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TELECOMMUNICATIONS: QUESTIONS AND ANSWERS

TELECOMMUNICATIONS: QUESTIONS AND ANSWERS
GOVERNMENT OBJECTIVE
What is the Government’s objective for telecommunications?
The Government’s objective is to ensure delivery of cost-efficient, timely and innovative telecommunications services on an ongoing, fair and equitable basis to all existing and potential users.

To meet this objective the Government has:

 established a regulatory framework that will maximise the contribution of the sector to economic growth, including by maintaining incentives for investment and innovation; and
 taken steps to support its broader policy objectives, in particular to ensure affordable access to telecommunications services and participation in the information society.
PROBLEMS WITH CURRENT REGIME
Why does the current regime not deliver on the Government’s objective?
There have been major problems with the length, cost and clarity of dispute resolution through the court process. This has impeded competition and resulted in higher prices than could otherwise have been achieved. Other countries do not rely on the courts to resolve these issues – they have specialist agencies (inside or outside general competition authorities) to resolve disputes.

There is also uncertainty surrounding several aspects of the Kiwi Share obligations, such as whether it applies to Internet calls. It is appropriate to clarify these issues and update the Kiwi Share since it is ten years since these obligations were established.

How does the new regime address these problems?
A Telecommunications Commissioner will be established in the Commerce Commission with the power to resolve disputes between industry players over regulated services. The Telecommunications Commissioner will be able to make recommendations to the Minister for regulation of other services in the future to ensure any emerging problems can be dealt with.

A revamped Kiwi Share will be established to:

 clarify that Internet calls are covered under the Kiwi Share; and
 upgrade the rural network to provide data service capability of 9.6 kilobits per second to 99 percent of lines.
REGULATORY INSTITUTIONS
Why has the Government decided not to create a separate agency for the Commissioner?
There are greater benefits to be gained from locating the new Commissioner within the Commerce Commission, including:

 peer review that would not be otherwise possible;
 the greater efficiencies possible through increasing the capacity of an existing body rather than creating a new one.
How does the role of the Telecommunications Commissioner compare to the role envisaged by the Inquiry?
The proposed role is very similar, although it is likely that the Commissioner will not be able to undertake a facilitative role to the extent envisaged by the Inquiry. This would have been the case whether inside or outside the Commission, as fair and impartial dispute resolution may be compromised by mixing the dispute resolution function with powers to facilitate commercial negotiation.

Why is the Commissioner called the Telecommunications Commissioner?

The Inquiry envisaged regulation of a broad range of services. While the possibility exists in the regime to regulate a broader range of services than is initially proposed, only telecommunications services specifically will be able to be regulated, so the term ‘Telecommunications Commissioner’ is appropriate.

The term ‘Electronic Communications Commissioner’ is more appropriate in overseas regimes where there is a history of sector specific regulation of telecommunications and broadcasting. Some of these countries are seeking to restructure their regimes to achieve coherent regulation across differently regulated sectors in the face of convergence.

Why is there no full right of appeal from a determination of the Commissioner?

The limited right of appeal proposed is consistent with decisions made in relation to general price control determinations and electricity pricing decisions of the Commerce Commission. It is desirable that the substance of the Commissioner’s determinations on extremely complex issues not be re-litigated in the courts, which has the potential to create further delays and costs. The involvement of two other Commissioners in final pricing review provides sufficient peer review for matters of substance.

Rights of appeal on points of law and judicial review remain available.

Why has the Government decided not to mandate an industry forum?
An industry forum would play a useful role in achieving the objectives of industry self-regulation. However, the Government does not consider it necessary to mandate a forum in legislation. The industry has indicated they want to establish a forum, and there are ample incentives for industry to work together to create codes. If they do not, the Commissioner can impose binding terms and conditions on technical issues during dispute resolution in any event.

Why is the Government not establishing a telecommunications ombudsman?

The Inquiry recommended against establishing an ombudsman on the basis that the industry would establish one if it so desired. While vigorous retail competition is relatively new in the electricity market, competition is already well-established in the telecommunications industry and problems are much less likely to arise.

FORM OF REGULATION
Why do we need three different categories of regulation?
The Government recognises the potential adverse impact of regulation on incentives to invest and innovate.

The three categories of regulation proposed will give the Government sufficient flexibility to introduce only as much regulation as it considers necessary to ensure that the long term interests of end users are promoted.
What is the precise difference between designation, deferred designation and specification?
The distinguishing feature of designation is that pricing principles will be prescribed for access to the service, allowing the Telecommunications Commissioner to set a price for access to the designated service in the event of a dispute.

Deferred designation is a ‘threat’ of designation that enables designation to be triggered immediately by the Minister of Communications if the industry does not resolve disputes within a prescribed deadline.

Specification is a lower tier of regulation that requires the service to be provided on request but does not allow the Commissioner to set a price if there is a dispute. It effectively sends a signal to industry that the service is being monitored and that a designation process could be initiated if disputes are not resolved.

Is designation of a service the same as price control?
No. A regulated price will only be set if there is a dispute over the price that the parties cannot resolve themselves. The Commissioner does not have the power to overturn commercially negotiated agreements.

Clarification of pricing principles will provide greater certainty for telecommunications firms when they negotiate over access to designated services, thereby solving one of the key problems with the current regime. The Government would prefer firms to reach their own agreements on a commercial basis.

REGULATED SERVICES
Scope of services

Why are the initial designations limited to certain Telecom services?
The Government considers that existing problems in the telecommunications sector derive from the essential facility nature of Telecom’s fixed telephone network. Because Telecom’s competitors need access to Telecom’s services to compete effectively, Telecom may be able to charge higher than efficient prices for access, or unduly delay the provision of access.

The Government considers that at this point there is no evidence of similar problems in relation to a wider range of services. However, other services could be brought under regulation in the future if the need arises.

Interconnection
Why are pricing principles for interconnection with Telecom’s fixed telephone network reciprocal (excluding cellular networks) in the event of a dispute?
If pricing principles were not reciprocal for other fixed networks, then the party interconnecting with Telecom would have the ability to set higher than cost interconnection prices for Telecom on its own network. This may provide an incentive to artificially stimulate Internet traffic to gain more termination revenue – one of the factors that may have given rise to the 0867 problem. The reciprocal mechanism removes these perverse incentives by requiring interconnection with the non-Telecom network to also be cost-based or on a bill and keep basis.

However, the Commissioner will only have the ability to examine the non-Telecom network’s interconnection prices if that network brings a dispute about interconnection before the Commissioner.

Wholesaling
Why does the wholesaling designation only apply to non-price capped services?
A price capped service (e.g. residential line rental) may be a loss making activity for Telecom in some areas where the costs of provision are high. Requiring Telecom to offer such a service to a competitor at a discount would effectively require Telecom to make further losses on that service.

Why is Telecom not being required to wholesale unbundled elements of a retail service offering where the unbundled elements are not offered as a retail product?

This would essentially be a form of local loop unbundling and would involve complex calculations requiring Telecom and the Commissioner to impute a retail price for a service that is not retailed, as the basis for determining the wholesale price.

Number portability
Why has the Government recommended designation of number portability as opposed to deferred designation (as recommended by the Inquiry)?
The Inquiry recommended a deadline of 31 July 2001 for the industry to resolve outstanding issues relating to number portability. Because of the likelihood that legislation will not commence until around the deadline recommended by the Inquiry, and the delays and disputes arising out of the industry process, the Government has decided to designate number portability from the commencement of the legislation.

Industry will still be required to determine the best number portability system and how this is paid for. However, if there is a dispute over the provision of the service, then the Commissioner will determine which is the best system and how it should be paid for.

What will happen to number administration?

Number administration has been functioning well under the existing Number Administration Deed. The Deed will need to be amended to retain the processes in respect of number administration and reflect the designation of number portability. Number administration could be designated in the future if problems arose.

Carrier pre-selection
Why has the Government recommended deferred designation of fixed to mobile carrier preselection on the Telecom network (as opposed to specification as recommended by the Inquiry)?
Any disputes over pre-selection are likely to concern the price of the service, rather than whether it is provided at all. The Government therefore considers that specification (which does not include pricing principles) would not address the potential problem.

Mobile services
The Inquiry recommended specification of a number of mobile services. Why has the Government chosen not to regulate these services?
The Government considers that there have not been proven problems with access to these services to date. The Government is concerned that regulating mobile services in these circumstances, particularly when the market for mobile services is growing rapidly, may dampen investment and innovation in these services. However, a watching brief over these services will be maintained.

Sky’s conditional access system

The Inquiry recommended limited specification of Sky’s conditional access system – why has the Government decided not to specify this service?
The Inquiry considered that the only form of regulation appropriate for this service was the development of an access code. The Government considers that as there are likely to be a number of competing set top boxes there is no purpose at this point to regulating access to Sky’s system.

Data tails
Why has the Government chosen not to designate data tails as recommended by the Inquiry?
Unlike the telephone service, it is not clear that designation of data services is justified at this point.

Wholesale provision of Telecom’s data services will be available in areas where Telecom is the sole provider. This ensures access by other data service suppliers to resources they require to complete point-to-point data connections, enabling them to make a full service offering and compete more effectively with Telecom.

Data network interconnection is being commercially negotiated currently and has the potential to provide much of the ‘data tail’ functionality sought by entrants. In the event that ‘data tail’ access issues prove to be a competition problem, the designation process is available as a backstop.

Local loop unbundling
Why is the Government not mandating local loop unbundling (LLU)?
The Government agrees with the Inquiry’s conclusions that:

 LLU does not seem to offer significant benefits to end users over and above those that could be achieved by requiring Telecom to wholesale its fixed network services;
 the objective of LLU – competitive delivery of fixed network and high speed data services – is likely to be achieved in many areas and through a variety of technologies without regulatory intervention;
 full LLU may not be exploited in areas where local loop competition is not likely given that such investment may be unprofitable; and
 full LLU is technically complex, and involves very complex pricing issues.
The Government has decided not to designate local loop unbundling at present for these reasons, taking into account:

 the risk that such a requirement could significantly reduce entrants’ incentives to invest in alternative infrastructure at a time when a number of new technologies are becoming available;
 the difficulty of setting accurate prices for unbundled local loop elements; and
 that cost-benefit studies do not conclusively support LLU; and
 it is possible to designate local loop unbundling in the future. This will be a key issue for the Telecommunications Commissioner to monitor.
Competition law
Will the Commerce Act still apply to telecommunications?
Yes. The Commerce Act will continue to apply to telecommunications services in the same way as before. The new regime will simply add a layer of necessary industry-specific regulation to complement the generic competition regime under the Commerce Act.

Spectrum management
Do the Government’s decisions affect the current spectrum management regime?
No. The Government considers that a robust process for spectrum allocation and management is best provided for through the strengthening of section 47 of the Commerce Act and by Government policy decisions on a case-by-case basis (as was the case with the decision to impose a competition rule for acquisition of 3G spectrum).

The Government considers that the introduction of ‘use or sell’ requirements for spectrum is unnecessary at this time, provided there is robust competition law.

HOW IS THE GOVERNMENT PROMOTING ITS SOCIAL OBJECTIVES?
Why is it necessary to revamp the Kiwi Share?
These measures are seen by the Government as necessary to address existing weaknesses with the Kiwi Share in terms of the Government’s social objective in telecommunications. As part of an upgraded Kiwi Share:

 Telecom will upgrade its data service capability to 9.6 kilobits per second for 99 percent of residential lines and 14.4 kbps for 95 percent;
 the obligations will be clarified to include Internet calls within the free local calling option;
 an improved monitoring and enforcement regime will be implemented; and
 an improved funding mechanism will be adopted.
How many people will benefit and how much will it cost?

The upgrade will enable basic Internet access for 22,000 of the 35,000 lines that currently are not able to obtain this access (leaving only 13,500 lines that do not currently have access, out of the total of 1,350,000 residential lines).

The capital cost of upgrading the network to the required standard will be about $100 million. This capital cost will be met by Telecom, with industry contributing to its share of any ongoing net operating costs under the funding arrangements for the Kiwi Share.

Why has the new Kiwi Share data standard been set at 9.6 kilobits per second?
9.6 kbps is the current level of capability required for use of satellite-based Internet download services, which provide a much better Internet access solution in outlying rural areas than reliance on copper wires, and which will be available over the whole of New Zealand.

While it would be possible to mandate a higher level of data capability, the Government has taken its decision having regard to the effect on investment and the cost of mandating a higher level.

Why has the upgrade not been provided for 100% of lines?
The cost of upgrading the additional one percent of residential lines is considerable compared to the costs of upgrading to 99 percent. Internet access in the most remote rural areas may well be provided more efficiently through other technologies and other initiatives. The Information Society Initiative will be considering such issues.
Why has the Government decided not to introduce a universal service obligation higher than the upgraded Kiwi Share requirements at this point?
There are key trade-offs involved in requiring higher data capability on existing copper networks:

 if higher levels of data capability on the existing network is mandated, incentives to invest in alternative technology are likely to decrease. There are a number of exciting new technologies coming available and the Government does not want to lock New Zealand into a copper wire future if that is not the best way forward;
 as a higher level of geographic coverage for data capability is required, for a higher percentage of lines, the costs of upgrading the existing network escalate dramatically.
The approach decided on by the Government is world-leading in terms of mandating a basic data requirement as part of a universal service obligation. The introduction of higher speed data services will be monitored and reconsidered in eighteen months’ time, including uptake in comparison with other countries, the desirability of a higher level of data capability, and the desirability of a competitive tendering mechanism.

Why should industry contribute to the Kiwi Share costs?

Industry will only be contributing to net Kiwi Share costs if it is established that there are any costs (using a robust costing process). Industry currently contribute to the costs through a premium on interconnection. The proposed mechanism will replace this. It will be more transparent and competitively neutral, and will give the Telecommunications Commissioner the final decision over the calculation of costs and cost contributions. It is also linked to the enforcement mechanism, as the Commissioner will be able to withhold the industry contribution if Telecom fails to meet its Kiwi Share obligations.

Why is the Government not putting the Kiwi Share upgrade out to competitive tender?

The Government has not ruled out this option for the future and will be referring to this possibility in legislation. Tendering out universal service obligations is a highly complex matter and is only just being considered in some countries. Australia, for example, has recently implemented a three year pilot study to determine whether the proposal has merit.

The Government will reconsider whether to introduce competitive tendering in eighteen months. At present, the Government considers that the complexities and costs involved in competitive tendering (including tender design, property rights issues, transitional issues) do not justify any change now.

How do the Government’s decisions on the Kiwi Share compare to the Inquiry’s recommendations?

The updated Kiwi Share obligations are consistent with the Inquiry’s view of what is required under the current Kiwi Share (i.e that the Kiwi Share currently includes low speed data capability). It is not envisaged that legislation will be necessary to implement the updated obligations since Telecom has indicated its willingness to upgrade the Kiwi Share through a revised Kiwi Share arrangement.

What will the Information Society Initiative do?
The details of this Initiative will be decided early next year, but the Government intends that the initiative will facilitate a partnership between government, industry and local communities in relation to measures that will promote the information economy in New Zealand.

The functions of the Initiative will include considering issues relating to access to bandwidth in New Zealand, and promoting such access where possible.

BENEFITS OF THE OVERALL PACKAGE
How will the new regime benefit residential and business consumers?
An effective dispute resolution mechanism and the ability to set a regulated price in the event of a dispute will result in more efficient introduction and pricing of telecommunications services. This will lead to more efficient competition, which will benefit all telecommunications users in New Zealand through lower prices and a more diverse range of services.

The upgraded Kiwi Share is designed to provide a solid platform for participation in the information society, with the aim of ensuring affordable Internet access for virtually all New Zealanders.

The regime will be good for those in the telecommunications industry as it will stimulate competition and provide regulatory certainty to ensure the focus is on achieving commercial outcomes rather than fighting disputes.

How does this package address the ‘digital divide’?
The Government considers that Internet access will be critical to effective participation in the information society. This package increases the level of data service capability to users, providing a solid platform for New Zealanders to take part in the information society.

The Information Society Initiative will be involved in ongoing work designed to encourage the development of the information society.

How does it address rural issues?
Reliable Internet access is an issue of particular concern to the rural sector in New Zealand. The upgraded Kiwi Share requires Telecom to provide reliable data service capability of 9.6 kilobits per second to 99 percent of residential lines and 14.4 kbps to 95 percent of lines over two years from the passage of legislation.

Improving the level of data service capability to 9.6 kbps, particularly in rural areas, will enable New Zealanders living in such areas to utilise satellite-based Internet download services.

A number of rural Internet users have problems with interference from electric fences. The Government will also be looking into the question of electric fence interference, in conjunction with key stakeholders, to identify possible solutions to this problem.

In addition, improved monitoring and enforcement of the Kiwi Share obligations will ensure that there is more accountability in relation to service standards.

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