Telecommunications Inquiry Draft Report Released

29 June 2000

Press Statement
from Hugh Fletcher, Chairman, Ministerial Inquiry into Telecommunications

Telecommunications Inquiry Draft Report Released
Questions and Answers on Draft Report
Executive Summary from Draft Report
Copy of this material as an Adobe Acrobat document (114 KB)
The Ministerial Inquiry into Telecommunications today released its draft report. The report sets out the Inquiry's preliminary views on the desirable regulatory regime for telecommunications.

The members of the Inquiry panel are Mr Hugh Fletcher (Chair), Ms Cathie Harrison and Mr Allan Asher.

The draft report says that it is critical that changes are made to the current regulatory regime if New Zealand is to move quickly to an information economy and reap the full benefits that such an economy has to offer. New Zealand must have more efficient procedures for resolving important issues in this rapidly changing industry.

The Inquiry's proposed approach, set out in the draft report, can be summarised as:

an emphasis on commercial negotiation;
a preference for industry self-regulation, focussed through the establishment of an Electronic Communications Industry Forum;
the establishment of a stand-alone regulator – the Electronic Communications Commissioner – to regulate the industry when necessary;
a list of regulated ("designated") services, which would require a provider of such a service to supply it to others at an efficient price and in a timely way. The initial list of services would be recommended by the Inquiry;
power for the Commissioner to quickly resolve any disputes over designated services;
a better-defined "Kiwi Share" service obligation, embodied in legislation, which will maintain an unlimited free local call service for voice and low-speed data calls; and
an Information Society Initiative to facilitate full participation by New Zealanders in the information economy.
Written submissions on the draft report are now invited and will be followed by an opportunity for cross-submissions, then public hearings.

The Inquiry panel said "it is important to note that the draft report is just that – a draft. The Inquiry's proposed approach should now be openly debated. To facilitate this, we have built into our process an opportunity for interested parties to comment on other submissions to add to the rigour of the debate. The Inquiry is open to making changes to its proposed approach, if persuaded by submissions and in public hearings."

The Inquiry is required to make recommendations to the Minister of Communications by the end of September, including detailed implementation requirements for any changes to the current regime. Submitters on the draft report are asked to spell out such requirements, including recommended drafting of key clauses of any legislation and regulation.

The draft report follows the Inquiry's Issues paper released in early April. Nearly all submissions suggested that changes to the existing regime were necessary. Submissions on the Issues paper have served as a key input to the draft report.

The Government wishes to ensure delivery of cost-efficient, timely and innovative telecommunications services on an ongoing, fair and equitable basis to all existing and potential users.

The Inquiry's final report is due with the Minister of Communications by 29 September.

Hugh Fletcher
Inquiry Chairman END

The Inquiry's draft report and other relevant information can be downloaded from the Inquiry's Website. Hard copies of the report are obtainable from the Inquiry office (04-460 1375). A list of questions and answers and a summary of the draft report are attached.

For further queries, contact:

John Gilbert
Inquiry Manager
PO Box 1473 Wellington

Tel: 64-4-460 1375
Fax 64-4-460 1374
Email: teleinquiry@med.govt.nz
Website: www.teleinquiry.govt.nz

Questions and Answers on Draft Report

1. Why is there a need for change from the current regulatory regime for telecommunications?
Consistent with the view of most other countries, the Inquiry considers that, for the electronic communications sector, reliance on generic competition law (the Commerce Act) and recourse to the Courts have proven inadequate to resolve disputes quickly and efficiently. This is largely because of the dynamic, fast changing nature of electronic communications markets and the strong interdependence of electronic communications networks. Changes to the regime are therefore required.

2. How could the approach favoured by the Inquiry be summarised?
An emphasis on commercial negotiation.
A preference for industry self-regulation, focussed through the establishment of an Electronic Communications Industry Forum.
The establishment of a stand-alone regulator – the Electronic Communications Commissioner – to regulate the industry when necessary.
A list of regulated ("designated") services, which would require a provider of such a service to supply it to others at an efficient price and in a timely way. The initial list of services would be recommended by the Inquiry.
Power for the Commissioner to quickly resolve any disputes over designated services.
A better-defined "Kiwi Share" service obligation, embodied in legislation, which will maintain an unlimited free local call for voice and low-speed data calls.
An Information Society Initiative to facilitate full participation by New Zealanders in the information economy.
3. What is the role of the proposed Electronic Communications Industry Forum?
The Forum would be responsible for industry self-regulation, in the form of Codes of Practice that would be binding on the industry. Codes covering "designated services" (see question 4) would need to be approved by the Commissioner to ensure they were consistent with certain criteria. The Inquiry proposes that the Forum would be funded by the industry and have compulsory membership.

4. What would be "regulated" and why?
The Inquiry proposes that specific electronic communications services ("designated services") should be subject to regulation. Designation of a service broadly means that a provider of that service is required to supply it to others at an efficient price and in a timely way. Designation of a service would result in industry self-regulation and/or specific requirements set out in regulation (e.g. mandatory obligations, pricing principles).

The term "services" generally relates to services offered by one telecommunications company to another (e.g. interconnection between networks, wholesaling of a service), although it is also possible that retail services could also be designated.

A service would only be designated if "designation criteria" were met. The primary test is that designation would be in the long-term interests of end users of electronic communications services. Designation would also need to facilitate competition, promote any-to-any connectivity of networks, and promote the efficient use of existing networks and investment in new ones. The Inquiry has developed an initial list of services that it currently proposes would be designated immediately. The Inquiry is particularly interested in submissions on this list, which is elaborated and discussed in the draft report.

5. Why is there a need for an Electronic Communications Commissioner and why not simply "beef-up" the Commerce Commission?
The role of the Electronic Communications Commissioner is significantly different from that of the Commerce Commission. The Commissioner would play a facilitative role, working closely alongside industry, and encouraging reliance on commercial negotiation and industry self-management whenever possible. This close relationship would mean that the Commissioner is well placed to quickly resolve any disputes, which is critical in this fast-moving industry.

Almost every other country has chosen to establish a stand-alone industry-specific regulator, with dedicated staff, and in-depth knowledge of the industry. The Inquiry considers this is the appropriate course of action to follow in New Zealand until such a time as telecommunications markets are fully competitive. At that time, it may become possible to rely on generic competition law.

6. What would be the costs of such a stand-alone industry-specific regulator?
For the purpose of comparison, the telecommunications group of the Australian Competition and Consumer Commission (ACCC) has 27 staff and an annual budget of about NZ$3.5 million. The cost and number of staff would likely be considerably less for the office of the Electronic Communications Commissioner given the electronic communications industry in New Zealand is considerably smaller than in Australia. Like the Australian example, the Inquiry proposes that the office of the Electronic Communications Commissioner be fully industry-funded.

7. Who would decide what should be regulated?
The Inquiry proposes that the Minister of Communications should be responsible for the designation of services to be regulated, on the recommendation of the Commissioner. In investigating whether a service should be designated, the Commissioner would be required to undertake public consultation. As noted in question 4, a service would only be designated if certain criteria were met. Any person could request that the Commissioner investigate whether a service should be designated, or removed from the designated list.

8. How would regulation work in practice?
In the event that commercial agreement over the supply of a service could not be reached, any party to the negotiation could ask the Commissioner to make a "determination". In effect, a determination would be a ruling by the Commissioner on a dispute, with the regulation of the designation service providing guidelines for such a ruling (e.g. pricing principles for supply of the service). The regulation would also help guide commercial negotiations between parties.

In the event that the parties cannot agree commercially and the Commissioner needs to be involved, the Inquiry proposes a two-stage determination process. First, an "interim determination" within 30 working days, which recognises the importance of expeditious decision-making.

Second, and only if the parties did not accept the interim determination, a "final determination", which would include public consultation so that all interested parties could make their views known. Final determinations could not be appealed, although judicial review would be available.

9. What does the Inquiry propose in respect of the Kiwi Share?
The Inquiry considers that Telecom's Kiwi Share obligations should be better defined to take account of changes to the telecommunications environment, and embodied in legislation. The existing Kiwi Share obligations would largely still apply; however, the Inquiry proposes to make it clear that the free local calling option includes low-speed data calls. Telecom would also be required to publicly release a programme each year that detailed Telecom's plans to increase the proportion of its residential customers that have reliable low-speed data access. Telecom could choose to use whichever technology it found most cost-effective to meet its Kiwi Share obligations.

10. What about high-speed Internet access?
High-speed Internet access of up to 144 kbps is likely to be available to most of the population within 1-2 years through services such as Telecom's CDMA service and Vodafone's GPRS service. These services are expected to have the same coverage as the companies' existing mobile networks. In addition, Sky has the potential to offer high-speed Internet downloads with nation-wide coverage, although spectrum constraints may limit the number of simultaneous Internet users.

In the Inquiry's view, this paints a positive picture of the availability of high-speed Internet access for New Zealanders in the near future.

11. What about broadband services?
Broadband access is likely to be widely available within 3-5 years through services such as Telecom's xDSL "Jetstream" and Telstra-Saturn's "Chello". The emergence of third-generation ("3G") cellular services will also add to broadband access over time.

In the Inquiry's view, this indicates that New Zealanders living in urban areas will have access to broadband services in the near to medium term. However, for people living in rural areas, the availability of broadband services is likely to be more problematic in the absence of specific initiatives to address this problem.

The Inquiry considers that a body should be established with industry, Government and community representation, to develop and implement initiatives designed to encourage and enable New Zealanders to fully participate in the information economy. The body should be partially funded by the industry and partially by the Government.

12. What about the 0867 issue?
The 0867 dispute over Telecom's handling of Internet traffic is now before the Courts and the Commerce Commission. A contributing factor in that dispute has been the terms of the current Telecom-Clear interconnection agreement. However, Telecom and Clear recently reached a temporary agreement on how to treat Internet traffic while the agreement is renegotiated.

In its draft report, the Inquiry makes proposals for the regulation of interconnection agreements. Further, network management issues, like 0867, could be addressed through the proposed industry forum. If the industry were not able to work through any issues, the Commissioner would have the option of designating the service.

13. Is the overall approach favoured by the Inquiry "heavy-handed" regulation?
No. The emphasis would be on commercial negotiation and, to the largest extent possible, industry self-management. Regulation would be kept to the minimum necessary, and only put in place where the case was well proven (as assessed against specific criteria) and industry self-management was not appropriate. Once in place, regulation would only apply in the event that commercial agreement between parties was not possible, or when such agreement was not in the long-term interests of end users of electronic communications services.

14. Is the approach favoured by the Inquiry friendly to business?
Yes. Electronic communications services are essential to almost every business, many of which rely on such services for communication with distant markets. E-commerce also provides an exciting opportunity for businesses of all sizes – small and large – in all parts of New Zealand. For businesses to compete and succeed globally, and to reap maximum benefit from the information economy, the Inquiry considers it critical that New Zealand has a regulatory regime that facilitates the delivery of benefits to end users – business and residential alike – in the form of improved competition, lower prices and innovation.

The focus of the Inquiry's approach is ensuring that regulation is in the best long-term interests of end users, including business. Further, regulation would only be warranted if it facilitated competition, promoted connectivity of networks and ensured the efficient use of existing networks and investment in new ones. The Inquiry also notes that TUANZ – a body representing business users of electronic communications services – proposes changes along the lines favoured by the Inquiry.

15. Is the approach favoured by the Inquiry similar to that recently published by the Electricity Inquiry?
No. There are certain features of the electronic communications sector that make it markedly different from other network industries (including electricity), which require a different approach to be taken.

A key difference is the requirement for electronic communication networks to interconnect. Put simply, every telephone user has an interest in having other people connected to the telephone network, so that he or she can communicate with them. The same cannot be said of a gas or electricity user. "Interconnection" of networks also has the potential for costly and time-consuming disputes. This is because existing operators may have an incentive to slow down entry of new competitors, or overcharge them (not so, or not to the same extent, in other network industries).

Other key differences are:

the rapid development of new technologies in electronic communications is enabling competition in access networks to emerge (not so in other network industries);
the electronic communications industry is dynamic and offers a wide array of services that rapidly change over time (not so, or not to the same extent, in other network industries); and
in electronic communications, there is generally none of the "structural separation" between retail and wholesale activities of the incumbent operator (Telecom), which is a feature of other network industries (e.g. electricity, gas).

Executive Summary from Draft Report

The draft report sets out the Inquiry’s current thinking on the approach favoured for a modified regulatory regime for telecommunications. It is intended to serve as a focus for a further round of submissions and for public hearings before the Inquiry’s final report. With the benefit of that feedback, the Inquiry’s final recommendations could vary from those set out in the draft report.

Approach to Regulation of Electronic Communications Services
New Zealand deregulated telecommunications services earlier and deregulated further than most other countries. Telecommunications services compare well to those in other countries in many respects. It is apparent, however, that a number of initiatives have been hindered by lengthy disputes and the absence of a commonly agreed set of principles governing matters such as interconnection, wholesale of telecommunications services, and allocation of telephone numbers.

Looking ahead, if New Zealand is to move swiftly to, and extract the full benefits of, an information economy, it can no longer afford inefficient procedures for resolving technical issues and settling disputes over access and other similar matters. An improved regulatory framework is needed to encourage and facilitate rapid innovation, high levels of investment and vigorous competition. The Kiwi Share obligations on Telecom also need to be better defined in line with the rapidly changing electronic communications environment.

New Zealand’s general approach of relying on general competition law and voluntary industry self-management is a desirable ideal. For telecommunications, however, this approach has not been fully effective, even when backed up by the threat of industry-specific regulation. The Inquiry accordingly favours industry self-management with a regulatory underpinning. This would be achieved through:

an Electronic Communications Industry Forum, with statutory backing and wide membership, to self-manage solutions to common industry problems; and
an Electronic Communications Commissioner, with clearly defined responsibilities and powers, to regulate designated electronic communications services where general competition law and industry self-regulation are ineffective.
Electronic Communications Industry Forum
A Forum should be established to self-manage a wide range of industry issues, including the development of standards and Codes of Practice. Membership would be compulsory for registered telecommunications and broadcasting networks operators. The Forum’s working parties on specific issues would be open to other interested organisations. The Forum would operate under general guidelines that encourage competition and entry into the industry and have regard to the long-term interests of end users of electronic communications services.

The Forum would be funded by the industry. In the case of designated services, the Commissioner would have the power to direct the Forum to develop standards and Codes of Practice and, where appropriate, to resolve disagreements concerning them.

Electronic Communications Commissioner
The Commissioner would:

make recommendations to the Minister of Communications that specific electronic communications services ("designated services") become subject to regulation, and recommend the pricing principles to apply to them;
encourage industry participants to negotiate their own commercial arrangements in respect of designated services, and only intervene at the request of a party to such negotiations or where any agreement is not consistent with the designation criteria;
in such circumstances, deliver an interim determination and pursue a public consultation process before issuing a final determination (if necessary); and
be responsible for developing, together with the Forum, information requirements, standards and Codes of Practice that would apply to designated services.
The Commissioner would also be an Associate Commissioner of the Commerce Commission and would participate in Commerce Commission hearings on electronic communications issues.

Designation of Electronic Communications Services
Electronic communications services would be designated, or removed from the list of designated services, through a public consultation process managed by the Commissioner. The final decision would be taken by the Minister of Communications, based on recommendations from the Commissioner.

For a service to be designated, it must meet the designation criteria set out below.

The objective of designation is to promote the long-term interests of end users of electronic communication services. In determining whether any designation will promote this objective, regard must be had to the extent to which designation:

facilitates competition in markets for services; and/or
promotes efficient any-to-any connectivity; and/or
encourages economically efficient use of, and economically efficient investment in, the infrastructure by which services are supplied.
Designation of a service would not preclude parties from reaching their own commercial arrangements. It would, however, ensure a backstop procedure was in place for resolving any disputes expeditiously. It would also enable the Commissioner to intervene if any agreement was not consistent with the designation criteria.

Initial List of Designated Services
The regime would begin with immediate designation of certain electronic communications services recommended by the Inquiry. In formulating its preliminary recommendations for the initial list, the Inquiry has grouped them into three categories set out below.

A. Likely recommendation for immediate designation unless persuaded to the contrary
carrier-to-carrier call origination and termination on fixed networks (interconnection);
wholesaling of Telecom’s local loop;
wholesaling of mobile services to qualifying entrants prior to network build out;
mandatory roaming between compatible mobile networks (temporary and conditional on network build-out);
carrier pre-selection from fixed to mobile networks (and possibly mobile to international);
carrier-to-carrier call origination and termination between mobile networks (interconnection);
co-location at mobile cell sites;
B. Unlikely to recommend for immediate designation unless persuaded to the contrary
local loop unbundling;
C. Do not intend to recommend for immediate designation but should be monitored by the Commissioner
conditional access systems, such as the ‘set-top box’ for cable and broadcast systems;
number administration and portability;
carrier-to-carrier call termination from fixed to mobile networks;
retail mobile network services; and
directories.
The Kiwi Share
The Inquiry considers that Telecom’s existing "Kiwi Share" obligations should be better defined to take account of changes to the telecommunications environment, and embodied in legislation. The Kiwi Share should also be subject to regular review.

Telecom should be required to:

continue to make ordinary residential telephone services available to the extent applying today;
maintain a local unlimited free-calling option for residential customers for both voice and low-speed data calls;
not increase in real terms its GST-exclusive monthly rental for ordinary residential telephone services; and
continue to increase the proportion of its residential customers that have reliable low-speed data access, in accordance with a programme that is publicly released annually.
In meeting the Kiwi Share requirements, Telecom could choose to use whichever technology it found most cost-effective.

The Inquiry proposes the removal of the existing Kiwi Share requirement for geographic averaging. The price cap referred to above would still apply in all areas.

Information Society Initiative
The Inquiry considers that a body should be established, with industry, Government and community representation, to develop and implement initiatives designed to encourage and enable New Zealanders to fully participate in the information economy. The body would be partially funded by industry.

ENDS

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