The development of ultra-fast broadband continues apace with Telecom about to separate into two listed companies - New Telecom and New Chorus (Chorus2). Separation is expected to occur on 30 November 2011.
In addition to Telecom, local fibre companies (LFCs) in Christchurch, Northland and some central North Island cities and towns are building fibre networks. Telecom has 24 other cities and towns throughout New Zealand.
In order to fit with Telecom's structural separation, and to implement the Government's Ultra Fast Broadband (UFB) initiative, the regulatory regime has been amended significantly through the Telecommunications (TSO, Broadband, and Other Matters) Amendment Act 2011 (the Amendment Act). This update summarises the regulatory regime going forward, assuming there are no changes arising from the imminent election.
Under the UFB initiative, Chorus2 and LFCs will build the fibre networks but provide services at a wholesale level, to retailers of telecommunications services (e.g. TelstraClear, New Telecom and Orcon). The retailers will use the fibre network to deliver telecommunications services. The UFB networks will be monopoly assets.
Chorus2 and LFCs are subject to fibre undertakings, in order to ensure that they provide "open access" to all retailers on their fibre networks. The undertakings require them to supply certain fibre services on their networks in a way that ensures that retailers are treated on fair and equal terms (e.g. Chorus2/LFCs must not treat retailers differently unless it is objectively justifiable).
Chorus2 has also given undertakings for its "legacy" copper network, which will replace the operational separation undertakings that currently apply to Telecom. The copper undertakings require Chorus2 to supply wholesale services using its copper access network on an "open access" basis, as for the fibre undertakings.
Communications and Information Technology Minister Steven Joyce has approved all deeds of undertaking from Telecom (on behalf of Chorus2) and the other UFB partners (see here).
Enforcement of undertakingsFibre and copper undertakings will be monitored by the Commerce Commission and enforceable in the High Court. Chorus2/LFCs may be subject to pecuniary penalties of up to $10 million for breaching them.
Asset allocation plan
Another regulatory requirement of structural separation was that Telecom had to prepare an Asset Allocation Plan, specifying how its assets and liabilities will be allocated between New Telecom and Chorus2, and how they will be used to provide telecommunications services. The Asset Allocation Plan was approved by the Minister in August and an overview of it is publicly available.
New Telecom and Chorus2 have some systems, assets or services that practically cannot be separated immediately (e.g. because of cost). They may enter into "sharing arrangements" for such systems, assets or services, which must be on arm's length terms and must not harm competition in telecommunications markets. The Commerce Commission has broad powers to monitor, investigate and enforce these arrangements.
Line of business restrictions
Chorus2 will also be subject to line of business restrictions, intended to prevent it from entering retail markets in the future.
Existing Telecommunications Act 2001 requirements
Existing regulation of Telecom's services and prices under the Telecommunications Act 2001 (the Act) will generally continue as it is now, but with a number of changes.
Most of the regulation shifts to Chorus2. This is because it will own and control the copper network, and provide wholesale services, to which most of the existing regulation applies.
The main changes to the existing regulation are consequential on the demerger of Telecom. For example, pricing of some regulated services will change, as the current approaches will either no longer be practical or are considered unfair to either Chorus2 or New Telecom.
It will be possible for pricing regulation to be imposed under the Act on the new fibre networks, but there are some restrictions on the actions the Commerce Commission can take. These restrictions are aimed at providing regulatory certainty to Chorus2/LFCs during the UFB build-phase.
Local Service TSO
At present, Telecom must provide a residential telephone service, including unlimited local calls, at a capped price (Local Service TSO). After the demerger, the terms of the Local Service TSO will not change, but the obligations will be split between Chorus2 and New Telecom.
Commerce Act authorisations
The Amendment Act imposed statutory authorisations for Telecom and UFB partners that provide exemptions from the restrictive trade and business acquisition provisions of the Commerce Act, for certain arrangements required to implement UFB.
Kiwi share obligations
After the demerger, New Telecom will not be subject to any particular foreign ownership provisions, apart from those that apply to all New Zealand businesses as part of the general law.
Chorus2, however, will be subject to provisions that replicate the current Kiwi Share obligations fund in Telecom's constitution. These obligations prevent any single shareholder from owning more than 10% of Telecom's shares, and non-New Zealand nationals from owning more than 49.9% of the shares, without the Minister of Finance's approval.
Agreements with CFH
Finally, there are agreements between CFH and Chorus2, and CFH and the LFCs, setting out the term of the Crown's investment in the UFB networks. They include rules in relation to infrastructure design, build, delivery and standard pricing (see here).
The agreements provide for the application of compensation mechanisms for Chorus2 and the LFCs if, during the term of the agreement, changes are made to the regulatory regime (e.g. regulation of pricing below the agreed level) which cause loss to Chorus2/LFCs. These mechanisms replace the now-rejected "regulatory holiday", which would have exempted Chorus2 and the LFCs from Commerce Commission scrutiny.