a price, to the detriment of consumers, and so acts in a manner akin to an exercise of market power, backdating of a lower price may be an appropriate remedy.

225. The spectre of backdating that has arisen in the UCLL/UBA FPP process has been framed in an unhealthy and distracting manner. We are of the view that the Commission’s discretion to backdate must be exercised in favour of the outcome that would best promote competition for the LTBEU.

226. Stakeholders cannot make provision for retrospective but unknown adjustments to prices going back for an uncertain number of months or years. It is too uncertain. In this process for example we felt obliged to increase customer prices to partially offset backdating after the Commission’s preliminary view on backdating. But we made no further provision on backdating following the July Draft Decision that the Commission will not backdate any price increase.

227. We think that is the right outcome as there can never be an instance where a retrospective price increase is reflective of likely outcomes in a competitive markets.

228. Our view is that the regulated prices are a de facto price cap on the price chargeable by the regulated entity. Any pricing above that regulated level is unlawful. But pricing below that level is permissible – and would be so especially when applied in a non-discriminatory fashion. In that regard even if the Commission were to set a retrospective effective date for a new, higher price, we think that it should not result in a retrospective adjustment of the otherwise lawful price already paid to the access provider.

229. In electricity there is a clear instruction on backdating. But backdating is a most unconventional commercial term. No party would ever willingly agree to it. So it makes no sense to have it in legislation.


230. We support legislation indicating that backdating should not considered except in cases where the regulator considers it is necessary to address anti-competitive or delaying behaviour. This is consistent with international practice.

34. In your view, is there still a need for a separate Telecommunications Commissioner (rather than using the general Commissioners)?

35. Would the increased accountability created by a merits review process outweigh the risk of increased uncertainty and length added into regulatory processes?

231. We support the retention and continuation of the role of the Telecommunications Commissioner (and a specialised telecommunications branch) within the Commerce Commission. This specialist role within the Commission remains appropriate given the complex but also fast-moving nature of communications technologies and markets and dependent adjacent markets. The incumbent, Dr Stephen Gale, has been both a general commissioner and a specialist commissioner and in our view he has demonstrated that specialist commitment to the sector is important.

232. We also note that the way in which the Commission operates, in that staff and other Commissioners spend time working across various regulatory processes, provides a useful training opportunity for transferring sector-specific knowledge, while maintaining a core group of sector specialists.

233. We support the increased accountability that a merits review process would provide,

36. Do you have any suggestions for the most effective way to transition to a new regulatory framework, and to ensure any updated framework remains fit for purpose over time?

234. Our views on an appropriate transition are discussed above.

37. Do you have any comments on the potential removal of the ‘broadcasting exclusion’ in the Telecommunications Act?

235. We do not understand what the effect of this change would be, and have received no further explanations from officials. We do not therefore feel able to comment on this question.

38. Are you aware of any barriers to trans-Tasman trade in communications markets that the Government should address, or areas where closer harmonisation with Australia would be beneficial?

236. We are not aware of any such barriers.

39. Please outline any other modifications you propose should be made to the regulatory framework, explaining how these would align with section 157AA(a) of the Telecommunications Act.

237. Please refer to our comments in this submission about the importance of further government work on reducing deployment costs for mobile infrastructure, and the need for a proper review of the TSO.

END


Attachment A: Economic Insights report

Provided as a separate document.

Spark New Zealand [PDF 573KB]

Documents

Transcript of Spark New Zealand [PDF 573KB]