Telecom separation now a fact
Hon David Cunliffe
Minister for Communications and
Information Technology
31 March 2008 Media Statement
Telecom separation now a fact
A robust plan for the operational separation of Telecom NZ has been approved by Communications and Information Technology Minister David Cunliffe.
“Telecom resubmitted its Amended Separation Plan. In accordance with the Telecommunications Act 2001, I have decided to approve the plan which is legally enforcable,” said Mr Cunliffe.
“This is a highly significant step for the telecommunications market, and I’m pleased to announce the successful implementation of the operational separation today – 31 March 2008 or “Separation Day.”
“The robust operational separation of Telecom has been a priority for this government. It is one of a number of measures in the government’s strategy to deliver a more effective telecommunications sector for the long-term benefit of all New Zealanders.
Efforts to ensure that the
undertakings are implemented will be ongoing. The Commerce
Commission is responsible for ensuring full, timely and
effective implementation of the approved undertakings and
this process will be rigorous.
“Our strategy is to improve market conditions to increase competition, innovation and investment to support New Zealand’s transformation to a stronger, more productive knowledge-based economy and society.
“Within one year we have seen this complicated and important process reach a successful conclusion. I am pleased that the undertakings can now be fully implemented as of our target separation day of 31 March.
This government has had a strong mandate for the three-way operational separation of Telecom and we have consulted widely with the industry, other stakeholders and Telecom to arrive at an effective and robust set of obligations to deliver on this.”
“While today is a significant step forward for the telecommunications sector it is not the end of the road for enhanced market competition. Work will be ongoing in the Telecommunications Service Obligations, the broadband pathway, the Digital Strategy refresh and several other regulatory matters.
“My thanks go to all those who have actively engaged in this process: in particular, Telecom CEO Dr Paul Reynolds and his team; officials and independent experts who have assisted the Crown.
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Backgrounder on Operational Separation
The Telecommunications Act 2001
sets out the main requirements for Telecom's operational
separation:
- the establishment of at least three
separate business units – a stand-alone, arms-length fixed
network business network (referred to as the Access Network
Services (ANS) unit in the Minister’s Determination), one
or more arms-length wholesale units, and one or more
arms-length business units that provide one or more other
functions (for example, retail services);
- the
establishment of an independent oversight group; and
-
transparency and equivalence of supply of relevant services
and access to Telecom’s network.
In addition to the
requirements of the Act, the Minister's Determination, as
amended in December 2007, comprises the following
requirements for Telecom:
- A requirement to establish a
separately branded, stand-alone ANS unit that will control
all present and future access network assets, including
fibre and wireless access assets. This will ensure broad
and comprehensive service coverage, and ensure the unit is
forward-looking and future-proofed.
- Generally speaking
no Telecom employees are allowed access to ANS unit
commercial or customer confidential information unless the
service provider that provided that information
consents.
- A requirement that any future commercial
fibre-to-the-premises and access to the NGN core be provided
on a non-discriminatory basis.
- A requirement for an
arms-length wholesale division that will provide access to
key fixed network regulated services, including advanced
bitstream services to all service providers (including
Telecom).
- A requirement that the definition of
relevant wholesale services include IP interconnection, and
Telecom to provide details of its future consultation
programme with service providers regarding IP
interconnection.
- A requirement that the key regulated
services be supplied to an “Equivalence of Inputs” (EOI)
standard, and that ANS services (including fibre and access
to the NGN core) be developed to be "EOI ready" to underpin
future non discriminatory access.
- A requirement for
Telecom to develop all necessary EOI infrastructure and
transition all its services to that infrastructure within a
four-year window. Telecom may (and has) propose migration
plans for its legacy services to EOI compliant networks
within four years as an alternative.
- Strict governance
and arms-length rules that enable the Telecom group to be
managed consistently with a robust operational separation,
including the ability for the Telecom CEO to direct units
subject to transparency requirements.
- Formal oversight
of Telecom's implementation and internal compliance by an
Independent Oversight Group (IOG) backed up by Commerce
Commission enforcement.
- A requirement for Telecom to
meet key organisational change requirements by "separation
day", which must be no later than 31 March 2008.
Questions and Answers
1. Is Telecom’s separation plan robust?
Yes, Telecom’s Separation Plan is compliant with the requirements set out in the Determination, as amended in December 2007, and it is considered more robust than the BT Separation Plan.
2. What difference does
this make for New Zealand families?
As a result of the operational separation of Telecom and other regulatory measures currently underway, it is expected that competition will increase and telecommunications users throughout New Zealand will be able to access a wider range of new and improved broadband-based services.
Improved broadband will offer kiwi families new ways of connecting with people, the ability to strengthen communities, enhanced participation in the democratic process, and new opportunities by breaking down the barrier of distance.
3. What are the pluses for the economy?
The operational separation of Telecom is one of many regulatory measures introduced by the Telecommunications Amendment Act No 2 in December 2006, which will increase competition and encourage investment in New Zealand’s telecommunications sector, resulting in greater availability of broadband services.
Broadband is seen as a key driver of productivity and innovation in knowledge based economies. A number of studies have been undertaken, most recently by the New Zealand Institute quantifying the potential benefits to the economy in billions of dollars.
4. Why is the
government imposing operational separation on Telecom?
Operational separation has been required by Parliament
via the amendment to the Telecommunications Act 2001, which
sets out the purposes of operational separation:
* To
promote competition in telecommunications markets for the
long-term benefits of end-users of telecommunication
services in New Zealand; and
* To require transparency,
non-discrimination, and equivalence of supply in relation to
certain telecommunications services; and
* To facilitate
efficient investment in telecommunications infrastructure
and services.
Separation will increase the transparency of Telecom's business operations, and remove or limit the incentives and ability of Telecom to engage in discriminatory behaviours that lessen, damage or exclude competition in downstream markets.
5. What is the timetable for implementation of Telecom's Separation Plan?
* 31 March 2008 – “Separation Day”, at which point
Telecom’s Separation Plan becomes legally enforceable and
the ANS unit (‘Chorus’) established and wholesale
services realigned.
* 1 July 2008 – remaining
organisational implementation requirements completed by
Telecom and Independent Oversight Group (IOG) appointed.
* As soon as possible – Telecom migrates to
self-consumption of LLU and UBA products and prices.
* 1
January 2009 – undertakings for IP Interconnection
finalised.
* December 2009 – business-to-business
gateways supporting equivalent business transactions to be
completed by Telecom. All re-sale services meeting re-sale
equivalence standard.
* By 2011 – all LLU and UBA
services fully EOI compliant.
6. What is the rollout plan for broadband?
Telecom has committed to the accelerated rollout of fast broadband that will deliver advanced broadband services to all cities and towns with more than 500 lines by 2012. Telecom announced the details of its cabinetisation plans and investment of $1.4 billion late last year. These plans have been built into the Separation Plan and in some circumstances extended. See question below for detailed list of milestone objectives.
7. What penalties will be imposed on Telecom for failure to comply with the finalised undertakings?
The Commerce Commission is able to take enforcement action in the High Court for each breach of the final separation undertakings by Telecom which could result in a pecuniary penalty of up to $10 million for each breach, plus $0.5 million per day for continuing breaches.
8. Will this be completed by 2012?
Yes. If Telecom does not meet the deadline, it will be subject to the penalties set out in the Telecommunications Act 2001 for failing to comply with the Separation Plan – up to $10 million plus $500,000 for each day the breach continues.
9. What is the difference
between the BT Separation Plan and Telecom’s Separation
Plan?
The Minister’s Determination was based closely on the Ofcom/BT requirements and undertakings. Any variations from the BT undertakings in Telecom’s Separation Plan have been necessary because of the vast difference in scale between Telecom NZ and BT and the different network environments.
10. How independent is Chorus?
Chorus is bound by the Separation Plan to operate on a stand-alone basis and at arm’s-length from all other Telecom business units. This will be closely monitored by the IOG and the Commerce Commission.
11. What will the levels of delegation be?
* ANS (Chorus): Manager (Mark Ratcliffe)
reports direct to Dr Paul Reynolds, CEO Telecom New
Zealand
Wholesale: Manager (Matt Crockett) reports
direct to Dr Paul Reynolds.
Retail: not yet announced.
* Telecom Board: The Separation Plan does not limit the Board's power to act in the best interest of Telecom. However, if the Board wants a business unit to act in a way that is not in accordance with the undertakings, the Board must make the request in writing, give a copy to the IOG and the Commerce Commission, certifying that the direction is consistent with the robust operation of Telecom, and report to the Commerce Commission and the IOG on whether the direction undermines the Act.
* Independent Oversight Group (IOG): Telecom will establish an IOG consisting of five members. The Telecom Board will appoint the members of the IOG, with the majority of members being independent of Telecom. The Board will appoint one of the independent members of the IOG to be the Chairperson. The Board must adhere to strict guidelines when appointing the IOG, and must consult with the Commerce Commission on the appropriate skills mix for the IOG before appointing the chairperson and other independent members. Telecom will establish terms of reference for the IOG that provide for the monitoring and oversight functions outlined in the Separation Plan.
* Commerce Commission: in accordance with the Telecommunications Act, the Commerce Commission will monitor and enforce the Separation Plan. The Commission will also have the ability to be involved in Telecom's IP Interconnection consultation programme, in whatever role it chooses.
* The Minister for Communications and Information Technology: is able to change his Determination at any time. This would require Telecom to provide a new Separation Plan.
12. Apart from separation, what else is being achieved in the telecommunications regulatory area?
The government is committed to creating the conditions for competitive broadband and communications services (including mobile) for all New Zealanders, including those who live in rural and remote areas.
In 2006, the government announced a comprehensive telecommunications package. Implementation of this package is now well underway, and the government and telecommunications industry are working hard to implement these changes.
To date:
* A review is underway of
Telecom’s Kiwi Share obligations, including the updating
of requirements to ensure the quality of all local service
available is at least of a minimum grade.
* Options to
encourage investment in broadband infrastructure, in both
rural and urban areas, are being developed. At last
year’s Digital Future Summit, the Minister announced
several policies that the government is considering to
promote investment.
* Planned regulation of access
services requiring the unbundling of the local loop and
sub-loop copper-wire lines between telephone exchanges and
homes and businesses, so alternative Internet Service
Providers can compete fully with Telecom to provider faster,
cheaper broadband. The Commerce Commission has issued its
final determination on the standard terms and conditions for
access to the unbundled local loop.
* Removing
constraints on the existing regulated Unbundled Bitstream
Service to enable alternative ISPs to offer broadband at
upload speeds faster than 128kbps.
* Encouraging
investment in alternative infrastructure such as fibre,
wireless and satellite networks by measures including a
review of public sector investment in telecommunications
infrastructure to encourage a whole-of-government
response.
13. What more is happening to improve telecommunications in New Zealand?
The government recognises the value that broadband brings to all New Zealanders. It is clear that there has been a history of under-investment both in rural telecommunications and in urban “black spots”, and the government is very concerned about the resulting lack of broadband capability in these areas.
The government is currently looking at
ways of addressing these issues, with a focus on:
* urban
fibre networks
* rural broadband
* international
connection; and
* demand aggregation
* operational
separation.
14. What changes have been made since the Minister declined to approve Telecom’s amended separation plan on 24 December 2007?
A significant number of
drafting amendments have been made covering a wide range of
issues, including:
* Reducing the level of group based
incentives for Wholesale Division Managers to no more than
30 per cent of their total income
* Enhancing the
milestones for NGN rollout to clarify expectations that
fixed voice customer lines operation will reach the target
of 84 per cent by the end of 2012. We will have achieved 10
Megabit per second and 89 per cent of lines will have
achieved 5 Megabit per second.
* Strengthening
provisions around IP interconnection to provide the
strongest possible assurances of non-discrimination given
the current level of technology uncertainty, and providing
for a robust and transparent process for resolving any
future definitional or access issues.
* Further
protection of confidentiality for customer and commercial
information, given the need to build additional safeguards
into Telecom’s internal information systems and providing
a role for the Commerce Commission in overseeing this
process
* The number of other drafting and definitional
changes to better give effect to the separation plan.
15. What other assurances have been received from Telecom in respect of separation related issues?
I have also received
several important letters from the Chief Executive of
Telecom NZ further underlining Telecom’s commitment
to:
* Maintaining the integrity and confidentiality of
commercial information and customer confidential
information, including by providing for the Commerce
Commission to proactively monitor and report information
during that transition period
* Providing further
commitments in respect of their telecommunications coverage
to underline the expectation that no less than 84 per cent
of lines will receive at least 10 megabit per second by 2012
and committing in principle to ensuring that Telecom’s
level of investment in Zone 4 rural lines “will not be
less than (but may be greater than) the gross contributions
that Telecom receives through the Telecommunications Service
Obligations subsidy
* Openly and transparently accounting
and expending future TSO compensation payments received by
Telecom under the local service TSO agreement in zone 4
rural areas. Telecom’s now committed to spending all TSO
contributions from other companies on Capex in Zone 4 rural
areas. Telecom has committed to use its best endeavours to
do this by 30 June 2008 noting the crown’s position that
all TSO contributions be spent in these rural areas.
Telecom understands it is the Crown’s position that
expenditure calculated for the purpose of the local service
TSO should be spent in the relevant are. Telecom will use
best endeavours to reach agreement with the Minister on the
new TSO by 30 June 2008.
* Clarifying the relationship
between Fixed Wireless Access, Mobile and Future Dual Use
Technologies.
* A letter confirming T’s commit to
maintaining the integrity and confidentiality of customer
information and commercial information during the transition
period to the fully separated new systems required in the
undertaking
* Telecom agreed to invite the Commerce
Commission to carefully monitor information security during
this transition period.
16. What are the requirements for operational separation based on?
The Determination, as
amended in December 2007, is based on the Telecommunications
Act's requirements and informed by:
* The model adopted
in the United Kingdom for British Telecom (BT), which was
identified by Cabinet as a useful basis for a robust
operational separation. Subsequently there was extensive
consultation with BT, OfCom, UK DTI and the EU Commission as
well as broader international benchmarking.
* The
government's consultation with the industry, other
stakeholders and Telecom itself, particularly on the draft
operational separation model in April 2007. The
government's model was well-received by industry and other
stakeholders.
* Engagement with Telecom on the
development of a robust and workable operational separation
model.
17. What is meant by equivalence of inputs (EOI)?
EOI is one of the cornerstones of operational separation as it removes the ability of Telecom to discriminate in favour of itself. It means that Telecom has to provide relevant regulated services at the same price, on the same technical and commercial terms, using the same operational support systems and process, to all market participants including itself. Telecom does not have to provide relevant non-regulated services to other providers other than on a voluntary basis, but if it chooses to do so it must be on a non-discriminatory basis.
18. What is being delivered in terms of Public Switched Telephone Network (PSTN) migration?
* By 30 June 2010 – more than 1,500
distribution cabinets installed or equipped with ADSL2+ or
equivalent DSL capability (e.g. VDSL capability) in
Telecom’s Zones 1,2 and 3 with DSLAMs installed and
operational.
* By 31 December 2010 – more than 2,200
distribution cabinets installed or equipped with ADSL2+ or
equivalent DSL capability (e.g. VDSL capability) in
Telecom’s Zones 1,2, and 3 with DSLAMs installed and
operational.
* By 31 December 2011 – 99% of lines in
Telecom’s Zones 1, 2 & 3 (which equates to 80% of existing
PSTN lines) engineered to have a maximum line loss of 60db
measured at 1024kbps at the external termination point.
As
a consequence of achieving the enforceable milestones in the
PSTN migration plan as at 31 December 2011, Telecom expects
there will be a significant improvement in broadband
performance within the Local Access Network (LAN). In
particular, the engineering design rules applied to the LAN
as part of those enforceable milestones will mean that:
*
84% of all existing PSTN lines will be technically capable
of 10Mbps or better within the LAN; and
* 89% of all
existing PSTN lines will be technically capable of 5Mbps or
better within the LAN.
Telecom has made a commitment in its Separation Plan to roll-out cabinetisation to improve local loop broadband speeds and PSTN telephone service migration to a next generation all IP network in lieu of a regulatory requirement to implement EOI for legacy services. Indications from Dr Paul Reynolds at the Digital Future Summit were that Telecom will strive to do more for rural customers outside the bounds of the undertakings.
19. Why have requirements for IP Interconnection been extended?
The area of IP interconnection is technically complex and standards in this area are still being developed. Consequently, in my Amending Determination I extended the period for finalising the undertakings in this one area to 1 January 2009. Since December and as a result of submissions and work by Telecom technical staff, Telecom has made a commitment to a detailed consultation process with other service providers and regulators. My Notice of Requirements required Telecom to amend its separation plan to introduce this greater level of undertaking.
20. How have wholesale incentives been handled?
The Separation Plan requires that the Head of the Wholesale’s group incentive be less the 30% of total remuneration in any year, and that the group incentive be less than the total of all other incentive payments (which are related to Wholesale Unit performance). The undertakings also require that an employee who reports directly to the Head of the Wholesale unit and who is responsible for relevant services, must not receive a payment that relates to the performance of the group as a whole. These requirements will ensure that key managers incentives are aligned with non-discriminatory requirements.
21. What steps were taken to finalise
the separation plan?
* The Ministry of Economic Development undertook research into separation models and Telecom’s current operational model and proposed an initial operational separation model for Telecom. The Minister released the model for public comment and feedback on 5 April 2007. Twenty three submissions were received, and released publicly on 1 May 2007. This consultation document, along with industry views and comments received on it, informed the Minister’s determination and provided the public and industry input at an early stage of development of the detailed requirements for operational separation.
* As part of its submission to government on the operational separation consultation paper, Telecom proposed a structural separation model. On 1 May 2007, the Minister invited comment on the Telecom proposal. Nineteen submissions were received on it.
* Part 2A of the Telecommunications Act
2001 sets out the process for the Minister of Communications
to finalise a legally enforceable Separation Plan with
Telecom. In accordance with the Act:
- On 26 September
2007, the Minister of Communications made his determination
of further requirements with which Telecom's operational
separation plan must comply.
- On 25 October 2007, the
Minister of Communications received Telecom's Draft
Separation Plan.
- For a period of 20 working days from
26 October 2007 to 23 November 2007, the Minister of
Communications sought submissions on Telecom's Draft
Separation Plan.
- After the completion of the public
consultation phase, Telecom was required to prepare an
Amended Separation Plan and a summary of how (if at all) the
Plan was amended as a result of public feedback. Telecom's
Amended Separation Plan and related documents were received
on 19 December 2007.
- On 24 December 2007, the Minister
of Communications and Information Technology released an
Amending Determination, updating his determination of
requirements for Telecom's operational separation.
- On
24 December 2007, the Minister for Communications and
Information Technology called for public submissions on
Telecom's Amended Separation Plan. Submissions were to take
into account the Minister's Amending Determination.
Submissions closed Friday, 25 January 2008.
- On 28
February 2008, the Minister for Communications and
Information Technology issued a Notice of Requirements
setting out areas of Telecom’s Amended Separation Plan
that he wanted to be amended. Telecom had 15 working days,
or until 25 March 20008, to resubmit its Amended Separation
Plan. The plan was received on 25 March
2008.
ENDS