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Regulatory Update – Regulating communications for the future

Home Insights Regulatory Update – Regulating communications for the future

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Contributed by: Craig Shrive, Christopher Graf and Edward Bowie

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Published on: September 10, 2015

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On 8 September 2015, the Minister for Communications and Broadcasting, Hon. Amy Adams, released a discussion paper entitled “Regulating communications for the future: Review of the Telecommunications Act 2001” (Discussion Paper) commencing a full review of the telecommunications and broadcasting markets.1  The review is mandatory under section 157AA of the Telecommunications Act (Act), which requires the Minister for Communications to commence a review of the policy framework for regulating telecommunications services in New Zealand by 30 September 2016. However, the Government has positioned the review as a workstream within its broader convergence review. 

Accordingly, the Discussion Paper considers the current state of the market, noting in particular the convergence occurring between telecommunications and broadcasting. This theme is discussed further in the recent Green Paper entitled “Exploring Digital Convergence: Issues for Policy and Legislation” (see our Regulatory Update of 28 August). The Green Paper also considers broader regulatory issues that have arisen as a consequence of digital convergence.

In light of convergence and the rapid development of new technology, the Discussion Paper seeks to prepare New Zealand’s regulatory regime in these industries for a post-2020 environment - when current ultrafast broadband (UFB) contracts are due to expire.   

Although the Discussion Paper expresses the Government’s initial views on a number of matters, its focus is economic regulation. At this stage, those views, and the analysis behind them, remain high-level and preliminary only. The Discussion Paper is clear that further consideration will need to be given to detailed implementation issues.

Utility-style regulation

The Government expresses the tentative view that a Building Block Model (BBM), typically used in utility-style regulation, should apply when setting regulated prices for fibre services post-2020. Under a BBM the initial regulated asset base can be ‘locked in’ and rolled forward from one regulatory period to another. Actual costs of the supplier go into the asset base, so long as they are efficiently incurred. For this reason, the Government considers BBM to provide predictable outcomes. Its initial view is that greater predictability will improve investment incentives.

That is in contrast to the Total Service Long Run Incremental Cost (TSLRIC) methodology which is currently used for pricing copper access services under the Act. Costs under a TSLRIC model are set based on what it would cost if existing assets were to be replaced with a ‘modern equivalent asset’, rather than the actual costs incurred by the supplier. Further, assets are re-valued each pricing period. In the Government’s view it is a contentious methodology, namely as it is volatile and so creates market uncertainty.

The Government has stated that it has not yet reached a view on when price regulation of UFB should occur.  The implementation of any BBM price regulation could be dependent on a recommendation from the Commerce Commission (Commission) that price regulation has become necessary. However, the Discussion Paper strongly hints that the Government is eager to provide certainty prior to the expiration of UFB contracts at the end of 2019. That suggests that 2020 may mark the beginning of price regulation in that area using a BBM.

The Discussion Paper notes that the ability of the BBM to achieve the policy outcomes envisaged by the Government depends on key implementation questions, such as how prices for individual services are set.

In our view, although the Government is right to identify similarities between Chorus’ networks and Part 4 regulated companies, a key distinction is that multiple services can be provided over telecommunications networks, which is likely to raise unique issues. In particular, it may need to be considered whether there will need to be greater regulatory prescription of pricing principles than currently exists under Part 4 of the Commerce Act.

Turning to regulation of copper access services, the Discussion Paper expresses a less firm view, in part because the Commerce Commission is due in December 2015 to release its final pricing principle for the unbundled copper local loop and unbundled bitstream access services, using the TSLRIC methodology. The preliminary position adopted by the Discussion Paper is that if fibre services are priced on a BBM basis, then adopting a consistent methodology for copper would send appropriate pricing signals to the industry. 

It also raises the prospect that regulation could be technology neutral, with copper and fibre networks being in a single regulatory asset base.

In the event that the Government does move to a BBM for fixed line services, the Discussion Paper indicates there may be a case for introducing merits review of input methodologies. The Act does not make provision for merits appeals of regulatory decisions, and the initial view expressed in the Discussion Paper is that merits review could introduce a higher degree of scrutiny on the substance of Commission decisions.

Backdating of regulatory decisions is a contentious matter under the Commission’s current process to determine prices for copper access services. The Discussion Paper indicates that the Government has no intention of legislating over the top of the Commerce Commission’s imminent decision for unbundled copper local loop and unbundled bitstream access services. However, in the interests of providing regulatory certainty, the Government is seeking views on whether it ought to clarify in legislation whether backdating of prices should or should not occur in the future.

Overall, it is apparent that the Government is troubled by the telecommunications regulatory minefield that has developed over the last few years, and would like a fresh approach going forward. But it also seems to recognise that the outcomes of the hard fought battles regarding copper access pricing must be given meaning, and not simply wiped away by fresh regulatory approaches following this review. Accordingly, the review promises to be interesting, as the Government and industry seek solutions that provide the right balance between old and new approaches.

Net neutrality

Net neutrality, the principle that all internet traffic should be treated equally by network operators, has become a high-profile issue in the United States and Europe. Proponents of net neutrality believe that a network operator should deliver the traffic requested by its customer, making no attempt to prioritise the traffic.

By contrast, opponents believe that requiring network operators to treat all internet traffic equally ignores the reality of running a network and the demands of the market. For example, in the United States, Comcast and Verison are alleged to have required payment from Netflix to enable faster access to their website from its subscribers.

The Discussion Paper notes that the practice of ‘zero-rating’, which has occurred for some time in New Zealand (whereby some customers can have access to certain websites without eating into their data caps), could be interpreted as prioritisation. Further, with the arrival of large players such as Netflix, the Discussion Paper suggests that if those players manage to secure a deal for prioritising traffic, that may create a barrier to the entry for smaller businesses.

The Discussion Paper simply poses questions in order to help the Government form a view on the matter, including whether net neutrality is even an issue in New Zealand. In particular, the Government is interested in views on whether clear rules like those offered by the United States and European Union would provide useful guidance in the New Zealand market.

Although it is appropriate to ask the questions, it would be surprising if there was an appetite for complex net neutrality regulation in New Zealand. It is far from clear that there are problems here and, if there were, that they could not be addressed under existing laws.

Convergence

Digital convergence has led to the risk that regulation is ‘siloed’ and considered in isolation by government and industry. The Discussion Paper proposes a Communications Act be established to consolidate the economic regulatory functions of the ‘siloed’ Act, the Broadcasting Act 1989 and the Radiocommunications Act 1989. The intent is to establish a more coherent regulatory regime that is better able to withstand future change. The existing Acts would remain in force to deal with specific non-economic aspects of regulation (eg content classification and standards).

Submissions

The Government is currently seeking feedback on the Discussion Paper. Submissions are due by 5pm Tuesday 27 October 2015, and can be emailed to [email protected].

 


 

FOOTNOTES

  1. This follows the first phase, commenced in 2013, which considered whether the existing policy framework for regulating telecommunications services is the most effective to promote competition for the long-term benefit of end-users. In particular, it reviewed the market structure, technology developments and competitive conditions in the industry, including the impact of fibre, copper and wireless investment, as well as the structure of the Telecommunications Service Obligations.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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