Government mulls changes in telecommunications and broadcasting

The government is contemplating major changes in how the telecommunication and broadcasting sectors are regulated from 2020 onwards.  A discussion paper released in late August as part of the review of the Telecommunications Act considers significant changes that could be made to the regulatory framework.  

The changes discussed include proposals on pricing regulation of fibre services, changes to pricing regulation of traditional copper services, amendments to the purpose statement in the Telecommunications Act, and proposals on broadcasting and radiocommunications.

The paper is timely.  Reforms are clearly needed to the regulatory regime as a result of rapid and major changes that have occurred to telecommunications and broadcasting markets in the last few years.  The paper lacks sufficient analysis for some of its key proposals.  Hopefully this will come in later stages of the review, but is certainly needed before the changes are made.

Price regulation of fibre services
One of the more significant changes discussed is to regulate the wholesale prices charged from the end of 2019 for ultra-fast broadband (UFB) services by Chorus and the three Local Fibre Companies (LFCs): Northpower, Waikato Networks and Enable Services. 

While capped prices currently apply to the UFB services under contracts with the Government, the price caps expire on 31 December 2019.  If no changes are made, Chorus and LFCs will be able to set prices as they wish from that date, limited only by the possibility of a Commerce Commission inquiry into whether or not prices should be controlled.  

The government is thinking about bypassing the inquiry step.  Under this proposal, the Telecommunications Act would directly declare that key UFB services are regulated, in the same way that unbundling of Telecom’s copper network was mandated in 2006.  The Commerce Commission would then move straight to setting prices and terms.

Direct regulation receives the most attention in the discussion paper but other options are considered.  These include a proposal that the Telecommunications Act set a pricing methodology but regulation would apply only if the Commission decides, albeit under a lighter test than at present.  A tailored information disclosure scheme is also considered, which would likely be similar to the scheme that applies to major airports under part 4 of the Commerce Act.  

The government is looking at direct regulation because it sees the UFB networks effectively as natural monopolies, and that price regulation is inevitable.  Regulation might as well be imposed directly, the argument goes, so as to reduce costs and save time.

This change is significant because it would mean that Chorus and LFCs would not have the chance to prove before the Commerce Commission that they face competition or that regulation is not necessary for other reasons.  

Pricing approach for fibre services
Changes to the pricing methodology used for regulated services, which would apply to UFB services if bought within the Telecommunications Act, are also considered in the government’s paper.  

For fibre networks, the government is considering a utility pricing approach.  In brief, this approach would involve determining the costs of building and operating a fibre network, with some checks to ensure efficiency, and adding a margin for profit.  Electricity lines companies and gas pipeline companies are currently regulated in a similar way under part 4 of the Commerce Act.

The government sees utility pricing as more appropriate for UFB services than the current access provider regime that applies to traditional copper services.  Utility style pricing is aimed primarily at preventing regulated companies from earning monopoly profits, whereas the access provider regime does not necessarily prevent that from occurring.

The current rules for setting the pricing of copper services were established when Chorus was part of Telecom.  When set, the rules were aimed at ensuring that Telecom’s competitors could buy wholesale services from Telecom and then use those services to compete with Telecom at retail.  At the same time, the wholesale price still allowed Telecom to compete fairly for retail customers. 

UFB services are provided by Chorus and the LFCs as wholesale only services.  Neither Chorus not the LFCs compete with their wholesale customers.  If the government is correct that the UFB networks are natural monopolies, utility-style regulation in principle is more appropriate than the current rules.

The current rules also require the Commerce Commission to make some difficult judgements and involve a complex two-stage process.  The government considers that utility-style pricing may avoid these problems. 

While a utility pricing approach should be simpler, it would still require the Commerce Commission to make judgements about efficiency, which can be particularly difficult for investments in assets.  For example, the recent very lengthy merits appeals against the input methodologies for electricity networks, gas pipelines and major airports significantly extended the price-setting processes for those sectors.

It is unclear whether a change in approach would lead to lower prices for consumers.  The capped prices in the UFB contracts were set following a competitive tender process.  It is possible that a regulated price could be higher or lower than that price.  

Pricing for copper line services
The discussion paper is more confusing about the pricing for traditional copper services.

In three different parts the paper considers moving to a single-step pricing process, changing to the utility pricing approach, or pricing at a level that doesn’t discourage consumers from moving to fibre services.  It is not clear whether these pricing approaches would work together (although it is difficult to see how this might occur) or would be alternatives.

Each approach has positive and negatives.  Simply collapsing the existing process would not remedy the concern that the current pricing rules could allow Chorus to earn monopoly prices and would mean that current concerns about the gap between copper and fibre pricing will continue.  Pricing on a comparative basis to fibre would address the second issue, but is likely to allow Chorus to earn a much higher margin on copper services than at present.  The cost-plus approach should eliminate the ability to earn monopoly profits but relies upon Commerce Commission judgements on efficient costs and investments. 

Possible regulation of broadcasting and radiocomms
The discussion paper also casts its net across broadcasting and radiocommunications.  It includes a proposal that the Telecommunications Act apply to broadcasting infrastructure and asks whether some of the competition issues that arise in radiospectrum allocations should be dealt with in the Act.

Applying the Telecommunications Act to broadcasting infrastructure would mean that access to platforms like Sky’s and Freeview’s satellite services could be regulated under the Act.  The paper is clear, however, that the content carried on those services would not be regulated.

The proposal in the paper to apply the Telecommunications Act to broadcasting infrastructure is justified on the argument that it is inconsistent that the Act currently applies to telecommunication services but not broadcasting, especially given convergence between broadcasting and telecommunications services.

Although price regulation could not be applied under the proposal without a Commerce Commission investigation, the proposed change is significant for the broadcasting sector.  It raises the risk of regulation and is likely to increase regulatory costs for the owners of broadcasting networks.  The Commission may well feel that needs to investigate in order to see whether or not its new powers need to be exercised.

For radiocommunications, the paper discusses whether measures to ensure that spectrum allocations for services such as mobile telephones and data should be included in the Telecommunications Act.  At present, these issues are dealt with by the government allocation-by-allocation, without much legislative support.  Any move to give these measures more legislative backing and oversight is welcome.

Is it all necessary?
The first part of the discussion paper describes the significant changes that have occurred in recent years in the telecommunications and broadcasting sectors. 

In the telecommunications sector, the retail share held by Telecom (now Spark) has decreased significantly and there are now three strong competitors in the mobile market.  In broadcasting, online content has become very popular.

The government attributes these changes in large part to digital convergence, the merging of different industries through digital technology.  Examples abound in the digital world.  We watch many of our TV shows over services delivered down phone lines.  We make our phone calls through internet providers.  We use a whole host of services, sitting at our computer screens, that were not even available 5 years ago.

Having discussed those points, the paper states in only a few short words and without detailed analysis that it considers that Chorus and LFCs will likely still need to be regulated post 2020.  

Similarly, the discussion paper lacks any analysis of whether there is a real problem that arises from the different treatment of telecommunications and broadcasting networks. 

The paper also does not appear to take into that even more change is likely to occur in the telecommunications and broadcasting sectors, assuming that the markets will essentially stay as they are.

Given the scale of change that has already occurred, and the likelihood that changes will occur at an even increasing pace, more justification of the key proposals and consideration of their likely effects is needed.  If not, there is a high risk that the proposals could stifle change rather than facilitate it.  The lack of analysis is also contrary to the government’s own rules on regulatory reform. 

To be fair, the government’s proposals are only tentative at this stage and more detail may come later in the review.  Regardless, it is reasonable to expect the government to undertake some analysis of whether regulation is justified.

Finally, the proposal to bring broadcasting infrastructure under the Telecommunications Act is justified on the basis that competitive changes have made broadcasting networks more similar to telecommunications networks than before.  If that is the case, then doesn’t that mean that there is now more inter-network competition?  If so, the government should be looking at whether regulation needs to be removed rather than adding it.

The deadline for submissions on the discussion paper is 27 October 2015.

Consider the following two articles as additional boxes:

Amendments to the purpose statement
Two amendments to the purpose statement that guides Commerce Commission decisions under the Telecommunications Act 2001 are proposed in the government’s review of the Act.  

Currently the purpose is to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand.  

The first amendment would tweak the purpose statement to provide that, in addition to promoting competition, the purpose is to promote outcomes consistent with outcomes in competitive markets.  This change recognises that the Act is aimed at regulating services provided in markets with little or no competition.  It would align also the purpose under the Telecommunications Act more closely to part 4 of the Commerce Act.  

While sensible, this first amendment is likely to make little difference to how the Commission applies the Act, as the Commission has effectively operated on that assumption under the Act as it stands.

The secondment amendment proposes additional purposes of promoting growth, innovation and investment in communication markets.  The government sees these purposes as linked to the first amendment, but proposes that they apply alongside the purposes of promoting competition and of achieving outcomes consistent with outcomes in competitive markets.

Structuring the purpose statement in the way proposed has the potential to complicate decision-making, with potential conflicts between the additional purposes and the competition related purposes.  It is easy to imagine extensive arguments before the Commission, and the courts, as to how to give effect to both sets of purposes.  It would be better to express the additional purposes as secondary to the competition related purposes.  

It is unclear whether the existing rider to the purpose statement, that it is to be achieved by regulating, and providing for the regulation of, the supply of certain telecommunications services between service providers, will remain.  Given the potential shift from regulating the terms of access between competitors to controlling the prices charged by wholesale-only providers, the rider does not seem necessary. 

Net neutrality
Statutory recognition of net neutrality is one of the options discussed in the government’s recent paper on its review of the Telecommunications Act.  

At present, the de facto rule applied by the industry is that all internet traffic is treated equally by network operators and telco providers.  Apart from some minor exceptions, this means that an email is delivered at the same speed as a streamed video.  

When internet traffic levels are high net neutrality can degrade services such as high definition video.  Opponents of net neutrality argue that priority should be given to time-sensitive services or services that users want to use instantly, as opposed to services that are not so time sensitive or where small delays do not matter.

On the other hand, a change from net neutrality would require network operator and telco providers to make judgments about what traffic is more important or could lead to special charges for some kinds of services.  It would also, for many people, remove a fundamental principle of fairness and democracy underlying the internet.

The paper does not come to any conclusions on this issue, but asks whether there is interest in introducing rules to ensure net neutrality.  The reality, however, is that without rules protecting net neutrality, the principle will become eroded over time as internet traffic increases and commercial pressures on telcos and ISPs build.  If net neutrality is to be protected, some sort of statutory rules or statutory backstop is likely needed. 

Nick Crang is a partner at Duncan Cotterill

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