Submission on Issues Paper regarding Unbundling the Local Loop

TELECOMMUNICATIONS ACT 2001:
SECTION 64 REVIEW INTO UNBUNDLING THE
LOCAL LOOP NETWORK
AND THE FIXED PUBLIC DATA NETWORK
TELECOM'S RESPONSE TO THE
COMMERCE COMMISSION'S ISSUES PAPER
30 MAY 2003
[PUBLIC VERSION]
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CONTENTS
1.
TELECOM'S MAIN SUBMISSIONS IN RESPONSE TO THE ISSUES PAPER ...................... 5
2.
TELECOM'S SERVICES IN NEW ZEALAND ......................................................................... 13
2.1 PSTN and data networks......................................................................................................... 13
2.2 Network history ........................................................................................................................ 15
2.3 Competing Networks................................................................................................................ 21
2.4 Issues arising from Telecom's Network History....................................................................... 33
2.5 Telecom's Next Generation Network ....................................................................................... 35
2.6 Telecommunications in New Zealand in 2008......................................................................... 41
3.
BROADBAND IN NEW ZEALAND .......................................................................................... 45
3.1 Broadband Penetration............................................................................................................ 45
3.2 Project PROBE ........................................................................................................................ 69
PART II: RESPONSES TO THE COMMISSION'S ISSUES PAPER............................................ 77
5.
INTRODUCTION ..................................................................................................................... 77
6.
INTERPRETATION OF THE TELECOMMUNICATIONS ACT 2001...................................... 79
6.1 Principles of interpretation ....................................................................................................... 79
6.2 Interpretation of section 64 ...................................................................................................... 89
7.
TECHNICAL, IS AND PRACTICAL CONSIDERATIONS AND COSTS ............................... 113
7.1 Overview of the Technical and Operational Issues of Unbundling ....................................... 115
7.2 Implications of LLU from an IS perspective........................................................................... 129
7.3 Cost Issues ............................................................................................................................ 133
8.
REGULATION OF TELECOMMUNICATIONS MARKETS: ECONOMIC ANALYSIS.......... 137
9.
TELECOMMUNICATIONS REGULATION IN OTHER JURISDICTIONS ............................ 149
10. MARKET ANALYSIS ............................................................................................................. 213
10.1
Retail market for business local access services (including local call services) in
metropolitan areas ......................................................................................................... 219
10.2
Retail market for business local access services (including local call services) in nonmetropolitan areas ......................................................................................................... 223
10.3
Retail market for the provision of residential local access and calling services in
metropolitan and non-metropolitan markets .................................................................. 227
10.4
Retail market for the supply of broadband Internet access to residential customers in
both metropolitan and non-metropolitan areas.............................................................. 233
10.5
Retail market for the supply of broadband Internet access to business customers in both
metropolitan and non-metropolitan areas...................................................................... 239
10.6
National market for the provision of ISP services.......................................................... 241
10.7
Markets for voice telephony services to residential customers in both
metropolitan and non-metropolitan areas...................................................................... 245
10.8
National retail market for the supply of national toll services to business customers... 247
10.9
National retail market for the supply of international toll services to business customers249
10.10
National market for the supply of fixed to mobile services to business customers....... 251
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10.11
National (and international) retail market for the supply of toll-free call services to
business customers ....................................................................................................... 253
10.12
National market for the supply of 0900 services to business customers ...................... 257
10.13
Retail market for the supply of data services to business customers in both metropolitan
and non-metropolitan areas (and in international markets)........................................... 259
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KEY POINTS
•
The Ministerial Inquiry, Interdepartmental Officials' Report to Cabinet, Select Committee
Report and Parliament have all considered and rejected full local loop unbundling as
being a net detriment to telecommunications end users. Global developments suggest
the net detriment is even greater now than then.
•
New Zealand telecommunications industry participants have repeatedly made
investments which have bypassed or superseded legacy access and network systems
without the need to regulate the unbundling of those assets. This has given end users
world class innovation and efficiency which have overcome the country's scale and
location disadvantages.
•
Regulated unbundling would deter or distort pending investment decisions on key
multiple service access and network technologies. New Zealand could lose its
leadership in IP based convergence of services, contents and applications: it could
regress to legacy network-based services.
•
No purpose for unbundling has been identified other than three "problems" which are not
in fact problems capable of being addressed by unbundling:
-
The perceived "problem" of access is no longer a problem, as a result of
wholesaling in the short term, and facilities-based competition in the medium to
long-term. In fact, unbundling could only worsen real competition in the access
market, as it would distort investment in access technology and would tend to
return the industry to dependence on Telecom's undifferentiated access
assets. That would establish an industry structure supportive of oligopolistic
behaviour.
-
The perceived "problem" of broadband access does not exist. On proper
analysis, New Zealand has high levels of broadband access and these are
about to increase with Project PROBE.
-
The problem of "data tails access" is simply a variant of the perceived access
"problem" discussed above. However, it cannot properly be analysed at this
stage. A trans-Tasman comparison would establish the relative advantage of
New Zealand users, but this is not possible for confidentiality reasons.
•
The type of unbundling permitted by section 64 of the Telecommunications Act is
severely limited. "Technology-neutral" unbundling is not permitted by the Act. .
•
The Issues Paper adopts an inappropriate framework for decision making. Unbundling
is unlikely to commence until 2005/6 and it will not have any significant impact until
2008. The focus on a few downstream service markets will result in a 1-2 year
timeframe which would be inappropriate for a long term unbundling decision.
•
The Commission must adopt analytical tools which allow it to examine the whole
industry in 2008. The dynamic efficiency analysis required by the Act calls for
consideration of the potential for changes in technology or demand over that period. By
then, the industry will provide different services and meet different needs. The
Commission's proposed analysis of current markets will fail to address the relevant
issues.
2
•
The Commission may not consider overseas experience of unbundling in jurisdictions
which have different statutory frameworks from New Zealand. The Commission should
not give weight to overseas experience of unbundling where the industry structures and
political and industry goals are different from New Zealand or which do not have the
other regulatory instruments now being developed in New Zealand. Australia's
legislation and industry structure presents a near analogy for New Zealand.
•
The Issues Paper does not identify some of the key issues which must be investigated
before the Commission can apply the criteria for its report set out in section 18 of the
Act. Those missing issues are identified in the main text and repeated overleaf:
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Issues for Investigation
Issue I: Would unbundling and leasing of Telecom's backbone network, mobile
network or DSL capability have delayed or pre-empted introduction of the by-pass or
superseding technology which now serves telecommunications end users?
Issue II: Would investors have taken the risks and incurred the write-offs of failed
technology innovations throughout the 1990s had they risked regulatory unbundling of
their assets on which their successes were based?
Issue III: Will there be an "access bottleneck" in 2008, or will there be there a diversity
of access technologies available to service different needs of different consumers?
Issue IV: Will the long term development of the telecommunications industry preserve
the current structure and bundles of services offered?
Issue V: Will the convergence of networks, access applications and services
perpetuate or replace current markets by 2008?
Issue VI: Is a projection of current market segments a useful tool for identifying the
long term benefits of users of telecommunications services within New Zealand in
2008?
Issue VII: What should be the basis upon which broadband or Internet access and
uptake is assessed?
Issue VIII: What is the competition problem created by any relative non-uptake of
broadband?
Issue IX: Will Project PROBE deliver an effective broadband service to rural New
Zealand?
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5
1.
TELECOM'S MAIN SUBMISSIONS IN RESPONSE TO THE ISSUES PAPER
1.
The Commission's investigation into local loop unbundling comes at a crucial time for
the development of the telecommunications industry in New Zealand. A decision to
unbundle is likely to seriously misshape and deter investment by Telecom in the shift to
a new and different network architecture, while also distorting build/buy decisions of its
competitors. These outcomes would be to the detriment of end-users.
2.
Just now:
3.
(a)
New Zealand is establishing a comprehensive regulatory package,
encompassing the terms and price of the telecommunications service
obligation, the terms and price of PSTN interconnection and the terms and
price of number portability.
Most importantly, the Telecommunications
Commissioner is determining the terms and price of what is likely to become
one of the most comprehensive resale regimes in the OECD. The full impact
of the regulatory package already in place will not be evident in the structure of
the telecommunications market for some years, and it will take even longer for
the effects of the individual elements of the package to be understood.
(b)
The technical basis of the industry continues its rapid development, with fixed
wireless, mobile, satellite, xDSL and Internet/IP technologies emerging to
provide new services and means of access and delivery. This is being
encouraged by Project PROBE, a specific Government initiative aimed at
promoting the spread of these technologies.
(c)
The speed of change in the New Zealand telecommunications industry is
reflected in the marked changes in asset values, ownership, investment and
employment in telecommunications service providers. With three major
companies operating in the New Zealand market, two of whom (Telstra and
Vodafone) have access to the vast capital resources of international parent
companies, it seems likely that that there will be no shortage of capital
available for investment in telecommunications so long as the economic
(including the regulatory) environment does not inhibit this.
(d)
The OECD is now in its 7th year of an experiment with local loop unbundling.
This was started and ended by the United States ("US"), mimicked by the
European Union ("EU") and other countries, and on recent evidence seems
likely to be ended by alternative views emerging in the US. The lessons of this
experiment are only now beginning to emerge, but on the whole it has been
unsuccessful in promoting entry and may well have impeded investment in
alternative access technologies and networks.
In Telecom's view:
(a)
the Issues Paper does not give a central place to the fundamental industry
structural changes which are occurring, and which will continue to change the
frame of reference for analysis of unbundling for the next 5 years. The
Commission cannot consider the costs and benefits of unbundling without an
assessment of the impact of unbundling on dynamic efficiency, and that will
require a detailed analysis of the changes in telecommunications technologies
and the telecommunications industry that are likely to occur over the next 5
years. Since these technologies will be quite different from those in place at
the time that the OECD began its experiment with unbundling, the rationales
for the introduction of unbundling by other OECD countries will have little
relevance to the assessment that the Commission must make at this time in
New Zealand;
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(b)
the Commission has an opportunity to relieve end users of telecommunications
services in New Zealand of the substantial costs associated with a regulatory
cycle which failed elsewhere in the OECD by looking forward to address the
regulatory issues and solutions that are relevant for the period 2003 – 2010,
not 1992 - 1998;
(c)
it is not possible to construct an unbundled regulatory factual and nonunbundling counterfactual while the extent, price, impact and inter-relationship
of the new resale and other regulatory regimes have not been played out. The
Issues Paper adopts a decision framework which does not reflect this grave
uncertainty or the implications for its proposed decision framework;
(d)
the Commission has sought submissions on the unbundling of assets which
are outside the scope of the section 64 investigation, for example, backhaul,
switch-to-switch transport, and "backbones"; and
(e)
the Commission does not appear to have a sufficiently clear understanding of
the distinctions between "interconnection" as that term is used in regard to
telephony networks, "interworking" as that term was used by Telecom in its
submission on the draft business wholesale determination, and
"interconnection" as that term is used in section 64(1)(b) of the
Telecommunications Act.
Purpose of unbundling
4.
Telecom considers that no good purpose has been identified for unbundling, less still a
purpose which satisfies the conditions of the Telecommunications Act.
5.
In its Issues Paper, the Commission implicitly suggests that there is a broadband
"problem" in New Zealand to which unbundling is a solution.
6.
First, there is no evidence to suggest that New Zealand is lagging behind other OECD
countries in business broadband uptake or in Internet uptake. New Zealand has a well
established, extensive and well priced narrowband Internet infrastructure, which
contributes to high overall Internet use. Broadband is widely available in New Zealand
and most New Zealanders have a choice of broadband platforms. New Zealand's
residential and business broadband prices are comparable with those of similar EU and
US products.
7.
The only perceivable broadband "problem" relates to New Zealand's low (by OECD
standards) residential broadband uptake rates. Why do residential customers choose
narrowband Internet access over broadband access? The evidence suggests that two
factors contribute to that: price arbitrage between broadband and narrowband (which is
exacerbated by the regulated residential call prices), and the limited number of
broadband applications currently available. Most residential customers do not yet need
broadband technology, so they are not willing to substitute. Distorting customer choice
through regulation will not solve a "problem" - as the evidence suggests that there is no
underlying problem - but will simply bring forward the point at which substitution of
narrowband for broadband access occurs.
8.
Secondly, even if there was a broadband "problem" there is no evidence that unbundling
has raised broadband penetration rates overseas. That outcome is not surprising - with
the benefit of hindsight, solving the broadband "problem" was never attainable by a
regulator. That conclusion naturally follows from the fact that regulating upstream
production cannot solve the problem of downstream market penetration. That is
because broadband is simply a technology which enables information to be transported
in greater quantities more quickly. Even when broadband technology is available,
7
customers determine whether they wish to use it, based on many factors of which price
is only one.
9.
The Issues Paper has also focused on removing a "bottleneck" in access infrastructure.
However, within the relevant timeframe for the Commission's investigation there is no
corresponding bottleneck in New Zealand.
10.
In fact, the only threat to this rapid progression of access competition in New Zealand is
mis-timed regulation. Telecommunications service providers are already and will seek
even more in the near future to begin delivering composite bundles of services across
multi-service platforms using new technology and in response to newly emerging
customer needs. Unbundling, and in particular unbundling of and interconnection with,
Telecom's fixed PDN, could defer those decisions.
11.
TelstraClear is building its own infrastructure including potentially a third generation
mobile network1 in order to be able to offer a "converged service layer, irrespective of
the type of access".2 Unbundling of Telecom's fixed PDN, and interconnection with it,
will alter the incentives to such competitors to continue to make the decision to build,
and deprive consumers of the diversity and innovation which has marked the evolution
of the industry over the last 15 years.
12.
A third "problem" is access to "data tails". In Telecom's view, this problem is just a
variant of the claimed access bottleneck, which does not exist now even for narrowband,
and certainly does not exist in the business broadband context.
Nature of unbundling
13.
Wholesaling and unbundling are often treated as if they are on the same continuum of
interaction between telecommunications services companies, but this notion is wrong:
(a)
(b)
1
2
Wholesaling is a marketing decision. The service provider identifies the end
service the customer seeks, or may seek if a new service were introduced.
The service provider then considers how its existing resources might be used
to deliver that output or how new assets may be acquired and used either
alone or in combination with existing assets. This is a highly complex process
with many parts of the organisation combining to define the service and
assess:
(i)
the degree of differentiation from existing services offered by the
organisation and services offered by its competitors;
(ii)
the services which competitors will offer in response to the new
service and the price of that competitive service;
(iii)
the inputs required to offer the service;
(iv)
the costs and risks;
(v)
the price the users will be willing to pay; and
(vi)
the likely lifecycle of the service.
Regulated unbundling, in contrast, is an asset utilisation decision taken by the
regulator. The regulator is limited to the existing assets of the regulated
service provider, and thus operates within a static technological framework
.See "TelstraClear seeks Kiwi mobile network", The Dominion Post, 27 May 2003.
Ibid.
8
which is inconsistent with both the speed of technical innovation in the industry
and the dynamic efficiency focus of the Telecommunications Act.
14.
Other regulators have sought to leave the asset utilisation decision to the parties, and
the Commission can draw on two lessons that have emerged from those attempts:
(a)
First, the regulator's authority to regulate without specifying exactly which
assets are affected must be clear. The US gave a broader statutory mandate
to its regulator than New Zealand. Despite that, the FCC's attempt to avoid
asset specific regulation and to substitute generalised descriptions of service
was held to be unlawful. This focus on the particular assets affected follows
from the confiscatory nature of unbundling: if there is to be a fundamental
interference in property rights for the use of others, it must be very clear which
assets are being affected.
(b)
Secondly, regulators with unbundling in place have found that they must
progressively move closer to the operational level. In the UK, the regulator has
ended up taking building utilisation and customer services call centre
decisions. In Australia, the regulations involve the most minute detail of day to
day operations. Unbundling would require the Commission to participate in
those operations. That follows from the asset orientated nature of unbundling,
and the attempt it makes to substitute decisions of the regulator for decisions of
the network owner.
15.
Telecom is concerned that the Issues Paper does not adequately consider the asset
specific nature of unbundling. Instead, the Paper suggests that "technology-neutral"
unbundling is preferred. (Telecom recognises that this may be a consequence of the
regulatory path which requires the Commission to establish only the broadest outline of
unbundling for inclusion in Schedule 1 to the Telecommunications Act, with detailed
terms to be agreed by the parties, or determined by the Commission if an application is
made.)
16.
However:
17.
(a)
The greatest threat regulated unbundling poses to dynamic efficiency is that it
unavoidably constrains Telecom's use of its assets. However, the most
efficient use of those assets will change radically as changes in network
architecture are made in response to customer demand and changing cost
structure induced by new technology. Specifying how those assets may be
used - which is what unbundling would do - threatens the network upgrade,
future technical innovation and hence dynamic efficiency.
(b)
The competitor has an equal interest in this precision: it must understand
exactly what it has rights to and where that is within the network and
geographically. Once it has these rights, it, too, will have an interest in how
and where Telecom invests in its network, in a way which is far more
fundamental than its current competitive interest. For example, it will have a
critical interest in Telecom's minor operational decisions on whether and when
to replace an unbundled copper pair with fibre.
The most immediate outcome of any unbundling would be the deferral of decisions by
Telecom to invest in its IP based Next Generation Network ("NGN") and delay by
TelstraClear in its similar investments, while it assesses whether it would be better to
seek unbundling of Telecom's (deferred) NGN. Walker Wireless, a company in a
leadership role in respect of building alternative networks to Telecom has stated
categorically that unbundling will make its job harder.
9
18.
That problem is made more stark by the limitations placed on the Commission by the
Telecommunications Act in defining what assets may be unbundled. In short, these are
limited to:
(i)
some assets used for connecting end users to DSLAM or first
Ethernet switches;
(ii)
the DSLAM/Ethernet switches themselves (in the case of the fixed
PDN); and
(iii)
the copper loop in the condition now owned by Telecom from the user
to, but not including, the main distribution frame (in the case of local
loop unbundling).
No other Telecom assets or services may be unbundled.
Dynamic efficiency and facilities competition
19.
The New Zealand telecommunications industry has been distinguished from others by a
high degree of facilities competition. Over the last 10 years, almost all legacy assets
have been subject to bypass by new entrants and existing participants in response to
innovation opportunities presented by new technology and threats of competition.
These assets include the local loop, network backbones of both TelstraClear and
Telecom, the data services and networks of Telecom, TelstraClear, CityLink and
Counties Power Ltd, mobile wireless of BellSouth/Vodafone and Telecom, and now
wireless data by BCL and new entrants such as Walker Wireless.
20.
Telecom agrees with the Commission's emphasis on dynamic efficiency in its Guide to
the role of the Commerce Commission in making Access Determinations under the
Telecommunications Act (Commerce Commission, May 2002) ("Guide"), but is
concerned that the Issues Paper does not establish an analytical framework for its
section 64 investigation in which dynamic efficiency can be given appropriate emphasis.
If the Commission is to meet its obligation to place emphasis on dynamic efficiency, it
must undertake a detailed analysis of the potential for unbundling to undermine
incentives for investment in new technologies and networks and it must assess the costs
to New Zealand of regulation that focuses on incremental competition using existing
infrastructures rather than focusing on competition to introduce the new technologies
and services that provide the most significant long-term benefits to end users.
21.
The Commission should identify the impact of unbundling on dynamic efficiency in the
industry as the most important criteria for assessing the long-term interest of
telecommunications users.
Time horizon for the analytical framework
22.
It would be 2005 before the terms of any unbundling regime could be established. Even
that depends on potential users having any interest in using unbundling rather than their
own investments or other regulatory instruments: experience elsewhere indicates there
may be little competitor interest. Once those terms are known, investment decisions will
be taken and services rolled out over the following year, with customers receiving those
services in 2006. Even that timetable would be faster than most OECD countries: in the
UK, the period from initiating enquiry (equivalent to the current Issues Paper) through to
handing over the first BT commercial (non-trial) co-location facilities to unbundling users
was about 4 years (December 1998 to December 2002).
23.
The Issues Paper does not indicate an analytical basis for the time dimension of its
market review to reflect this unavoidable delay of unbundling. Telecom considers that a
conventional timeframe adopted under section 27 of the Commerce Act relating to trade
10
practices would not be suitable. That time frame is driven by the need to assess the
immediate impact of an act on competition in a market. In contrast, the issues at stake
in section 64 of the Telecommunications Act require the Commission to consider
matters that can only be assessed over a much longer time frame.
24.
Furthermore, the Commission must consider a timeframe that is consistent with the
evaluation of dynamic efficiency, and that in the context of an assessment of the
existence of bottlenecks and the appropriate policy response to them, this means the
medium to long term (corresponding perhaps to 5 – 10 years). This is because
dynamically competitive telecommunications markets may be characterised by facilities
that have the appearance of natural monopolies in the short term, but are in fact just the
mature phase of one technology at the point before it is displaced by an alternative
technology.
25.
Only a period of 5 – 10 years will allow the Commission to consider potential bottlenecks
in the context of the cycles of technical change in the industry that are the result of
dynamic efficiency. The emergence of new technologies over such a time frame is
illustrated by comparing paragraph 7.1.1 of the Report of the Ministerial Enquiry, which
suggests wireless access is not a viable competitor for high speed data transmission,
with paragraphs 6, 7 and 8 of the submissions of Counties Power Ltd dated 14 May
2003, recording the investment of several major companies in providing competitive
wireless access and of course the very real investment plans and successful PROBE
tenders of Walker Wireless. With technology evolving at that rate, the time frame
selected by the Commission for its analysis of the relevant industry structures, affected
markets, and consequences of unbundling will be critical.
Market structure for the analytical framework
26.
The market analysis framework adopted in the Issues Paper is very similar to that used
by the Commission in its adjudication of business acquisitions under section 47 of the
Commerce Act. It is also very similar to the analytical process used by the Commission
in determining whether or not a designated service should be wholesaled.
27.
This framework presumes that the impact of unbundling can be assessed in isolation in
a small number of so-called relevant downstream markets. This may be so in the case
of an acquisition or a wholesaling determination, but it does not reflect the reality of
unbundling and is inconsistent with the requirement that the Commission consider
unbundling in terms of its impact on dynamic efficiency.
28.
If unbundling occurs, it will have an effect on every single telecommunications market
regardless of the competitive assessment of any particular market. In order to do a
proper evaluation of the need for, and the effects of, unbundling, every single upstream
and downstream telecommunications market needs to be evaluated. This would involve
many hundreds of markets.
29.
Furthermore, the Commission will need to consider relativities between these markets.
For example, if the Commission determined that the downstream market for operator
services was not competitive and that unbundling would be the proper mode of
addressing the lack of competition, the Commission's analytical framework suggests
that unbundling would then occur. However, this ignores the fact that unbundling would
also occur in markets which had been held to be competitive, say, for example, local
access, broadband and calling markets. If the Commission considers that unbundling
should not occur in that situation, it is unclear from its analytical framework how it would
reach such a decision.
30.
A narrow focus on certain downstream markets is inconsistent with a focus on the
dynamic efficiency effects of unbundling. Dynamically efficient markets do not have
stable market definitions because the technical innovations that are introduced as the
11
core strategies in dynamically competitive industries will redefine product boundaries
and production processes. The Commission's investigation must take into account that
any time frame long enough to capture the impact of dynamic competition and the costs
and benefits of unbundling will also be a time frame over which it is unlikely to be
possible to define stable downstream markets.
31.
The Commission should use an industry-wide perspective for its analysis of unbundling.
This will require a balancing of the impacts on many aspects of the industry, including
upstream and downstream markets, rather than an analysis and decision on the many
hundreds of affected markets.
These main submissions are explained and expanded upon in the following sections of this
submission.
12
13
2.
TELECOM'S SERVICES IN NEW ZEALAND
32.
The following provides a short outline of the development of Telecom's networks, and in
particular its data networks. This is intended to provide not only background information
regarding Telecom's existing data network, but also to illustrate the nature of investment
risk and decision-making in a practical and relevant context.
2.1
PSTN and data networks
Total Investment
33.
The Post Office corporatised its telecommunications business in 1987 to form Telecom.
The company was sold by the Crown in 1989. Almost all data services and equipment
now owned or operated by Telecom was acquired since then. Investment by Telecom
since 1991 on fixed wire services on the PSTN and data networks has totalled over $4.2
billion.
Telecom's PSTN
34.
New Zealand's PSTN was an analogue system until the late 1960s when a conversion
to digital was commenced. Ninety percent of the conversion was completed by 1993
and the whole project was completed in 1999. Telecom's was one of the first PSTNs in
the world to be digitalised. The PSTN equipment has been updated since then, but its
original digital architecture remains. This is about to fundamentally change with a
transition to an Internet Protocol ("IP") based system, as described below. Thus,
restructure changes are made once every 25-30 years, with the most relevant being
conversion from analogue to digital and from digital to IP.
Data Networks
35.
Data had been transferred by telex for many years prior to 1986, and some other forms
of data, including fax, have been transferred over the PSTN, but this was not achieved
by a "data network". The PSTN network was not designed to deliver a data service to
the public but to deliver particular applications, principally voice conversations, but also
images (fax). "Data Networks" emerged when Telecom started to provide network
services that simply allowed transmission of data between applications hosted by
customers, when customers developed a need to transmit data between applications
hosted in different locations, and these applications were not suitable to be hosted on a
grand scale in the same way as in the PSTN.
36.
The following very brief description of the data networks is intended to illustrate those
components which play an important role in potential unbundling. More detailed
descriptions are provided in other sections of this submission. Telecom appreciates that
the Commission is fully familiar with the technical issues, and in far greater depth, than
has been discussed below. Nonetheless, an introductory overview may be of
assistance at this stage.
37.
A characteristic of these data networks is that investment in them is directed towards the
electronics (modems, multiplexers, cross-connects, switches, routers and so on) at
some times during technology evolution, and towards the transport media (copper, fibre,
microwave, wireless, satellite, and so on) at other times. Sometimes technology
developments and relative cost make transport of data over long distances to an
electronic device more efficient, with a very few large devices being acquired in
preference to investment in many devices and less transport. This is exemplified by the
elimination of many local exchanges with the data being transported to fewer central
points. At other times, greater efficiency is gained by acquiring more devices and
placing these closer to the customer. A potential example is the acquisition of more IP
14
network devices and their location closer to customers, should Telecom proceed with its
NGN described below.
38.
One consequence is that it is not possible to take a technology neutral approach to the
current investigation. For example, an assumption that interconnection is indifferent to
the type of device or transport medium at which that interconnection is provided could
result in the interconnection taking place at Auckland, Karori or Stout Street. It could
occur by means of a physical copper connection, a DSLAM port, a router or a
microwave link. The form and place of interconnection could occur through one device
out at one place one month and another device and another place the next month,
depending on how Telecom is operating its network from month to month. Telecom and
the access seeker could not plan even the most simple evolution of their networks on
that basis. The fine detail of the electronics and transport will need to be addressed in
order to decide just where, on that technical basis, and for what period, there should be
unbundling or interconnection, if at all. Hence, the Commission will need to gain an
appreciation of the overall networks and also the engineering detail of where and how
unbundling may be implemented in relation to specific electronics.
39.
Telecom at present owns and operates data transmission equipment organised into a
Digital Services Transmission Network ("DSTN") and an Asynchronous Transfer Mode
network ("ATM"). Telecom also has Transactions Services, Alarm Transport, Eftpos
Transport and other specialised networks which are used by Telecom to manage its own
business and to provide services to specific customers, such as banks.
40.
Telecom organises those networks to provide different services. For example, the
DSTN provides Telecom's Digital Data Service ("DDS"). In turn, services such as DDS
may be organised in different ways which provide different characteristics to meet
customer requirements.
For example the DDS meets the following customer
requirements:
(a)
low speed data;
(b)
high speed data;
(c)
multipoint data; and
(d)
stacked Wideband data.
15
2.2
Network history
41.
This outline is divided into the following periods, each of which is characterised by a
different set of incentives and investments:
(a)
pre-1990;
(b)
the 1990s, up to early 1999;
(c)
1999-2002; and
(d)
2002 to the present.
Pre-1990
42.
The period prior to 1990 was characterised primarily by the digitalisation of both voice
and data networks. Both were enabled by the development and deployment of digital
transmission systems, both microwave radio and fibre optic. Voice services became
digital with widespread deployment of NEAX switching equipment, and data with the
deployment of the DSTN. Other significant network developments included X.25 Packet
Switching, ISDN and fax, along with what was to prove to be the last innovations in
telex.
Telecom's DSTN
43.
The first significant dedicated data network developed by Telecom was the DSTN.
Development began with digital transmission in 1986, using X.50 (lower than 64kb/s)
multiplexing equipment. By 1988, deployment of digital cross-connects became viable
as a replacement to the manual, copper distribution frames used up until that time.
Development in transmission equipment to support higher access speeds continued
through to the end of the 1980s.
44.
These developments were essentially market and technology driven. Massive growth in
demand for leased line services became unsustainable with the labour-intensive
analogue transmission technologies and limited transmission capacity of analogue
systems, and the growing use brought demand for improved service performance.
Digital technologies reduced costs, supported higher transmission speeds and enabled
management visibility of at least part of the network. These developments provided a
basis for the network which continues to carry the bulk of data services today.
45.
Not all decisions, however, look successful in hindsight. Notably, the deployment of
Fleximux in the late 1980s proved to be a decision which came too late – growth in low
speed data services was near its peak, no longer justifying new technology.
46.
DSTN is now a stable network, unlikely to develop significantly from its present
architecture, although the cost of maintenance of the network may increase as a result
of maintenance becoming more difficult with its age over the next few years.
X.25 Packet switching
47.
In 1982, the New Zealand Post Office launched its first X.25 packet switching network,
which supported not only basic X.25 services from which the Internet was to ultimately
evolve, but a range of specific services including Videotext and the Telecom Transaction
Service on which EFTPOS, Automated Teller Machines, Lotto and the TAB built their
networks.
16
48.
Packet switching provided a lower cost and public alternative to construction of
dedicated, leased line, private networks. Long distance transmission was shared
between multiple users, thus enabling costs to be shared.
49.
The development of packet services was driven by a combination of market demand
and Telecom innovation. The development of the EFTPOS network in particular was an
innovative development. It took at least two attempts to finally produce a workable
model, in partnership with the banks.
ISDN, fax and telex
50.
The 1980s saw the launch of both ISDN and fax, and continued investment in telex.
51.
Telex proved to be nearing the end of its life, though not without one last round of
technology development – electronic telex. Telex services have proven very resilient,
with Telecom only recently closing the service.
52.
Fax became part of everyday life and introduced data communications to the mass
market. However, it steadfastly resisted any attempts to develop it beyond basic, low
grade image transmission. Neither G4 fax nor Telecom's Smartfax fax broadcast
service were huge successes.
53.
ISDN was then developed as an integrated public switched data network built on the
existing infrastructure of the PSTN. However, ISDN never reached its potential with
respect to data services, instead becoming a predominantly voice service, providing
PBX trunk circuits.
The 1990s
54.
The 1990s were the growth years of the digital networks. Both the DSTN and the PSTN
experienced steady growth and innovation, delivering new services over a mature
infrastructure. The PSTN had Centrex and Intelligent Network ("IN") services added to
it. The DSTN evolved through higher access data speeds, and data services received
special attention with the establishment of the Telecom's Netway subsidiary and Xtra
ISP. Uptake of higher speed data services was enhanced through the introduction of
Frame Relay, with its improved flexibility and lower cost structure.
55.
Along with these came first steps in a range of new technologies such as DSL and ATM,
and a few mis-steps, like the Integrated Residential Services Network ("IRSN").
DSTN and X.25
56.
The evolution of the DSTN continued through the 1990s with expansion of the network
of RN64 cross-connects, and the addition of higher access speeds (64 and 128 kb/s)
and Wideband Digital Data Services (nx64kb/s over a 2Mb/s transmission link).
57.
Developments were driven by evolving technology and the interactive technology push
and market pull this drives. Higher transmission speeds, improved cost and higher
density equipment enabling more circuits to be delivered through a smaller "footprint"
drove encouraged changes in information technology, with increased centralisation of IT
functions and more widespread computer networking.
58.
First analogue leased line services, then later both PacNet and low speed DDS services
went into a passive decline. Growing bandwidth requirements saw customers choosing
to move away from these services, requiring little if any incentive to do so. As has
generally been the case over the years, there has been no active migration of customers
off obsolete technologies, though this is beginning to change.
17
Frame relay
59.
Telecom introduced a "frame relay" service, which enabled Telecom to provide
committed transfer rate services, at full cost, but also a peak transfer rate which could
be provided if the virtual circuit had capacity after other data simultaneously being
transferred was taken into account. The speed capabilities of the system were an
increase from a maximum of 64 kb/s to 2Mb/s. The system has some traffic shaping
characteristics and was suited to computer-to-computer communications as it
transported long packets of data. The transport between two major cities was over the
same link (ie fibre or wireless) as other data (data other than that carried on the "frame
relay"), and the "frame relay" service was overlaid on the existing DSTN network by
investing in new electronics at either end of the inter-city transport.
60.
Through its subsidiary Netway, Telecom also developed an X.25 packet switch network
(separate to Telecom's public network), using these Frame Relay services. Just as X.25
provided flexibility and cost advantages over low speed DDS due to sharing of transport
links, Frame Relay provided equivalent benefits relative to high speed and wideband
DDS services. One significant difference with Frame Relay, however, is that delivers
virtual private networks, rather than public network data services. The demand for
public data proved much lower than was expected in the 1980s and early 1990s, with
larger customers who were the dominant traditional users of data services being much
more concerned with security and service performance than public networks were able
to address. A place therefore existed in the market for a mix of dedicated, leased line
services (enabling customers to build their own secure networks), switched private
network services (which maintained levels of security while reducing costs through
bandwidth sharing) and public switched services.
Xtra
61.
Xtra was established in 1995 as an Internet Service Provider ("ISP") with the
expectation that it too would become a revenue-growth opportunity, although that
proved to be much more difficult than expected in what was an already crowded ISP
market. Xtra did, however, represent the real beginnings of Telecom's experience with
what was to become a highly disruptive technology – IP.
ATM
62.
In the early 1990s, the broadband future was expected to be based on Broadband
ISDN, out of which came ATM. Initially considered to be a contender for both the
enterprise and public network backbones, the role of ATM has shifted substantially over
the years, and continues to do so.
63.
Deployment of ATM was based on a belief in huge bandwidth growth expectations, and
that ATM-25 (a 25Mb/s connection) would be the next step in delivery to the desktop
beyond 10Mb/s Ethernet. This proved to be wrong. Instead widespread adoption of
Fast Ethernet (100Mb/s) took that evolutionary step, and ATM became primarily a core
network technology, supporting very high bandwidth corporate Virtual Private Networks
("VPNs"). Thus development of the ATM network was driven by technology evolution
and moulded by global market trends.
IP services
64.
The data networks described so far all transmit data over a particular path which can be
determined by the network engineer from the time the data is received from the
customer: it is passed from one physical location and electronic device to another
location and device, and thence to its destination in accordance with a pre-existing set of
design decisions and resource allocations. IP networks operate on the principle that the
device in the network breaks down the data into its component packets and determines
18
on a dynamic basis which is the most efficient way for each data packet to be
transported to its destination. It then re-assembles the packets into the composite data
from which it originated. If any packets are not received, a packet switching IP network
will re-send the missing packets. There is no assurance of quality.
65.
In 1996 Telecom commissioned a part of the service called IPNet which was capable of
delivering data to and from Internet service providers who then passed it on to the
Internet (which is entirely IP based). This permitted dial up Internet access using a
modem at the user's premises. The modem converted the datastream into an IP
protocol packet which then was carried through the local exchange switch to a remote
access server, which handed the packet to the ISP. The ISP then passed it to the
Internet server and from that point on, the data entered the IP domain and, as described
above, followed a stochastic path to its destination. IPNet developed along with the ISP
market, and was launched in 1996, enabling the creation of "virtual ISPs". A nationwide
pool of dial-up modems was established to serve Xtra and other ISPs, with high speed
delivery of aggregated dial-up Internet user traffic to the ISPs. Again, the value of
packet-based aggregation was used to improve the efficiency of the carriage of data
traffic.
66.
Ultimately, however, the existence of free local calling for dial-up Internet made any
value-based proposition for revenue growth very difficult, and IPNet became more a
matter of cost reduction though migration of data off the circuit switched PSTN onto a
packet data network.
DSL
67.
Telecom began trials of DSL technology in 1996/97, using equipment from NEC which
was capable of delivering both video and data services. It was seen as an providing an
alternative to the IRSN infrastructure, but was novel technology.
68.
The initial trial was based on proprietary technology for the delivery of both video and
data. With the collapse of IRSN, however, video content was lost and eventually DSL
was to be pursued as a data-only technology.
69.
Development of DSL technology was, and still is, strongly influenced by developments in
other markets, notably the US. It has been influenced by regulatory perspectives on
separation of video and telephony services, and relative regulation of telcos and cable
TV companies influencing the technology, the markets and the availability of content to
drive the services the technology supports. Again the availability of suitable content and
cost structures at this time meant that commercial deployment did not proceed.
1999-2002
70.
This period was characterised by the slowing of growth in mature voice and data
services, and the first steps to what was shaping up to become the post-Internet world.
The development of DSL, the battle between ATM and IP in the core of network and the
growing importance of Ethernet access services are the hallmarks of this time.
Nokia DSL
71.
In 1999, Telecom deployed its first DSL technology supporting commercial services.
Based on Nokia DSL technology, DSL was built to support data services only, and in
particular to feed the apparently voracious appetite of Internet growth. Jetstream was
launched 6 months behind the launch of similar services in the US, and almost 2 years
ahead of Australia.
72.
DSL was driven by broadband growth and was seen as the broadband delivery
mechanism for the future. Coverage has progressively grown to be among the best in
19
the world, in the face of regional competition from wireless operators and urban
competition from TelstraClear and fibre-based competitors.
73.
Symmetric (SDSL) technologies have been pursued throughout the life of DSL, based
on an expectation of low cost 2Mb/s link delivery which has yet to occur, largely due to a
lack of a driver in the US where telcos have seen little benefit from migrating such
services to DSL.
IP.Networking
74.
In 2000, Telecom launched what was then one of the first IP-based virtual private
network services in the world, IP.Networking. This highly innovative set of products was
at least a year ahead of its time, and was driven by both a response to the increasingly
competitive data market and a view of the future direction of data networking
technology.
75.
Based around Cisco routers and IP over DSL and Frame Relay, IP.Networking services
were very successful, yet strained the technology to its limits. The Cisco routers were
based on ATM technology, which at the time seemed a logical choice in what was
expected to become an integrated IP/ATM future. Unfortunately, the technology failed
to scale well, and ATM has lost out to IP/MPLS as the primary core network technology
supporting IP VPNs.
76.
The early deployment of IP.Networking services gave both Telecom and its customers
valuable experience with the emerging IP VPN-based technology and supported the
follow-on steps to the NGN.
ATM
77.
This period has seen ATM move from having an assured role in the core of public data
networks for many years to come, to a point today where Telecom is seriously
considering whether ATM has any more than a bit-part to play in the NGN.
78.
Toward the end of the 1990s, a congested DSTN and a lack of alternative services to
which to migrate customers led to growth in DDS services being hosted on the ATM
network. Changes in Frame Relay pricing also influenced such moves. Finally,
"platform rationalisation" started to focus Telecom much more strongly on the
operational costs arising from the existence of multiple, parallel networks supporting
similar services, and the need to much more proactively manage the lifecycles of both
assets and services.
79.
ATM investment was considered to be "future proof" – the future of ATM as a key
enabling data transport technology seemed assured. Plans for long-term expansion and
growth of the ATM architecture were developed and investment decisions based on
expectations of a sound future.
Ethernet
80.
As a technology, Ethernet has none of the characteristics typically sought by incumbent
network engineers – it has poor resilience characteristics and a low inherent capability to
support a variety of different service types. Nonetheless, it appears to have become the
technology of choice of infrastructure competitors both in New Zealand and overseas.
81.
For both Telecom and TelstraClear, the approach to Ethernet has been one of multiservice delivery, for which the development of suitable technology has been slow.
CityLink, in contrast, have promoted the unique nature of Ethernet in an emerging high
speed Internet market and built a very successful business as a result.
20
82.
Consequently, the Ethernet-based services Telecom has delivered to date have been
almost exclusively motivated by the actions of infrastructure-based competitors.
Now: 2002-2003
83.
Telecom is now starting to actively pursue lines of investment based on its experience
with a variety of technologies over the last few years. Current investment is now based
on a more fully integrated plan for development based on multi-service access over
Ethernet and IP. These include upgrade of the IP core network, new DSL, development
of IP services, Voice over IP ("VoIP") and Ethernet access development.
New IP core
84.
The limitations of the Cisco IP core noted above have led to its replacement by IP/MPLS
technology in the form of Juniper routers. This has been driven by a need for more
scalable technology and a need for further advanced technology to support evolving IP
services, especially integrated multi-service delivery.
Alcatel DSL
85.
Telecom is currently deploying new DSL technology, which in contrast to most new
technology developments is not driven by significant new features or improved
economics. Rather, it has been driven primarily by operational considerations and
future evolution to support of multi-service delivery.
86.
Existing Nokia DSL
While this has been adequate for delivery of high
speed Internet services, it is insufficient in a multi-service delivery model. This,
combined with a new commercial relationship with Alcatel centred on delivery of a multiservice network, led to the change in technology which will see the Alcatel DSL
management integrated with a range of other Alcatel products.
IP Edge
87.
The IP "edge" refers to those devices directly involved in the provision of IP service
functionality, and provision of user connectivity to the core network. Next generation
functions such as a new broadband access server are currently being deployed to
support growth in existing as well as new services.
Voice over IP
88.
21
2.3
Competing Networks
89.
The Commission is familiar with the access to the current networks of Telecom and
TelstraClear from various applications determinations. However, the development of
other access services may not have been covered and the following short summary is
intended to identify issues which the Commission may wish to consider in the current
investigation.
Clear's Tolls Bypass
90.
Clear Communications was formed in 1988/9 and acquired access to New Zealand
Railways Limited's national fibre optic network and Transpower fibre optic network
across the Cook Strait. Based on these assets, Clear decided to offer a toll by-pass
service under which it would take the voice signal at Telecom's main exchange at
Wellington, switch it to its fibre optic network and deliver it to (say) Telecom's Auckland
main exchange.
91.
Clear's fibre optic backbone was a frame relay service, which was far more efficient than
Telecom's DSTN transport system. This gave Clear an opportunity to buy Telecom's
access services at wholesale prices and resell them, bundled with its backbone, as a
retail point-to-point data service. Clear's modern low cost backbone facility competing
against Telecom's older, high cost backbone provided a significant return on its
investment in that modern backbone.
92.
Telecom then installed its own equipment to derive its Frame Relay transport service.
As a result, both companies were operating from the same transport cost base, and
competition drove the prices for transport down. That meant that Clear was reselling
access purchased from Telecom, and bundling it with a transport service similarly priced
to Telecom's. One problem for Clear was that it had to buy access from the customer to
the Telecom main exchange where Telecom passed the data to its frame relay and also
had to buy access from Telecom's main exchange to Clear's exchange. Note that the
distance of the latter access may not have been great but the electronics were
significant. Thus, Clear had to buy more access and resell that to its customers, than
the access that Telecom had to acquire for itself for sale to its customers. Although
Clear complained, the fact was that it acquired an additional service and so had to pay
an additional price for it.
Clear's Local Business Loop
93.
In 1992, Clear decided to offer a fibre-to-business service in Wellington, Auckland and
Christchurch. It rolled out a fibre network from its exchanges to Telecom's main
exchange (thereby eliminating the access cost which it had complained about) and
extended it throughout the Central Business Districts ("CBDs"). This strategy took
advantage of the relatively inferior data service being offered by Telecom and Telecom's
decision not to install fibre-to-business at that time.
94.
Telecom followed with a decision to install fibre-to-business about 2 years after Clear.
Thereafter, both Clear and Telecom found the fibre-to-business investment was difficult
because both companies were running their old time division multiplexed ("TDM") data,
as well as modern packet data, over the same equipment.
CityLink
95.
In 1995/1996 CityLink (in association with Saturn and the Wellington City Council)
introduced a new facility which avoided that legacy technology problem. It decided to
roll out a fibre-to-business network with no TDM. This was novel technology which
connected a customer's local area network to an Internet point of presence, effectively
22
bypassing Telecom's access. The technology was well suited to the customer's
requirements and CityLink have now acquired 40% of the fibre access traffic in
Wellington. Neither Clear nor Telecom saw this opportunity, nor were they able to react
to it because of their legacy technology. Telecom thought that the technology was
unreliable and that the method of connection (connected to trolley bus suspension lines)
was also unreliable.
96.
In the 1980s Telecom began providing mobile phone services using Advanced Mobile
Services ("AMPS"). At that stage, the mobile network and mobile technology were in
their infancy, but each was to experience exponential growth throughout the 1990s as
phones got smaller, batteries lasted longer and coverage was expanded and improved.
In 1993, BellSouth New Zealand Limited ("BellSouth") set up a competing mobile
network to Telecom, using Global Standard for Mobile technology, and each company
set out about expanding its market base and network coverage. In 1996, Telecom
introduced Digital AMPS technology ("D-AMPS").
In 1998, Vodafone acquired
BellSouth's business and set about competing aggressively for mobile market share with
Telecom, with each company introducing new services such as text messaging and
mobile data services. In 2000, Telecom introduced its Code Division Multiple Access
("CDMA") technology, with the new service using numbers in the 027 range. The next
state in the evolution of mobile networks is the much-heralded 3-G. The first 3-G
networks are already being deployed in Australia.
Coaxial cable
97.
In the mid-1990s, video was delivered by co-axial ("co-ax") cable from the head end to
the customer with splitting points along the route. In the mid-1990s, TelstraSaturn
(originally Kiwi Cable TV, then Saturn) rolled out a video cable to Kapiti and then
announced that it would roll out cable in Wellington. In response, Telecom decided that
it would provide a competitive video/TV network, but would add an interactive telephone
component to it.
98.
The IRSN formed the basis for an ambitious move by Telecom into integrated service
delivery.
99.
At the time, telcos around the world were moving into cable TV both in response to
cable TV operators, and as a result of recognising what was seen to be a revenue
growth opportunity through the combined provision of video, high speed Internet and
telephony services.
100.
The competitive threat to Telecom from (what was then) Saturn was taken very
seriously. It involved an infrastructure-based competitor bringing a bundled package of
telephony and video to the market, against which Telecom could only offer telephony
over its existing network.
101.
Telecom was to sink tens of millions into IRSN over a period of a few years.
102.
IRSN was a complete network overlay, comprising a hybrid fibre-coax ("HFC") network
into which Telecom invested some $80m between August 1996 and December 1997.
Rolled out in parts of Wellington and Auckland, it never achieved sufficient scale to
become viable.
103.
Saturn offered good television content as well as a high speed Internet and telephone
service which was very successful. Telecom had difficulties obtaining television content,
and it eventually withdrew the service. The Saturn service is now owned by
TelstraClear.
104.
Although these technologies have had different levels of technical success throughout
the 1990s, with co-ax not being as versatile as anticipated, it should be noted that co-ax
23
is now becoming more functional. This increased functionality derives from the
investment being put into co-ax in response to the large number of homes passed by
co-ax around the world. The owners of this cable are seeking ways of extracting
additional value, and research and development is responding to that.
Satellite
105.
Satellite-based systems can provide effective models, particularly through the use of
hubs, which can feed bandwidth out through WiFi and other wireless solutions. Several
international satellite companies with bi-directional capabilities have recently expressed
interest in the New Zealand market:
(a)
Dutch satellite operator New Skies Satellites has stated publicly that it will soon
be able to offer low-cost two-way broadband Internet anywhere in New
Zealand, as a result of the repositioning of one of its satellites, NSS803. The
NSS803 satellite will have a high-power beam targeting New Zealand. This in
turn will result in a reduction in the size (and hence the cost) of antennae
needed to relay data to and from the satellite, and the cost of installing
antennae.
Connections would typically range between 64kbs/sec and
5Mbs/sec, but New Skies claims that organisations which want their own
transponder could get 45Mbit/sec.
(b)
In August 2002, Optus began to offer broadband services to rural Internet
users through a new satellite service sold through reseller Niche Media
International. The service offers download speeds of 200kbps but costs
$8,300 with a monthly $95 download fee.
(c)
Sky started broadcasting UHF in 1990 to main centres and, after it had
acquired rugby content, extended this to about 80% of the country. In 1997
Sky commenced satellite transmission. It transmitted the content signal from a
terrestrial station to a transponder on an Optus geo-stationary satellite. In
1998, the service became digital. There are three transponders with New
Zealand coverage available on this satellite. One transponder was initially
committed to Sky but this has expanded to half of the second transponder.
Each transponder has a capacity of 40-50 channels. This satellite gives 99.9%
coverage of New Zealand.
(d)
Interactive TV is provided by a modem on a Telecom circuit which allows a
return signal to Sky via the Telecom network. The return signal is provided by
Telecom along with other services Sky requires to provide interactive TV.
(e)
This technology could be used to provide data access, but there are limitations
to this. The TCP protocol requires reverse channel for about 10% of the
capacity of the main channel. Streaming video uses TCP and the result is that
the limitation on this data flow is the reverse flow through the local loop. This
can be overcome by using the satellite for reverse data, but this requires a
much higher cost satellite dish.
(f)
This technology is well-suited to web browsing, broadcasting TV, near videoon-demand, video conferencing, remote education and other users with
significant remote broadcast components.
(g)
IP Star has announced it is launching a new satellite for location over New
Zealand in October 2003, and is planning to build a hub in Auckland. Once it
has done that, it will be active in seeking multiple uses for its satellite and hub.
It will offer high-speed data interaction.
24
Wireless
106.
Wireless technology has evolved rapidly over the last 5 years to the point where it is
now capable of providing an access path to telecommunications networks. The principal
services in New Zealand are provided by Walker Wireless, BCL, electricity lines
companies and TelstraClear. These permit transmission of data in IP format at high
speeds and will permit transmission of VoIP.
107.
Wireless access is currently in the growth stage of the technology/product life cycle.
There are an estimated 35,000 wireless Internet users in New Zealand3. This figure is
predicted to rise to 450,000 by 2005. There are currently two broad categories of
technologies in the provision of wireless access:
108.
109.
110.
3
(a)
services utilising 802.11b are commercially available and have the majority of
market share; and
(b)
other technologies including TD-CDMA and OFDM.
Generally these
technologies are either at the planning or trial stage, however, none are yet
commercially available.
There are currently several areas of industry concentration or focus for wireless
providers. These are:
(a)
any industries prevalent in rural areas (for example, agriculture, horticulture);
(b)
the Government's broadband initiative which includes schools and regional
initiatives (which is discussed in section 3.2; and
(c)
finance and business of the small and medium enterprise ("SME") segment
within metropolitan and regional CBDs.
Telecom expects that the following key players will develop in the wireless market in the
next 3-5 years:
(a)
Walker Wireless/Vodafone;
(b)
Telecom with Mobile Jetstream;
(c)
TelstraClear;
(d)
New retailers through Rural Networks Joint Ventures;
(e)
ihug (which will continue to develop its satellite offer);
(f)
CityLink;
(g)
new retailers through Broadcast Communications Limited ("BCL") and
TelstraClear;
(h)
Far North Trust; and
(i)
Vodafone.
Telecom expects the following geographic segmentation of the predicted current and
planned wireless coverage:
Budde, Paul, Telecommunications and Information Highways in NZ (2003).
25
REGION
CURRENT ACCESS
PLANNED ACCESS
Northland
•
TelstraClear
•
Far North Trust
•
Vodafone
•
BCL
•
Walker Wireless
•
IPStar
•
ihug
•
New Skies
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
CityLink
•
ihug
•
Vector
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
Rural Networks
•
Walker Wireless
•
IPStar
•
Counties Power
•
New Skies
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
ihug
•
Optus
•
ihug
•
BCL
•
Vodafone
•
Walker Wireless
•
Optus
•
IPStar
•
New Skies
Auckland
Waikato
BOP
East Coast
Hawkes Bay
Taranaki
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
Walker Wireless
•
ihug
•
IPStar
•
Optus
•
New Skies
26
REGION
CURRENT ACCESS
PLANNED ACCESS
Manawatu
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
ihug
•
New Skies
•
Walker Wireless
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
Walker Wireless
•
ihug
•
IPStar
•
Optus
•
New Skies
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
CityLink
•
New Skies
•
Walker Wireless
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
Walker Wireless
•
ihug
•
IPStar
•
Optus
•
New Skies
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Buller Networks
•
New Skies
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
ihug
•
Optus
•
TelstraClear
•
BCL
•
Vodafone
•
IPStar
•
Walker Wireless
•
New Skies
•
ihug
•
Delta Utility Services
•
Optus
Wairarapa
Kapiti
Wellington
Nelson/Marlborough
Westcoast
Canterbury
Otago
27
REGION
CURRENT ACCESS
PLANNED ACCESS
Southland
•
TelstraClear
•
BCL
•
Vodafone
•
Walker Wireless
•
SouthNet
•
ihug
•
Delta Utility Services
•
Optus
111.
Walker Wireless and Vodafone have contracted to provide wireless broadband to
Southland, Wairarapa and Northland. In a media release on 1 April 2003, IPWireless
Inc who supply the technology behind the Walker Wireless/Vodafone solution
announced that they have released software upgrades which will enable retailers to offer
a quality voice solution. There is significant development and testing underway in the
US, Europe and Asia and IPWireless are a major player internationally. Telecom
believes that IPWireless may be using New Zealand as a testing ground to prove the
capability to Vodafone with a view to rolling out globally.
112.
Walker Wireless and Vodafone have launched a $6 million consumer trial in Auckland of
a technology new to New Zealand that offers users fully mobile, high speed Internet
access without wires or phone sockets.
113.
CityLink has also been trialling a short-range Wi-Fi network, CafeNet. The company is
targeting hotels, libraries, convention centres and cafes as access points for the
network. In Wellington, MCS Digital RT is also considering a point-to-point digital radio
service that would link to its existing trunked radio network in the North Island.
114.
BCL's telecommunications strategy states they want to be "the leading provider of
wholesale broadband wireless access solutions with specific emphasis on rural and
provincial markets". Telecommunications currently accounts for 25% of the company's
revenue. BCL's data and wholesale voice solution, using Airspan technology, will reach
70,000 rural customers in October and will be available to retailers who negotiate an
agreement with BCL.
115.
TelstraClear was reported on 27 May 2003 to be investing $14m over the next 18
months in building wireless base stations to provide business with high-speed Internet
and voice telephony services. The equipment will use the 3.5 GHz spectrum band
where TelstraClear has management rights to around 27 MHz of spectrum. Users will
be able to connect from a distance of 7km to base stations and would have access to
speeds of up to 2 Mbps. VoIP protocol would allow users to connect ordinary analogue
handsets to the system, with additional hardware.
116.
The business development manager for TelstraClear's technology supplier was reported
on 27 May 2003 as saying that "TelstraClear have a reliance to some extent on using
Telecom lines where they don't have their own access. It will mean they won't have that
reliance any more."
117.
It is not correct then to claim that Telecom's access infrastructure is a bottleneck due to
the substantial investment required to duplicate it. Bypassing Telecom's networks using
wireless or satellite technologies allows its competitors to achieve greater scale faster
than if they attempted to duplicate Telecom's fixed network. Nor does it prevent those
competitors from continuing to roll out fixed infrastructure where it is necessary.
Telecom expects that competitors will increasingly use wireless or satellite networks to
provide immediate infrastructure coverage to specific areas, while rolling out fixed
infrastructure in those parts of the areas where fixed infrastructure is more efficient or
practical, swapping customers over to fixed infrastructure as it reaches them.
28
118.
Project PROBE, the Government's provincial broadband initiative, will accelerate the
roll-out of such satellite, wireless and fixed wireless networks, by facilitating local and
central government subsidies for infrastructure deployment across provincial New
Zealand. These networks are due to become operational by December 2004. More
information on Project PROBE is provided in section 3.2.
119.
The recently announced successful Walker Wireless/Vodafone tender for the
deployment of a broadband network in Southland is an example of the sort of facilitiesbased competition that will develop in New Zealand in the near future. Walker Wireless
and Vodafone's PROBE subsidised network will eventually deliver voice and broadband
data services to up to 95% of Southland's 92,000 people, as illustrated by Figure 2.1
and they will be competing with Telecom to do so.
120.
Telecom's broadband coverage in the region (which is in the process of being expanded
in response to the competitive threat Walker Wireless and Vodafone's network will
present) will also cover a similar percentage of customers to the Walker
Wireless/Vodafone network, as illustrated by Figures 2.1 and 2.2. This facilities-based
competition will be repeated in each of the PROBE regions, which together cover New
Zealand. Further, as Telecom's continued network deployment in Southland illustrates,
other competitors and network operators will continue to deploy their own infrastructure.
29
30
31
Fibre-to-the-home
121.
Telecom is now looking at the potential of fibre-to-the-home.
results from the decision to require unbundling of the
local loop in the US (which slowed investment by owners of the local loop) discussed in
paragraphs 654 to 668 and the recent FCC decision to exempt fibre-to-the-home from
that unbundling, discussed in paragraph 682. The owners of the local loop had been
trialling more widespread use of fibre-to-the-home in anticipation of that decision, and
now that the decision has been taken, investment is commencing and scale benefits to
the electronics are being passed back to other purchasers such as Telecom.
122.
In any case where Telecom upgrades copper to fibre-to-the-home, the old copper would
be removed and reused elsewhere to partly offset the cost of fibre, thereby making
earlier upgrades economically viable.
Interconnection with Telecom's fixed PDN
123.
Section 64(1)(b) refers to "interconnection with ... Telecom's fixed PDN". The
Commission asks at question 6.1(a) for submissions on whether data networks can
already interconnect with one another, and states at paragraph 69 of the Issues Paper
that interconnection would involve the provision of switch-to-switch transport. Each of
these evidences confusion as to the meaning of the term "interconnection" as it is used
in section 64 and Telecom agrees that the use of the term "interconnection" in section
64(1)(b) is confusing and even unhelpful.
124.
Interconnection is a term familiar in relation to telephony, where its primary purpose
relates to the connection of public networks to enable a user of one network to
communicate freely with the users of other networks delivering similar services on
demand. However, this "any-to-any" connectivity requirement is not generally relevant
for data networks, which largely provide private network services.
125.
The only data services which require interconnection to support "any-to-any"
connectivity are those with global public addressing schemes, such as X.25, ISDN, and
Internet-based services (eg web browsing and Internet email). In contrast to others,
these services enable a user to communicate with any other user on demand and under
user control (ie the end-user determines the destination of the traffic). In each of these
cases, interconnection arrangements already exist providing global connectivity.
126.
Telephony interconnection also enables a third party to offer services to users of a local
telephone network (eg toll bypass), and this capability is also available under
interconnection agreements already in place. Internet users, for example, are able to
choose between any number of email service providers, and not just their own ISP's
email service.
127.
The Commission's question 6.1(a) illustrates a further confusion with the term
"interconnection". This question implicitly refers to a quote from Telecom's Business
Wholesale Submission, in which Telecom never asserted that data networks generally
already interconnect. Rather, Telecom stated that data networks already interwork. By
this, Telecom was referring to the use, by other network operators, of Telecom retail
services in combination with their own facilities to provide a single customer's data
network.
128.
When employing Telecom services in this manner, network operators are employing the
same service features used by end users to achieve interworking between these
services and their own equipment and facilities.
32
129.
Interworking in the context of interconnection, however, is a very different matter. For
PSTN interconnection, for example, interconnection requires interworking of trunk
interfaces and very complex signalling capabilities not used at customer interfaces.
Similarly, interconnection of ISPs employs different protocols to those used within ISPs'
networks and between ISPs and their customers. The more complex the features
required to interwork between networks, the more difficult and costly they are to
implement and maintain.
130.
Telecom therefore submits that use of the term "interconnection" in the context of
section 64(1)(b) is unclear, and may well be intended to address a different purpose to
that for which the term "interconnection" is typically used between telecommunications
networks.
Telecom has nonetheless endeavoured to consider alternative
interpretations, and these are addressed in section 6 of this submission.
33
2.4
Issues arising from Telecom's Network History
131.
The history of telecommunications in New Zealand over the last 15 years is dominated
by technological development, innovation and risk taking by infrastructure investors:
132.
133.
(a)
Clear invested in a backbone telecommunications network without any access
or distribution system or any scale of service.
(b)
BellSouth invested in a mobile network without any scale of service.
(c)
Sky invested in UHF and in sport content to support it. Subsequent very large
investments have been made in satellite and modems.
(d)
Optus and IPStar have invested in satellites to compete with terrestrial
broadcast and data telecommunications. IPStar has done so at a time when it
has no scale of service.
(e)
Saturn invested in a rollout of co-ax cable which was not a successful
investment and required further investment in copper pairs to provide a bundle
of services. Both were made without any scale of service.
(f)
Telecom invested in co-ax cable without a scale or scope of service. This was
not a successful investment and has been superseded by xDSL investments.
(g)
CityLink invested in new, untried technology and a new distribution
infrastructure without any scale of service, with considerable success.
(h)
United Networks has invested in wireless and power line access systems
without any scale or scope of service.
(i)
Walker Wireless/Vodafone have invested in a wireless access network without
any scale of service.
(j)
TelstraClear has invested in wireless technology to by-pass Telecom's copper
based access.
That history is also marked by innovations which have suffered from shifting consumer
demands:
(a)
electronic telex was introduced but suffered from the shift from telex to fax;
(b)
ATM network to the desktop did not meet the demand which was eventually
serviced by Ethernet;
(c)
BellSouth's mobile network initially did not achieve its potential, but Vodafone
has now acquired the asset and it has become a successful investment;
(d)
DSL technologies have been introduced to meet demands which have shifted
and required new technology to continue to meet that demand;
(e)
IP.Net was not an adequate response to consumer demand which was in turn
distorted by free calling.
Secondly, this history provides numerous examples of successful technologies and
networks which nonetheless failed to meet their initial expectations.
Telecommunications is driven by the global force of technological change. It is
inevitable in such an environment that changes will occur within the life of network
34
assets, and that part of being a successful telecommunications operator is managing the
impact of change. It is also inevitable that any investment made today may not prove to
be on the most successful path of technological development in the future.
134.
Thirdly, with few exceptions, major developments and investments in Telecom's network
were the result of infrastructure-based competition – IRSN and initial DSL trials and
Ethernet access technologies are key examples.
135.
This is a fairly
inevitable consequence of being ahead of the market, and acknowledging the
investment risk inherent in pursuing new ideas – the enabling technologies are
invariably immature, yet if successful, rapidly mature. This is as true for Telecom as it is
for new entrants experimenting with new technologies.
Issues for Investigation
Issue I: Would unbundling and leasing of Telecom's backbone network, mobile
network or DSL capability have delayed or pre-empted introduction of the by-pass or
superseding technology which now serves telecommunications end users?
Issue II: Would investors have taken the risks and incurred the write-offs of failed
technology innovations throughout the 1990s had they risked regulatory unbundling of
their assets on which their successes were based?
Issue III: Will there be an "access bottleneck" in 2008, or will there be there a diversity
of access technologies available to service different needs of different consumers?
35
2.5
Telecom's Next Generation Network
Access, broadband and integration
136.
In the past, each communications network was specialised and designed to deliver a
single service or application. That is, the hardware that made up a network was
configured to deliver a particular service to specialised access devices. The NGN is a
single network that will deliver multiple services to different access devices. The
convergence of different services on separate technology platforms onto the future
single technology platform is the result of being able to transfer the service requirements
previously hardwired into the separate technology platforms into the software of the
future single platform. This transfer from what was physically identifiable bits of
technology to software on a single technology platform results in the cost of the future
platform being common across multiple services and the access devices. The following
example of the PSTN and IP.Net (which is described in paragraph 142 below) illustrates
the development of service specific technology platforms and their integration into a
single platform.
137.
For about 100 years up until the 1990s, the PSTN evolved to efficiently enable two
people separated by distance to have a conversation. A key technical requirement of
the PSTN to enable people to have a conversation is that there is no noticeable lag
between the speaker talking and the listener hearing what is being said. In other words,
there is negligible latency. This requirement is generally implemented on the PSTN by
dedicating resource or a circuit to the phone call between two people for the duration of
the phone call.
138.
Excluding calls to the Internet, a phone call lasts on average 3 to 4 minutes and people
make on average 3 to 4 phone calls a day. As a result, the utilisation of a circuit is
potential low if the circuit was dedicated to just two people. It is more efficient to
increase the level of utilisation of a circuit allowing different calls between different
people to use the same circuit The use of the same circuit between separate callers is
technically achieved by building switches into the PSTN.
Thus, the service
requirements for a conversation, which are low latency for a short period of time, have
resulted in a PSTN that dedicates a circuit to the call for its duration. The resources
allocated to switching and transmission have been designed with the typical call lengths
associated with a conversation in mind.
139.
The service requirements for the PSTN have changed dramatically with growth of the
Internet and the WorldWide Web. Now the communication is not just a conversation
between two people. It involves a person reading a computer screen with content that
has been retrieved from another computer that can be half a world away. The key
requirement to change is the average holding time for a call, which has increased from
an average call duration of 3 to 4 minutes to an average holding time of 30 to 40
minutes. In combination with the popularity of Internet access, this has resulted in 60%
of the traffic carried by the PSTN now being related to the Internet.
140.
The enormous growth in this traffic has driven the capacity of PSTN switching and
transmission resources. However, being a technology optimised to carry voice traffic,
the PSTN is an inefficient means of carrying the data traffic being exchanged between
end users and the Internet, and hence much of this capacity is poorly utilised in terms of
the actual volume of data being transmitted.
141.
Voice transmission has historically been most efficiently carried by the establishment of
a fixed bandwidth circuit for the duration of a conversation - a voice call. The circuit is
optimised for the bandwidth used by speech, and has other characteristics such as
latency (delay) optimised for the characteristics of normal conversation. Internet data
transmission, in contrast, does not require a fixed bandwidth but comprises short bursts
36
of data, is latency insensitive, and is not based on conversations, but transactions
occurring intermittently over periods of application use. Consequently, the majority of
dial-up Internet calls make very low utilisation of the circuit established, yet the circuits
are held for long periods of time.
142.
Consequently, Telecom has sought to minimise the PSTN circuit resources used by dialup Internet calls, notably by building a service (IP.Net) which routes calls over the
shortest feasible routes to facilities where the data from such calls can be transferred to
data network facilities for carriage to the caller's ISP.
143.
In addition, as already noted, Telecom has a number of other specific data networks that
are designed to meet business customers' different service requirements. Outside of
Telecom, the number of separate networks can be extended to include terrestrial and
satellite broadcast television.
144.
37
38
39
40
Managing uncertainty
172.
There are two primary mechanisms which Telecom is employing to manage the
uncertainties outlined above. The first is that noted with respect to each of the areas
addressed – the implementation of an architecture which is "agile", that is, able to be
adapted to meet changes in service requirements, technological enablers or global
market trends.
173.
The second is a formal process which ensures learning from implementation and
external observation is continuous and able to be reflected into a cycle of refining
business goals, technology architecture and migration principles.
41
2.6
Telecommunications in New Zealand in 2008
174.
By 2008, these factors are likely to produce a range of telecommunications industry
scenarios.
175.
The most likely is one in which customers have responded to the wide range of facilities
and services which will be delivered by application and content providers, such as Sony,
Microsoft, MSN, AOL Time Warner, Vodafone Live, TVNZ, XTRA, music and movie
distributors, News Ltd, Openwave, Sun Microsystems, network competitors such as
Telecom, TelstraClear, BCL, electricity utilities, AT&T, Sprint, Sintel, access providers
such as Telecom, TelstraClear, BCL, Walker Wireless, PROBE providers, Wired
Country, Sky TV, ihug, Vodafone New Skies Satellite, IP Star and Optus, and customer
premises equipment providers, such as Sky TV, Microsoft, Xbox, Playstation,
Gamecube, Cisco and Intel.
176.
The Telecom and TelstraClear networks will both be IP based, but will be configured
differently in order to deliver services to different customers, with TelstraClear continuing
to focus on corporates, especially Trans-Tasman operators such as ANZ, Westpac, Lion
Nathan, AXA and Fonterra. TelstraClear will marginally cost some of their Australian
services, probably by Telstra Corporation providing New Zealand services to its
Australian based trans-Tasman customers at a low price just to get the whole of the
business relationship rather than let Telecom into the relationship. Telstra Corporation
will leverage its scale in Australia to host services in Australia and deliver them to
customers throughout Australasia.
177.
North American and European network operators will extend their networks to New
Zealand, or at least to Australia from where they will service New Zealand. In most
cases Telecom has to interconnect to large overseas players for the purposes of its
customers, often in a peering arrangement where charging is low or absent, but also
where Telecom is forced to make payments but receive no payments in return (such as
for Internet access to the US market). For example, Telecom has to pay Sprint so that it
can exchange Internet traffic with it in the USA, and receives no such payments from
Sprint in return. This has enabled Sprint to compete directly for New Zealand ISP and
corporate business. Major international carriers will use these methods to gain access
to New Zealand and gain a scale position in international bandwidth and centralised
hosting of applications and content (probably in the USA or Europe) and long-lining
these around the globe.
178.
Applications and content providers will seek to reach over the telecommunications
providers to develop a relationship with the customers, just as web-based businesses
are doing today. However, at present they are limited by the performance of the Internet
and their ability to enter into revenue-sharing models with telcos.
179.
At present, the owners of the most compelling content, such as movie studios, are
reticent to adopt online models until copyright and commercial issues become clearer.
However, in 5 years network owners will enter into revenue sharing arrangements (or
some similar leveraged structure) with applications and content providers to justify the
required investment in network capability in order to guarantee a high quality experience
for customers application by application (assuming the environment is appropriate for
converged business value chains to form).
180.
North American and European networks will seek to aggregate their entire customer
base when negotiating with the providers. Usually, applications and content players will
compete vigorously and sell rights to local players on a country-by-country basis. The
slow development of online models is currently seeing more concentrated development
of applications and content delivery. For example, in the place of several CD store
owners in any location, currently the online model looks like being dominated by two
42
global players - eMusic and Pressplay (each owned by consortia of major music labels).
Unfortunately for New Zealanders in this example, this means that there is little
emphasis on dealing with the distribution rights in New Zealand for these services to be
available here. Since global winners are those that emerge as winners in USA, Europe
(and possibly Asia), New Zealanders will receive little attention as a market until those
battles are won. Telstra Corporation will seek to negotiate Australian arrangements with
these providers, to maximise their scale advantage, while Telecom will seek
New Zealand-specific arrangements to maximise the use of its network and access
arrangements.
181.
Access providers will compete with ubiquitous services derived from their own facilities,
and resale of competitors facilities. In all geographic areas of the country there will be at
least two access facilities, with comparable cost structures, and for most of the
population there will be three or four. Where there are not comparable cost structures,
the value proposition to end customers will be tailored to ensure that customers value
those different access arrangements. Entrants will tend to employ technology that
differs from Telecom. Usually this will mean seeking to offer some form of performance
or functionality that Telecom does not offer.
182.
The distinction between "broadband", "voice", "PSTN", "business data", video,
broadband and associated "services" will be irrelevant, as all of these will be provided by
a common network. Telecom will have developed its NGN rapidly, and will have
replaced its current mix of Cisco routers, Juniper routers, ATM switches and DSLAMs
with a very large number of ATM switch enabled DSLAMs located close to customers,
providing a highly efficient network. TelstraClear will respond with innovations deriving
from its similar, but much larger IP network in Australia.
183.
Interconnection will use standards not yet developed. Interconnection can exist four
ways: best efforts, which is provided today via the way that telcos interconnect for
Internet traffic; data circuit or data service based, which is provided today by frame relay
and similar services or resale; customer service based, which is how PSTN services
interconnect today; network QoS based which is very much a dream that may never
become a reality. MPLS based standards may never develop to the point where they
produce satisfactory service facilitating interconnection.
184.
Overwhelming benefits will emerge for end users in terms of price, quality and choice.
While price is one factor of customers' needs, service level expectations will change.
Residential customers will seek services that help better run households (Unified
Messaging), make the world a smaller place (Internet), pursue personal interests and
hobbies (on demand education services no the Telecom portal), free them up to get on
with other things (broadband Internet access), and let them decide when and where they
work (remote working).
185.
The result of these projections and the worldwide evolution towards IP networks are:
(a)
There will be vertically integrated (by contract or ownership) groups which will
offer content, applications, diverse services and multiple devices over which
those services will be delivered. These services are likely to be carried by
TelstraClear and Telecom offering applications and content sourced from many
upstream companies providing those services with multiple backbone network
and delivered through Mobile, fixed wireless, cable, DSL, and PSTN. The
services provided will meet customer needs for communication whether text,
audio or video, whether stored or real-time, whether one to one, one to many
or many to many; for entertainment whether text, audio or video whether
interactive or one way, whether live, broadcast or on-demand, whether games,
movies, music etc; for low cost high quality IT solutions; for businesses such as
contract centres, CRM, accounting, eCommerce, etc;
43
(b)
There will be contractually integrated firms (through various forms of
distribution agreement) combining content and applications, through alternative
delivery such as satellite and wireless and using reselling of Telecom services
to ensure that the customer receives a seamless service.
(c)
There remain significant uncertainties which will shape the NGN. These
uncertainties are driven not just by changes within the telecommunications
industry, but by global players in the information, entertainment and
communications industries.
(d)
There will be a changed industry structure and changed user requirements. In
the words of the Chief Executive of TelstraClear, "Telco is an outdated
concept".4
Issues for Investigation
Issue IV: Will the long term development of the telecommunications industry preserve
the current structure and bundles of services offered?
Issue V: Will the convergence of networks, access applications and services
perpetuate or replace current markets by 2008?
Issue VI: Is a projection of current market segments a useful tool for identifying the
long term benefits of users of telecommunications services within New Zealand in
2008?
4
Dominion Post (Wellington), 17 December 2001.
44
45
3.
BROADBAND IN NEW ZEALAND
3.1
Broadband Penetration
Introduction
186.
187.
188.
In this section, Telecom provides analyses of:
(a)
the dial-up Internet infrastructure;
(b)
broadband infrastructure and broadband availability, speeds and prices; and
(c)
Internet connectivity and uptake rates.
There is no evidence to suggest that New Zealand is lagging behind other OECD
countries in business broadband uptake or in Internet uptake in general. In Telecom's
opinion:
(a)
New Zealand has a very well established and extensive dial-up Internet
infrastructure. The wide availability and low prices of New Zealand dial-up
Internet services have been sustained over a long period, leading to high
overall Internet use. In support of this submission, Telecom refers the
Commission to paragraphs 203 to 208 below.
(b)
Broadband is widely available in New Zealand, and a choice of broadband
platforms and comparatively very high-speed broadband products exists for
most New Zealanders. In support of this submission, Telecom refers the
Commission to paragraphs 209 to 216 below.
(c)
Despite New Zealand's data transfer cost disadvantage, New Zealand
residential and business broadband prices are comparable with those of similar
US and EU broadband products.
Telecom refers the Commission to
paragraphs 217 to 236 below.
Telecom agrees with the Commission's view in paragraph 426 of the Issues Paper that
there is evidence to suggest that New Zealand's residential broadband uptake rates are
lower than those of other countries in the OECD. In Telecom's view (supported by the
evidence in paragraphs 253 to 262 below) two factors are responsible for the low
broadband uptake:
(a)
price arbitrage between broadband dialling and narrowband dialling; and
(b)
the limited number of broadband applications currently available.
Summary
Internet and broadband infrastructures
189.
5
New Zealand has a state-of-the-art telecommunications infrastructure. The current state
of New Zealand's telecommunications infrastructure is a function of early digitalisation of
the fixed telephony network5 and New Zealand's high percentage of GDP spend on
information communication technologies compared to other countries in the OECD.
New Zealand became the fourth country in the OECD to have a fully digital network (after France, Luxembourg
and Iceland) in 1997. See paragraph 203 below.
46
190.
As a result of its advanced telecommunications infrastructure, New Zealand was one of
the earliest OECD countries where widespread commercial Internet access was
available to both commercial and residential users. The highly competitive ISP market
has ensured that New Zealand has enjoyed early innovation and low prices for Internet
access products and services.6 The evidence suggests that wide availability and low
prices have been sustained over a long period.7 Currently, New Zealand boasts
comparatively well priced dial-up Internet and broadband infrastructures, combined with
unmetered access to local telephony services. Service quality and availability are high,
and where quality and availability differences exist, they are usually due to geographical
factors.8
Availability and pricing of broadband
191.
New Zealand was one of the first OECD countries to offer commercial broadband
access services.9 The evidence suggests that there is wide availability of very highspeed broadband products compared to EU countries and the US.10 Numerous
broadband platforms are now available, including DSL, Ethernet LAN, Fixed Wireless,
cable modems and interactive satellite:
(a)
DSL is currently available to 85% of New Zealand's telecommunications
customers;11
(b)
satellite services are available nationwide;
(c)
wireless services are available in the cities and most large provincial centres;12
(d)
cable is available in Wellington and some areas of Christchurch;13 and
(e)
Ethernet LAN services are available in the CBDs of Wellington and Auckland.14
192.
Due to technical restrictions, DSL is not a feasible means of service provision at
locations further than between 5 and 7 kilometres from the local exchange. Hence, it is
currently an unsuitable option for many rural locations in New Zealand. Satellite,
wireless and mobile telephony technologies provide alternatives in these locations for
much of New Zealand. ihug claims national availability of its Ultra Satellite product,
making it the broadband product with the most widespread coverage. Mobile telephonybased broadband services also have very wide coverage. Local initiatives (for example,
Southland, Wairarapa, Northland) are currently proceeding with wireless provision using
a consortium of Vodafone, Walker Wireless and BCL as a viable rural broadband access
solution.15
193.
Price benchmarking is difficult because of:
6
(a)
the wide variety of product quality internationally; and
(b)
the fact that in some cases, it requires a comparison to be made between flat
rate-priced products and products where usage is charged per megabyte.
For example, New Zealand was one of the first countries to introduce unmetered ISP packages. See paragraph
206 below.
7
See paragraph 208 below.
8
See paragraphs 209 to 213 below.
9
Commercial broadband services were first offered by CityLink in 1996, with the introduction of Ethernet LAN
services. See paragraph 209 below.
10
See paragraphs 211 to 215 below.
11
This compares to 65% in the US, 67% in the UK and 85% in Australia. See paragraph 212 below.
12
See paragraph 209 below.
13
See paragraph 209 below.
14
See paragraph 209 below.
15
This initiative is discussed in paragraphs 263 to 279 below.
47
194.
195.
However, price benchmarking performed by the OECD shows that business and
residential prices for New Zealand residential broadband products are comparable with
those for similar US and EU products.16 This is despite the fact that:
(a)
the US-centric nature of the international Internet charging processes means
that New Zealand users must pay the costs of transportation both of traffic
requested by New Zealanders from the US and New Zealand sourced content
requested from the US;17
(b)
the New Zealand broadband products surveyed are generally of a higher
quality than the equivalent OECD broadband products; and
(c)
due to the high costs of transporting data from its origin to New Zealand, New
Zealand has metered charging. This is because data transfer charges faced
by New Zealanders are significantly greater than the prices faced by
consumers in other countries. New Zealand charging practice attempts to
ensure that consumers of international traffic pay the real cost of information
consumption.
Business broadband access prices are also very competitive when adjusted for levels of
usage. New Zealand pricing structures ensure that businesses that do not require large
volumes of data exchange are not penalised by having to subsidise heavier users.18
Internet and broadband connectivity and uptake
196.
New Zealand is in the top 10 OECD countries for the vast majority of Internet connection
and utilisation statistics.19 There is considerable consistency in the extent of Internet
connectivity and usage across sectoral divisions.20
197.
The evidence shows high levels of DSL uptake by businesses, which is not limited to
metropolitan areas. Those figures do not include connections to other broadband
platforms. It is also important to compare broadband uptake by New Zealand
businesses with that by overseas businesses of similar size and dimension. New
Zealand leads the comparative benchmark countries by a significant amount in the
SME/micro business segments. These are the business segments that broadband
technologies are designed to serve.
198.
The only area in which New Zealand does not compare favourably with other countries
in the OECD is residential broadband uptake.21 The reasons for this anomaly are
discussed below.
Residential broadband uptake
199.
Based on its submissions in 253 to 262 below, Telecom is of the view that there are two
reasons for New Zealand's low comparative broadband uptake.
200.
The first is the impact of pricing arbitrage between dial-up and broadband technologies.
As discussed at paragraphs 254 to 257 below, broadband products are not,
comparatively speaking, priced highly in New Zealand. However, dial-up Internet
access is also priced very favourably. As noted in paragraph 207 below, New Zealand
16
See paragraphs 217 to 230 below.
As noted in paragraph 217 below, as over 85% of all Internet traffic consumed in New Zealand incurs this
double premium, benchmarking the price of transporting a specific piece of information worldwide is almost
impossible.
18
See paragraphs 229 and 230 below.
19
See paragraphs 231 to 236 below.
20
See paragraphs 231 to 236 below.
21
See paragraph 238 below.
17
48
residential consumers also benefit from unmetered access to local telephony services
via the Kiwi Share (latterly the Telecommunications Service Obligation ("TSO")).
Combined with unmetered ISP access, the TSO offers New Zealand residential
consumers unlimited access to the Internet without additional usage charges once fixed
access prices have been paid.
201.
The second factor is the very limited availability or lack of broadband applications in
New Zealand, and generally (see paragraphs 258 to 261 below).
202.
Another valid application justification arises from comparing New Zealand application
usage with that of the US, which exhibits four times the broadband penetration of
New Zealand, but approximately similar levels of DSL penetration. As noted in
paragraph 260 below, the most significant applications difference between the US and
New Zealand is that cable television packages incorporating cable broadband Internet
access are widely available in the US, whereas cable packages in New Zealand are
restricted to a narrow population base. Cable broadband purchase significantly
outweighs DSL purchase in the US. If content and infrastructure bundles provide the
pricing arbitrage incentives to favour cable broadband access over any other form of
broadband or dial-up Internet access, this application difference may be the single most
significant factor accounting for New Zealand's low broadband uptake.
Internet and Broadband Infrastructures in New Zealand
Dial-Up Internet infrastructures
203.
New Zealand has a record of being one of the heaviest-investing countries in
Information Communications technologies ("ICTs") in the OECD. From 1996 onwards,
New Zealand has recorded the highest percentage of GDP spent on ICTs in the
OECD.22 This high relative spend is reflected in very high levels of investment in all
technologies.
Much of this investment is evident in the current state of the
telecommunications infrastructure relative to other OECD countries.
In 1993,
New Zealand with 95% led the OECD in the proportion of the fixed telephony network
comprised of digital lines.23 New Zealand became the fourth country in the OECD to
have a fully digital network (after France, Luxembourg and Iceland) in 1997. Australia
did not reach this milestone until 1999, at which stage the US level had reached only
94%.24 The current high quality levels and wide availability of dial-up and broadband
telecommunications networks in New Zealand are a reflection of the levels of investment
that have occurred. Whilst it is acknowledged that service quality and availability are in
some instances restricted by geographical factors, given New Zealand's challenging
topography and its low population density relative to many other OECD countries,25
New Zealanders on average have access to state-of-the-art telecommunications
infrastructure.
204.
New Zealand was one of the earliest OECD countries to have widespread commercial
access to the Internet. Academic access to NZGate commenced in 1989 and became
fully commercially available in 1992.26 A highly competitive ISP market emerged. This
led to an early adoption of dial-up access by both commercial and residential users.27 In
22
OECD Science and Technology database.
This compares to Australia with 40%, the UK 75% and the US 85% at the same date.
24
OECD 2001a, Communications Outlook, Paris, Organisation for Economic Co-operation and Development
Information Society, <http://www.oecd.org>.
25
Alger, Dan, and Leung, Joanne, The Relative Costs of Local Telephony Across Five Countries, ISCR
Research Paper, 1999, <http://www.iscr.org.nz/research/>.
26
Brownlee, Nevil, 1997, Internet Pricing in Practice, in McKnight, Lee W.; and Bailey, Joseph P. (eds), Internet
Economics (Cambridge, Massachusetts: Massachusetts Institute of Technology).
27
Enright, Christina, Strategic Behaviour of Internet Service Providers in New Zealand, Wellington: ISCR, 2000,
<http://www.iscr.org.nz/research/>.
23
49
February 2003, using Statistics New Zealand household and population numbers28 (as
opposed to survey figures) and dial-up ISP account numbers from Xtra29 extrapolated
using Phoenix Research market share numbers,30 dial-up Internet penetration in
New Zealand was 60 ISP accounts per 100 households, or 19.4 per 100 population.
205.
The New Zealand dial-up access product is of high quality compared to (for example)
US offerings, with an average speed of 46.3kbps compared to IBM (45.7), MCI (44.7),
TDSNet (35.2) and WebUSA (32.8).31 This high-speed capability, combined with
generous allocations of nodes per customer at the ISP level, ensures that the average
dial-up customer receives a service that averages around 10kbps at peak times.32
206.
The highly competitive ISP market has ensured that New Zealand has enjoyed early
innovation and low prices for Internet access products and services.33 Furthermore,
New Zealand was one of the first countries (after the US) to introduce unmetered ISP
access packages. Currently approximately 80% of New Zealand dial-up customers34
use unmetered packages, compared to 48% in the UK,35 and the prices for these
packages compare very favourably with the international benchmarks in Figure 3.1
below. Fierce ISP price competition has also been fuelled by the behaviour of Telecom
and TelstraClear, principally with the emergence and subsequent demise of "free"
ISPs.36
28
Statistics New Zealand population and household tables, http://www.statistics.govt.nz .
Xtra Management Report, March 2003.
30
Phoenix Research, The Xtraordinary Internet Universe: Summary of the First Six Months of OPG's Universe
Survey September to November 2002, 2003, provided by Xtra.
31
Boardwatch Top 10 Dialup Internet Service Providers, April 2003.
32
Based upon Xtra provisions (50% market share) - interview with Chris Thompson, May 8 2003.
33
Enright, Christina, Strategic Behaviour of Internet Service Providers in New Zealand, Wellington: ISCR, 2000,
<http://www.iscr.org.nz/research/>.
34
Based upon Xtra customers (50% of the market) as at March 2003.
35
Oftel, Internet and Broadband Brief – January 2003, 2003, <http://www.oftel.gov.uk>, p4.
36
Karel, Annemieke, Free ISPs in New Zealand, NZ ISCR Working Paper, 2003.
29
50
Figure 3.1: Comparison of Residential Dial-Up Internet Access Prices
Country
ISP
Package
NZ
NZ
NZ
UK
UK
France
US-CA
Paradise
Xtra
Paradise
Tiscali - UK
NTL
Noos
Speak Easy
Paradise 150
Xtra Daytime
Paradise 250
Tiscali Daytime
128k Package
Noosnet Forfait Primo
56K Dial Up
NZ
US-CA
US-CA
Sweden
US-CA
Sweden
Germany
UK
US-Ohio
US-CA
US-Ohio
US-Ohio
UK
Germany
US - CA
US - CA
US - CA
Sweden
Sweden
UK
US-Ohio
UK
Sweden
US-Ohio
UK
US-CA
US-CA
US-CA
Sweden
US-CA
Germany
Sweden
Germany
UK
US-Ohio
US-Ohio
US-Ohio
US-CA
UK
Sweden
UK
UK
US - Ohio
US - Ohio
US - Ohio
France
Germany
France
US - Ohio
Sweden
France
US-CA
US-Ohio
Sweden
Sweden
UK
Germany
US-CA
UK
US-Ohio
US-CA
US - Ohio
US-Ohio
Germany
US-CA
US-CA
US-Ohio
Xtra
Pacbell SBC
AT&T
Tele2
XO
UPC
Tiscali - de
NTL
Speak Easy
Qwest
Qwest
Ameritech
Telewest
Prima
AOL
EarthLink
XO
Telia
Telia
Onetel
AT&T
Virgin
Spray
XO
Freeserve
AT&T
MSN
Pacbell
UPC
EarthLink
Arcor
Tiscali - se
Tiscali - de
Tiscali - UK
AOL
EarthLink
XO
AOL
BT
Telia
NTL
Telewest
Ameritech
AT&T
MSN
Noos
Arcor
Wanadoo
EarthLink
Tele2
AOL.fr
EarthLink
AOL
Telenordia
Telia
Pipex
Tiscali - de
Qwest
Demon
Qwest
EarthLink
EarthLink
EarthLink
Arcor
Covad
AT&T
Covad
Xtra ValuePack
Yahoo! Dial Bundled Plan with SBC
Worldnet Service Plus
Tele2Internet Kabel
Consumer Dial - Unlimited Access Plan
Chello
Tiscali DSL 500
NTL:home Internet service unlimited
56K Dial Up
Qwest DSL 256
Qwest DSL 256
SBC Yahoo! Dial Bundled Plan
Blueyonder Surfunlimited
Com _easy
Prepaid subscription
EarthLink Unlimited Prepaid Deal
Consumer Dial - Unlimited Access Plan
(Comhem) High speed Internet IC 500
Telia Gruppenanslutning Broadband
Unlimited hours plan
Worldnet Service Plus
Virgin.Net- 24seven
ADSL Broadband
Consumer Dial - Unlimited Access Plan
Freeserve AnyTime
WorldNet Service Unlimited
Dial-up Access
SBC Yahoo! Dial Service Plan
Chello Plus
EarthLink Unlimited
Arcor ISDN Flat Rate 64
Tiscali ADSL Bredband
Tiscali DSL time1000
Tiscali Anytime
Prepaid subscription
EarthLink Unlimited Prepaid Deal
Consumer Dial - Unlimited Access Plan
Standard Plan
BT openworld Anytime
(Comhem) High speed Internet IC 1000
512 Package
Blueyonder Broadband Internet
SBC Yahoo! Dial Service Plan
WorldNet Service Unlimited
Dial-up Access
Noosnet Forfait Presto
Arcor DSL - Flatrate 128
CableWanadoo
EarthLink Unlimited
Tele2 ADSL
Unmetered Service
EarthLink The Works
Standard Plan
Telenordia ADSL Bredband
Telia ADSL Broadband
Pipex Xtreme Solo
Tiscali DSL time2000
DSL Deluxe
Express Solo
DSL Deluxe
EarthLink High Speed Internet
EarthLink The Works
EarthLink High Speed Internet
Arcor DSL - Flatrate 768
TeleSurfer Link
Broadband Internet Value Package
TeleSurfer Link
Connection
usage
for 150
hours
0
0
0
0
0
0
0
total
ISP
Annual
fixed
0
0
0
0
17
47
0
Annual
subscrip
-tion
134
164
178
72
180
161
128
134
164
178
72
197
208
128
0
0
0
47
0
11
40
0
0
71
72
0
0
19
0
0
0
31
29
0
0
0
38
0
0
0
0
0
8
6
0
32
40
0
0
0
0
0
0
31
17
17
0
0
0
73
6
60
6
33
0
0
0
36
33
59
40
71
46
72
0
0
0
6
47
12
48
230
137
145
303
154
244
215
120
129
188
190
138
144
250
171
171
171
241
245
156
147
162
244
155
168
188
188
188
285
188
212
265
258
180
173
173
173
205
192
286
300
300
190
190
190
246
316
263
190
293
212
231
207
301
306
281
300
274
300
277
360
233
363
360
325
361
329
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
134
164
145
251
154
255
256
120
129
259
262
138
144
268
171
171
171
271
274
156
147
162
282
155
168
188
188
188
293
194
212
297
298
180
173
173
173
205
192
316
317
317
190
190
190
319
322
322
196
326
212
231
207
337
340
340
341
345
346
348
360
233
363
365
373
373
376
total
PSTN
0
0
0
119
0
0
100
usage
for 150
hours
0
0
0
0
0
0
0
0
0
0
119
0
0
100
ISP+
PSTN
charges
134
164
178
191
197
208
228
0
100
100
0
100
0
0
137
129
0
0
129
124
0
100
100
100
0
0
119
129
119
0
129
119
100
100
100
0
100
84
0
0
119
129
129
129
100
119
0
0
0
129
129
129
0
0
0
129
0
114
100
129
0
0
0
0
0
0
0
0
129
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
100
100
0
100
0
0
137
129
0
0
129
124
0
100
100
100
0
0
119
129
119
0
129
119
100
100
100
0
100
84
0
0
119
129
129
129
100
119
0
0
0
129
129
129
0
0
0
129
0
114
100
129
0
0
0
0
0
0
0
0
129
0
0
0
0
0
230
236
245
251
253
255
256
257
258
259
262
267
268
268
271
271
271
271
274
275
275
281
282
284
287
288
288
288
293
294
296
297
298
299
301
301
301
304
311
316
317
317
319
319
319
319
322
322
325
326
326
331
335
337
340
340
341
345
346
348
360
362
363
365
373
373
376
(adapted from Oftel benchmarking.)37
37
Oftel, International Benchmarking Study of Internet Access (dial-up and broadband), Oftel, 2002, p5.
51
207.
New Zealand residential consumers have also benefited from unmetered access to local
telephony services via the TSO. Combined with unmetered ISP access, the TSO offers
New Zealand residential consumers unlimited access to the Internet without additional
usage charges once fixed access prices have been paid, and is considered to be
instrumental in promoting very high levels of Internet use.
208.
Wide availability and low prices of New Zealand dial-up services have been sustained
over an extended period.38 Recent developments in the market for dial-up narrowband
Internet access services include the introduction of SkyMail by Sky Television.
Broadband Infrastructures
209.
38
New Zealand became one of the first countries in the OECD to offer commercial
broadband services in 1996, when CityLink introduced Ethernet LAN services. Five
distinct broadband platforms exist:
(a)
DSL - offered commercially by Telecom since January 1999; currently 85% of
Telecom customers can access DSL services.
(b)
Ethernet LAN – introduced by CityLink in the Wellington CBD; currently
servicing in excess of 550 connections, including nearly all of New Zealand's
Government departments, trading banks and insurance companies, several
ISPs, schools, State-owned Enterprises, medical practices, a hospital, the
University and the City Council, all of which are information transfer-intensive
activities. This network was described by US commentator David Isenberg, on
his recent visit to Wellington, as one of the most impressive networks of its type
in the world.39
(c)
Fixed Wireless – first offered by Walker Wireless in the Auckland CBD in 2001,
subsequently extended to include several suburban areas of Auckland and the
CBDs of Wellington and provincial centres Whangarei, Tauranga, Hamilton,
Napier, Wanganui, Palmerston North, Christchurch and Dunedin, with future
coverage planned in Rotorua, Taupo, Gisborne, New Plymouth, Hastings,
Blenheim, Timaru, Queenstown and Invercargill; customer numbers are
unknown, but the extent of current and planned regional coverage indicates
significant investment to date and into the future (http://www.Walker
Wireless.com).
(d)
Cable modems – first offered by Saturn Communications - originally Kiwi Cable
TV (now TelstraClear) in Wellington in 1999,40 subsequently extended to some
areas of Christchurch in 2001; investment suspended in 2002,41 predominantly
a residential technology; 4500 customers in June 2002.42
(e)
Interactive Satellite – provided by ihug since 1998; available nationwide;
satellite download with dial-up upstream connection; 5000 customers in
Howell, B. and Marriott, L. "The State of e-New Zealand: Implications for Economic Development", The State,
Economic Development and Ethnic Co-Existence in Malaysia and New Zealand, ch 14 in Terence, E and
Stephens, R., Kuala Lumpur: CEDER, 2003.
39
November, 2002, cited in Howell, B. and O'Connell, C., Broadband Development and Productivity: An
Exploratory Study of Mature Broadband Users, Wellington: ISCR, 2003.
40
Ministry of Economic Development Resources and Networks Branch, New Zealand Telecommunications 19872001: New Zealand Telecommunications Information Publication No. 8, p 11.
41
Presumably in anticipation of an unbundling adjudication by the Telecommunications Commissioner (Rosemary
Howard, November 29, 2002; "We believe it's more industry efficient for TelstraClear to buy from Telecom rather
than build duplicate networks to reach consumers who are widely spread throughout New Zealand."
http://www.telstraclear.co.nz/companyinfo/media_release_detail.cfm?newsid=81&news_type=tclArchive );
42
OECD, Broadband Access for Business, Paris: OECD, 2002, p 14.
52
New Zealand in October 2002,43 representing approximately 8% of Telecom's
DSL customer base at the same date, and more than the 4500 cable modem
subscribers.
210.
New Zealand therefore exhibits active facilities-based broadband platform competition,
with widespread availability. The best current estimate of market shares shows DSL
technologies have approximately 90% market share, and competitors 10%. DSL's
advantage appears to be derived from a combination of widespread availability, high
quality service and low prices.
Broadband availability
211.
Broadband is widely available in New Zealand. There are some very local provision
problems in respect of some technologies. However, this is generally due to
technological and topographical limitations making investments for some networks in
some circumstances uneconomic.
212.
DSL is currently available to 85% of the country's telecommunications customers. This
compares to 65% in the US, 67% in the United Kingdom ("UK") and 85% in Australia.44
Satellite services are available nationwide and wireless services in the areas identified in
paragraph 209 above. Cable is available in Wellington and some areas of Christchurch.
Ethernet LAN services are available in the CBDs of Wellington and Auckland.
213.
Due to technical restrictions, DSL is not a feasible means of service provision at
locations further than between 5 and 7 kilometres from the local exchange. Hence, it is
currently an unsuitable option for many rural locations in New Zealand. Satellite,
wireless and mobile telephony technologies provide alternatives in these locations for
much of New Zealand. ihug claims national availability of its Ultra Satellite product,
making it the broadband product with the most widespread coverage although it requires
access to a fixed wire telephone service for the back-feed. Mobile telephony-based
broadband services also have very wide coverage. Local initiatives (for example,
Southland, Wairarapa, Northland) are currently proceeding with wireless provision using
a consortium of Vodafone, Walker Wireless and BCL as a viable rural broadband access
solution. Telecom addresses these local initiatives in section 3.2.
Broadband speeds
214.
New Zealand enjoys wide availability of very high-speed broadband products compared
to the EU and the US.
215.
The standard ADSL service offered to both residential and business users is a
guaranteed minimum of 2Mbps downstream and 250kbps upstream. A slower
symmetrical package offering 128kbps is available for residential consumers only.45
Cable modem services offer two speeds: 256kbps downstream/128kbps upstream and
2Mbps downstream/256kbps upstream,46 whilst Ethernet LAN services are available at
speeds of 10, 100 and 1000 mbps. Mobile-based services achieve maximum speeds of
153kbps,47 whilst wireless services promise speeds up to 3Mbps downstream and
1Mbps upstream.48 Satellite speeds are variable, with speeds over 1Mbps readily
achievable from top sites, but as "a rule of thumb, you can expect to download data from
popular sites at around 6 - 10 times faster than a standard modem"49 – that is, around
256kbps to 400kbps based on New Zealand average modem service speeds.
43
44
45
46
47
48
49
http://www.ihug.co.nz/news/articles/151002.html .
OECD (2002) op. cit. p32.
http://www.telecom.co.nz/content/0,3900,200359-200546,00.html#20020481 .
http://www.telstraclear.co.nz/products/Internet/broadband .
http://www.telecom.co.nz/content/0,3900,202142-1487,00.html#20019589 .
http://www.Walker Wireless.co.nz/static/aboutthetrial.asp .
http://www.getultra.co.nz/sales/speed.html.
53
216.
In international terms, New Zealand broadband services offer comparatively very highspeed services for residential consumers. Oftel benchmarking of EU and US broadband
products classifies residential services as offering a minimum speed of 128kbps, but
shows only one provider (Bostream, Sweden; 2.5Mbps upstream/750kbps downstream)
as offering a faster residential broadband product than the basic New Zealand ADSL
offering. The majority of residential services offer between 512 and 1500 kbps
downstream speeds.50 In respect of business offerings, Oftel categorises service
speeds into low (minimum bandwidth 128kbps), medium (minimum 500kbps) and high
(minimum 1000 kbps). Clearly, the New Zealand services targeted at business users
(DSL, Ethernet LAN and wireless) all sit within the high-speed Oftel classification. Only
14 of the 50 business products benchmarked by Oftel as "high" exceed the speed of the
basic New Zealand DSL business offering.51
Broadband Prices
217.
Benchmarking of broadband products where there is a wide variety of product quality is
problematic. Comparisons are also difficult when flat-rate priced products must be
juxtaposed with products charging per megabyte of traffic. Furthermore, the US-centric
nature of the international Internet charging processes mean that New Zealand users
must pay the costs of transportation both of traffic requested by New Zealanders from
the US and New Zealand sourced content requested from the US. As over 85% of all
Internet traffic consumed in New Zealand incurs this double premium, benchmarking the
price of transporting a specific piece of information worldwide is almost impossible.
218.
Nonetheless, some reliable benchmarking exercises have been undertaken. The OECD
process weights the number of kbps per month that can be downloaded per US dollar.
By this method, New Zealand's residential Jetstream packages ranked 2nd and 3rd in the
OECD in 2001, within the caps applicable then of 400Mb and 600Mb respectively. The
unmetered and uncapped Telecom/Xtra Jetstart product (now no longer available as
replaced with Jetstream Starter 5000 with a 5Gb cap) had the 3rd lowest monthly charge
in this benchmarking.
219.
The Oftel benchmarking process compares prices using a basket approach based upon
market segment (business or residential) and product quality to rank the best-priced
broadband products in Sweden, Germany, France, the UK and the US. Residential
baskets are priced presuming a monthly traffic volume of 1.2Gb and a minimum
bandwidth speed of 129kbps. Business – Low presumes 6Gb monthly at minimum
bandwidth 129kbps, Business – Medium 9Gb at minimum 500kbps and Business – High
16Gb at 1000kbps.52 Oftel benchmarking prices the best 70 products in each category.
Only in the Business-High category are there fewer than 70 products available. Fifty six
products were priced in this category in August 2002.
Residential prices
220.
New Zealand residential broadband prices are comparable with similar US and EU
products despite the data transfer cost disadvantage.
221.
Inserting indicative New Zealand prices into the Oftel baskets as at August 2003,
Telecom/Xtra's Jetstream Starter 5000, at 18th, is among the cheaper residential
products offered (see Figure 3.2 below), although it is the slowest. It is priced
significantly below the average Oftel-benchmarked price of T33.60, as are TelstraClear's
Cable 500 product and Telecom/Xtra Jetstream Home 500, both of which impose a
monthly cap of 500Mb. Telecom/Xtra Jetstream Home 1000 (1000Mb cap) is slightly
above the average price, but when adjusted for the additional 200Mb of traffic used for
50
51
52
Oftel (2002) op. cit. p 130.
Oftel (2002) op. cit. p 133.
Oftel (2002) op. cit. p 51.
54
the Oftel benchmarking, this product is comparatively expensive. Sweden appears to
offer the overall cheapest residential broadband packages, with 10 of the 20 cheapest
products being Swedish. Four in the cheapest ten are UK products, three German, two
US. Jetstream Starter 5000 is cheaper than the cheapest French residential package.
It is noted that the majority of US and UK DSL products, including those offered by
incumbent telecommunications companies such as BT, AT&T, Verizon, Pacbell and
Ameritech, are significantly (10%-55%) more expensive than the cheapest New Zealand
products. Indeed, AT&T offers two cable modem products that are cheaper than its
cheapest DSL offering.
55
Figure 3.2: Modified Oftel Benchmarking: Broadband Residential
Rank
Country
ISP
Package
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
Sweden
Sweden
US
Sweden
Germany
Sweden
Sweden
Sweden
Sweden
UK
UK
Sweden
Sweden
Sweden
UK
Germany
Germany
NZ
UK
US
France
Germany
NZ
NZ
US
Germany
France
US
US
Germany
UK
Germany
US
UK
Germany
UK
UK
UK
US
France
France
UK
UK
US
France
US
US
Germany
Germany
France
France
Sweden
UK
US
UK
UK
Germany
NZ
US
US
US
US
US
France
France
Germany
France
US
US
UK
US
Germany
US
Germany
NZ
Tele2
UPC
Qwest
Telia
PrimaCom
Spray
UPC
Tiscali
Telia
NTL
Telewest
Tele2
Telenordia
Telia
Pipex
Tiscali
Tiscali
Telecom-Xtra
Demon Express
Qwest
Wanadoo
Arcor
TelstraClear
Telecom-Xtra
EarthLink
Arcor
Noos
Covad
AT&T
AOL
BT
PrimaCom
Comcast
Onetel
Tiscali
Freeserve
Freeserve
Pipex
AT&T
Club Internet
9 Telecom
Zen Internet
Tiscali
Road Runner
Wanadoo
MSN
Qwest
AOL
T-Online
AOL
Tiscali
Bostream
Onetel
Verizon
BT
Demon
Tiscali
Telecom-Xtra
Southwestern
Pacbell
Ameritech
AOL
Covad
Nerim
Club Internet
NGI
Wanadoo
Qwest
EarthLink
Telewest
Verizon
NGI
AT&T
QSC
Telecom-Xtra
Tele2Internet Kabel
Chello
Qwest DSL 256
(Comhem) High speed Internet IC 500
_easy
ADSL Broadband
Chello Plus
Tiscali ADSL Bredband
(Comhem) High speed Internet IC 1000
512 Package
Blueyonder Broadband Internet
Tele2 ADSL
Telenordia ADSL Bredband
Telia ADSL Broadband
Pipex Xtreme Solo
- de Tiscali DSL time2000
- de Tiscali DSL time1000
Jetstream Starter (unlimited downloading)
Solo
DSL Deluxe
CableWanadoo
Arcor DSL - Flatrate 768
Cable 500 (500 MB per month)
Jetstream Home 500 (500Mb per month)
EarthLink High Speed Internet
Arcor-DSL flatrate 768
Noosnet Forfait Rapido
TeleSurfer Link
Broadband Internet Value Package
.de AOL High Speed DSL Flat (12months)
Home 500 Plug & Go
_pro
High Speed Internet Service
Unplugged 500
- de Tiscali DSL 500
Connection-only pack
Freeserve Broadband
Pipex Xtreme Home Office Std - Self
Broadband Cable Internet Service
Pack Modem Haut Debit
9Online ADSL 512
ZenADSL Home
- UK Tiscali ADSL USB 500
Residential Service
Wanadoo ADSL (Xtense500)
DSL
MSN Broadband Powered by Qwest 256
.de AOL High Speed DSL Flat
T-Online DSL Flat
.fr AOL ADSL
.fr Pack ADSL Tiscali Liberty Surf
ADSL Private
Hard wired 500U
Online DSL Package 1 (Was Online DSL
Home 500 Engineer assisted
Express
- de Tiscali DSL time100
Jetstream Home 1000 (1000Mb per month)
Basic DSL Internet Service up to 1500
Basic DSL Internet Service up to 1500
- SpeedPath 768
.us High Speed DSL
TeleSurfer
Nerim Base
Forfait Haut Debit ( Net 1)
NGI DSL Student
Wanadoo ADSL 1
MSN Broadband Powered by Qwest
EarthLink DSL
1MB Internet
Online DSL Package 2 (Was Online DSL
NGI DSL Flat
Single User ADSL - 608/128
Q-DSL Home
Jetstream1000 adjusted to 1200Mb
DSL/Cable
Modem
CM
CM
DSL
CM
CM
DSL
CM
DSL
CM
CM
CM
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
CM
DSL
DSL
DSL
CM
DSL
CM
DSL
CM
DSL
DSL
CM
CM
DSL
DSL
DSL
DSL
DSL
CM
DSL
DSL
DSL
DSL
CM
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
Total
Monthly
Charges
21
21
22
22
22
23
24
24
26
26
26
27
28
28
28
28
28
29
29
29
30
30
30
31
31
31
31
32
32
32
32
33
33
34
34
34
34
35
35
35
35
35
35
35
35
35
35
35
35
36
36
36
36
37
37
37
38
39
40
40
40
40
41
41
41
42
42
43
43
43
44
44
45
45
57
Downstream
capacity
512
512
256
512
256
512
768
512
1000
512
512
512
512
512
512
768
768
128
512
640
512
768
256
2000
1500
768
512
200
1440
768
500
1024
1500
512
768
512
512
512
1440
512
512
512
500
1500
512
768
256
1500
768
512
512
2500
512
768
768
512
768
2000
1500
1500
768
1472
608
512
512
1024
500
640
1500
1024
1500
1024
608
1024
2000
56
222.
When comparing residential Jetstream packages in the Oftel tables, it must be noted
that the Jetstream product is the second best quality product ranked. Of the seventy
cheapest residential products benchmarked, only Sweden's Bostream ADSL Private
2500kbps service is of higher quality.
The next fastest residential products
benchmarked are 1500kbps. This does not mean very high speed residential products
are not offered in the markets considered – rather, it identifies that only one product of
equal or higher quality than the Telecom product is among the cheapest 70 residential
products in the five markets considered. At a monthly exchange volume of 1.2Gb, the
combined fixed 1000Mb charge plus the additional usage of 200 MB for Jetstream
Home 1000 is priced at T57, nearly 60% more expensive than the 52nd-ranked Swedish
Bostream product. However, for customers who remain within the 1000Mb cap,
Jetstream Home 1000 is only marginally (8%) more expensive than the unmetered
Swedish product. Thus, within limits of use, the New Zealand product compares very
favourably with the only product of greater quality registered in the Oftel benchmarking
survey. Indeed, of all the other products ranking ahead of Jetstream Home 1000, only
five (Earthlink – USA, 24th; Comcast – USA, 32nd; Roadrunner – USA, 43rd; .de AOL –
Germany, 47th; and Bostream) have speeds of 1500kbps or higher. Moreover, only .de
AOL and Bostream are DSL products – the others are all cable products.
223.
It is also noted that of the seventy residential products benchmarked by Oftel, only two
(Germany's Tiscali DSL 500 and Tiscali Time 100, both 768kbps products) are not sold
as flat-rate unmetered packages. Per megabyte charging is undertaken in New Zealand
due to the high costs of transporting data from its origin to New Zealand. Xtra figures
show that over 85% of Internet data consumed in New Zealand originates in the US.53
The costs of transporting this data via the Southern Cross Cable are significantly greater
than the costs experienced by US consumers accessing the same data in the US.
Furthermore, due to Internet interconnection charging practices, New Zealand data
transporters are unable to recover the cost of data transport provided by New Zealand
servers to the US or other foreign jurisdictions. New Zealand prices must include a
component to cover this additional cost. Hence, the data transfer charges faced by
New Zealanders are significantly greater than the prices faced by consumers in other
countries who source their information predominantly from within their own country or
common economic zone (EU). The New Zealand charging practice occurs in an
endeavour to ensure that consumers of international traffic pay the real costs that their
information consumption incurs. Indeed, Paradise charges for additional traffic at two
separate rates (2c/MB for national traffic, 20c/MB for international traffic) in order to
send the appropriate price signals to consumers with respect to these additional costs.
This charging practice undoubtedly accounts for the higher price of the Jetstream Home
1000 package adjusted to match the 1.2Gb benchmark of the Oftel survey.
Business Prices
224.
New Zealand business broadband access prices are also extremely competitive when
benchmarked against offerings in Europe and the US.
225.
Given the very high quality of the New Zealand DSL product, the only relevant business
product comparison that can be made using the Oftel data is in the Business – High
category. To estimate the charges for the benchmarked 16Gb, two approaches can be
taken:
53
(a)
using the price for Xtra's Jetstream 10000 business package and adding the
usage charge for the additional 6 GB; or
(b)
using the price for Xtra's Jetstream 20000 and recognising that it offers a
higher volume of data downloading than the benchmarked products.
Extracted from Xtra management report March 2003.
57
226.
The lowest price is yielded by the first option. This is displayed along with the PPPconverted prices for each of the Xtra business products (Jetstream 600, Jetstream
1200, Jetstream 1800, Jetstream 3000, Jetstream 5000, Jetstream 10000 and
Jetstream 20000, with monthly caps of 0.6, 1.2, 1.8, 3, 5, 10 and 20 GB respectively) in
Figure 3.3.
227.
The New Zealand product, priced at 16Gb per month, ranks towards the end of the Oftel
list, at a price (T685) slightly higher than the Oftel average (T511). For high volume, fast
broadband, the US clearly offers the best prices, with 23 out of the cheapest 24 products
being US products. All of the US products, and the solitary Swedish product (3rd) in this
group, are all offered in unmetered packages. The next 13 positions (25th to 37th) are
occupied by German products. The US' Covad product sits at 38th, followed by another
14 German products. New Zealand's adjusted Jetstream 10000 plus 6000Mb product
sits in the middle of these German products. Of the German products sitting above
Jetstream, eight are metered and ten unmetered. Only Germany offers metered
business broadband products at this quality level in the Oftel survey. It does not appear
that any business product offered in the UK reaches the quality described as High in the
Oftel definition, and only one product of this type is provided in the Swedish market.
228.
As per the Oftel basket, New Zealand's business Jetstream product is priced on a par
with those available in Germany. Like New Zealand, Germany offers metered business
products. Whilst US business prices are undoubtedly cheaper per month, when service
quality is factored in, only seven of the cheaper business packages (three US, four
German) offer downstream speeds better than those of Jetstream.
229.
When adjusting for levels of usage, however, the New Zealand business packages are
very competitive. The prices for low-volume users (less than 5Gb a month) rank
amongst the cheapest US products. Even the New Zealand 10Gb product ranks in the
middle of the table, at a price less than the Oftel average. The New Zealand pricing
structures mean that businesses that do not require large volumes of data exchange are
not penalised by having to subsidise heavier users via flat-rate unmetered packages. If
the distribution of New Zealand business Internet usage mirrors that of residential
usage, there are probably a very large number of very low-using businesses, and only a
few very high-using ones. Moreover, business usage may not be as extensive in terms
of total megabytes transferred per customer as residential usage.
230.
Anecdotal evidence from Xtra and survey data support the contention that New Zealand
business broadband subscribers on average consume only small volumes of data
exchange. Xtra reports that broadband consumption during traditional business hours
(daytime) is very much less than in the evenings, which are dominated by residential
usage. Furthermore, most surveys of business use of the Internet in New Zealand cite
email and web browsing as the predominant business Internet applications.54 These
low-volume, unstructured applications are those most suited to New Zealand's small
businesses.55 It is presumed that larger businesses with significant data transfer
requirements would be using dedicated transfer mechanisms such as leased T-1 lines
or Ethernet LAN services where these are available, rather than DSL.
54
For example, Statistics New Zealand, Information Technology Use in New Zealand: 2001, Wellington, New
Zealand: Statistics New Zealand, 2002; Clark, D., Bowden S. and Corner, P., Adoption and Implementation of EBusiness in New Zealand: Comparative Empirical Results for 2001 and 2002, Hamilton, New Zealand: Waikato
Management School, 2002.
55
OECD (2002) op. cit. p5; Howell, B., and Obren, M., Telecommunications Usage in New Zealand: 1993 2002, ISCR Research Paper, 2003.
58
Figure 3.3: Modified Oftel Benchmarking: Broadband Business - High
Rank
Country
ISP
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
NZ
NZ
US
US
NZ
Sweden
US
NZ
US
US
US
US
US
US
NZ
US
US
US
US
US
US
US
US
US
US
US
US
US
US
Germany
Germany
Germany
NZ
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
US
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Telecom-Xtra
Telecom-Xtra
Qwest
Speak Easy
Telecom-Xtra
Telia
Qwest
Telecom-Xtra
Speak Easy
XO
Speak Easy
Qwest
Speak Easy
Southwestern Bell
Telecom-Xtra
Covad
XO
Speak Easy
Speak Easy
AT&T
XO
Speak Easy
EarthLink
Southwestern Bell
Covad
AT&T
Speak Easy
Speak Easy
EarthLink
Claranet
KKF
KKF
Telecom-Xtra
KKF
NGI
KKF
NGI
NGI
Claranet
WorldCom
QSC
NGI
KKF
Covad
NGI
Claranet
KKF
NGI
QSC
WorldCom
Arcor
52.
53.
54.
55.
56.
NZ
NZ
Germany
Germany
Germany
Telecom-Xtra
Telecom-Xtra
T-Online
T-Online
Arcor
57.
58.
59.
60.
61.
62.
63.
64.
Germany
Germany
Germany
Germany
France
France
France
Germany
T-Online
T-Online
KKF
NGI
Nerim
Nerim
Nerim
T-Online
Package
Jetstream 600
Jetstream 1200
DSL Pro, 1M
NetCommuter ADSL 1.5/768
Jetstream 1800
Telia Bredband Foretag -2.0 Mbits
DSL Pro, 4M
Jetstream 3000
NetCommuter 1100K
Business DSL 1.1Mbps
NetCommuter 1500K
DSL Pro, 7M
Multi-Office 1100K
Symmetric DSL Internet 1100K
Jetstream 5000
Telespeed 1.1
Business DSL 1.5Mbps
Net Advantage 1100K
Net Advantage Plus 1100K
Multi User SDSL - 1100/1100
Business DSL 2.3Mbps
Multi-Office 1500K
Earthlink Biz DSL 1.1 Mbps
Symmetric DSL Internet 1500K
Telespeed 1.5
Multi User SDSL - 1500/1500
Net Advantage 1500K
Net Advantage Plus 1500K
Earthlink Biz DSL 1.5 Mbps
sDSL 1024
Professional DSL Volume 1000K
Professional DSL Volume 1500K
Jetstream 10000
Professional DSL Volume 2000K
NGI SDSL 1000 Volume Rate
Professional DSL Flatrate 1000K
NGI SDSL 1000 Flat Rate
NGI SDSL 1500 Volume Rate
sDSL 2300 small business
Worldcom Internet DSL Office
DSL Business 10
NGI SDSL 2000 Volume Rate
Professional DSL Flatrate 1500K
TeleXtend 1500
NGI SDSL 1500 Flat Rate
sDSL2300
Professional DSL Flatrate 2000K
NGI SDSL 2000 Flat Rate
DSL Business 20
Worldcom Internet DSL Office2300
Arcor Internet Business
Flatrate2300/2300
Jetstream (10000 + 6000Mb)
Jetstream 20000
T-Interconnect Basic 1.92Mbit/s
Interconnect 3 - volume rate
Arcor Internet Business
Flatrate385/4000
Interconnect 4 - volume rate
Interconnect 3 - flat rate
Professional DSL Flatrate 4000K
NGI SDSL 4000 Flat Rate
Nerim HDSL 1024 Kbits
Nerim HDSL 1536 Kbits
Nerim HDSL 2084 Kbits
Interconnect 4 - flat rate
DSL/Cable
Modem
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
Total
Monthly
Charges
35
61
66
77
87
116
118
139
164
181
181
193
198
202
213
215
215
215
229
247
249
249
249
250
262
281
283
283
283
288
356
374
405
410
421
427
439
441
443
469
471
477
519
533
535
535
555
570
601
610
638
2000
2000
1000
1500
2000
2000
4000
2000
1100
1100
1500
7000
1100
1100
2000
1100
1500
1100
1100
1100
2300
1500
1100
1500
1500
1500
1500
1500
1500
1024
1000
1500
2000
2000
1000
1000
1000
1500
2300
1024
1024
2000
1500
1500
1500
2300
2000
2000
2300
2300
2300
DSL
DSL
DSL
DSL
DSL
685
724
858
867
915
2000
2000
1920
4096
4000
DSL
DSL
DSL
DSL
DSL
DSL
DSL
DSL
973
1073
1078
1095
1314
1530
1746
2063
6016
4096
4000
4000
1024
1536
2048
6016
Note that all prices are calculated at PPP in UK£ based on tariffs valid at August 2002.
Downstream
capacity
59
Internet connectivity and uptake in New Zealand
231.
Figure 3.4 summarises New Zealand's relative position to benchmark OECD countries
in a variety of metrics (listed below).56
232.
Connectivity:
233.
234.
(a)
ISP accounts per 100 population, measuring the extent of penetration of the
Internet generally;
(b)
households with access to the Internet, indicating relative availability and
recreational use of the Internet;
(c)
PC access to the Internet in schools, providing evidence of educational
utilisation of the Internet;
(d)
Internet Hosts per 1000 inhabitants, a measure of domain name linked
computers connected to the Internet, and hence a measure specifically of
business connectivity to the Internet;
(e)
web sites per 1000 inhabitants, providing an indication of the extent of
(particularly business) content being created in each location;
(f)
domain names per 1000, as a measure of both business and residential
''presence" and indicating the extent to which individuals and businesses are
creating content for the Internet; and
(g)
secure servers per million inhabitants, measuring the extent to which Internet
connectivity is being utilised for secure transactions.
Broadband Statistics:
(a)
broadband subscribers per 1000 inhabitants;
(b)
DSL subscribers per 1000 inhabitants; and
(c)
DSL coverage (availability) as a percentage of telecommunications customers.
Uptake:
(a)
minutes of use per ISP account per month, as a proxy for the relative amounts
of information being exchanged via dial-up Internet accounts.
235.
Overall, New Zealanders can be classified as world-leading users of Internet
technologies. There is considerable consistency in the extent of Internet connectivity
and usage across sectoral divisions (business, residential, educational) suggesting that
usage of the Internet and the information that its exchange enables, is widespread.
236.
Figure 3.4 shows that New Zealand is within the top 10 OECD countries for the vast
majority of these connection and utilisation statistics. It lies ahead of Australia in all
except the broadband statistics. Most statistics relative to the UK also show
New Zealand to be performing well, with the exception of content creation. Whilst the
US clearly shows higher rankings than New Zealand, this is not surprising given that
most innovation with respect to Internet technologies and the applications that make use
of the capabilities of those new technologies is occurring in that market. The statistics
56
The metrics in figure
http://www.sourceoecd.org .
4
are
taken
from
the
current
OECD
Telecommunications
Database
60
show that a relatively large amount of content is created in New Zealand, given that
around 85% of Internet traffic "consumed" in New Zealand emanates from the US. This
is a strong indication that New Zealand's extensive use of Internet connectivity is being
used for productivity gains relative to other countries.
Figure 3.4.
Relative OECD Internet Connectivity and Uptake Rankings
Internet Metric
New
Zealand
#
Rank
Connectivity Statistics
th
ISP Accounts/100
14
9
th
Household %
48
5
th
School Availability
22
4
Internet
Hosts/1000
Web Sites/1000
th
105
8
11
12
th
th
Domain
22
11
Names/1000
rd
Secure
202
3
Servers/million
Broadband Statistics
th
BB
7
19
Subscribers/1000
th
DSL
14
15
Subscribers/1000
DSL Coverage %
85
Uptake Statistics
nd
Hours/month/ISP
21
2
Account
(Xtra)
237.
Australia
#
Rank
12
47
17
10
th
8
th
5
95
9
USA
South
Korea
#
Rank
#
Rank
th
18
50
27
5
rd
3
nd
2
th
23
5
10
th
272
1
st
14
13
th
47
1
st
6
19
16
th
190
5
9
17
8
20
63
13
17
th
25
4
51
1
141
8
6
20
7
21
28
th
th
173
4
th
15
14
th
130
65
26
th
11
47
th
26
nd
h
18
4
(Telstra)
11
38
16
st
14
2
85
1 =
th
19
21
301
th
Rank
th
5
1
(AOL)
st
1
st
1
st
90
-
France
#
th
38
UK
-
#
Rank
12
th
10
th
9
th
5
12
6
21
rd
23
th
18
th
31
19
th
th
4
20
th
st
9
20
th
th
38
21
th
11
15
th
st
12
17
th
66
th
10
7 =
(All ISPs)
The comparison between New Zealand and South Korea is, however, interesting.
Whilst Korea leads the OECD in residential Internet connectivity (ISP accounts per 100
and broadband connections per 100), it lies in the lower half of the OECD in respect of
business utilisation and content creation statistics. The one exception is domain names
per 1000. However, this statistic may be consistent with a higher desirability for
individuals to have a web presence, as it incorporates individuals as well as businesses
having registered domain names.
The single inconsistency in Internet uptake and utilisation statistics in New Zealand is
the relatively low (in OECD terms) broadband uptake. Telecom addresses the factors
that have contributed to low broadband uptake below.
57
The initial response can be found in examining the applications base. Howell and
Obren57 introduce a substitution-based model that uses the applications base, the value
of user time and information transfer technology costs to analyse the point at which a
given user will substitute broadband technologies for dial-up access. They conclude
that in the presence of flat-rate pricing for both dial-up and broadband technologies, the
only factors that induce earlier substitution are:
(a)
high fixed costs of dial-up relative to broadband;
(b)
broadband that is significantly faster than dial-up;
Howell and Obren (2002) op. cit.
th
10
7 =
(All ISPs)
The New Zealand environment
239.
st
91
Broadband Uptake
238.
st
61
(c)
a high user valuation of time; and
(d)
the number of information exchanges that the user undertakes.
240.
When there is a usage charge for both dial-up and broadband, in addition to the other
factors, substitution is less likely to occur if the per-megabyte charge for broadband is
high relative to the per-minute charge for dial-up.
241.
There is no evidence to suggest that a low number of Internet information exchanges
occurs in New Zealand. The New Zealand standard DSL product is one of the fastest
available in the OECD and the fixed price differences between broadband and dial-up
are comparatively similar. Therefore, the "problem" delaying substitution may be simply
either that user valuations of time are especially low in New Zealand, or that variable
price differences, arising as a consequence of New Zealand users facing per megabyte
usage charges, are influencing uptake. Whilst low user time valuations may be
depressing residential substitution, the extent to which per megabyte charging is
influencing substitution depends upon the caps set for unmetered usage.
242.
But even usage charges are an insufficient explanation for observed behaviours in the
business market, as a variety of packages with unmetered traffic of 0.5, 1.2, 1.8, 3, 5,10,
and 20GB per month are available, or in the residential market for consumers whose
monthly data transfer requirement does not exceed 1GB. In addition, it does not
account for the low levels of sale of the unmetered low-end residential product that has
a 5GB monthly unmetered usage cap. The low levels of purchase of this product are
more likely to be determined by low valuations of time and the comparative speed of the
products, given that very high quality average speeds are achieved via dial-up (46kbps)
relative to the speed of the broadband connection (128kbps). Only residential users
with high volume and high speed requirements face penalties from usage charges in the
New Zealand market. As the average usage volume per month in the residential market
is less than 1,000MB and only 5% of residential consumers using the 5GB product
exceed this quantity, the per megabyte charging policy will substantially influence only a
small proportion of the market.
Market segment differences
243.
The analysis above suggests that the uptake and usage patterns in the New Zealand
market may greatly differ depending upon the market segment. Business users, with
packages offering effectively unmetered access up to a variety of customised caps
would be expected to be more likely to purchase the fast product than residential users.
Residential users, though, would be expected to prefer the lower-speed unmetered
product.
Business broadband uptake
244.
Figure 3.5 shows the pattern of sales of DSL accounts to business and residential users
based upon Telecom business designation. Figure 3.6 shows the customer breakdown
between high speed Jetstream and low speed Jetstream Starter within Xtra's customer
base. Figure 3.7 shows the diffusion of sales of DSL accounts to customers that
Telecom bills as business customers, measured against Statistics New Zealand's
database of significant business enterprises (280,000 as at February 2002). These
penetration statistics represent a low-side estimate of business penetration, as small
businesses recorded on the Statistics New Zealand database may be purchasing DSL
connections as part of the residential base, whilst not being recorded as businesses in
the Telecom database. Furthermore, two levels of business enterprise growth are
postulated beyond the data from 2002 – high levels of business growth based upon the
high levels of 2001-2002, and slow growth, based upon the average growth for the past
8 years.
2001
Bus DSL
Figure 3.5: Telecom NZ DSL Market Size
50000
45000
40000
Jul-00
35000
Apr-00
30000
Jan-00
25000
Oct-99
20000
Jul-99
15000
Apr-99
10000
Jan-99
5000
0
2000
Figure 3.6: Xtra DSL Product Customer Base
30000
25000
20000
15000
10000
5000
0
1999
Oct-00
Jan-01
Res DSL
2002
2003
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
62
Jet Stream
Jet Start
Note that Xtra began separating Jetstream and Jetstream Starter (Jetstart customers in
July 2001).
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
Connections
63
Figure 3.7: Business DSL Diffusion per Significant Enterprise
9.00%
8.00%
Diffusion Percent
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02
May-02
Jun-02
Jul-02
Aug-02
Sep-02
Oct-02
Nov-02
Dec-02
Jan-03
Feb-03
Mar-03
Apr-03
0.00%
Bus Diffusion - Med Bus Grow th
Bus Diffusion - High Bus Grow th
245.
The predicted pattern was in fact the one observed until about a year ago. At March
2002, slightly under 50% of all New Zealand DSL connections were sold to business
customers58 compared to 30% in the UK and 20% in the US (BellSouth).59 However,
from this point, whist business connection growth has continued steadily, residential
uptake has surged, so that by April 2003, total residential DSL connections
outnumbered business connections by a factor of around 1.9:1, yielding proportions
similar to those of the UK in 2002 (see Figure 3.5).
246.
However, the above data shows steady growth of both the residentially targeted Jetstart
and the business targeted Jetstream products. Clearly, there is significant residential
purchase of the faster, capped product (approximately 7000 customers purchased
Jetstream Home 500 and Jetstream Home 1000 compared to the 12,900 Jetstart
customers in November 2002). There are two explanations: either this is a measure of
the extent of "quasi-business" use of DSL occurring via residential plans, or there are
residential consumers who value the speed of Jetstream and are prepared to limit usage
or have such low usage that they fall beneath the caps. The behavioural segmentation
data Telecom has received supports the latter explanation. It shows that
% of
Jetstream residential users use an average of just 134 Mbs a month (these users are
likely to be using Jetstream largely for emailing and basic surfing only), and
%
of Jetstream users use less than 1,000 Mbs a month. Of the remaining
%,
% use an average of 5.2 GB per month (probably for surfing, email, software
downloads, gaming and file sharing), and
% use an average of 2 GB a month
(probably because of lower gaming and software downloading requirements). These
figures suggest that most users find Jetstream useful for doing the basics more
efficiently, but are not too interested in the residential applications broadband is currently
most suited to - gaming and file sharing.
58
59
Howell and Obren (2002) op. cit
OECD (2002) op. cit p 29.
64
Business penetration
247.
Nonetheless, Figure 3.5 shows very different purchasing patterns between business
and residential customers. Furthermore, the levels of penetration by various business
segments show very favourable levels in New Zealand, consistent with the high and
consistent indicators of business connectivity and utilisation of the Internet in Figure 3.4.
Figure 3.7 shows, even using the very conservative methods of estimating business
penetration outlined above, a DSL penetration rate of between 8 and 8.5 per 100 of
New Zealand's approximately 285,000 statistically significant business enterprises at
March 2003. This does not include connections to any of the other broadband
platforms, and is an acknowledged under-representation of the true level of business
penetration. This business penetration level is particularly impressive in the face of
international comparison. Australia, for example, has a target of 3% of all businesses
using broadband in 2003.60 New Zealand passed this level in DSL penetration alone in
April 2001.
248.
Furthermore, New Zealand's high levels of business DSL connectivity are not just
confined to metropolitan locations. Figure 3.8 below shows the regional diffusion of the
technology. It is noted that the base used in this analysis is geographic units, so it
captures each regional branch of each of the significant enterprises represented in
Figure 3.6. Hence the two sets of figures are not directly comparable.
249.
Figure 3.8 shows that at April 2003, New Zealand had a minimum business DSL
penetration rate alone of 7.2 per 100 sites where business is transacted. This ranges
from 9.2 per 100 in Auckland to 2.1 per 100 in Tasman. Significantly, apart from
Auckland's strong showing, there does not appear to be a strong metropolitan-provincial
divide in this data, as Otago, with a large rural hinterland is second with 8.0 per 100, and
provincial Gisborne third with 7.9 per 100. Wellington (7.9) and Canterbury (7.4) come
next, followed by Nelson (6.8), Taranaki (5.9), Hawkes Bay (5.8), Waikato (4.8),
Southland (4.7), Bay of Plenty (4.5), Manawatu-Wanganui (4.3), Marlborough (4.0),
Northland (3.7) and West Coast (3.6). Therefore, even New Zealand's worst-performing
region, Tasman, when measured on DSL penetration per significant business location,
is close to the target set for all methods of broadband penetration per significant
Australian enterprise in 2003.
60
NOIE, The Current State of Play, Canberra: NOIE, 2002.
65
Figure 3.8: Regional Business DSL Penetration per Significant Geographic Unit
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
Ja
n99
Ap
r-9
9
Ju
l-9
9
O
ct
-9
9
Ja
n00
Ap
r-0
0
Ju
l-0
0
O
ct
-0
0
Ja
n01
Ap
r-0
1
Ju
l-0
1
O
ct
-0
1
Ja
n02
Ap
r-0
2
Ju
l-0
2
O
ct
-0
2
Ja
n03
Ap
r-0
3
0.0%
Northland Region
Auckland Region
Waikato Region
Bay of Plenty Region
Gisborne Region
Haw ke's Bay Region
Taranaki Region
Manaw atu-Wanganui Region
Wellington Region
Total, North Island (5)
Tasman Region
Nelson Region
Marlborough Region
West Coast Region
Canterbury Region
Otago Region
Southland Region
Total, South Island (6)
Total, New Zealand (5)(6)
250.
When comparing business connectivity to the Internet, it is important that businesses of
like size and dimension are compared. New Zealand businesses are very small by
world standards. The UK reports that in November 2002, 5% of its Small and Medium
("SME") businesses connecting to the Internet used broadband (this figure equates to
3.5% of UK businesses in total)61. The comparable figure for all significant New Zealand
enterprises at that point was 7.0% (geographic units 6.3%). Fewer than 0.5% of
New Zealand's 285,000 significant businesses have more than 100 employees. Thus,
New Zealand's total business uptake ostensibly falls within the UK's SME category, and
New Zealand DSL penetration overall is significantly higher than that of the UK.
251.
Using the Telecom business database, over 50% of business enterprises in this register
subscribe to DSL. This compares very favourably to Norway, where only 20% of
businesses in this category use all broadband methods.62 This is especially interesting,
given that Norway (12th) lies significantly ahead of New Zealand in the number of
broadband connections per 100.
252.
The figures cited above are a deliberate low level estimate based upon population data
and relate only to one technology platform, DSL. Even given these shortcomings, there
is significant evidence that the high levels of business Internet connectivity and use
exhibited in Figure 3.4 translate into equally high levels of business connectivity to
broadband technologies. There is no evidence of business sector lags in broadband
connectivity.
Indeed, New Zealand leads comparative benchmark countries by
61
62
Oftel (2002) op. cit.
http://www.norwaypost.no/content.asp?cluster_id=19123&folder_id=9 .
66
significant amounts in respect of the SME and micro business segments. In fact, these
are the very business segments that broadband technologies are designed to serve,63
as larger businesses generally use leased T-1 connections (NZ has penetrations of
around 50 per 100 in this technology per business with over 100 employees).
Residential broadband uptake
253.
Accordingly, New Zealand's relatively low broadband uptake rates result from low
residential broadband uptake rates. The two factors that contribute to this are identified
below.
Pricing arbitrage
254.
It is well recognised that worldwide, user valuation of leisure time tends to be low.
Varian64 identifies in his INDEX studies that the valuation of users' leisure time at
Berkeley University was around 0.5c per minute in respect of the willingness to pay
extra money for faster Internet connections. It follows that even if New Zealanders'
value is this low, so is that in other countries that rank higher in residential broadband
uptake. Given that the value of user time is so low, the relative speed of technologies
assumes less importance in the Howell and Obren substitution equation. This is further
diminished given that the time taken to exchange information is extremely small
compared to the time taken by the user (either manually or using computer applications)
to process that information once it is received. The differences in transfer speeds
between dial-up and DSL at prevailing New Zealand speeds and qualities would, for the
very low average levels of megabytes exchanged by DSL users in the Xtra database,
amount to less than a few minutes each day. Therefore, in the substitution decision
between dial-up and broadband (and at the low user valuations of time exhibited) the
effect of the savings from broadband speed on the average residential consumer is
negligible.
255.
In fact given the speeds at which information is transferred over the Internet, constraints
in user time are more likely to occur from constraints in distribution and processing at
either end of the Internet chain (servers, etc.) than from the transmission itself. For
example, server speeds of many public newsgroups are extremely slow and users are
required to pay additional fees to access information off servers with faster speeds. No
matter how capable the user's connection to the Internet is, if the servers from which
information is regularly obtained are slow, faster transmission speeds will have
negligible effect on the total time taken to receive data.
256.
It follows that holding applications and transmission time constant, fixed access pricing
arbitrage appears to be the solitary explanation for New Zealand's low residential
broadband penetration rates. However, broadband products are not, comparatively
speaking, expensive – Figure 3.2 shows that they rank very competitively with the
offerings of the rest of the OECD. Rather, it is the extremely favourable dial-up prices
that depress residential uptake. But that is not 'bad' in the sense that it is not
constraining use of the Internet (Figure 3.4 shows this is the case).
257.
The conclusion that this analysis appears to invite is that, worldwide, it is not the
superior speed capabilities of broadband that induce residential purchase for the
majority of residential users with identical information exchange needs. Rather it is
pricing arbitrage between the two technologies for basic connectivity to the Internet that
appears to be the key determining factor at the current point in time.65
63
OECD (2002) op. cit. pp 9-10.
Varian, Hal. 2002. "The Demand for Bandwidth", Ch 4 in Crandall, Robert W.; and James H. Alleman (eds),
Broadband: Should We Regulate High - Speed (Internet Access)? Washington, D.C.; AIE - Brookings Joint
Center for Regulatory Studies, 2002.
65
Hausman, Jerry, "Internet - Related Services: The Result of Asymmetric Regulation". Chapter 7 in Crandall,
Robert W.; and James H. Alleman (eds), Broadband: Should We Regulate High-Speed Internet Access?
64
67
Broadband applications
258.
The only remaining potential factor influencing New Zealand's low level of residential
broadband uptake is the applications that are used in this sector. Specifically, are there
applications which require the high information volume and speed capabilities of
broadband that are being used in other countries but not in New Zealand? If there are
such applications this could explain the difference in broadband penetration rates. If
there are not, then the conclusion becomes that there are just not the applications
available worldwide that require broadband's capabilities, and that international
broadband penetration statistics are solely a reflection of pricing arbitrage between
different technology platforms in different countries (including bundling of broadband
Internet access with other applications such as basic telephony and cable television).
259.
For example, a handful of applications are routinely available in South Korea but not in
New Zealand, including VoIP and unpoliced streaming of audio and video content in a
legal environment that does not enforce copyright. VoIP is popular in South Korea as a
result of relative pricing of fixed line and Internet telephony prices. However,
New Zealand residential telephony prices are in the lower half of the OECD already,66
meaning that this application is unlikely to be as popular in New Zealand unless it is
associated with substantial price reductions. Currently prevailing unmetered local call
access would further discourage the use of VoIP in the New Zealand market.
Furthermore, New Zealand copyright laws do not tolerate unrestricted copying,
distribution and streaming of copyright material, thereby reducing the relative application
potential of the two countries. The additional consideration is that in the market for
entertainment products, Internet entertainment applications compete with all other
entertainment applications. The range of entertainment substitutes in South Korea is
much more limited than in New Zealand, making entertainment options such as video
and audio streaming and interactive games more popular than in New Zealand, where a
variety of entertainment options, including participating in and viewing sport, sailing,
skiing, and other outdoor activities, along with many broadcast entertainment options
(free and pay-to-air television, radio etc.) compete with Internet-based entertainment
options.
260.
Another valid application justification arises from comparing New Zealand application
usage with that of the US, which exhibits four times the broadband penetration of
New Zealand, but approximately similar levels of DSL penetration. The most significant
applications difference between the US and New Zealand is that cable television
packages incorporating cable broadband Internet access are widely available in the US,
whereas cable packages in New Zealand are restricted to a narrow population base
(Wellington and some parts of Christchurch). Cable broadband purchase outweighs
DSL purchase in the US by a factor of approximately 2.5:1.67 Despite the argument that
cable and DSL are competitors in a single market in the Untied States,68 it has also
been argued that cable television content forms part of the product that influences the
decision of US broadband purchasers.69 Without tied content to offer in a bundle with
infrastructure access, DSL is in a different market, and the products are not remotely
close substitutes. Moreover, bundling opportunities provide pricing advantages for cable
providers.70
Washington, D.C.: AIE - Brookings Joint Center for Regulatory Studies, 2002. New Zealand is not alone in this
being a significant factor depressing broadband uptake – Hausman has identified that factor is significant in the
US' comparatively poor performance in the broadband penetration metric.
66
Howell and Obren (2003) op cit.
67
Howell (2002) op cit.
68
Crandall, Robert; J Gregory Sidak and Singer Hal, The Empirical Case Against Asymmetric Regulation of
Broadband Internet Access, Brookings Institute, March 2002.
69
Howell (2002) op. cit.
70
Bakos, Yannis; and Erik Brynjolfsson, Bundling and Competition on the Internet, Marketing Service, January
2000.
68
Cable Content and Infrastructure Access Bundles
261.
If it is indeed content and infrastructure bundles that provide the pricing arbitrage
incentives to favour cable broadband access over any other form of broadband or
narrowband access, then this solitary application difference may be the single most
significant factor accounting for New Zealand's low broadband uptake. It is interesting
to note that without the incentive of content bundles, DSL uptake in the US is similar to
that of New Zealand. Given the similarities of residential DSL prices in the two
countries, there is substantial anecdotal credibility to support this explanation, especially
given that there is no evidence of business reluctance to purchase broadband in
New Zealand.
262.
By way of a comparison, whilst New Zealand does not have a nationwide cable
television product with which Internet access can be bundled, it does have a digital
satellite-based pay television service with 516,731 subscribers, amounting to a
penetration rate of 28.3% of households within its reach, at December 31, 2002.71 This
is in addition to the 123,360 (12.2% penetration) of subscribers to its UHF pay TV
service. Since late 2002, this service has offered email services with the digital product,
effectively competing with ISPs for that share of the 850,000 dial-up customer market
that accesses the Internet for email applications only. The potential exists for this
provider to use the digital satellite infrastructure to compete directly with ISPs for wider
Internet access services. If bundling of Internet access via cable with television content
is indeed prompting purchase of cable broadband subscriptions in other countries, then
in order to get a true comparison between New Zealand broadband penetration and that
of other countries, New Zealand's broadband share must be adjusted to reflect the
proportion of purchases of digital satellite mail access that in other countries would be
registered as broadband sales.
71
http://www.skytv.co.nz/index.cfm?pageid=75&languageid=1&siteid=237_1.
69
3.2
Project PROBE
263.
The Government's provincial broadband initiative, Project PROBE will ensure that much,
if not all of provincial New Zealand has, within 3-5 years:
(a)
at least 2 competing voice and data access networks; and
(b)
access to broadband services.
It is therefore directly relevant to the Commission's present investigation. As a result of
Project PROBE in the provinces, market driven facilities-based competition in urban and
suburban areas of New Zealand, and the recent and soon to be announced regulated
wholesaling regimes, national solutions to each of the potential competition problems
discussed above have been and are being implemented. This section of Telecom's
submission discusses the goals and objectives of Project PROBE, their likely impact in
provincial New Zealand, and how they would be affected by unbundling.
264.
Project PROBE addresses the issues of access to broadband services, and access to
telecommunications networks generally, on a national basis, but with an emphasis on
provincial regions. It splits New Zealand into 15 regions, and provides for a PROBEsubsidised network to be built in each. Those regions are:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
Northland;
Auckland;
Bay of Plenty;
Waikato;
Gisborne;
Hawkes Bay;
Taranaki;
Manawatu-Wanganui;
Wairarapa;
Wellington-Kapiti Horowhenua;
Nelson-Tasman;
Marlborough;
West Coast;
Canterbury;
Otago;
Southland; and
remote areas nationwide which can only feasibly be reached by satellite
access.
70
265.
These regions are shown mapped onto New Zealand in Figure 3.9 below.
Figure 3.9: Project PROBE coverage72
72
Ministry of Education website.
71
Purpose of Project PROBE
266.
Project PROBE's objectives are to: 73
roll out broadband to all schools and communities that do not have access to
broadband communications and secondly to encourage competition in
broadband telecommunications outside the metropolitan centres.
267.
Project PROBE's objectives directly address, in provincial New Zealand, each of the
potential competition problems the Commission has identified in its Issues Paper. It
further submits that Project PROBE will provide the means with which any such
competition problems that may exist today in provincial New Zealand, will be addressed
within 3-5 years.
268.
Project PROBE facilitates the rollout of advanced access networks, many of which will
compete directly with Telecom's current access network in each of the provincial regions
identified above. Specifically, Project PROBE requires that successful parties' networks
must be able to support, amongst others, each of the following:
269.
(a)
"always on" dedicated service;
(b)
IP Internet access;
(c)
data transfer;
(d)
web hosting;
(e)
flexible billing and account management;
(f)
streamed media; and
(g)
IP-based point to point, and multi-point, video conferencing.
Networks capable of supporting each of these will also be capable of supporting, within
3-5 years, most other telecommunications services, be they voice or data services.
Only modern, technologically advanced networks will be capable of supporting each of
the above functionalities, and these such networks will almost by definition also support
most other telecommunications services. If this is accepted, then Project PROBE can
be seen as relating directly to each of the potential competition problems identified
above.
Access to broadband communications
270.
73
The Government has publicly stated that Project PROBE will make a substantial
contribution to delivering the Government's social policy objective of high-speed Internet
access availability to all New Zealand schools and communities. As discussed above,
Telecom does not accept that increased access to broadband services will necessarily
result in increased broadband penetration. 85% of New Zealand currently has access to
such services. However, the Government's social policy objective of ensuring that
100% of schools have access to these services - something that is just not possible
using Telecom's current access network - allows competing broadband access for whole
communities to be leveraged off the networks that will be required to provide coverage
to schools. Given that 85% of end-users already have access to such services on
Telecom's networks, it can be assumed that the majority will have a choice of networks
across which these services can be delivered. Even if New Zealand's present
broadband penetration rates do indeed evidence a competition problem, Project PROBE
will address that problem within 3-5 years by facilitating competing broadband access
Ministry of Education website (21 January 2003 update).
72
networks. Therefore, Telecom submits that the Commission need not consider
broadband penetration as a competition problem which unbundling might address.
'Deployment of competing telecommunications access infrastructure
271.
While Project PROBE's primary focus is on the delivery of broadband access to schools,
its secondary objective is the deployment of competing telecommunications access
infrastructure capable of providing broadband services to telecommunications end-users
generally in provincial areas. This objective is directly related to the first and third
potential competition problems identified by the Commission, the extent to which
Telecom's local loop and data tails are bottleneck facilities. Indeed, in order for PROBE
subsidised networks to be commercially viable in the long run, they will have to support
all of voice, data and broadband services.
272.
Project PROBE aims to accelerate the timeframes within which alternative access
networks to Telecom's current network would otherwise be rolled out in provincial New
Zealand, by facilitating central and local government subsidies for the initial deployment
of these networks. In direct comparison to unbundling, which facilitates multiple
providers delivering telecommunications services across one infrastructure platform (in
this case Telecom's), PROBE encourages multiple technology platforms. The subsidies
that are provided reduce both the risk of deploying a new network, as well as the cost.
273.
However, where possible the Government intends that these subsidies will not be
ongoing, but rather that the networks set up with PROBE subsidies will be self-funding
from the outset.74 It anticipates that PROBE network operators will be able to leverage
off the infrastructure they deploy to provide broadband services to schools, to provide
voice and data (including broadband) services to the broader community.
274.
To this end, the Government has stated that it will give preference to those tenders that
will be self-funding. It can therefore be expected that most tenders will propose
extensive network and service coverage for each region, if not immediately, then within
very short timeframes. This has been borne out in the recently announced successful
tenders for Southland, Northland and Wairarapa. These regions produced RFPs
independently of the Project PROBE tendering process, and were the first of the regions
to announce the successful tenderers - in each case a Walker Wireless/Vodafone
partnership that will deliver not only broadband, but also voice and other data services to
the wider regions.
275.
Taking Southland as an example of the type of coverage and facilities based
competition Project PROBE will facilitate in provincial regions, Walker Wireless and
Vodafone will be investing in wireless infrastructure which will provide coverage to
between 92% and 95% of Southland's population of 92,000 people. This infrastructure
will include backhaul, fibre-optic capacity, switching services, and a cellular network
extension, and will be provided from 22 points of presence in the region.
276.
The successful tenderers for each of the other regions will be announced in late June
2003, and will come from one of 18 companies, consortiums and partnerships invited to
tender for Project PROBE by the Government out of an initial field of 30 interested
parties. Their tenders can be expected to be just as extensive in terms of coverage and
services offered as those of Vodafone and Walker Wireless in Southland, Northland and
Wairarapa. The 18 tenderers are a diverse mix of telecommunications wireline network
operators, wireless network operators, electricity lines companies and satellite
operators. This diversity, and the fact that so many parties are considered serious
contenders for the PROBE tenders is evidence of the very real facilities-based
competition which Telecom's access networks will face in the near future. Specifically,
74
Ministry of Education and Ministry of Economic Development Request for Proposals: PROBE - Provincial
Broadband Extension, p 36.
73
the 18 are: Apertura, Counties Power, E-Comm Pacific, ihug/BCL, Intelsat, Network
Tasman,
NZ
Sprint/BCL,
Rural
Networks,
South
Waikato
Networks,
Tangent/BCL/Powerco, Telecom/BCL, TelstraClear, The Lines Company, The
Pacific.net, UCC Technologies, United Networks Communications, ViaSat/PacAmTel
and Walker Wireless/Vodafone.
277.
Once the successful tenderers are announced, they will have until the end of 2004 to
deploy their networks sufficiently to cover at least all of the schools identified as being
within the relevant region. As discussed above, in reality these networks will provide
coverage and services far beyond simply broadband services to schools. Their
coverage will extend to voice and data services, and to a great majority of each region's
population. The effect of PROBE will therefore be to facilitate facilities-based
competition in provincial New Zealand within a 3-5 year timeframe.
Effect of unbundling on Project PROBE
278.
279.
The commercial viability of alternative technology platforms will however be jeopardised
if Telecom's access infrastructure is unbundled. Unbundling creates an economic
disincentive for new entrants and other retail or wholesale competitors to invest in their
own infrastructure, by permitting them to simply rent infrastructure from Telecom as and
when they require it. This allows them to avoid the risks associated with infrastructure
investment:
(a)
that the technology invested in will fail to scale well or will be "stranded" by the
emergence of a superior technology; and
(b)
that end-user uptake and thus economic return on the investment will be lower
than anticipated.
This disincentive is further exacerbated if a cost-based methodology is used for
unbundling. If cost-based unbundling were introduced, the ability of Project PROBE to
provide the facilities-based competition within the timeframes described above would be
seriously jeopardised.
Issues for Investigation
Issue VII: what should be the basis upon which broadband or Internet access and
uptake is assessed?
Issue VIII: What is the competition problem created by any relative non-uptake of
broadband?
Issue IX: Will Project PROBE deliver an effective broadband service to rural New
Zealand?
74
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75
76
77
PART II: RESPONSES TO THE COMMISSION'S ISSUES PAPER
5.
INTRODUCTION
280.
In its Issues Paper, the Commission identifies three specific competition problems that
unbundling is allegedly designed to address:
281.
(a)
dealing with the incumbent's market power in the local loop and stimulating
competition in the "last mile" (ie, ubiquitous access) (paragraph 89);
(b)
increasing penetration of broadband services (paragraph 396); and
(c)
dealing with any natural monopoly in data tails (paragraph 306).
Telecom agrees that internationally unbundling has been regulated with the stated
purpose of addressing these problems. However, in regard to each problem:
(a)
International unbundling regulation is irrelevant to the present investigation: As
discussed above in section 9, the decisions made internationally were made in
response to specific statutory regimes and market conditions, none of which
are comparable to those in which the Commission must conduct the present
investigation.
(b)
No such competition problem exists in New Zealand: As a result of over 15
years of competition in New Zealand telecommunications markets, and in light
of the recently released Business Wholesale determination, and the soon to be
released Residential Wholesale draft determination, any natural bottlenecks
that may have existed have been eliminated. In relation to broadband
penetration rates, New Zealand's low residential penetration rates do not
evidence a competition problem. On the contrary, we are leading the world in
Internet usage.
(c)
Access network competition in the coming few years will remove any natural
monopoly: Even if such a competition problem was found still to exist, despite
the Wholesale determinations, it would be solved by market demand for
facilities-based competition within the 3-5 year timeframe discussed above,
provided only that the Commission does not regulate unbundling within that
timeframe. Emerging access technologies and market pressures will combine
to provide alternative national networks that will have the capacity to match or
better Telecom's present networks' reach.
282.
This investigation will affect future investment; it is not simply regulating use of current
assets. It is the first of its kind and should reflect the underlying principles of the
Telecommunications Act that there is to be as much market as possible and as much
Government regulation as necessary.
283.
The key message is that no form of unbundling would satisfy the section 18 test
because:
(a)
none of them will promote real competition. The most they can hope to
achieve is apparent competition using existing facilities;
(b)
none of them brings long term benefits to end users; and
(c)
none is efficient. This efficiency, particularly dynamic efficiency in the long
term, is to be the prevailing criterion.
78
284.
The Commission must:
(a)
limit the review to what is permitted by section 64. It must exclude from this all
but the local loop as defined in the Act and the PDN to the first data switch or
equivalent facility, which must be interpreted so as to not interfere with
Telecom's property rights;
(b)
recognise the different legislative mandates and market/competition and social
drivers for unbundling around the world and that consideration of how
unbundling has been implemented, and worked, in those legislatures would
breach section 64 and sections 18 and 19;
(c)
recognise the distortion which intrusive unbundling could cause to investment
options now available to Telecom in the NGN, and is already causing to
TelstraClear in ceasing its roll-out of its local loop;
(d)
await the effect of the business wholesale and residential resale determinations
to provide wholesale services which are more immediate and effective ways of
dealing with any perceived problems which unbundling might be introduced to
address; and
(e)
recognise that unbundling is a no return option, while the non unbundling
counter-factual always leaves the Commission two options of continuing with
wholesaling or moving into unbundling.
79
6.
INTERPRETATION OF THE TELECOMMUNICATIONS ACT 2001
6.1
Principles of interpretation
285.
The Commission is required to have regard to four broad issues of statutory
interpretation in interpreting and applying section 64.
(a)
Purpose of the Act: Interpret the Act so as to promote the statutory purpose
set out in section 18.
(b)
Statutory context:
Have regard to the wider statutory context and
parliamentary history when:
(i)
interpreting and applying the purpose set out in section 18; and
(ii)
resolving uncertainties in the scope of section 64.
(c)
Presumption against interference with private property rights:
Resolve
ambiguities and uncertainties in the Act in accordance with the common law
principle in favour of preserving established property rights.
(d)
Policy guidelines: Have regard to and to correctly apply the guidelines and
policies the Commission has published. Those guidelines give rise to
legitimate expectations as to the manner of a decision-maker's exercise of its
powers.
Purpose of the Telecommunications Act
286.
287.
Section 18 of the Act specifies the statutory purpose to which the Commission must
have regard in discharging its functions. Section 18 provides that:
18
Purpose
(1)
The purpose of this Part and Schedules 1 to 3 is to promote
competition in telecommunications markets for the long-term benefit
of end-users of telecommunications services within New Zealand by
regulating, and providing for the regulation of, the supply of certain
telecommunications services between service providers.
(2)
In determining whether or not, or the extent to which, any act or
omission will result, or will be likely to result, in competition in
telecommunications markets for the long-term benefit of end-users of
telecommunications services within New Zealand, the efficiencies
that will result, or will be likely to result, from that act or omission
must be considered.
Section 19 of the Act specifies the procedure the Commission must follow when making
its recommendation to the Minister under section 64:
19.
Commission and Minister must consider purpose set out in
section 18 and additional matters
If the Commission or the Minister (as the case may be) is required
under this Part or any of Schedules 1 to 3 to make a
recommendation, determination, or a decision, the Commission or
the Minister must –
(a)
consider the purpose set out in section 18; and
80
(b)
if applicable, consider the additional matters set out in
Schedule 1 regarding the application of section 18; and
(c)
make the recommendation, determination, or decision that
the Commissioner or Minister considers best gives, or is
likely to best give, effect to the purpose set out in section
18.
288.
Section 19 limits the Commission's investigatory and decision-making powers. It directs
the Commission first towards the considerations it must take into account when making
a recommendation, determination or decision, and then to the purpose with which the
recommendation, determination or decision must accord. The section imposes
mandatory (as distinct from permissible) relevant considerations which the Commission
must have regard to when making any recommendation, determination or decision
under that part of the Act and conversely considerations to which the Commission may
not have any regard.
289.
One such consideration is Schedule 1 to the Act. Section 19(b) provides that Schedule
1 may be considered only if it is "applicable". Telecom is of the view that Schedule 1 is
not applicable for the following reasons and, therefore, may not be considered:
(a)
Part 2 of Schedule 1 is applicable only to circumstances specified in that Part,
which are irrelevant to the section 64 investigation;
(b)
subpart 1 of Part 1 of Schedule 1 is applicable only to circumstances specified
in that subpart, which are also irrelevant here;
(c)
subpart 2 of Part 1 applies only "to designated access services". The subpart
specifies conditions which must be met by an "access provider", which is
defined as:
The person named or described in Part 2, or Part 3, of Schedule 1 as
the access provider for the designated service or specified
service.
[Telecom emphasis]
(d)
no designated or specified service in Part 2 or Part 3 of Schedule 1 has any
relevance to the services which might be recommended under section 64;
(e)
thus, no aspect of Schedule 1 as it is set out in the Act at present is applicable
to the current investigation.
290.
This is consistent with the scheme of section 64 which places quite different obligations
on the Commission to those placed on it by Subpart 2 of the Part 2 of the Act, which
applies when the Commission is making a determination of all or some of the terms on
which a designated or specified service must be provided.
291.
Section 64 requires a report:
… under clause 4 of Schedule 3 on whether or not each of the following
services should be a designated service or a specified service …
[Telecom emphasis]
292.
On the other hand, when considering the terms on which a service is to be provided,
section 29 requires a determination which must:
. . . in the opinion of the Commission -
81
(a) be made in accordance with (i) the applicable access principles and any limits on those applicable
access principles; and
(ii) any regulations made in respect of the applicable access principles and
any limits on those applicable access principles; and …
293.
The applicable access principles and limits in section 29 are defined in the Act by
reference to the relevant designated or specified service. As there is no such
designated or specified service for the matters being investigated under section 64,
there are no applicable access principles to refer to or consider.
294.
This is entirely consistent with the overall scheme of the Act which provides the following
sequence:
(a)
the Commissioner recommends designation or specification to the Minister
under section 64;
(b)
the Minister accepts that recommendation under section 68(1);
(c)
the Governor-General, by Order in Council, amends Part 2, or Part 3, of
Schedule 1, to add the designated or specified service;
(d)
the notification, decision to investigate, consultation, draft determination and
other procedures in Subpart 2 of Part 2 of the Act has been complied with; and
(e)
in particular, the parties to the designated or specified services have made
reasonable attempts to negotiate the terms of supply of the designated or
specified service.
295.
It is not clear from the Issues Paper whether the Commission intends following the
sequence of steps described in the preceding paragraphs of this submission, as
Appendix 1 to the Issues Paper stops at the Order-in-Council stage. In case it becomes
relevant, Telecom notes that the "details of the proposed alteration" to Schedule 1
referred to in the third bullet point of box 2, and the third and fourth bullet points of box 4,
of Appendix 1, and the "description of the service, applicable conditions, description of
access seeker and provider, and for a new designated service, the applicable initial and
final pricing principles" all refer to descriptions of comparable detail to the corresponding
provision already included in Schedule 1. This does not include the "terms of supply of
the service" which may not be considered specified by the Commission, Minister or
Governor-General under section 64 and may not be considered by the Commission
under Subpart 2 of Part 2 of the Act, until the parties to the service have made
reasonable attempts to negotiate them.
296.
When applying corresponding provisions the ACCC has said: 75
In deciding to declare an eligible service, the Commission is limited to specifying
the service (as distinct from the manner in which the service is to be provided).
297.
It follows that Telecom disagrees with the criteria in paragraph 41 of the Issues Paper, to
the extent that reference to Schedule 1 is included in paragraph 41(b).
298.
For similar reasons, Telecom disagrees with the criteria in paragraph 41 of the Issues
Paper, to the extent that reference to Schedule 2 is included in paragraph 41(c):
75
ACCC, Telecommunications Services - declaration provisions of Part XIC of the Trade Practices Act, (July
1999) p 39.
82
299.
300.
(a)
access codes under Schedule 2 are for "designated services or specified
services";
(b)
unbundling is not a designated or specified service for unbundling;
(c)
therefore, there is no access code for unbundling, and the Commission cannot
refer to one.
The combined effect of sections 18 and 19 is that the following considerations, each of
which is a mandatory consideration, exhaust the matters that the Commission may take
into account in deciding whether or not to recommend that either of the services referred
to in section 64 be designated or specified:
(a)
promotion of competition in telecommunications markets;
(b)
the long-term benefit of end-users of telecommunications services; and
(c)
efficiencies to be had.
Telecom will address the interpretation and weight that should be given to each of these
considerations at paragraphs 311 to 325.
Statutory context of the Act
301.
The parliamentary statements on the Telecommunications Act 2001 show that
Parliament was aware that intrusive regulatory intervention would frustrate the
underlying and express statutory purpose of the Act. The Commission's powers must
be interpreted in light of this concern.
302.
Telecom refers the Commission to the statements quoted in paragraph 43 of Telecom's
Residential Wholesale submission, and repeated below. The statements confirm it was
Parliament's intention to protect against "unnecessary regulation" so as to stimulate
competition, investment and innovation in the industry:
"[The Bill] follows the basic principle of as much market as possible and as
much Government regulation as necessary … It encourages and promotes
commercial arrangements wherever possible" (David Cunliffe MP, Hansard 9
May 2001).
"The dispute resolution procedure in the bill is designed to provide a backstop
that will enable disputes … to be resolved quickly" (Hon Paul Swain, Hansard 9
May 2001).
"The measures in this bill are not light-handed or heavy-handed, they are evenhanded … It is a fine balance between commercial imperative in the first
instance, and Government intervention when the need arises" (Hon Paul Swain,
Hansard 9 May 2001).
"The role [of the Commissioner] will be more facilitative [than that of other
Commerce Commissioners], and will try to resolve issues before they become
major problems … As the Minister has said many times, we are looking for an
outcome that will encourage companies to sort out their problems for
themselves, with the Government getting involved only as a last resort" (Kevin
Campbell MP, Hansard 27 November 2001).
"One of the key planks to our policies has been allowing the industry to work out
its problems itself, if at all possible … The best sort of regulatory framework is
the one that is never used. The threat of Government action is enough to
encourage the parties to come to a commercially sensitive arrangement" (Kevin
Campbell MP, Hansard 18 December 2001).
83
"This bill … has come up with a new framework for careful and moderate
industry-specific regulation. Where the market is competitive there is no
regulatory intervention" (David Cunliffe MP, Hansard 18 December 2001).
"In a highly competitive market like [telecommunications] we need as much
market as possible, as much government as necessary. … [The regime] is
designed to promote investment in, and competition in such a way that people
decide to invest in, telecommunications in New Zealand, not because of
regulation, but because of return on capital" (Hon Paul Swain, Ministerial
Statement, 20 December 2000).
303.
These concerns are also found in the CRNEC Report to the Ministerial Inquiry into
Telecommunications, where it was noted that greater net economic harm will occur
where regulation occurs, but is not necessary, than where regulation does not occur,
and is necessary.76 Accordingly, a broad interventionist mandate was deliberately
withheld by Parliament, in favour of "backstop" regulation, and a policy of "as much
market as possible". Telecom submits that the Commission should interpret the
statutory context as prohibiting detailed and intrusive regulation except as a very last
resort.
Presumption against interference with property rights
304.
Telecom refers the Commission to paragraphs 46 to 49 of its Residential Wholesale
submission, which are set out below:
305.
It is a fundamental principle of statutory interpretation that a statute will not be
interpreted in a manner which interferes with or prejudices established property rights or
other economic interests, except under clear statutory authority construed according to
the legislative intention.77 The presumption against interference with property rights
must be applied by the Commission in determining the interpretation and operation of
[the wholesaling regime].
306.
The following statement of the law from Lord Radcliffe in A-G (Canada) v Hallet & Carey
Ltd is the usual starting point:78
There is a well-known general principle that statutes which encroach upon the
rights of the subject, whether as regards person or property, are subject to a
"strict" construction. Most statutes can be shown to achieve such an
encroachment in some form or another, and the general principle means no
more than that, where the import of some enactment is inconclusive or
ambiguous the Court may properly lean in favour of an interpretation that leaves
private rights undisturbed.
307.
Even more emphatically, Lord Hoffman in R v Secretary of State for the Home
Department, ex parte Simms stated:79
Fundamental rights cannot be overridden by general or ambiguous words
308.
76
In the context of a statute such as the Telecommunications Act, which is obviously
intended to limit Telecom's freedoms of contract, business organisation and asset use,80
See Final Report, Appendix 6.
Laws NZ Statutes paragraph 177. In addition to this principle of statutory interpretation, Telecom notes the
potential relevance of the Bill of Rights Act 1990 (see Westco Lagan Ltd v Attorney General [2001] 1 NZLR 40,
52-55 and Lumber Specialties v Hodgson [2000] 2 NZLR 347, 373-374).
78
[1952] AC 427 at 450 (HL). This principle has been applied in numerous New Zealand cases such as Stewart
Investments Ltd v Invercargill City Corporation [1976] 2 NZLR 362, Fuller v Macleod [1981] 1 NZLR 390, Glogau v
Land Transport Safety Authority [1997] 3 NZLR 353. It is also cited with approval by Joseph, Constitutional and
nd
Administrative Law in New Zealand (2 ed, 2001) 910.
79
[2000] 2 AC 115, 131 (HL). Cited with approval in R v Pora [2001] 2 NZLR 37, 50 (per Elias CJ).
80
Courts take a broad approach to the meaning of "property" in this context. See Westco Lagan [2001] 1 NZLR
40 ("contractual rights are intangible property"), Lumber Specialties v Hodgson [2000] 2 NZLR 347 ("Property" for
77
84
the presumption against interference with property rights means that where the
Commission is choosing between different options which are consistent with the
statutory purpose (for example, as the result of an ambiguous phrase, a process which
is not fully specified or a discretion to be exercised), it must choose the one which
causes the least interference with Telecom's property rights.81 Only this approach is
consistent with the well-accepted proposition that Parliament will not be taken to have
intended the erosion of fundamental rights in the absence of clear and unambiguous
language.82
Application of the presumption to the Commission's section 64 investigation
309.
Telecom submits that this presumption requires the Commission to interpret and, if
necessary, apply section 64 in the way that least intrudes on Telecom's property rights
and economic interests. The Commission has not applied this principle to date in its
interpretation of section 64. In paragraphs 52 (2nd bullet point) and 69 (3rd bullet point)
of the Issues paper, the Commission implies that the ambiguity of section 64 suggests
"scope for flexibility in [interpretation] sic". Telecom refers the Commission to Professor
Joseph's statement on the dangers of such an approach:
The Commission and Minister must resist any temptation to conflate the
statutory purpose (section 18) and power in question (section 64). It is not
permissible to approach section 64 by saying: "The language of section 64 is
uncertain and there is no agreement about the nature and scope of the
unbundling review. Nevertheless, whatever section 64 may propose, the
economists are agreed that recommendation X would best promote the
statutory purpose of securing long-term benefits to end-users". On this
approach, it could not be discerned whether recommendation X was within the
mandated scope of LLU review. The primary responsibility of ascertaining the
scope of the review power is abdicated in deference to a broadly framed
83
statutory purpose.
310.
Purposes and powers are distinct. A statutory purpose (or object) cannot enlarge the
scope of a power legally conferred. Rather, the power conferred must be employed in
such a way so as to best promote the statutory purpose. However, the limits of the
power must be ascertained before it can be employed to promote the statutory purpose.
The Commission's statements referred to above attempt to reverse the interpretive
sequence, and to use the statutory purpose to amplify a power beyond its lawful scope.
Policy guidelines
311.
Telecom agrees with the proposition at paragraph 41(d) of the Issues Paper that the
Commission must follow the Guide in interpreting and applying its powers in regard to its
investigation under section 64. In particular, Telecom makes the following observations
of the Guide and paragraphs 42 to 45 of the Issues Paper.
this purpose has generally been given a wide interpretation by constitutional courts"; Glogau v LTSA (presumption
applied to copyright in a taxi driver's log book) and Allen v Thorn Electrical Industries [1968] 1 QB 487
(interpretive presumption applied to rights under an employment contract).
81
4th
This approach is supported by Laws NZ Statutes paragraph 175, 177; Bennion, Statutory Interpretation ( ed,
nd
2002) 723-728; Burrows, Statute Law in New Zealand (2 ed, 1999) 205; De Smith, Woolf & Jowell, Judicial
th
nd
Review of Administrative Action (5 ed, 1995) 326; Driedger, Construction of Statutes (2 ed, 1983), 183-185.
82
R v Secretary of State for the Home Department, ex parte Simms [2000] 2 AC 115 (HL) . See also R v Pora
[2001] 2 NZLR 37, 50 (per Elias CJ) and 65 (per Thomas J). Furthermore, even where it clearly is Parliament's
intention to curtail rights, the principle of "proportionality" may apply - that rights can only be curtailed to the extent
reasonably necessary to meet the ends which justify the curtailment. See Lord Cooke's speech in R v Secretary
of State for the Home Department , ex parte Daly [2001] 3 All ER 433.
83
Joseph, The legal and interpretive issues governing the Commerce Commission review under section 64 of the
Telecommunications Act 2001, 2003, p 23.
85
Promotion of competition
312.
In considering whether unbundling of any form would promote competition, the
Commission must have regard to the efficiencies that will result, or will be likely to result
from that form. The promotion of competition is not of itself the purpose of the Act. The
Commission makes reference to this in its Guide, at paragraph 60, and in its Issues
Paper at paragraph 42:
Competition will be promoted where efficient access prices provide the potential
new entrant with incentives for entry which neither encourage inefficient entry
nor deter efficient entry.
313.
Telecom agrees with this approach in principle, and, as discussed above, submits that
the Commission is bound by this statement. Accordingly, the Commission must not
recommend any form of unbundling that does not:
(a)
encourage efficient entry; and
(b)
discourage inefficient entry.
314.
However, that while the conditions for efficient entry are relevant, they go only part of the
way to meeting the requirement that the Commission give precedence to the promotion
of dynamic efficiency. The existence of an access regime may reduce dynamic
efficiency even where access prices are set at the efficient level. For example, an
access regime that promotes use of an existing technology may delay the introduction of
a new technology, and may undermine the incentives for the access provider to invest in
that new technology.
315.
Telecom addresses the efficiencies of unbundling more fully at section 8, but submits
that for unbundling to promote efficiency and provide long-term benefits for end users it
is necessary that:
(a)
the local loop be a natural monopoly over the medium to long term;
(b)
it be feasible for entrants to offer products that are differentiated from those
available under the wholesale regime; and
(c)
access to unbundled elements be provided, at the least, at a price that fully
reflects the incumbent's cost of capital for local loop or PDN investment, and
the options that are provided to the entrant by the terms of unbundled access.
If any of these conditions are not met, then unbundling will not promote efficiency or
provide long-term benefits to end users.
316.
Telecom also submits that in addressing the Act's concern with the promotion of
competition for the long-term benefit of end-users, the Commission must clearly
differentiate those arguments that relate to regulatory responses to natural monopoly
and those arguments that relate to the promotion of entry by competitors. In particular,
the argument that unbundling assists competitors in staging the rollout of competing
networks is logically inconsistent with the claim that local access network or PDN is a
natural monopoly, and impossible to justify on efficiency grounds. Investment cost and
timing issues for potential entrants are not matters that justify regulatory intervention
under the Act. In addition, there can be no presumption that the transfer of the
incumbent's customers to an entrant whose presence in the market relies on regulatory
promotion of entry will provide any efficiency benefits in the short or long term. Thus,
the Commission must focus on assessing whether the local access network or PDN is a
natural monopoly given the cost structure of the existing networks and the potential for
bypass by competing technologies. Only if the Commission finds that a natural
86
monopoly exists will there be any basis for claiming that unbundling may promote
dynamic efficiency and provide long-term benefits to end users.
Long-term benefit of end-users
317.
The second section 18 consideration, long-term benefit of end-users of
telecommunications services, is also subject to the "efficiencies that will result, or will be
likely to result". In regard to this consideration however, the Commission's guidelines
state only that:
The long-term benefit of end-users will generally be promoted by lower prices
on a sustainable basis, higher quality of service, and greater choice.
318.
Telecom notes that Government officials advised Parliament, at the Select Committee
stage of the Telecommunications Bill 2001, that the phrase "efficient long-term benefits
of end-users of telecommunications services" was "equivalent to" net economic benefits,
and was intended to be a "robust proxy for the whole of society".84 Despite this, the
Commission has interpreted the phrase in a somewhat narrower fashion, as noted in
paragraph 45 of the Issues Paper.
319.
The Commission also states at paragraph 47 that sustainability of low prices is a key
concept in interpreting the meaning of "long-term". Telecom considers this definition to
be inadequate because there is no necessary association between lower prices and
dynamic efficiency. Policies that promote static efficiency may be viewed as providing
low prices on a sustainable basis with the existing technology, whereas the focus in
markets subject to rapid technical change must be on the benefits resulting from the
development of new technologies. Consequently, Telecom prefers, and invites the
Commission to endorse, the ACCC's view, that:
"long-term" should be interpreted from an economic perspective [in this regard,
the "long-term" is the time within which suppliers can vary all factors of
production (eg in response to an increase in consumer demand]
and that
"the long term is not a set period, but rather the time taken for the substantive
consequences of a declaration decision to unfold".
320.
Consideration of the long-term requires the Commission to look beyond the usual 2 year
period when assessing the effects of unbundling, and hence when defining the factual
and counter-factual. This is because even the static effects of the impact of unbundling
will not be fully observable in a 2 year time period, and the dynamic efficiency impacts to
which the Commission must assign precedence certainly cannot be assessed over such
a short time frame. The Commission implicitly recognises this where it discusses the
claimed benefits of unbundling (such as at paragraph 59) and it must apply a consistent
approach to the time frame for the analysis. The Commission will therefore need to look
over a five to 10 year time frame to assess the impact of unbundling on static efficiency
associated with the existing access technology, but also to assess the impact of
unbundling on the incentives for Telecom and other parties to invest in alternative
access technologies.
Efficiencies to be had
321.
84
In assessing whether an act or omission is for the long-term benefit of end-users of
telecommunications services, the Commission must consider the efficiencies that will
Ministry of Economic Development, Clause by clause analysis of submissions on Telecommunications Bill Parts 1-5, 23 July 2001 (released under the Official Information Act 1982), clause 15.
87
result from the recommended action (section 18(2)). In its published guidelines, the
Commission identified three forms of efficiency (paragraph 64):
322.
(a)
allocative efficiency: where service providers use their resources to produce
telecommunications goods and services most valued by end-users;
(b)
productive efficiency: where service providers produce telecommunications
goods and services at least cost (and to minimise industry-wide costs); and
(c)
dynamic efficiency: where service producers invest, innovate and improve
telecommunications services, increase productivity and lower costs through
time.
The Commission also anticipated likely tensions between static efficiencies (allocative
and productive) and dynamic efficiencies, and set out its views on how it would resolve
such trade-offs (paragraphs 68 and 113):
Where there are tensions between short-term allocative efficiency and long-term
dynamic efficiency, the Commission takes the view that the latter will generally
better promote competition for the long-term benefit of end-users.
323.
It further observed that dynamic efficiency will occur where providers are "able to
achieve a reasonable risk-adjusted return on the capital they invest in the industry"
(paragraph 64), and concluded that it would promote the statutory purpose (section 18)
to determine terms of supply that (paragraph 115):
… encourage efficient investment in infrastructure over the medium to long-term
by giving a reasonable return on the capital invested in networks and for the
production of services.
324.
This policy guideline commits the Commission to a course of action from which it may
not waiver. When making the necessary trade-offs, the Commission must recognise the
need for dynamic efficiency and accord due weight to it. Evidence that the Commission
had failed to do so but rather was drawn by short-term expediencies
(allocative/productive efficiency) would invite challenge in the courts.
325.
Telecom agrees that this policy is the correct one, taking the above principles of
interpretation into account. The specific elements of the statutory purpose in section 18
and the wider statutory purpose evidenced by the statements quoted in paragraph 302
leave the Commission little (if any) room for manoeuvre. The Commission's current
policy of promoting dynamic over static efficiencies is consonant with the statutory
mandate: to promote the "long-term benefit of end-users of telecommunications
services" (section 18) while stimulating investment and innovation, and allowing "as
much market as possible".
326.
Telecom addresses the economic rationale for unbundling more fully at section 8.
327.
Telecom submits:
(a)
the Commission may not consider Schedule 1;
(b)
the time for that to be done, if at all, will be when the Commission is asked to
make a determination of the terms of access to any designated or specified
service after that service has been added to Schedule 1;
(c)
the Commission must have regard to the wider statutory context and the
presumption against interference with property rights when interpreting the Act;
and
88
(d)
in considering whether unbundling of any form would promote competition for
the long term benefit of end-users, the Commission should place paramount
importance on identifying dynamic efficiencies or inefficiencies that would be
likely to result.
89
6.2
Interpretation of section 64
328.
With the above principles of interpretation in mind, we now turn to the interpretation and
application of section 64 of the Act:
64
Mandatory review of local loop unbundling and access to, and
interconnection with, Telecom's fixed PDN
(1)
329.
The Commission must, within 24 months after the
commencement of this Act, deliver to the Minister a final report
under clause 4 of Schedule 3 on whether or not each of the
following services should be designated service or a specified
service:
(a)
access to the unbundled elements of Telecom's local loop
network:
(b)
access to the unbundled elements of, and interconnection
with, Telecom's fixed PDN.
(2)
For the purposes of sub-section (1) and subject to sub-section
(3), the procedure set out in Part 1 of Schedule 3 applies with any
necessary modifications.
(3)
The Commission must not commence its investigation under
clause 1 of Schedule 3 earlier than 12 months after the
commencement of this Act.
In applying the above principles of interpretation to section 64, and the relevant
definitions, of the Act, the Commission must:
(a)
investigate unbundling only of those parts of Telecom's networks that are
clearly within the Act's definitions of "local loop network" and "fixed PDN";
(b)
refuse to investigate elements outside those boundaries;
(c)
in the absence of clear and unequivocal language in section 64, or in any of the
relevant definitions in the Act, interpret them in the manner which least
interferes with Telecom's property rights;
(d)
apply the Act's policy of only "as much Government regulation as necessary" in
interpreting and applying its powers under the Act; and
(e)
investigate only those forms of unbundling that are technically and
operationally practical, having regard to Telecom's networks.
Importance of the "local loop network" and "fixed PDN" definitions
330.
Telecom agrees with the Commission's conclusion in paragraph 48 of the Issues Paper
regarding the central importance of the interpretation and application of definitions of the
terms "local loop network" and "fixed PDN" to determining the scope of the
Commission's investigation, but for additional reasons. The Commission considers "too
broad a definition" of those terms would lead to uncertainty and have undesirable
consequences in terms of innovation and investment. Telecom agrees, but also submits
that a definition not clearly and unequivocally justified by the language of the Act would
breach the obligations of the Commission recorded in the preceding paragraph of this
submission.
90
Key areas of uncertainty in section 64
331.
Telecom wishes to comment on the following main areas of uncertainty in regard to
section 64:
(a)
whether the section permits the Commission to separately investigate (i)
access to the unbundled elements of Telecom's local loop network and (ii)
access to the unbundled elements of, and interconnection with Telecom's fixed
PDN, separately;
(b)
the Commission's technology-neutral approach;
(c)
the degree of unbundling of Telecom's local loop and fixed PDN that is
contemplated by section 64;
(d)
how the "local loop network" definition, used in section 64(1)(a) should be
interpreted and applied to Telecom's networks; and
(e)
how the "fixed PDN" definition and the term "interconnection with", used in
section 64(1)(b), should be interpreted and applied to Telecom's networks.
Separate investigations under section 64
332.
In paragraph 24 of the Issues Paper, the Commission states that it may separate "the
reviews under section 64(1)(a) and 64(1)(b)" into two reviews. Section 64 requires the
Commission to deliver to the Minister "a final report". Part 1 of Schedule 3, which sets
out the procedure which must be followed by the Commission in carrying out "an
investigation" under section 64, is also phrased only in the singular. Telecom submits
that Parliament did not require or permit "two reports" or "two investigations" but
required that the Commission investigate regulated unbundling of Telecom's local loop
and fixed public data networks together.
The Commission's technology-neutral approach to section 64
333.
The Commission notes in paragraph 49 of the Issues Paper that where necessary it will
seek to avoid framing any definition in technology-specific terms, in order to allow the
access provider to determine the most efficient way of supplying the service, and to
minimise distortions in terms of technological and innovative developments. The
Commission should not consider potential unbundling in "technology-neutral" terms, for
the reasons discussed below.
334.
Section 64 permits designation or specification of a service or services, but the extent of
that service or those services is limited to two of Telecom's assets (its local loop network
and fixed PDN). If the service involves other assets, it would not be authorised by
section 64.
335.
A "technology-neutral definition of Telecom's local loop network and fixed PDN" as
proposed in paragraph 49 of the Issues Paper would not be a definition at all. The first
things which are to be defined if the Act is to be applied, are assets (ie, a local loop
network and a fixed PDN), not services delivered utilising those assets. If the
Commission recommends a service without first defining the assets to be used in its
delivery, it will not know whether it is requiring the utilisation of permitted assets or nonpermitted assets. If non-permitted assets were required, Telecom would obviously not
be required to provide them, and the service would, therefore, not be available;
336.
The problems which arise if this "asset first" approach is not taken could be illustrated as
follows:
91
(a)
at paragraph 58, the Issues Paper suggests that "… bandwidth is then rented
to the access seeker …", but does not explain how the lines to which the
access seeker may be given access under section 64 become "bandwidth".
"Bandwidth" is not an asset described in the "local loop network". Unless the
Commission identifies which assets will be utilised to enable this "bandwidth
rental" service, it may inadvertently expect the utilisation of non-permitted
assets;
(b)
paragraphs 59 to 63 of the Issues Paper discuss a situation where Telecom
might "install high speed access links to the customer premises and then
makes this access link available to third parties". They also discuss the
situation where Telecom "sells part of that bandwidth to different access
seekers". It is implied that such services involve installation of equipment to
derive such high speed line. The Issues Paper does not identify that
equipment. It seems likely that it would be on the network side of Telecom's
access multiplexer (for example, a DSLAM in the case of DSL lines). It is
uncontroversial that the line (customer facing) side of the local exchange
distribution frame is the farthest possible boundary for the assets subject to
section 64(1)(a). As Figure 6.1 below illustrates, an access multiplexer used
to provide high speed lines is beyond this point and so is a non-permitted
asset;
Customer
building
Telecom n/w
termination
“Local
Exchange”
Copper line
Building
entry or BDF
Maximum extent of local loop network
DSL
AM
MDF
Access Seeker
Assets required under
connection59-63
paragraphs
Figure 6.1: Bitstream access "high speed lines" in relation to the "local loop network"
(c)
at paragraphs 64 and 65, the Issues Paper discusses the situation in the US
where local and tandem switches and many other assets are made available to
access seekers, but these are clearly outside the definition of permitted assets
under section 64;
(d)
at paragraphs 66 and 67, the Issues Paper discusses "backhaul". The assets
that would be used to provide backhaul services are outside the "local loop
network" definition, and hence the scope of the Commission's investigation.
Figure 6.2 illustrates the parts of Telecom's networks that Telecom would be
required to provide access seekers with access to or transmission services
across in order to provide backhaul services. These parts are beyond the line
side of Telecom's local exchange distribution frames;
92
Customer
building
Distant
Exchange
“Local
Exchange”
Backhaul
Building
entry or BDF
Extent of local loop
network
MDF
Access
Seeker
equipment
to Access
Seeker's network
Figure 6.2: Backhaul in relation to the "local loop network"
337.
"Technology-neutral" terms will cause Telecom and access seekers unnecessary
difficulties of interpretation, leading to inevitable disagreements and costly and time
consuming dispute resolution. Section 18 of the Act requires the Commission to have
regard to the efficiencies that will result from an act or omission. Section 19 requires the
Commission to make the recommendation that it considers best gives effect to section
18. Framing unbundling in technology-neutral terms with these resultant uncertainties,
disagreements and disputes would result in less net efficiencies than framing it in
specific terms and, therefore, could not best give effect to section 18;
338.
The reason that efficiency may be reduced by the use of technology-neutral terminology
is that the rationale for unbundling is technology-specific. As noted above, the minimum
conditions required to justify unbundling are the existence of a natural monopoly and the
technical feasibility of product differentiation utilising unbundled network elements to
create more competition than is provided by reselling of the incumbent's wholesale
products. Both the definition of a natural monopoly and the feasibility of product
differentiation under unbundling must be assessed in relation to specific technologies
and associated cost structures. Even if the copper local loop was a natural monopoly in
the past, its natural monopoly status may be removed by the development of alternative
access technologies, and there would be no justification for any assumption that any
new access technologies such as cellular or wireless local access are natural
monopolies. Technology-neutral terminology will facilitate mandatory unbundling of
assets associated with new access technologies that are not natural monopolies, even
though unbundling cannot improve, but may well reduce, competition and efficiency in
these circumstances.
339.
Finally, the Act already provides the Commission with the mechanism to ensure
designated or specified services do not become outdated by technological advances, by
way of the discretionary powers of amendment of the description of designated or
specified services granted the Commission under section 1 of Part 1 of Schedule 3. The
use of technology-neutral terms would not, therefore, accord with the policy of the Act.
Summary of Telecom's submission on the Commission's technology-neutral approach to
section 64
340.
Unbundling involves expropriation of assets and, therefore, constitutes a serious
interference with private property rights. For this reason alone, the Commission must be
very specific in determining which of Telecom's assets each form of unbundling would
expropriate. Only then can it properly determine whether any form of unbundling would
promote competition for the long term benefit of end-users, and in particular, what
efficiencies will be likely to result. Telecom submits that the Commission must revise its
technology-neutral approach.
93
The degree of unbundling contemplated by section 64
341.
Paragraphs 52 to 67 of the Issues Paper conclude that it is unclear from the words of
section 64 whether the Commission is to investigate unbundling of Telecom's local loop
network as single unbundled elements themselves, or unbundling of their component
parts. The Commission has analysed a number of aspects of the definitions when
reaching this conclusion.
342.
A more direct analysis of the words of sections 64(1)(a) and (b) would avoid this
uncertainty. The assets which are subject to the investigation are those covered by the
terms "Telecom's local loop network" and "Telecom's fixed PDN", which are defined in
terms of lines between one specified point and another. Those assets, and only those
assets, may be subject to a recommendation. Whatever might be meant by the words
or concepts "access", "service", "unbundled", "network" or "elements", which the
Commission has discussed, those words or concepts can only be applied to those
defined assets.
343.
The Issues Paper suggests that reference to "elements" in section 64 might mean that
Parliament intended that, in respect of section 64(1)(a), parts of Telecom's lines might
be provided to access seekers. That would have the effect that Telecom would be left
with ownership of the whole line but be deprived of all the rights of ownership in respect
of the "part" allocated to the access seeker and, in effect, most of the rights in respect of
the remainder, which would become a stranded asset. Telecom would itself need
"access rights" in respect of its own line.
344.
There is nothing in the words of the Act to support this proposition. To the contrary, the
parliamentary history of the Act shows that Parliament decided against allowing access
seekers access to parts of Telecom's lines.85 The use of the words "network elements"
internationally is quite random and could not support the proposition. In fact, the type of
copper line sharing implied by the Commission when contemplated offshore is generally
the result of very specific legislating authority not present in the Act. As pointed out in
the "technology-neutral" submission, most forms of line sharing require utilisation of nonpermitted assets of Telecom.
345.
Given the absence of unequivocal words in the Act, the presumption against
interference with Telecom's property rights and the absence of any statutory context for
this proposal and the use of assets outside the ambit of section 64, Telecom submits it
is not authorised by the Act. These issues are discussed further below in connection
with "derived access" transmission systems.
Purpose of the Act
346.
347.
85
Even if there were any doubt or ambiguity in section 64(1)(a), the starting point for the
Commission should be to ask which of the available interpretations best accords with:
(a)
Parliament's intention that the Telecommunications Act impose only as much
regulation as necessary; and
(b)
the section 18 purpose statement.
Telecom refers to the Parliamentary quotations referred to at paragraph 302, which
envisage that regulatory interference would be a "backstop" or "last resort" which would
maintain "as much market as possible" and impose only "as much Government
regulation as necessary". As stated in paragraph 303, Telecom considers that the
At the Committee stage of the Telecommunications Bill, Ms Sue Kedgley, a Green member, moved
amendments through Supplementary Order Paper to allow access seekers to access Telecom's "local sub-loop".
The amendment was defeated. See Hansard, 5 December 2001). This porposed amendment is discussed
further at paragraph 365 of this submission).
94
Commission should interpret the wider statutory context of the Act as precluding
detailed, intrusive regulation except as a very last resort.
348.
349.
In regard to section 18, Telecom agrees with the Commission in Box 2.2 of the Issues
Paper that:
(a)
only access seekers receive benefits from higher levels of unbundling
additional to those provided by lower levels of unbundling; and
(b)
telecommunications end-users see no benefits from higher levels of unbundling
additional to any they may see from unbundling at only one access point.
The "arguments in favour" provided in this box are inconsistent with the matters that the
Commission is required to consider and should, therefore, be deleted. Telecom makes
this submission because it is not clear how providing cost transparency, allowing access
seekers to acquire only the network elements "that they want" and providing the access
seekers with flexibility to choose the technology and services they wish to offer, will
promote dynamic efficiency or the long-term benefits of end-users. These arguments
appear to be more relevant to the development of a case to reduce the costs of entry
than a case for the promotion of efficiency and are thus inconsistent with the matters
that the Commission must consider.
Summary of Telecom's submission on the level of unbundling contemplated by section
64
350.
The Commission must only investigate whether the services of unbundled access to
Telecom's local loop or fixed public data network, as single elements themselves, be
provided.
Interpretation and application of section 64 (1)(a)
351.
Section 64(1)(a) refers to "access to the unbundled elements of Telecom's local loop
network". "Local loop network" is defined by the Act as:
. . . all lines, including cables and aerial lines, between a residential or business
telecommunications services user's distribution point where it enters the user's
building (or, in the case of the commercial buildings, the building distribution
frames) and the local telephone exchange distribution frame or optical fibre
distribution frame or equivalent facility.
"Line" is defined as:
line
(a)
means a wire or a conductor of any other kind (including a fibre optic
cable) used or intended to be used for the transmission or reception
of signs, signals, impulses, writing, images, sounds, instruction,
information, or intelligence of any nature by means of any
electromagnetic system; and
(b)
includes
(i)
any pole, insulator, casing, fixture, tunnel, or other
equipment or material used or intended to be used for
supporting, enclosing, surrounding, or protecting any of
those wires or conductors; and
(ii)
any part of a line
95
352.
The Commission's investigation into unbundling Telecom's local loop network is
constrained by the "local loop network" definition. The Commission cannot investigate
any form of unbundling that would require Telecom to provide access seekers with
access to parts of Telecom's network that are outside the "local loop network".
Identifying the boundaries of the "local loop network" definition is therefore of central
importance in identifying the scope of the Commission's investigation.
Network side boundary of the "local loop network" definition
353.
354.
Where the lines connecting an end-user to a local exchange distribution frame are
copper-only the boundaries of section 64(1)(a) are uncontroversial:
(a)
on the end-user's side, the boundary is the end-user's "distribution point where
it enters the end-user's building (or in the case of commercial buildings, the
building distribution frames)". In Telecom network terms, this is either at the
Building Distribution Frame ("BDF") or at an External Termination Point ("ETP")
at the building entry (Note that not all non-BDF premises are equipped with an
ETP, however it is Telecom practice to equip an ETP whenever work is
undertaken at such customer's premises); and
(b)
on the network side, the boundary is the local exchange distribution frame. In
Telecom network terms, this is at the Main Distribution Frame ("MDF") in a
building housing a Local Exchange ("LX"), Remote Line Unit ("RLU") or other
service platform interface equipment.
Figure 6.3 shows how the definition of "local loop network" would map onto Telecom's
Access Network in such a case, and where an access seeker would get access to it if
unbundling of Telecom's local loop network was designated or specified.
Customer
building
Telecom n/w
termination
“Local
Exchange”
Drop
Distribution
Feeder
Cu
Cu
Cu
Building
entry or BDF
Pillar or
terminal
CrossConnection
Cabinet
i/f
MDF
Maximum extent of local loop network
Figure 6.3 The "local loop network" mapped onto Telecom's access network
355.
356.
Similarly, where the lines connecting an end-user to a local exchange distribution frame
are fibre only, and that fibre is used to deliver services to one customer (ie, is not a
shared access), the boundaries of section 64(1)(a) are uncontroversial and similar to
those for the copper-only case:
(a)
on the end-user's side, the boundary is the end-user's building optical fibre
distribution frame; and
(b)
on the network side, the boundary is the local exchange optical fibre
distribution frame ("OFDF"). In Telecom network terms, this is at the OFDF in
a building typically housing an LX or RLU.
Figure 6.4 shows how the definition of "local loop network" would map onto Telecom's
Access Network in such a case, and where an access seeker would get access to it if
unbundling of Telecom's local loop network was designated or specified.
96
Customer
building
Telecom n/w
termination
“Local
Exchange”
Distribution
Feeder
Fibre
Fibre
i/f
OFDF
BDF
Maximum extent of local loop network
Access
Seeker
connection
Figure 6.4 "Local loop network" mapped onto Telecom's access network with dedicated
fibre to the customer
357.
Despite this, where an end-user is served by fibre-only lines, the Commission should
refuse to consider unbundling in order that participants in New Zealand's
telecommunications industry are encouraged to continue to upgrade its fixed access
infrastructure. As discussed earlier in this submission, fibre is slowly replacing copper
as the fixed access medium of choice. However, international experience of fibre
unbundling has shown that it has a negative effect on industry participants' continued
investment in fibre access infrastructure. Indeed, the FCC, in its Triennial Review
recently recommended the removal of all obligations on ILECs to unbundle any new
fibre lines for precisely this reason.
358.
However, while the boundaries of section 64(1)(a) are fairly uncontroversial with respect
to copper-only or fibre-only access, where the lines connecting an end-user to a local
exchange are a combination of a copper line and a derived access transmission
system,86 the boundaries are less certain. This case might be referred to as a "hybrid"
line. While the boundary on the end-user's side does not change, there are several
possible interpretations of where the boundary of section 64(1)(a) is on the network side:
(a)
86
at the point in the network where the copper pair connected to an end-user's
building (or in the case of a commercial building, the building's distribution
frame) terminates at the remote terminal of the access transmission system
(for example, at an active cabinet with a fibre feeder system). This
interpretation excludes the transmission system component of a hybrid line
from the definition of "local loop network", and considers the remote terminal to
be an "equivalent facility" to the local exchange. Figure 6.5 shows how the
"local loop network" definition would map onto Telecom's network in the case
of a hybrid line on a fibre feeder system; or
A derived access transmission system is any system which 'derives' a customer connection from a system
which supports multiple customer accesses over a shared physical facility (eg fibre optic transmission system or
PCM system), or from a radio transmission system.
97
Customer
building
Telecom n/w
termination
“Local
Exchange”
Drop
Distribution
Feeder
Cu
Cu
Fibre
Building
entry or BDF
Active
Cabinet
Pillar or
terminal
i/f
OFDF
Extent of local loop network
Figure 6.5: Hybrid line with network boundary at remote terminal of access transmission
system
(b)
at a distribution frame (optical or copper) in the local exchange. This
interpretation includes the transmission system component of a hybrid line in
the definition of "local loop network". Figure 6.6 shows how it would map onto
Telecom's network.
Customer
building
Telecom n/w
termination
“Local
Exchange”
Drop
Distribution
Feeder
Cu
Cu
Fibre
Building
entry or BDF
Pillar or
terminal
Active
Cabinet
i/f
OFDF
Extent of local loop network
Figure 6.6: Hybrid line with network boundary "local exchange"
359.
"Local loop network" should be interpreted to exclude derived access transmission
systems. Telecom submits the following six reasons why this interpretation should be
preferred.
Limitations of the "local loop network" definition
360.
In order to provide access seekers with access to an individual end-user connection
Telecom would be required to provide those access seekers with access to equipment
that is not included in the "local loop network" definition: the equipment required to
provide access to an individual customer connection (the "SDH node") is on the network
side of the local exchange MDF or OFDF as illustrated by Figure 6.7 for the case of a
fibre feeder system. It is only at the SDH node that it is possible to derive a circuit to an
individual end-user, whose copper distribution line has been aggregated into a fibre
feeder. As Telecom has already stated (at paragraph 352) the Commission cannot
consider any form of local loop unbundling that involves parts of Telecom's networks
that are outside of its "local loop network".
98
“Local
Exchange”
Distribution
Cu
S
D
H
Feeder
Fibre
Active
Cabinet
OFDF
Switch
S
D 2M i/f
H
Individual customer line cannot be
accessed
this point
(if here)
Individualbefore
customer
line cannot
be
accessed here
Figure 6.7: Access to fibre feeder system at local exchange87
No Telecommunications Act purpose is served
361.
The general intent of the provision of unbundled local loops is to enable support of
transmission forms and systems of the access seeker's choosing, whereas access
transmission systems provide customer connections which are specific to the service
being provided by the access provider (for example, a POTS service or a 64kbit/s data
service), and often employ proprietary technologies. If "unbundling" required them to be
provided to the access seeker, that access seeker would have no choice but to pass on
the technical service to the end user and thus, become a reseller of Telecom's network.
Equivalent facilities available at remote terminals
362.
The "local loop network" definition specifically provides for access seekers to get access
to unbundled copper pairs at the remote terminal of a derived access transmission
system where they are served by a hybrid line. The use of the words "or equivalent
facility" after "local exchange distribution frame or optical distribution frame" in the
definition are clear evidence that Parliament contemplated that the "local loop network"
would end before the local exchange distribution frame in certain circumstances (ie,
where an end-user is served by a hybrid line). Wherever copper pairs terminate at a
remote terminal, they do so on a distribution frame - a directly equivalent facility to the
distribution frames in Telecom's local exchanges.
"Line" definition
363.
The "local loop network" definition is confined to "lines", where the definition of "lines"
clearly describes a physical facility, rather than a logical or derived channel in a
transmission system. Derived channels are a service provided by Telecom utilising its
skills, assets and proprietary systems and do not form "part of a line".
Presumption against interference with private property rights
364.
The presumption against interference with private property rights clearly applies in this
instance, with the result that any ambiguity in the "local loop network" definition be
construed in a manner which excludes unbundling of derived access transmission
systems from section 64(1)(a).
Statutory context
365.
87
At the committee stage of the Telecommunications Bill, Ms Sue Kedgley, a Green
member, moved amendments through Supplementary Order Paper to redefine "local
Note that access to an individual customer connection may not be technically feasible even at this point,
depending on the capabilities of the transmission system and the nature of its connection to service platforms.
99
loop unbundling" (Hansard, 5 December 2001). The proposed amendments were to
replace the "local loop network" definition with definitions of Telecom's "local loop",
"local sub-loop" and "shared loop". The amendment was voted down by 72 to 38 votes
in the House. This clearly shows that Parliament intended that fibre feeder lines be
excluded from the "local loop network" definition. The courts will reason inferentially
from amendments (or attempted amendments) to Bills, where such amendments
confirm the parliamentary legislation.
366.
Finally, Telecom notes that the words used in the statutory definition of the "local loop
network" do not include any part of the MDF or OFDF or use of the MDF or OFDF. This
is because the local loop network is limited to the "lines … between [users] . . . and the
local exchange distribution point . . ." [Telecom emphasis] in contrast to the definition of
fixed PDN which includes a PDN that connects an end user's building . . . to a data
switch . . . and includes the data switch . . . " [Telecom emphasis].
Summary of Telecom's submissions on the interpretation of section 64(1)(a)
367.
368.
Broadly, end-users of Telecom's local loop network can be served by three different
types of access:
(a)
copper-only;
(b)
fibre-only; and
(c)
a combination of a copper distribution line and a derived access transmission
system.
The following table outlines the boundaries of the "local loop network" definition, and
thus section 64(1)(a):
Access
End-user-side boundary
Network-side boundary
Copper-only
End-user's BDF, or an ETP
MDF in a building housing an LX, RLU or
other
service
platform
interface
equipment
Fibre-only
End-user's OFDF
OFDF in a building typically housing an
LX or RLU
Copper/derived access
transmission system
End-user's BDF, or an ETP
The point where the copper pair
terminates at the remote terminal of the
access transmission system
Section 64(1)(b)
Preliminary matters
369.
Section 64(1)(b) refers to "access to the unbundled elements of Telecom's fixed PDN".
"Fixed PDN" is defined as:
Fixed PDN
(a)
means a PDN, or that part of a PDN, that connects an end-user's building
(or, in the case of commercial buildings, the building distribution frames) to
a data switch or equivalent facility; and
(b)
includes the data switch or equivalent facility and that part of the overall
telecommunications link within the building that connects to the end users
equipment
100
370.
As discussed above, section 64(1)(a) and the "local loop network" definition are, with the
exception of hybrid lines, relatively unambiguous. By contrast, section 64(1)(b) and the
"fixed PDN" definition. In many cases, the words used in section 64(1)(b) and the "fixed
PDN" definition are words that have historically been fairly well understood in regard to
telephony networks, but not data networks. The similarities in drafting of the "fixed
PSTN" and "fixed PDN" definitions are obvious, yet the phraseology and technology
used by telephony and data networks, which have evolved rapidly in recent times, are
different.
371.
In this context, Telecom has attempted below to provide the Commission with an
analysis of what it considers are the major uncertainties of section 64(1)(b) and the
"fixed PDN" definition, and how they could best be resolved. Where Telecom considers
there to be some clarity, for example in relation to the "data switch of equivalent facility"
referred to in the "fixed PDN" definition, it has provided the Commission with information
as to how that part of the section maps onto Telecom's data network architecture. For
the reasons given elsewhere, if there is any ambiguity, only the least intrusive form of
unbundling would be lawful.
372.
For there to be a recommendation under section 64(1)(b), there must be identified:
(a)
a "network";
(b)
that is "public";
(c)
that carries "data"; and
(d)
that is owned by Telecom.
Once that network has been identified there must also be identified:
(e)
that part of it "that connects an end-user's building … to a data switch or
equivalent facility";
(f)
"that part of the overall telecommunications link within the building that
connects to the end-user's equipment"; and
(g)
a "data switch or equivalent facility".
Each will be considered in turn.
Network
373.
"Network", in a data sense, is an imprecise term. At its clearest, the term can be used to
describe a "complete" network; a collection of assets which have been designed, and
which are owned and operated, as an integrated, interdependent whole. Each part is
linked, and is designed to be linked, to all others or even all parts to all other parts, in a
logical manner. Telecom's DSTN and ATM network satisfy these criteria.
374.
The term "Network" has also been used to refer to a collection of assets which were not
designed to be linked together, or operated an integrated, interdependent whole, but
which have been made to perform as such. Telecom's X.25 Packet and IP "networks"
are examples. Each consists of certain assets (X.5 Packet switches in the case of the
X.25 network, and routers in the case of the IP network) that are designed to be part of
complete X.25 and IP networks, but are at present linked to parts of the DSTN and ATM
network. However, this variant of the term "network" blurs the line between networks
and services.
101
375.
Finally, the term "network" is sometimes used to refer to "logical" networks, which do not
consist of any unique assets, but instead use the assets of other networks in order to
provide logical services. Telecom's Frame Relay service is an example of this: it uses
the assets of the DSTN and the ATM network. This variant is in practice a service.
376.
Telecom could therefore be said to have the following data networks:
•
X.25 Packet Network;
•
Digital Services Transport Network;
•
Asynchronous Transfer Mode network; and
•
IP network.
But Telecom considers only its DSTN and ATM network are properly referred to as
networks under section 64.
377.
The components of each, such as the cross connects, switches, signalling systems and
fibres, wires and radio transmission assets are the network. Thus, the xDSL or Ethernet
assets owned by Telecom are not networks, contrary to the Issues Paper suggestion.
As discussed above, the Frame Relay Service is a service.
Public
378.
The use of this term in relation to Telecom's data networks is problematic. A network is
public under the Act, only if it is "intended for use, in whole or in part, by the public".
This implies that the public may "use" the network, ie determine what assets will be
utilised, how they will be utilised or when a service may be interrupted or stopped. In
this sense, the PSTN is a public network. The only truly "public" data network in this
sense, however, is the Internet. Telecom provides data transmission services using all
its networks, including its own transaction services network, its alarm transport and its
Eftpos transport but no member of the public may use any of them in this sense except
in the case of the X.25 Packet network. The other networks are not used by the public,
but are facilities used by Telecom to offer particular circuits or services to customers.
Nonetheless, the existence of the X.25 Packet network as a public network means that
section 64(1)(b) may still apply (and even this assumes that the X.25 Packet network is
a "network". As discussed above, even this is questionable).
Data
379.
All telecommunications networks carry data but it seems the Act does not treat all
telecommunications networks as data networks. Telecom agrees that this is a useful
distinction if properly applied. Telecom submits that a network which is primarily
designed and used to carry voice is not a data network. For that reason, Telecom's
ISDN network is not a data network.
380.
Telecom accepts that its interpretation of "PDN" as simply Telecom's X.25 Packet
network might be viewed as contentious and to this end, but without prejudice to its
position set out above, Telecom has provided information below as to how the "fixed
PDN" definition would map onto each of its other candidate for the description "PDN".
That part of the public data network that connects an end-user's building to a data
switch or equivalent facility
381.
The only asset subject to investigation is the "fixed PDN" which can be no more
extensive than an asset "that connects an end-user's building … to a data switch or
102
equivalent facility" and includes the data switch or equivalent facility. That definition
excludes:
•
"trunk transmission between switches" referred to in the second bullet in
paragraph 70 of the Issues Paper;
•
any wider assets such as the "network" referred to in paragraph 77 of the
Issues Paper;
•
"leased lines" and "private circuits" of the type described in paragraph 76 of the
Issues Paper;
and that the Act does not permit:
•
substitution of the term "tails" as a description of the relevant assets as
suggested in paragraphs 73-77 of the Issues Paper;
•
substitution of "tails" with any particular "principal application" as suggested in
paragraph 77 of the Issues Paper;
•
a recommendation by the Commission in respect of "Telecom's fixed access
network" as is suggested in paragraph 80 of the Issues Paper, and less still is
"fixed PDN" to be determined by the "types of switches or electronics that are
attached to the access network at the local exchange" as is stated there,
and that:
382.
383.
•
"Telecom's local data tails" is not the fixed PDN, and the fixed PDN is not a
"dedicated circuit[s]" as suggested in paragraph 81 of the Issues Paper;
•
the "access infrastructure of the Digital Services Transport Network" is not the
fixed PDN as suggested at paragraph 70, first bullet point.
Telecom also submits that the Issue Paper's discussion at paragraphs 78-82 sometimes
confuses the assets included in "PDN" with those included in a "fixed PDN". While the
former includes the latter, the reverse does not apply. Those paragraphs also
sometimes confuse the assets with the services those assets are used to provide:
•
the "data network" referred to in paragraph 78 seems to be intended to mean
the PDN;
•
the "services" in paragraphs 78 and 79 are, in some case, networks not
services.
To be a fixed PDN an asset must be part of a PDN. Thus:
•
an unconditioned copper loop from a local exchange to a user's building is not
part of X.25 any of Telecom's data networks. Potentially unconditioned copper
loops are part of those data networks, but that potential will not be realised until
the additional investment is made to make them part of these networks, such
as installation of an xDSL modem or other enhancements to make them
suitable for that use, and then only if they are in fact used as part of that
network;
•
a copper loop conditioned by an xDSL modem may be a part of a data
network; and
103
•
fibre from the exchange to a user will almost certainly be part of one of
Telecom's PDNs, if it has an Ethernet connection and otherwise has the
investment required to form part of that network.
That part of the overall telecommunications link within the end-user's building
384.
"telecommunications link" is defined in the Act as:
… any line, radio frequency, or other medium used for telecommunications.
385.
The "line" definition is stated at paragraph 350.
386.
"telecommunications" is defined in the Act as:
(a)
means the conveyance by electromagnetic means from one device
to another of any encrypted or non-encrypted sign, signal, impulse,
writing, image, sound, instruction, information, or intelligence of any
nature, whether for the information of any person using the device or
not; but
(b)
does not include any conveyance that constitutes broadcasting.
387.
The above definitions clearly exclude Telecom's customer located network equipment
located within end-users buildings, but on the network side of the connection to the end
user's equipment, from the "fixed PDN" definition.
The definition of
"telecommunications" provides expressly states that "telecommunications" is the
conveyance of signs, signals and impulses etc from one device to another. The clear
implication must be that the processing of those signs, signals, impulses etc that occurs
within those devices is not "telecommunications".
388.
This interpretation accords with the use of the term "telecommunications" in the
"telecommunications link" definition.
Lines and radio frequencies are solely
transmission media, and do not process signs, signals or impulses. The words "or other
medium" in the definition must also be read as ejusdem generis with "any line or radio
frequency", such that only other pure transmission mediums are included within the
definition. It also accords with the presumption against interference with property rights.
Data switch or equivalent facility
389.
Telecom agrees with the Commission's suggestion at paragraph 87 that the "data switch
or equivalent facility" referred to in the "fixed PDN" definition is the first "data switch or
equivalent facility" in the network with which there is, or potentially could be,
interconnection. Section 64(1)(b) clearly contemplates that interconnection be available
at the network side boundary of the "fixed PDN" definition, which is the first "data switch
or equivalent facility".
390.
The term "data switch or equivalent facility" is undefined in the Act. It suggests that a
"data switch" is a specific piece of equipment, with specific characteristics against which
other equipment can be compared for equivalence. However, many of the technologies
that Telecom's networks are based upon do not employ devices called "switches" at all.
Nonetheless, the function with which the term "switching" is commonly associated can
be defined in general terms, and devices within Telecom's network identified as capable
performing that function. Telecom submits therefore, that the term "data switch or
equivalent facility" refers not to specific pieces of equipment on Telecom's network, but
rather to the points in Telecom's network where certain functionalities are available.
Telecom discusses below what these key functional criteria of the "data switch or
equivalent facility" are.
104
391.
In general technical usage, switching is a function which involves the ability to direct
telecommunications traffic under user control (ie the end-user determines the
destination, and the "switch" simply directs the traffic towards that destination) or on a
pre-configured basis , from any port (logical or physical) on a device to any other port, or
at least to one of a number of ports. In this sense, a switching function may be
distinguished from other functions performed by multi-port devices such as multiplexers
or hubs. A multiplexing function for example, is one which maps traffic from any of a
number of "tributary" ports to a single "aggregate" port, and vice versa. A hub function
is one that that simply replicates traffic appearing at one port to all other ports (a hub is
in effect a multi-port repeater). A switching function expresses selective traffic mapping.
392.
Such a switching function may be called cross-connection, routing or switching,
depending on the technology employed, and other considerations such as whether the
traffic mappings are static or vary under end-user control or information contained within
the data traffic (eg packet addresses). In saying this however, it should be noted that
network elements are often named for the dominant function which they perform, even
though they may perform other functions as well. Thus, a multiplexer may include a
cross-connect functionality, or an ATM switch may include a packet routing function.
393.
Telecom submits therefore that one key criteria which an asset must satisfy in order to
be classed as a "data switch or equivalent facility" is the ability to direct traffic between
different external interfaces on the asset. In the context of unbundling, a switch must
necessarily enable traffic from interfaces facing users to be directed to interfaces facing
access seeker's networks (and vice versa).
394.
Telecom submits that the other criteria for the "data switch or equivalent facility" referred
to in the "fixed PDN" definition is the ability to allow an access seeker's network to
interconnect. Section 64(1)(b) clearly contemplates that interconnection would be able
to occur at the "data switch or equivalent facility". This interpretation accords with what
is accepted to be the primary policy objective of unbundling: the removal of any access
bottlenecks. At the points in its network where these criteria are met, Telecom could
provide access seekers with access to data circuits to individual end-users.
Summary of Telecom's submissions on the "fixed PDN" definition
395.
It is uncertain which of Telecom's "networks" are "public data networks" as defined in the
Act. On one interpretation, none of its "networks' satisfy all of the criteria, and on
another only, its X.25 Packet network does. This uncertainty aside however, Telecom
considers that the boundaries of the "fixed PDN" definition, irrespective of which
"networks" they are applied to, are fairly clear.
396.
On the end-user-side, the boundary is the point inside the end-user's building where
Telecom's transmission media such as lines and frequencies connect to the end-user's
equipment. Telecom notes however that where Telecom has installed devices or
equipment which perform more than merely transmission functions, these are excluded
from the definition. On the network-side, the boundary is the first point in Telecom's
"networks" at which traffic from individual end-users may be directed to interface facing
access seeker's networks (and vice versa), and at which access seekers can
interconnect with Telecom.
Interconnection
397.
While Telecom accepts that Parliament clearly intended that interconnection should be
possible at the "data switch or equivalent facility", Telecom submits that the
Commission's suggested interpretation of the term "interconnection with…Telecom's
fixed PDN" at paragraph 69 is incorrect.
105
398.
The uncertainty regarding the use of the term "interconnection" in section 64(1)(b) arises
both out of the context in which that term is most commonly used (which is in relation to
the interconnection of local telephone networks), and the necessity for data
interconnection to operate at both a physical and logical level.
399.
The term "interconnection" is most commonly used in relation to interconnection of local
telephone networks. In this instance, interconnection is necessary to enable the
customers of any local telephone network to communicate with users of another
telephone network without themselves also having to be customers of that other
network.
This "any-to-any connectivity" purpose of interconnection has limited
application in data networks, however, as for all leased line and private network services
(the majority or data services), the same customer is served at all locations, and can
thus choose to subscribe to services of a single network and achieve connectivity
between all locations.
400.
It also addresses a different problem to unbundling. It deals with the situation where
one needs to be able to communicate with any given member of the population of users
at the instant that one decides to have that communication, irrespective of the fact that
they are served by another provider's network. Instantaneous any-to-any connectivity is
the need. The competitive bottleneck is the inability of an entrant to economically
establish this sort of connectivity to the entire population of users. The competitive
provision of data services does not rely upon this type of any-to-any connectivity, and
therefore Telecom submits that in this form interconnection to the fixed PDN is not
required.
401.
Interconnection as a concept refers to the connection of an access seeker to the
"middle" of a network (that is, at some point between those locations at which end-users
connect to the network). As Telecom stated in its Business Wholesale submission (and
as quoted by the Commission in paragraph 308 of the Issues Paper), interconnection is
not necessary to enable interworking between data services provided by different
networks, as connection between such services at their respective end-points achieves
the necessary levels of interworking required for an end-to-end retail service to be
provided..
402.
"Interconnection" can also simply refer to the physical connection of two networks.
However, the use of the term "interconnection" in section 64(1)(b) but not section
64(1)(a) implies something more than just a physical connection.
Physical
interconnection is also required to achieve local loop unbundling, as an access seeker
must physically connect to the local loop network in order to use unbundled local loops,
yet the Act makes no reference to interconnection in this context. Therefore, the
interconnection referred to in section 64(1)(b) must be something different again.
403.
The local telephone network form of interconnection illustrates that interconnection in a
physical sense may require more than just a simple physical connection to reflect the
purpose of that interconnection. In relation to interconnection with Telecom's fixed
"PDN", the nature of the interface, and the protocols employed by communications that
are to be delivered across that interface will define the form of interconnection required.
As described later, in section 7.1, without this interworking, physical interconnection of
data networks would in some cases be largely useless. Telecom therefore submits that
the interconnection referred to in section 64(1)(b) will differ depending on the specific
technical nature of the point at which unbundled access to Telecom's "fixed PDN" is
proposed, but will nevertheless require more than simple physical interconnection.
404.
Telecom also submits that the Commission's conclusion in paragraph 69 that
interconnection implies inclusion of switch-to-switch transport is incorrect. Provision of
such transport is not necessary to achieve the objective of unbundling (access to a
circuit to the end user) or to achieve interconnection of Telecom's network with access
seekers' networks. Therefore, the purpose of the Act, which dictates that regulation
106
must only be imposed where "necessary", and expounds the least detailed and intrusive
forms of regulation as possible, and the presumption against interference with private
property rights dictate that the Commission must interpret the words "interconnection
with" so as to exclude switch to switch transport.
Summary of Telecom's submissions on interconnection
405.
Telecom submits that the interconnection referred to in section 64(1)(b) requires
something more than simple physical connection. The "something more" will differ
depending on the specific technical nature of the point at which unbundled access is
proposed. However, interconnection does not require, and should not be interpreted as
requiring, switch-to-switch transport.
Mapping section 64(1)(b) onto Telecom's networks
406.
Telecom's use and design of its networks is optimised for the delivery of its own retail
services, and does not necessarily take advantage of all available functionality of all of
its equipment. Where the functionality required to satisfy the criteria set out above for
the term "data switch or equivalent facility" is available at a point in Telecom's network,
but that element is not presently enabled or used by Telecom for those functions,
Telecom submits that the purpose and statutory context of the Act, and the presumption
against interference with private property rights require that it should be considered by
the Commission as a candidate for the "data switch or equivalent facility". If that point is
the closest of all candidate points to end-users, then the Commission must interpret it as
the "data switch on equivalent facility" referred to in the "fixed PDN" definition.
General case
407.
Figure 6.7 below illustrates the general architecture of Telecom's data networks, which
comprise access, aggregation and core components. Access provides connectivity from
the customer premises to an Telecom network facility (a cabinet or building) at which
multiple customer accesses are aggregated, and then linked by transport infrastructure
to one of a small number of core sites. Telecom discusses these components more fully
below.
Aggregation site
Customer
building
access
'mux'
'Core' site
transport
Network
boundary
Interface to
customer
equipment
to other
'core' sites
Crossconnect or
router etc
Figure 6.7: Telecom data network generalised architecture
Access component of Telecom's networks
408.
The access component comprises a link from (typically) an individual customer to an
aggregation node. This link often has characteristics specific to the service(s) being
delivered. Access is generally considered to include the service delivery interface,
which is a network interface on either equipment at the customer's premises or at the
aggregation site which defines the nature of the access link and is specific to the access
service provided. For example, an analogue voice access will include a line circuit
107
interface incorporating digital speech encoding and line signalling capabilities; a copper
data access will incorporate a line circuit supporting line encoding for data transmission
at the desired bandwidth.
Aggregation component of Telecom's networks
409.
The aggregation component gathers multiple individual accesses through a switch or
multiplexer (typically different aggregation devices are used for different types of access)
for transmission to other locations. Aggregation is effectively a matter of implementing
scale economies – aggregated accesses share a common transport infrastructure which
is sized to suit the total number of accesses served from the aggregation site. By way of
example, aggregation transport links today can range from 150MB/s to 2.5GB/s in
bandwidth. Aggregation sites include what have historically been referred to as 'local
exchange' sites, as well as active cabinets containing remote terminals of derived
access transmission systems.
Core component of Telecom's networks
410.
The core component of Telecom's networks provides switching, routing or crossconnection between aggregation sites, providing connectivity between access links
hosted by an aggregation site and those hosted by others. Core sites are linked by
(generally long distance) transmission facilities (typically 2.5GB/s or greater) to provide
such connectivity. Core sites are, in practice, a subset of aggregation sites, as all core
sites also include aggregation functions.
411.
In most cases, equipment at the aggregation site can fulfil the functional requirements of
a data switch or equivalent facility as described above. The following provides
examples in relation to the major types of access, illustrating in each case the first point
at which interconnection with a "data switch or equivalent facility" in Telecom's fixed
PDN could be implemented.
412.
Specifically, the access and aggregation components of Telecom's data networks
include:
(a)
Narrowband Time Division Multiplexing ("TDM") over circuit-based access and
switching (the DSTN). This supports low speed (64/128 KB/s and sub-rate
services and accesses to Frame Relay and X.25 Packet Switching networks;
(b)
Broadband, ATM-based access over copper xDSL technologies. These
support a limited range of ATM end-user services, cross-connection for some
TDM services, switching and connectivity for Frame Relay services, and
access and aggregation for xDSL-based services;
(c)
Ethernet access and aggregation, primarily used for access aggregation for
services over Ethernet on fibre access, along with limited, local area
transparent LAN services.
Narrowband TDM access
413.
414.
Narrowband, circuit-based (TDM) access supports the majority of data services supplied
by Telecom today, and forms the access component of the X.25 network and the DSTN,
Telecom's legacy data networks. This form of access thus also supports the majority of
Telecom 'data tails' used by TelstraClear to provide its own data services.
108
415.
A variety of multiplexing technologies have been employed over the years as the X.25
network and the DSTN have evolved, as illustrated in the above diagram. However, in
each case, these technologies aggregate sub-rate or 64KB/s channels onto 2MB/s links,
which are then further aggregated onto higher order transmission systems for
connection to core sites.
416.
Transmission equipment employed in the network has evolved from simple multi-stage
multiplexing functions, through add-drop multiplexing (which includes a limited crossconnect function) to full cross-connect capability operating at 2MB/s or higher
bandwidths. Such cross-connects are, however, also capable of supporting a 64KB/s
cross-connect capability. In the Telecom network architecture this capability is not
utilised, as Telecom's architecture, optimised for its own retail service offerings, employs
large scale, dedicated 64KB/s cross-connects in centralised locations. Nonetheless,
transport cross-connects deployed at aggregation sites are capable of fulfilling the
requirements of the data switch or equivalent facility in section 64(1)(b). Interconnection
can also be supported at these points.
417.
In the case of narrowband TDM accesses therefore, the first data switch or equivalent
facility is the first network element which can support a 64KB/s cross-connection
function and interconnection with access seekers' networks. In most cases this could be
an SDH cross-connect.
109
Broadband, ATM -based access over copper (xDSL)
418.
In recent years, Telecom has been deploying xDSL technologies (predominantly ADSL
and G.SHDSL) supporting IP and Frame Relay based services. For these accesses,
aggregation is performed by a DSLAM, as shown in Figure 6.9 below. As this is a
rapidly-evolving technology, Telecom has already implemented several different
versions of DSLAM technology in its network.
Access
Aggregation
~
End User (A)
Data
1stData
switch
switch
NTU
Core
~
MDF
Broadband
IP
MDM
ATM switch
DSLAM
DSLAM
MDF
MDM - DSL Modem
SDH - Synchronous Digital Hierarchy multiplexer/cross-connect
Figure 6.9
419.
While a DSLAM is literally an access multiplexer, most DSLAMs employed in the
Telecom network either have equipped, or can have equipped, an ATM switching
function.
420.
Such functions are employed to enable direct connection between different line
termination interfaces on the DSLAM. Again, while the Telecom architecture, optimised
for Telecom's retail service offerings, does not generally employ such a function in this
manner, DSLAMs are nonetheless capable of fulfilling the requirements of the data
switch or equivalent facility in section 64(1)(b),discussed above at paragraph 389 to 396.
421.
Therefore, in the case of DSL-based access services, the first data switch or equivalent
facility is generally a DSLAM located at an aggregation site.
Ethernet access over fibre
422.
Telecom supports a limited range of very high speed (10MB/s, 100MB/s and 1GB/s)
services employing Ethernet on fibre access. For these accesses, aggregation is
performed by an Ethernet switch at the aggregation site as shown in Figure 6.10. Such
services are not available nationwide, however, and aggregation switches may also
serve a wider area than copper-based access aggregation devices, given the longer
reach possible with fibre access. Consequently, only a subset of aggregation sites are
equipped with Ethernet aggregation switches.
110
Access
~
End User (A)
Aggregation
Data
1stData
switch
switch
NTU
Core
~
MDF
Ethernet
access
Ethernet
Ethernet
aggregation
switch
switch
CLNE
POS, Gigabit Ethernet
Ethernet
core switch
OFDF
CLNE - Media converter or router
POS - Packet over SDH
SDH - Synchronous Digital Hierarchy multiplexer/cross-connect
Figure 6.10
423.
The Ethernet aggregation switches are, as the name explicitly states in this case,
capable of fulfilling the requirements of the data switch or equivalent facility in section
64(1)(b).
424.
Therefore, in the case of Ethernet on fibre access services, the first data switch or
equivalent facility is the aggregation switch located at the aggregation site hosting a
given customer access.
Application to future network developments
425.
In addition to considering this interpretation to the existing networks configuration,
consideration must be given to anticipated future developments of the fixed PDN.
426.
Firstly, the access component of the networks is expected to remain relatively stable.
The majority of access comprises very long life assets, and therefore change tends to
be slow. Even deployment of fibre access to the customer will take many years to
impact a large proportion of customers.
427.
The main element of access to change over the near to medium term will be the service
interface. Changes here will be driven by changes in retail service offerings and their
market demand, and by changes in aggregation technologies, discussed below.
428.
In the aggregation component of the network there is expected to be more change than
in access given the much shorter life of electronics. However, the sheer number of
interfaces (millions of access lines) moderates the rate of change. Nonetheless,
changes in market demand will drive changes in aggregation technologies. In particular,
it is expected that demand for dedicated TDM access services will decline, and that
demand for higher bandwidth access types (particularly DSL) will rise.
429.
Higher speed accesses will also drive migration of copper-based aggregation
technologies toward the customer as line length is a factor determining maximum
bandwidths which can be supported by copper lines.
430.
Nonetheless, it expected that aggregation technologies will continue to be capable of
fulfilling the requirements of the data switch or equivalent facility in section 64(1)(b).
There may, however, be some changes to the form of interconnection to new
technologies.
For example, a change to Ethernet-based DSL technology will
necessarily imply a change in interconnection from an ATM-based interface to an
Ethernet-based interface, along with consequent impacts on other protocol layers
necessary to achieve a necessary level of interworking.
111
431.
It is the core in which the greatest degree of change is expected, with a number of
anticipated changes in protocol stacks, technologies, network architecture and physical
implementation over the next 5-10 years, yet uncertainty about the exact nature of those
changes.
432.
A significant expected change with respect to "data switch" functionality is the migration
of IP edge functions toward the customer, effectively distributing "core" functions across
an increasing proportion of aggregation sites. This will include for example, the
migration of ATM switches toward the customer, and potentially elimination of ATM
switches altogether. Again, however, there is a great deal of uncertainty about both the
development path and the rate at which this will occur.
433.
What is certain, however, is that global developments in information, entertainment and
telecommunications industries will play as much a part in determining the nature and
rate of change as local market conditions such as local customer value perceptions,
application development and regulatory environment.
434.
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113
7.
TECHNICAL, IS AND PRACTICAL CONSIDERATIONS AND COSTS
Implementation and ongoing costs are central to Commission decision-making
435.
Unbundling is a highly intrusive and resource-intensive form of regulation. It is important
that the Commission does not underestimate the technical, Information Systems ("IS")
and practical considerations and costs associated with:
(a)
the initial implementation of an unbundling regime; and
(b)
the ongoing management and co-ordination required to support such a regime.
436.
These considerations and costs have often been underestimated or not well understood
by regulators or law-makers internationally when mandating unbundling. It is important
the same mistake is not repeated in New Zealand. The Commission must learn from
the overseas experiences, and its cost/benefit analysis must properly account for each
of the considerations and costs discussed below.
437.
Telecommunications services are delivered by a tightly integrated system which
includes sophisticated computing equipment, copper and fibre optic cables located
throughout the country, and a large team of staff and contractors dispersed throughout
the country that must be well coordinated to ensure the service is delivered. Unbundling
of Telecom's local loop network or fixed PDN would break-up this integrated delivery
system, and experience in other jurisdictions demonstrates that this break-up process is
complex, lengthy and costly. The Commission recognises this, at least at a summary
level in paragraph 197:
In other jurisdictions, long and complex proceedings have followed the
imposition of LLU as a result of technical considerations.
438.
It now must ensure those costs and considerations are taken into account in determining
whether any form of unbundling should be imposed.
439.
Telecom also wishes to bring to the Commission's attention the ongoing impact
unbundling would have on Telecom's human resources, and its ability to optimise its use
of such resources to bring new products and services to market while maintaining
existing ones. Implementation of unbundling would require large amounts of such
resources, and the ongoing management and support of unbundling would tie up a
lesser amount of resources on a permanent basis. These resources would have to be
diverted from other projects including product, service and network development and
maintenance.
International experience
440.
Many of the issues relevant to local loop unbundling have been considered and
addressed in a number of countries. It is therefore possible to draw from these
countries' experiences in identifying the issues to be considered.
There are
nevertheless differences between the forms of unbundling implemented in the various
jurisdictions and the manner in which each has addressed specific issues relating to
unbundling. As a result, there are very few "industry solutions" which can be drawn from
international experience. There are also differences in the New Zealand environment
which will require consideration.
441.
In the case of unbundling of Telecom's fixed PDN, however, there are few regulated
services internationally which provide a basis for assessing the implications of section
64(1)(b), and the issues which arise are in many instances quite different to those
encountered with local loop unbundling.
114
442.
There are also some issues for which there are no readily-available solutions. The
complexities of interconnection and interworking of data networks at the various
protocols and layers to which data networks operate, are vast, and not yet fully
understood. The costs associated with this particular aspect of fixed PDN unbundling
are therefore unknown, but Telecom's experience suggests the costs of integration tend
to be grossly underestimated when not well understood.
443.
In this context, Telecom sets out below some key technical and operational issues it has
identified as being relevant to the present investigation, the implications of unbundling
from an IS perspective, and a summary of the costing issues these raise.
115
7.1
Overview of the Technical and Operational Issues of Unbundling
444.
In question 4.1 of the Issues Paper, the Commission seeks submissions on the technical
and practical consideration it must consider in the course of its investigation under
section 64. In this section, Telecom responds to that question, and discusses what it
considers are the key technical and operational considerations.
445.
Technical and operational issues relating to unbundling cover a range of subject areas,
including the following:
446.
(a)
Physical issues: encompassing co-location of access seeker's equipment and
network demarcation considerations;
(b)
Interworking and compatibility issues: including both physical network
considerations (primarily relevant to local loop unbundling) and logical network
considerations (primarily relevant to fixed PDN unbundling);
(c)
Network management and business process considerations: including the
primary fulfil, assure and billing processes; records and information access and
real time network management considerations;
(d)
Functionality considerations: addressing services and technologies supported
and functional capabilities of the unbundled elements;
(e)
Capacity considerations: including the management of availability of
accommodation, plant and network element capacity and allocation;
(f)
Development issues pertaining to ongoing development and investment in the
network and operational facilities: including capacity expansion and changes to
architecture, technology & services.
Telecom therefore describes in the following firstly some general issues common to both
forms of unbundling, then specific issues in relation to local loop unbundling and PDN
unbundling. Table 7.1 provides an overview of the range of the issues. While it is not
the Commission's task to provide the solutions to all of these technical issues, Telecom
submits that it must have regard to them:
(a)
When undertaking a cost/benefit analysis; and
(b)
When considering what form of unbundling should be imposed.
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Table 1: Overview of technical and operational issues relating to local loop and PDN unbundling
Generic Issues
Physical
issues
Interworking
&
compatibility
Local loop unbundling
Fixed PDN unbundling
•
•
•
Co-location of facilities
Space & building services
Security
•
•
Cabinet issues (internal vs external)
Accommodation of access seeker's line
equipment (eg DSL) and backhaul
•
•
Cabinet issues (less than LLU)
Accommodation for backhaul only
•
Identification and provision of
demarcation points:
(a) In Telecom buildings;
(b) In cabinets;
(c) At customer premises.
•
•
•
MDF/OFDF
Cabinet MDF
BDF/entry point/ETP
•
•
•
2DF/OFDF
TNT/BDF/Entry point/ETP
Network termination vs. service
interface
•
•
Physical (applies to LLU)
Logical (applies to PDN)
•
Electromagnetic compatibility (ability of different
transmission technologies to co-exist in the
same cable)
Implications for:
(a) Technology choice
(b) Equipment location (building vs cabinet)
(c) Network
development (see separate
discussion)
(d) Capacity – impact of new high speed
services on existing users
•
•
Interfaces and protocol stacks
Standards and local
variations/implementations
Network & system integration
Interface publication (PTC)
Network & customer interfaces
Higher layers vs lower layers
•
•
•
•
•
117
Table 1: Overview of technical and operational issues relating to LLU and PDN unbundling (cont'd)
Generic
•
•
•
Management
and OSS
•
Local loop unbundling
Fixed PDN unbundling
•
•
•
•
Operational systems
General fulfil, bill and assure
process requirements
Equal access, vs. equivalent
access vs commercial access
Records & information
Cable records
plant characterisation
•
Publication of standards
Technology-specific information
(co-ordination required)
Configuration information
•
Network management
•
Cable pair test access
•
Management system visibility and
performance reporting - network
vs end-to-end (eg LanLink vs DDS)
•
•
Services supported
Functional capabilities
•
•
Unconditioned or conditioned copper pairs?
If conditioned, to what level?
• loading coil removal
• multiple removal
• Interference from legacy technologies (eg
HDB3)
•
•
QoS
Layers – layer 2, layer 3, virtual vs.
actual
Security considerations
Simplicity vs cost. Edge vs. core
Functionality
•
•
Capacity management
Availability & assessment
•
•
Capacity
issues
•
•
•
•
Access to spare capacity
Who gets it?
Obligations to build
Physical pairs vs. ability to support high speed
services
• Relates to EMC issues
Accommodation capacity for collocation facilities
• Cabinets
High occupancy buildings
•
•
•
•
•
Dedicated vs shared
Overbooking
Real-time management (resource
brokering)
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Table 1: Overview of technical and operational issues relating to LLU and PDN unbundling (cont'd)
Generic
Development
issues
Local Loop Unbundling
Fixed PDN unbundling
•
•
Capacity expansion
Triggers & obligations
•
Copper expansion vs replacement with fibre
•
Interface capacity, bearer capacity,
service coverage
•
Changes in architecture
•
•
Cabinetisation, fibre feeder, RLU bypass
Obligations to maintain copper from host site for
unbundled services
•
Eg IP edge migration
•
Changes in technology
•
Treatment of legacy technologies eg HDB3
implications for EMC
Removal/re-location of equipment
•
•
•
DSTN obsolescence
Changing role of ATM
DSL development
•
Retail/wholesale vs. unbundled
elements
•
Coordination
•
Changes to services
•
•
•
•
Commercial
Technical
Establishment & ongoing
Adaptation of overseas codes of
practice to NZ conditions
Operational
•
119
General issues
447.
When considering any form of unbundling, there are some general issues which will
always arise. These relate primarily to the type of access that is to be provided to
access seekers, and the degree of coordination between the access provider and
access seekers that is necessitated by such access.
Principles of unbundled access
448.
Many of the technical and operational issues that arise in relation to unbundling are
dependent on the underlying access principles adopted by a regulator in mandating
access to elements of an access provider's network. Broadly speaking, the access
principles that might be adopted by a regulator can be categorised as:
(a)
Equal access;
(b)
Equivalent access; or
(c)
Commercial access.
449.
Equal access principles give access seekers the same rights of access, on the same
terms, as the access provider has for delivery of its own retail services. They imply
access to the same information and processes, equal rights to availability of spare
capacity, and equal influence over the development of networks and services as those
available to the access provider's retail operations.
450.
Equal access has major implications for operational systems, processes and for the
access provider's ability to develop such systems and the network itself. It consequently
has major implications for the access provider's property rights, dynamic efficiency and
ultimately, the long term interests of end-users.
451.
Equivalent access principles give access seekers a right of access which allows them to
achieve equivalent outcomes in terms of end-user service to those available to the
access provider. This also necessitates access to the information and processes used
by the access provider, but does give some flexibility to the access provider in
determining how access to such information and processes is achieved. Thus, while
less intrusive than an equal access regime, an equivalent access regime nonetheless
has similar implications in terms of dynamic efficiency and long-term benefits to endusers.
452.
Commercial access is essentially access on a basis largely determined by commercial
necessity. It provides access only to those facilities, information and processes as are
necessary to achieve the purpose for which unbundled access is mandated, and is thus
restricted to bottleneck facilities, information and processes. Access to any other
information, processes and facilities is on a commercially negotiated basis, independent
of the regulated services.
453.
Commercial access principles are the only principles consistent with the
Telecommunications Act 2001, which promotes regulation as a "backstop" of "last
resort" which "encourages commercial arrangements wherever possible". They also
least interfere with Telecom's private property rights. Consequently, the issues
discussed in this section are those consistent with a commercial access regime.
454.
In this regard, Telecom submits that in evaluating international unbundling regimes,
including methods by which technical and operational issues are addressed, the
Commission should consider the implications of the access principles under which such
regimes operate.
120
Co-ordination between the access provider and access seekers
455.
Provision of access to unbundled elements of an access provider's network inevitably
requires a degree of co-ordination between the access provider and access seekers
regarding technical and operational issues. The degree of co-ordination required will
reflect such factors as the complexity of interworking required and the degree of
compatibility between the interconnected networks.
456.
In many jurisdictions, multilateral bodies exist or have been established to address such
issues, with varying levels of oversight by, and interaction with, regulatory agencies. In
some jurisdictions, such bodies, and the processes by which they operate, have been
long established due to the requirements of the market or past regulatory intervention.
Consequently, the approaches taken are often unique to a particular market, and while
they may provide valuable insight into the form of a New Zealand environment, it is
unlikely that processes or codes of practice could be uplifted from another jurisdiction
and applied in New Zealand.
457.
For example, codes of practice for management of interference between equipment
used by different operators on unbundled local loops vary substantially from one
jurisdiction to another, reflecting a variety of factors such as the access principles
applied, the architecture of the access provider's network, and whether or not operators
have had previous requirements (and hence codes of practice) for management of
similar issues such as interference between radio transmission systems or within copper
cables.
Local loop unbundling issues
458.
As noted earlier, local loop unbundling has been implemented in a number of
jurisdictions, and consequently there is substantial documentation available on the
range of issues which must be addressed in considering and implementing local loop
unbundling.
459.
The following focuses on some key technical and operational issues to which
consideration should be given in considering the mandating of any form of local loop
unbundling. The issues outlined encompass obligations on the access provider to
'condition' unbundled copper pairs; issues relating to roadside cabinets; and issues
relating to ongoing development of the access provider's network. However, Telecom
notes that these issues are far from exhaustive; other issues, such as physical capacity
at local exchange buildings are also relevant.
Conditioned or unconditioned copper
460.
Conditioning, in regard to copper pairs, is the process of making a copper pair suitable
for a specified use.88 More specifically, conditioning generally applies to removal of
elements which preclude the use of a copper pair for use with high speed access
technologies. Conditioning may therefore involve removal of loading coils, stubs and
multiples, all of which reduce the performance of a technologies such as DSL.
461.
However, even with conditioning of a particular copper pair, it may still not be possible to
employ high speed technologies, due to the presence of interfering legacy technologies
such as 2MB/s systems employing HDB3 line coding. Removal of these technologies to
enable operation of DSL on a cable clearly has significant implications for the access
provider.
88
Note the term 'conditioned' copper loop is sometimes used to describe bitstream access, whereby a
conditioned loop is one on which equipment has been installed in order to provide a derived circuit. Here the term
is used only in the context of providing a copper loop only, but one which may have been modified or 'groomed' to
suit the desired use.
121
462.
Telecom submits however that the presumption against interference with property rights
prevents conditioning obligations being placed on Telecom. The imposition of such
obligations would constitute a serious interference with Telecom's private property
rights. Not only would Telecom be forced to lease its assets to its competitors at their
request, it would also be required to alter them in a manner not of its choosing.
463.
In the absence of conditioning obligations on the access provider, the significance of
such issues as access to plant records and line testing increases.
Access to cabinets
464.
Obligations regarding unbundled access to copper sub-loops, where the access seeker
gets access at an active cabinet, vary across different jurisdictions. Active cabinets
present challenges in terms of technical feasibility due to the inherently confined space
available.
465.
Cabinets are generally engineered to serve a certain maximum number of customers,
with adequate space only for equipment delivering different services to those customers,
and sufficient spare capacity for growth and 'turnaround' (space to install replacement
equipment which can then have services transferred to it with minimal service
disruption).
They are thus optimised for the access provider's architecture.
Environmental considerations (and in New Zealand, the Resource Management Act in
particular) also encourage cabinets to be made as small and unobtrusive as possible.
466.
This then creates problems for collocation of access seeker's equipment. There is
neither sufficient space available for the access seeker's equipment, nor even, in most
cases, available space on the distribution frame for termination of an access seeker's
equipment.
467.
Location of an access seeker's cabinet alongside an existing access provider's cabinet
is also problematic, as there is likely to be opposition for environmental reasons, and
distribution frame capacity is still required to link the access seeker's equipment to the
copper sub-loops used.
Development of the network
468.
Most incumbent operators are progressively deploying active cabinets within their
copper access networks in order to reduce the length of copper loops. This is driven by
an expectation of demand for higher access speeds in future, which require shorter
copper line lengths to operate at the highest speeds.
469.
Such development takes a very long time, with roughly only
% of copper
accesses in the Telecom network served by fibre feeder systems despite these being
deployed as the preferred feeder technology for
.
470.
Nonetheless, when such systems are deployed, they create two challenges in a local
loop unbundling context. Firstly, they result in the difficulties noted above regarding
unbundling at cabinets. Secondly, they disrupt any unbundled services currently in use
at the time of deployment, as the existing copper feeder from the host exchange site is
generally removed or re-configured as distribution plant serving another area.
471.
Retention of copper feeder pairs solely to support unbundled services is impractical and
inefficient for cost and technical reasons, including interference between high speed
systems supported by such pairs and high speed services provided directly from the
new cabinet.
122
472.
How such issues are resolved has important implications for the operational processes
supporting an unbundling regime, as well as the costs, risks and incentives for the
access provider in development of its network.
PDN unbundling issues
473.
As there are few equivalent regulated services internationally to the form of unbundling
implied by section 64(1)(b), the following explores somewhat more thoroughly the issues
relating to access to the unbundled elements of, and interconnection with, Telecom's
fixed PDN.
474.
Telecom notes however that it has not had sufficient opportunity to consider the
implications of all potential forms of PDN unbundling, and has focused on those issues
arising from forms of unbundling consistent with Telecom's interpretation of the scope of
section 64.
Physical issues
475.
Physical issues relating to unbundling of the fixed PDN encompass similar areas as
those posed by local loop unbundling – collocation of facilities, and identification and
provision of demarcation points.
476.
Co-location requirements for PDN unbundling are, however, inherently less demanding
than local loop unbundling in terms of accommodation requirements, due to the absence
of a requirement to accommodate the access seeker's own customer-facing equipment.
Instead, it is limited to accommodation for backhaul facilities and a demarcation point
suitable for the form(s) of interconnection provided (eg 2DF, OFDF). Nonetheless,
challenges remain to address security and third party access, and provide
accommodation in high occupancy sites (especially major core network nodes).
477.
The demarcation points for fixed PDN unbundling are different to those for the local loop
variant. Customer node demarcations are more varied, depending on the nature of the
service required and configuration of Customer Located Network Equipment. The
demarcation point may be at or adjacent to a building distribution frame, or at the
Telecom network termination ("TNT") in the customers' premises.
478.
It should be noted that for some services (eg Jetstream), there is a distinction between
the TNT and the Service delivery point. In such cases, the TNT marks the boundary of
Telecom's network, yet the service is defined in relation to some point beyond the TNT –
in the case of Jetstream, it is defined in terms of the service the customer receives at the
DSL modem on their premises, which is generally customer owned.
Interworking and Compatibility
479.
Interconnection with Telecom's fixed PDN inherently requires consideration to be given
to the nature of the interface, and the protocols and services supported by that interface,
between the access provider's network and an access seeker's network.
480.
In this case the issues are completely different to those encountered with local loop
unbundling, and encompass such issues as protocol stacks, technical standards,
network and system integration, and interface definition and publication. Depending on
the level of interworking required, and whether it is required at or between the endpoints of data service, these issues can be very complex.
Interworking
481.
The Commission asks in its Issues Paper whether respondents agree or disagree that
data networks can already interconnect with one another, implying that Telecom had
123
asserted in its submission on the draft Business Wholesale determination that data
networks already interconnect.
482.
Telecom did not assert that data networks already interconnect with one another.
Rather, Telecom asserted that networks already interwork, through interworking of retail
services.
483.
In this submission, Telecom has made a distinction between interworking and
interconnection (see the discussion from paragraph 397 of this submission).
In
essence, interworking is the ability for communications to operate across an interface
between two networks, be that "interconnection", or simply connection of retail services.
484.
If two networks are physically connected, yet the interfaces, or protocols employed, on
each network are not very similar, no communication will be possible. The situation can
be compared to two people speaking to each in two different languages, neither
understood by the other party.
485.
In the absence of absolute standards, any interworking between different networks is
likely to support only a subset of the capabilities employed in each network. This might
be compared with two people conversing in one language in which each speaks
different dialects of, or which might be a second language for one party.
Communication is possible, but may be limited.
486.
Achieving complete interworking requires equal capabilities in both networks, and a
complete interface between the two networks. Continuing our language metaphor, they
must speak and understand the same dialect, and share a common set of jargon and
colloquialisms.
Protocol stacks
487.
Data networks comprise elements which employ a number of different protocols, in a
"protocol stack". Each layer of the stack encapsulates and transports transparently the
contents of higher layer protocols. A feature of this encapsulation model is that a
network element need not be concerned about anything above the layer at which it
operates. The implication of this for network interconnection, however, is that
interworking must be defined at all layers at which an interconnected network operates.
488.
A commonly applied model for considering this layering of protocols is the seven-layer
OSI (Open Systems Interconnect) model for Internetworking. In interconnection, the
layers typically addressed are the lower layers, the Physical, Data link, and Network
layers, which collectively handle data transport issues.
489.
Historically, data services operated by telcos were relatively simple – they provided
simple, Data Link layer services providing point to point links. The majority of DDS
services provided by Telecom on its DSTN fit this description, and were historically
implemented using essentially Data Link layer technologies and protocols. Such link
services can be used by either customers or other operators to build networks, by the
addition of higher layer functions and protocols which are encapsulated with the Data
Link services. The DSTN does not operate on these layers - they are essentially
invisible to it - and hence interworking with it need only be defined at the Data Link and
Physical layers.
490.
''In practice, few "protocol stacks" line up neatly with the OSI model layers, and
functions supported by different protocols may overlap. Across a network, different
technologies may be used to perform similar, but slightly different functions. Add
tunnelling to this, where from an end-to-end perspective, a lower layer service may
appear to be provided, but is actually carried by higher layer protocols, and it becomes
124
apparent that protocol stacks can be very complex, and change throughout an end-toend connection across a network.
491.
Interworking for data network interconnection therefore needs to be defined in terms of
the physical interface, and all protocol layers on which a network operates. What
protocols need to be defined will vary depending on the layer at which a service
operates, the underlying technologies employed, the location in the data network at
which interconnection occurs, and considerations such as quality of service
requirements, security requirements and network management capabilities required.
Simplicity and Interworking
492.
The complexity of Interworking can clearly be considerable and costly. In fact, it is
becoming increasingly complex, and successful integration of differing technologies
becoming more difficult. This has been a factor in Telecom's decision to work with a
single, prime supplier for much of its fixed network, relying on the supplier to integrate all
the technologies they supply. Below are some common solutions to this issue.
493.
Firstly, end user interfaces are often simpler as they do not require visibility of the
complexity required within the network to carry multiple services efficiently, with
appropriate quality of service and security considerations.
494.
Alternatively, if only a single facility is transited, or bandwidth and quality of service
requirements are low, a simple link-layer protocol may be sufficient.
495.
Finally, simplicity may be achieved through higher cost. Simply providing higher
bandwidth for example may obviate the need for complexity, to manage quality of
service.
Interface and protocol standards
496.
Interconnection of data networks obviously occurs in a wide number of contexts, not
least of which is interconnection between ISPs. Such interconnection is aided by the
existence of international standards, some of which are expressly developed for the
purposes of network interconnection (eg the border gateway protocols employed by
ISPs).
497.
There are two practical issues which limit the usefulness and extent to which such
standards can enable effective interworking between networks.
498.
Firstly, standards are generally not absolute. That is, they include various degrees to
which individual implementations can be customised to suit a particular environment.
Interworking therefore requires coordination between interconnecting parties to agree on
specifics, or for one party to impose a particular standard on other parties (which
approach tends to reflect the commercial relationship involved).
499.
Secondly, any interworking implementation requires some degree of trust between the
parties, and the set of functionality supported will reflect that degree of trust, not only of
the party directly interconnected with, but of the other parties they in turn interconnect
with. The issues associated with accurately auditing an interconnected network's
continued adherence to Quality of Service standards for example, require a high degree
of trust.
500.
This element of trust inevitably limits the set of capabilities which the parties are
mutually willing to support.
125
CLNE and network interconnection
501.
Delivery of data services has generally involved installation of some Customer Located
Network Equipment ("CLNE"), ranging from simple Network Termination Units ("NTUs")
to complex routers providing firewalling, address translation and service monitoring
functions.
502.
Increasingly complex CLNE, especially that associated with multi-service access, is also
more tightly coupled to functions within the network than has historically been the case.
These functions support the differentiated connectivity requirements for different
applications required in a multi-service environment. This has implications for
unbundling interconnection, where the point of interconnection exists between the CLNE
and associated functions in the core of the network.
503.
In essence, there are two possible means by which this may be addressed. Firstly,
unbundled services may need to be equipped with only basic CLNE sufficient to deliver
the required capabilities, and thus eliminate the need for matching capabilities in the
access seeker's network. Alternatively, if interconnection were to occur beyond where
such functions are implemented in the access provider's network, a simple resale model
may become more attractive.
Management and OSS
504.
PDN unbundling, as with local loop unbundling, raises an array of issues relating to the
operation and management of the interconnected networks, and the provision of
services over those networks.
505.
Major issues relating to key operational processes (fulfil, assure and bill) are discussed
in sections 7.2 and 7.3 below. In addition to these, consideration should be given to
issues relating to records and information regarding the unbundled network, and
network management.
506.
Regarding the DSTN, it should be noted that concerns regarding ongoing support of the
it's management systems is a major factor in plans to sunset DDS services. However, it
is unclear what the implications of unbundled access to the DSTN would be for these
plans.
Records and Information
507.
Although interface and protocol specifications may address the major technical
requirements of interconnection, it is inevitable with any complex form of network
interconnection that issues will arise requiring ongoing technical co-ordination,
information exchange and collective problem resolution between the parties The degree
of co-ordination required is proportional to the complexity of the interconnection
arrangement, and the level of detail to which the form of interconnection is specified,
both commercially and technically.
Network management integration
508.
A further consideration is network management visibility. Supporting visibility of network
performance, and ability to configure or alter network configuration generally requires a
higher degree of complexity and specification that simple traffic transfer.
509.
Some management visibility can be achieved through addition of equipment either side
of an uncontrolled (ie in this case non-Telecom) network which can be interrogated
regarding transmission performance (eg packet loss, latency).
126
510.
Other functions, especially those requiring real time information from, or configuration of
the network, require interworking of management systems, in addition to interworking of
the networks themselves. This, however, tends to raise even greater issues regarding
network security.
Functionality
511.
Technical issues relating to functionality are closely related to those regarding interface
specifications, protocols and network management. However, it is worth noting the
significance of certain functional requirements in relation to defining forms of PDN
unbundling.
512.
Quality of service ("QoS") has become a major factor in specification and design of data
networks and services. Generically, requirements are often expressed simply as "with"
and "without" QoS. "Without QoS" typically means unspecified QoS, or "best efforts"
connectivity, implying such factors as peak bandwidth, packet loss and latency will be
variable.
513.
Some applications have more demanding QoS requirements than others, however.
Typically, higher value services (from a customer perspective) have the higher QoS
demands. Meeting QoS requirements efficiently may require interaction between the
application and the network. In the absence of such interaction, bandwidth utilisation
may need to be lower (and more costly) in order meet possible application requirements.
514.
This is an area of significant technology development at present, and the means of
managing such issues in a multi-service context are only in the early stages of
deployment.
515.
Quality of service considerations are particularly relevant where there are a number of
stacked protocols, and especially where tunnelling occurs. In order to provide QoS at
the highest layer of the stack, all lower layers must be capable of delivering known QoS
characteristics to the higher layers.
516.
Security issues are a further major consideration. These are closely related to the
network configuration and QoS issues discussed above. This is a complex and rapidly
developing area, requiring close attention to detail in regard to specific configurations,
and is very difficult to address in general terms. It is nonetheless critical in relation to
network interconnection.
517.
Overall, functional considerations are best managed either by ensuring simplicity, or
focusing on where such issues need to be addressed anyway – in the context of retail
services.
Capacity issues
518.
PDN unbundling raises many of the same capacity issues as local loop unbundling, with
most of these deriving from the principles of unbundled access outlined in paragraph
448 above.
519.
In addition to these, the key issues for fixed PDN unbundling relate to the allocation and
management of shared bandwidth. In the traditional environment of circuit-based data
services (such as DDS services), bandwidth management has not been an issue – each
circuit uses a fixed, dedicated bandwidth which remains unchanged for the life of the
service. In modern packet and cell-based networks, however, with much higher peak
bandwidth demands, bandwidth management has become a key issue and will become
more so in the multi-service network of the future.
127
520.
With high bandwidths, and high peak-to-average ratios come opportunities for
bandwidth sharing, which makes more efficient use of large links between network
nodes. This is achieved in ATM networks, for example, though 'over-booking', where
the statistical nature of traffic flows is taken advantage of to minimise the overall
bandwidth requirement given, and the aggregate requirements of individual traffic
streams. Up until now, such management has been largely rule-based and established
through manual configuration of the network.
In future, however, technology
developments are expected to enable real-time resource brokering between applications
and the network.
521.
The impact of unbundling in this context is uncertain. Should unbundled access be
unable to integrate with the bandwidth brokering mechanism (which is likely, given the
complexity of such an arrangement), capacity used by unbundled connections on
shared facilities (eg between aggregation elements and core network nodes) will need to
fall outside such a regime, increasing the cost of both unbundled and non-unbundled
bandwidth components.
Development issues
522.
As with local loop unbundling, PDN unbundling will raise a number of issues regarding
the ongoing development of both access provider's and access seekers' networks,
encompassing capacity expansion, architecture change and technology obsolescence.
523.
Capacity expansion comprises two main elements – expansion of interface capacity and
expansion of backhaul or backbone capacity. Interface capacity expansion is relatively
straightforward, typically being low (relative) marginal cost, and driven incrementally by
demand.
524.
Backhaul capacity, however, tends to be dominated by large chunks of investment, and
is often managed through a combination of both supply increase and demand
moderation. The latter becomes necessary due to the long cycle times (up to 2 years)
often involved in the construction of new infrastructure. In high cost areas, in particular,
service offerings may be limited while new capacity is built, to ensure existing services
are not adversely affected.
525.
Capacity expansion issues are also related to service coverage, with expansion of
service coverage increasingly dependent on levels of consumer demand in an effort to
manage investment risk.
526.
Architecture development may also result in major changes to both location and forms of
unbundled access. An example is the anticipated migration of IP edge functions toward
the customer as the NGN is developed. Such changes can have significant impact on
the use of specific technologies. For example, the use of ATM switching may reduce (or
even be eliminated) if the IP edge is migrated aggressively toward the customer. The
rate and form of such changes are often uncertain however, as noted at the beginning of
Telecom's submission.
527.
Technology obsolescence is also an issue requiring consideration. A particular issue is
the anticipated obsolescence of the DSTN.
528.
The DSTN comprises a number of elements.
Telecom's retail services are
529.
To date, alternative services to the DDS range have not been widely adopted, and so
attention has been given to finding ways to extend the life or find alternatives to these
However central to the operation of
128
technologies. One example is the
530.
With growing adoption of DSL-based services, however, other alternatives are
developing, including withdrawal of DDS services from the market. As with operational
systems (see paragraph 506 above), however, it is unknown what the implications of
DSTN unbundling might be regarding these elements of the DSTN and their planned
withdrawal.
531.
Finally, unbundling will inevitably complicate the process of network development, both
by imposing additional requirements on the access provider's networks and services,
and reducing the flexibility available to change the network without significant impact on
services.
532.
Currently, efforts are made to define retail services at as high a layer as possible. This
enables changes in lower layers to be made without impacting the retail service.
Elsewhere in this submission, Telecom has noted the uncertainties confronting it and the
need to maintain architectural flexibility to face global market and technology changes.
533.
By requiring interconnection into the middle of the network, unbundling of Telecom's
fixed PDN would expose these lower layers, and would reduce the flexibility with which
Telecom will be able to change the network. The risks associated with this issue can
best be managed by one of two courses of action:
(a)
requiring interconnection in parts of Telecom's networks exhibiting the lowest
risk or rate of change (either mature technologies such as the DSTN or those
parts of the networks closer to the customer eg the local loop); or
(b)
limiting access obligations to those equal to those required for delivery of retail
services.
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7.2
Implications of LLU from an IS perspective
534.
Telecom presented to the Commission on the implications, from an IS perspective, to
implement the draft "Business Wholesale Determination", and the steps Telecom is
taking, as part of Project Jupiter, to improve processes, provide greater flexibility, and
achieve higher levels of automation. Implementation of unbundling would have at the
least similar IS implications, and depending on the unbundling option, may be
significantly more difficult to implement. The additional difficulties with unbundling are
likely to arise due to it being a new form of service, whereas the wholesale
determination relates to existing retail services only.
535.
It is therefore important that the Commission consider seriously the practical implications
its decisions on unbundling will have, including the IS costs it will give rise to and the
time required to implement it. To that end we outline below recent history of the most
relevant Telecom information system, Telecom's requirements for new information
systems, and likely IS issues if local loop unbundling or unbundling of Telecom's fixed
PDN is imposed.
ICMS history
536.
537.
Telecom's most significant information system is the Integrated Customer Management
System ("ICMS") which was architected in 1989 to bring together various computer and
paper based systems delivering information data and functions nationally via a single
system.
130
131
Implications of unbundling for IS
548.
Unbundling would involve access seekers demanding new services to deliver from an IS
perspective. Implementation would require the development of new services, new
processes to support those services, and new processes to ensure unbundling did not
erode the service provided by existing services to existing customers.
549.
As described above, Telecom's current IS environment is inflexible, with a high cost and
long lead-times to effect changes. This IS environment is not well suited to
implementing unbundling. The Commission should be aware that the costs of
attempting to implement unbundling using the current IS environment would be high,
and there would be long lead-times. Using existing systems to implement unbundling is
likely to cause the same difficulties as those presented to the Commission in relation to
implementing the draft Business Wholesale Determination, and include:
(a)
incomplete meeting of requirements due to forcing systems designed to meet
retail requirements to deliver unbundling requirements;
(b)
additional risk of non-delivery or systems failure due to the same reason; and
(c)
additional uneconomic cost and time on assets at or nearing end of life.
132
133
7.3
Cost Issues
550.
In the context of a discussion as to who should bear the burden for demonstrating that
supply of an unbundled service is not technically feasible, the Commission states (at
paragraph 197):
To make this assessment, the onus will be on the access provider to
demonstrate that supply is not technically feasible.
551.
This approach to identifying the implementation costs and impediments is inconsistent
with the approach the Commission is taking in relation to the identification of benefits (ie
the onus of proof is not on the access seeker to demonstrate the benefits). In Telecom's
view the Commission has an unambiguous legal obligation to consider such costs and
impediments, as well as benefits, as part of considering "the efficiencies that will result,
or will be likely to result" as set out in section 18(2) of the Act:
In determining whether or not, or the extent to which, any act or omission will
result, or will be likely to result, in competition in telecommunications markets for
the long-term benefit of end-users of telecommunications services within New
Zealand, the efficiencies that will result, or will be likely to result, from that act or
omission must be considered.
552.
This legal obligation on the Commission is not dependent upon another party
demonstrating anything. Thus the Commission, in Telecom's view, is not in a position to
shift the burden of proof to Telecom to demonstrate that the supply an unbundled
service is not technically feasible, or to demonstrate the costs of supplying the service.
The Commission has an obligation to consider such costs, and the time required to
implement unbundling, and by implication to do the necessary research.
553.
Furthermore, the Commission is already aware that the implementation of unbundling in
other jurisdictions has involved lengthy, complex and expensive proceedings to resolve
technical issues. In Australia, for example, there was a period of several years between
the time a LLU service was declared and when that service first became available. The
development of the associated codes also took years to develop. The Commission
should expect similar time periods, and costs, to resolve these technical issues in New
Zealand, and ensure such costs and implementation lead times are included in the cost
benefit assessment it has indicated it will undertake.
554.
Given the size and nature of the known practical implementation issues associated with
unbundling, Telecom considers these issues should form a central part of the
Commission's decision-making process in this review. Any cost/benefit assessment that
omits such issues will be misleadingly incomplete. To assist this assessment Telecom
sets out below some key technical and operational issues it has identified as being
relevant to the present investigation, the implications of unbundling from an IS
perspective, and a summary of the costing issues these raise.
555.
In addition to the selected technical and IS implementation issues discussed above,
there are a range of others which unbundling would give rise to, and which would lead to
significant costs and possible time delays. Telecom believes that the costs of unbundling
can be grouped into the following broad categories:
•
network resources;
•
fulfil processes;
•
assure processes;
134
•
billing processes; and
•
transaction costs.
Network resources
556.
Network resources include changes that must be made to network infrastructure and
facilities that must be made by Telecom and/or access seekers in order to support
unbundling services. These include the inefficiencies in the use of facilities that
unbundling is likely to give rise to (for example those caused by Telecom being less able
to manage cross-talk and interference), and physical costs arising for example from colocation and access to cabinets.
Fulfil Processes
557.
558.
Fulfil processes include all processes and activities to provision an unbundled service.
The costs associated with fulfil processes and systems include:
•
service requests and feasibility checks;
•
service order creation;
•
works order requests;
•
service contractor work (ie "patch contractors"); and
•
service closure and handover processes.
Unbundled services would require the development and implementation of new
processes and systems and a significant increase of resources for a number of the
steps within these processes and systems. For example, to provision an unconditioned
copper pair between a customer site and an entrant's interconnection facility requires
both Telecom and the entrant to send "patch contractors" to connect and test the copper
pair. In addition, the dual truck rolls will incur additional coordination costs to ensure that
the contractor's activities are aligned.
Assure
559.
560.
Assure processes include all processes and systems to guarantee that a product is
performing to agreed service levels. The costs associated with assure processes
include:
•
Initial fault logging;
•
Diagnosis;
•
Fault clearance procedure (including truck rolls);
•
Testing and handover; and
•
Systems to record fault management activities for billing purposes.
The impact of unbundled services on assure processes is likely to depend on how much
management "visibility" Telecom has of its unbundled infrastructure. In general, the
more "physical" the unbundled element (eg an unbundled copper pair), the less network
management visibility possible, and hence the greater the need for resource duplication
(ie truck rolls) and coordination activities.
135
Bill
561.
562.
Billing processes include all processes and systems to present the entrant with accurate
and timely billing information. Billing processes and systems normally provide the
following functionality:
•
Collection;
•
Mediation;
•
Rating; and
•
Billing and presentation.
Telecom's existing billing system has been developed around telephony retail service
and is not designed to provide billing functionality for unbundled service options.
Depending on the particular unbundled option, the billing requirements and the time and
cost to implement will vary.
Transaction Costs
563.
564.
Transactions costs comprise relationship and coordination costs that are in addition to
existing transaction costs associated with interconnection and wholesale services
supplied to entrants, and existing retail services supplied to end customers. These
incremental transaction costs include:
•
Development of contracts between Telecom and entrants;
•
Coordination costs between Telecom and entrants;
•
Development of contracts with third parties (eg. service contractor firms) and
entrants to facilitate assure and fulfil processes; and
•
Coordination costs between Telecom, third parties and entrants.
The contracts and coordination activities that are required to support unbundled services
are extremely detailed and complex due to the unnatural and inefficient pass-off points
that unbundling requires between the access provider and the access seeker. Evidence
of this complexity is shown by the very detailed and complex nature of the ACIF codes
developed for LLU procedures between Telstra and entrants in Australia.
136
137
8.
REGULATION OF TELECOMMUNICATIONS MARKETS: ECONOMIC ANALYSIS
565.
The introduction to Chapter 3 of the Commission's Issues Paper notes that the starting
point for its investigation must be "…determining what competition problem unbundling
is designed to address, and identifying whether such a problem exists in the New
Zealand context". Telecom agrees that this is the appropriate starting point, but is
disappointed by the lack of clarity and precision in the Commission's consideration of
the competition problems identified in other jurisdictions.
566.
The Commission notes at page 33 that in other jurisdictions the competition problems
that unbundling has been designed to address include:
•
unbundling to deal with the incumbent's market power in the local loop and to
stimulate competition in the last mile; and
•
unbundling to ensure a faster rollout of broadband services.
567.
However, neither of these two statements clearly identifies a competition problem. The
first refers to market power but does not identify its source, thus providing a poor base
from which to consider whether unbundling might assist in resolving the competition
problems. The second statement does not make it clear how "ensuring a faster rollout
of broadband services" is a "competition problem": presumably, a faster rollout of
broadband services might be the outcome of the removal of a competition problem, but
cannot be the competition problem itself.
568.
The discussion in Chapter 3 of the Issues Paper makes it clear that the literature from
other jurisdictions views unbundling as addressing two claimed sources of competition
problems:
(a)
unbundling is required to circumvent a natural monopoly position. If it is not
economically efficient to duplicate the local access network, then unbundling
may facilitate competition for the supply of services utilising the incumbent's
network and, by comparison with wholesale provision, may promote the supply
of differentiated services; and
(b)
unbundling promotes investment in alternative local access networks by
reducing the costs of entry, including the cost of investment in network
infrastructure.
569.
In the Commission's Issues Paper, and in a number of the citations that it provides, joint
treatment of these two issues results in a confusion of natural monopoly problems with
the promotion of competitive bypass. It is logically inconsistent to refer to both natural
monopoly problems and the promotion of competitive bypass as rationales for the
adoption of unbundling. If there is a natural monopoly, then alternative local access
networks will be inefficient by definition.
570.
If a natural monopoly exists, then competition and the long-term welfare of consumers
will be improved if a regulator can set efficient prices for access to the natural monopoly.
There is, however, no credible case to be made that promotion of entry by competitors
will increase efficiency or consumer welfare. More importantly, regulatory promotion of
entry may harm consumers even where there is a natural monopoly, because
subsidisation of entry through mechanisms such as artificially low regulated prices will
have pervasive negative impacts on the efficiency of the market as a whole. The
Commission must therefore confine its attention to the identification of natural monopoly
facilities, and consider whether unbundling is an efficient mechanism for providing
138
access to that facility, and eschew any interest in the use of unbundling to promote
entry.
571.
If competitive bypass is possible, then the network is not a natural monopoly and
facilities-based competition should be preferred because of the potential for product
differentiation, and the options that result from technological diversification of the options
available to consumers. The argument that unbundling assists competitors in staging the
rollout of competing networks is logically inconsistent with the claim that the local access
network or PDN is a natural monopoly, and impossible to justify on efficiency grounds.
Investment cost and timing issues for potential entrants are not matters that justify
regulatory intervention under the Act.
Defining effective competition, natural monopolies and bottlenecks
572.
The requirement that the Commission give precedence to dynamic efficiency has two
implications for consideration of natural monopoly. First, it must adopt a definition of
natural monopoly that is dynamic. Second it must recognise the implications of dynamic
competition for market structure. The standard textbook definition of a natural monopoly
considers a static model in which a fixed investment results in declining average costs
over the feasible range of output. A dynamic representation of natural monopoly will
consider the potential for changes in technology or demand over time that will make
bypass feasible. For example, a natural monopoly will be subject to competition from
lower cost facilities, and these will emerge over time as potential competitors of the
incumbent search for technologically superior solutions that will allow them to bypass
the incumbent network.
573.
The Commission's view of effective competition in the access network and PDN appears
to be guided too much by reference to models of perfect competition.
In
telecommunications, dynamic imperfect competition is a more realistic model, since it
can take account of sunk investment, technical change and product differentiation.
Dynamic competition means that while an individual access network may have declining
average costs over the feasible range of outputs, competition is provided by the
development of alternative technologies and networks. While each new access network
may have declining average costs over the feasible range of output, uncertainty about
the path of technical change will make it possible for different networks with different
cost structures and differentiated products to compete in providing services to
consumers. Hence, in the framework of dynamic competition, the question of whether
the copper wire local loop is a natural monopoly hinges on whether the cellular, satellite
and wireless local access will provide effective competition in the foreseeable future.
Thus, the definition of a natural monopoly is much more complex in a world in which
dynamic efficiency is considered. The Commission must recognise that short-term
natural monopolies are only of interest in a static world, and only relevant to static
efficiency.
574.
At paragraph 42 the Commission notes concerns about oligopolistic behaviour between
small numbers of competing infrastructure providers. Oligopolistic behaviour is most
unlikely to be observed in dynamically efficient markets where there are competing
network providers with differentiated infrastructure technologies (as occurs when
networks are constructed at different times). It is well established in the economics
literature that oligopolistic behaviour will only be observed where it is possible for firms
to negotiate, write and enforce a collusive agreement. These conditions are unlikely to
prevail where there are competing infrastructure providers and more likely to prevail
where there are regulated unbundling or wholesale regimes because:
(a)
Interaction between firms on unbundled elements and wholesale products,
albeit at regulated prices, creates greater opportunity to discuss joint increases
in profitability. Less interaction occurs between competing network providers
139
where only an interconnection agreement is required for efficient operation of
both networks.
(b)
If one network has newer technologies and lower costs, or the prospect of
being able to offer a superior range of new services in the future, it is unlikely
that the owner of this network will enter into pricing agreements with the owner
of an older network. It is not clear why the network with lower costs or superior
products would enter into a collusive agreement that protected the market
share of its rival(s).
(c)
Regulatory structures for interaction between competing firms also allow firms
to collect more information about the pricing and strategy of their competitors
than is available between two competing but interconnected networks. In
particular, unbundling and wholesaling both provide for considerable
transparency in the cost structures and product offerings of competitors.
Transparency of cost structures is reduced, and there is greater potential for
vigorous competition through discounts, bundling and other forms of price
discrimination, where there are competing networks.
(d)
The level of interaction required by agreements to use unbundled elements
and to purchase wholesale products may provide scope for the development of
punishment strategies for those firms who cheat on any collusive agreement.
In contrast, competing networks have no direct means of punishing rivals aside
from engaging in vigorous competition in relation to price and new services..
575.
At paragraph 92 the Commission notes that the Guide describes bottlenecks as key
facilities that are unlikely to be duplicated in the short to medium term. While Telecom
agrees that it is conceptually possible to define a bottleneck as a facility that is a natural
monopoly in the short term, it is not clear that this has any relevance to the
Telecommunications Act given the requirement that the Commission consider long-term
benefits to end users. Dynamically competitive telecommunications markets may be
characterised by facilities that have the appearance of natural monopolies in the short
term, but are in fact just the mature phase of one technology at the point before it is
displaced by an alternative technology. Efficient regulatory responses to short-term
bottlenecks will be quite different from those appropriate for natural monopolies that are
unlikely to be subject to duplication or bypass in the foreseeable future. In particular, the
cost of introducing a regime such as unbundling is unlikely to be justifiable as a
regulatory response to a short-term bottleneck, especially when alternative regulatory
responses such as the wholesale regime may remove much of the short-term impact of
the bottleneck
576.
Telecom submits that the Commission must consider a timeframe that is consistent with
the evaluation of dynamic efficiency, and that in the context of an assessment of the
existence of a natural monopoly, this means the medium to long term (corresponding
perhaps to 5 – 10 years). Only a period this long will allow the Commission to consider
both the claim that the local loop and PDN are natural monopolies against the evidence
the duplication and bypass by alternative technologies are feasible and will be
implemented in the foreseeable future. In addition, it is only over a 5 to 10 year period
that the prospective impact of unbundling on competition can be assessed.
577.
Telecom is also concerned about the Commission's use of the term "duplication" in its
description of bottlenecks and more generally in respect of infrastructure competition.
As was demonstrated above by the discussion of the recent history of infrastructure
competition in New Zealand, the extent and speed of technical change in the
telecommunications industry make bypass by an alternative technology a more likely
route to competition than duplication. For example, the Commission's assessment of
whether the local loop is a natural monopoly will hinge crucially on its assessment of the
period over which cellular, satellite and wireless technologies will become effective
140
substitutes for fixed wire access. The Commission should make it clear that it
understands these issues by using the term bypass as an alternative to duplication, and
by considering scenarios that explicitly recognise that new networks (whether built by
the incumbent or the entrant) are unlikely to duplicate the technology of the existing
network.
The impact of unbundling on facilities based competition
578.
In paragraph 121 of its Issues Paper the Commission notes that:
Some regulators argue that unbundling stimulates competitors to roll out their
own networks, others that it is a long-term form of competition in itself.
In this section we consider the view that unbundling stimulates competitors to
roll out their own networks.
579.
In paragraph 121 of its Issues Paper the Commission cites the view of Ovum that
unbundling will act as a stimulus to facilities based competition. The Commission's
citation does not accurately transcribe the text of the Ovum report. The correct
quotation for the full section of the relevant text reads:
If LLU is priced correctly to reflect the true costs of building a modern access
network, then entrants will only be encouraged to chooses LLU (over the
alternative of deploying their own infrastructure) to the extent justified by the
incumbent's economy of scale advantages. In due course, once the entrant has
achieved a critical mass of customers in a local area, it is unlikely to opt instead
for its own competitive facilities. Thus properly priced LLU has the effect of
encouraging alternative local infrastructure if an only if there are true economic
benefits from its duplication of facilities.
The evidence to date from markets with and without LLU supports this counterargument.
•
In the US, where LLU is available, entrants have used it selectively,
primarily as an entry strategy to lower their investment risk. However,
they are installing their own facilities as soon as it makes commercial
sense to do so….
We thus believe that LLU will lower the major barrier to market entry and, over time, will lead
to an increase in the amount of investment in alternative access networks.
580.
The Commission's Issues Paper (at paragraph 206) also quotes from the ACCC's
declaration that local loop unbundling become a declared service, where the ACCC said
that "…declaration is expected to facilitate the roll out of new infrastructure through
lowering entry barriers and reducing investment risks".
581.
The views of Ovum and (implicitly) the ACCC contain three logical errors.
(a)
It is not possible for unbundling to lower the investment risk of the entrant (as
they claim it has in the US) if unbundling is priced to reflect the true cost of
building a modern network (as they claim it must be). The true cost of building
the network will include the investment risks, including the risk of stranding and
the cost of the loss of the option to wait to invest. If unbundling lowers the
investment risk of the entrant, it can only be because regulators consistently
price the cost of access at a level that does not fully reflect the costs of the
sunk investment of the incumbent.
(b)
If the economies of scale of the incumbent are such as to make the local loop a
natural monopoly, then the acquisition of customers by the entrant is unlikely to
encourage the entrant to build out its own network, and is irrelevant to the
141
efficiency of their decision to do so. The transfer of customers from the
incumbent to the entrant has no impact at all of the assessment of whether the
local loop is a natural monopoly. If it is a natural monopoly, then it will be
inefficient for the entrant to build their own network no matter how large the
share of customers that they have.
(c)
582.
Ovum and the ACCC refer to a "barrier to entry", which if overcome will result
in the entrant building out their own network. That barrier to entry cannot be
the fact that the local loop is a natural monopoly, because there is no
regulation that will change the fact that it is inefficient to build out the local
network. If therefore appears that the references to a barrier to entry refer to
the high cost of investment which is lowered by unbundling. However, the cost
of investing in infrastructure is a cost of being a facilities-based
telecommunications provider, not a barrier to entry. Policies that lower costs of
doing business provide subsidies to entrants not the removal of barriers to
entry.
The Ovum study also assumes that the need for firms to invest in infrastructure up to the
point at which the copper loop joins the network is a barrier to entry, and argues that the
rollout of fibreoptic cable to cabinets and RCUs increases the barrier to entry. The
Ovum study notes (at page 18) that
…the entrant has to install its own capacity down to that point in the network
which increases the cost of provision. This means that the barriers to market
entry using LLU are steadily rising as access network modernisation takes
place."
583.
Telecom considers the assumption that increases in the infrastructure investment
required by the entrant constitute a barrier to entry to be without foundation. Unless it
can be demonstrated that the infrastructure of the core network is a natural monopoly,
then no barrier to entry can be assumed to exist.
584.
The Commission must not repeat the conceptual confusion and logical inconsistency of
the Ovum report. To avoid these problems it should recognise the inconsistency
between a focus on addressing problems created by any natural monopoly (bottleneck)
and arguments that the benefits of unbundling include:
585.
(a)
Helping entrants achieve a critical mass of customers before they invest in full
infrastructure roll-out, and
(b)
Reducing the investment risk of entrants.
The Commission must focus its investigation solely on identifying those areas in which
network competition will not be economically feasible in the foreseeable future. If
network competition is feasible then there is no economic justification for mandating
unbundling.
Does unbundling deter investment?
586.
The Commission considers the impact of unbundling on investment in a number of
sections of its Issues Paper, particularly at paragraph 188 and in Appendix 2. Telecom's
view is that the impact of unbundling on investment will depend on three factors:
(a)
The pricing principles used for unbundling
(b)
The portion of the network that is subject to mandatory unbundling; and
142
(c)
The perceived security of the property rights acquired by incumbents when
they make new network investments.
587.
Telecom notes that the work by Kahn, Haring and Rohlfs (cited in Appendix 2 of the
Issues Paper), and many other authors does not attempt to argue that every form of
unbundling will reduce investment. Rather, they argue that the cost-based pricing
methodologies of regulators in the US and elsewhere have consistently set prices for
unbundled facilities at rates so low that they undermine incentives to invest. Thus, the
impact of unbundling on investment hinges on the pricing principles rather than the
existence or otherwise of unbundling.
588.
When unbundling is introduced, entrants are granted an option to delay investment by
renting unbundled elements. This may be particularly important with new and uncertain
technology, where unbundling grants the entrant the option to utilise the technology
while waiting to see if it is commercially successful, or waiting to see if it is likely to be
replaced by a superior technology within a short period. These options are costly for the
incumbent to provide, since its investment in new technology is fixed and largely sunk,
and it has no right to recover a portion of the cost from the entrants if the investment is
unsuccessful, or if it is "stranded" by the emergence of a superior technology long
before the end of its engineering life.
589.
Up to this time, telecommunications regulators have failed to develop cost principles for
unbundling that reflect the incumbent's true cost of investment in an industry with rapid
technical change. In particular, they have consistently based their pricing on required
rates of return on capital invested that are well below the rates of return that entrants or
incumbents require before undertaking new infrastructure investment. As a result,
regulators have usually set prices for unbundled network elements at levels that are so
low as to provide entrants with a strong incentive to rent unbundled elements and
provide incumbents with a strong incentive not to invest in new technologies.
590.
As Professor Quigley points out in a paper already provided to the Commission,89 the
resolution of this pricing problem with unbundling is difficult precisely because the cost
of the unbundled element will only be one component of the calculation of the efficient
lease rate (price) for a lease contract over that element. The requirements for the
calculation of efficient rental rates go well beyond data on costs of individual network
elements, the expected rate of depreciation in capital value, and the cost of capital
associated with ownership of the asset.
591.
Professor Quigley notes that:
The complexity associated with the calculation of an efficient rental payment
comes from the fact that a lease both transfers property rights associated with
the exclusive use of network elements and transfers risks associated with the
ownership and use of the network element. The allocation of risk-bearing
between the lessee and lessor will depend on the provisions in the lease and on
particular circumstances specific to the firm (such as the probability of
bankruptcy) and specific to the asset (such as the expected path of the market
price of the asset over time). Thus, the calculation of the efficient price for a
lease goes well beyond calculations based simply on cost.
592.
He further states that:
The different terms associated with lease contracts may be thought of as
complex combinations of real options provided to or by the parties to the lease
agreement. For example, leasing preserves the real option of the entrant to
wait to invest, and a lease that may be cancelled by the lessee at short notice
preserves the lessee's option to adopt a new technology as soon as an
89
Neil Quigley, The Public Policy Framework For the Consideration of Local Loop Unbundling (Wellington:
Charles River Associates) 7 March 2003.
143
alternative network is available. These options are costly for the incumbent (the
lessor) to provide, and valuable to the lessee, and thus should be reflected in
the rental payments for network elements that are set by the regulator.
593.
Telecom's view is therefore that the Commission cannot reach a view about the likely
impact of unbundling on investment until it has determined the pricing methodology that
will be used to set the price of unbundled network elements. This is all the more
important because avoidance of the problems with the pricing of unbundling that have
been so clearly identified in the international literature will require a fundamentally
different methodology and approach to the calculation of the lease rate than those
currently being used by the Commission to set prices under the Telecommunications
Act.
594.
The pricing of unbundled network elements also presents major challenges for the
Commission with respect to the allocation of fixed and common costs. Regulatory rules
must normally be established to allocate these costs proportionately across different
services, but competitive markets will not allocate costs in this way. Competitive
markets will allocate fixed and common costs on the basis of Ramsey pricing rules. The
problem for the Commission is that in respect of network elements the fixed and
common costs are the largest share of the costs to be allocated, and any regulatory
rules for the allocation of these costs may be less efficient than the allocation that would
be applied in a competitive market.
595.
The portion of the network that is subject to unbundling will affect the extent to which
unbundling stimulates investment. The further into the core of the network mandatory
unbundling is extended, the less investment by entrants and incumbents will be
associated with unbundling. This is because the consistent failure of regulators to adopt
pricing principles for unbundled elements that fully reflect the benefits of the lease
contract to the entrant and the costs of the lease contract to the incumbent means that:
(a)
The lease of unbundled elements will normally be preferred to network
investment by any entrant; and
(b)
Investment in new network infrastructure or the upgrading of existing
infrastructure by the incumbent is equivalent to granting options to entrants
without any compensation.
596.
In footnote 64 (paragraph 188) the Commission refers to views expressed by George
Yarrow (without reference to source) and Dr John Small that incumbent
telecommunications companies may not invest in the absence of unbundling, implying
presumably that the loss of investment as a result of the introduction of unbundling will
be small. Telecom rejects both the general assertion that incumbents lack incentives to
invest in the absence of unbundling, and the logic of the specific views expressed by
Yarrow and Small. First, incumbents are profit-maximising firms just like the entrants,
and they have incentives to undertake investments that are profitable. Second, the past
has no bearing on incentives to invest in the future. The incumbent firm's incentives for
future investment hinge completely on the threat of entry and bypass of the existing
technology as well as the profitability of the investment.
597.
The property rights providing for use, and providing the right to exclude use by others,
are abrogated by the introduction of unbundling. Unbundling not only requires the
incumbent to give up use rights in its property but also requires the incumbent to
become a lessor. There is nothing in theory to say that the incumbent should be
indifferent between ownership of an asset for its own use and ownership of an asset for
lease. The incumbent will have the option of a wide variety of investment projects. It is
entirely plausible that an asset that was attractive to own when it could be used is
unattractive to own when the property right associated with use is removed. If there are
144
synergies between ownership and use, then removal of the right to use may mean that
an alternative use of the capital is more attractive.
598.
The requirement to lease to entrants in fact amounts to requiring the incumbent to invest
its capital in facilities provided to its competitors. The incumbent no longer has the
option to redeploy that capital into areas where it may have a higher expected return,
and in a world in which capital is scarce this will have substantial costs for the
incumbent. Unbundling thus amounts to direction of the capital investment policy of the
incumbent as well as the confiscation of its property rights. There can be no question
that regulation of the type associated with unbundling will change the views of all market
participants about the payoff to investment in infrastructure.
Vertical integration, price discrimination, and benefits to end users
599.
600.
601.
Elsewhere Telecom has described the NGN investments that are anticipated and the
impact that this technology will have on the provision of telecommunications services in
New Zealand. The NGN services will be capable of delivery over copper (DSL),
wireless, satellite and cellular access platforms, and therefore do not in themselves
create competition problems. In addition, the investment in the NGN is unlikely to create
a natural monopoly because:
(a)
both niche competition and duplication of services provided by competing
networks will be feasible; and
(b)
there will, for the foreseeable future, exist strong competition resulting from
convergence
between
specialised
content,
information
and
telecommunications companies.
The uncertainty of the path of technological change, and the early stage of the
development of the NGN mean that the risks associated with regulation that may impact
on the incentives to invest in new network infrastructures are particularly large:
(a)
Because technical change is imminent, regulation geared to historical and
present infrastructures and technologies may either quickly become redundant
or, more importantly, have unforeseen and perverse effects if it is cast in a way
that allows mechanistic application to future technologies.
(b)
Because the precise form of technologies and network structures associated
with the NGN is at present unknowable, it will not be possible to write
technology-specific regulation of the type that is required for unbundling.
Telecom submits that at the present time it would be inappropriate to introduce
unbundling that is to be applied to the NGN given that views about the
competitive processes, access technologies and application platforms that will
be associated with the NGN are continuing to evolve so rapidly.
(c)
Because the uncertainty associated with NGN technology provides the
potential for all industry participants to leapfrog over their competitors with
timely investment in the technology that does ultimately prove successful, the
next few years are likely to witness intense dynamic competition. The strength
of this dynamic competition, and the ensuing benefits to end users, could
however be substantially undermined by unbundling regulation which focuses
the attention of service providers on small changes in market share using
existing access technologies.
A key disadvantage of unbundling is that it may inhibit the owner of the network
infrastructure from price discrimination through vehicles such as the sale of bundles of
access and services aimed at different market segments. This has very important
145
implications in a market where major new investment is feasible so long as there is a
business case to support it.
602.
Price discrimination may facilitate early investment and thus earlier delivery of new
services to consumers, because the ability to charge different groups of consumers
prices dictated by the value they receive (or their willingness to pay) will increase the
revenue generated by the investment. Price discrimination is not efficient in all
circumstances, but in general it is efficient under the condition that output is increased.
Increased output may take two forms:
(a)
New infrastructures and services may be made available earlier than would
otherwise have been the case. The benefits of earlier availability may offset
the loss of consumer surplus associated with price discrimination, and the firm
undertaking the new investment earns only competitive returns in the long-run.
This is particularly important in telecommunications, where the social welfare
benefits of early adoption may be very large.
(b)
Price discrimination may facilitate the offer of some (perhaps basic) services
associated with the new technology at prices that increase the total number of
consumers with access to the new technology, and which thus increase total
output in the market.
Both cases are consistent with observed pricing strategies for telecommunications
services in New Zealand.
603.
In an environment in which technology is not changing rapidly, it may be feasible to
anticipate the types of price discrimination practices that will be utilised by competing
firms and regulate to protect and enhance the competitive benefits associated with
them. In an environment of rapidly changing technology, it will not be possible to predict
either the price form or the welfare benefits arising from price discrimination and
bundling of services. In these circumstances, mandatory unbundling may have
unintended and perverse impacts on the ability of firms to price discriminate, and thus by
impairing the business case for new investment, substantially reduce the benefits
received by end-users of telecommunications services.
604.
A key disadvantage of unbundling is that it will inhibit the owner of the network
infrastructure from price discrimination through vehicles such as the sale of bundles of
access and services aimed at different market segments. This has very important
implications in a market where major new investment is feasible so long as there is a
business case to support it. Price discrimination may facilitate early investment and thus
earlier delivery of new services to consumers, because the ability to charge different
groups of consumers prices dictated by the value they receive (or their willingness to
pay) will increase the revenue generated by the investment. The benefits of earlier
availability may offset the loss of consumer surplus associated with price discrimination,
and the firm undertaking the new investment earns only competitive returns in the longrun.
The relevance of wholesaling and other existing regulated services
605.
It is not possible to consider the costs and benefits of the introduction of unbundling
without considering the impact on the market of other regulated services. In particular,
the Commission's recent Wholesale determination will have a substantial impact on the
costs and benefits of any unbundling regime that might be considered.
606.
Since the fundamental issue for the Commission to consider is whether unbundling is
necessary to address competition and efficiency problems in the local loop, the impact
of the Wholesale determination on any competition and efficiency problems in the local
access market must be considered. The impetus to the development of wholesaling that
146
will be provided by the Commission's determination will facilitate substantial and
effective competition in the provision of retail services over the local loop. Wholesaling
provides limited scope for product differentiation by comparison with unbundling, but it is
not clear that in the future this will necessarily provide advantages to consumers.
Unbundling provides greater scope for product differentiation only if copper wire access
continues to be the preferred access technology. If wireless or cellular access becomes
the preferred technology, then the benefits of differentiated products provided over the
copper local loop will be minimal, and certainly not justified by the costs that unbundling
will impose on the New Zealand Telecommunications industry.
607.
Not withstanding the additional costs of unbundling over wholesale, unbundling can
provide benefits over wholesale only if the following two conditions are satisfied:
(a)
The incumbent is electing to delay the introduction of a service that can be
profitably delivered via the existing local loop, or quality of service is lower than
would be under unbundling competition but not wholesale; and
(b)
Competitive by-pass of the local loop is not economic either because it is a
natural monopoly or there is some other barrier to entry.
608.
In short, the benefits of unbundling over wholesale will be confined to areas where the
incumbent is delaying the introduction of product diversity into areas where by-pass is
not a threat. The by-pass condition is relevant because a delay in the introduction of a
new service in spite of the competitive pressure from potential or actual facilities-based
access competition is an indicator that the value of the new service may in fact not be
high and may be negative. Wholesale provides for product differentiation on the basis of
brand, so only if a greater diversity of services can be provided does unbundling provide
any prospect of benefits to consumers.
609.
These conditions create a test for the benefits of unbundling, since a counterfactual set
of services is observable in areas where the incumbent faces potential or actual access
competition (ie from TelstraClear). A test for whether unbundling can provide benefits
that wholesale alone cannot deliver is identifying services that are only being provided in
areas with access competition, and excluded from all other areas.90 Only if other
providers are offering services that are differentiated from those of Telecom will it be
credible to argue that unbundling will provide those benefits.
610.
Telecom submits, in addition, that this test is necessary but not sufficient to identify
unbundling benefits over wholesale access, since there may be reasons unrelated to
competitive pressure which is stopping the roll-put of new services in non-competitive
areas. For example, costs may be preventing the profitable roll-out of services in
remote areas. In this case, unbundling would not provide any net benefits because an
efficient unbundling price would require both the entrant and incumbent to face these
prohibitive costs.
Transactions costs and other costs of mandating unbundling
611.
90
The Commission's Issues paper has little to say about transactions costs, but these are
high and very important. As Telecom has noted above, the transactions costs
associated with unbundling arise from the combination of complex contracts about the
detail of the implementation about unbundling, and the effective creation by unbundling
of markets for services where no competitive firms would ever find it commercially
practical to create markets. For example, in commenting on the US early experience
with local loop unbundling, Faulhaber (2001) offers the following transaction costs
Note that the TSO rules out such variations in diversity for basic services including dial up data speeds.
147
explanation for the limited success of unbundling in bringing about enhanced
competition:91
Congress and the FCC acted to insert a market boundary deep within the
RBOC local exchange networks … This market boundary involved extremely
rich information flows across it, resulting in very high transaction costs. … to
ensure equality of treatment of CLECs, a highly detailed regulatory scheme …
flourished, complete with extensive complaint procedures and appeals as
market participants tested the FCC and the courts' willingness to enforce the
new regulation. It is the complexity of the market boundary which forces a
complex regulatory regime to manage that market, and uncertainty and
vagueness that encourages the legal and political gaming that results in very
high political transaction cost.
612.
In other words, the prescribed points of interconnection have created untenable market
boundaries with prohibitive transaction costs.
613.
The level of transaction costs may also be shaped by the terms and conditions under
which an access seeker obtains access to the incumbent's facilities. These conditions
can range from a regime with minimal 'reasonable access' obligations whereby the
incumbent largely retains control of the assets and has minimal cost impositions, to a
regime in which the local loop is considered a common resource to which all operators
have equal rights of access, and the incumbent, as owner of the asset, is obliged to
undertake any development of the assets to facilitate equal access.
614.
Where unbundling increases transaction costs it may result in an increase in prices as
the network owner attempts to recover the additional costs imposed on it by the
unbundling regime. In this case, any analysis of unbundling would need to consider the
trade-off between the increase in prices paid by consumers and any long-run benefits
that they might receive from unbundling.
615.
For these reasons, Telecom considers that both the Commission's Issues Paper, and
reports such as that by Ovum provide too little attention to the magnitude of transactions
costs and their potential impact on any assessment of dynamic efficiency.
Summary: Necessary conditions for unbundling to promote dynamic efficiency
and provide long-term benefits to end users
616.
91
To summarise the above discussion, Telecom submits that for unbundling to promote
efficiency and provide long-term benefits for end users it is necessary that
(a)
the local loop and fixed PDN be natural monopolies over the medium to long
term;
(b)
it be feasible for entrants to offer products that are differentiated from those
available under the wholesale regime;
(c)
the transactions costs associated with the introduction of unbundling and the
efficiency losses resulting from the confiscation of the incumbent's property
rights are outweighed by the efficiency gains from unbundling;
(d)
access to unbundled elements be provided at a price that at the least fully
reflects the incumbent's cost of capital for local loop or fixed PDN investment,
and the options that are provided to the entrant by the terms of unbundled
access; and
G. F. Faulhaber (2001) "Policy-Induced Competition: The Telecommunications Experiments", unpublished,
http://bpp.wharton.upenn.edu/Acrobat/Faulhaber_AEW_10_3_01.pdf.
148
(e)
617.
unbundling be implemented on a basis that does not impair the dynamic
competitive processes associated with competing investments in uncertain new
technologies, or undermine the incentives that all telecommunications services
providers face to make those investments.
Telecom submits that if any of these conditions are not met, then unbundling will not
promote efficiency or provide long-term benefits to end users.
149
9.
TELECOMMUNICATIONS REGULATION IN OTHER JURISDICTIONS
Introduction
618.
619.
The Commission should not give any weight to overseas experience with unbundling for
the following reasons:
(a)
the statutory unbundling provisions in the Act (referred to in this section as the
"NZ Act") are unique and unlike the statutory regimes which governed the
implementation of unbundling in the overseas jurisdictions where it has been
mandated;
(b)
in many cases, the services and forms of unbundling mandated in those
overseas jurisdictions also use network elements to which section 64 of the NZ
Act does not apply;
(c)
the justifications for unbundling in other jurisdictions have consistently bundled
together natural monopoly problems with regulatory assistance to entrants who
wish to stage the building of networks. Telecom is of the opinion that this latter
goal is inconsistent with the objectives of the NZ Act and refers the
Commission to section 6.1 of its submission; and
(d)
New Zealand's newly introduced extensive regulated wholesale regime is
extensive. In most overseas jurisdictions where unbundling exists,
comparatively few services (or none at all) are subject to a regulated wholesale
regime.
To highlight these differences, Telecom provides below:
(a)
a broad overview of the regulatory unbundling regimes of the jurisdictions listed
in Appendices 3 and 4 of the Issues Paper; and
(b)
country-by-country summaries of those jurisdictions.
Overview
The European Union
620.
In the mid-1990s, the telecommunications markets of most EU member states (with the
exception of the UK, which is discussed starting from paragraph 630 below) were
characterised by little or no competition, where a (usually) Government-owned
incumbent dominated all aspects of the telecommunications industry (see Figure 9.1
below).
150
Figure 9.192
Country/
Incumbent
% of public
ownership as
at 1/09/99 (EU
LLU Directive
Dec 1999)
Market Share
of Incumbent Local Calling
1998
75% + 1 share
100%
83%
100%
85%
100%
84%
1995
50% +1 share
100%
95%
100%
95%
100%
89%
1992
0.0%
95%
95%
94%
No data
90%
No data
1998
77.8%
100%
100%
97%
96%
87%
96%
1997
63.6%
100%
98%
100%
87%
100%
83%
1996
65.3%
100%
98%
100%
64%
100%
64%
51.0%
100%
100%
100%
100%
100%
100%
1996/97
0.0038%
100%
100%
100%
98%
100%
98%
1998
3.46%
100%
100%
100%
94%
100%
68%
100%
100%
100%
100%
100%
100%
89%
1994
44.0%
100%
99%
100%
95%
90%
80%
1995
10.5%
100%
100%
100%
100%
100%
100%
1997
1.3%
100%
98%
85%
90%
100%
89%
100%
98%
92%
100%
75%
68%
62%
BT .002%
K 44.997%
87%
73%
73%
65%
55%
50%
Date of
Privatisation
1997
Austria (Tel
Austria)
Belgium
(Belgacom
S.A.)
Denmark
(TeleDanmark
Finland
(Sonera)
France
(France
Telecom)
Germany
(Deutsche
Telekom)
Greece
(OTE)
Ireland
(Eircomm)
Italy
(Telecom
Italia)
Luxembour
g
Netherland
s (KPN)
Portugal
(Portugal
Tel)
Spain
(Telefonical
de Espana
S.A)
Sweden
(Telia)
UK (BT &
Kingston)
1984
1999
Market Share
of Incumbent Long Distance
1997
1999
Market Share of
Incumbent International
1997
1999
621.
To address this lack of competition, the EU introduced a broad package of reforms in
1997, which were intended to liberalise the telecommunications industry (the "EU
Telecommunications Regulatory Framework").
The EU Telecommunications
Regulatory Framework was intended to promote competition through various measures,
including introducing broad obligations relating to access and interconnection. However,
it did not mandate unbundling.
622.
The EU introduced unbundling in December 2000, with effect from mid-2001.93
Unbundling was legislated for by a regulation ("EU Regulation"), a measure quite
different from the EU's ordinary legislative process.94 The overriding reason for the use
92
"Players in The European Telecommunications Market", 2000 Implementation Report of the EU's Information
Society Directorate, Chart 5, 13 < eunet:http://europa.eu.int/ISPO/infosoc/telecompolicy/5R_ANN42.pdf>.
93
Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on
Unbundled Access to the Local Loop.
94
The EU's forms of action under Article 249(189) of the EC Treaty are regulations, directives, decisions,
recommendations and opinions. These are independent legal instruments in EU law, with no connection to
151
of this instrument was political pressure to introduce unbundling quickly. Unbundling
was viewed as a means of promoting service-based competition to achieve the
underlying political goal of increasing broadband penetration as quickly as possible in
the EU member states. Mandating unbundling would, it was hoped, produce an
incentive for competitors to enter the broadband services market using recently
developed DSL technologies.95
623.
The EU Regulation mandates three types of unbundling:
(a)
"full" unbundling to the incumbent's MDF (this form of unbundling is usually
referred to as "local loop unbundling");
(b)
"shared" unbundling to the incumbent's MDF (also referred to as "line
sharing"), where the incumbent handles the local loop and provides the high
frequency portion of the loop to competitors. This enables the incumbent to
continue to provide voice telephony services over the loop at the same time as
the competitor provides data services over the high frequency portion; and
(c)
"sub-loop" unbundling, which is a form of unbundling that extends only to the
street cabinet/distribution pole. Sub-loop unbundling was introduced primarily
in recognition of the fact that the nature of network construction in some EU
member states (primarily in Germany) does not support full unbundling.
624.
The EU Regulation does not mandate the unbundling of fibre or hybrid loops. The
exclusion of fibre from the scope of the EU Regulation was an explicit policy decision,
made on the grounds that the provision of fibre loops is a specific market which is
developing at the moment, under competitive conditions.96
625.
Of the countries referred to by the Commission in Appendices 3 and 4 of the Issues
Paper, Austria, Belgium, Denmark, Italy, Ireland and the Netherlands have introduced
legislation to comply with the EU Regulation. Germany did not initially legislate to
mandate line sharing. The EU expressed its disapproval of Germany's stance and
threatened to take disciplinary action against Germany. Norway and Switzerland, which
are not EU member states, have also legislated to mandate unbundling in order to align
their telecommunications regulatory regimes with those of the EU member states.
626.
The levels of uptake of unbundling since its introduction in the EU have been very low.
To date, only 0.56% of local loop lines in the EU have been unbundled. The EU's
Eighth Implementation Report notes that "progress in regard to unbundling over the last
year has still been slow".97 By 1 October 2002, there were just over 1 million unbundled
lines in the EU, out of a total of nearly 187 million subscriber lines. The majority (77%)
of this statistic derives from Germany, where 855,404 lines have been unbundled. The
Eighth Implementation Report shows that in the UK, only 1509 of the 29 million lines
have been unbundled (which equates to 0.0052% of total lines). In Denmark, only
44,061 (1.32% of total lines) have been unbundled, and France (1043) and Belgium
(1556) with (0.0030%) and (0.033%) respectively.
national legal instruments. Regulations are binding in their entirety and are directly applicable in Member States.
As "Community laws", regulations must be complied with fully by those to whom they are addressed (individuals,
Member States, Community Institutions). Regulations apply directly in all Member States, without requiring a
national act to transpose them, on the basis of their publication in the Official Journal of the EU.
95
Refer to paragraph 691.
96
Commission Recommendation on Unbundled Access to the Local Loop: Enabling the competitive provision of
a full range of electronic communications services including broadband multimedia and high-speed Internet,
Brussels, 26 April 2000, C(2000)1059.
97
Commission of the European Communities, Eighth Report From The Commission On The Implementation Of
The Telecommunications Regulatory Package, Brussels, 3 December 2002, COM(2002) 695 Final.
152
627.
Some commentators have suggested that the European unbundling experience is not
likely to improve. Forrester Research forecast that by 2004 less than 2% of incumbents'
fixed lines would be unbundled to new entrants in any Western European country,
before unbundling would lose its relevance and penetration tapers off.98 The poor
European performance has prompted calls for a complete rethink of the unbundling
policy. For example, the head of regulatory affairs at the European Competitive
Telecommunications Association (ECTA), the telecoms trade body, notes that: "In the
short-term the [unbundling] process is going nowhere, policy makers need to go back to
the drawing board and give competitors a way of accessing local exchanges without
huge upfront expenditure..".99 Others point to the disastrous role played by the telecoms
regulators in the collapse of the European telecoms industry: 100
Regulators just as much as poor managers have blood on their hands for what
they have done to contribute to the problems the telecoms industry faces today.
[…The European telecoms industry is likely to remain in crisis for a third
successive year] with further job losses, deep indebtedness, reduced
investment (and) further bankruptcies.
628.
629.
The EU's telecommunications regulatory framework was overhauled last year. The
objective of the revised framework is to move away from specific telecommunications
regulation and towards applying general competition law principles to
telecommunications regulation. The new framework:
(a)
identifies a number of telecommunications markets;
(b)
requires that national regulators undertake a range of market reviews, using
the new framework as a guide, and identify operators with significant market
power in those markets ("SMP Operators"); and
(c)
where SMP Operators have been identified, provides for the introduction of a
number of regulations (for example, non-discrimination principles).
The EU Regulation has provisionally been retained as part of the new regulatory
framework. It is currently undergoing a consultation process. The results of that
consultation process have not yet been released.
The United Kingdom
630.
The UK telecommunications industry was liberalised, and the incumbent (BT) was
privatised, in 1984 (see paragraphs 702 to 704 below). The 1984 reforms were driven by
the goal of promoting infrastructure-based competition. Since then, the UK has become,
and remains one of the most competitive telecommunications markets in the world.
631.
The UK's regulated wholesale regime appears to be far less extensive than the New
Zealand equivalent. The price of wholesale products is generally not regulated.101 One
exception is the regulation of a wholesale product termed a "partial private circuit". A
partial private circuit is a direct connection with a customer via a 2 Mgb circuit. The
competitor purchases the circuit from the customer's premises to the nearest point of
interconnection. As the Commission notes in paragraph 462 of the Issues Paper, Oftel
(the UK telecommunications body) recently determined that the "local access" portion of
this product must be provided by BT at a regulated price.
98
Godell, L., Nordan, M., European Unbundling Death Spiral, Forrester Research Inc BV: Netherlands, 2001.
"Europe fails to open up local telephone networks", Financial Times, 31 July 2002.
100
"Vodaphone chief Gent warns EU of over-regulation", The Euronet, January 2003 (Reuters).
101
However, there are some regulated interconnect, line rental and carrier selection products. The regulation of
most of those products is based on EU Directives. One example is carrier pre-selection, which was implemented
in 2000, in accordance with an EU Directive. One other notable exception is the regulation of partial private
circuits.
99
153
632.
When unbundling was first raised as a regulatory tool in the early 1990s, it was ruled out
on the basis that it was a disincentive to infrastructure build. However, unbundling
regulation was introduced in the UK prior to the commencement of the EU unbundling
debate. In November 1999, following a public inquiry, Oftel issued a policy statement
requiring British Telecom ("BT") to unbundle its local loop. A form of unbundling
referred to as "partial baseband leased circuit" was mandated.102 Unlike the EU
Regulation, the UK unbundling debate was exclusively driven by the goal of promoting
speedy broadband uptake (see paragraph 705 below). Competition in the UK
telecommunications market was, at that stage, far more advanced than competition in
that sector in the remainder of the EU (as shown in Figure 9.1).
633.
Consistent with the EU Regulation, BT is now also required to provide full unbundling,
line sharing and sub-loop unbundling.103
634.
Unbundling has had a negligible impact on the UK telecommunications industry. The
first commercial (non-trial) co-location sites are now being handed over to operators to
install their equipment, but only a negligible number of lines have been unbundled (as
noted in paragraph 626 above), 1509 lines or 0.0052% of total BT lines.104 Part of the
reason for this lack of success is that it is not economically feasible to use unbundling
for telephony services. Whereas basic UK interconnect prices are at the bottom end of
the EU, the fully unbundled loop rental price is one of the highest in Europe. There also
exists a wide range of competitively priced (unregulated wholesale products and
favourably (for competitors) priced wholesale local access and data products.105 The
Yankee Group notes that: 106
As the true implications of the cost of unbundling unfold, many operators are
turning to wholesaling from the incumbent to avoid the risks and commitment
associated with investing in collocation.
635.
Consistent with the Yankee Group's view, the wholesale ADSL services – also known as
"bitstream access" - offered by BT have seen high uptake rates by alternative providers.
Bitstream access is provided on a non-discriminatory basis by BT at retail minus pricing
highest in Europe.107 In July 2002, alternative ADSL providers had gained a 40%
market share.108
The United States
636.
A 1984 Court decision resulted in a regulated split between local and international
telecommunications carriers. The Federal Communications Commission ("FCC"),
through a series of "expanded interconnection decisions", continued to regulate longdistance carriers with the aim of promoting competition in the provision of long-distance
telephone services.
637.
In the mid-1990s, regulatory attention shifted to the regulation of local exchange carriers
("LECs"). In 1996, The US Congress enacted the Telecommunications Act of 1996.
102
A technical description of this form of unbundling is provided in paragraph 669 below.
The requirement to provide a partial baseband leased circuit is still in effect. It was mandated by Oftel in 2000
by way of a modification to BT's licence. While the EU Regulation takes precedence, this licence condition still
remains in BT's licence.
104
See Ovum "Strategies for Next Generation Services" 2002, J4; Case Studies and Ovum "UK Interconnect
Country Analysis", 2003.
105
For example, line rental and private partial circuits.
106
The Yankee Group "Into the Labyrinth: Untangling the Real Cost of Unbundling" (Vol. 1, 1(14) September
2001).
107
While the development of the market as a whole has been slow, competitive access providers have done
much better in the UK than other countries, most notably the US and Germany, where they have less than 10% of
the DSL market.
108
Ovum "UK Interconnect Country Analysis", 2002.
103
154
638.
The US Act was intended to promote competition, with the underlying aim of speeding
up broadband penetration.109 The unbundling provisions are very widely framed and
require incumbents to offer competitors access to their network elements:110
on an unbundled basis at any technically feasible point on rates, terms and
conditions that are just, reasonable and non-discriminatory.
639.
The US Act provides an incentive for unbundling, by allowing LECs to provide long
distance services if they meet a statutory checklist.
640.
The FCC has used its discretion under the unbundling provisions to introduce a wide
range of unbundling obligations that extend far beyond local loop unbundling. As a
result, there has been a significant amount of litigation surrounding the scope of the
FCC's discretion to regulate unbundling.111
641.
Despite the breadth of the unbundling obligation, the uptake of unbundling in the US has
been relatively low. 5.7% of total switched lines in service in the US are unbundled to
new entrants (UNE-P).112 Put another way, in 6 years, alternative providers have only
attracted 3 percent of the country's lines to their own facilities - and this is steadily
declining.113
642.
In December 2001, the FCC initiated a review of its unbundling policy ("Triennial
Review"). The results of the Triennial Review were released on 20 February 2003.
Judging from those results, unbundling obligations will be significantly narrowed. For
example, the FCC has eliminated broadband access and access to fibre loops from the
list of network elements which are required to be unbundled.
Canada
643.
Local loop unbundling was mandated in Canada in 1997, by the Canadian Radiotelevision and Telecommunications Commission ("CRTC"). The CRTC's decision
Review of Regulatory Framework (discussed at paragraph 853) focused on the need to
make "applications and solutions to meet the needs of users in today's environment"
possible.114
644.
Unbundling is limited to the local copper loop and excludes the provision of switching
capacity and data services. This is consistent with one of the aims of the Canadian
Telecommunications Policy to:115
stimulate research and
telecommunications …
645.
development
in
Canada
in
the
field
of
This is not one of the NZ Act's statutory purposes.
Korea
646.
109
Unbundling was introduced in South Korea in December 2000. At the time when
unbundling was introduced, Korea was the world's leader in wireless
telecommunications and broadband Internet access. When Hanaro obtained its licence
for local telephony, unbundling was not mandated:116
This objective is echoed in the US Act's preamble, which is cited in paragraph [ ].
US Telecommunications Act of 1996, section 251(c)(3).
111
This litigation is summarised in paragraphs [ ] to [ ].
112
The remainder of this statistic refers to lines that are provided by wholesale or exclusive use of facilities-based
entry.
113
Federal Communications Commission, Local Telephone Competition: Status as of December 2002.
114
See paragraph 857 below.
115
See paragraph [ ] below.
116
See paragraph [ ] below.
110
155
After considering the potential large capital investment in its own local loop
facilities and the lack of supportive regulation, Hanaro concluded that it would
focus on the broadband access market rather than the voice telephone market.
Hanaro decided to bypass local loops by installing its own ADSL facilities and
leasing cable networks…Hanaro ignited the broadband boom…
Australia
647.
Australia's unbundling regulatory framework (which is described in detail in paragraphs
867 to 955) is very similar to the regime set out by the NZ Act. The unbundled local loop
service ("ULLS") was declared in Australia in 1999. However, the service has not been
sought after by competitors in practice. Instead, most competitors rely on Telstra's
commercial offerings. Telecom will provide the Commission with details of the
commercial offerings by Telstra Corporation to APPT (which are subject to a
confidentiality undertaking) if Telstra Corporation agrees to Telecom's request that
information to be disclosed. Telstra Corporation has not yet done so.
648.
One significant difference between the New Zealand and Australian regimes is the
scope of each country's regulated wholesale regime. The only retail service required to
be offered at regulated prices in Australia is the Local Carriage Service. The scope of
regulation of that service has recently been narrowed significantly, while New Zealand
now has 98 regulated resale services.
THE UNITED STATES
Introduction
649.
Telecom refers to the Commission's analysis in paragraphs 382 to 395 and Appendix 3
of the Issues Paper where the Commission addresses the objectives and main reasons
for mandating local loop unbundling in the US.
650.
In Telecom's view, the Commission's analysis for the most part adequately addresses
those objectives. Telecom provides a summary of the US regulatory unbundling regime
below, which expands on and adds to the Commission's summary.
651.
There are several important differences between the US regulatory unbundling regime
and the New Zealand unbundling regulatory regime. Based on these differences (which
are described more fully in the summary below and summarised in paragraph 685 to
687), Telecom submits that the US approach to unbundling should not be taken into
account by the Commission.
Background to the current US regulatory regime
652.
The regulation of telecommunications carriers in the US began in 1984, with the
modified final judgment ("MFJ") of the District Court of Columbia in an anti-trust case
brought by the US Department of Justice against AT&T.117 The MFJ required AT&T to
divest itself of its local telephone operations. The US was divided into 161 local access
transport areas ("LATAs"), most of which were centred on a city or other large suburban
centre. AT&T's local telephone operations were transferred to seven regional Bell
operating companies (local exchange carriers, or "LECs"), while AT&T retained its longdistance and manufacturing operations. LECs were entitled to provide local and intraLATA telephone services. However, they were prohibited from providing long distance
(inter-LATA) telephone services, or manufacturing equipment to use in their own, or
customers' premises.
653.
The new regime was subject to joint regulation by the Federal Government (acting
through the Federal Communications Commission ("FCC")) and State authorities. The
117
US v American Tel & Tel Co (1982) 552 F Supp 131 (DC); affd Maryland v US (1983) 460 US 1001.
156
FCC was made responsible for regulating inter-LATA and international telephone
services. State authorities were responsible for intra-LATA and local services.
Telecommunications Act of 1996
654.
After the split between local and international telephone operations, the FCC (through a
series of "expanded interconnection decisions") increasingly regulated long-distance
carriers with the aim of promoting competition. In the mid-1990s, regulatory attention
shifted to regulation of LECs. This shift eventually resulted in the enactment of the
Telecommunications Act of 1996 ("US Act"), which amended the provisions of the US
telecommunications statute (the Communications Act 1934).
655.
The US Act is intended to promote competition in the local telephony market. This aim
is made clear by the US Act's preamble, which states that its purpose is:
To promote competition and reduce regulation in order to secure lower prices
and higher quality services for American telecommunications consumers and
encourage the rapid deployment of new telecommunications technologies.
656.
Accordingly, Telecom agrees with the Commission's description of the purpose of the
US Act in paragraphs 382 and 383 of the Issues Paper and its view (at paragraph 95 of
the Issues Paper) that "addressing bottlenecks has been an important reason why
regulators have mandated LLU".
657.
However, Telecom also draws the Commission's attention to the other stated purpose of
the US Act, which is to "encourage the rapid deployment of new telecommunications
technologies". The encouragement of the rapid deployment of new telecommunications
technologies is not a purpose of the NZ Act.
658.
As the Commission notes in paragraph 385 of the Issues Paper, the US Act envisioned
three alternatives that competitors might employ to enter the local exchange market.
Those alternatives are outlined in sections 251 and 252 of the Communications Act.
Section 251 lists three ways by which a firm can enter local telephony:
(a)
Interconnection: under which a competitor builds its own network and
connects with the network of a LEC, so that the competitor's customers can
complete calls to the LEC's customers.
(b)
Resale: under which a competitor buys from the LEC, at wholesale price, the
basic service provided to the customer. The competitor then retails that
service to its customers under its own brand name, sometimes combining the
service with other services.
(c)
Unbundling: under which the LEC leases unbundled network elements
("UNEs") to the competitor. The competitor can then build its own network by
buying some network elements from the LEC and obtaining other network
elements from rivals already in the market (such as local transport services
provided by competitive access providers) or directly from equipment vendors
(such as manufacturers of switches).
659.
The US Act also enables State Public Utility Commissions ("PUCs") to establish rates
for the purchase of unbundled network elements ("UNEs") (in practice, the methodology
used to determine these rates is set by the FCC).
660.
Telecom also draws the Commission's attention to section 271 of the US Act. Section
271 authorises ILECs to provide inter-LATA services, subject to FCC approval, if several
statutory criteria are met. Authorisation is granted state-by-state and depends on
whether the ILEC has entered into an agreement with a CLEC to provide access and/or
157
interconnection (as described in section 251) in accordance with the provisions of
section 252. Section 252 provides a process for the negotiation and approval of
agreements relating to the forms of access described in section 251. The NZ Act does
not contain a similar statutory trade-off.
Unbundling provisions
661.
The unbundling provisions in the US Act are very widely framed. The key provision in
relation to unbundling is section 251(c)(3), which requires LECs to offer competitors
access to their network elements:
on an unbundled basis at any technically feasible point on rates, terms and
conditions that are just, reasonable and non-discriminatory…
662.
The FCC is authorised to rule on whether, and how, unbundling under section 251(c)(3)
should occur by applying the threshold test in section 251(d)(2). That section provides
that the FCC must consider, at a minimum, whether:
(A)
access to such network elements as are proprietary in nature is
necessary; and
(B)
the failure to provide access to such network elements would impair
the ability of the telecommunications carrier seeking access to
provide the services that it seeks to offer.
The First Order
663.
Section 251(d)(1) required the FCC to establish regulations to implement the US Act's
requirements within 6 months of the date it was enacted. Accordingly, in August 1996,
the FCC issued its Local Competition First Report and Order118 ("First Order"), which
the Commission refers to in paragraph 386 of the Issues Paper:
(a)
defined the words "proprietary", "necessary" and "impair" in the context of
section 251(d)(2);
(b)
provided a complete list of UNEs; and
(c)
established a methodology for pricing UNEs.
Unbundling requirements
664.
The FCC stated that:119
in some instances, it will be "necessary" for requesting carriers to obtain access
to proprietary elements (eg elements with proprietary protocols or elements
containing proprietary information), because without such elements their ability
to compete would be significantly impaired or thwarted…[r]equiring new
entrants to duplicate unnecessarily even a part of the incumbent's network
which could generate delay and higher costs for new entrants, and thereby
impede entry by competing local providers and delay competition, contrary to
the goals of the 1996 Act.
665.
118
The FCC adopted a literal dictionary definition of the meaning of "impair" and held
that:120
First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of
1996, 11 FCCR 15,499(1996)).
119
First Order, pp 282-283.
120
First Order, p 285.
158
generally…an entrant's ability to offer a telecommunications service is
"diminished in value" if the quality of the service the entrant can offer, absent
access to the requested element, declines and/or the cost of providing the
service rises.
666.
667.
Consistent with its interpretation of the above terms, the FCC ordered that ILECs make
seven UNEs available to competitors:121
(a)
local loops;
(b)
network interface devices;
(c)
local switching, including circuit switching and packet switching (subject to
some exceptions);
(d)
interoffice transmission facilities;
(e)
signalling networks and call-related databases;
(f)
operations support systems; and
(g)
operator services and directory assistance.
The First Order also contained an "all elements" rule, which allowed competitors to
provide services relying solely on the elements in a LEC's network.
UNE-P
668.
The cumulative effect of the list of UNEs in the First Order and the "all elements" rule
was that ILECs were, in effect, required to make bundles of UNEs available to
competitors. This enabled competitors to purchase an entire network element platform
(or "UNE-P") (which the Commission refers to in paragraph 385 of the Issues Paper).
UNE-P generally consists of a loop, switching facilities and transport.
The Supreme Court decision in AT&T Corp v Iowa Utilities Board
669.
As the Commission notes in paragraph 386 of the Issues Paper, the rules developed by
the FCC in the First Report were overturned and remanded by the Supreme Court in
AT&T Corp v Iowa Utilities Board 119 SC 721 ("AT&T"). The First Order was
challenged on the grounds that the FCC did not have the jurisdiction to implement the
US Act's local competition provisions and that its rules governing unbundling (in
particular, Rule 319 and the "all elements" rule) were inconsistent with the express
provisions and purpose of the US Act.
670.
The Supreme Court struck down as "arbitrary and capricious" the list of UNEs in Rule
319.122 Consequently, the Court directed the FCC to:
determine on a rational basis which network elements must be made available,
taking into account the objectives of the Act and giving some substance to the
"necessary" and "impair" requirements.
121
First Order, Rule 319.
In doing so, the Supreme Court relied on the "Chevron doctrine", stemming from Chevron USA v Natural
Resources Defense Council (1984) 467 US 837, where the Court had held that regulations promulgated by
agencies pursuant to a congressional grant of authority should be given "controlling weight", "unless they are
arbitrary, capricious or manifestly contrary to the statute".
122
159
The UNE Remand Order
671.
672.
After the decision in AT&T, the FCC issued the "UNE Remand Order",123 referred to by
the Commission in paragraph 387 of the Issues Paper. The UNE Remand Order
focused on:
(a)
revising the "necessary" and "impair" standards in light of the Supreme Court's
decision in AT&T; and
(b)
developing a limiting standard relating to the goals of the US Act.
The FCC held that the "necessary" standard is a stricter standard that applies to
proprietary network elements, whereas the "impair" standard applies to non-proprietary
network elements.124 A proprietary network element is "necessary" if:
taking into consideration the availability of alternative elements outside the
incumbent's network, including self-provisioning by a requesting carrier or
acquiring an alternative from a third party supplier, lack of access to that
element would, as a practical, economic, and operational matter, preclude a
requesting carrier from providing the services it seeks to offer.
673.
A LEC's failure to provide access to a non-proprietary network element "impairs" a
requesting carrier if:
taking into consideration the availability of alternative elements outside the
incumbent's network, including self-provisioning by a requesting carrier or
acquiring an alternative from a third-party supplier, lack of access to the element
materially diminishes a requesting carrier's ability to provide the services it
seeks to offer. In order to evaluate whether there are alternatives actually
available to the requesting carrier as a practical, economic and operational
matter, we look at the totality of the circumstances associated with using an
alternative.
674.
675.
123
Consistent with the wording of section 251(d)(2) and the Supreme Court's decision in
that the FCC must apply a limiting standard "rationally related to the goals of the [US]
Act", the FCC listed several other factors that it would consider in determining whether a
network element must be unbundled:
(a)
rapid introduction of competition in all markets (in other words, whether the
availability of a UNE is likely to encourage competitors to enter the local market
in order to serve the greatest number of consumers as rapidly as possible);
(b)
promotion of facilities-based competition, investment and innovation;
(c)
reduced regulation (the extent to which investment and innovation can be
encouraged by reducing regulatory obligations to provide access to network
elements, as alternatives to the incumbent's network elements becoming
available in the future);
(d)
certainty in the market; and
(e)
administrative practicality.
However, the UNE Remand Order retained the list of network elements that were
required to be unbundled, excepting operator services and directory assistance.
Federal Communication Commission, Third Report and Order and Fourth Further Notice of Proposed
Rulemaking, FCC 99-238, November 1999.
124
UNE Remand Order, p 9.
160
The Line Sharing Order
676.
The FCC refined unbundling further in the "Line Sharing Order"125 (which the
Commission does not refer to in the Issues Paper). The Line Sharing Order mandated
that the high frequency portion of the copper loop spectrum should be unbundled. The
FCC defined the "high frequency" portion as any frequency:126
above the voiceband on a copper loop facility used to carry analogue circuitswitched voiceband transmissions.
677.
The FCC clarified that the unbundling obligation extends only to one competitor per
line.127
Subsequent developments
678.
In the aftermath of the UNE Remand Order, there has been significant litigation
surrounding the provision of UNEs and the TELRIC pricing methodology. One recent
cases is of particular importance in the context of the application of the unbundling
provisions and is summarised briefly below.
USTA v FCC
679.
The Court of Appeal for the District of Columbia Circuit considered 'the UNE Remand
Order in USTA v FCC (2002) WL 1526475, CADC. As the Commission notes in
paragraph 389 of the Issues Paper, the Court rejected the list of unbundled elements
included in the UNE Remand Order:
As to almost every element, the [FCC] chose to adopt a uniform rule, mandating
the element's unbundling in every geographic market and customer class,
without regard to the state of competitive impairment in any particular market.
As a result, UNEs will be available to CLECs in many markets where there is no
reasonable basis for thinking that competition is suffering from any impairment
of a sort that might have the object of Congress' concern.
680.
The Court disagreed with the FCC's definition of "impair", holding that it submitted to the
Supreme Court's ruling "in a nominally quantitative sense". Further, it held that the Line
Sharing Order did not consider the relevance of competition in broadband from cable
and satellite technologies. Accordingly, it remanded both the UNE Remand Order and
the Local Competition Order.
The Triennial Review
681.
125
In December 2001, the FCC initiated its first triennial review of the policies on UNEs
specified in the UNE Remand Order by issuing a Notice of Proposed Rulemaking
("NPRM"). The NPRM sought comment on most aspects of the unbundling regime,
including:
(a)
the application of the statutory "necessary" and "impair" standards, as well as
how the FCC should take into account other goals of the US Act in making
rules;
(b)
a more targeted approach to defining network elements, such as whether the
unbundling rules should vary by type of service, geography, or other factors;
and
Federal Communications Commission, In the Matters of Deployment of Wireline Services Offering Advanced
Telecommunications Capability and Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, 1999, Third Report and Order.
126
Line Sharing Order, p 26.
127
Line Sharing Order, p 47.
161
(c)
the appropriate role of PUCs in the implementation of unbundling rules.
682.
As a result of the Triennial Review, on 20 February 2003 the FCC adopted new rules
relating to the unbundling of network elements. The changes with relevance to
broadband issues are outlined by the Commission in paragraph 390 of the Issues
Paper. Telecom refers the Commission to the attachment to the FCC's press release of
20 February 2003, which lists the other changes brought about by the Triennial Review.
Significantly, the new rules contain some changes to the availability of switching (a vital
element of UNE-P). Switching for business customers served by high-capacity loops is
no longer unbundled (based on a presumptive finding of no impairment). States have
90 days to rebut this national finding. Specific criteria will be set out for states to
determine whether impairment exists in a particular market, for mass market customers.
State PUCs must complete findings in 9 months. If a state finds that no impairment
exists, carriers are required to transition off UNE-P within 3 years. Line sharing is also
no longer available as a UNE.
683.
The FCC will, later this year, release an order detailing how it will apply its conclusions
in the Triennial Review.
Unbundling uptake
684.
Telecom acknowledges that (as the Commission recognises in paragraphs 391 and 392
of the Issues Paper) new entrants have increasingly relied on UNE-P rather than
wholesale or facilities-based entry. However, Telecom draws the Commission's
attention to the fact that overall unbundling uptakes are very low. Only 5.7% of total
switched lines in service in the US are unbundled (UNE-P).128
Significance of the US approach
685.
The breadth of the unbundling obligation under the US Act is a function of two factors
peculiar to the US context and which the Commission does not address in the Issues
Paper:
(a)
the broad purpose of the US Act, which is to promote competition and
encourage the rapid deployment of new telecommunications technologies.
The encouragement of the rapid deployment of telecommunications new
technologies is not a purpose of the NZ Act; and
(b)
the fact that the obligations imposed under the US Act relating to wholesale,
interconnection and unbundling were introduced as a trade-off for allowing
incumbent local service providers to provide long distance services. Therefore,
there is a significant incentive for incumbent local service providers (who are
not otherwise permitted, under US law, to offer long distance services) to
unbundle network elements. The NZ Act does not provide incumbent local
service providers with comparable incentives to unbundle network elements.
686.
Further, unbundling has not addressed the goals of the US Act.
687.
Furthermore, the results of the recently carried out Triennial Review show a reversal, to
a significant extent, of the FCC's policy in relation to unbundling and a consequent
narrowing of the scope of the unbundling obligation. Significantly, as a result of the
Triennial Review the FCC has eliminated broadband access and access to fibre loops
from the list of network elements which are required to be unbundled.
688.
Given the differences between the US and New Zealand legislative approaches to
unbundling and the failure of unbundling to promote the objects of the US Act, Telecom
128
Federal Communications Commission, Local Telephone Competition: Status as of December 2002.
162
concludes that the US approach to unbundling should not be taken into account by the
Commission.
THE EUROPEAN UNION
689.
Telecom refers to the Commission's analysis in paragraphs 352 to 361 of the Issues
Paper, where the Commission addresses the EU's objectives for mandating local loop
unbundling.
690.
Telecom agrees with the Commission's EU analysis, and provides some additional
commentary below. As summarised in paragraph 622, EU local loop unbundling
regulation had the objectives of promoting competition and broadband access. Both of
these are EU-specific concerns.
The EU regulatory unbundling regime
691.
On 26 April 2000, the EU issued a non-binding recommendation requiring the provision
of unbundled access to the local loop.129 The objectives of local loop unbundling were
outlined in the recommendation and are reproduced by the Commission in paragraph
353 of the Issues Paper.
692.
The recommendation did not, however, address unbundled access to fibre loops:
The provision of new loops with high capacity optical fibre directly to major
users is a specific market that is developing under competitive conditions with
new investments and therefore this Recommendation does not address
unbundled access to fibre local loops.
693.
The EU's recommendation formed the basis for its Regulation on unbundled access to
the local loop ("EU Regulation").130 The objectives of the EU Regulation are described
in paragraphs 354 and 355 of the Issues Paper.
694.
The EU Regulation applies to the copper local loop and mandates:131
(a)
full unbundled access;
(b)
line sharing;
(c)
sub-loop unbundling; and
(d)
unbundling of "related facilities".132
Unbundling uptake
695.
129
As stated in paragraph 626 above, to date in Europe only 0.56% of local loop lines have
been unbundled to new entrants. The EU's Eighth Implementation Report notes that by
1 October 2002, there were just over 1 million unbundled lines in the EU (out of a total of
Commission Recommendation on Unbundled Access to the Local Loop, Enabling the competitive provision of
a full range of electronic communications services including broadband multimedia and high-speed Internet,
Brussels, 26 April 2000, C(2000)1059.
130
Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on
Unbundled Access to the Local Loop.
131
Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on
Unbundled Access to the Local Loop, articles 2 and 3.
132
These are defined in article 2 of the EU Regulation to include facilities associated with the provision of
unbundled access to the local loop, including allocation, cable connections and relevant information technology
systems.
163
nearly 187 million subscriber lines). 77% of this statistic derives from Germany with
855,404 lines.133
Significance of the EU approach
696.
As outlined in paragraph 354 of the Issues Paper, the aim of the EU Regulation was:
Intensifying competition and stimulating technological innovation on the local
access market, through the setting of harmonised conditions for unbundled
access to the local loop, to foster the competitive provision of a wide range of
electronic communications services.
697.
The above aim comprises two distinct objectives:
(a)
the removal of a "bottleneck"; and
(b)
the promotion of broadband and Internet use.
698.
The objectives of the NZ Act are more narrowly framed than the objectives of the EU
Regulation. Fostering the competitive provisions of a wide range of electronic
communications services is not an aim of the NZ Act.
699.
In any case, unbundling has failed to achieve those objectives. The continually low
unbundling uptake rates in the EU evidence that failure.
700.
Accordingly, Telecom concludes that the EU's introduction of unbundling is irrelevant in
the New Zealand context.
THE UNITED KINGDOM
Introduction
701.
In paragraphs 366 to 381 of the Issues Paper, the Commission addresses the UK's
objectives for mandating local loop unbundling. Telecom generally agrees with the
Commission's analysis. Telecom highlights below some of the points made by the
Commission, which it considers to be important in shaping the UK's experience with
local loop unbundling.
Background to the current unbundling regime
702.
The UK liberalised its telecommunications market much earlier than other EU countries.
The first step in that liberalisation was the enactment of the Telecommunications Act
1984 ("UK Act"), which gave broad powers to the Office of Telecommunications
("Oftel") to regulate the telecommunications industry.
Telecommunications Act 1984
703.
133
The UK Act provides a framework setting out how Oftel will exercise its powers and
functions in regulating the UK telecommunications industry. The head of Oftel is the
Director General of Telecommunications. Under the UK Act, the Director General has a
number of functions, including:
(a)
promoting the interests of consumers;
(b)
maintaining and promoting effective competition; and
Commission of the European Communities, Eighth Report From The Commission On The Implementation Of
The Telecommunications Regulatory Package, Brussels, 3 December 2002, COM (2002) 695 final.
164
(c)
704.
ensuring that telecommunications services are provided in the UK to meet all
reasonable demands.
Under the UK Act, Oftel has powers to grant and revoke the licences of
telecommunications service providers and to impose conditions on those licences. Oftel
has used this last power to mandate that the largest incumbent, British Telecom ("BT")
unbundle its local loop.
Unbundling direction
705.
In the EU, unbundling was driven primarily by competition concerns. By contrast,
unbundling in the UK was driven solely by the objective of promoting broadband access.
In November 1999, following a public inquiry, Oftel issued a policy statement setting out
its decision to require BT to unbundle its local loop. 134 In that policy statement, Oftel
concluded that unbundling was necessary to introduce competition in the provision of
broadband. Oftel commented:135
Oftel expects that, in time, a number of different delivery routes for higher
bandwidth will be available. But for now, DSL technology, which enables higher
bandwidth access to be delivered over ordinary copper telephone lines, offers
the greatest potential to deliver these new services to smaller businesses and
the public at large. Currently only BT provides the ubiquitous network that could
deliver this access to the mass market.
706.
After conducting a cost-benefit analysis, Oftel mandated that a form of unbundling
described as "partial baseband leased circuit" be introduced. This option is described
as:
… a copper link extending from the customer premises to the local exchange
(commonly referred to as a 'local loop'). The circuit is partial because, rather
than connecting one customer to another, it provides only a portion of the link
and is designed for connection with another operator's system for onward
conveyance. The circuit is baseband because it extends over the entire
available spectrum, from DC(0Hz) upwards, and can thus be used to provide
services that make use of all the available frequencies on the line.
Unbundling uptake
707.
Unbundling has, so far, had very limited success in the UK. The first commercial (nontrial) co-location sites are now being handed over to operators to install their equipment,
but only a negligible number of lines have been unbundled (as noted in paragraph 626
above) 1509 lines or 0.0052% of total BT Lines.136 Notably, the fully unbundled loop
rental price is one of the highest in Europe at just over $15(US), which contrasts with the
UK interconnect charges in Europe which historically are the lowest. The Yankee Group
notes that:137
As the true implications of the cost of unbundling unfold, many operators are
turning to wholesaling from the incumbent to avoid the risks and commitment
associated with investing in collocation.
708.
134
In the absence of local loop unbundling (full and shared-access), the wholesale ADSL
services - also known as "bitstream access" - offered by BT have seen high uptake rates
Access to Bandwidth: Delivering Competition for the Information Age, Oftel, November 1999.
Access to Bandwidth: Delivering Competition for the Information Age, Oftel, November 1999, summary,
paragraph 3.
136
See Ovum "Strategies for Next Generation Services", 2002, J4; Case Studies and Ovum "UK Interconnect
Country Analysis", 2003.
137
The Yankee Group "Into the Labyrinth: Untangling the Real Cost of Unbundling", Vol 1, No. 14, September
2001.
135
165
by alternative providers. Bitstream access is provided on a non-discriminatory basis by
BT at retail minus pricing highest in Europe.
Significance of the UK approach
709.
The Commission's summary of the UK's objectives for unbundling does not explicitly
recognise that the introduction of unbundling was almost exclusively broadband-driven.
The UK's telecommunications market had been liberalised in 1984 and was
consequently far more competitive than the markets of the rest of the EU at the time
when unbundling was introduced. Promoting broadband access is not an aim of the NZ
Act.
710.
In any case, Telecom notes that unbundling uptake in the UK has been very low in the 4
years since unbundling was introduced.
711.
Accordingly, Telecom submits that the decisions to mandate unbundling in the UK is
irrelevant in the New Zealand context.
AUSTRIA
Introduction
712.
The Commission address Austria's experience with unbundling in Appendix 3 of the
Issues Paper. Telecom notes that while the title of that Appendix is "International
Experience with Local Loop Unbundling", the Commission's summary of Austrian
unbundling regulation focuses on broadband deployment. Accordingly, Telecom
provides a summary of the Austrian regulatory unbundling regime and the main reasons
for mandating unbundling below, and summarises the features which distinguish it from
the New Zealand context.
Background to unbundling regulation
713.
The Austrian Telecommunication Act 1997 ("Austrian Act") commenced the
liberalisation of Austria's telecommunications market. The Austrian Act aimed to
establish a fair, transparent and non-discriminatory environment for competing providers
and established Telekom-Kontrol Gmbh ("TKG") as the regulator of the
telecommunications market as well as establishing an independent panel authority, the
Telekom Kontrol Kommission ("TKK"). These bodies carry out regulatory operations
such as issuing licences, price and interconnection regulation, while the Supreme Postal
& Telecommunications Authority is responsible for the development and implementation
of telecommunications strategy.
714.
The objectives of regulation are set out in section 32(1) of the Austrian Act:
(a)
to ensure equality of opportunity and fair competition in the telecommunications
market;
(b)
to encourage new suppliers to enter the market;
(c)
to prevent the abuse of significant market power and other abuses;
(d)
to ensure compliance with the principles of open network access based on
DNP;
(e)
to implement the sector-specific competition regulations of the European
Communities; and
166
(f)
to resolve disputes between market subscribers and between market
subscribers and users.
715.
Austria's progress towards unbundling has occurred against a slightly different backdrop
to that of most other EU countries. Although some other EU countries also implemented
unbundling prior to the EU Regulation in anticipation of the change, unique
circumstances in Austria led the TKK to take decisive steps towards unbundling in 1999.
716.
In the wake of unsuccessful negotiations between Telekom Austria ("Telekom") and
some of its competitors, Telekom approached TKK on 11 March 1999, initiating a
regulatory proceeding against the Austrian alternative network operators UTA, Connect
Austria and Telekabel. Telekom requested that TKK determine the main rules to be
applied in relation to requests by Telekom's competitors for an exclusive right to use
Telekom's local copper loop.
717.
The main issues in dispute concerned:
(a)
the level of unbundling that should be mandated;
(b)
restrictions on use of the individual subscriber line (for example, for ADSL
applications); and
(c)
the scope of competitors' rights of co-location.
Unbundling regulation
718.
The obligation to offer unbundled access to the local loop was already embodied in the
Austrian Act and the Interconnection Ordinance.138 Under section 37(1) of the Austrian
Act, a dominant operator is obliged to grant to other users "access to its telecom
network or unbundled parts thereof".
719.
However, section 37(1) goes on to state that this obligation shall not apply "if the
operator presents facts that indicate that this obligation is not justified in the particular
case". The regulatory authority must then decide whether it is in fact justified.
720.
The principle of unbundled access is specified in further detail in sections 2 and 3 of the
Interconnection Ordinance. Unbundled network elements are described as the local
loop "with or without further technical facilities".139 Section 3(1) of the Interconnection
Ordinance specifies that the operator seeking network access must not be obligated to
order services for which it has not raised a respective demand.
721.
Additionally, unbundling may be obtained subject to the conditions that:
722.
138
139
140
(a)
it is technically feasible; and
(b)
the party seeking access must bear the costs of implementation of special
network access.140
Unbundled lines cannot be split or sublet. Unbundled access may be refused by the
dominant operator on the basis of "essential requirements" such as:
(a)
network integrity and interoperability of services;
(b)
a lack of material justification; or
Federal Gazette II No 14/1998.
Section 3, paragraph 2 of the Interconnection Ordinance.
Section 40 (1) of the Austrian Act.
167
(c)
where local competition has already developed and is functioning (section 3(3)
of the Interconnection Ordinance).
723.
The decision rendered by the TKK in July 1999 constitutes a "framework decision" which
determines the general conditions of unbundled access, rather than deciding on any
particular party's right to obtain access to any specific subscriber line. While the
decision was only legally binding on the parties, the principles of non-discrimination
under section 34 of the Austrian Act require Telekom to apply the contents of the
decision to other competitors seeking access.
724.
While the TKK acknowledged that partial unbundling would in theory be possible, it
concluded that full unbundling would, at present, be sufficient to create and enhance
competition. The regulatory authority noted that it would reassess the issue in
September 2000, when its decision expired.
Subsequent developments
725.
When the EU Regulation came into force, TKK (on 12 March 2001) passed new
decisions concerning unbundling. The decisions state that Telekom must offer "line
sharing". However, with regard to "bit-stream access" there existed a separate offer
from Telekom based on a commercially negotiated agreement for Internet access via
ADSL. Therefore, this point was not addressed in the decision.
Significance of the Austrian Approach
726.
The Austrian decision to introduce full local loop unbundling was primarily based on
circumstances unique to Austria - the existence of a bottleneck in that jurisdiction. The
decision to introduce line sharing was based on the EU Regulation. Telecom repeats its
submission in paragraphs 697 to 700 above on the significance of the EU's unbundling
experience in the New Zealand context. Accordingly, Telecom concludes that Austria's
decision to mandate unbundling is not relevant to the New Zealand context.
BELGIUM
Introduction
727.
The Commission addresses Belgium's unbundling experience in Appendix 3 of the
Issues Paper. The Belgian summary focuses almost solely on broadband deployment.
Telecom provides a summary of the Belgian regulatory unbundling regime below and
summarises the features which distinguish it from the New Zealand context.
Background
728.
The Belgian Act of 19 December 1997 ("Belgian Act") fully liberalised the Belgian
telecommunications market and abolished all exclusive and special rights for the
provision of public voice telephony and public telecommunications networks. It also
introduced the concept of universal service and empowered the national regulatory
authority (the Belgian Institute of Postal Services and Telecommunications ("BIPT")) to
arbitrate disputes between telephone operators. In December 2002, the Belgian
Parliament approved the proposal to make BIPT a fully independent regulator.
729.
The Belgian Act is an adaptation, with modifications, of the "Act of 21 March 1991 on the
Reform of Some Public Enterprises". Secondary legislation (by Royal Decrees) is
necessary to implement the general principles of the Belgian Act.
168
Unbundling regulation
730.
The requirement to unbundle the local loop (pursuant to the EU Regulation) was
introduced in 2000. This obligation, and obligations for Belgacom (a provider with
significant market power) to publish reference offers concerning the unbundling of the
local loop were introduced by Royal Decree of 12 December 2000. Belgacom is
required to offer all three forms of unbundled access to the local loop referred to in the
EU Regulation.
731.
Belgacom was legally obliged to publish its unbundling reference offer for the
unbundling of the local loop in 2001. It published the reference offer early (on 31
December 2000). Two months later, the Minister of Telecommunications approved by
ministerial notice, BIPT's judgment on requiring modification. Belgacom was required to
reconsider specific tariffs on raw copper, shared access and blocs, tie cables and
splitters. Belgacom accordingly amended the offer. BIPT formally approved the
reference offer in April 2002, and is considering the new 2003 reference offer.
732.
At the end of 2002 only 2,005 lines had been fully unbundled and 1,632 lines had
shared access.141
Wholesale services
733.
A wholesale offer for bitstream access was published by Belgacom in 2001, according to
a 1998 Royal Decree, which has been required to be modified by ministerial decisions,
particularly in relation to terms of tariffs.
734.
A retail offer for ADSL services was published by Belgacom in 1999 based on the Royal
Decree of 22 June 1998.
735.
Wholesale services can potentially include the provision of services everywhere on the
national territory under the principle of general access. These services have been
defined by Royal Decree as:
(a)
leased lines;
(b)
data communication services;
(c)
ISDN access; and
(d)
telex and telegraphy services.
Significance of the Belgian position
736.
Belgium's decision to unbundle was made in order to comply with the EU Regulation.
Telecom refers the Commission to its submission on the significance of the EU's
unbundling experience in paragraphs 697 to 700 above.
DENMARK
Introduction
737.
141
In Appendix 3 of the Issues Paper, the Commission addresses the Danish unbundling
experience. The Commission's analysis focuses on broadband deployment. Telecom
provides a summary of the Danish regulatory unbundling regime and Denmark's
objectives in introducing unbundling below.
Federal Planning Bureau Network Industries in Belgium: Economic Significance and Reform (Working Paper,
January 2003) 44.
169
Background to unbundling regulation
738.
Denmark was one of the first EU countries (together with the UK) to liberalise its
telecommunications network. Local loop unbundling was mandated in 1998. The basis
of Danish telecommunications deregulation was the signing of a political agreement in
1995, which established, as a policy objective, that Danish telecommunications
customers should be offered the world's best and cheapest communication services.142
This policy objective of "best and cheapest" has since been supplemented with the aim
to "promote general access to the network society".
739.
The 1995 agreement stipulated that liberalisation was to take place in two steps. In
accordance with the second stage, legislation was passed which allowed new entrants
to lease facilities in the telecommunications networks of incumbent providers.143
740.
During 1997 and 1998 uncertainty arose as to whether the "lease of infrastructure
capacity" required under that legislation included access to the copper local loop. In a
ruling on a specific case, the National Telecom Agency ("NTA") held that it did. This
decision was overturned on appeal to the Complaints Board, who held that the statute
did not explicitly allow unbundling of the copper local loop to be included under the
interconnect regime under Act No. 466.
Unbundling regulation
741.
742.
In response to this decision the legislation was amended by Act No. 470 of July 1998
("Act No. 470") to explicitly include the unbundling of the local loop. Act No. 470
specified that "lease of infrastructure capacity" also includes access to lease of stretches
of physical infrastructure capacity including, for example:
(a)
raw copper (the unbundled local loop);
(b)
raw fibre; and
(c)
coaxial cable.
The object of Act No. 470 was:
[T]o promote competition in the telecommunications sector and to ensure
unrestricted exchange of telecommunications traffic between end users and
access by these to a wide and varied range of telecommunications services at
low prices and of high quality.
743.
142
Since then, Act No. 470 has been repealed and replaced by the Act of Competitive
Conditions and Consumer Interests Opportunity (Act No. 418, May 2000) ("Act No.
418"). The objects of Act No. 418 are to provide end-users with the opportunity to:
(a)
choose freely the providers of telecommunications networks or
services under whom they want to be customers;
(b)
communicate with all other end users whether or not these are
customers under the same provider or another provider;
(c)
have access to all providers of various information and contents
services by telecommunication networks;
(d)
compose freely their usage of telecommunication networks and
services as well as information and content services, whether or not
Teleprofil 1999, available at http://www.itst.dk/wimpdoc.asp?page=tema&objno=95024045, p 9.
Act No. 466 on Universal Service Obligations and Certain Consumer Interest within the Telecommunications
Sector.
143
170
these are delivered by several different providers of network
services; and
(e)
retain the subscriber numbers when changing between providers of
telecommunication networks and services.
Wholesaling
744.
745.
Act No. 418 provides for the following wholesale interconnection services:
(a)
exchange of traffic between providers of telecommunications networks or
services (including both carrier pre-selection and carrier selection on a call-bycall basis);
(b)
lease of infrastructure capacity, including leased lines;
(c)
sharing of facilities such as buildings and exchange equipment; and
(d)
service provider access, meaning wholesale purchase of telecommunications
networks or services provided to a number of end-users who have not been
specified in advance.
However, Denmark does not have a regulated wholesale regime similar to that of New
Zealand. Retail Services are not generally regulated.
Subsequent Developments
746.
Following the enactment of Act No. 470, the incumbent, Tele Danmark, developed a
framework agreement to provide access to the unbundled loop. A year later this had
resulted in only one interconnection agreement. However by 2000, a total of 12
agreements had been signed.
747.
The NTA has now been replaced by a new National IT and Telecom Agency and now
operates under the Ministry for Science, Technology and Innovation. The principal
mandate of the new agency is to:144
develop and implement initiatives within key areas of the Government's IT and
policy strategy - a strategy that aims to ensure an optimal framework for IT and
telecommunications and conditions that will enable citizens, businesses and
their public sector to realise the network society.
Significance of the Danish approach
748.
144
Denmark's decision to unbundle was legislated for in accordance with the provisions of
Act No. 470. One of the objects of Act No. 470 was to "provide access … to a wide and
varied range of telecommunications services at low prices and of high quality". Neither
this purpose, nor the objects of the replacement legislation, Act No. 418, is a statutory
aim to which the Commission is entitled to have regard in deciding whether to mandate
unbundling under the NZ Act. Similarly, one of the objects of the replacement
legislation, Act No. 418 was to provide end-users with the opportunity to "compose
freely their usage of telecommunication networks and services as well as information
and content services, whether or not these are delivered by several different providers of
network services". This is also not a statutory aim to which the Commission is entitled
to have regard under the NZ Act.
International Telecommunication Union, Competition policy on telecommunications: the case of Denmark,
November 2002, 4.
171
IRELAND
Introduction
749.
The Commission addresses the Irish local loop unbundling experience in Appendix 3 of
the Issues Paper. Overall, Telecom agrees with the Commission's summary of the Irish
regulatory unbundling regime. Telecom has some additional comments on the Irish
regulatory unbundling regime and Ireland's objectives in mandating unbundling. Those
comments are set out below.
Background to unbundling regulation
750.
The telecommunications regulator, as established by the Telecommunications
(Miscellaneous Provisions) Act 1996, was the Office of the Director of
Telecommunications Regulation ("ODTR"). ODTR's regulatory powers have recently
been transferred to the newly established Commission of Communications Regulation
("ComReg").
751.
The latest piece of the regulatory framework is the Communications Regulation Act
2002 ("Irish Act"). The Irish Act does not alter existing regulatory powers, but:
752.
(a)
orders the transfer of functions (namely, licensing and regulation of the
electronic communications industry) from ODTR to the newly established
ComReg; and
(b)
restates the powers and functions of the Irish telecommunications regulator.
Section 10(1)(a) of the Irish Act sets out ComReg's functions in relation to electronic
communications services:
to ensure compliance by undertakings with obligations in relation to the supply
of and access to electronic communications services, electronic
communications networks and associated facilities and the transmission of such
services on such networks.
753.
Section 10(4) establishes ComReg as the national regulatory authority for matters
regarding unbundled access to the local loop. In order to carry out these functions
under section 10(3), ComReg is afforded "all such powers as are necessary or
incidental to the performance of its functions under this … Act."
754.
Section 12(1) sets out the objectives of ComReg in exercising its functions:
(a)
in relation to the provision of electronic communications networks,
electronic communications services and associated facilities (i)
to promote competition;
(ii)
to contribute to the development of the internal market;
and
(iii)
to promote the interests of users within the community.
Unbundling regulation
755.
The Irish Act does not contain any specific obligations relating to unbundling. However,
section 57 sets out general principles in relation to infrastructure sharing and ComReg's
role in overseeing negotiations for shared infrastructure.
172
756.
In March 1999, the ODTR launched a consultation process. As the Commission notes
on page 36 of Appendix 3 to the Issues Paper, the decision to introduce local loop
unbundling by April 2001 was announced on 19 April 2000.145 The decision to unbundle
was based on the fact that the EU was about to introduce legislation mandating
unbundling, as the Commission recognises on page 37 of Appendix 3 to the Issues
Paper.
757.
In the opening sentence of the Foreword, the Director of Telecommunications
Regulation ("Director") indicated that:
The key to the development of new and innovative telecommunications services
and access methods in Ireland is liberalisation.
The Director also commented that there was a "huge, pent-up demand for high
bandwidth applications" and went on to recognise that "it is clear that broadband access
forms the major part of the commercial opportunity offered by LLU".
758.
In December 2000, the EU adopted the EU Regulation. As a result, Ireland was obliged
to begin to implement not only bitstream access, but also line sharing, full unbundled
access and the unbundling of "related facilities". As required by the EU Regulation,
Eircomm, the largest incumbent, published a reference offer for all of the above
elements on 1 January 2001. In the Decision Notice regarding Eircomm's Access
Reference Offer in September 2001, the Director highlighted (in the Introduction) the fact
that the EU Regulation had been "required as a matter of urgency in order for Europe to
reap the full benefits of the Internet and electronic commerce". The Director stated that:
The speed of this reaction [of the adoption of the EU Regulation] underlies the
importance of local loop unbundling at EU level: the same policy reasons also
mean that local loop unbundling must not be delayed in Ireland.
Wholesale services
759.
Several interconnection and carrier selection services are required to be offered on a
cost-based basis.146
760.
The introduction of a wholesale flat rate Internet product - Flat Rate Internet Access Call
Origination - is also under way following a number of requests by operators in 2002.
Significance of the Irish approach
761.
Ireland's decision to unbundle the local loop and "related facilities", and introduce line
sharing was made in order to comply with the EU Regulation. Telecom refers the
Commission to its submission on the significance of the EU's unbundling experience in
paragraphs 697 to 700 above.
GERMANY
Introduction
762.
145
146
The Commission examines Germany's objectives and main reasons for mandating local
loop unbundling in paragraphs 362 to 365 of the Issues Paper. The Commission's
analysis includes unbundling statistics relating to Germany but does not focus on those
objectives. Instead, the analysis focuses on broadband deployment. Telecom refers
the Commission to its analysis of Germany's regulatory unbundling regime below.
Decision Number 06/00, Report on ODTR Consultations on Local Loop Unbundling.
For example, PSTN origination and termination, carrier pre-selection and number portability services.
173
Background
763.
Germany introduced unbundling regulation before most other EU countries. Full
unbundling of the copper local loop was mandated in 1996 and coincided with the
enactment of the Telecommunications Act 1996 ("German Act").147 Regulation in
Germany was a response to lack of competition in an environment where the
State-owned incumbent, Deutsche Telecom, held the overwhelming proportion of the
market (see Figure 9.1 above).
764.
The German Act aims to promote the development of the telecommunications market
through liberalisation and deregulation. To that effect, it set up the Regulatory Authority
for Telecoms and Posts ("Reg TP"), which is responsible for monitoring and regulating
the German telecommunications industry.148 The Reg TP is supervised by the Federal
Ministry of Economics and Technology.
Telecommunications Act 1996
765.
The purpose of the German Act (as stated in section 2) is:
[t]hrough regulation of the telecommunications sector, to promote competition,
to guarantee appropriate and adequate services throughout the country and to
provide for frequency regulation.
766.
767.
768.
The aims of the regulation are:
1.
to safeguard the interests of users in the fields of telecommunications
and radiocommunications as well as to maintain telecommunications
secrecy;
2.
to ensure equal-opportunity and workable competition, in rural as
well as in urban areas in telecommunications markets;
3.
to ensure provision through the Federal Republic of Germany of
basic telecommunications services (universal services) at affordable
prices;
4.
to promote telecommunications services in public institutions;
5.
to ensure effective, interference-free use of frequencies, due regard
also being paid to broadcasting requirements; [and]
6.
to protect public safety interests.
Section 35 obliges telecommunications carriers who have a "dominant position" to allow
users to access their "telecommunications network or parts thereof". Connection can be
granted by:
(a)
general network access (connections provided for all users); or
(b)
special network access.
Section 35(2) imposes certain requirements on the contents of network access
agreements. Agreements are required to be comprehensible and based on objective
criteria. A telecommunications carrier is only entitled to restrict network access:
for reasons based on the essential requirements within the meaning of Article
3(2) of Council Directive 90/387/EEC of 28 June 1990 on the establishment of
147
Telekommunikationsgesetz, TKG.
Reg TP superseded the Federal Ministry of Posts and Telecommunications and its subordinate Federal
Office.
148
174
the internal market for telecommunications services through the implementation
of open network provision (OJ No L 192 p1) and only insofar as such restriction
is in conformity with other provisions of European Community law.
769.
Pursuant to section 35(5), the German (Federal) Government is entitled to lay down
ordinances which describe how special network access must be enabled.
Unbundling regulation
770.
The first requests for unbundling were made in 1996. Unbundling was mandated in May
1997 by the Network Access Ordinance.149 Section 2 provides that:
the carrier shall provide unbundled access to all network elements, including
unbundled access to the local loop.
771.
The unbundling requirement does not apply where "the carrier can provide evidence that
such requirement is not objectively justified in a given instance".150
772.
The Network Access Ordinance also mandates co-location.151
Recent developments
773.
774.
On 30 March 2001, Reg TP released determinations:
(a)
lowering the rental of the local loop;
(b)
setting out conditions on which Deutsche Telekom would be required to
provide line sharing; and
(c)
mandating that Deutsche Telekom make access network products available to
competitors for wholesale purposes.
The requirement to provide line sharing was introduced in order to comply with the EU
Regulation. However, Reg TP has not so far mandated bitstream access.
Significance of the German approach
775.
As reflected in the purpose of the German Act, local loop unbundling in Germany was in
the context of a telecommunications market characterised by lack of competition where
the State-owned incumbent held almost all of the market (refer to Figure 9.1).
Accordingly, Telecom concludes that Germany's decision to mandate unbundling is not
relevant to the New Zealand context.
ITALY
Introduction
776.
149
150
151
The Commission addresses Italy's local loop unbundling experience in Appendix 3 of
the Issues Paper. The Commission's analysis focuses almost solely on broadband
deployment. Telecom provides a summary of the Italian regulatory unbundling regime
below and summarises the features which distinguish it from the New Zealand context.
Netzzugangsverordnung Verordnung uber besondere Netzzugange, NZV, first published 1 October 1996.
Network Access Ordinance, section 2.
Network Access Ordinance, section 3.
175
Background to unbundling regulation
777.
The regulation of the Italian telecommunications industry has been heavily influenced by
EU regulation. The telecommunications market regulator, Autorita per le Garanzie nelle
Comunicazioni ("Agcom") was created in July 1997 under Act No. 249 of 31 July 1997,
with powers to:
(a)
identify operators with significant market power;
(b)
define and set interconnection charges relating to interconnection that network
operators have to provide;
(c)
define licensing conditions;
(d)
issue licences to new operators;
(e)
arbitrate disputes brought to its attention by any party; and
(f)
set and enforce price-cap regulations.
Unbundling regulation
778.
On 16 March 2000, Agcom introduced specific unbundling obligations for Telecom Italia,
the largest Italian incumbent.152 As with Ireland, this move was driven by Italy's desire
to comply with the EU Regulation. Unbundling was to be carried out within six months
of that date and is now fully operative.
779.
With its order mandating unbundling, Agcom published general guidelines regarding the
services that must be offered by Telecom Italia on an unbundled basis:
780.
(a)
unbundled copper loop;
(b)
unbundled fibre loop;
(c)
access extension (lines between switches); and
(d)
digital transmission channels (digital circuits between the local office of
Telecom Italia and the operator's point of presence).
Telecom Italia appealed this Order to the TAR Lazio, in particular with respect to the
inclusion of unbundled fibre loops in the mandatory offering. The appeal was not
upheld. On 12 May 2000, Telecom Italia put forward a reference offer for unbundling for
approval by Agcom.
Significance of the Italian approach
781.
Italy's decision to unbundle was made in order to comply with the EU Regulation.
Telecom refers the Commission to its submission on the significance of the EU's
unbundling experience in paragraphs 697 to 700 above.
THE NETHERLANDS
Introduction
782.
152
The Commission addresses the Netherlands' unbundling experience in Appendix 3 of
the Issues Paper. The Commission's analysis focuses on broadband deployment.
Agcom, Decision 2/00/CIR, 16 March 2000.
176
Telecom provides a summary of the Dutch regulatory unbundling regime below and
summarises the features which distinguish it from the New Zealand context.
Background to unbundling regulation
783.
Prior to the implementation of telecommunications reform, there was one incumbent
telecommunications operator (Koninklijke PTT Nederland NV ("KPN")) of which the
Dutch state is the largest shareholder. The Dutch state also holds a "golden share"
which ensures all major decisions of KPN require state consent. In terms of
infrastructure, the Netherlands is unique in Europe, having a high rate (89%) of
households connected to a cable television network (also capable of providing Internet
services without using telephone networks).153
Independent Post and Telecommunications Authority Act 1997
784.
The Independent Post and Telecommunications Authority ("OPTA") was established on
1 August 1997 under the Independent Post and Telecommunications Authority Act
("OPTA Act"). It is an independent administrative authority ("IAA") under the Ministry
for Transport, Public Works and Water Management ("Ministry of Transport"),
established to act as a governmental referee for a liberalised market.
785.
OPTA supervises the telecommunications industry by being the regulator and
implementer (of for example, numbers and registration) under the Telecommunications
Act 1998 ("Dutch Act").
786.
OPTA was set up as an IAA to guide the transition of a monopolistic telecommunications
market to a market with full competition.154 Its mission statement states:
OPTA stimulates sustained competition in the telecommunications and post
markets. That is to say: a lasting situation in which private individuals and
business end users can choose between providers and services in such a way
that the price and quality supply in the various constituent markets is created by
effective market incentives. In the event of insufficient choice OPTA protects
end users.
787.
The Netherlands is not in favour of introducing sector-specific rules to regulate
competition, unless they are considered necessary to create full market competition in
addition to the applicable provisions of the Dutch Competition Act. Therefore, a regular
assessment of OPTA by the Ministry of Transport takes place every 4 years to assess
the "desirability or not of continuing with the regulatory authority".155
788.
OPTA's legislative duties are to:156
153
(a)
ensure the provision of first-class telecommunications facilities and applications
to strengthen the competitive position of the Netherlands and the Ministry of
Transport so as to ensure the availability of an infrastructure with innovation
potential;
(b)
guarantee the quality and accessibility of the telecommunications infrastructure
through optimal (national) market conditions in order to achieve an adequate
playing field in the national and European markets so that general competition
rules will suffice in the long term. The Ministry of Transport is required to
Nico van Eijk, Broadband Services and Local Loop Unbundling in the Netherlands, IEEE Communications
Magazine, October 1999, 3.
154
Explanatory Memorandum to the OPTA Bill, Parliamentary Documents 1996/1997, 25 128, no 3, 2-3.
155
Article 25 of the OPTA Act.
156
Cabinet position on the evaluation of the Independent Post and Telecommunications Authority (OPTA), 6 July
2001, paragraph 1.2.
177
promote the realisation of this objective by providing OPTA with a set of tools
to bring the end of sector-specific legislation; and
(c)
789.
790.
safeguard social interests in relation to access to and use of
telecommunications facilities so users can count on good and affordable
accessibility of basic services and have confidence in the security, reliability,
privacy and effectiveness of consumer protection.
OPTA's statutory tasks involve:
(a)
the regulation of market parties, including KPN;
(b)
issuing licences for the roll out of cable television networks;
(c)
the arbitration of disputes between market parties (for example, in relation to
interconnection);
(d)
maintaining the European Open Network Provision Rules as set out under
Dutch law (for example, non-discrimination and the cost orientation
requirement);
(e)
managing the allocation of telephone numbers; and
(f)
evaluating costs involved in the universal service provision and setting parties'
contribution amounts.
While OPTA was originally established under the Ministry of Transport, it is now
overseen by the Ministry of Economic Affairs. OPTA 'is currently contemplating an
integration with the Netherlands Competition Authority ("NMa"), as a chamber within that
organisation. The two organisations currently cooperate with each other under a
Collaboration Protocol drawn up in 2000 to ensure a uniform application of general and
sector specific competition rules.
Telecommunications Act 1998
791.
On 15 December 1998 a new Act ("Dutch Act") (based on the European Open Network
Provisions) took effect. The Dutch Act aimed primarily to give greater opportunities for
new initiatives and market developments, while maintaining balanced economic
development. The purpose of the Dutch Act states:
it is desirable to establish rules in order to guarantee a cohesive infrastructure
and to promote real competition.
792.
The Dutch Act makes a distinction between negotiations for interconnection and special
access. Interconnection is required by all providers of public telecom networks and
public telecom services under Article 6.1.
793.
Special access means access to a telecom network at locations other than the network
connection points that are provided to most end users. Under Article 6.9 providers must
comply with a reasonable request for special access only if they have been designated
by OPTA as a provider with "significant market power" (assumed to exist in principle if
the provider has more than 25 percent market share of the relevant market). KPN is
designated as having significant market power. This designation is reviewable every 2
years (although currently remains in place in respect of KPN).
794.
Article 6.9 provides that a provider must respect the principles of transparency, nondiscrimination, objectivity and cost-orientation. Special access contemplates both
178
requests for wholesale services (for example, carrier selection) classed as narrowband
access and local loop unbundling classed as broadband access.
795.
In March 1999 OPTA released Guidelines on access to the unbundled local loop ('MDFaccess') to further elaborate on the meaning of "special access". The guidelines noted
that at the date of the report, hardly any competition had developed in the majority of
local and regional markets for fixed telecommunication services. Development of
alternative structures to provide broadband services was limited and access to KPN's
infrastructure was deemed to be required initially.
796.
In the Consultation Document on special access services it was noted that, in principle,
small business and private users should have access to different providers for voice
telephony and other two-way services.157 It provided graphical evidence of the great
demand for fast Internet access,158 and pointed out that two-way connections through
cable television networks were not becoming available as quickly as expected. Hence,
the emphasis on implementing local loop unbundling was perceived as a necessary
response to service access to broadband services.
797.
The following definitions on local loop unbundling were established:
798.
799.
157
158
(a)
Local line: the fixed transmission path from the network termination point up to
and including (a share in) the main distribution frame.
(b)
Local connection: the local line as well as a line card (completely or partly)
necessary to connect an individual end user to a telecommunications service.
(c)
Local loop: all parts of a telecommunications network from the network
termination points up to and including the line cards (including the line blocks).
In order to acquire access, an access seeker is required to make a reasonable request.
A "reasonable request" is one where:
(a)
the access is essential for the requesting party to compete in the
telecommunications market (this will be the case if refusing access would result
in impeding access to the end user or rendering this access considerably and
unavoidably uneconomical); and
(b)
sufficient capacity is available.
OPTA also made a determination of cost-oriented tariffs on special access to the local
loop via the main distribution frame which involved the conditional approval of the
Embedded Direct Costs cost allocation system. However, OPTA recognised that
effective competition between access networks should not be impeded by potential
differences in regulated cost allocation methods and valuation principles. It has
implemented a gradual transition period of 5 years, beginning in January 2002, under
which the tariff to be negotiated between market parties should initially be based on
historical cost and then to be adjusted to a tariff based on current costs (ie, an
increasing tariff on a commercial basis). OPTA considered that this transition period
does justice to both the early stages of development of competition at present and the
further development of competition in coming years. It follows the Canadian model to
stimulate innovative access and to activate market parties to install their own facilities in
due time or to acquire them in another way. As of October 1999, KPN's competitors had
yet to take advantage of the guidelines for shared access.
Consultation Document on special access services, OPTA, June 1998.
Consultation Document on special access services, OPTA, June 1988, p 14.
179
800.
Full unbundling has been available since June 2000, preceding the introduction of the
EU Regulation.
Wholesale regime
801.
A wholesale service may be created through Article 3.11 of the Dutch Act which requires
the holders of a licence for the use of sets of frequencies that are intended for the
provision of public telecommunications networks, public telecommunications services or
broadcasting transmission networks to share the use of aerial installation points, if a
reasonable request for sharing has been made.
802.
Article 5.10 provides for the making of reasonable requests to share facilities with
respect to the installation and maintenance of cables.
803.
Under Article 6.1, a provider with significant market power must provide for
interconnectivity, and under Article 6.9 must comply with reasonable requests for special
access. Narrowband access will cover most wholesale services such as an ISP service
or carrier selection. However, "special access" is a wide term and encompasses both
requests for wholesale services and access to other points on the provider's network not
normally provided to end users.
804.
Any requests for interconnection and special access must be considered on the
principles of transparency, non-discrimination, objectivity and cost orientation.
Significance of the Dutch approach
805.
While there are specific references to benefiting the end users of telephony services in
the Dutch Act and the OPTA Act which are similar to those in the NZ Act, the Dutch
approach is coloured by reference to the EU Regulation. There are different legislative
policy goals in place, such as the exit policy of sector-specific legislation, and pricing
model approaches which provide limitations to the protection of new market entrants in
telecommunications markets.
806.
The Netherlands also operates under a different market model, which stimulates the
development of competition between cable and telecommunications providers as a
result of a high level of cable penetration. This differs from the stimulation of
competition in New Zealand with differing access to cable television networks as
alternative providers of broadband services. Accordingly, Telecom concludes that
Netherlands' decision to mandate unbundling is not relevant in the New Zealand
context.
NORWAY
Introduction
807.
The Commission addresses Norway's unbundling experience in Appendix 3 of the
Issues Paper. The Commission's analysis focuses solely on broadband development.
Telecom provides a summary of the Norwegian regulatory unbundling regime and
Norway's objectives in introducing unbundling below.
Background to unbundling regulation
808.
Although Norway is not part of the EU, its telecommunications regulatory regime has
principally followed the same timetable as the EU. Access to the local loop was
provided in accordance with the provisions of the EU Regulation. The largest
incumbent, Telenor, now competes with 37 newcomers.
180
809.
810.
The White Paper states the main objectives for the transition in the area of
telecommunications as being:159
(a)
to ensure households and companies throughout the country have access to
basic telephony services of a high quality and at a reasonable price; and
(b)
to ensure the greatest possible added value and effective use of resources in
the telecommunications sector by ensuring access to an effective use of a
public telecommunications network and public telecommunications service
through active competition.
To meet these goals, the Telecommunications Act of 3 June 1995 (no. 39) ("Norwegian
Act") and Regulation no. 1259 of 5 December 1997 ("Norwegian Regulation") were
passed.
Telecommunications Act 1995
811.
812.
Section 1.3 of the Norwegian Act provides that its purpose is to promote:
(a)
fulfilment of national needs for telecommunications and effective utilisation of
resources through effective competition;
(b)
nationwide provision of basic telecommunications services of equal terms;
(c)
technical quality and security;
(d)
access to public communications networks and public telecommunications
services;
(e)
coordination of telecommunications networks or telecommunications services;
(f)
telecommunications services adapted to needs;
(g)
consumer interests; and
(h)
protection of personal data and privacy.
The objectives of the Norwegian Regulation are set out in section 1.1 of the Regulation.
These are to create a basis for:
(a)
access of households and firms nationwide to basic telecommunications
services of high quality at a reasonable price; and
(b)
optimal value added from efficient utilisation of resources and the
telecommunications sector, by securing access to and efficient use of public
telecommunications networks and public telecommunications services to
effective competition.
813.
Section 3.2a of the Norwegian Regulation provides that access to the local loop also
includes full and partial access in compliance with the EU Regulation. Accordingly, the
EU Regulation is adopted as secondary law.
814.
Section 3.2a of the Norwegian Regulation further provides that bitstream access to the
local loop must be offered to other providers:
159
Report no. 24 (1998-1999) to the Norwegian storting (parliament) on "Individual Regulatory Issues in the
Telecommunications Sector".
181
815.
(a)
on equivalent and non-discriminatory terms; and
(b)
at a quality equivalent to that offered to the incumbent's owner undertakings.
Section 1(5) of the Norwegian Act provides that the King, the Ministry, the Norwegian
Telecommunications Authority Complaints and Advisory Board ("NTACAB") and the
Norwegian Post and Telecommunications Authority ("NPTA") constitute the
"telecommunications authority" under the Norwegian Act. Determining the division of
functions within the telecommunications authority is the King's responsibility.
Wholesale services
816.
817.
160
161
162
163
Under the Norwegian Regulation all providers of public telephony services must comply
with delivering the following services:
(a)
a uniform metering system for invoicing both end users and other providers;160
(b)
maintaining an overview of end user information so that a system for directory
enquiries can be established. Where access to this system is provided to the
public, it must be provided on a non-discriminatory basis. Access to
information about end users affiliated with other providers shall be agreed
between the providers. The NPTA can lay down further regulations for the
system;161
(c)
access to and without payment from end users for calls to emergency services
and any required transfers between individual public telecommunications
networks;162 and
(d)
establishing a fault notifications service and passing on any notifications of
faults received about other providers.163
Where these services require access to public telephone networks, the providers must
make publicly available the delivery terms governing access to such networks and the
delivery of such services. The terms of delivery are required to include the following
provisions:
(a)
deadlines of connection and delivery;
(b)
quality of the network and services;
(c)
price;
(d)
associated services;
(e)
coverage;
(f)
procedures in the event of non-payment;
(g)
method of metering usage;
(h)
maintenance;
(i)
time allowance for fault rectification;
Section 2.6 of the Regulation.
Section 2.7 of the Regulation.
Section 2.8 of the Regulation.
Section 2.8 of the Regulation.
182
(j)
liability for damages; and
(k)
compensation and refund schemes.
Exemptions from any of these terms may be granted by NPTA if it would appear
unreasonable to impose such requirements on a provider.164
818.
These services cannot be cross-subsidised from other exclusive or special rights activity
and when this occurs those rights must be transferred at market price.165 Only where
the provider of access to telecommunications networks, of public telephony services and
transmission capacity has significant market power must they offer to other providers
access, supply and transmission capacity on equal and non-discriminatory terms and
conditions and with a quality equal to that of the provider's undertaking.166
819.
The introduction of operator pre-selection and number portability in 1998 may also fall
into the scope of wholesale services depending on the arrangement providers have with
each other in regard to interconnection.
Significance of the Norwegian approach
820.
Telecom submits that Norway's decision to unbundle was made in order to comply with
the EU Regulation. Telecom refers the Commission to its submission on the
significance of the EU's unbundling experience in paragraphs 697 to 700 above.
SWITZERLAND
Introduction
821.
The Commission addresses Switzerland's unbundling experience in Appendix 3 of the
Issues Paper. Telecom agrees with the Commission's analysis, and provides a more
detailed analysis of Switzerland's regulatory unbundling regime and its objectives in
mandating unbundling below.
Background to Swiss unbundling regulation
822.
The Swiss Federal Office of Communications ("Bakom")167 and Federal
Communications Commission ("ComCom")168 serve as regulators of the
telecommunications market in Switzerland. As Switzerland is not an EU member state,
EU telecommunications policy is not binding in Switzerland. Nevertheless, Bakom and
ComCom have liberalised Switzerland's telecommunications regulatory policy to be
largely consistent with the EU's regulatory framework. The principal exception to this
rule, until very recently, has been unbundling.
823.
Although incumbents in neighbouring EU countries have been required to unbundle to
alternative operators since the EU Regulation was introduced, Swisscom AG
("Swisscom"), Switzerland's largest incumbent, had until 1 April 2003 escaped this
stage of market liberalisation.
824.
However, as the Commission recognises in its summary, on 26 February 2003 the
Swiss government announced its decision to unbundle the local loop. ComCom has
164
Section 2.5 of the Regulation.
Section 2.15 of the Regulation.
166
Section 3.2 of the Regulation.
167
Bakom is the telecommunications regulatory agency that provides input for the decisions of various Swiss
federal agencies and implements ComCom's decisions.
168
ComCom is an independent judicial body established in 1998 primarily to award fixed and mobile licences,
resolve interconnection disputes, and allocate radio spectrum.
165
183
since been promoting local loop unbundling as a key step towards greater competition
and towards strengthening Switzerland's position as a business location.169
825.
Switzerland is implementing unbundling by making changes to the Federal Ordinance
on the Telecommunications Services ("Ordinance") and the Law of
Telecommunications ("LTC"). The revision in the Ordinance came into effect on 1 April
2003. From 1 April 2003, market-dominant operators were obliged to unbundle the local
loop and subject their leased line offerings to the unbundling regime.
Law of Telecommunications
826.
The aim of Switzerland's LTC is:
to ensure that a range of cost-effective high quality and nationally and
internationally competitive telecommunications services is available to private
170
individuals and the business community.
827.
The Government has asked the Ministry for Transport, Environment and
Telecommunications to draft a revision of the LTC so as to include local loop
unbundling. It is expected that it will take several years for this to take effect.
Swisscom's belief is that local loop unbundling will not be in effect until 2005 or 2006, if
at all.171
828.
The Federal Council regards the existing legal foundation in the LTC as adequate for
being able to regulate all three forms of unbundling at decree level.
Decree on Telecommunications Services
829.
On 26 February 2003 the Federal Council decided to introduce unbundling of the local
loop as rapidly as possible at the decree level. In its sitting on 7 March 2003, the
Federal Council adopted the relevant additions to the Decree on Telecommunications
Services. As the Commission recognises, the Decree now defines leased line,
bitstream access, shared line access and full access unbundling variants and places
them under the existing interconnection regime under the LTC as of 1 April 2003.
830.
The three forms of local loop unbundling (now defined in the Decree) provide access to
subscriber lines. The term "subscriber line" specifies the physical line that is used to
connect the subscriber to the local exchange, a remote switching exchange or similar
telecommunications equipment of telecommunications services providers.
831.
It should be noted that a decree can be contested in court and that Swisscom has
indicated that it will be contesting the legal basis of the decree.172
History
diAx v Swisscom
832.
169
170
171
172
On 31 July 2000, the diAx company (now TDC Switzerland AG) submitted to ComCom
an interconnection request for the three forms of unbundling recommended by the EU:
full unbundling, shared access and bitstream access. Swisscom had refused to provide
these services and the regulator (ComCom) was asked to arbitrate.
ComCom Press Release 2002, released on 6 February 2002, obtained from http://www.fedcomcom.ch.
See Telecommunications Law, Chapter 1, Article 1 of April 1997 (status on 1 January 2002).
Speech given at Q4 2002 Swisscom AG Analyst Meeting, 26 March 2003.
Speech given at Q4 2002 Swisscom AG Analyst Meeting, 26 March 2003.
184
833.
Unbundling is not explicitly written into the LTC. It was therefore, a matter of
interpretation of the LTC to clarify whether unbundling fell within the existing
interconnection regime in the LTC.
834.
ComCom enforced precautionary measures which obliged Swisscom to offer bitstream
access in parts of Switzerland. In addition, ComCom held that parties had to work out a
standard offering for shared access and full unbundling within three months of the
decision.173
835.
Swisscom lodged a complaint against this decision with the Federal Court. As a result,
in early 2001, the precautionary measures were lifted based on the justification that they
could cause Swisscom irretrievable disadvantage.174
Commcare v Swisscom
836.
In its judgment of 3 October 2001 on the leased line procedure, the Federal Court
approved Swisscom's appeal. The Court held that unbundling was not considered an
"interconnection service" as defined by Swiss telecommunications law. Accordingly,
Swisscom was not required to offer local loop unbundling to alternative operators.
Sunrise AG175
837.
In February 2002, ComCom reluctantly refused Sunrise's request for unbundled access
to Swisscom's network on the basis of the Commcare decision.
838.
The above decisions confirm that leased lines and unbundling can only be regulated by
changes in legislation.
Study by the Scientific Institute for Communications Services
839.
In May 2002, the Federal Office of Communications ("Ofcom") presented the results of
a Scientific Institute for Communication Services ("WIK")176 study.177 The results
showed that the dynamics of competition had stagnated in Switzerland, as indicated by
the individual providers' prices, which had remained stable for some considerable time.
Further, Swisscom's continuing dominant position in the access network was regarded
as problematic. Ofcom, in its press release, stated that:178
As a result of the continuing failure to unbundle the local loop, competitors are
unable to come up with comprehensive competitive service offerings, with a
concomitant lack of stimulus for innovation and competitive pressure.
According to WIK, rapid development of the high-potential broadband market
will require market-dominant providers to open up the last mile to competition.
In its regulatory recommendations, WIK therefore comes to the conclusion that
areas in which individual companies continue to enjoy a dominant position in the
market must be regulated as quickly as possible.
840.
173
We emphasise however, that WIK's argument for mandating local loop unbundling was
to encourage "rapid development of the high-potential broadband market", not the
promotion of competition.
See the ComCom Annual Report, 9 November 2000 at http://www.fedcomcom.ch.
See the ComCom Annual Report 2001, "Activities of the Commission" at http://www.fedcomcom.ch.
175
Swisscom's principal competitor for local and national services is Sunrise AG, owned by TDC Switzerland AG,
a consortium led by Denmark's TDC.
176
WIK is a research institute founded in 1982, forming part of the German federal ministry for the economy and
technology.
177
The WIK study is entitled "Status of the Swiss Telecommunications Market in an International Comparison".
This is not available in English.
178
ComCom Press Release 2002, released 6 February 2002, obtained form http://fedcomcom.ch.
174
185
Swisscom's response
841.
Swisscom, in its 2002 Annual Report states: 179
We are at pains to understand the endeavours of the regulator and legislator to
extend regulation in this way and believe the move will fail to promote greater
competition. Unbundling will reduce the incentive of all market players to invest,
which in turn will impede evolution of the information society. The move also
represents a serious incursion into the proprietary rights of Swisscom. A glance
over the border shows that unbundling of the last mile has done little to foster
greater competition.
Significance of Switzerland's LLU experience
842.
The justifications for mandating unbundling in Switzerland are different to the objects of
the NZ Act. Switzerland implemented unbundling to, amongst other reasons, make
Switzerland a more attractive business location and thus, stimulate investment. It
seems Switzerland also felt pressure to align itself with the EU despite not being a
member.
843.
Accordingly, Telecom concludes that Switzerland's decision to mandate unbundling is
not relevant in the New Zealand context.
CANADA
Introduction
844.
In Appendix 3 of the Issues Paper, the Commission provides a short summary of
Canada's experience with local loop unbundling. The Commission's analysis focuses on
broadband deployment. Telecom provides a summary of the Canadian regulatory
unbundling regime and Canada's objectives in introducing unbundling below.
Background to unbundling regulation
845.
846.
179
Historically, the delivery of telecommunications services in Canada was regulated by
both Federal and provincial authorities. The Federal Government's regulatory powers
originate from the legislation that first incorporated Bell Telephone (in 1880) and then
introduced a regulatory scheme (in 1882). Regulation of telecommunications services
was entrusted to railway regulators (most recently named the Canadian Transport
Commission) in 1882, pursuant to the Railway Act 1903 ("Railway Act"). The Railway
Act contained rules governing:
(a)
"just and responsible" rates;
(b)
the imposition of certain terms and conditions on telecommunications
suppliers; and
(c)
the approval of agreements.
The Canadian telecommunications markets had a monopoly structure subject to tight
regulatory control. This structure was consistent with the underlying policy approach
that the industry was subject to "natural monopoly" characteristics. In most states,
telephone services were provided by a single telecommunications provider whose
monopoly position was protected by municipal, provincial or federal laws prohibiting
entry by competition.
At www.swisscom.com - Clear overview summary of 2002, p 6.
186
847.
848.
The underlying policy approach has changed as a result of three significant changes in
legal regulation:
(a)
several Court decisions confirming federal jurisdiction over telecommunications
undertakings;180
(b)
the establishment, in 1986, of the Canadian Radio-television and
Telecommunications Commission ("CRTC"), which has been given
responsibility for federally regulated telecommunications undertakings and
broadcasting; and
(c)
the enactment of the Telecommunications Act 1993 ("Canadian Act") which
gave the CRTC extensive powers (and obligations) and concurrently gave the
Government greater control of telecommunications policy.
Since the Canadian Act came into force, the CRTC has significantly reformed the
telecommunications regulatory framework. Most significantly, in 1997 it mandated local
loop unbundling. Unbundling is limited to the copper loop and excludes the provision of,
for example, switching capacity and data services.
The Telecommunications Act 1993
849.
180
The Canadian Act sets out a statutory regime which applies to all telecommunications
providers (including telephone, cable, satellite and wireless providers). The objects of
the Canadian Act are summarised in the Canadian Telecommunications Policy (in
section 7) as being:
(a)
to facilitate the orderly development throughout Canada of a
telecommunications system that serves to safeguard, enrich and
strengthen the social and economic fabric of Canada and its regions;
(b)
to render reliable and affordable telecommunications services of high
quality accessible to Canadians in both urban and rural areas in all
regions of Canada;
(c)
to enhance the efficiency and competitiveness, at the national and
international levels, of Canadian telecommunications;
(d)
to promote the ownership and control of Canadian carriers by
Canadians;
(e)
to promote the use of Canadian transmission facilities for
telecommunications within Canada and between Canada and points
outside Canada;
(f)
to foster increased reliance on market forces for the provision of
telecommunications services and to ensure that regulation, where
required, is efficient and effective;
(g)
to stimulate research and development in Canada in the field of
telecommunications and to encourage innovation in the provision of
telecommunications services;
(h)
to respond to the economic and social requirements of users of
telecommunications services; and
(i)
to contribute to the protection of the privacy of persons.
Alberta Government Telephones v Canadian Radio-television and Telecommunications Commission [1989] 2
SCR 225, 61 DRL (4 ) 193; Téléphone Guevremont Inc v Quebec (regie des telecommunications) [1994] 1 SCR
th
878, 112 DLR (4 ) 127.
th
187
850.
851.
852.
The Canadian Act gives the CRTC a number of powers in relation to
telecommunications services.181 Pursuant to section 24, the offering and provision of
telecommunications services are subject to conditions imposed by the CRTC or included
in a tariff approved by the CRTC. Carriers are required to obtain the CRTC's consent to
agreements and arrangements with other carriers in respect of:
(a)
the interchange of telecommunications by means of their telecommunications
facilities;
(b)
the management or operation of either or both of their facilities or any other
facilities with which either or both are connected; or
(c)
the apportionment of rates or revenues between the carriers.
Under section 32, the CRTC has the general power to:
(a)
approve the establishment of classes of telecommunications services
and permit different rates to be charged for different classes of service;
(b)
determine standards in respect of the technical aspects
telecommunications applicable to telecommunications facilities;
(c)
amend tariffs filed under section 25 or any agreement or arrangements
submitted for the CRTC's approval;
(d)
suspend or disallow any portion of a tariff, agreement or arrangement
that is in its opinion inconsistent with the [Canadian] Act;
(e)
substitute or require the carrier to substitute other provisions for those
disallowed;
(f)
require the carrier to file another tariff, agreement or arrangement, or
another portion of it, in substitution for a suspended or disallowed tariff,
agreement, arrangement or portion; and
(g)
in the absence of any applicable provision in this Part, determine any
matter and make any order relating to the rates, tariffs or
telecommunications services of carriers.
of
Section 34 allows the CRTC to forbear from exercising its powers and duties under the
Canadian Act to approve tariffs or set preceding and other terms and conditions, where
it finds, as a question of fact, that:
(a)
to refrain would be consistent with the Canadian telecommunications policy
objectives set out in section 7; or
(b)
the telecommunications service or class of services is or will be subject to
competition sufficient to protect the interests of users.
The Local Competition Decision
853.
181
On 16 December 1994, the CRTC released its decision Review of the Regulatory
Framework.182
The decision recommended significant modifications to the
telecommunications regulatory framework in light of industry developments. Part of the
A "telecommunication service" is defined to mean "a service provided by means of telecommunications
facilities and includes the provision in whole or in part of telecommunications facilities and any related equipment,
whether by sale, lease or otherwise" and includes services incidental to the business of providing
telecommunications services.
182
Telecom Decision CRTC 94-19 CRTC, Review of the Regulatory Framework.
188
decision focused on reductions in barriers to entry to the local competition market. The
CRTC recommended that:
In the opinion of the Commission…restrictions on entry into the local market
should be removed and principles of open access, unbundling and colocation…should be pursued. The applications and solutions required to
meet the needs of users in today's environment are not always possible if
entry is restricted in some markets. Users should have the flexibility to
obtain solutions from any supplier or mix of suppliers. This means that barriers
to entry on the supply-side of telecommunications, including those that restrict
telephone companies, should be reduced. Conversely, service providers must
have the means to access and serve subscribers without technical barriers to
entry.
[Telecom emphasis]
854.
855.
856.
Consistent with the Review of the Regulatory Framework, the CRTC initiated a
proceeding to establish principles and procedures that would permit competitive entry
into the local exchange market. This proceeding culminated in the Local Competition
decision, issued on 1 May 1997 ("Local Competition Decision").183 The Local
Competition Decision establishes a framework governing access to the local exchange
market, including:
(a)
a regime governing the extent, and cost of, interconnection;
(b)
mandatory unbundling provisions;
(c)
various competitive safeguards;
(d)
resale provisions; and
(e)
a regulatory framework for new entrants.
The CRTC established a definition of "essential facilities" in order to determine which
facilities should be subject to the mandatory unbundling provisions. It held that ILECs
should not generally be required to make available facilities for which there are
alternative sources of supply or which CLECs can reasonably supply on their own.
Accordingly the CRTC concluded (at paragraph 79) that to be essential, a facility,
function, or service must meet all thereof the following criteria;
(a)
it is monopoly controlled;
(b)
a CLEC requires it as an input to provide services; and
(c)
a CLEC cannot duplicate it economically or technically.
The CRTC held that:
(a)
central office codes (NXXs);
(b)
subscriber listings; and
(c)
local loops in certain (geographical) bands;
met the "essential facility" definition.
It also considered a range of other
telecommunications facilities, services and functions. Its conclusions in relation to those
are set out below.
183
CRTC, Local Competition decision, Telecom Decision CRTC 97-8.
189
Local loops
857.
The local loop was defined as the transmission path from the MDF to the customer's
premises. The CRTC found that local loops situated in small urban and rural areas met
the "essential facility" criteria. It acknowledged that there was competitive supply in
other geographical bands and hence those criteria were not met. However, that
competitive supply was limited. The CRTC therefore mandated unbundling of those
local loops for a period of 5 years from the date of the decision, in order to allow CLECs
to compete effectively in the short term. The CRTC noted that:184
Loops may be provided using a variety of technologies ranging from simple
metallic pairs to fibre optic systems The Commission considers that, should the
ILECs provide local exchange services that require a specific type of loop, that
type of loop should be made available on an unbundled basis.
Inside Wire
858.
The CRTC held that, as inside wire may be obtained from multiple providers, it does not
meet the "essential facility" definition. However, the CRTC held that customers must be
permitted to connect the inside wire to the network of any ILEC in whose area they are
situated "in order to promote competitive entry and foster consumer choice".
Local switching
859.
The CRTC noted that switching equipment was "readily available" in a wide variety of
sizes and configurations that would allow CLECs to compete with ILECs. In addition,
there was evidence that a number of potential CLECs already possessed switching
functionality and that they would likely provide switching functionality to other CLECs.
Accordingly, the CRTC found that switching equipment was not an "essential facility".
Transiting of traffic
860.
The CRTC held that transiting could be provided by various means and that, in addition,
an intra-CLEC market was likely to evolve in the provisioning of transiting. Accordingly,
the CRTC concluded that transiting was not an "essential facility". However, for reasons
similar to those discussed in relation to the local loop, the CRTC directed ILECs to
unbundle transiting functions and provide transiting services for a period of 5 years from
the date of the decision.
Signalling networks
861.
For the reasons outlined above, the CRTC held that unbundled access must be
provided to signalling networks.
Extension of sunset clause
862.
184
185
As the Commission recognises in its summary, on 1 March 2001, the CRTC released an
order extending the 5 year sunset period for "near-essential facilities" (local loops in lowcost bands, transiting of switched local traffic and signalling networks and extended area
service delivery of CLEC - originated switched local traffic) indefinitely, "until such time
as the market for such facilities is sufficiently competitive". The CRTC held that:185
(a)
these facilities are critical inputs required by CLECs;
(b)
in almost all cases, ILECs are the only available source of such facilities;
Local Competition Decision, paragraph 87.
CRTC Order, paragraph 29.
190
(c)
entrants in the local market face substantial barriers to entry, which limit their
ability to expand their networks and require customers through self-supply of
such facilities; and
(d)
in light of the delays in implementing local competition and remaining entry
barriers, competition will not evolve sufficiently before the end of the sunset
period.
Public Notice: Application by Telephone Companies to Carry on Broadcasting
Distribution Undertakings
863.
ILECS have received an (informal) trade-off for the requirement to unbundle in the form
of the CRTC's permission to carry out broadcasting functions.
Significance of the Canadian position
864.
The implementation of unbundling regulation in Canada was driven by specific aspects
of its statutory framework, the most significant of which is the extensive Canadian
Telecommunications Policy in section 7 of the Canadian Act. One of the aims of the
Policy is to:
stimulate research and development in Canada in the field of
telecommunications and to encourage innovation in the provision of
telecommunications services.
865.
Although this aim appears to be similar to the NZ Act's drive for efficiency, it is important
to note that there is also an express aim in section 7 to "enhance the efficiency and
competitiveness, at the national and international levels, of Canadian
telecommunications".
866.
In addition, the level of unbundling in Canada is limited to the local copper loop and
excludes the provision of (for example) switching capacity and data services. In a
similar arrangement to that in the US, ILECs have received an (informal) trade-off for the
requirement to unbundle in the form of the CRTC's permission to carry out broadcasting
functions.
AUSTRALIA
Introduction
867.
The Commission summarises Australia's experience with local loop unbundling in
Appendix 3 of the Issues Paper. The Commission's analysis includes a short summary
of Australia's objectives for introducing local loop unbundling and focuses on broadband
deployment.
868.
Of the jurisdictions the Commission considers in the Issues Paper, Australia is the most
similar international jurisdiction to New Zealand (in terms of its legislative regime and
social and economic context). Accordingly, Telecom does not seek to distinguish
Australia's regulatory unbundling regime from New Zealand's. Telecom considers that it
is important to have a clear understanding of the Australian regulatory unbundling
regime. Therefore, Telecom provides a detailed summary of the Australian unbundling
regulatory regime and the objectives of unbundling regulation below.
869.
Telecom wishes to highlight two issues relating to the Australian position which the
Issues Paper does not address:
(a)
the level of uptake of Australia's unbundled local loop services ("ULLS").
Telecom has information suggesting that to date the level of uptake of the
191
ULLS has been very low. Instead, entrants rely on Telstra Corporation's
commercial DSL services. Telecom's subsidiary, AAPT, has details about
Telstra's commercial offerings. The information is subject to a confidentiality
arrangement with Telstra Corporation. Telecom will make this information
available to the Commission when Telstra Corporation agrees to release AAPT
from the undertaking. Despite several requests, Telstra has not yet done so;
and
(b)
870.
the scope of Australia's regulated wholesale regime.
Hence, Telecom's analysis of the Australian unbundling regulatory regime is split into
three parts:
(a)
Part I outlines the statutory telecommunications regulation regime and
describes how the ACCC will apply its powers under that regime;
(b)
Part II describes the regulation of the unbundled local loop service ("ULLS"),
and the digital data access service ("DDAS"); and
(c)
Part III briefly outlines the Australian regulated wholesale regime.
Part I: Australia's statutory telecommunications regulation regime
Introduction
871.
On 1 July 1997, the Australian Government introduced a legislative package with the
overriding aim of promoting competition in the telecommunications industry. The most
significant amendment was the enactment of the Trade Practices (Amendment)
Telecommunications Act 1997, which amended the provisions of the Trade Practices
Act 1974 ("TPA") by introducing provisions (Part XIC) to regulate competition in, and
facilitate network access to, the telecommunications industry. The legislative package
also included amendments to the Telecommunications Act 1997.
Role of the ACCC
872.
The Australian Competition and Consumer Commission ("ACCC") regulates competition
issues in Australia. It is responsible for both general and telecommunications industryspecific competition regulation. Its functions with respect to telecommunications are
varied, with its main functions being the administration of the telecommunications
access regime in Part XIC of the TPA and the regulation of anti-competitive conduct in
the telecommunications industry under Part XIB of the TPA.
Summary of Part XIC
Object
873.
The object of Part XIC (as stated in section 152AB) is to:
promote the long-term interests of end-users of carriage services or of services
186
provided by means of carriage services ["listed services"]
874.
186
This object is also referred to as the "LTIE test". In order to determine whether
something satisfies the LTIE test, the ACCC is required, by section 152AB, to have
regard to the following objectives:
A "carriage service" is a service for carrying communications by means of guided and/or unguided
electromagnetic energy (section 152AC).
192
(a)
the objective of promoting competition in the markets for listed services (regard
must be had to the extent to which something will remove the obstacles to endusers of listed services gaining access to those services);
(b)
the objective of achieving any-to-any connectivity in relation to carriage
services that involve communication between end-users;187 and
(c)
the objective of encouraging the economically efficient use of, and the
economically efficient investment in, the infrastructure by which listed services
are supplied. In determining whether something will achieve this objective,
regard must be had to:
(i)
whether it is technically feasible for the services to be supplied and
charged for, having regard to:
(aa)
the technology that is in use or available;
(bb)
whether the costs that would be involved in supplying, and
charging for, the services are reasonable; and
(cc)
the effects, or likely effects, that supplying, and charging for,
the services would have on the operation or performance of
telecommunications networks;
(ii)
the legitimate commercial interests of the supplier or suppliers of the
services, including the ability of the supplier or suppliers to exploit
economies of scale and scope; and
(iii)
the incentives for investment in the infrastructure by which the
services are supplied.
Declaration of services
875.
Under Part XIC, the ACCC has the discretion to "declare" eligible services.188 A service
may be declared following a public inquiry.189 In deciding whether to declare an eligible
service, the ACCC must consider whether the declaration will advance the object of Part
XIC.
876.
Once a service is declared, carriers and carriage service providers are obliged to supply
the service to access seekers, unless they are specifically exempted from doing so.190
The obligation to supply the service is one of several "general access obligations" in
section 152AR imposed on carriers and carriage service providers (referred to as
"access providers") in respect of declared services. If a carrier or carriage service
187
Pursuant to section 152AB(8), any-to-any connectivity is achieved if, and only if, each end-user who is
supplied with a carriage service that involves communication between end-users is able to communicate, by
means of that service, with each other end-user who is supplied with the same service or a similar service,
whether or not the end-users are connected to the same telecommunications network.
188
"An eligible service" is defined in section 152AL as "a listed carriage service … or a service that facilitates the
supply of a listed carriage service … where the service is supplied, or is capable of being supplied, by a carrier or
a carriage service provider (whether to itself or to other persons)". Listed carriage services (defined in the
Telecommunications Act 1997) are carriage services between two points, at least one of which is located in
Australia.
189
Until recently, a service could also be declared on the recommendation of the Telecommunications Access
Forum, an industry body. A recent amendment to the TPA (in December 2002) abolished this body.
190
The ACCC has the discretion to issue individual or class exemptions if it considers that doing so will promote
the long-term interests of end-users. As a result of a recent amendment to the TPA, the ACCC now has the
ability to determine a wider class of exemptions - ordinary class exemptions, anticipatory class exemptions,
ordinary individual exemptions and anticipatory individual exemptions.
193
provider supplies declared services, whether to itself or to other persons, it must, if
requested to do so by an access seeker (referred to as a "service provider"):
877.
(a)
supply the service, in order that the service provider can provide carriage
services and/or content services;
(b)
take all reasonable steps to ensure that the technical and operational quality of
the declared service supplied to the service provider is equivalent to that which
the carrier or carriage service provider provides to itself; and
(c)
take all reasonable steps to ensure that the service provider receives, in
relation to the declared service supplied, fault detection, handling and
rectification of a technical and operational quality and timing that is equivalent
to that which the access provider provides to itself.
The parties are prima facie free to negotiate the terms and conditions on which a
declared service is supplied. If the parties fail to reach agreement, and the access
dispute is notified to the ACCC, the ACCC has the power to arbitrate and make a
determination as to those terms and conditions.191
The ACCC's approach to declaration of services
878.
The ACCC has set out guidelines in relation to the declaration of services in its
publication Telecommunications services - Declaration provisions - a guide to the
declaration provisions of Part XIC of the Trade Practices Act (ACCC, July 1999). The
guide sets out how the ACCC will apply the objectives listed in Part XIC in determining
whether to declare a service. It also deals with the ACCC's approach to service
descriptions192 and unbundling193 of declared services.
Application of objectives in Part XIC
879.
In the ACCC's view, whether declaration of the relevant service will promote the LTIE:
is essentially a question of whether declaration will contribute to the
establishment of an environment which will increase the likelihood of those
interests being improved over the long term.
880.
End-users are the consumers of carriage services and other services supplied using
carriage services. The "long-term interests of end users":
refers to end-users' economic interests. These interests include lower prices,
increased quality and greater diversity of goods and services.
881.
The long-term is not a set period, but rather the time taken for the substantive
consequences of a declaration decision to unfold.
882.
The ACCC views the objectives listed in section 152AB (see paragraph 874 above) as
"essentially secondary objectives". Accordingly,
191
The ACCC is required to resolve the dispute in a timely manner through an arbitration process and must also
have regard to using alternative dispute resolution methods such as mediation and conciliation (section 152CLA).
192
The ACCC has a large degree of flexibility in how to describe a service. Its policy is to specify services in
generic and non-technical terms where possible. Terms and conditions of access are not included in the service
description.
193
Often, eligible services will be seen as bundles of particular network elements. Consequently, the ACCC will
form a view as to the degree of unbundling that is appropriate. The ACCC's approach to unbundling will be
guided by criteria relevant to the objective of Part XIC. Criteria given by the ACCC include (1) whether
unbundling will lead to any loss of efficiencies, (2) whether there is any demand for the unbundled elements; and
(3) whether the service contains elements which could be supplied by other service providers in competition with
the potential access provider.
194
Where declaration is likely to result in the achievement of one or more of these
objectives, it will generally promote the long-term interests of end-users.
883.
The ACCC uses a "with and without test" to consider the likely result of declaration on a
secondary objective.
884.
The ACCC applies the objectives listed in section 52AB in the following way:
(a)
Promoting competition:
competition where:
Declaration of a service is likely to promote
(i)
the service is an input that is used, or could be used, to supply
carriage services or downstream services; and
(ii)
competition in the market for the supply of the service is unlikely to be
effective in the future and this is likely to have a detrimental impact on
competition in markets for downstream services.
(b)
Achieving any-to-any connectivity: This objective is relevant only when
considering services which involve communications between end-users. When
considering other types of services (for example, carriage services which are
an input to an end-to-end service), it is given little, if any, weight.
(c)
Encouraging efficiency: The ACCC's view is that this objective refers to the
economic concept of efficiency. The key issue is:
whether declaration will create an environment whereby the
participants have increased incentives to undertake efficient use of,
and efficient investment in, infrastructure.
885.
In doing this, the ACCC's general approach is to separately analyse the impact of
declaration on:
(a)
the economically efficient use of infrastructure used to supply carriage services
and downstream services; and
(b)
the economically efficient investment in infrastructure used to supply carriage
services and downstream services.
The ACCC will give particular
consideration to the risks to efficient investment of declaring a service.
Part II: Declared services
Summary of declared services
886.
887.
In this section, Telecom:
(a)
lists the declared telecommunications services; and
(b)
provides summaries of the regulation of the ULLS and the DDAS.
There are currently 14 declared telecommunications services (counting originating and
terminating tails as one service). Eight of those services are "deemed declared
services". 194
The deemed declared services are:195
194
Deemed declared services are services which were deemed to be declared when Part XIC was first enacted.
ACCC Register of declared telecommunications services. The ACCC's register contains service descriptions
for those services and can be accessed through ACCC's website (http://www.accc.gov.au).
195
195
888.
(a)
domestic originating and terminating access services provided over the PSTN,
GSM and AMPS networks;
(b)
the domestic transmission capacity service;
(c)
the digital data access service;
(d)
the conditioned local loop service;
(e)
the AMPS to GSM diversion service; and
(f)
the broadcasting access service.
The ACCC has also declared the following six services following public inquiries:
(a)
originating and terminating services provided over Telstra's ISDN (declared in
November 1998);
(b)
the local loop carriage service, the local loop service and local originating and
terminating service provided over the PSTN (August 1999);
(c)
the analogue pay TV broadcast carriage service (September 1999); and
(d)
the line sharing service (August 2002).
The unbundled local loop service
Description
889.
In August 1999, the ACCC declared:
(a)
the ULLS;
(b)
local PSTN originating and terminating services; and
(c)
the local carriage service;
as declared services under Part XIC (see Declaration of local telecommunication
services: A report on the declaration of an unconditioned local loop service, local PSTN
originating and terminating services, and a local carriage service under Part XIC of the
Trade Practices Act 1974, ACCC, July 1999 ("ULLS Report")).
890.
The ACCC register of declared services describes the ULLS as: 196
… the use of unconditioned communications wire between the boundary of a
telecommunications network at an end-user's premises and a point on a
telecommunications network that is a potential point of interconnection located
at or associated with a customer access module and located on the end-user
side of the customer access module.
891.
The ULLS description was intended by the ACCC to cover:
(a)
196
where an end-user chooses to churn from one service provider (for example,
Telstra) to another service provider for services provided over the line. In such
a situation the access seeker would acquire use of the line; and
ACCC Register of declared telecommunications services.
196
(b)
892.
where a line has been deployed but is not currently being used to supply
services to end-users.
The ACCC has elaborated on the ULLS description in the following terms.197
Under Telstra's customer access network architecture, customers are
connected to the broader network by means of cabling which runs from a
customer's premises to what is known as 'Customer Access Module (CAM)'
equipment. The CAM equipment does not necessarily undertake switching;
rather its function is to provide battery feed, ring current and dial tone to the
customer premises equipment. CAM equipment includes remote switching
units or stages (RSUs/RSSs), remote (and integrated remote) integrated
multiplexers (RIMs/IRIMs) or newer generation remote customer multiplexers
(C0-MUXs). In some areas, notably CBD's, (sic) customers are directly
connected to local access switches (LAS) which effectively serve as the CAM in
this case.
Under Telstra's customer network architecture, the CAM can then be connected
(directly, or by means of other CAM equipment) to a Local Access Switch (LAS)
and/or a data/IP network. Voice traffic is currently routed to the LAS for carriage
using a circuit switched network, whilst data traffic is routed to a data/IP
network.
… the ULLS refers to the unconditioned twisted copper pairs that connect a
customer's premises to the nearest CAM. Hence, in the case of full unbundling
of the local loop, the link between MDF and the CAM is re-connected to become
a link to the access seeker's CAM.
The ULLS is a service in its own right and is also, a component of local PSTN originating
and terminating services and the Local Carriage Service.
893.
The access seeker receives the use of the twisted copper pair without conditioning or
specific carriage technology. This enables the access seeker to add its own carriage
technology in order to supply, for example, high speed data carriage services to endusers or alternatively multiple telephony services to medium and large corporates
(supplying up to 30 voice channels on a single copper pair) or a combination of voice
and data services.198 The point of interconnection is at or associated with the point at
which the copper wire terminates. This will be the end-user side of a customer access
module.199
894.
Access seekers using the ULLS to supply carriage services to their customers are
responsible for the provision of all carriage services that the customer wishes to receive
over the line. Access seekers, however, choose to "split" particular services (for
example, voice and data services) and contract with a carrier for the transmission of
particular types of services (for example, voice services) over that carrier's network.
These wholesale arrangements are matters for resolution by means of commercial
negotiation and are not specified in the service description for the ULLS.200
895.
The ACCC notes in its declaration decision for the ULLS that access seekers advised
they propose to attach electronic equipment to the line (for example, HDSL or ADSL
modems) in order to supply these services to end-users and that they would also use
the ULLS to supply telephony services either with, or independently of, a DSL service
such as ADSL.201
197
ACCC, Pricing of the unconditioned local loop services (ULLS) and review of Telstra's proposed ULLS
charges, draft Discussion Paper, August 2002, pp 5, 6.
198
ACCC, Declaration of local telecommunications services, July 1999, at pp 15, 16.
199
Ibid, p 18.
200
Ibid.
201
Ibid, p30. See p30 onwards of the declaration decision for further elaboration.
197
ACCC arguments in favour of partial unbundling
896.
The ACCC made the following arguments relating to lack of demand for full unbundling
and its efficiency losses, when declaring the ULLS and recommending a partial
unbundling approach: 202
The issue of transparency is an important argument in favour of full unbundling.
On the other hand, full unbundling could lead to loss efficiencies through access
providers needing to separate internal processes so that each element could be
provided as a separate service. In the absence of demand for individual
elements which access seekers would then combine with elements sourced inhouse or from other carriers or carriage service providers, the Commission is of
the view that full unbundling would not be warranted at this time.
Market inquiries indicate that most potential access seekers do not want to
acquire all network elements individually, but rather will be seeking particular
bundles of elements. The partial unbundling approach is seen as better
promoting the interests of end-users, taking into account the current demand for
particular elements and the costs associated with unbundling.
ACCC arguments in favour of declaring the ULLS
897.
The following sets out the arguments the ACCC made for declaring the ULLS.
898.
The ACCC examined whether the making of the declaration would promote the longterm interests of end-users of carriage services or of services provided by means of
carriage services.
Will declaration promote competition?
899.
The ACCC analysed the effect of the declaration on the high bandwidth carriage
services market and the local telephony services market.
900.
The ACCC considered that even where end-users could be served by the Optus HFC
network, there were likely to be benefits from access to the ULLS, owing to possible
capacity constraints which limit the ability of Optus to satisfy demand. The ACCC noted
that, furthermore, the presence of high barriers to entry and high market concentration
provide scope for coordinated (or accommodating) action by network operators.
Enabling other service providers to supply high bandwidth carriage services by means of
the ULLS minimises the scope for this to occur.203
901.
The ACCC took the view that the ULLS was unlikely to be supplied to access seekers in
the absence of declaration in a manner that would meet their demand and that
declaration would therefore be likely to promote competition in the market for high
bandwidth carriage services.
902.
The declaration of the ULLS would enable end-users in CBDs, inner city and suburban
areas and in regional (country town) locations to gain access to an increased range and
choice of high bandwidth carriage services, thus removing obstacles to them gaining
access to those services and in turn promoting their interests. The services can be used
for Internet access, video on demand, remote areas network (LAN) access and
interactive multimedia.204
903.
The ACCC noted that Telstra questioned the extent to which service providers could
introduce a greater range of carriage services. In Telstra's view, rigorous technical
standards are required to prevent interference problems associated with xDSL
202
203
204
ACCC, Declaration of local telecommunications services, July 1999, at pp 14, 15.
Ibid, p77.
Ibid.
198
technologies. Accordingly, Telstra was of the view that innovation would be limited to
the value added to the carriage services rather than the technologies themselves.205
904.
In response to this, the ACCC noted that:
(a)
while the process of establishing standards may involve limiting the range of
electronic equipment that can be used with the ULLS, it ensures that end-users
are not limited to the technology choices made by the network owner; and
(b)
if industry standards are developed in accordance with best practice
approaches to regulation, they will tend to be outcomes based and minimise
the extent to which they prescribe the means by which compliance is achieved.
905.
Accordingly, the ACCC took the view that the need for such standards in itself is a direct
result of the innovation generated by competition and that such developments would not
be likely in the absence of declaration with Telstra retaining full control of the
infrastructure.206
906.
Telstra also submitted to the ACCC that declaration of the ULLS would simply transfer
"a bottleneck from one service provider to another, while doing nothing for broader
competitive access to the customer base". The ACCC, however, took the view that this
ignores the variety of ways in which competition can be introduced into a market.
Competition with declaration of the ULLS may be introduced in relation to use of the
customer line rather than the promotion of competition through the duplication of
infrastructure. In a very real sense, therefore, the ACCC noted, there will be competition
for the customer.207
907.
The ACCC considered that although there were likely to be end-users for whom
declaration may have no impact, particularly those served by multiple customer access
networks such as in CBD districts, if all these CBDs or even those of Sydney and
Melbourne were excluded from the scope of the declaration, there would be likely to be
many end-users in those areas who would be served by only one customer access
network and so would be disadvantaged vis-à-vis their suburban counterparts.
Accordingly, the ACCC considered that the declaration should apply to all geographic
areas but that this be re-considered in 5 years' time (in other words, in 2004).208
908.
Telstra argued that it would take until 2001 to deliver ULLS to the market, due to the
need to develop standards and make modifications to Telstra's systems. The ACCC,
however, was sceptical about the need to take this length of time to bring the service to
the market and, in its view, there were measures that could be taken to bring the service
to the market at an earlier date.209
909.
The ACCC considered that the declaration was also likely to promote competition in the
market for local telephony services. This was based on the following factors:210
205
(a)
Telstra held around 94% of the local telephony services market;
(b)
capacity constraints on Optus' HFC network to provide local telephony services
and it being unclear whether the potential for new entrants to roll out networks
in discrete areas would be sufficient to generate effective competition in local
telephony services; and
Ibid, citing Telstra Research Laboratories, The Customer Access Network: Broadband Services Provision,
Information Paper, May 1999.
206
Ibid, p 78.
207
Ibid.
208
Ibid.
209
Ibid.
210
Ibid, p 79.
199
(c)
910.
potential access seekers advising the ACCC that they planned to use the ULLS
to supply telephony services either independently of, or bundled with, high
bandwidth carriage services (for example using ADSL). Increasing the range
and choice of service providers is expected to provide greater scope for price
competition in local telephone services.
Telstra suggested to the ACCC that declaration of an alternative service, namely its
proposed bitstream access service, would meet service providers' access requirements.
However, the ACCC considered this would not meet the needs of most carriage service
providers.211
Will declaration promote any-to-any connectivity?
911.
The ACCC considered that the declaration of the ULLS would have no impact on the
achievement of any-to-any connectivity independently of the matters considered by the
ACCC in relation to economic efficiency.212
Will declaration encourage economic efficiency?
912.
913.
The ACCC considered that the concept of economic efficiency consisted of three
components:
(a)
productive efficiency: which is achieved where individual firms produce the
goods and services they offer to consumers at least cost;
(b)
allocative efficiency: which is achieved where the prices of resources reflect
their underlying costs so that resources are then allocated to their highest
valued uses; and
(c)
dynamic efficiency: which reflects the need for industries to make timely
changes to technology and products with respect to changes in consumer
tastes and in productive opportunities.
The Commission separately considered the impact of declaring the ULLS on the
economically efficient "use of infrastructure" and "investment in infrastructure" and
concluded that declaration of the ULLS would be expected to enable service providers
to make efficient investment decisions at access prices which enable the access
provider to reach commercial returns. Declaration was also expected by the ACCC to
encourage investment in DSL technology and in data networks and so satisfy the
investment criterion of the LTIE test.213
ULLS access arbitrations
914.
The Productivity Commission report notes that the ACCC has been asked to arbitrate in
relation to four access disputes involving supply of the declared ULLS. Those disputes
were between Telstra and each of AAPT, Optus and its subsidiaries, OneTel and
Primus.214
915.
The Productivity Commission report also notes that on 22 December 2000, the ACCC
issued interim determinations in respect of the arbitrations involving AAPT, Optus and
Primus.215
211
Ibid, pp 79-80.
Ibid, p 80.
213
Ibid, pp 89-95 where the Commission provides a detailed discussion of the effect of declaration of the ULLS
on investment.
214
Productivity Commission 2001, Telecommunications Competition Regulation, Report No. 16, AusInfo,
Canberra, at p 238, table 7.2.
215
Ibid.
212
200
916.
The ACCC did not issue a final determination in respect of any of the ULLS arbitrations.
In November 2001, AAPT's arbitration was settled with Telstra and withdrawn, along
with those lodged by Optus and Primus. Each of the arbitration proceedings were
confidential.
ULLS pricing principles and indicative prices
917.
The ACCC has issued the following reports in respect of pricing of the ULLS:
(a)
Pricing of unconditioned local loop services and review of Telstra's proposed
ULLS charges, ("draft Discussion Paper"), August 2000; and
(b)
Pricing of unconditioned local loop services, Final report, March 2002 ("Final
Report").
Pricing principles
918.
The draft Discussion Paper followed Telstra's announced proposed charges for the
declared ULLS in June 2002, which involved a number of components including a
connection charge, a monthly rental charge and other components relating to the
service quality and provisioning times. Industry participants considered these charges,
particularly the monthly line rental, as being well above analogous line cost estimates
determined as part of the ACCC's n/e/r/a-based network costing work conducted for the
assessment of Telstra's PSTN undertakings. Some industry players argued that these
line costs were equally relevant to the determination of appropriate ULLS charges.
919.
The draft Discussion Paper was intended to provide the industry with guidance on ULLS
prices when negotiating in relation to supply of the declared service. The paper notes
that the ACCC's broad principle for pricing access service based on total service long
run incremental cost ("TSLRIC") determined to recover the efficient costs of a "forwardlooking" network is appropriate to apply in the costing of the provision of the ULLS.
920.
The ACCC also considered that a de-averaged approach to pricing ULLS, as proposed
by Telstra where differences in costs in different geographical locations are reflected in
access prices, is a more efficient basis on which to price the ULLS. The ACCC
considered that a de-averaged approach:
921.
23
(a)
is less likely to distort either the build-buy decision of competitors or Telstra's
own investment plans;
(b)
will mean there is less opportunity to access seekers to "cream skim", ie target
high call volume customers in CBD and inner-metro areas; and
(c)
is less likely to lead to inadequate provision of services to regional and remote
customers.23
The ACCC considered Telstra's suggestion for inclusion of an access deficit contribution
("ADC") when pricing the ULLS but did not think at that stage it was appropriate for
ongoing monthly charges to include an access deficit adjustment. The ACCC believed
that previously held arguments about the inclusion of an ADC in the access price for
PSTN originating and terminating access ("PSTN OTA") do not apply in the case of the
ULLS.24
ACCC, Pricing of unconditioned local loop services (ULLS) and review of Telstra's proposed ULLS charges,
draft Discussion Paper, August 200, at pp 16-18.
24
Ibid, pp 18-20. Also see ACCC, Pricing of unconditioned local loop services (ULLS), Final Report, March 2002
at pp 19-23 for further elaboration on ADC issues and the ULLS.
201
922.
The draft Discussion Paper contained detailed analysis reviewing Telstra's proposed
ULLS charges and comparing them with its n/e/r/a-based cost estimates and some
limited information on ULLS charges in a number of other countries. The ACCC
concluded that it was not in a position to come to any definitive views about the
reasonableness of the proposed Telstra charges.
Indicative ULLS prices
923.
The ACCC's Final Report broadly confirms the pricing approach it adopted in the draft
Discussion Paper and sets indicative prices for the ULLS relying on the arbitration
processes referred to above that it had conducted for the service.
924.
The Final Report also makes the additional comment that a network termination device
("NTD"), in other words, a distributor which functions as a demarcation point between
carrier network lines and customer premises cabling, may be appropriate in some
situations. The ACCC makes the point that this is particularly so where reliance on the
first socket is not possible or appropriate but concludes it would be premature to
incorporate a specific charge for the provision of an NTD as part of or in addition to
Telstra's ULLS line costs. This is because it would have the effect of mandating the use
of an NTD in all ULLS provisioning situations and it is not clear that this is necessary or
appropriate based on then current industry practices.216
925.
The ACCC outlines Telstra's proposed pricing approach for ULLS, as first announced in
June 2000, as follows:
Telstra proposed the following main charging components for the ULLS:
•
Once-off provisioning charges of which the main charges are service
qualification and connection charges; and
•
Ongoing charges made up of network costs, ULL-specific costs and an
access deficit contribution.
The once-off charges are to be billed when (the) service is provided and the
ongoing charges on a monthly basis. All the charges are applied on a per line
basis. The connection, network and access deficit charges are subject to
variation related to the geographic location of lines in accordance with four
'bands' that are delineated on the basis of teledensity.
•
Band 1 - CBD areas of Sydney, Melbourne, Brisbane, Adelaide and
Perth.
•
Band 2 - urban areas of capital cities, metropolitan regions and large
provincial centres (including other CBD areas not already included in
Band 1).
•
Band 3 - semi-urban areas including outer metropolitan and smaller
provincial towns.
•
Band 4 - rural and remote areas.
It is expected the greatest take-up of the ULL service will occur within Bands 1
and 2.
Telstra's network charges also differ depending on whether the ULLS is
provided at an RSS/RSU or an IRIM.
In relation to the ongoing charges these relate to the following costs:
216
Ibid, pp 25-26.
202
926.
•
Network costs comprising the annual cost of PSTN lines to the level of
the RSS/RSU or IRIM, including annual capital, O&M and indirect costs;
•
ULL-specific costs such as additional IT system and management costs
required to provide the ULLS; and
•
An access deficit contribution … (the contribution applies only to bands 1
and 2. Lines in band 3 and 4 receive an access deficit rebate …)
Telstra's originally proposed line charges are set out in table 1 below:
Table 1: Telstra's proposed ULL line charges ($ per line for 2000/01)
Annual
IRIM
Band 1
Band 2
Band 3
Band 4
414
672
989
Annual
RSS/RSU
272
572
763
989
Annual
ULLspecific
137
137
137
137
Annual
access
deficit
contrib.
50
50
-56
-56
Monthly
total
IRIM
Monthly
total
RSS/RSU
50
63
89
38
63
70
89
927.
Telstra also proposed a service qualification test ("SQT") of $6.50 per line based on an
automated system where the set-up costs for the automated system are borne by a
range of Telstra's services including ULL, ADSL and ISDN.
928.
Telstra proposed a connection fee for each line which comprises:
(a)
order administration fee ($11);
(b)
cable jumpering ($65-$80 depending on teledensity band); and
(c)
testing and tagging at customers' premises ($17).217
929.
The Commission's determination of appropriate ULLS network costs took into account
submissions made to it in response to its August 2001 draft Discussion Paper,
submissions in the course of the four ULLS arbitrations and a report which looked at
ULLS-specific costs prepared by consultants engaged by the Commission, the
Communications and Media Policy Institute of the University of Canberra and AAS
Consulting Pty Ltd ("CMPI/AAS"). These consultants reviewed Telstra's ULLS-specific
costs, commented on the reasonableness of the $11.42 per month/line ULLS specific
cost charge proposed by Telstra (which equated to $137 per year) and undertook an
international benchmarking study of ULLS-specific costs. The ACCC's benchmarking
report is detailed in section 7 of the ACCC's Final Report.
930.
The ACCC finalised its estimates of ULLS network cost and ULLS-specific costs and
combined these elements to provide estimates for the total charges for the ULLS as a
whole, and compared them with Telstra's proposed charges for 2000-01, as follows:
217
Ibid, pp 27-29.
203
ACCC's and Telstra's ULLS charges (2000-01) - summary
2000/2001
Band 1
Band 2
Band 3
Band 4
ACCC
monthly total
IRIM
ACCC monthly
total RSS/RSU
Telstra
monthly total
IRIM
20
24
60
12
35
39
59
50
63
89
Telstra
monthly total
RSS/RSU
38
63
70
89
ACCC's ULLS charges (2001-02) - summary
ACCC monthly total
IRIM
2000/2001
Band 1
Band 2
Band 3
Band 4
21
24
58
ACCC monthly total
RSS/RSU
13
35
39
58
931.
The ACCC did not form views on other ULLS-related charges proposed by Telstra and
encouraged access seekers to resolve any disputes in relation to the payment of such
charges by negotiation.218
932.
The ACCC also made further revisions to the network cost estimates to arrive at
estimates of ULLS network costs by connection type and band. These are shown on
Table 7 (at page 50) of the Final Report.
ACCC benchmark terms for the supply of the ULLS
933.
Amendments to the TPA by the Telecommunications Competition Bill 2002, which took
effect from 19 December 2002, require the ACCC to determine model terms and
conditions relating to access to each "core service". The ULLS is defined as one core
service (and PSTN, OTA and the LCS are the others).
934.
The ACCC must take reasonable steps to make its determination on benchmarking
terms by 18 June 2003 and is required to consult with the public and the Australian
Communications Authority before doing so (see sections 152AQB of the TPA).
935.
The ACCC is considering price and non-price model terms separately for the three core
services. It has issued the following discussion paper in relation to pricing issues:
936.
218
(a)
Future Access Pricing Approaches for PSTN, ULLS and LCS, Discussion
Paper, September 2002; and
(b)
has sought access seekers' views, and met with them, in relation to particular
non-price issues they would like covered in the model terms.
The access pricing paper discusses possible future approaches to pricing of the ULLS.
The paper also canvasses developing a common industry modelling framework for both
access prices and costs related to the universal service obligation - USO (which is
similar to New Zealand's TSO).
Ibid, p 49.
204
937.
The ACCC has called for submissions in response to its Discussion Paper and is yet to
take further steps to develop benchmark prices for the core services.
The ULLS record keeping rules
938.
The ACCC has issued record keeping rules ("RKRs") in respect of the supply by Telstra
of the ULLS. Their purpose is to monitor Telstra's compliance with its non-discrimination
obligations in the standard access obligations ("SAOs") under section 152AR of the TPA
in relation to the ULLS.
939.
Under the RKRs, Telstra is required to provide the ACCC with extensive detail on a
weekly basis on the way in which it intends to provide its competitors with prompt
access to its copper network and the uptake of Telstra's retail ADSL service.
940.
The ACCC has also directed Telstra to provide it with details concerning the scope and
time frame it delivers services on its copper network to itself and its competitors, and
deployment and fault handling in connection with the ULLS.
Ministerial draft accounting separation direction
941.
Australia's Minister for Communications, Information, Technology and the Arts recently
issued a draft direction under Part XIB of the TPA requiring the ACCC to implement
accounting separation measures for Telstra's retail and wholesale operations. This
direction was an initiative foreshadowed by the Telecommunications Competition Bill
2002.
942.
The draft direction includes requirements for the ACCC to exercise its RKR powers
under Part XIB of the TPA to ensure that:
(a)
Telstra prepares records and reports in relation to all services of Telstra to
which the Regulatory Accounting Framework ("RAF") applies on a historic cost
and current cost basis and provide those reports to the ACCC within specified
timeframes;
(b)
Telstra prepares records and reports that record the value of Telstra's internal
supply of "core services" (which, as noted above, includes the ULLS) as if
Telstra had purchased those services at a wholesale price based on the prices
that Telstra charges access seekers for those services. Telstra is required to
provide those reports to the ACCC within specified timeframes. The ACCC is
to use these reports to prepare an imputation or margin analysis of the report;
(c)
Telstra prepares records and reports that compare the outcomes of Telstra's
performance for the supply of specified wholesale services and specified retail
services in accordance with key performance indicators for non-price terms
and conditions and provides those reports to the ACCC within specified time
frames; and
(d)
the ACCC makes copies of the above reports available to the public.219
Telstra's 2003 undertakings for ULLS
943.
219
On 9 January 2003, Telstra lodged access undertakings setting out the price at which it
is prepared to supply the ULLS, as well as some non-price terms relating primarily to the
SAOs, for the years 2002/03, 2003/04 and 2004/05. Telstra lodged undertakings for the
LCS and PSTN OTA with these undertakings.
See Australian Competition and Consumer Commission, Accounting Separation - Telstra Corporation Limited,
Direction (No 1) 2003 - draft, and Explanatory Statement.
205
944.
Telstra's undertakings are considered by the ACCC and a decision made to reject or
accept them based on the LTIE and other relevant criteria. Interested parties are invited
to make submissions to the ACCC in respect of the undertakings. The ACCC has six
months from the date of the lodgement of the undertakings in which to reach its
decision, excluding the time in which it "stops the clock" for example, because it is
waiting for information requested from Telstra. If the ACCC fails to reach a decision it is
taken to have accepted the undertakings.
945.
The ACCC's decision can be appealed to the Australian Competition Tribunal which
must make a decision whether to accept or reject the undertaking within six months.
The Tribunal is unable to "stop the clock" and if it fails to make a decision within the six
months, it too is taken to have accepted the undertakings.
946.
Telstra's ULLS access undertakings utilise a PIE II TSLRIC/TELRIC model to assert that
the efficient network cost of providing ULLS for RSS connected services is as follows
(per service per month):
947.
2002/03
2003/04
2004/05
$44.71
$43.69
$43.72
Telstra's submission in support of the undertakings notes that there may be a concern
that an immediate shift to prices based on efficient costs could have a short term effect
on wholesale customers as these prices are above what these customers are currently
paying. Telstra therefore proposed to transition to efficient cost based prices over the
long term rather than immediately and is proposing the following pricing for all years
covered by the undertakings for RSS connected services (per service per month): $20
in Band 1 and $40 in Bands 2, 3, 4.220
Digital Data Access Service
948.
The ACCC register of declared services describes the digital data access service
("DDAS"), which applies to the provision of a "Domestic Data Access Service" by any
access provider ("AP") to any access seeker ("AS") as
… an access service for the domestic carriage of data between an Interconnect
Terminal Point (ITP) located at the AS's exchange or network facility and a NTU
or unimux or modem located at the customer's premises where the customer is
directly connected to the AP's network.
949.
The ACCC register further elaborates on the description of the declared service as
follows:
The service as described comprises a number of separate elements as follows:
220
(a)
Interconnect Terminal Point (ITP) Location;
(b)
network synchronisation;
(c)
connection between the ITP and a Digital Cross Connect Centre
(DCCC);
(d)
connection between the DCCC and the AP's Network Boundary at
the customer premises end;
(e)
a local connection between the customer's premises to the AP's
Network Boundary;
Telstra Corporation Limited, Telstra's Submission in Support of its Undertakings dated 9 January 2003. See
also the actual undertakings and Telstra's methodology submission in support of the undertakings.
206
(f)
provision of unimux equipment; and
(g)
an optional service monitoring and management tool.
…
In accordance with the Trade Practices Act Part XIC, these elements:
•
may not be available from all APs
•
may have restrictions in their availability
…
The availability of the services may vary depending on the geographical and
technical capability of the AP's network at the time at which a request for the
services is made or the service is delivered.
…
The service will be based on digital technology. The local connection will
operate, in accordance with ITU Recommendations, in the following range of
speeds divided into two categories:
Subrate (X.50) 1200 bit/s, 2400 bit/s, 4800 bit/s, 9600 bit/s, 19.2 Kbit/s and 48
Kbit/s.
nx64 kbps 64 kbit/s (n=1) or multiples, up to 1984 kbit/s (n=31)
The trunk connection will be based on 1984 kbit/s in accordance with ITU
Recommendations. Sub-rate muxing will use X50, or other appropriate
signalling as appropriate. Nx64k muxing will use G704 interfaces.
The facilities of the service are summarised below relative to the two speed
categories:
Subrate (X.50)
nx64 kbps
Service
1200 bit/s to 48 Kbit/s
nx64 kbit/s where n = 1 to 31
Coverage
National service area
National service area
No. of
Interfaces
Available
One interface per customer access.
One service per interface
Up to eight (8) services interfaces
per customer access. One service
per interface.
Types of
Interface
X.21, X.21bis and V.35 (48 kbit/s
only)
X.21, V.35, G.704.
Integration
Interworking with higher
management facilities and network
control.
Interworking with higher
management facilities and network
control.
All speeds and interfaces
X.21 and V.35 at speeds 64 kbit/s,
128 kbit/s, 192 kbit/s, 256 kbit/s
and 384 kbit/s.
G.704 at speeds 64 kbit/s to 1984
kbit/s
207
Option
Combinations
service monitoring and
management tool enabling
configuration management,
redirection, alarm access and test
access.
service monitoring and
management tool enabling
configuration management,
redirection, alarm access and test
access.
…
The AP will publish at least half yearly tables detailing the geographic areas
where there are restrictions on the provision of this service.
…
(a) ITP means N x 2Mbit/s Unimux equipment used solely for the purpose of
terminating this service served by the connection to the APs DCCC. The
equipment provided by the AP will interface with the AS's network via the digital
data service interface specifications and at the specified speeds, and will be
located at the AS's exchange or network facility.
(b) Data traffic will be handed over from and to the AS at the ITP agreed by the
AS and the AP.
950.
The service was deemed to be a declared service on 1 July 1997 under transitional
provisions enacted at the time the telecommunications-specific access regime was
introduced into the TPA.
Part III: The Australian regulated wholesale regime
951.
The declaration provisions in Part XIC give the ACC the option of introducing an
extensive regulated wholesale regime. However, the ACCC has not done so.
Therefore, the Australian regulated wholesale regime is currently very narrow in scope.
The only regulated wholesale service required to be provided is the local carriage
service ("LCS"), which was declared by the ACCC at the same time as the ULLS (in
August 1999). The LCS is described as:221
a service for the carriage of telephone calls from customer equipment at an enduser's premises to separately located customer equipment of an end-user in the
same standard zone.
952.
"Standard Zone" is defined with reference to Part 8 of the Telecommunications act 1997.
"Telephone calls" are defined as: 222
calls for the carriage of communications at 3.1 KH2 bandwidth solely by means
of a public switched telephone network.
953.
In June 2000, Telstra sought an individual exemption from the LCS for the CBDs of
Sydney, Melbourne, Brisbane, Adelaide and Perth. On 22 July 2002, the ACCC granted
individual and class exemption in respect of those areas. The class exemption took
effect from 22 July 2002. The individual exemption for Telstra is due to take effect from
17 July 2003.
954.
In November 2000,. Telstra applied for another individual LCS exemption, in relation to:
221
222
(a)
the remaining CBDs (Hobart, Darwin and Canberra);
(b)
the metropolitan areas surrounding all CBDs; and
ACCC Register of Declared Telecommunication Services.
ACCC Register of Declared Telecommunication Services.
208
(c)
the regional areas of Woollongong, Newcastle and Geelong.
Significance of the Australian experience
955.
Unlike the other countries listed by the Commission in Appendices 3 and 4, Australia's
legislative unbundling regime does not greatly differ from New Zealand's legislative
regime. The most significant point of difference between the Australian and New
Zealand telecommunications regulatory regimes is the relative scope of each country's
regulated wholesale regime. New Zealand's recently introduced regulated wholesale
regime is far more extensive than the Australian equivalent (where essentially the only
regulated retail service is local access).
SOUTH KOREA
Introduction
956.
In Appendix 3 of the Issues Paper, the Commission addresses South Korea's
experience with unbundling. The summary contains some detail about Korea's
regulatory unbundling regime and focuses on broadband deployment. Telecom
provides a more detailed summary of the Korean unbundling experience below.
Background to unbundling regulation
957.
In December 2000 the Telecom Business Act of Korea mandated local loop unbundling
of the copper loop. In December 2001, the government finalised the regulation setting
out the details of the obligation on major telecom service providers to provide unbundled
elements to competitors (including pricing).
958.
Korea is the world's leader in wireless telecommunications as well as broadband
Internet access.223 It is believed that the lack of local loop unbundling (prior to 2000)
worked in South Korea's favour. Telecom refers the Commission to the quote on page
60 of Appendix 3 of the Issues Paper from a report by the Korean Ministry of Information
and Communication:224
It is noteworthy that Korea enacted its statutory and regulatory requirements for
incumbent facilities-based service suppliers (KT, Hanaro and Thrunet) to
provide unbundled network elements to their competitors when the country was
already well on its way to leading the world in broadband access penetration
rates.
959.
The lack of local loop unbundling regulation encouraged companies to invest in
broadband enabling facilities. When Hanaro obtained its licence for local telephony,
unbundling was not mandated. 225
After considering the potential large capital investment in its own local loop
facilities and the lack of supportive regulation, Hanaro concluded that it would
focus on the broadband access market rather than the voice telephone market.
Hanaro decided to bypass local loops by installing its own ADSL facilities and
leasing cable networks…..Hanaro ignited the broadband boom…..
223
Over the last few years, Korea has made vigorous efforts to build the wired and wireless telecom
infrastructures across the nation. As a result, Korea as at December 2002 had 31 million mobile subscribers,
equivalent to 67% of the total population. Furthermore, as of October 2001, the number of people with a
broadband Internet connection stood at 10 million subscribers, or 70% of total households in Korea, which is the
highest penetration rate throughout the world. (Source: Message from the Minister, Sang-Chul Lee, Minister of
Information and Communication, December 2002).
224
IT Korea 2002, a report by Dr Seungtaik Yang, (the then) Minister of Information and Communication of the
Republic of Korea, May 2002.
225
Lee, Jeong Young, Lee, Seung-weon and Yang, Hwanjung, South Korean Residential Broadband Market
Analysis, submitted as partial fulfilment of the degree of Masters in Interdisciplinary Telecommunications at the
University if Colorado, Boulder, 9 May 2002.
209
960.
Furthermore, Korea did not introduce unbundling in order to promote broadband access.
Despite this, Korea is number one by a wide margin in terms of broadband access.
961.
In the 1990s, the Korean government began the liberalisation and deregulation of the
telecommunications sector. The government reformed the telecommunications industry
by abolishing laws and regulations that were inconsistent with international norms. The
government's liberalisation of the telecommunication industry was part of its long term
policy to make Korea a global telecommunications leader.
Background to unbundling regulation
962.
The key legislation governing the telecommunications sector took effect on 1 January
1998, and was amended in 1998 and in 2000.
963.
The Telecommunications Business Act226 and subsequent revisions outline the
privatisation of Korea Telecom and other state-owned firms, an increase in the limits on
foreign ownership in the telecommunications service sector, and the introduction of such
new services as international simple wholesale and Internet telephony.
964.
The Ministry of Information and Communication has stated with reference to these
developments that:227
All of these factors and developments have led to a tremendous growth in the
telecommunications service sector in a much more competitive market
environment and further growth is projected, making Korea the world's leader in
wireless telecommunication services as well as broadband Internet services and
applications.
Wholesale provisions
965.
In line with the Korean Government's policy to promote competition in the
telecommunications sector, the Telecommunications Business Act was amended to
allow wholesale of any telecommunications services in January 1998. The MIC also
enacted and announced The Guideline for Application and Review Criteria for
Wholesale Licensing in which the Government introduced a category of resale-based
services, that can be provided by special service providers and value added service
providers.
966.
New entrants have predominantly entered the international services market
(international simple resale) by leasing dedicated lines and using the fixed service
providers' networks. However, in practice most special service providers have chosen
to provide their services through mobile fixed service providers rather than using KT's
PSTN.
Significance of South Korea's experience
967.
South Korea has been able to achieve its enviable position while not having unbundling
regulation. In fact, had South Korea mandated local loop unbundling earlier, South
Korea may not be in the position they are in today. As the Hanaro example shows, as
unbundling was not mandated, investment was encouraged and '"the broadband boom
was ignited'".
968.
The experience of South Korea highlights advantages of not mandating local loop
unbundling. Further, the experience of South Korea should not be considered by the
226
To date we have been unable to obtain this Act in English.
Yang, Dr Seungtaik, IT Korea 2002, (the then) Minister of Information and Communication of the Republic of
Korea, May 2002.
227
210
Commission as there are numerous social factors which distinguish it from New
Zealand.
JAPAN
Introduction
969.
The Commission addresses Japan's unbundling experience in Appendix 3 of the Issues
Paper. Telecom provides a more detailed analysis of Japan's regulatory unbundling
regime and Japan's objectives in mandating unbundling below.
Background to unbundling regulation
970.
Until 1985, there were state-owned monopolies for the provision of telecommunications
services in Japan, with Nippon Telegraph and Telephone ("NTT") providing domestic
services, and Kokusai Denshin Denwa ("KDD") providing international services. The
Telecommunications Business Law ("TBL") passed in December 1984 and implemented
in 1985 introduced competition principles to all areas of the market including separating
competition into national and international components and allowing the entry of new
common carriers ("NCC"), distinguishing between
(a)
Type 1: carriers which own and operate their own transmission and switching
facilities, and
(b)
Type 2: carriers which lease transmission facilities from Type 1 carriers.
971.
The two incumbent carriers were prevented from competing in each other's markets but
there were no such restrictions on the NCCs.
972.
The Ministry of Posts and Telecommunications ("MPT") was also established. The MPT
was made responsible for regulatory supervision and policy-making for the Japanese
telecommunications industry. In January 2001 the MPT was reorganised, and became
the Ministry of Public Management, Home Affairs, Posts and Telecommunications
("MPHPT"). This body is authorised to:
(a)
grant permission to businesses seeking to operate as Type 1 and 2 carriers;
(b)
designate the telecommunications facilities that must be offered as part of an
interconnect agreement under regulated conditions;
(c)
order carriers to start or restart negotiations and arbitrate in the case of
disputes; and
(d)
approve or set interconnection charges.
Unbundling regulation
973.
Between 1995 and 1996 the MPT undertook an extensive review of the
telecommunications industry, leading to the amendment of the TBL in June 1997. As of
1 July 1999 NTT was split into two operating companies: NTT West and NTT East,
serving the corresponding regions of the country. The market for international leased
circuits and international wholesale was liberalised and new rules for interconnection
were introduced. Fixed local loop facilities in excess of 50% of the total number of
subscriber lines at prefecture levels were listed by MPT as designated facilities along
with intra-prefectural telecommunications facilities installed as one system with those
local loop facilities.
211
974.
The two new operators were unenthusiastic about introducing DSL to their customers,
and the regulatory body responded by requiring full unbundling and line sharing of the
local loop in March 2000. After delays in implementation, in July 2000 the MPT ordered
NTT to open all local exchanges for co-location, to allow unbundlers access to central
offices and to lift the limitations on rack space that were present.
975.
On 21 December 2000, the MPT received the first report from the Telecommunications
Council in response to its inquiry regarding "Desirable Pro-competitive Policy in the
Telecommunications Field for Promoting the IT Revolution". A report from the MPHPT in
2001 indicated that the Minister had decided to take appropriate measures including
measures to promote the unbundling of optical fibres by NTT regional companies and to
introduce wholesale rates for the wholesale of local telecommunications services. NTT
was obliged to unbundle backhaul back to its local exchanges over its fibre network and
to provide the necessary information to support competitors in gaining access. NTT is
also obliged to provide facilities to its competitors under the same terms and conditions
as it provides to its own divisions. Regulation allows access not only to the two NTT
companies but also to the access infrastructure of any carrier that builds a network.
976.
Forcing the owner of the only national subscriber network to invest heavily in the
adoption of a future-proof fibre-based broadband network has meant that that the carrier
has been unable to capitalise on adapting existing copper infrastructure to carry
broadband. At the same time NTT's two local exchange subsidiaries (NTT West and
East) are prohibited from becoming Internet service providers and thus have no
motivation to complete fibre-to-the-home investments (under which NTT would only be
able to resell capacity to other ISPs).
Subsequent developments
977.
The revised Telecommunications Law of 2001 provides for the identification of operators
with SMP in the fixed and mobile markets. SMP operators are subject to regulatory
supervision in setting interconnection rates, as well as other acts that affect the
competitiveness of the market. Carrier pre-selection was introduced in May 2001 while
number portability was introduced in March 2001.
978.
At present the following services are required to be offered on a cost basis:
979.
(a)
leased lines used in interconnection;
(b)
ancillary services;
(c)
number translation services;
(d)
local loop unbundling;
(e)
number portability;
(f)
carrier pre-selection.
The following constitute unbundled fixed network elements that are designated facilities:
(a)
operator;
(b)
tandem, group tandem and local switch;
(c)
signalling network;
(d)
ISDN;
212
(e)
public and subscriber telephone;
(f)
directory service and database; and
(g)
cell station.
Significance of the Japanese approach
980.
The Japanese approach' is irrelevant in the NZ context.
context differs vastly from New Zealand's:
The Japanese regulatory
(a)
there is structural separation of local and long distance providers;
(b)
new carriers can compete in both markets;
(c)
unbundling was introduced as a response to lack of enthusiasm for introduction
of DSL services; and
(d)
the incumbent is heavily regulated (for example, its subsidiaries cannot operate
as ISPs).
213
10.
MARKET ANALYSIS
Introduction
981.
This section of Telecom's response is largely aimed at providing the Commission with
information about the potentially relevant downstream markets identified in paragraphs
233-234 and 319-320 of the Commission's Issues Paper. However, Telecom considers
that this narrow approach to market analysis is unsuitable for determining whether or not
such an extensive regulatory intrusion as unbundling should be advanced. The
following paragraphs set out Telecom's concerns with the Commission's proposed
approach.
982.
Despite these concerns expressed below, Telecom has provided information about each
of the downstream markets identified in the Commission's Issues Paper. In this
introductory session, Telecom also makes several key points which are common to all of
the markets which are analysed in further detail in the following sections.
Concerns with the Commission's analytical framework
983.
In Section 4 of its Issues Paper, the Commission sets out the analytical framework to be
used by the Commission in deciding whether or not to recommend that some form of
unbundling becomes either a designated or specified service. In summary, it involves:
(a)
identifying the relevant markets;
(b)
determining the current and future state of competition in those markets;
(c)
defining the factual and counterfactual;
(d)
if markets are competitive, not recommending regulation; and
(e)
if markets are uncompetitive, determining whether or not regulation is in the
long-term interests of end-users.
984.
This framework is very similar to that used by the Commission in its adjudication of
business acquisitions under section 47 of the Commerce Act. It is also very similar (at
least until step (d)) to the analytical process used by the Commission in determining
whether or not a designated service should be wholesaled.
985.
The flaw with this analytical framework, in the context of the unbundling review, is that it
presumes that the pros and cons of unbundling can be assessed in isolation in a small
number of so-called relevant downstream markets. This may be so in the case of an
acquisition or a wholesaling determination, but it does not reflect the reality of
unbundling. The Commission's framework does not appear to recognise that if
unbundling occurs, it will have an effect on every single downstream
telecommunications market regardless of the competitive assessment of any particular
market. In order to do a proper evaluation of the need for, and the effects of,
unbundling, every single downstream telecommunications market needs to be
evaluated.
986.
The apparent failure of the Commission's framework to recognise the all-market
interconnectedness of unbundling, also means that there is no clear framework for
analysing each downstream market in relation to all of the others. In a wholesaling
determination this is not necessary because it is presumed that regulation of one market
will not impact on any other market and, therefore, each market can be assessed in
isolation. This presumption is impossible in relation to unbundling. For example, if the
Commission determined that the downstream market for operator services was not
214
competitive and that unbundling would be the proper mode of addressing the lack of
competition, the Commission's analytical framework suggests that unbundling would
then occur. However, this ignores the fact that unbundling would also occur in markets
which had been held to be competitive, say, for example, local access and calling
markets. If the Commission considers that unbundling should not occur in that situation,
it is unclear from its analytical framework how it would reach such a decision. This gap
in the Commission's analytical framework highlights the necessity of taking an holistic
approach and looking at the entire telecommunications industry including each and
every one of the markets in relation to each other, to determine whether or not
unbundling should be mandated.
987.
One final concern with the Commission's framework is its silence on the time-frame to
be used to assess competition in the relevant markets under the counter-factual
analysis. The Commission's usual practice in its adjudications under section 47 relating
to business practices is to take a 2 year view of new entrants on the future of the
relevant market.228 This length of time is too short for the purposes of this review.
988.
A longer period of time is required arises out of the requirements of the
Telecommunications Act itself. For example, the Commission must take into account
the long-term interests of end users under section 18 in its recommendation. In the
context of an issue as radical as unbundling, this necessitates a longer term view of the
market than 2-3 years. Telecom considers that a 5-10 year timeframe is more
appropriate. In addition, the Commission has emphasised the importance of promoting
dynamic efficiency in its regulatory role under the Act. This also requires a longer
timeframe than that mandated by the business acquisition processes.
989.
A longer timeframe is also justified if the current trends, and their likely impacts on
competition in the telecommunications industry are to be properly evaluated. For
example:
990.
228
(a)
Wholesaling under the Act has just begun. It is likely that there will be some
teething problems as it is implemented. Taking only a short term view will not
properly measure its impact on competition. This is particularly so with a
number of applications still on foot or expected and the possibility of pricing
reviews.
(b)
Similarly, the telecommunications industry is currently experiencing a one in 30
year technological revolution. This, coupled with the rapid evolution of cellular,
wireless and other alternative technologies, will have significant ramifications
on competition in the industry. These developments are likely to make the
local loop and fixed PDN wholesale markets contestable within 5 years to the
extent they are not already. For example, in paragraph 1066 below is a
description of the increasing trend for residential households to substitute
mobile for fixed line access. This slow but steady increase shows the
timeframes required to allow alternative technology to compete with
established infrastructure. At first such technology may be too expensive and
risky for high substitutability. However, as providers of this technology recoup
their investment costs, the price becomes more competitive and over similar
timeframes, customers become more comfortable using the new technology.
The following sections have been prepared to assist the Commission within the
timeframe it has selected. They do not represent Telecom's view of the identified
markets in the correct timeframe for section 64 analysis and do not take into
Commerce Commission, Practice Note: 4, The Commission's Approach to Adjudicating on Business
Acquisitions under the Changed Threshold in Section 47 - A Test of Substantially Lessening Competition,
paragraphs 1.2 and 7.4.
215
account the fundamental changes which will have occurred in the industry and
which have been discussed in Part I of this submission.
Test for competition: "workable or effective"
991.
The Commission has adopted as the definition of "competition" the meaning given to
that term in section 3(1) of the Commerce Act: "workable or effective competition". The
same definition was adopted by the Commission in Decision 497 (the Business
Wholesale Determination, see paragraphs 289-297). Telecom has agreed that this is
the correct starting point when assessing the state of competition in a market (see
Telecom's Submission on the Business Wholesale Draft Determination dated 24
January 2003, paragraph 338).
992.
The Commission is aware that Telecom does not agree with the Commission's
interpretation and application of the test for limited competition in Decision 497 (see
Telecom's Submission on the Business Wholesale Draft Determination, paragraphs
314-337). In summary, Telecom considers that the Commission's interpretation sets too
low a threshold which would result in the regulation of most markets in which Telecom
offers services contrary to the intention of section 18 of the Telecommunications Act.
993.
Considering that the starting points in Decision 497 and in this unbundling review are the
same, and further considering that the Commission has taken a very wide interpretation
of how that test is to be applied in the wholesaling context, an existing finding by the
Commission that Telecom does not face limited competition nor is likely to face
lessened competition in a particular market must, in the absence of significant new
evidence, lead to the conclusion that that market has effective and workable competition
for the purposes of the unbundling review. The Commission also refused to exercise its
discretion to require wholesaling finding that there was no persuasive evidence that
doing so would further enhance competition. In other words, if the Commission has
decided that there is no basis for wholesale regulation in a particular market, there
should be no basis for any other form of regulation in that market.
Wholesaling
994.
Following Decision 497, Telecom is required to wholesale 98 services to TelstraClear in
a number of the downstream markets for which the Commission has requested
information in the context of this review. In addition, further markets will be subject to
wholesale regulation after the Commission makes a final determination in relation to
TelstraClear's Residential Wholesale application.
995.
Decision 497 is the Commission's first decision relating to the wholesaling of Telecom's
retail services and was released on 12 May 2003. It is not yet apparent how this
regulation will impact on competition in the relevant markets. However, Telecom
considers that the impact will be substantial.
996.
Decision 497 gives TelstraClear access to a broad range of Telecom's retail services at
a substantial discount of 16%. Not only does this give TelstraClear additional
competitive leverage in markets where it does not currently have a competing network, it
is also likely that other competitors will use Decision 497 as a precedent for negotiating
wholesale terms with Telecom. In the following analyses, Telecom has endeavoured to
provide reasoned predictions of the impact of wholesaling in the affected markets.
997.
Telecom does not seek to paint wholesaling as a perfect answer to the perceived lack of
competition in some markets. Wholesaling, like all regulatory interventions, has its
limitations. For example, a competitor selling a wholesaled service is limited, in certain
cases, in the service it can offer to its customers by the nature of the service provided by
Telecom at the wholesale level. Such limitations would not be present if the competitor
216
was using its own infrastructure to provide the service. In other words, wholesaling will
never be as competitively effective as alternative infrastructure.
998.
999.
However, the following elements indicate that wholesaling under
Telecommunications Act will result in greater competition in the relevant markets:
the
(a)
the number of services currently and potentially subject to the regime is far
greater than in any other OECD country (as discussed in section 9 of this
submission) thus allowing competitors to provide a full telecommunications
service offering to most end-users;
(b)
the discount is substantial (but subject to pricing review) and allows room for
competitors to price differentiate;
(c)
there is scope for competitors to differentiate on non-price elements (for
example, TelstraClear has indicated it intends to differentiate on brands and
bundles as well as pricing229); and
(d)
it provides a means by which competitors can increase customer numbers to
provide a financial case for extending alternative network into new areas.
In summary, the wholesaling regime allows for far more regulatory intervention in the
telecommunications markets than predicted. It is also far more extensive than any other
comparable regime in the world. Rather than impose an additional regulatory regime on
top of this already complicated and expensive process, the wholesaling regime (together
with the related interconnection and TSO regulatory regimes) should be allowed time to
develop, at least 5 years, before further regulatory intervention is considered. Until such
time, it will not be clear whether or not such further intervention is necessary. Given
current trends in wholesaling, Telecom predicts that it will not be.
Markets
1000.
229
p 9.
The downstream markets identified by the Commission are dealt with in the following
order:
(a)
retail market for business local access services (including local call services) in
metropolitan areas;
(b)
retail market for business local access services (including local call services) in
non-metropolitan areas;
(c)
retail market for the provision of residential local access and calling services in
metropolitan and non-metropolitan areas;
(d)
retail market for the supply of broadband Internet access to residential
customers in both metropolitan and non-metropolitan areas;
(e)
retail market for the supply of broadband Internet access to business
customers in both metropolitan and non-metropolitan areas;
(f)
national market for the provision of ISP services;
(g)
markets for voice telephony services to residential customers in both
metropolitan and non-metropolitan areas;
Rosemary Howard quoted in "TelstraClear wins Telecom wholesale deal" New Zealand Herald, 13 May 2003,
217
(h)
national retail market for the supply of national toll services to business
customers;
(i)
national retail market for the supply of international toll services to business
customers;
(j)
national retail market for the supply of fixed-to-mobile call services to business
customers;
(k)
national (and international) retail market for the supply of toll-free call services
to business customers;
(l)
national market for the supply of 0900 services to business customers; and
(m)
retail market for the supply of data services to business customers in both
metropolitan and non-metropolitan areas (and in international markets).
1001.
As indicated by the Commission's Issues Paper, some of the above markets are
relevant to the unbundling of both Telecom's local loop network and Telecom's fixed
public data network. However, at this preliminary stage, Telecom has not dealt with
these elements separately in the following market analyses.
1002.
Telecom reiterates its position in paragraph 986 above, that all downstream markets are
relevant to this review. As a result, its position is that other downstream data markets
will of course be relevant to the Commission's determination. However, given its
concern about the Commission's proposed decision-making framework, Telecom does
not consider it appropriate to provide information about those markets at this preliminary
stage.
References to prior submissions
1003.
In the following analyses, there are references to previous submissions and
determinations relating to TelstraClear's Business Wholesale and Residential Wholesale
applications. In the interests of brevity, the following references are used:
•
"Decision 497":
The Commerce Commission's Determination on the
TelstraClear Application for Determination for "Wholesale" Designated Access
Services, Decision 497, dated 12 May 2003.
•
"Telecom's Business Wholesale Submission": Telecom's submission on
the Commission's Business Wholesale Draft Determination, dated 24 January
2003.
•
"Telecom's Residential Wholesale Submission": Telecom's submission on
TelstraClear's Residential Wholesale Application, dated 7 March 2003.
•
"Telecom's Residential Wholesale Cross-Submission": Telecom's crosssubmission on TelstraClear's Residential Wholesale Application, dated 26
March 2003.
•
"TelstraClear's Residential Wholesale Cross-Submission": TelstraClear's
cross-submission on its Residential Wholesale Application, dated 26 March
2003.
218
219
10.1
Retail market for business local access services (including local call services) in
metropolitan areas
Overview
1004.
This market relates to the provision of local access services (including local access call
services) to businesses in metropolitan areas throughout New Zealand (otherwise
referred to as "Zone 1" in Telecom's Business Wholesale Submissions).
1005.
The Commission has defined the Zone 1/metropolitan market as all areas within a 200
metre radius from competing local access infrastructure (Decision 497, paragraphs 315316). The Commission has also distinguished between the provision of local access
services to SME customers and to corporate customers (Decision 497, paragraphs 137144).
1006.
There is currently effective and workable competition in the retail market for business
local access in Zone 1 to both corporate and SME customers. Although there is no
express decision to this effect, the Commission appears to agree in Decision 497 that
there is effective and workable competition in Zone 1 in relation to corporate customers.
However, it concluded that this was not the case for SME customers. Telecom
disagrees with this conclusion. There is effective and workable competition in the SME
sector evidenced by high levels of competitor churn, reduced pricing and innovative
product offerings and pricing plans. In any event, further wholesaling of services in the
SME sector will only serve to increase competition.
1007.
Given the current level of competition in this market in relation to both corporate and
SME customers as well as the likelihood of increased competition in the SME sector as
a result of wholesaling, local loop unbundling in relation to this market is not justified.
Competition Assessment
1008.
Telecom has previously provided the Commission with information on the history and
development of competition in this market (Telecom's Business Wholesale Submission,
paragraphs 417-419). It has also provided information on customer churn (paragraphs
392-401), market shares (paragraphs 420-423) and competitive activity (paragraphs
424-426).
Market participants
1009.
As noted by the Commission in Decision 497 at paragraph 379, the SME sector has two
main players: Telecom and TelstraClear. However, the number of participants in the
SME sector may increase. CallPlus has indicated that it intends to enter the SME sector
using wholesaling, and others are expected to follow. Telecom believes most (if not all)
of the smaller service providers currently competing in the corporate sector (including
Compass, CommVerge, Walker Wireless and CityLink) are likely to wish to begin
competing in the SME sector under wholesaling in order to grow their market shares. In
some cases, this will be simply to increase the number of wholesaled services a
company currently resells, in other cases, it will be used to provide additional financial
grounds for the roll-out of alternative network. Companies who currently only provide
tolls services to customers will use this existing relationship as a basis for beginning
wholesale business models. (Telecom notes that it is not yet clear how many
competitors can successfully use the legislated wholesale regime. Once a certain
number of resellers are in a market, there must be more than limited competition which
removes the Commission's ability to mandate wholesaling. This another reason why
more time should be given for wholesaling to develop (see paragraph 999 above).)
220
1010.
It is important to note that it is not just established telecommunications companies which
are likely to wish to enter. A range of non-telecommunications companies (such as
electricity companies, IT integrators and Internet service providers) may see wholesaling
as an opportunity to leverage off their existing customer relationships and provide further
integration of services for their customers.
1011.
As noted in its Business Wholesale Submission (paragraphs 420-423), Telecom's
competitors have had most success where they have focused their efforts and deployed
a strong sales force. There is a strong correlation between the areas in which Clear and
Telstra Saturn employed a strong sales forces and their market shares. There is no
reason why similar efforts in reselling Telecom's wholesale services will not provide the
same result. In fact, Telecom anticipates that TelstraClear will strengthen its sales force
in the SME market to take advantage of wholesaling and that as a result TelstraClear
will increase its customer base and market share, at the expense of Telecom. Other
competitors are likely to react similarly.
Price trends
1012.
Telecom has provided information on price trends in its Business Wholesale Submission
(at paragraphs 402 - 410). As noted in that submission, there can be intense pricing
competition in competitive areas as competitors attempt to acquire market share.
Standard line rental is used as a "loss leader" to gain the more profitable calling
revenue. Prices have declined quite markedly over the last few years (refer to graphs in
Telecom's Business Wholesale Submissions at paragraphs 402-410),
The declining price trends reflect the
competitive nature of both the corporate and SME sectors of the market.
1013.
Telecom's current forecasts across both Zone 1 and 2 (combined) indicate that
Telecom's market share in the SME sector will fall
% over the next 3 years.
Telecom has also forecasted a decline in the average price of Centrex and Local Calling
services over the same period as well as a decline in Telecom's market share in the
corporate sector.
Barriers to switching
1014.
There are minimal barriers to switching for customers seeking to switch from Telecom's
network to TelstraClear's network for local calling access services in Zone 1. Telecom's
provision of local number portability to all fixed-network carriers with interconnection
agreements with Telecom has further reduced perceived barriers to switching. The
ability to wholesale local access services to SME customers in Zone 1 may also address
any issues that customers may have with TelstraClear's or any other service provider's
abilities to provide them with a complete telecommunications solution. Wholesaling also
removes any latent issues with number portability as the customer retains its Telecom
number when its Telecom line is wholesaled to another provider.
1015.
In relation to wholesale, the process for re-assigning customers to TelstraClear is well
established and although there is room for improvement, it cannot be considered a
significant barrier to switching. Telecom is currently in negotiations with TelstraClear
relating to improving reassignment and other wholesale processes. Also, as the
Commission is aware, the development of wholesale processes is a significant part of
Telecom's wider IS development. If any barrier to switching exists as a result of
wholesale processes, these barriers will gradually disappear as Telecom's IS
development is rolled out. (Telecom refers the Commission to the confidential
information provided about Telecom's IS development plans: Appendix 4 of Telecom's
Residential Wholesale Submission and paragraphs 17-22 of Telecom's Residential
Wholesale Cross-Submission.)
221
Product innovation and differentiation
1016.
Telecom's Business Wholesale Submission outlined some of the areas in which
Telecom has sought to differentiate itself from other service providers in order to remain
competitive in the local access and calling market in Zone 1 (paragraphs 426-429).
1017.
There is nothing to indicate that this competitive activity will cease. Importantly,
wholesaling of SME services will allow price differentiation, the most common form of
differentiation currently used in Zone 1. For example, local call pricing can be varied by
price per minute, rounding by the second or the minute, peak / off-peak, and the
geographic extent of the local calling area.
The counterfactual: future state of the markets without unbundling
1018.
Significant changes in the market for local access services to business in the Zone
1/metropolitan areas are expected in the next 2 to 3 years with the completion of
networks competing with Telecom's infrastructure, the introduction of wholesaling in the
SME customer market and the development of alternative fixed and wireless access
infrastructure (refer to section 2 of this submission for further information about this
alternative technology). In relation to wholesaling, Telecom refers the Commission to
paragraphs 1029 to 1032 below, where wholesaling and its impact are discussed in
further detail in relation to the local access market for business customers in the nonmetropolitan/Zone 2 areas. Telecom submits that the same principles and arguments in
relation wholesaling in to Zone 2 apply equally to wholesaling in the SME sector of Zone
1.
1019.
As with the local access residential market, it is also expected that the local access
business market will see an increase in customers who substitute wireline access
services with mobile phone services and other forms of wireless technology (see
paragraph 1066 below).
1020.
In relation to the corporate customer market, wholesaling will not be a factor, however
Telecom still considers that as a result of the other trends in the market, it will continue
to face significant competition from TelstraClear and other competitors.
New entry
1021.
The list of potential entrants who may wish to enter the business access market on the
basis of wholesaling has already been provided in paragraph 1009 above. The reason
for such an extensive list is that the start-up costs for becoming a reseller of Telecom's
wholesaled services is minimal. No significant investment in infrastructure is required.
Also, a number of the potential entrants have established relationships with customers,
such as toll service providers and utilities companies, which reduces start-up marketing
costs. The cost of wholesaling compares favourably with unbundling where an entrant
would have to invest a significant amount in infrastructure to take advantage of the
unbundled elements of Telecom's network. In other words, there are less barriers to
entry under wholesaling than under an unbundling regime.
New products
1022.
In those parts of Zone 1 where there is competing infrastructure, it is not expected that
there will be a significant amount of product differentiation between the competing
providers. Product differentiation is not currently, and is not expected to become, an
important competitive advantage in this market. A comparison of Telecom's and TCL's
services offered over their independent networks highlights the level of uniformity in the
services currently provided:
222
1023.
(a)
The basic business line and local calling product is exactly the same for both
providers except in relation to price. Price differentiation in relation to calling
occurs in a variety of ways including price per minute, per second or per minute
charging, the geographic extent of the local calling area and peak / off-peak
calling prices.
(b)
Smart Services (eg Call Minder, Call Waiting, 3-way calling, etc) are offered by
both companies. The only variations are in the operational details. For
example, different sounds used to indicate a message is waiting, different
access numbers, different processes to turn on call forwarding, etc. These
differences do not represent a difference in value to the end-user.
As is the case in the residential local access market, Telecom expects the ability for
customers to purchase services from a single supplier on a single bill (for example, a
"one stop shop") will become increasingly important for customers. This will be
facilitated through the wholesale regime and unbundling of the local loop will not add
any value to this customer requirement.
Summary
1024.
Given the existing competition in the market for business local access services in the
metropolitan markets and the expected impact of wholesaling in relation to SME
customers, there is no justification for unbundling Telecom's local loop or fixed data
networks in respect of these markets.
223
10.2
Retail market for business local access services (including local call services) in
non-metropolitan areas
Overview
1025.
This is the second business local access market. This market is differentiated from
market 10.1 on the basis of geographical area, in that it relates to the non-metropolitan
areas of New Zealand (otherwise known as "Zone 2"). As described at paragraph 1005
above, the non-metropolitan/Zone 2 area has been defined as the area 200 metres
beyond TelstraClear's network .
1026.
In its Business Wholesale Submission at paragraph 447, Telecom acknowledged that it
currently faces limited competition in this market. As a result of Decision 497, 43
services have been regulated and must be wholesaled by Telecom in this market to both
SME and Corporate customers. There will be a significant increase in competition in the
next 5 years through the wholesaling of these services combined with the completion
development of alternative fixed and wireless access infrastructure. Telecom submits
that, given these developments, there is no justification for unbundling Telecom's local
loop network or fixed PDN network in Zone 2.
Competition assessment
1027.
In recent years, there has been some reduction in prices in Zone 2, despite the limited
level of competition in this market. This is as a result of Telecom's wholesale agreement
with TelstraClear as well as competition from other service providers, mobile competition
and the countervailing market power of Telecom's customers. Telecom refers the
Commission to its Business Wholesale Submission (paragraph 402 - 410) for more
detailed price trend information in relation to Zone 2. Telecom also refers the
Commission to paragraph 1013 above, where it was noted that, across both Zone 1 and
2 (combined) prices are expected to decline over the next 3 years, following the
introduction of wholesaling.
1028.
As in Zone 1, wholesaling will remove any significant barriers to switching for customers
in Zone 2. For example, difficulties in providing customers with a single bill and network
reach issues have been considered a barrier to customers switching certain services to
TelstraClear and other non-Telecom service providers in the Zone 2 market. Both of
these issues are removed by wholesaling. The single-bill issue is resolved because the
majority of services required by most business customers are either regulated or offered
as part of Telecom's fair and workable regime. Wholesaling also removes network
reach as an issue.
The counterfactual: future state of the markets without unbundling
Wholesaling
1029.
TelstraClear will be the big player in the new wholesale environment in Zone 2.
TelstraClear's market share is expected to increase markedly with the introduction and
impact of wholesaling. As a consequence, Telecom anticipates losing 9% of total
market share in the next three to 5 years because of wholesaling.
1030.
Telecom's timeline of TelstraClear's expected impact in areas not currently reached by a
TelstraClear network is as follows:
(a)
224
1031.
As discussed in relation to the wholesale of local access services to SME customers in
Zone 1, several other smaller players are also likely to wish to take advantage of
wholesale access and thereby compete with Telecom. These smaller players include
existing telecommunications providers such as Walker Wireless as well as other utilities
and communication companies, such as ihug who may offer local calling and access
services as part of a bundled service solution.
1032.
Walker Wireless will launch a wireless offering including access and voice in the next 2
to 4 years (using wireless broadband technology). It has publicly stated that it will offer
two lines, Internet access and voice services, for $100 per month. This offer is most
likely to be targeted at the SME end of the market. Walker Wireless is discussed in
further detail in section 2.3 of this submission. TelstraClear has also announced
introduction of a wireless access.
Other developments
1033.
Fixed line penetration for local access business lines is high. The market has reached
saturation and currently only grows in line with the economy as new businesses start.
There is nothing to indicate that further competition, whether or not stimulated by
regulation, will increase penetration of local access services.
1034.
In summary, Telecom submits that the business local calling and access market in Zone
2/non-metropolitan areas will change substantially with the introduction of a wholesale
regime. Accordingly, Telecom expects that there will be:
(a)
more customer choice between service providers;
(b)
increased price competition as players currently offering calling services
compete for access market share (which will enable them to offer convergence
and one bill);
(c)
alternative package options as competitors link with third parties; and
(d)
improved service levels as companies aim to differentiate themselves
(including billing and payment options).
Infrastructure development
1035.
There will be further infrastructure development by power companies outside of the CBD
areas. This will introduce alternative network infrastructure competition into Zone 2. As
an example, Counties Power are cabling the Franklin district, extending this venture to
the King Country and Pukekohe. This means customers in these areas will have the
choice in the next 3-5 years of Telecom access, a bundled solution from either
TelstraClear, Callplus or ihug, WalkerWireless wireless access offering or a retailer
offering services from Counties Power infrastructure.
225
Differentiation
1036.
As wholesaling develops however, Telecom does expect its competitors to be very
effective at differentiating their offerings based on price, service and, in particular,
packaging with other telecommunications and utilities services.
Summary
1037.
Telecom acknowledges that there is currently limited competition in the nonmetropolitan/Zone 2 areas for local access services to business customers. However,
this will change dramatically in the next 3-5 years as the impacts of wholesaling under
Decision 497 and of the development of alternative technology and infrastructure
combine, to increase the level of competition in this market. For this reason, unbundling
of either Telecom's local loop or fixed PDN networks is not justified in relation to this
market.
226
227
10.3
Retail market for the provision of residential local access and calling services in
metropolitan and non-metropolitan markets
Overview
1038.
There is effective and workable competition in both of the networked metropolitan
markets for residential local access and calling services as a result of the significant
competition between Telecom's and TelstraClear's networks in these areas.
TelstraClear has conceded Telecom faces more than limited competition in these
markets although it disputes the boundary of these markets (TelstraClear's Residential
Wholesale Cross-Submission, paragraphs 4.6-4.9)
1039.
As acknowledged by Telecom in its Residential Wholesale Submission (see paragraph
3.36), it is likely that Telecom currently faces limited competition in the following markets
for local access and calling services:
1040.
(a)
the Wellington non-networked metropolitan market;
(b)
the Christchurch non-networked metropolitan market; and
(c)
the non-metropolitan market.
However, the implementation of a wholesaling regime will allow competition to develop
in the markets identified above. It is expected that such wholesaling will also lead to the
further deployment of infrastructure by TelstraClear and other providers to create even
further competition in these markets. Telecom considers that these markets will be
highly competitive in the next 2 - 3 years.
Current State of Competition
1041.
In relation to the metropolitan markets, Telecom has previously provided the
Commission with information on the history and development of competition in this
market (Telecom's Residential Wholesale Submission, Appendix 1, paragraphs 3.18 3.26). It has also provided information on competitive activity (paragraphs 3.27 - 3.28),
customer churn (paragraphs 3.10 - 3.14) and market shares (paragraphs 3.15 - 3.17).
This information was provided in March 2003. To Telecom's knowledge, there has been
no significant change in this information in the interim period.
Barriers to switching
1042.
As evidenced by churn information provided by Telecom to the Commission in
paragraphs 3.10 to 3.14 of Appendix 1 to Telecom's Residential Wholesale Submission,
there are currently minimal barriers for customers seeking to switch network providers in
networked metropolitan areas.
1043.
Telecom also expects barriers to switching to be reduced in non-networked metropolitan
markets and the non-metropolitan market once a residential wholesaling regime is
implemented. The reasons why wholesaling reduces barriers to switching has been
described in paragraphs 1014 above.
1044.
Unlike business wholesale processes which have been in place between TelstraClear
and Telecom for a considerable period of time, there has never been any residential
wholesaling by Telecom. However, this should not be seen as a significant barrier to
residential customers switching to TelstraClear or to other service providers. The
reassignment processes currently used for business wholesale are adaptable for
residential services. In fact, the process for dealing with a residential wholesaling will be
simpler than for business, because the number and complexity of services is greatly
228
reduced for residential wholesaling. The only complicating factor is the volume of
transactions. As stated in paragraph 1015 above, Telecom is working with TelstraClear
towards improving wholesale processes.
Existence of countervailing power
1045.
Telecom refers the Commission to its marketing initiatives outlined in paragraphs 3.27 to
3.29 of Appendix 1 in its Residential Wholesale Submission which indicate the
competitiveness of the networked metropolitan markets. As discussed by Telecom in
paragraphs 79 to 87 of its Residential Wholesale Submission, its responses to
competition in the networked metropolitan markets have had to extend to the nonnetworked metropolitan markets because of residential customer perception or psyche.
This political/public policy consideration is a considerable factor to be taken into account
by Telecom when assessing proposed activities in a residential area.
1046.
Telecom considers that it is likely that similar independent rivalry will quickly develop in
the non-metropolitan markets in response to TelstraClear's (and potentially other
competitors' entry) as a result of the wholesale regime. Telecom's response to this
increase in competition will necessarily have to focus on a wider geographical area than
that in which competitors initially target customers as a result of the customer perception
issue.
1047.
Alternative technologies are also expected to become significant competitors in the
telecommunications markets in the next 2 - 5 years. Telecom refers the Commission to
section 2.3 of this submission which deals with alternative technologies.
Product innovation and differentiation
1048.
In addition to the basic local access and calling service (HomeLine), Telecom also offers
two other local access and call services: HomeLine Economy (see paragraphs 4.1 to
4.15 of Appendix 1 of Telecom's Residential Wholesale Submission) and 60s Plus (see
paragraphs 5.1 to 5.13 of Telecom's Residential Wholesale Submission).
1049.
A range of additional services are also offered in this market (for example, see
Smartphone services and packages). Telecom refers the Commission to paragraphs
12.1 to 15.9 of Appendix 1 in its Residential Wholesale Submissions for a summary of
Telecom's past and present residential packages in these markets (such as SmartLine
and MessageLine).
1050.
As with business local access there is uniformity in the type of products offered in the
residential local access market (see paragraph 1036 above) where competing networks
currently exist. TelstraClear offers similar services to Telecom over its existing
residential network in Wellington and Christchurch. As well as the basic local access
and calling service, TelstraClear offers its customers additional services which are very
similar to Telecom's most popular Smartphone services. TelstraClear's main points of
differentiation occur on price and packaging. It seems clear that they will continue to do
this under a wholesaling regime.
1051.
Telecom also refers the Commission to its discussion of future product differentiation
under a wholesale regime in paragraphs 1065 and 1066 below.
The counterfactual: future state of the markets without unbundling
1052.
Currently, fixed line penetration in households is high at 96.4% (Statistics New Zealand
Census 2001). In Telecom's view, the market has reached saturation point and neither
wholesale nor unbundling will stimulate further growth in access lines.
229
Market participants
1053.
While TelstraClear is currently Telecom's only competitor in the residential access and
local calling markets, competition from other providers for other services such as tolls,
Internet and mobile is also occurring in these markets.
1054.
Given the small size of the New Zealand market, the industry will not sustain a plethora
of new entrants in the residential market. The priority of most providers will still be in the
business markets where there are higher margins and where the smaller market size
and geographic density makes it easier to focus and acquire customers.
1055.
As noted in relation to business local access services, it is likely that those players who
chose to compete in the residential markets, will use their existing customer
relationships as leverage when competing for local access customers in areas where
wholesale may occur. This ability to leverage from existing relationships is driven by the
desire by customers to deal with a single service provider (the "one bill" issue).
1056.
The twin of this strategy is also likely to occur. TelstraClear (and potentially) other
competitors will use wholesaled local access and calling services as a base from which
to then offer more lucrative tolls and packages of services. As noted in Telecom's
Residential Wholesale Submissions (Appendix 1, paragraph 11.6), TelstraClear has
been very effective in using packages as a competitive tool. It is expected that
TelstraClear will continue with this strategy (see comments of Rosemary Howard
referred to in paragraph 998(c) above).
1057.
Not only are packages an effective way of winning customers to TelstraClear, they are
also a very effective tool for growing revenue from individual customers. For example,
recent market research indicates that customers switching from Telecom to TelstraClear
typically increase the number of telecommunications services from 2-3 to 4-5. It is this
phenomenon which is driving much of the convergence in the telecommunications
market.
1058.
The smaller players considered most likely to enter the residential markets are Call Plus,
ihug and WorldxChange because of their existing customer numbers.230 Telecom
predicts that these smaller telecommunications companies will seek to use wholesaled
services to attract new customers and to provide a broader range of products to existing
customers. If successful they will focus on higher value calling customers by offering
competitive calling prices with the convenience of one bill.
1059.
Telecom expects the emergence of specialist providers (ie rural companies) to seek to
provide wholesale access as part of a broader rural solution for customers within 2 to 4
years of the implementation of a wholesaling regime. These companies will leverage off
their existing relationship with customers as rural specialists, and provide them with the
benefit of having everything on one bill (including utilities, equipment, supplies etc) and
receiving discounts and rewards for this. See section 2.3 of this submission which
230
Telecom's market research indicates that ihug has a subscriber base of approximately
customers across New Zealand and Australia, with the New Zealand share apoproximately.
CallPlus is believed to have approximately
business and residential customers. WorldxChange has
approximately
toll by-pass customers.
230
discusses wireless and alternative technologies and, in particular, the emergence of new
broadband providers, who are likely to target this customer market.
Wholesaling - effect on market share
1060.
The introduction of wholesaling will result in a residential local calling and access market
with no significant barriers to switching. The reasons why wholesaling reduces any
existing barriers is outlined in paragraph 1014 above.
1061.
TelstraClear's market share in all markets (metropolitan and non-metropolitan) is
expected to increase markedly over the coming years with the introduction and impact of
wholesaling. Telecom predicts that TelstraClear will launch a wholesale access offer
firstly in Auckland in the next year. As a result, Telecom predicts that it will lose
approximately
% access share in this market in the next 2 years. We
anticipate TelstraClear being more proactive nationwide with wholesaling from late 2004
onwards and expect similar market loss nationwide consequently.
1062.
Accordingly, TelstraClear will target customers through the following means:
(a)
lower prices;
(b)
flexible packages (which includes linking with 3rd parties such as Sky and
Vodafone to provide a competitive advantage and a converged product);
(c)
aggressive marketing support programmes (for example, door knocking,
outbound calling, direct mail); and
(d)
innovation around entry offers (for example $50 to change suppliers, first 3
months access free).
1063.
As noted above (paragraph 1055), TelstraClear is currently building its calling base and
will target these and other existing customers for its wholesale access services.
Currently, TelstraClear has approximately
calling customers. The
Buddecom Report states that it is likely that TelstraClear will achieve a national market
share of 25% (which includes both residential and business customers) within 3 to 5
years of the implementation of any wholesaling regime. Telecom considers this is a
reasonable prediction of what TelstraClear could achieve under wholesaling.
1064.
In summary, Telecom submits that the residential local calling and access markets will
change substantially with the introduction of a wholesale regime in non-networked
markets. Accordingly, Telecom expects that there will be:
(a)
more customer choice between service providers (likely that TelstraClear will
be a national provider and other smaller companies will seek to use wholesale
to compete in certain regions);
(b)
increased price competition as players currently offering calling services
compete for access market share (which will enable them to offer convergence
and one bill);
(c)
alternative package options as competitors link with third parties;
(d)
improved service levels as companies aim to differentiate themselves
(including billing and payment options); and
(e)
a tested reassignment process as discussed in paragraph 1015 of this
submission in relation to the business local calling and access markets.
231
New products/technology
1065.
Telecom expects that it and other providers will continue to innovate and offer new and
exciting products targeting the different needs of customers. The following product
innovations are expected in the next few years:
(a)
1066.
Telecom predicts that mobile substitution of fixed access lines will continue to increase,
growing to
% by
(currently
%). This is because customers
are valuing the freedom and mobility that a mobile provides over the value of the
landline. Currently,
% of households have fully substituted their access line for a
mobile phone. This is expected to rise in the next
as basic Internet
services are provided on mobile phones. Customers are also choosing to purchase a
mobile phone instead of a second fixed line, and Telecom also notes a significant
decline in fixed line calling behaviour when a customer purchases a mobile phone
(especially in fixed to mobile calls). Therefore, mobile services will be increasingly seen
as an alternative solution for fixed local access in the future.
Investment plans
1067.
Telecom refers the Commission to its earlier discussions of expected investment in the
broadband markets (see section 2.3 of this submission dealing with emerging
broadband and wireless technologies). Telecom expects these new technologies to
converge into the local calling and access markets and increase competition.
1068.
In particular, Telecom expects new entrants in the form of utilities companies will
continue to enter the market as wholesale providers. Telecom predicts that this will
drive additional retail access competition in the next 2 - 3 years. In particular, Telecom
notes that, of the 27 electricity lines companies operating in New Zealand, five of these
companies are already providing telecommunications services. Telecom discusses the
entrance of utilities companies in section 2.3 of this submission dealing with new and
emerging alternative broadband technologies.
Summary
1069.
There is significant competition in the residential local access markets where there are
competing networks. The wholesaling of residential local access services is expected to
have a significant impact on the state of competition in other areas. Given these two
factors, unbundling of either Telecom's local loop or fixed PDN network is not justified in
relation to these markets.
232
233
10.4
Retail market for the supply of broadband Internet access to residential
customers in both metropolitan and non-metropolitan areas
Overview
1070.
There is effective and workable competition in the retail market for broadband access to
residential customers in the metropolitan market. Telecom refers the Commission to
TelstraClear's letter dated 1 May 2003 clarifying the withdrawal of all Jetstream services
in metropolitan markets from both TelstraClear's Residential Wholesale Application and
Business Wholesale Application. This should be seen as acknowledgment by
TelstraClear that Telecom does not face limited, and is not likely to face lessened
competition in the retail market for broadband access to residential customers in the
metropolitan market.
1071.
Telecom does not agree with the Commission's assessment in Decision 497 that it faces
limited, or is likely to face lessened, competition in the retail market for broadband
Internet access to residential customers in the non-metropolitan market. Telecom refers
the Commission to the regional broadband initiatives discussed in paragraphs 582 to
584 of Telecom's Business Wholesale Submission which is evidence of the competition
faced by Telecom in the non-metropolitan broadband market. However, whether or not
there is currently more than limited competition is immaterial in relation to this
submission because the advent of wholesaling in the non-metropolitan market will
increase competition in any event.
1072.
Broadband access is already widely available through Telecom's xDSL capability and is
used by the business sector where it adds the most value. Project PROBE (as
discussed in section 3.2 of this submission) has the potential to make broadband access
virtually universally available in regional New Zealand. Telecom, BCL, Walker Wireless,
Vodafone and 027 will make broadband available both in the residential urban sphere
and the business sphere.
1073.
Unbundling will not increase the availability of xDSL or any other form of broadband
local access.
Competition Assessment
1074.
There are three main types of broadband competitors existing at present: those offering
a broadband service across their own wireline network; those offering a broadband
service across their own wireless network; and those offering a broadband service
across alternative network suppliers.
1075.
Telecom refers the Commission to the market information provided in paragraphs 567 to
572 of the Business Wholesale Submission) relating to the current level of competition in
the residential markets.
Barriers to switching
1076.
In the metropolitan market, customers have access to alternative networks. There are
minimal barriers to switching between these networks. The ability of TelstraClear to
wholesale services in the non-metropolitan market will also reduce barriers to switching.
1077.
Telecom refers the Commission to its comments in paragraph 561 of the Business
Wholesale Submission regarding installation costs which applies equally to residential
broadband markets. Telecom expects installation costs to continue to decrease.
Telecom predicts that competitors will run free installation offers to obtain broadband
customers. While at present uptake offers mainly relate to free connection, Telecom
expects an increase in the innovation of uptake offers to occur in the near future (for
234
example, free download days, modem specials, megabyte promotions and free rental for
the first month(s) of connection).
1078.
The only significant barrier to switching currently existing is high modem prices.
However, Telecom expects that the costs of modems will continue to decrease as they
have in the last 2 years. As a result, barriers to switching will further decrease. As
modem prices decrease, Telecom expects competitors to subsidise modems to facilitate
churn.
Product differentiation
1079.
Telecom refers the Commission to its list of Jetstream services and associated prices in
paragraphs 9.2 to 9.3 of Appendix 1 of its Residential Wholesale Submission.
Telecom's competitors provide their customers with similar products. The following
table represents the broadband products offered to residential customers at present by
Telecom's competitors:
Paradise High Speed
Starter
Paradise High Speed
Express
$59.95 per month plus $17
modem rental
$92.95 per month plus $17
modem rental
$65 per month
256kbps
upstream,
128kbps downstream
2mbps upstream, 256kbps
downstream
128kb downstream
10GB cap (from 1 May
2003)
1GB cap
20c international
national usage
20c
international
national usage
/
2c
6 email addresses
1080.
1081.
/
Walker Wireless Ultamo
2c
6 email addresses
Telecom submits that network providers have the ability to differentiate on a number of
aspects today including:
(a)
pricing (rental and usage);
(b)
volume caps (under BCL wholesale service);
(c)
number of e-mail addresses and e-mail storage limits;
(d)
e-mail security options (for example, virus and firewalls);
(e)
connection fees;
(f)
development of content services and portals;
(g)
bundling with other services (for example, phone and Internet access); and
(h)
level of customer service and support (for example, 24x7 and online support
tools).
However, Telecom does acknowledge that, under wholesaling,
providers will still be reliant on Telecom for some aspects of customer service
and support.
Telecom submits that wholesale providers have the ability to differentiate on all those
aspects discussed above except the speeds of broadband offered. This last point is not
a barrier to competition because there does not appear to be any sustainable
competitive advantage in differentiating services based on speeds of broadband.
235
The counterfactual: future state of the markets without unbundling
Market participants
1082.
Telecom expects the numbers of competitors in the broadband market to increase
dramatically with the introduction of wholesaling and the continued development of
wireless technologies. The principal entrants are discussed in paragraph 1083 below.
Telecom refers the Commission to section 2.3 of this submission which discusses
alternative technologies. Telecom views these alternative technologies (such as Walker
Wireless' competitively priced service) as substitutes for its fixed broadband services.
1083.
Telecom expects that TelstraClear, ihug, Call Plus and WorldxChange will all seek to
actively use Telecom's wholesale broadband services to deliver alternative nationwide
retail services to residential consumers. Telecom also predicts ISPs, who are current
resellers of Telecom's broadband services, will seek to leverage wholesaling in the
broadband markets to increase competition in the ISP market.
(a)
TelstraClear:
(b)
ihug: Currently, ihug is very active in the Jetstream market as resellers of
Telecom's service. It is Telecom's understanding that ihug has developed
distribution channels through Dick Smith and will want to continue to use this
avenue to market its services.
(c)
CallPlus: CallPlus is positioning itself as New Zealand's only 100% owned full
telecommunications service provider. To be a true full-service provider,
CallPlus will want access to Telecom's wholesale broadband services. This
will also serve to increase its market share as broadband becomes more
important to users.
(d)
WorldxChange: WorldxChange is estimated to have appropriately
toll bypass customers. WorldxChange has focused on high value
residential customers with large international toll spends, particularly in the
Auckland region. Wholesaling will allow WorldxChange to provide its existing
customers with a single telecommunications solution on one bill. As with
CallPlus, broadband is likely to be an attractive wholesale service to
WorldxChange and its customers.
236
1084.
In addition to competitors at a retail level, Telecom also expects service providers of
alternative technologies to begin wholesaling their services in the near future (for
example, Walker Wireless and electricity lines companies). The emergence of lines
companies in particular highlights the ease of new entry into the wholesale market. This
entry by wholesale service providers will be threatened if unbundling occurs. Telecom
refers the Commission to its comments in section 2.3 of this submission which
discusses the effects of wireless broadband technology.
Penetration of broadband
1085.
Telecom expects penetration of broadband to increase significantly in the next 2 years
with Telecom expecting to reach
% penetration on ADSL alone. In particular:
(a)
Telecom is forecasting just over
connections by the end of
(b)
Telecom predicts
total broadband residential
financial year.
BCL connections by
.
1086.
As discussed in section 3.1 of this submission, one of the primary reasons for the
reasonably low level of broadband penetration in the residential markets is that basic
dial-up data services provide the majority of customers with the services they require (ie
Internet access) at a cheaper price. As residential consumers begin to demand the
applications which can only be provided via broadband, it is expected that penetration
will increase.
1087.
Unbundling does not affect broadband penetration rates.
Telecom refers the
Commission to paragraph 8 and section 3.1 in support of this submission. In particular,
Telecom notes that experience in the UK has demonstrated that unbundling is not the
key enabler of bringing broadband to the market, especially as unbundling only provides
access to customer lines and not to the services over them, which is what ultimately
drive mass broadband uptake. BT has found that a combination of technologies (DSL,
satellite, cable, wireless and mobile) all have a part to play in working together to drive
broadband uptake. All of these technologies are being invested in today by a range of
infrastructure providers. It is this investment that will stimulate broadband competition
and uptake.
1088.
Delivering mass-market penetration of broadband will require a concerted effort from a
range of providers, not only in the communications industry but also in a range of other
industries. Along with the physical delivery of infrastructure (which is well advanced in
New Zealand), it is the combination of companies working together - fixed and wireless
communication providers, ISPs, broadcasters, content providers - that will deliver the
applications that will drive broadband uptake.
Investment plans
1089.
In the near future, Telecom predicts a shift of broadband away from predominantly being
about fast Internet and towards applications. In the residential market these applications
will primarily be in the entertainment sector competing against established market
leaders such as Sky, the television networks (both national and international), video
stores, movie theatres, movie/video distributors and casinos.
1090.
Examples of these new initiatives can be found internationally where Video on Demand,
Music on Demand, Gaming, Instant messaging, Personal website, Adult, Chat, Banking
and Home Networking are available using broadband.
237
Summary
1091.
Currently, there is effective and workable competition in the residential broadband
markets. This will only increase with the uptake of wholesaling and the development of
alternative technology. Broadband penetration is expected to grow significantly in the
next few years as more applications become more attractive and affordable for
residential customers. Unbundling is more likely to hinder, than to help, the growth of
competition and penetration in the residential broadband markets.
238
239
10.5
Retail market for the supply of broadband Internet access to business customers
in both metropolitan and non-metropolitan areas
Overview
1092.
Telecom refers the Commission to its overview of the broadband market in paragraphs
1070 to 1073 above in relation to the residential markets.
Competition assessment
Metropolitan retail market
1093.
The Commission has concluded that Telecom does not face limited competition nor is it
likely to face lessened competition in the metropolitan retail market for business
broadband access (see paragraph 518 of Decision 497). Telecom agrees with the
Commission in this respect. As discussed in paragraph 1006 above, unless there is
significant new evidence to the contrary, this must be almost irrefutable evidence that
there is effective and workable competition in this market.
Non-metropolitan retail market
1094.
Telecom disagrees with the Commission's conclusion in its Business Wholesale
Determination as to the level of competition existing in the non-metropolitan broadband
market. Telecom refers the Commission to its previous discussion of Project PROBE
and regional initiatives in section 3.2 of this submission which applies equally to the nonmetropolitan broadband business market. The Commission did note that candidates
were required to demonstrate ways of extending delivery to businesses (this was also
discussed in paragraph 584 of Telecom's Business Wholesale Submission).
1095.
The Commission concluded (at paragraph 527 of Decision 497) that in non-metropolitan
areas for business broadband, Telecom served virtually the entire market so that there
is limited competition. While Telecom has acknowledged that it does not face significant
competition from existing suppliers at present in non-metropolitan areas, Telecom does
face a significant threat from new entrants as a result of the development of alternative
broadband technologies. Therefore, it disagrees with the Commission's conclusion.
1096.
However, the question of whether or not there is currently more than limited competition
becomes immaterial in relation to this submission because the advent of wholesaling in
the non-metropolitan market will increase competition in this market in any event.
Barriers to entry
1097.
The Commission considers that barriers to entry are more significant in the
non-metropolitan business broadband areas as there is a more dispersed customer
base (see paragraph 527 of Decision 497). Telecom considers that wholesaling will
reduce any such barriers and refers the Commission to its discussion of barriers to entry
in relation to the non-metropolitan residential broadband market (see paragraph 1076 of
of this submission) which applies equally to the non-metropolitan business broadband
market.
The counterfactual: future state of the markets without unbundling
1098.
Telecom refers the Commission to its discussion of the effects of wholesaling, new
entry, new products and investment plans in the context of residential broadband
markets which applies equally to the business broadband markets (see paragraphs
1083 to 1090 of this submission). The key differences in business are noted in the
following paragraphs.
240
Market participants
1099.
The principal potential new entrants identified in the residential markets (paragraph 1082
above) will also be the main players in the wholesaling of business broadband services.
As a result of the greater revenue obtainable from business customers, there is also a
greater likelihood of smaller players seeking to enter this market. For example,
New products
1100.
In business, as with residential, broadband as a vehicle for applications rather than for
Internet use will become increasingly important. However, the major difference will be
that broadband applications in the business markets will not be entertainment-type
products. Rather, the type of applications are expected to be things such as video
conferencing from your desktop and integrated messaging (the ability to access all
messages in the one place across mobile, Internet, fax, etc).
Penetration of broadband
1101.
Compared to the residential markets, there is a far higher level of penetration of
broadband services in the business markets.
% of medium enterprises; and
of corporates use Jetstream products. Only
% of small enterprises
use Jetstream. This lower level of penetration is due to some of the same reasons
outlined in paragraph 1086 above in relation to residential customers. Telecom expects
other service providers to take advantage of Telecom's high penetration rates by using
wholesaling to churn these customers.
1102.
Telecom forecasts penetration of broadband amongst small business customers to
increase to
% by the end of the
financial year. Along with
growth in other segments, this will bring the total number of business connections to just
over
by
.
Summary
1103.
In summary, workable and effective competition is already evident in metropolitan areas.
The combined effect of wholesaling, regional initiatives and Project PROBE will be to
facilitate workable and effective competition in non-metropolitan areas. Unbundling
offers no advantage over these developments in non-metropolitan areas and would be
of no impact in the already competitive metropolitan areas. Nor would unbundling serve
to increase penetration rates. As discussed above, medium enterprise and corporate
penetration rates are high. Small enterprises' penetration rates will rise in direct
correlation to the need for applications rather than more Internet access. Unbundling
will do nothing to increase this natural growth. No convincing case for unbundling can
be made in the business broadband markets.
241
10.6
National market for the provision of ISP services
1104.
There is effective and workable competition in the national retail market for the provision
of ISP services. As stated in paragraph 585 of the Telecom's Business Wholesale
Submissions, "this is not a 'bottleneck' service and should not be regulated". In its short
history, the ISP market has been subject to intense competition and rivalry between the
participants.
1105.
There is no lack of competition in this market that needs to be addressed by a regulatory
solution such as unbundling, nor would unbundling have any effect in the market given
the number of significant competitors, Telecom's relatively small market share, and the
new technologies through which ISPs are working (from mobile to television).
Current state of competition
1106.
Telecom has provided the Commission with extensive information on the significant
amount of competition in the ISP services market in its Business Wholesale
Submissions, paragraphs 585 to 617. A brief summary of that information is provided in
the following paragraphs.
1107.
The New Zealand ISP market has been subject to intense competition and rivalry
between participants. In the last 1 - 2 years the large number of entrants has been
stabilised at approximately 85 providers. Smaller players have continued to expand and
enter the market and will increasingly focus on regional markets and communities of
interest where specific solutions are required. There has been some ISP consolidation,
driven primarily by an increased focus on differentiation based on service and
innovation, best supported by degree of scale. TelstraClear has seen significant growth
in market share through a combination of organic growth, acquisition of other ISPs and
packaging of Internet with other telephony and entertainment services providing a
compelling price proposition to customers.
1108.
Service providers were able to aggregate international traffic, lower their cost structures
and provide price innovation due to input costs such as international bandwidth being
reduced. Currently the market is characterised by service innovation rather than price
innovation - the number of features and solutions tailored to customers rather than mere
price reductions to differentiate between competitors. Service providers compete on
quality of service - innovative value-add services and content partnerships.
Vertical integration
1109.
Larger participants are owned by telecommunications companies, but independent
operators such as ihug and Attica have had success demonstrating that vertical
integration is not a prerequisite to gaining customer loyalty. Such companies have
provided fierce price competition. As submitted in paragraph 589 of Telecom's Business
Wholesale Submissions, Telecom does not deny that there is a benefit to being able to
include Xtra's ISP charges on a Telecom customer bill but suggests that the benefit is
not highly valued. It is not really a competitive advantage as Xtra's success is derived
from other factors independent of its relationship to Telecom namely customer service,
marketing and innovative offering. Xtra has consistently held less than a 50% share of
the market for the provision of ISP services.
1110.
Telecom has submitted at paragraph 611 of the Business Wholesale Submissions that
any advantage derived from Telecom's ability to cross-sell ISP services along with other
Internet services or other telecommunications services is limited. The Commission has
already noted that the "one bill/single provider" asset is not a material driver (see
paragraph 612 of Telecom's Business Wholesale Submissions). However, as noted by
242
the Commission, other ISPs also have the ability to resell other services (see paragraph
614 of Telecom's Business Wholesale Submissions).
1111.
The ability of other ISPs to resell additional services with traditional ISP services will be
significantly increased by virtue of the wholesaling regime. As already noted in relation
to the broadband markets (paragraph 1083 above), ISPs are considered to be one of
the major competitors using wholesale broadband and local access services to provide
a single service offering to customers.
New entry
1112.
As noted by the Commission in the Draft Determination, there are low barriers to enter
the ISP market and very low barriers to expansion. Telecom has already provided the
Commission with information on the level of capital and uptake required to enter the
market (paragraphs 605-608 of Telecom's Business Wholesale Submissions). Given
the relative ease of entry, as submitted at paragraph 607, the most plausible explanation
for the lack of entry in the last 4 years is that the market is already so competitive that
further entry may be unattractive.
The counterfactual: future state of the markets without unbundling
1113.
According to the Budde Report of 2002 there are approximately 85 ISPs in the New
Zealand market. This number has not changed significantly in the last 1 - 2 years and
Telecom does not expect to see this number significantly reduce although there is likely
to be some consolidation as the market matures. Telecom expects to maintain its
market position with modest growth in market share over the next 3 - 5 years. This
growth will be achieved by continued focus on innovation and service such as anti-virus,
email alerts to mobile phone, cyber patrol services and messaging on mobile phone.
1114.
Basic Internet services (email, basic surfing, messaging) are increasingly becoming
device agnostic. This will continue in the next three to five years with more customers
accessing these services through their mobile and TV (such as Sky's email service).
Through this, new service providers are emerging such as Vodafone and Walker
Wireless. Those new providers will reshape the competitive landscape of traditional
Internet services.
1115.
Telecom's predictions of market share are set out in the table below. The main reason
for the predicted increase in TelstraClear's market share is that it is likely to use the
wholesaling regime to offer packages of services including Internet access through its
Clearnet and Paradise brands.
Price forecast
1116.
Average price per minute will continue to decline over the next
years as a result
of increased competition and reducing international bandwidth costs. Average revenues
243
per user have declined steadily over the last
and Telecom expects this trend
to continue. Average revenue per user will decline most in the broadband area.
Summary
1117.
The market for the provision of ISP services is already highly competitive. Effective and
workable competition thrives in this market, as it has since the market's inception. ISP
services are being increasingly provided through mobile and television networks, and in
conjunction with telephony services. This promotion of ISP services with telephony
services will grow as TelstraClear and other service providers package ISP services with
wholesaled local access and broadband services.
1118.
The level of effective and workable competition in this market is such that unbundling is
not justified.
244
245
10.7
Markets for voice telephony services to residential customers in both
metropolitan and non-metropolitan areas
1119.
Telecom is unsure as to the meaning and scope of the "markets for voice telephony
services to residential customers in both metropolitan and non-metropolitan areas" (see
paragraph 234 of the Commission's Issues Paper).
1120.
Accordingly, Telecom refers the Commission to information provided by Telecom on the
following services:
1121.
(a)
Additional/Enhanced Directory Listings (see paragraphs 7.1 to 7.7 of Telecom's
Residential Wholesale Submission);
(b)
Message Connect (see paragraphs 8.1 to 8.11 of Telecom's Residential
Wholesale Submission);
(c)
MessageLine (see paragraphs 11.1 to 11.14 of Telecom's Residential
Wholesale Submission);
(d)
SmartLine (see paragraphs 12.1 to 12.10 of Telecom's Residential Wholesale
Submission);
(e)
Flexipack (see paragraphs 13.1 to 13.11 of Telecom's Residential Wholesale
Submission);
(f)
Smartpack (see paragraphs 14.1 to 14.10 of Telecom's Residential Wholesale
Submission); and
(g)
Familypack (see paragraphs 15.1 to 15.9 of Telecom's Residential Wholesale
Submission).
Telecom is able to provide further information on this market at a later date if requested
by the Commission.
246
247
10.8
National retail market for the supply of national toll services to business
customers
1122.
This market relates to the provision of national toll services to business customers
throughout New Zealand. For the reasons given in its Business Wholesale Submissions
(paragraphs 618 - 665), Telecom submits that there is effective and workable
competition in this market.
1123.
As evidence of the level of competition in this market Telecom refers the Commission to
the fact that TelstraClear withdrew national toll calls from its Business Wholesale
application on the basis that Telecom no longer faces limited competition for that service
(see Wholesaling Conference, Transcript - Day 2, 12 February 2003, ll 18 - 23).
Following TelstraClear's decision to withdraw that and other services, the Commission
concluded (at paragraph 102 of its Business Wholesale Determination, Decision 497)
that the market for national toll services to business was no longer relevant to the
Business Wholesale Determination.
1124.
Given the high degree of competition already present in this market there was no
justification for wholesaling. For the same reasons there is no justification for
unbundling Telecom's local access network to promote competition in this market.
Competition assessment
1125.
1126.
In summary, Telecom submits that there is effective and workable competition in the
national retail market for national toll services to business for the following reasons:
(a)
in addition to TelstraClear, Telecom faces competition from a number of
smaller providers (see Telecom's Business Wholesale Submissions,
paragraphs 619 - 620 and the Draft Wholesale Business Determination,
paragraphs 340 - 345);
(b)
there are low entry barriers, as evidenced by the history of entry in this market
(see the Draft Wholesale Business Determination, paragraph 364);
(c)
Telecom's market share has reduced, and is expected to continue trending
downwards over the next 3-5 years (see Telecom's Business Wholesale
Submissions, paragraphs 627 - 629 and the Draft Wholesale Business
Determination, paragraphs 346 - 352);
(d)
there have been significant price reductions in recent years (see Telecom's
Business Wholesale Submissions, paragraphs 630 - 631 and the Draft
Wholesale Business Determination, paragraph 356); and
(e)
Telecom and other service providers have developed numerous product and
pricing innovations (see Telecom's Business Wholesale Submissions,
paragraphs 650-651).
In the period since Telecom made its Business Wholesale Submissions, there has been
no significant change in this market and there is nothing to suggest any radical change
will occur in the near future other than a steady increase in competition as an indirect
result of wholesaling.
The counterfactual: future state of the markets without unbundling
1127.
Telecom expects competition to intensify in the market for national toll services to
business over the next few years as an indirect result of the wholesaling of services in
other markets. Given customer preference for a single bill and the ease of selling new
248
services to existing, rather than new, customers Telecom believes TelstraClear and
other competitors will adopt a two-pronged approach to this market:
(a)
they will leverage off existing tolls customers to sell wholesale local access
services, other wholesale services and packages; and
(b)
conversely, they will leverage off their ability to wholesale local access and
other services to secure new tolls customers.
1128.
Summary
1129.
There is effective and workable competition in the business national toll services market.
Although no direct wholesaling of these services will occur, wholesaling is likely to
increase the already significant level of competition. Given the current and future state
of competition in this market, there is no justification for unbundling to be found in
relation to this market.
249
10.9
National retail market for the supply of international toll services to business
customers
Overview
1130.
This market relates to the provision of international toll services for business customers
in New Zealand. For the reasons given in its Business Wholesale Submissions
(paragraphs 666 - 684), Telecom submits that there is effective and workable
competition in this market.
1131.
As evidence of the level of competition in this market Telecom refers the Commission to
the fact that TelstraClear withdrew international toll calls from its Business Wholesale
application on the basis that Telecom no longer faces limited competition for that service
(see Wholesaling Conference, Transcript - Day 2, 12 February 2003, ll 18 - 28).
Following TelstraClear's decision to withdraw that and other services the Commission
concluded (at paragraph 102 of Decision 497) that the market for international toll
services to business customers was no longer relevant to the Business Wholesale
Determination.
1132.
Telecom submits that there is a high degree of competition in the retail market for
international toll services to businesses. For this reason Telecom further submits that
there is no justification for unbundling the local loop network in respect of this market.
Competition assessment
History of competition
1133.
Telecom refers the Commission to the summary of the history of the international toll
services to business market, provided at paragraphs 672-677 of its Business Wholesale
Submission.
Current state of competition
1134.
Telecom refers the Commission to paragraph 1125 above, where the reasons for
competition in the national toll services to business market are summarised. For similar
reasons Telecom submits that there is effective and workable competition in the national
retail market for international toll services to business:
(a)
Telecom faces competition from a number of service providers, including
TelstraClear (see Telecom's Business Wholesale Submissions at paragraph
681);
(b)
there are low entry barriers, as evidenced by the history of entry in this market
(see the Draft Wholesale Business Determination at paragraph 364);
(c)
Telecom's market share has reduced, and is expected to continue trending
downwards over the next 3-5 years (see Telecom's Business Wholesale
Submissions at paragraph 670);
(d)
there have been significant price reductions in recent years (see Telecom's
Business Wholesale Submissions at paragraphs 671 and 678); and
(e)
Telecom and other service providers have developed numerous product and
pricing innovations (see Telecom's Business Wholesale Submissions at
paragraphs 679 - 680 and 682).
250
1135.
In the period since Telecom submitted its Business Wholesale Submissions (24 January
2003) there has been no material change in the level of competition in this market and
there is nothing to suggest this will change in the future.
The counterfactual: future state of the market without unbundling
1136.
Telecom refers the Commission to paragraph 1127 above, which refers to the
downstream competitive effects of wholesaling in tolls markets. Telecom also expects
this to occur in the international toll services to business customers.
Summary
1137.
Given the significant level of effective and workable competition in this market, there is
no justification for unbundling Telecom's local loop network in relation to this market.
251
10.10
National market for the supply of fixed to mobile services to business customers
Overview
1138.
This market relates to the provision of fixed-to-mobile call services for business
customers in New Zealand. For the reasons given in its Business Wholesale
Submissions (dated 24 January 2003 at paragraph 685 - 702), Telecom submits that
there is effective and workable competition in this market. Telecom disagrees with the
Commission's conclusion in the Business Wholesale Determination (Decision 497, at
paragraph 453) that Telecom faces limited competition in this market. In any event,
further wholesaling of services in this market, as will occur following the Commission's
decision, will only serve to increase competition in both the SME and corporate sectors
of this market. For these reasons Telecom submits that there is no justification for
unbundling the local loop network in respect of this market.
Competition assessment
History of competition
1139.
Telecom refers the Commission to the summary of the market history for business fixedto-mobile call services provided at paragraphs 692 - 694 in Telecom's Business
Wholesale Submission .
Current state of competition
1140.
Telecom faces competition in this market from the same participants in the international
and national toll markets, in addition to Vodafone which also competes in this market via
its "VCI" solution discussed below.
1141.
Telecom refers the Commission to the market share information for the SME sector of
this market provided in paragraph 689 of Telecom's Business Wholesale Submission.
As noted in that submission (paragraph 689), there is no comparable information for the
corporate sector.
1142.
Telecom refers the Commission to the price trend information provided at paragraph 690
of Telecom's Business Wholesale Submission.
Product Differentiation
1143.
Various new products have been introduced by participants (including Telecom) in this
market, including Telecom's Mobile Direct service and Vodafone's VCI (Vodafone
Corporate Interface). Telecom refers the Commission to the product differentiation
information provided at paragraphs 695 to 700 of Telecom's Business Wholesale
Submission.
The counterfactual: future state of the market without unbundling
1144.
Telecom refers the Commission to paragraph 1127 above, which refer to the
downstream competitive effects of wholesaling in tolls markets. This downstream effect
will also occur in the fixed to mobile services market.
Summary
1145.
Given the significant level of effective and workable competition in this market, there is
no justification for unbundling Telecom's local loop network in relation to this market.
252
253
10.11
National (and international) retail market for the supply of toll-free call services to
business customers
1146.
Telecom submits that there is a separate market for international toll-free services.
From a demand side perspective, national toll-free services are not substitutable for
international toll-free services. This approach is consistent with the approach taken by
the Commission in its Business Wholesale Determination when it assessed a separate
market for international toll free services and a separate market for national toll free
services (see paragraphs 396 to 425 of the Business Wholesale Determination).
1147.
Part A sets out the competition assessment for national toll-free services. Part B sets
out the competition assessment for the international retail market for international tollfree services.
Part A: National Toll Free Call Services
Overview
1148.
Telecom submits that there is effective and workable competition in the national retail
market for toll free services to businesses. This is a conclusion that the Commission
reached in Decision 497 (see paragraphs 396 to 416).
1149.
As the Commission has not requested Telecom's opinion on the national retail market
for toll free services to residential customers in its Issues Paper (paragraphs 233 to
234), Telecom has not considered this market in its response to the Issues Paper.
However, Telecom would like to point out to the Commission that TelstraClear has
withdrawn Home 0800 National and International services from its Residential
Wholesale Application (see paragraph 5.43 of TelstraClear's Residential Wholesale
Cross-Submission). This should be seen as acknowledgment by TelstraClear that
Telecom does not face limited and is not likely to face lessened competition in the
national market for toll free services to residential customers.
1150.
Accordingly, Telecom submits that an identical conclusion (as drawn by the Commission
in Decision 497 as relates to the national market for toll free services to businesses)
would also be warranted in the residential toll free markets.
1151.
Due to the Commission's decision in Decision 497 indicating that these markets are
already competitive, Telecom considers it unnecessary to provide a detailed summary of
these markets. Accordingly, Telecom submits that neither of the national markets for toll
free services to businesses or residential customers requires any form of regulation due
to existing competitiveness.
The counterfactual: future state of the market
1152.
The New Zealand market for toll free services products is largely mature following
significant investment in both product innovation and advertising/sales by service
providers over the last 5 years.
1153.
Telecom expects significant competition to continue in this market over the next 3-5
years as a result of the following:
(a)
active wholesaling by Telecom and TelstraClear providing opportunities for
expansion by existing smaller players and entry by new players; and
(b)
continued price-based competition to attract new customers and win-back
business.
254
1154.
In the 3-5 year period, Telecom expects to see the emergence of Vodafone as a serious
0800 competitor and the marketing 0800 mobile terminating numbers.
1155.
The following sets out Telecom's estimates of market shares in the next 5 years:
1156.
Telecom expects the average price per minute will continue to decline over the next 5
years as a result of:
(a)
the use of price to encourage switching;
(b)
number portability which allows competitors to offer 0800 at a significantly
reduced price resulting in increased price competition;
(c)
TelstraClear wholesaling its services, resulting in attractive deals for smaller
players;
(d)
continued innovation by smaller players on price, billing and repackaged
reporting;
(e)
TelstraClear continuing to compete on price while building further functionality;
and
(f)
increasing substitution of toll free services for other cost effective channels
such as Internet web pages.
Summary
1157.
Telecom submits that unbundling will have no positive effects on the national retail
market for toll free services. The Commission has concluded that Telecom does not
face limited, or is not likely to face lessened, competition in the retail market for national
toll free services. Accordingly, this market does not require any regulatory intervention.
Part B: International Toll Free Call Services
Overview
1158.
Telecom submits that it faces effective and workable competition in the retail market for
international toll free services to businesses. This is a conclusion that the Commission
reached in its Business Wholesale Determination (see paragraphs 396 to 416).
1159.
Telecom refers its position in paragraph 1150 above of this submission which relates
equally to the national market for international toll free services.
255
Current State of Competition
History of competition
1160.
Telecom refers the Commission to its discussion of the national retail market for
international toll free services in its Business Wholesale Determination (see paragraphs
417 to 425 of the determination).
1161.
Telecom also refers the Commission to the information provided in Telecom's Business
Wholesale Submission (see paragraphs 672 to 677).
Summary
1162.
Telecom submits that unbundling will have no benefit on the national retail market for
international toll free services. The Commission has concluded that Telecom does not
face limited, or is not likely to face lessened, competition in the retail market for
international toll free services. Accordingly, this market does not require any regulatory
intervention.
256
257
10.12
National market for the supply of 0900 services to business customers
Overview
1163.
Telecom submits that it faces effective and workable competition in the retail market for
premium rate communication services (0900 services). Telecom refers the Commission
to its discussion of premium rate services in Decision 497 (see paragraphs 455 to 465 of
Decision 497). Telecom agrees with the Commission's conclusion that Telecom does
not face limited, and is not likely to face lessened, competition in the national retail
market for premium rate communication services.
1164.
Telecom's current 0900 service operates in the national market for premium rate
communication services. Telecom's 0900 service faces significant competition in the
form of Internet and short messaging services ("SMS") (also known as "text
messaging").
1165.
Accordingly, there is strong competition between 0900, SMS and Internet services in the
premium rate services market.
Current State of Competition
History of competition
1166.
Telecom refers the Commission to its summary of the history of competition in this
market (paragraphs 780 to 784 of its Business Wholesale Submission), and to its
discussion of existing and potential future competition from SMS (see paragraphs 785 to
792 of Telecom's Business Wholesale Submissions). Over the next 3-5 years Telecom
predicts that there will be a steady decline in the use of Telecom's 0900 service with
substitution from SMS and Internet services. Competition will be focused on these two
products.
The counterfactual: future state of the market without unbundling
1167.
Telecom refers the Commission to the Commission's discussion of barriers to entry in
paragraphs 793 to 795 of Telecom's Business Wholesale Submission.
Summary
1168.
Telecom submits that unbundling would have no benefits on the retail market for
premium rate services. The Commission has concluded that Telecom does not face
limited, or is not likely to face lessened, competition in the market for toll free services.
Accordingly, this market does not require any regulatory intervention.
258
259
10.13
Retail market for the supply of data services to business customers in both
metropolitan and non-metropolitan areas (and in international markets)
Overview
1169.
There is effective and workable competition in the retail market for the supply of data
services in metropolitan areas and in international markets. While the Commission has
concluded that there is limited competition in non-metropolitan areas, wholesaling of
certain data services will now occur in this market as a result of the Commission's
conclusion.
1170.
The effects of wholesaling will be to increase competition by removing barriers to entry,
increasing the threat of new entry, and allowing competitors to meet the needs of
converged solutions. This means that wholesaling will lead to effective and workable
competition in this market. The development of broadband wireless networks will also
have a major impact in non-metropolitan areas as well as in the other markets.
Unbundling will have no impact on competition in the already highly competitive
metropolitan and international markets. It will also give no additional competitive
advantage over wholesaling in increasing competition in non-metropolitan areas. In
addition, unbundling is likely to form a deterrence to investment in other technologies.
This could halt or, at least, delay the emergence of wireless technologies in the data
markets.
Current state of competition
Metropolitan
1171.
The Commission concluded that Telecom does not face limited and is not likely to face
lessened competition in the retail market for data services in metropolitan areas. As
noted by the Commission at paragraph 548 of Decision 497, there have been numerous
and diverse entries utilising a range of technologies and entry strategies including the
use of trolley bus cables, gas ducts and wireless options.
Non-metropolitan
1172.
The Commission concluded that Telecom does face limited competition in nonmetropolitan areas as a result of its high market share and the absence of prospective
new entry. As the Commission is aware, Telecom disagrees with that conclusion (see
paragraph 555 of the Wholesale Determination, Telecom has a 2km rule rather than the
Commission's 200m rule).
However, regardless of how the present state of
competitiveness is assessed, the advent of wholesaling coupled with the emergence of
new technologies such as wireless will only increase competition.
International market
1173.
The Commission concluded that Telecom does not face limited and is not likely to face
lessened competition in the retail market for data services in the international market.
(Decision 497, paragraph 574). As a result, there is effective and workable competition
in this market.
Future state of the markets
1174.
As detailed in Telecom's Business Wholesale Submissions, prices have declined quite
markedly over the last few years, reflecting the competitive nature of the market. Prices
are expected to fall further in the future. In its Business Wholesale Submissions,
Telecom cited a number of examples where it has responded to competitive pressure
260
through pricing (ie free installation). Telecom is forecasting that this will need to
continue as the markets maintain and/or increase in competitiveness.
1175.
The need for innovation is fuelled by the high level of existing
competition in the market. However, as discussed below at paragraphs 1179 and 1180
such innovation is highly dependent on cost recovery which will be uncertain in an
unbundled environment. This can only deter innovation.
Wholesaling
1176.
Under wholesaling in the non-metropolitan areas, Telecom expects competitors to seek
to combine data services with other services (existing and wholesale) to produce
tailored solutions to customers. Telecom considers that likely entrants who may seek to
use wholesale services include telecommunications companies such as Callplus,
systems integrators such as Logical, Datacraft, Datacom, Dataplus and Computerland,
and hardware suppliers/systems integrators such as IBM and Hewlett Packard.
1177.
Broadband providers could also provide data services in these areas. Further, an
increase in wholesale network providers such as Counties Power, BCL and Rural
Networks will further stimulate competition in this market. Telecom refers to section 2.3
of this paper relating to alternative technologies for further discussion of the impact of
these technologies on the telecommunications markets.
1178.
Any significant barriers to entry on the non-metropolitan areas will be greatly reduced by
the wholesale regime. Wholesale will provide the network reach and ability to offer a
broad array of services. Unbundling will not reduce barriers any further than wholesale
has. Issues of one-bill and network reach are already eliminated with wholesale.
Customer switching barriers have been eliminated already with wholesale, number
portability and so forth.
Summary
1179.
The advent of unbundling in the data markets would not facilitate competition to any
greater degree than that already existing in the markets or that which will develop as a
result of wholesaling and the emergence of new technologies. In fact, a major risk of
unbundling would be that it stifles the development of new technologies and ultimately
negates the stated aim of increasing competition.
1180.
Unbundling via (shared or dedicated) bitstream access, if the pricing is cost based, is
likely to have a negative effect upon the developing wireless networks. This would
impose one technology solution on the market – a cheap one with a declining quality of
service. A key risk associated with unbundling is that competitors will simply combine
on one network rather than innovating and competing on the basis of their network
(United's use of fibre optic for example).
1181.
Overseas experience suggests unbundling based competition will be restricted to the
high-density areas - those areas already being serviced by two or more networks.
These are the areas where competition in the data markets is already thriving, as the
Commission found in Decision 497 (paragraph 547).
1182.
For these reasons, there is no justification for unbundling Telecom's fixed PDN in
relation to these markets.