Review of the Telecommunications Act

A blog post from Reg Hammond, Policy Consultant at InternetNZ
22 April 2016

Review of the Telecommunications Act

Following Communications Minister Amy Adams' high level policy statement on the future of communications regulation, the initial response from all sides of the industry was consistent. Welcoming: the early engagement; the commitment to determining the regulatory settings that will apply from 2020; and the proposed utility-style, building block methodology (BBM) for both copper and fibre regulation. Most also hedged their bets noting the many complex issues that need to be addressed.

A week later those issues are emerging and questions are being posed.

The regulated asset base

Top of the list is what constitutes Chorus' asset base and how it is valued. The asset base will be used to calculate the regulated price of the services from 2020. Unlike the one-dimensional electricity sector, telecommunications has two overlapping fixed networks - the aging copper network that is rapidly losing customers as people migrate to UFB fibre and the modern UFB network which will cover 80% of the country, with a significant share of the cost covered by the taxpayer.

After 2020, will copper users pay for the copper network and fibre users pay for the fibre network? How will shared costs across both networks be allocated? More importantly, will the remaining 20% of copper users be expected to pay for the maintenance of the aging copper network or will fibre users be expected to cross-subsidise the copper network they do not use?

Incentives to maintain the copper network and service quality

Without resolution of the issues about the relative costs of the fibre and copper networks, and who pays those costs, it is difficult to see how incentives will play out. Multiple scenarios can be envisaged, particularly in rural areas.

If, through regulated prices, Chorus is rewarded for making inefficient investments in rural areas they will obviously make those inefficient investments. Alternatively, if Chorus is not rewarded for making inefficient investments why would they bother to even maintain the copper network? Chorus has no obligation, other than an ineffectual telecommunications service obligation, to upgrade the rural copper network. If price caps are placed on copper and fibre regulated products, and also on overall revenue, the options appear to be that copper prices will either rise astronomically or fibre prices will rise to cross subsidise copper or a regulated price cap prevents those options. Chorus might simply undertake the minimum maintenance on the copper network. The latter option may well be the best if it is accepted that in future rural broadband services will predominantly be delivered by mobile or fixed wireless.

Anchor products

The current legislation recognises that customer expectations change over time, and in a competitive environment, suppliers constantly upgrade the networks to meet increased demand. Upgrading is factored into the regulated price Chorus can charge. In such a dynamic industry the concept of an anchor service at an anchor price is difficult to envisage, depending on how you define the idea. In reality, if the price is anchored then the service provided for that price should consistently improve. Conversely if the service is anchored then the expectation would be that the price should decline. There may be more promise in a core product that does change over time being the one subject to price regulation, but more thinking is needed on this idea.

What place competition?

The Government's stated goal is "to develop a stable and predictable regulatory framework that supports competition, innovation, and efficient investment for consumers." but the announcement also says that promoting infrastructure competition is no longer a primary goal. While those statements do not necessarily contradict each other, the legislation to implement such a complex policy will need to be very carefully handled.

For example, in some circumstances (such as mobile) promoting competition remains a priority. Elsewhere, investment or innovation may be the Government's primary goal. But if stability and predictability are also goals they will not be achieved without clarity about whether investment, competition and innovation are to be equally weighted or not.

A case in point would be investment in the rural 20%. The Government has proposed a target of 50mbps for almost all New Zealanders by 2025. Achievement of such a target will not occur in rural areas without massive investment in either the fixed network, the mobile networks, or both. If fixed network regulation is weighted towards investment, and Chorus is able to recover its investment through national regulated pricing, it make sense for it to inefficiently invest. Mobile operators who are in a competitive environment with no regulated return will struggle to compete with Chorus even though investment in mobile/fixed wireless networks to deliver 50Mbps in rural areas would almost certainly be much more efficient.

Timing, transition and getting it right

The high level policy statement is useful and many of the proposals at that high level are welcomed. But approaches such as BBM are not a quick easy fix. If they were they would have been introduced in 2011. The likelihood is that every second between now and 2020, and maybe more, will be required. The transition from a regime predicated on promoting competition to a regime accepting that much of the wholesale service is a monopoly will be complicated. Transitional arrangements should not be rushed - getting it right is more important than getting it done quick.