UNISON SUBMISSION ON REGULATING COMMUNICATIONS FOR THE FUTURE

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1 15/130 File Ref: E6/23 27/10/2015 Telecommunications Review Team Communications Policy Ministry of Business, Innovation & Employment PO Box 1473 Wellington UNISON SUBMISSION ON REGULATING COMMUNICATIONS FOR THE FUTURE Unison welcomes the opportunity to provide a submission on the Ministry of Business, Innovation and Employment s (MBIE s) discussion document: Regulating Communications for the Future. Unison Networks Limited (Unison) is an electricity distribution business that operates in the Hawke s Bay, Taupo and Rotorua areas, servicing over 110,000 businesses and homes. The wider Unison Group also includes UnisonFibre Limited (UFL), a wholesale provider of ultra-fast broadband (UFB) via a fibre optic network. UFL s network spans over 700 kilometres connecting businesses and residences throughout the same network area as our electricity distribution business. UnisonFibre Context and Support for the Review Although UFL is a wholesale provider of ultra-fast broadband, however it is not part of the Local Fibre Companies group who are the Government s partners in the UFB initiative. UFL is instead in direct competition with Chorus. Therefore, any regulation to address the monopoly fibre communications industry under Part 4 of the Commerce Act would not directly apply to UFL, but would clearly impact indirectly through the prices UFL can set. Unison is supportive of the high-level proposals set out in the consultation document. We agree that the current legislative tool, the Telecommunications Act 2001, is outdated largely due to rapidly changing technology and the convergence of services. The implementation of an overarching Communications Act makes sense to consolidate regulation across the sector. Unison also agrees with the challenges set out for communications in the future, particularly around the changing pace of communications technology, the convergence of services, and regulatory uncertainty (with particular regard to UFB pricing). Within this context, Unison urges MBIE to ensure careful drafting of any revised/new legislation to future-proof it as much as possible and support continual growth, innovation and investment in communication technologies.

2 Pricing for Fixed Line Access Services Questions 4-5: Unison agrees with MBIE that the policy objectives for the price regulation of fixed line infrastructure make sense. Unison also believes that there may be a case for a shift to technology-neutral service descriptions. However, any shift would still need to ensure technical descriptions (e.g. for fibre and copper networks) remain available. Question 6: Unison considers that utility-style regulation is likely to be appropriate for fixed line communication services, such as the UFB network. Notwithstanding fringe competition from the likes of UFL, the UFB network, in most circumstances is a natural monopoly service (uneconomic to duplicate) and economic regulation would provide consumers with protection as well as enable the LFCs to earn reasonable returns on their investments over time. Unison submits that it may be preferable to regulate early while the LFCs earn sub-wacc returns, which need to be offset in the longer-term as uptake increases by above WACC returns. The risk with holding off on regulation until returns exceed WACC is that the LFCs become subject to regulatory opportunism where investors become subject to truncation of returns only when UFB investments become successful. Regulation of this type will ensure regulatory certainty and Unison would support the introduction of a price-quality path and regulated revenue under the Building Block Model (BBM). This would provide a more certain environment for Chorus and the wider market for the provision of fibre services. Questions 7-8: Unison is opposed to retaining the status quo for UFB services beyond We agree with MBIE that this would not meet the policy objectives for price regulation of fixed line access services there may be reduced incentives for businesses to continually innovate and invest in improving service quality if the regulatory landscape remains too uncertain. Unison is supportive of implementing a BBM pricing methodology to set a maximum allowable revenue (MAR) for UFB services. This methodology would ensure that revenues closely align to the efficient actual costs faced by providers at the time investments were made, as described in figure 16 on page 75. The BBM methodology would provide certainty to the industry that actual costs of investments can be fully recovered over time. However, there are some challenges with the BBM for the communications industry, the first of which being the fit with one of the UFB objectives to deliver nationally level products and pricing so that service providers can procure common products at consistent prices. BBM seems to suggest that the cost structures of different LFCs will determine pricing; however this contradicts the above UFB objective. Secondly, we have recently seen Chorus bring numerous new fibre services to market that fall outside of the UFB price book and it seems likely that service offerings will continue to evolve in future years as technology evolves and products are aligned to market needs

3 communications is a dynamic market. This suggests that even if BBM revenue caps are introduced post the current UFB contract period, it is unknown how this will actually translate into specific product pricing and there would be a risk that the LFCs apply unduly discriminatory pricing practices in areas where there is fringe competition. Accordingly, UFL submits that MBIE also needs to consider whether there needs to be complementary regulation in the area of product pricing. Despite these challenges, Unison remains supportive of a BBM methodology, and we are particularly interested in which methodology will be used to calculate the initial regulatory asset base (RAB). This is a key component of the BBM methodology, and has a significant impact on the MAR. Appendix C sets out MBIE s preliminary position on the RAB calculation, and states: Given UFB is a recent (and ongoing) infrastructure investment, there is a strong case for actual efficient capital expenditures being used as the basis for the initial UFB RAB valuation. Unison would support this type of methodology being used, as opposed to other methodologies that are based on future / hypothetical costs. For example, the Commerce Commission s pricing principle review for Unbundled Bitstream Access (UBA) and Unbundled Copper Local Loop (UCLL) has been developed using a forward-looking cost based method, TSLRIC 1. This methodology has proven challenging to implement, and as such Unison believes a methodology based on actual costs and expenditure would be preferable. Finally, Unison also believes that further price regulation of the UFB service should address any potentially anti-competitive behaviour that may occur in areas where there are UFB providers who are non-lfcs. For example (hypothetically), anti-competitive behaviour may involve Chorus using methods to subsidise prices in areas where there is non-lfc competition. This type of behaviour would undermine the national goal of consistent pricing for similar services throughout New Zealand. Unison submits that consideration should be given to strengthening the monitoring of the LFCs so that there is not undue price discrimination or anti-competitive pricing in areas where there is competitive fringe. Questions 9-11: The discussion paper proposes two options for the implementation of regulating UFB pricing direct regulation from 1 January 2020 or introducing price caps and/or information disclosure while retaining a regulatory backstop. Unison submits that there are benefits and drawbacks to both options and we do not have a strong view on either option at this point. We do submit, however, that there may be merit in implementing a tailored test for intervention, such as the Airport Services regulatory monitoring model under section 56G of the Commerce Act. This type of backstop, combined with certainty of pricing methodology and information disclosure, may be appropriate to consider in the context of the UFB industry. What is likely to be important is that there is a clear text for intervention that recognises that LFCs may be making loses in the short-run, which would need to be offset in the longer-run by above WACC returns. 1 Total service long run incremental cost.

4 Question 14: The discussion document asks submitters to consider whether the BBM model be introduced under Part 4 of the Commerce Act or under a similar model of the Telecommunications Act. Unison submits that Part 4 of the Commerce Act should be used for this regulation, particularly if a similar approach to the Airport Services model is used. This legislation is fit fur purpose and is already working well in a number of industries (Electricity Lines Services, Gas Pipeline Services and Airport Services). Mobile Competition and Radio Spectrum Unison has a small interest in this area due to our use of radio bandwidth to support the mesh network communications system for our electricity distribution network. The only submission point we wish to make on this area is that we seek assurance from MBIE that we would retain access to our current bandwidth allocation should any changes in this area progress. Unison would also be open to the future sharing of radio spectrum with other communications services, such as water, providing these arrangements would not impact negatively on our operations. The Regulatory Toolkit Question 22: Unison agrees with MBIE that there is a need to update the current purpose statement in the Telecommunications Act. Unison supports the proposed two-part purpose statement outlined on page 95. This statement inherently captures the need for a sustainable communications industry by focusing on the promotion of growth, innovation and investment. We suggest that the relevant competitive standard is the workably competitive standard to avoid doubt that it is not other models of competition that is envisaged. Question 24: MBIE asks the question whether Chorus should have to meet any requirements to protect consumers prior to withdrawing copper services or switching off the copper network within the UFB footprint. Although this question is not directly relevant to Unison, we submit that there should be a minimum UFB service level available in areas prior to copper services being made obsolete, combined with notice period similar to the digital television switchover. Unison would also support more industry certainty around the timing and/or conditions needed to render the copper obsolete. Conclusion Overall, Unison is supportive of the direction MBIE is taking with the review of the Telecommunications Act The current Act is outdated, particularly with the convergence of services and rapidly changing technology; resulting in regulatory uncertainty. Price regulation of the communications industry using a BBM would provide more certainty and ensure that revenues closely align to the efficient actual costs faced by providers at the time investments were made.

5 Unison looks forward to engaging with MBIE as the detail around legislative change is developed, along with any accompanying regulation. If you have any further questions about the information provided, please contact Roanna Vining, Regulatory Affairs Analyst: (06) or Yours sincerely Nathan Strong GENERAL MANAGER BUSINESS ASSURANCE