Telecommunications (New Regulatory Frameworks) Amendment Bill Vodafone New Zealand Full Submission to the Economic Development, Science and ...
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Telecommunications (New Regulatory
Frameworks) Amendment Bill
Vodafone New Zealand
Full Submission
to the
Economic Development, Science
and Innovation Select Committee
2 February 2018
Page 1 of 73
Contents
All parties must have strong incentives to innovate over the UFB network ....................... 4
Line of Business restrictions must remain in place ...................................................................... 7
S69R and s69S are critical to structural separation ................................................................ 9
Removing the restrictions would have a significant impact on the market and
consumers .............................................................................................................................................. 9
Ensuring continued Layer 2 access without the line of business restrictions is not a
simple fix ............................................................................................................................................... 12
An alternative approach .................................................................................................................. 13
Unbundling must be made a commercial reality ...................................................................... 15
What is needed for unbundling to be successful .................................................................. 16
Competition on fibre networks is the norm internationally ............................................. 19
Layer 1 access is an essential feature of the regime ........................................................... 20
Unbundling cannot wait any longer .......................................................................................... 23
Unbundling is feasible in New Zealand..................................................................................... 24
Anchor products ..................................................................................................................................... 27
Anchor products and DFAS should be applied to LFCs to ensure geographically
consistent pricing .............................................................................................................................. 27
The proposed anchor products are not well specified for the market in 2020 ......... 29
DFAS must be priced based on costs ......................................................................................... 32
Consumer Service Quality................................................................................................................... 33
A purpose statement is required ................................................................................................. 34
Information powers should focus on improving consumer choices ............................. 36
Codes can set minimum standards and resolve coordination issues ........................... 37
Page 2 of 73
Other issues .............................................................................................................................................. 39
CAPEX free-pass ................................................................................................................................. 39
Pricing methodologies will be a necessary complement to the Anchor products . 40
Full non-discrimination requirements must remain in place ........................................... 41
Commission workload could be streamlined ......................................................................... 41
Amend the purpose statement ................................................................................................... 42
Copper deregulation ........................................................................................................................ 43
Attachments
Attachment 1: Advice from Paul Radich QC on the easing of the line of business
restrictions................................................................................................................................................. 45
Attachment 2: The role of the line of business restrictions ................................................... 51
Attachment 3: Potential features of a Layer 1 input methodology .................................... 54
Attachment 4: Consolidated recommendations and changes to the Bill ........................ 58
Page 3 of 73All parties must have strong incentives to
innovate over the UFB network
1. Innovation is essential to reach the Government’s goal of elevating ICT to New
Zealand’s second largest export category. As currently drafted, the Bill will not
realise the full potential of the Government-funded UFB network. We have
made huge strides with the rollout of fibre, but we must not drop the ball with
the next round of innovation.
2. Chorus and LFCs currently have limited
incentive to upgrade the UFB network, The Bill should maximise the
and have strong incentives to prevent levels of innovation and
RSPs from themselves investing in investment by Chorus, LFCs
innovation such as fibre unbundling. and RSPs.
This impacts our ability to bring new
and innovative products to
consumers.1
3. A combination of weak fibre unbundling requirements, limited terms set for
entry-level broadband, and relaxation of line of business restrictions in the
current Bill take us in the wrong direction.
1
Examples include Upgrades to the next generation of fibre equipment - a change as significant as the
leap from VDSL to Fibre, the delivery of seamless and reliable ‘internet of things’ services, increasing
demand for more sophisticated cyber security, and increasing use of data cloud applications like
artificial intelligence.
Page 4 of 73Figure 1: Maximising RSP and Chorus/LFC innovation2
4. International experience shows that market growth comes from competition
by both wholesalers (like Chorus and the LFC) and RSPs investing in fibre
networks.
5. There are three key aspects of the Bill that will impact innovation:
5.1. The removal of the line of business restrictions on Chorus (sections 69R
and 69S) will hand control of significant parts of the market to the fibre
companies, bringing back the perverse vertically integrated incentives
of ‘old Telecom’. This will stifle RSP innovation and put current product
innovation, like internet telephone services and internet television
broadcasting at risk.
5.2. The Bill is not strong enough to make fibre unbundling an early reality.
The current proposal leaves too much in the hands of Chorus and the
LFCs, hoping they act like a benevolent monopolist and shape the
market to align with consumer’s interests rather than their own.
2
This figure is focussed on forward looking innovations, so does not cover the currently contracted
UFB builds. It does, however, count innovations such as VOIP and multicast that are under threat by
the current proposals. In the New Zealand context it is also appropriate to count adoption of
technology as innovation as well as developing unique technologies.
Page 5 of 735.3. Setting the broadband anchor product at 100/20 Mbps means that it
will be irrelevant in the market in 2020-2023. In this fast moving
market, what may be sufficient today will be irrelevant in five years’
time. With little other constraint on how Chorus and LFCs price
services, we risk turning true fibre products of 1Gbps+ into niche
products priced out of the reach of ordinary New Zealanders. A
correctly specified anchor product will put increased pressure on
Chorus to upgrade its network earlier to meet consumer demand
Page 6 of 73Line of Business restrictions must remain in
place
Recommendations
Vodafone recommends that the Bill be amended to:
1. Line of business restrictions on Chorus must remain and be extended to
the LFCs
1.1 Retain s69R and s69S
1.2 Extend the line of business restrictions to also cover the LFCs
1.3 Clarify that the Regulatory Asset Base only extends to Layer 2, no
matter the line of business restrictions in place
6. The Bill proposes to repeal sections 69R and 69S. This would remove the
current restrictions on what services Chorus can offer, short of retailing. This is
the most significant change proposed in the Bill, and yet has been passed off
as simply removing a ‘redundant’ provision.
7. The impact of this change appears to have been severely mis-understood. This
issue has never been raised in any of other consultation to date, the
implications have not been fully presented to Ministers, and no alternatives
have been considered.
8. As per Figure 2 below, sections 69R and 69S draw the dividing line between
wholesalers and retailers. They currently require Chorus to sell a plain
wholesale product (known as a Layer 2 product under the OSI model), and to
not bundle this with backhaul services.3 Without these restrictions Chorus
could start offering “white label” products with the ultimate consequence of
restricting the freedom of retailers to differentiate themselves.
3
Attachment 2 provides a more detailed description of these restrictions.
Page 7 of 73Figure 2: Competition is reduced by relaxing the line of business restrictions
9. Removing these restrictions would unwind the gains of structural separation
achieved in 2011. It would risk reverting back to the perverse incentives when
Telecom was vertically integrated and controlled all aspects of the market,
innovation and investment. As
the owner of the fibre they would Chorus clearly doesn’t
be able to squeeze margins,
monopolising services previously like competition
provided by the competitive
retail sector. This would harm A similar story is emerging in mobile
innovation and consumer choice. services, where Chorus are aiming to
shut down competition by promoting
10. This is further compounded by themselves as the owner of a
the lack of leadership on Layer 1
monopolised 5G network, eliminating
price and terms as discussed in
the main rival to fibre.
the following chapter. Without
true Layer 1 access, Chorus faces The same anti-competitive attitude is
no competitive pressures. It is likely to be taken in layer 3+ services
therefore unlikely to develop if the line of business restrictions
products that end users demand.
were relaxed.
11. The line of business restrictions
must remain in place for Chorus under the new regime. These restrictions
should also be extended to the LFCs who will have greater freedom to creep up
into other parts of the market as the product restrictions imposed by CFH
expire.
Page 8 of 73S69R and s69S are critical to structural separation
12. Sections 69R and 69S are at the heart of the statutory obligations imposed on
Chorus when they were structurally separated from Telecom. Nothing has
changed to warrant altering this position.
13. In the Discussion Paper sections 69R and 69S were explicitly noted as
“enduring legislative obligations” underpinning Chorus’ role as a “structurally
separated, wholesale only” business operating in “markets with limited
competition”.4
14. This is also reflected in the Regulatory Impact Statement accompanying the
introduction of the line of business restrictions. It states that these provisions
are necessary to ensure that Chorus could not reintegrate in markets “where it
could have an undue advantage arising from its market power in upstream
access network service markets”.5
Removing the restrictions would have a significant impact
on the market and consumers
15. Table 1 below shows some of the practical changes that may occur in the
market if the line of business restrictions are lifted and a clean Layer 2 service is
no longer available on reasonable terms.
4
Regulating Communications for the Future: Review of the Telecommunications Act 2001
(September 2015), p 69.
5
MED, “Regulatory Issues Resulting if Telecom Becomes a Partner in the Ultra-Fast broadband
initiative” February 2011, para 125.
Page 9 of 73Table 1: Potential changes for consumers if line of business restrictions are lifted
WHAT THINGS WOULD CHORUS BE ABLE TO DO IF WHAT IMPACT WOULD THIS HAVE ON THE MARKET AND CONSUMERS?
LINE OF BUSINESS RESTRICTIONS WERE
REMOVED ?
Create more geographically aggregated hand- If hand-over at local exchanges was no longer practical it would cause significant parts
over points, i.e. only sell “end-to-end” services. of the competitive backhaul network to become monopolised. This would weaken
New Zealand’s backhaul capacity and make the network less resilient for consumers.
Only sell Layer 3 products that include an IP Competition at Layer 3 is important as there is currently two standard in use.
address Vodafone uses IPv6 whereas other RSPs such as Spark use IPv4. Which standard would
Chorus choose?
Certain applications need (or perform better with) static addresses, for example DNS
servers and some firewalls. If this choice is made by Chorus it would make it much
harder for RSPs to sell differentiated products to meet end user’s needs.
Only sell Layer 3/4 products with pre-defined Layers 3 and 4 significantly impact the quality of service experienced by consumers.
quality specifications To capacity manage available bandwidth, rather than investing in additional
bandwidth, Chorus may sell products with high latency, or more readily drop packets,
harming the day to day consumer experience.
With limited competitive pressure, regulations would need to work overtime to
maintain current quality, and there would be little incentive to improve.
Determine if and how voice services can be It is unclear whether Chorus has the incentives to configure the network for VOIP or
offered over fibre. TV services.
Determine if and how television broadcasting
services can be offered
Determine if and how, new as yet unthought- Chorus has little incentive to create unique or new offerings, or commercially
of products could be offered. negotiate reasonable terms. This means that less new products will be offered to
consumers, and those that are offered, will be developed more slowly.WHAT THINGS WOULD CHORUS BE ABLE TO DO IF WHAT IMPACT WOULD THIS HAVE ON THE MARKET AND CONSUMERS?
LINE OF BUSINESS RESTRICTIONS WERE
REMOVED ?
Gives Chorus the ability to bundle services at For example, Chorus may reach an agreement with a virus protection firm and offer a
the wholesale level. “clean internet” wholesale product. If this service was considered part of their network
it would be included in their RAB and they could earn a return on it.
They could sell the “clean internet” product at zero extra cost compared to a standard
wholesale product, this would effectively force consumers to buy a particular brand
virus protection as they would be paying for it regardless of whether they took it up or
not.
Sell wholesale plans that include WiFi units If Chorus and the LFCs were able to include WiFi units at the wholesale level, they
would have every incentive to sell them below cost to capture the market. This would
be a significant detriment to consumers as RSPs would no longer:
be able to offer troubleshooting advice, which we can only do on our WiFi
units
become unclear if consumers can use their own WiFi units
prevent competition between RSPs on the WiFi units they offer, for example
upgrading the bandwidth, or technology (such as beamforming) that they use.
Also innovations like offering a WiFi unit that can pick up a 4G signal to work
as a backstop if the fixed network goes down.
Chorus may also be able to combine the WiFi unit and the fibre modem (known as an
ONT), much like Vodafone does in markets where we have been able to unbundle
such as Portugal. This may be a benefit to some consumers in some cases, but is
better achieved by unbundling which would enable competition rather than
extending a monopoly position.
Page 11 of 7316. Not only is monopolising these parts of
Chorus has a history of the market possible, but they are in
restricting the freedom Chorus’ rational interests. It may:
of use of its products 16.1. provide greater control of the
retail market, which is an ends of
• HSNS – a copper product that itself.
was configured in such a
complex way that it took us a 16.2. delay further CAPEX and ration
full year to construct a voice existing network capability by
service to work with it reducing quality.
16.3. configure products in a way that
• EUBA – a copper product that
is cheaper for them to
has part of its bandwidth
administer, but significantly
dedicated to voice services,
and cannot be used for any increase RSP costs to offer the
other services, even if the services consumers demand.
customer does not want a
voice service
Ensuring continued Layer 2 access without the line of
business restrictions is not a simple fix
17. Attempting to mandate Chorus and the LFCs to continue to offer Layer 2
access without the line of business restrictions is not a simple fix. It would
require more regulatory control than currently proposed, vastly increasing
complexity compared to simply retaining the existing line of business
restrictions.
18. Firstly, the anchor product regime will not resolve this problem. The proposed
‘entry-level broadband’ 100/20 Mbps anchor product must be offered at Layer
2. However, as discussed in the Chapter below on the anchor products, the
proposed service will be irrelevant in the market in 2020 to 2023.
19. To retain Layer 2 access without the line of business restrictions, an access
regime would need to be developed. European experience shows that this will
take many years and significant resource from the regulator and industry. 6
6
BEREC, 2015, “Common Characteristics of Layer 2 Wholesale Access Products in the European
Union”
Page 12 of 7320. European regulators found that it
was insufficient to simply require Most European
Layer 2 access with non-
discriminatory or equivalence of
Countries have now
input (EOI) obligations. In 2014 mandated Layer 2
when the UK regulator Ofcom first Access Including:
introduced price regulation of • Austria
Layer 2, they found that, despite • Belgium
having an EOI obligation: “there is • Denmark
a significant and real risk that BT • France
has an incentive to impose a price • Greece
squeeze”.7 To achieve genuine • Italy
open access, European regulators • Spain
have imposed some form of price • United Kingdom
regulation, typically either a
bottom up LRIC+ approach or a margin squeeze test.
21. The draft Bill contemplates no such regime alongside the removal of the line of
business restrictions. At the bare minimum, the Government should consult
with the industry on the broader implications. However, we fail to see any
benefits that would justify the cost of implementing a Layer 2 access regime. It
is far simpler to keep the current restrictions in place.
An alternative approach
22. Before any change is made to these important provisions full consultation is
necessary. This will provide the opportunity for the policy rational to be
clarified, all issues to be fleshed out, and alternative options considered.
23. It is likely that such consultation would find that keeping the current
restrictions in place is by far the simplest and most effective approach. This will
retain competition, have little if any detrimental impact on the market and the
service end users experience.
24. However, if Government is set on easing these restrictions we recommend
considering an Exemptions regime as part of the consultation. This would be
far simpler than a European style Layer 2 access regime, and could be
modelled on the Electricity Industry Act 2010. That legislation stops generator-
retailers from owning distribution or transmission networks, or vice versa.
However, it does allow the Electricity Authority to grant an exemption if:
7
Ofcom, 19 March 2015, “Fixed Access Market Reviews: Approach to the VULA margin”, para 3.75
Page 13 of 73(a) the exemption will either promote, or not inhibit, competition in the
electricity industry; and
(b) the exemption will not permit an involvement in a distributor and a
generator or a retailer that may create incentives and opportunities to
inhibit competition in the electricity industry8
25. Alongside the Exemptions regime, the legislation should also clarify that the
regulatory asset base (RAB) only covers fibre services up to Layer 2. This would
make it more difficult, but not impossible, for Chorus to implement a margin
squeeze for any of the exempt activities.
8
Electricity Industry Act 2010 s90(2)
Page 14 of 73Unbundling must be made a commercial
reality
Recommendations
Vodafone recommends that the Bill be amended to:
2. Ensure unbundling becomes a commercial reality
2.1 Include the Equivalence of Input (EOI) obligation on the Layer 1
product in the Act, and clarify that this applies to both price and
terms
2.2 Extend the unbundling requirement to the LFCs, rather than just
to providers subject to price-quality regulation
2.3 Require the Commission to set a Layer 1 input methodology
2.4 Require the Commission to collect and publish the information
required to calculate the Layer 1 price
2.5 Allow the Commission to set a Layer 1 anchor price from the first
regulatory period
2.6 Remove the Ministerial approval required before setting a layer 1
price
2.7 Delete the proposed s204 from the Bill, which will only serve to
complicate and confuse any Layer 1 price calculations.
26. Unbundling continues to be delayed in any practical sense. Unbundling was
intended to be a feature right from the beginning of the UFB roll-out. It was
then delayed until 2020 to give Chorus and the LFCs time to build scale. And
now the Bill is not strong enough to make it a commercial reality, leaving too
many decisions in the hands of the fibre companies.
27. Unbundling would allow competition deep into the network by allowing
connections directly to the fibres themselves (known as layer 1 access). Rival
companies can then invest in their own active equipment creating a
competitive market over features such as access speeds, latency and
resilience. Competitive pressures will deliver continued improvements for all
New Zealanders.
Page 15 of 7328. However, at present the Layer 1 price and terms will be set by Chorus or the
LFC, guided by an EOI obligation. After 2023, the Commission can review the
implementation of unbundling, and recommend to the minister that a
regulated Layer 1 price is set for the following regulatory period starting in
2026 – 2028. This means it will be 2026 at the earliest before consumers
receive the benefits of unbundling, almost a decade away.
29. The Bill’s approach is not strong enough to make fibre unbundling an early
reality. It is the equivalent to letting the ‘fox in the henhouse’. Chorus and the
LFCs are too conflicted to be given all the power to specify the unbundled
product.
30. As a result, New Zealand is set to miss out on all the benefits of early fibre
unbundling. This will deny the regime a major incentive for innovation, and will
result in a much more complex regime. That cost that will ultimately be borne
by all New Zealanders.
What is needed for unbundling to be successful
Equivalence of Inputs is necessary, but not sufficient
31. We agree that the Layer 1 price and terms must be set on EOI terms. This
requirement is set in the Deeds of Open Access Undertakings for Fibre Services
and requires Chorus and the LFCs to price Layer 1 access on the same price and
terms as they supply it to themselves.
32. The EOI requirement must be included in the legislation and applied to both
the LFCs and Chorus. This will provide certainty that the EOI requirement will
remain in place. As it currently stands, it could be easily wiped out if the Deeds
were changed. This is too low a threshold to support a significant long-term
investment in unbundling.
33. The legislation must also clarify that the EOI obligation applies to price as well
as access terms. Despite being the policy intent, it has caused confusion during
the consultation process.
34. The omission of the LFC unbundling requirement in the Bill appears to be an
oversight and must be rectified. Unbundling will be critical in LFC regions.
Make sure EOI is enforceable by following international best practice
35. International experience has shown that regulatory requirements like EOI
alone are not successful in constraining monopoly power. This is because too
much discretion is left in the hands of the monopoly providers.
Page 16 of 7336. To make unbundling successful, we
recommend that: The UK experience
36.1. the Commission is required to
set a Layer 1 input In the UK, wholesale fibre access was
initially regulated by a “fair and reasonable
methodology
terms” condition. Recent analysis found
a. This aligns with the European that British Telecom over-recovered by
Commission’s NZ$1.5b (₤780m) over the duration of
recommendation that for EOI this regulatory approach (2014 – 2017).
regimes to be successful, the By 2017 they were earning a rate of return
regulator must determine in over three times greater than the
advance “the procedure and approved rate.
parameters” that need to be Frontier Economics, Profitability and the
Incentive to Invest: A report for Vodafone,
used to comply with the EOI
obligation.9
Ofcom found that an EOI requirement was
36.2. the Commission is required to not sufficient for service metrics, and
collect Information Disclosure resulted in quality that was “equivalently
data on Layer 1 prices and poor for all providers”. For example only
terms 60% of repairs on unbundled lines
happened on time. They have now set a
a. This will give interested far more prescriptive regime.
parties the ability to hold Ofcom, Making Communications work for
Chorus and the LFCs to everyone: Initial conclusions from the Strategic
account on the prices and Review of Digital Communications
terms they set for the Layer 1
product.
36.3. the Commission is able to set a Layer 1 anchor product from the first
period if they see fit.
a. If the Commission does not believe that Chorus and the LFCs will
adhere to the EOI obligation, they should have the ability to set the
price directly, as they did for the unbundled copper access.
37. The requirement to first report to the Minister on setting a Layer 1 price must
also be removed. This is a highly technical decision, and well within the
mandate of the Commission as an independent regulator. A review by the
Minister will only slow down the process and impact the independence of the
Commission’s decision.
9
European Commission, “Recommendation of 11.9.2013 on consistent non-discrimination obligations
and costing methodologies to promote competition and enhance the broadband investment
environment”,2013, para 66.
Page 17 of 73Remove the proposed section 204
38. The Government will set a number of static products that Chorus must offer,
known as ‘anchor products’ and the DFAS product.10 Section 204 in the Bill
excludes these products from consideration when setting the Layer 1 price.
This will only complicate Layer 1 calculations, and is not future proof.
39. We favour a pragmatic ‘wholesale minus’ approach to setting a Layer 1 price.
This would protect the margin between the Layer 1 and Layer 2 products, but
still leave flexibility for Chorus and the LFCs
Figure 3: Conceptual
to manage prices of both products to
reflect uptake. picture of wholesale minus
calculation
40. As per figure 3, a ‘wholesale minus’
approach would require the
Commission to make two key decisions.
40.1. determine a reference bundled
Layer 1 and Layer 2 price to use
as a starting point. This could be
either the average price, or some
product reflective of the middle
of the market.
40.2. define the Layer 2 costs, and
minus these off the bundled
price.11
41. This is a common approach both in New Zealand and internationally. In New
Zealand it is used for the RBI wholesale rate (ensuring a 38% discount between
retail and wholesale), and the avoided costs saved approach applied by the
Commission to Telecom in the past. A similar approach was also used for
determining the wholesale access price to British Telecom’s fibre network in
the UK.
42. Section 204 would constrain the choice of the reference product, potentially
making a ‘wholesale minus’ approach unworkable. For example, it is unclear if
the reference product could be the average price, as that would include the
anchor products set by Government. If the anchor products were excluded
from the average it would artificially inflate the Layer 1 price.
10
These products are discussed in more detail in the next chapter.
11
This would be a specific dollar value rather than a percentage. This gives greater flexibility for both
prices to ‘float’, adjusting to the market conditions.
Page 18 of 7343. We are also concerned that if in the future the Commission sets a larger suite of
anchor products, there may be few products remaining to use as a reference
price. As it is currently written this even applies if the anchor product prices are
set based on costs, leaving no justification to continue to exclude them.
44. This clause must be deleted, or at bare minimum amended to be more
principles- based. The reference product must be able to be set on principled
economic terms, not constrained by the Act.
Competition on fibre networks is the norm internationally
Regulatory agencies should 45. Unbundling is all about
encourage infrastructure competition creating competition in a larger
at the deepest level where it is part of the fibre market. It
reasonable allows rival companies to install
their own equipment in the
BEREC Best Practice Remedies on the Market for
Wholesale (Physical) Network Infrastructure network, offering variety to
Access consumers and healthy
competitive tension.
46. Most countries now consider some form of infrastructure competition to be an
essential part of the market. The form of infrastructure competition varies from
country to country, but there are broadly three approaches.
46.1. Facilities-based competition, which is most prominently practiced in
the USA. Under this approach the Government encourages rival
providers to completely duplicate their networks.12
46.2. Physical infrastructure access, which is becoming popular in
Europe.13 It requires the incumbent to allow access seekers to use their
physical assets like ducts and poles. Access seekers can then deploy
their own fibre right up to the customers’ premise.
12
The FCC’s current stance is in a state of flux, but in the past they have put in place ‘overbuild’
conditions on merger applications. This means that the merged entity has to build a certain portion of
its network in competition with existing networks. See: https://www.reuters.com/article/us-
timewarnercable-m-a-charter-communi/u-s-approves-charters-time-warner-cable-buy-with-
conditions-idUSKCN0XM22H. The FCC also considers regulation on a geographic basis, only regulating
markets where there are not rival network providers.
13
Countries that have, or are currently consulting on implementing physical infrastructure access
include: Bulgaria, Croatia, Cyprus Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungry, Ireland, Italy Latvia, Lithuania, Luxembourg, Macedonia, Malta, Norway, Poland, Portugal,
Slovakia, Slovenia, Spain, Switzerland, Turkey, and the United Kingdom.
Page 19 of 7346.3. Access to Layer 1 equipment is also popular in some parts of
Europe,14 and has really taken off in Singapore. Under this approach the
incumbent gives access to their Layer 1 ‘unlit’ fibre to access seekers,
who can then deploy their own active equipment.
47. The choice between these approaches comes down to the particular
circumstances of each country. The large USA market can support duplicate
networks. In Europe, mandated access to physical infrastructure is a response
to the way incumbents deployed fibre, which made access to Layer 1
equipment near impossible.
Layer 1 access is an essential feature of the regime
48. The reason infrastructure competition is so common across the world is
because it plays an essential role in developing a sustainable fibre market. This
remains true in New Zealand.
Unbundling is the best incentive for innovation
49. Unbundling is crucial to creating competitive pressures deeper in the network.
This will add an innovation incentive to complement the standard building
blocks model, which in its standard configuration focusses solely on reducing
costs, not bringing new products to the market.
50. Unbundling allows rival companies to offer connectivity with different
capabilities to consumers. Figure 4 below shows the upgrade path available.
14
Including, Denmark, Ireland, Netherlands, Italy, Sweden and Slovenia
Page 20 of 73Figure 4: Fixed line upgrade path
51. As Figure 4 shows, we are already starting to see New Zealand fall behind the
rest of the world. Chorus have only recently started to consider upgrading to
the current industry standard 10GS-PONs.15 This standard was approved by the
IEEE in 2009,16 nine years later New Zealanders are still waiting. This would be
like deploying a 4G mobile network for the first time in 2018 (rather than 2014
when it was deployed here) and calling it cutting edge innovation.
52. Internationally, the industry is on the cusp of upgrading to next generation
equipment – NG-PON217. This will be critical to enable New Zealand’s digital
future.
15
https://blog.chorus.co.nz/we-have-1-gig-broadband-whats-next/
16
http://standards.ieee.org/findstds/standard/802.3av-2009.html
17
The International Telecommunications Union recently designated TWDM-PON as the NGPON-2
standard. This is capable of 40Gbps download and upload per port, see: http://www.itu.int/rec/T-REC-
G.989/
Page 21 of 7353. The upgrade to NG-PON2 will-
among other things-resolve the Benefits of NG-PON2
need for greater assured
(minimum) speeds. Today Chorus Massive upgrade in speed
only offers 2.5Mbits of assured • Download speed 16 times greater
speed on the UFB network.18 This is than today
barely sufficient for a standard • Upload speeds 32 times greater
definition video stream, and ten than today
times below the 25MBps • Significantly increased assured
(minimum) speeds
recommended by Netflix for a
Ability to parse out different
single 4K stream.19
customer groups
54. NG-PON2 technology is being • Can differentiate service between
actively developed by Verizon in business and residential
the USA. They have resolved all customers
technical issues, and plan to Improved resilience
commercially deploy in early 2018. • Can maintain connectivity while
They actively promote this as a maintenance or repairs are
undertaken on key pieces of
differentiator compared to their
equipment
competitive rivals CenturyLink and
AT&T.20
55. Absent competitive pressure, New Zealand is unlikely to see this new
technology deployed on UFB any time soon. However, if unbundling was
available early, investors would progress right to NG-PON2 to offer new
services not available today.
Unbundling will simplify regulations
56. In New Zealand it is inefficient to have regulations as comprehensive as other
countries. However, as the regime matures, there will be a growing need to
manage the market power of Chorus and the LFCs by setting access terms and
service level agreements (SLAs).
18
Currently it is rare for an end-user to ever be constrained to the assured speed, but we anticipate this
will be a growing problem when the network is more fully utilised.
19
See https://help.netflix.com/en/node/13444
20
See https://www.fiercetelecom.com/telecom/verizon-holds-firm-ng-pon2-fttp-path-says-
approach-drive-future-proof-investments
Page 22 of 7357. The box to the left sets out the
BEREC’s bare minimum 10 – bare minimum standards
standards that BEREC21 recommends
should be applied to all Layer 2
For each ‘Layer 2’ product standards products.22 In a market as small
should be set for: as ours, it is not practical for the
Commission to specify all
• Type of technology features of every product.
• Customer premise equipment
• Bandwidth
However, Chorus and LFC market
• Quality of service power cannot just be ignored.
• Traffic prioritisation 58. Unbundling will temper the
• Multicast capability
market power of Chorus and the
• Number of VLANs
• Customer identification LFCs, reducing the need for
• Security comprehensive standards.
• Fault management
Unbundling cannot wait any longer
59. The Bill is effectively proposing to push unbundling out for a further decade. A
Layer 1 anchor product could not come into force until the second regulatory
period beginning in 2026-2028.23 This is almost 20 years after unbundling was
initially promised.
60. By 2026-2028 the opportunity for unbundling may have passed. Delaying
unbundling beyond 2020 reduces the competitive benefits and business case.
If regulated unbundling is available from 2020:
60.1. we can roll out next generation equipment early in its life-cycle,
meaning we can get the most value out of it before it is surpassed by
the following generation.
60.2. we would be able to unbundle many customers as part of the fibre
installation process, rather than as a separate upgrade visit. This would
minimise disruption, cost and allow scale to be built quickly.
21
BEREC is the Body of European Regulators for Electronic Communication. It provides. It provides
advice to European regulators in the application of the EU regulatory framework.
22
BEREC, “Common Position on Layer 2 Wholesale Access Products” 6 October 2016.
23
The Commission can only review the Layer 1 price after 2023. If they see a problem they then have
to report to the Minister. If the Minister agrees she then sets a Layer 1 price by order in council, which
will then be ready for the third regulatory period which will start between 2026 and 2028.
Page 23 of 73Unbundling is feasible in New Zealand
61. Despite the significant benefits of unbundling, the Government has been
reluctant to take the steps necessary for it to be successful. Much discussion
has rested on an unfounded assumption that unbundling in New Zealand is not
feasible.24 This does not align with our experience internationally where
unbundling has occurred, or our experience of installing networks in New
Zealand.
Unbundling is a good business decision
62. Unbundling is an important part of our future strategy for our fixed line
business. It will ensure that we can continue to bring innovation and
investment on the fibre networks.
63. For example, connected homes of the future will require much greater
bandwidth. Internationally, Gartner has named Vodafone as the world leader in
IOT technologies for each of the last four years,25 and we are also investing
heavily in video streaming services like Vodafone TV which will in the future
require significantly greater assured speeds. To bring the future we see to New
Zealand, we need to ensure that we have the right network to deliver it.
Unbundling is practically achievable in New Zealand
64. The fibre network in New Zealand is one of (if not the) best designed networks
in the world for unbundling. Unbundling was specifically designed in the
contracts with CFH. As a result:
64.1. Splitters are housed in easy to access fibre flexibility points.
64.2. There are two fibre lines between the fibre flexibility points and the end-
user premises. This allows continuous connection as a gaining access
seeker can leap-frog the existing supplier, only shutting off the old
connection once the new one is installed.
64.3. In most cases there is excess fibre between the fibre flexibility point and
the exchange, with the ability to easily deploy more if needed.
24
For example in the RIS accompanying the last consultation paper it notes that “It is not clear
whether widespread unbundling of fibre would occur”. Ministry of Business Innovation and
Employment, “Regulatory Impact Statement: Implementing a post-2020 fixed line communications
regulatory framework” 2017, p21.
25
Gartner, “Magic Quadrant for Managed M2M Services, Worldwide”, 23 October 2017.
Page 24 of 7365. As a wider Vodafone Group we also The reasons unbundling has
have experience in unbundling GPON
been dismissed elsewhere
networks. Two current examples are
in Portugal and Italy. The market
are not applicable in NZ
conditions in these countries allowed
The paper by Analysis Mason that
commercial deals to be reached.26 In concluded Layer 1 access was not
both cases we were able to reach a viable in the UK focussed on the lack
Layer 1 price that ensured a of flexipoints making access to
reasonable return while also making splitters difficult, the lack of fibre
unbundling commercially feasible for deployed and the high costs of
the access seeker(s). deploying more fibre.
66. This demonstrates the practical
Because of the way the network was
achievability of unbundling, even in deployed here, these concerns are
networks less suited to unbundling not applicable in New Zealand.
than New Zealand. For example in
both Portugal and Italy connections Analysis Mason: Competitive models in
GPON: Final Report for Ofcom, 1 Dec 2009
run through two splitters (one near
the exchange, and one closer to the
premise), compared the one splitter
in New Zealand. This shows the fallacy in the common argument that the
number of splitter installations makes unbundling unachievable.
67. Vodafone locally has significant experience running fibre networks, and the
equipment required to unbundle fibre. For example the upgrade of the ‘Fibre X’
HFC network, used the same active equipment as a fibre network. We recently
upgraded to 10GS-PONs, which have four times the bandwidth of the GPONs
used by Chorus.
Unbundling can work in the proposed regulatory model
68. Throughout the consultation process, concerns have also been raised about
how to ensure that Chorus and the LFCs can continue to have a guaranteed
return each year, and continue to be able to offer a full suite of products.27
26
These were both commercial deals, but relied on very different market conditions compared to New
Zealand.
In Portugal we reached a commercial agreement with Optimus to sell layer 1 access to each
other’s networks in the two main cities of Lisbon and Porto. This was necessary to present a
greater challenger position to Portugal Telecom.
In Italy the electricity utility company Enel established a fibre unit called Enel Open Fibre.
Enel only deployed a layer 1 network, which they were able to do cheaply using some of their
existing infrastructure. Vodafone Italy were among the first to reach an agreement with Enel
for Layer 2 deployment
27
We have discussed in more detail in our previous submission why these concerns are over-played.
Page 25 of 7369. We strongly disagree with the assumption that regulation should shield Chorus
and the LFCs from all revenue risk. All business in competitive markets face
risks, which are increased if they do not keep up with consumer demand. If
Chorus and the LFCs fail to keep up with the market, they will lose customers
to any rival provider. This is the right incentive to have on Chorus and the LFCs,
as it provides the pressure to deliver what consumers demand.
70. The purported risk that Chorus will not be able to offer a full range of
differentiated products has also been over-played. Chorus claims that the
current fibre prices – including the proposed 100/20 Mbps anchor product –
are being sold below cost. They argue that using these costs as the benchmark
for calculating a Layer 1 price would set the Layer 1 price too low. This is
completely at odds with the financial performance of Chorus and LFCs. For
example UFF and Enable would not have been in a position to buy out the
Government’s shareholding ahead of schedule if their most popular products
were being sold below cost.28
71. Instead of dismissing unbundling on the basis of these minor risks, attention
should rather be on good regulatory design that balances risk and benefits
between all parties. This can be achieved by implementing the ‘wholesale
minus’ approach recommended above.
See: https://www.nbr.co.nz/article/waikato-networks-buys-out-crowns-holding-ultrafast-fibre-
28
189m-b-193981
Page 26 of 73Anchor products
Recommendations
Vodafone recommends that the Bill be amended to:
3. Ensure ‘Anchor products’, and the DFAS product apply to the LFCs
as well as Chorus to be nationally consistent;
4. Ensure Anchor products and the DFAS product are responsive to
customer demand
4.1 Allow the Commission to set the Layer 2 broadband anchor
product and the DFAS product as part of the price setting
consultation.
4.2 Remove the requirement for a separate review, and Ministerial
approval before anchor products or DFAS can be changed.
72. The Bill requires Chorus to offer certain ‘anchor’ services, which will be priced
and specified by the Government. For the first regulatory period these products
will be:
72.1. An entry level broadband product specified at 100/20Mbps
72.2. A voice only service
72.3. Government will also specify price and terms for the direct access fibre
service (DFAS), a point to point Layer 1 service for enterprise customers.
73. These products will be fixed at their 2019 prices and then increased each year
for inflation. Chorus can price any other products as it sees fit within its overall
revenue cap.
Anchor products and DFAS should be applied to LFCs to
ensure geographically consistent pricing
74. Geographically consistent pricing has been a key principle of
telecommunications services in New Zealand since December 2014. It has had
an important democratising effect on supplying the best quality internet
services available at the same prices across the country.
Page 27 of 7375. Section 200 of the Bill seeks to enshrine this principle in UFB pricing from
2020. However it makes one glaring omission. Currently the LFCs are free to
price as they see fit, and are unlikely to align with Chorus or with each other.
76. This means many consumers will have different prices for the same Fibre
product. For example it is likely that consumers in Whangarei, Auckland,
Hamilton, and
Figure 5 Map of Chorus and LFCs across
Christchurch will all have
NZ
different prices.
77. One simple and low
cost way to partially
resolve this problem is
to extend the anchor
product and DFAS
requirements to the
LFCs. This would give at
least some products
nationwide
consistency, and allow
RSPs like Vodafone to
continue advertising on
a nationwide basis.
Anchor product and DFAS prices will not hurt the LFCs viability
78. We see no reason why applying the anchor products and DFAS restrictions to
the LFCs would hurt their ability to earn a reasonable return. Anchor, and DFAS
prices will be set using actual prices already applied by the LFCs, or (if our
recommendation below is accepted) by the Commission based on the actual
cost of delivering these services.
79. LFCs would also be free to set all other prices as they see fit, giving them
considerable freedom to ensure that they recover their costs.
Page 28 of 7380. If the Government remains
LFCs have thrived under concerned about the ability for
current fibre pricing the LFCs to recover costs it
could allow LFCs to opt for a
Both UFF and Enable have been able custom anchor and DFAS price
to buy out the Government’s stake in set for their circumstances. This
their networks well ahead of could work in a similar way to
schedule.
the DPP/CPP pricing regime for
electricity distribution
This would not be possible if current
prices were insufficient to meet costs businesses.
The proposed anchor products are not well specified for
the market in 2020
81. Figure 6 below summarises what we expect the fixed market will look like
during the first regulatory period (2020-23). Competition will exist for basic
broadband services between fibre, copper and fixed wireless, with Chorus and
the LFCs holding a near monopoly position over the higher speed products that
will be in most demand.
Figure 6: Broadband market in 2020-23
Page 29 of 7382. Setting the anchor product at a speed of 100/20Mbps, priced at $4529 (and
increasing for inflation) will:
82.1. not be sufficient to meet the needs of most customers;
82.2. dampen uptake of fibre for users with lower speed requirements.
Alternative products will already be in place for 100/20Mbps, and $45+
for fibre at this speed will be too expensive to compete against the
alternatives; and
82.3. shift most of the burden of recovering Chorus’ allowed revenue to the
higher speed products significantly increasing those prices, and
creating ‘haves’ on high speed fibre, and ‘have nots’ on lower speed
copper and fixed wireless.
83. To avoid this situation, the Government should require the Commission to set
an anchor product for mainstream users as part of the price-setting process.
The Anchor products should also be set based on costs, and not automatically
increase for inflation, instead only being adjusted when input costs justify it.
A 100/20Mbps product will not be a reasonable substitute
Figure 7 Demand for faster products will continue to
84. By 2020-23 a 100/20Mbps
increase to meet peak traffic demands
product will not meet the
needs of most New
Zealanders. As shown in
figure 7 Cisco predicts that
peak traffic demands will
continue to exponentially
increase. Faster and faster
products will be needed to
use this much data.
85. Asking consumers to step
down to this speed if faster
products are priced too
high is not reasonable, and
will only serve to hold back
broad adoption of fast
speed internet in New Zealand.
29
The Cabinet paper states that the anchor product will be priced at 2019 prices, which are currently
set to be $45 for the 100/20 product. See Cabinet Economic Growth and Infrastructure Committee, 22
May 2017 “Review of the Telecommunications Act 2001: Final Decisions on Fixed Line Services,
Mobile Regulation and Consumer Protection”, para 26.
Page 30 of 7386. We know that speeds have risen markedly in the last five years, and will
continue to increase. For example about five years ago (August 2012) we were
selling a 256Kbps product with a 3GB cap.30 For many users in 2020-23 a
100/20Mbps product will be as irrelevant as a 256Kbps product would be
today. A fully connected household simultaneously managing a plethora of
connected devices, running multiple 4k streams, as well as gaming and
internet browsing will not function on a 100/20 Mbps connection.
A high priced 100/20 product will hurt fibre uptake
87. A $45 wholesale price (and increasing for inflation), is simply too expensive for
an entry-level product. This is greater than today’s price for mainstream
products, and the inflation adjustment allows a continual upward march, which
goes against all historic trends for this sector.
88. Alternative technologies unencumbered by regulatory pricing are likely to
price more aggressively and pull customers away from UFB fibre. For example,
copper (through technologies called vectoring and G.Fast)31 and fixed wireless
(a possibility over 4G, but particularly when 5G is deployed)32 will be easily
capable of 100/20Mbps speeds by the early 2020s.
89. We therefore risk facing the same situation as Australia, which is struggling to
attract enough customers to the NBN network because the products are priced
too high compared to the alternative technologies.33 This is making it very
difficult for NBN to recover its costs, as there are not enough customers
connected. Reports have shown that comparative uptake is now worse than
before NBN.34
Prices above 100/20Mbps will sky-rocket
90. A falling number of ‘entry-level’ 100/20Mbps customers on fibre risks sky-
rocketing prices for all other products. This will lock ordinary New Zealanders
out of the benefits of ultra-fast connectivity.
31
See for example https://www.versatek.com/blog/how-g-inp-will-optimize-copper-lines-to-reach-
100mbs/
32
See for example: https://www.cedmagazine.com/news/2015/06/vivint-launches-100Mbps-fixed-
wireless-broadband-service; or http://www.zdnet.com/article/nbn-announces-100Mbps-fixed-
wireless-product/; or http://www.landmobile.co.uk/news/spain-aeromax-selects-mimosa-networks-
for-100Mbps-fixed-wireless-service-to-consumers-and-businesses/
33
See ACCC, “Communications Sector Market Study: Draft Report” October 2017, p19.
34
See Technical Policy Institute “The End of Australia’s National Broadband Network?” June 2016.
Page 31 of 7391. Chorus’ allowed revenue will be based on the costs to deploy the fibre network,
and will be recovered over all connections. Chorus’ allowed revenue doesn’t
change if there are fewer people on the network. A smaller number of
consumers on fibre simply means they will be burdened with higher prices to
cover Chorus’ costs.
92. Ultimately this will drive more consumers away from fibre, raising the price for
the remaining customers even further. Faster connectivity will be so valuable
to the remaining few that they will likely pay enough to recover Chorus costs.
But we are left with a few customers on fast fibre connections, with most
ordinary New Zealanders on slower copper and fixed wireless.
DFAS must be priced based on costs
93. The regulated DFAS product will be priced at the 2019 levels - $355 per month.
This price was set in the reference offers agreed with CIP, with no clear link to
the costs of actually supplying this service. We recommend that the
Commission sets the price of this product based on costs.
94. At its current level the DFAS price could harm competition. DFAS is used both
to supply services to enterprise customers, but also to connect mobile towers.
If the DFAS price is not set on costs it may arbitrarily increase the costs of
mobile services. This is particularly troubling as it may artificially make fixed
wireless less competitive compared to fibre.
Page 32 of 73Consumer Service Quality
Recommendations
Vodafone recommends that Part 7 of the Bill be amended to:
5. Include robust purpose statements in the new Part 7 of the Bill
5.1 Introduce a purpose statement that makes clear the
Commission’s role in Retail Service Quality:
5.2 Include the information gathering and monitoring powers in Part
7;
5.3 Require that the Commission issue determinations setting out
the information it will collect under the information powers;
5.4 Introduce a specific purpose for information powers that
focusses on improving end-users ability to make informed
choices;
5.5 Make clear Retail Service Quality codes are to set minimum
standards and overcome coordination issues between providers.
6. Remove the ability for the Commission to require service providers
to “prepare and produce forecasts and forward plans”; and
7. Require that all Commission Retail Service Quality codes to apply
equally to all providers (wholesale and retail)
96. Vodafone is focussed on providing a great customer experience.
Unfortunately, service quality across the telecommunications sector has not
always met the expectations of our customers, and this has resulted too
frequently in complaints to the Commission, Minister and consumer
organisations.
97. In part, this is driven by a once in a generation migration from legacy copper to
next generation fibre and fixed wireless networks. Our customers are also
rapidly changing the ways in which they use technology. This has challenged
the industry’s capability to deliver services that meet customers’ expectations.
98. Vodafone recognises these pain points and is 100% focussed on addressing
them. Improving service quality is at the very heart of our business plan, and we
are making significant progress to address these challenges.
Page 33 of 7399. We also recognise that the backstop powers proposed under the Bill are a
necessary safeguard if the industry (including RSPs, Chorus and the LFCs) is
unable to address these service challenges of its own accord. However, we
recommend some minor but important changes to ensure that the regime
functions as intended.
100. Experience from the UK regulator, Ofcom, has shown the importance of the
regulator and the industry working collaboratively to ensure that any future is
effective and benefits consumers, without unnecessary cost or complexity. We
are already working with the industry to determine a sensible set of metrics
that could form the basis of the monitoring regime.
A purpose statement is required
101. A general purpose statement for
Experience in the UK Part 7 is required to ensure that
the Commission has clear
Ofgem, the UK energy regulator, was guidance about how Parliament
given similar powers to those proposed intends the regime to work. At
in the Bill. They chose to implement present, the draft Bill is
strict codes that significantly curtailed ambiguous and leaves significant
the ability of companies to compete. room for interpretation in the
For example, suppliers were only future well beyond the policy
allowed to offer four products, there intent. That would be damaging
were rules on how products could be to competition.
discounted, rules on bundling, and more. 102. If the purpose is clear, we can
The UK Competition and Markets avoid that outcome. Clearly
Authority later found these codes: defining a purpose is also
consistent with the Legislation
restrict the behaviour of suppliers Advisory Committee Guidelines,35
and constrain the choices of and the Treasury’s Expectations
customers in a way that may have for Good Regulatory Practice.36
distorted competition and Both these documents
reduced customer welfare. emphasise the need to clearly
identify the policy objective in
Competition and Markets Authority, “Energy
the legislation itself.
Market Investigation: Final Report” 24 June
2016, para 171.
35
Legislation Advisory Committee Guidelines: Guidelines on Process and Content of Legislation, 2014
Edition
36
The Treasury, “Government Expectations for Good Regulatory Practice”, April 2017
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