New Zealand’s telecommunications policy – a way forward

New Zealand has made a commitment to fibre to the premise investment supported by public funding, with further extension of fibre planned and national broadband targets announced on 6 October 2015.
Achieving these objectives efficiently and at least cost to public finances requires a commitment to an approach to fibre regulation from 2020 that supports investment alongside an approach to copper pricing and copper-fibre transition that is supportive of investment and, ultimately, copper retirement.

The paper proposes that the price of copper is stabilised as close as possible to the price of the basic fibre product. Given the costs, time and uncertainty involved in resetting the price of copper, the price should then be indexed to (at least) the consumer price index indefinitely. This approach is simple and would support fibre investment, copper to fibre migration and, ultimately, copper closure.

Regarding the latter, we propose a permissive approach which leaves the decision to Chorus subject to a minimal notice period (the FCC have recently proposed a notice of 6 months for copper retirement) and a requirement that end users are made no worse off by the change – a condition which would be met by the proposed transitional anchor product. If some customers, using legacy services, preferred a longer period for transition they would be free to negotiate extended migration on commercial terms.

The paper also argues that applying cost orientation to fibre may prove contentious and complex. Cost orientation also does not allow consumers’ valuation of fibre to be reflected in investment decisions. However, if cost orientation is applied, the building blocks method is preferable to an incremental cost method. A revenue cap could be applied to both copper and fibre to reduce complexity and facilitate migration.
Further, we assess layer 1 (passive) unbundling of fibre and conclude that it involves different trade-offs to copper unbundling. Fibre unbundling would offer less by way of opportunities for third party innovation, and would eliminate service-price differentiation at the wholesale level (which would consequently eliminate differentiation at the retail level due to arbitrage by layer 1 unbundlers). We therefore conclude that layer 1 fibre unbundling is not in the public interest.

Rather than applying cost orientation and layer 1 unbundling we propose an anchor product approach whereby the price of the 30/10 Mbps fibre product is fixed in real terms from 2020 on. We propose that the 30/10 Mbps anchor be applied to all fibre providers nationally. This product would act as a constraint on abuse of market power coupled with flexibility in the specification and pricing of all other service tiers.
As an additional measure to support copper fibre transition, should the wholesale price of copper remain below the 30/10 Mbps fibre product, we propose a transitional anchor product on fibre at a level of service and price corresponding to copper based ADSL i.e. a service level around a ball park of 15/1 Mbps. A sunset clause might be attached to this transitional anchor.

Finally, we propose an approach to regulation that supports voluntary long-term agreements regarding wholesale fibre access. Voluntary long-term (seven year) contracts have recently emerged in the Netherlands. Contracts could take the form of two part tariffs with an up-front element and reduced ongoing line charges. This would incentivise retailers to market fibre more aggressively in order to grow the market.