Telecommunications (New Regulatory Framework) Amendment Bill

Transcription

1 Telecommunications (New Regulatory Framework) Amendment Bill Submission Economic Development, Science and Innovation Select Committee 2 February 2018

2 Contents Executive Summary... 1 Introduction... 4 The telecommunications sector... 5 Regulatory framework for wholesale telecommunications services... 8 Proposals repeal important competition protections... 9 Ring-fencing of monopoly businesses is conventional where building block models are applied Provisions that repeal these protections should be omitted from the Bill, and Chorus line of business restrictions should be strengthened Part 6: the utility pricing model The Bill provides asset valuation guidance, and the guidance should be clarified Consideration of the interests of end users, competition and efficiency Retail service quality The industry is focused on improving customer service Regulating retail markets is a significant step A Part 7 purpose statement and improve implementation Attachment: additional detailed comments... 27

3 Executive Summary The Telecommunications (New Regulatory (the Bill) introduces fundamental changes to the regulatory access framework governing one of New Zealand s most important and value-creating sectors. Telecommunications services are critical inputs into every one of New Zealand s domestic and export business. They are used daily by almost every New Zealander, are empirically linked to improved educational attainment, employment prospects and health, and are the modern glue that keeps communities across New Zealand connected to each other and to the world. In that context, this Bill will affect all New Zealanders and requires careful consideration. It introduces fundamental changes to two parts of the telecommunications regulatory framework: It removes and replaces the regulatory access framework that governs Chorus fibre and copper access networks; and It grants the Commerce Commission (the Commission) unprecedented powers to regulate retail telecommunications services. The Bill follows a comprehensive consultation process, which Spark has participated in. We comment in this submission only on those areas of the Bill we consider do not properly address concerns raised in that consultation, or were not consulted on at all. But we also recognise the considerable effort that has gone into the preparation of this Bill, which is reflected in the large number of provisions we do not recommend any changes to. New regulatory framework for wholesale telecommunications services The Bill proposes the application of a utility regulatory model to UFB fibre services. This model will grant Chorus: a guaranteed return on its fibre access network; and annual price increases in a sector characterised by annual retail price reductions. UFB fibre wholesale and Chorus UBA broadband prices through regulatory period 1 Those are large concessions: concessions that most New Zealand businesses will never enjoy. We support the shift to a new regulatory model because it brings with it investment certainty for Chorus and pricing certainty for end-users. But the Bill should be more concerned with what additional competition protections are necessary to ensure that Chorus uses this guaranteed return, which will grow to be hundreds of millions of dollars in free cash flow each year, in a positive way: 1 Source, Commerce Commission decision, CFH arrangements, Chorus commercial price and CPI at 2%. Telecommunications (New Regulatory Public Version 1

4 maintaining and improving the performance of its fibre and copper networks and services; and does not misuse it to reduce or remove competition in adjacent markets to its fixed access network business. As it stands the Bill does not contain sufficient protections to ensure competition is enhanced, and not reduced. Without those protections, the Bill will take our industry, and end-users, backwards not forwards. We propose the following changes to the provisions implementing this new regulatory framework for wholesale telecommunications services: Increase, rather than relax, line of business restrictions on Chorus: When the 2011 telecommunication reforms that resulted in the structural separation of Telecom were passed, line of business restrictions were placed on Chorus to prevent it from using its monopoly assets to reduce competition in adjacent markets to its access network business. This Bill introduces a much more favourable utility-style regulatory model for Chorus, with a guaranteed return for it. That should mean even tighter line of business restrictions on Chorus. Instead, the Bill proposes to remove several of the line of business restrictions that were added to the Telecommunications Act 2001 (the Act). We recommend retaining and strengthening those restrictions. Remove the proposed regulatory holiday for fibre access and backhaul services: the Bill proposes to exclude fibre access and backhaul service from the Commission s existing powers to amend, or to investigate adding or removing regulated services in the Act. This amounts to a regulatory holiday, and is unwarranted. Remove Commerce Act ouster provisions for fibre anchor products: The Bill currently exempts Chorus price-capped fibre services from the protections in the Commerce Act against anti-competitive pricing practices, such as predatory pricing. This exemption should be removed or apply only where Chorus is charging the regulated price for the service. Extend the purpose statement to allow the Commission to consider all end-users interests, not just the interests of fibre customers: The Bill currently requires the Commission to prefer the interests of fibre customers over the interests of copper customers or wireless customers. We do not agree that is appropriate. Remove the direction to the Commission to add prior losses to the Chorus regulatory asset base: The Bill currently directs the Commission to add losses incurred by Chorus from its fibre access network since 2011 to Chorus regulatory asset base and, therefore, require end-users to pay for those losses. As a profitable monopoly network operator who pays dividends to its shareholders we are at a loss as to what these losses are. We do not agree that Chorus fibre access network should be treated as a standalone business from the copper network it is replacing. Either way, we consider this an issue the Commission should be given the discretion to decide on. Each of these changes are technical in nature. But that does not detract from their importance to New Zealanders. Under this Bill, wholesale fibre and copper services will increase to approximately $58 and $54 respectively by That s $6-8 a month extra for every New Zealand home with a broadband connection. It is our collective responsibility to make sure that if we are going to ask end-users to pay more for their fixed line broadband services - those increased prices are (a) no more than is necessary; and (b) used to improve the quality of their fixed line services and not to reduce competition in other markets. The ACCC has very recently reviewed the application of this same utility-style regulatory model in electricity markets in Australia. It has observed that decisions taken very early on in the design and Telecommunications (New Regulatory Public Version 2

5 implementation of the model can lock-in cost increases that may burden users for years for come. We do not want similar observations to be levelled at our industry in the years to come: One thing is clear from this consultation and information gathering: there is a severe electricity affordability problem across the NEM and the price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure. Retail electricity prices have significantly increased in the past decade, and many households cannot absorb these increases. An increasing number of consumers are reporting difficulties meeting their electricity costs, and some consumers have been forced to minimise their spending on other essential services, including food and health services, to afford electricity bills. New retail regulatory framework The Bill provides the Commission with unprecedented powers to regulate retail services in a market of over 100 retail service providers. We acknowledge that customer perceptions of telecommunications service providers, and the levels of service some customers have experienced, at times leave a lot to be desired. We want to do better and we have to do better, and we are committing significant resources towards doing better. We welcome helpful and constructive ideas from any party that can assist us in this goal, including from central government and the Commission. But we already have all of the policy settings necessary to ensure better customers service will happen. We are the most heavily-regulated sector in New Zealand, with numerous policy interventions over the last 15 years having resulted in intense competition, with over 100 retailers competing hard for customers. That competition provides every incentive on each of us to deliver the service experience our customers demand of us. The Bill proposes to add more regulation this time at the retail level and suggests this will lead to improved customer service levels, without any evidence that policy-makers have identified specific industry or market failures or behaviours that this Bill will address. Regulations on top of more regulations are unlikely, in our view, to lead to more positive outcomes for customers. They are more likely to distort competition and create barriers to entry. While the Bill affords the Commission sweeping ability to regulate retail markets, it provides little guidance on when and how it should intervene in retail markets. We suspect this reflects a lack of a clear policy rationale for these interventions. This creates uncertainty for retail service providers looking to invest in service quality, and for the Commission who must determine a regulatory approach consistent with Government policy. Accordingly, we propose a clearer purpose statement for part 7 of the Bill that directs the Commission to promote the availability of reasonable minimum retail service quality where the market is not delivering these outcomes on its own. Telecommunications (New Regulatory Public Version 3

6 Introduction 1. Thank you for the opportunity to make this submission on the proposed utility style framework for telecommunications set out in the Telecommunications (New regulatory Framework) Amendment Bill ( Bill ). 2. We also request an opportunity to make oral submissions to the Committee as it considers the Bill further. 3. This is the first time interested parties have had the opportunity to comment on key policy proposals, and on the detailed regulatory proposals. Accordingly, we have addressed the key policy and legislative concerns in the body of our submission, and made a number of detailed comments in the attached table. 4. While the Bill is somewhat technical in nature, the question that should occupy the mind of the Committee is whether it strikes the right balance in promoting long term benefits for end users of telecommunications services and providing incentives to suppliers to innovate, invest and compete. 5. The Bill makes significant amendments to the current regulatory framework. If not applied with care, proposed UFB regulatory arrangements could lead to significant year on year price increases for end users, and undermine emerging competition between networks. If not applied with care, regulation of retail service quality will potentially displace competition between RSPs. So careful consideration is required, to ensure the right amount of flexibility and discretion is given to the Commission to manage these risks over the course of the decades we expect this regulatory framework to apply for. 6. In this submission, we comment on proposals: a. To implement a new wholesale services regulatory model for the regulation of existing regulated services will effective be "grandfathered" save annual price increases, and a new utility regulatory model will be applied to UFB fibre services; and b. To establish a retail service quality regulatory framework which requires the Commission to monitor and publish consumer information on retail service quality, and delegates it reserve powers to determine retail service quality through regulation; 7. These proposals have significant implications for competition - how it will occur in the telecommunications sector or is displaced by regulation - and telecommunications prices faced by consumers. The Committee is rightly considering this Bill in detail. 8. This is the first opportunity the industry has had to comment on the detailed proposals. Therefore, we ve only addressed our key concerns in the body of our submission. The attached table sets out our detailed comments relating to the proposals, and proposed amendments to improve the Bill. Telecommunications (New Regulatory Public Version 4

7 The telecommunications sector 9. The telecommunications sector provides critical infrastructure for New Zealanders. The services provided by the infrastructure enable kiwis to communicate with loved ones and the rest of the world, and support kiwi businesses competing in global markets. It s important to get the regulatory framework right because there will be significant long-term consequences for consumers and our economy if we get it wrong. Mobile and fixed providers 10. This is an important and dynamic market led by private firms. New Zealand needs both world class fixed and world class mobile infrastructure. These are provided under different industry structures. 11. Three competing national mobile network operators offer voice, SMS and mobile data services at prices that benchmark well against countries we typically compare ourselves to. Commission benchmarking shows that the competitive market is delivering consumers great outcomes with prices that are up to 47% less than the OECD average, and the rapid deployment of new technologies such as 4G mobile broadband. At the same time, international network monitoring organisations rank New Zealand s 4G speeds in the top ten in the world. So the market is delivering internationally-competitive pricing and performance. Commerce Commission benchmarking December Meanwhile, wholesale fixed services are provided by Chorus over its national copper network and UFB fibre, and a handful of regional LFC and fixed line providers. Retail service providers (RSPs) provide services to end consumers using wholesaled access services and national transport networks provided by wholesale providers. Chorus reports that it wholesales to around 100 retail service providers. 2 Source, Commerce Commission infographic December 2017 Monitoring Report Telecommunications (New Regulatory Public Version 5

8 13. By any measure, this is a significant industry with operators that are making significant investments in telecommunications infrastructure. The Commission reports that private sector operators serve over 8.2 million connections across mobile and fixed line networks, accrue around $5.3B in retail revenues and invest (with the Crown) almost $1.6B year on year to maintain existing services and provide new services expected by consumers. Industry investment since 2011 UFB reforms, $Billion 3 A dynamic and competitive sector 14. This is a highly dynamic and competitive sector. Mobile networks operators have deployed modern technologies. New wireless "5G" technologies provide new capabilities, including enhanced mobile broadband intended to be used for telemedicine and transport services. All New Zealand mobile operators have announced plans to deploy 5G technologies in mobile networks - the next generation of technologies that will cater to the exploding demand for mobile broadband and open up opportunities for new services and service models including in telemedicine, transport and sensor networks. 15. These networks are increasingly used to provide a "fixed" broadband service to customers who may want the superior performance over a degraded copper line, or who value the convenience of wireless services. Mobile networks are both a partial competitor to the regulated UFB fibre networks, and a customer. It is estimated that up to 30% of households have already ditched the voice landline using only mobile services. Spark already has over 100,000 wireless broadband customers. While many of these customers are new to broadband (there may not be a reliable or affordable existing broadband service where they live or work), some are replacing an existing fixed connection. 16. Governments around the world are supporting the deployment of both high speed fixed networks and mobile 5G deployments because they see both as critical to achieving economic objectives, and they are encouraging competition between them. 3 Source, Commerce Commission Telecommunications industry questionnaire results December 2017, CFH annual report and Spark estimate Telecommunications (New Regulatory Public Version 6

9 17. We need to harness and promote competition that will continue to deliver this innovation and investment, and we need a policy framework that encourages competition. The Bill must advance the interests of all parties in the telecommunications sector, and not just those of Chorus and the LFCs. Telecommunications (New Regulatory Public Version 7

10 Regulatory framework for wholesale telecommunications services 18. The Bill provides for a new regulatory framework to Chorus and LFC fibre network operators: a. Existing regulated wholesale broadband and backhaul services used by RSPs are effectively grandfathered (subject to year on year price increases at CPI); and b. A new utility regulatory model is to apply to UFB fibre services. The proposed utility regulatory model is based on that that has been applied to Australian utilities and is sometimes called a building block model. 19. We generally support proposals to grandfather copper service prices and apply the utility regulatory model to fibre providers as, when implemented, this should reduce the regulatory uncertainty that has plagued the industry in the last ten years. 20. The flipside for this certainty is that Chorus will receive guaranteed returns on its investment in the UFB fibre network. A guaranteed return is something very few firms have. Further, at the same time as guaranteeing fibre returns, the proposals lock in high regulated prices for current copper wholesale services. This will result in wholesale broadband prices much higher than countries we compare ourselves to. The Bill will see wholesale broadband prices exceed $58 per month before the Commission can consider what prices should be in UFB fibre wholesale price through regulatory period 4 4 Source, CFH arrangements, Chorus commercial price and CPI at 2%. Telecommunications (New Regulatory Public Version 8

11 Chorus copper UBA broadband wholesale price through regulatory period However, the Bill goes beyond that necessary to implement the utility regulatory model, and leaves significant gaps in the regulatory framework. At the same time as guaranteeing Chorus fibre returns, the Bill: a. Winds back many of the important UFB competition protections put in place as part of the 2011 UFB framework, potentially distorting competition and innovation in the industry; b. Directs the Commission to only consider the interests of end users of the fibre network and fibre and the return to fibre service provider, where its decisions will have wider implications for competition and end users on related or downstream networks; and c. Unnecessarily bounds the Commission s discretion on key pricing parameters that may well result in higher than necessary prices for consumers. 22. These additional proposals add significant risk to the framework as in a dynamic and uncertain market there can be significant adverse consequences for competition and end users. Proposals repeal important competition protections 23. The Bill repeals key competition protections implemented as part of the 2011 UFB framework, and relax competition protections inserted into the Act in These protections were the result of ongoing competition concerns that had plagued the industry. 24. The 2011 Act was designed on the assumption that a structurally separated Chorus would focus on providing copper and fibre accesses - the connection to the home or business - on an open access and non-discriminatory basis. Chorus would be prohibited from using its control of the publicly-funded access network to undermine competition in any other markets, and competition would be promoted where feasible. In practice, this meant that: a. Chorus would be prevented from offering services in competition with RSPs. Chorus was prohibited from selling direct to end users, and specific technical limitations were put in 5 Source, Commerce Commission decision and CPI at 2%. Telecommunications (New Regulatory Public Version 9

12 the Act to prevent Chorus "scope creep" into retail services, and non-access network wholesale services i.e. a provision on providing end to end or layer 3 services; b. Chorus was prohibited from favouring its own business in providing the shared monopoly input. Non-discrimination obligations were designed to recognise that Chorus is both a supplier of monopoly inputs to wholesale customers and a competitor in other markets; and c. The Commission retained the ability to regulate important inputs such as backhaul to wireless base-stations used by potential competitors to Chorus, and these regulations could be amended over time. 25. The Bill will remove each of these protections. Chorus will be permitted to expand into other parts of the market (wholesale national transport and ISP), and will no longer be obliged to provide wholesale customers access to the fibre network on the same terms as it provides the service to itself. For example, Chorus will be permitted to develop white label broadband services, expand into parts of the value chain currently served by ISPs, or withhold backhaul services to slow the deployment of new mobile technologies. 26. At its heart, this Bill provides Chorus with a much more favourable regulatory framework than it has faced under the 2011 Act. It will receive a guaranteed return on its fibre access network, annual price increases on its key services for the next 5-7 years, and replacement cost pricing for a copper network it is not replacing. 27. In that context, the Bill should be concerned with what additional competition protections are needed to ensure Chorus does not misuse this windfall, but instead applies it to maintaining and improving its access networks. The Bill should tighten Chorus line of business restrictions to limit Chorus to supplying fixed-line fibre and copper access network services. Instead, it proposes to remove line of business restrictions on Chorus. 28. Chorus is a monopoly. Monopoly businesses use their monopoly assets to reduce or remove competition in markets. If Chorus is permitted to leverage its fixed-line monopoly into adjacent competitive markets, it will reduce or remove competition in those markets, and this Bill should prevent that. Chorus has already indicated that its ambition is to be the monopoly publicly-funded provider of 5G mobile services in New Zealand. No-one can believe the existing three mobile network operators could overbuild a Chorus-operated 5G network, because none of the three mobile network operators have a war-chest of the sort the building block model will provide Chorus every year in the form of a guaranteed return on its fixed networks. It's unclear how important access to regulated fibre will be for 5G services, but it is clear that Chorus would have an incentive to use its control of the publicly funded fibre network to dominate this market. 29. Under the Bill, not only will Chorus be permitted to pursue this strategy, but the Commission won't have access to the normal tools it might use to address it: a. s20 of the Bill removes the Commission s ability to require Chorus, through fibre undertakings, to provide access to the UFB fibre network on the same terms as Chorus uses the network itself; b. s207 with s224 of the Bill will remove the Commission s powers to change or add regulated access or backhaul services; and c. s203 of the Bill provides that Chorus anchor services will not be subject to Commerce Act competition protections. Telecommunications (New Regulatory Public Version 10

13 30. These changes are not a simple tweak to the current model - they are significant structural changes and undermine the whole purpose of the 2011 structural separation of Telecom. that the Commerce Act ouster clauses which exemption Chorus from the jurisdiction of the Part 2 of the Commerce Act 1986 exacerbate these changes. Chorus could, for example, decide to use its exchange space to enter the data centres market and price data centre services at below the cost of the data centre real estate (in effect a predatory pricing strategy) for an entire regulatory period without being subject to the provisions of section 36 which prevent the use of a position of market power for anti-competitive purposes. 6 That would be possible because all of the exchange costs will be recovered from regulated services. 31. Although a similar ouster provision exists in Part 4 of the Commerce Act, it does appear that the case for ouster is not made out in respect of regulated fibre markets where the risk of getting it wrong spans a larger number of potential networks products and services. 32. This is a significant concern for Spark, and for the retail telecommunications sector more broadly. Spark plans to invest and deploy the next generation of mobile technologies on our network, competing hard for end users. The proposed amendments to soften the Chorus line of business restrictions do not simply remove redundant, administrative provisions as claimed in the introduction to the Bill they are substantive in nature. They will re-ignite the debate on vertical provision and Chorus ability to favour its own downstream services. It may well undermine competition and future investment plans of RSPs and MNOs. Ring-fencing of monopoly businesses is conventional where building block models are applied 33. We propose strengthening the line of business restrictions currently in the Act, in order to ringfence Chorus monopoly business from competitive markets. Ring-fencing is considered an important element of the regulatory framework for other utilities, and the same should be true of Chorus. Ring-fencing is designed to minimise potential distortions to competition and innovation in adjacent parts of the sector. Prohibiting a monopoly firm from expanding in to these markets is the most effective means of prevent "creeping" monopoly power. It is for this reason that Chorus was subject to line of business restrictions in the 2011 UFB reforms in the first place. 34. In fact Australia regulators, recognising the importance of ring fencing regulated monopoly businesses such as Chorus, are adding restrictions to regulated firms - prohibiting them from expanding into competitive markets due to rising concerns over anti-competitive cross subsidies and discrimination. 35. The Australian Energy Market Commission (AEMC) has implemented mandatory guidelines that aim to separate regulated monopoly services from those a regulated firm may seek to offer to contestable markets. [ ] ring-fencing aims to prevent the harm that would be likely to result from the following types of DNSP [electricity line company] behaviours: 2 cross-subsidising an affiliate's services in contestable markets with revenue derived from its regulated services discrimination in favour of a DNSP's related electricity service provider operating in a contestable market providing related electricity service providers with access to commercially sensitive information acquired through provision of regulated services 6 Commerce Act 1986, s 36 Telecommunications (New Regulatory Public Version 11

14 restricting access of other participants in contestable markets to infrastructure services provided by the DNSP, or providing access on less favourable terms than to its related electricity service providers. The Guideline sets out the obligations a DNSP must meet to separate its regulated monopoly services from any services it may seek to offer to contestable markets. We expect the Guideline will aid development of competitive markets where competition is feasible and support efficient, incentive-based regulation of monopoly networks where competition is not feasible The Australian Energy Regulator is obliged to apply the AEMC guideline to Australian lines businesses. 37. The New Zealand Electricity Authority (the EA) is equally concerned that monopoly line businesses are ring-fenced to limit distorting competitive and emerging parts of the industry. Consumers interests are best served when access seekers can be confident that they will receive efficient and non-discriminatory access to monopoly networks. 38. In May 2017, the EA published its Enabling mass participation in electricity markets consultation. The Authority identified that a lack of an effective open or equal access framework was a potential gap in the framework, and noted that respondents indicated an effective framework is critical to enable consumers to benefit from technology changes and business innovation. A lack of confidence in access arrangements would deter investment and participation in activities to offer services and products that provide long term benefits to consumers. The situation was sufficiently concerning that it launched an equal access project to consider the matter further. 39. The concerns run across the Electricity and Commerce Acts, and agencies (EA and Commerce Commission). The EA has asked its expert innovation and participation advisory group, as part of its 2017/18 plan, to advise on whether the existing framework is effective in promoting competition and long-term interests of end consumers and options for change. 8 Provisions that repeal these protections should be omitted from the Bill, and Chorus line of business restrictions should be strengthened 40. There was no consultation on proposals to remove line of business restrictions or to limit the Commission s ability to amend the DFAS service, and these changes are not necessary to implement the utility regulatory model. 41. Therefore, we recommend that at a minimum the Committee omit the proposals from the Bill. Further, we propose strengthening Chorus line of business restrictions to ensure it cannot apply its monopoly power in what would otherwise be competitive markets. Proposed amendments are set out below. Line of business restrictions 42. The Bill would repeal protections set out at s69r and s69s of the Act the bright line restrictions were intended to prevent Chorus from creeping into competitive parts of the market. 43. These protections should be strengthened. The sector is even more dynamic sector than in 2011 when current protections were implemented. While service providers plan to invest to upgrade 7 As summarised by the Australian Energy Regulator in November See Authority decision paper on enabling mass participation and Authority letter to advisory group and equal access presentation to advisory group for presentation outlining issues and EA letter to advisory group. Telecommunications (New Regulatory Public Version 12

15 networks and offer innovative new services, the proposed regulatory framework leaves Chorus with even stronger incentives to protect copper broadband revenues. Chorus has further indicated it wants to be the sole provider of future mobile networks. 44. We propose strengthening the ring fence provisions by prohibiting Chorus deploying mobile networks (beyond the provision of supporting infrastructure such as UFB fibre backhaul links and towers), and adding an exemption regime whereby Chorus can be exempted from these provisions where it can demonstrate public benefits from expanding outside its core monopoly business. 45. We would welcome Chorus as a partner to New Zealand s mobile network operators as we deploy 5G infrastructure across New Zealand. Access to Chorus fixed line assets such as its backhaul network and telecommunications cabinets will enable mobile operators to deploy competing 5G networks quicker and at lower costs. But we would not support Chorus being permitted to use those assets - on which it is already guaranteed a return - to build its own 5G network, and to provide layer 2 or above mobile services as that by definition will distort competition in 5G markets. Chorus has already proposed that it be given a 5G monopoly, which only confirms our concern Chorus wants to redeploy the guaranteed return it will receive on its fibre assets to reduce or remove competition in mobile markets is credible. 46. Accordingly, we believe that Chorus should be prohibited from expanding into the mobile sector while it remains the UFB fibre access provider. In practice, this would mean that provisions to repeal line of business restrictions should be deleted from the Bill - i.e. in sections 20 delete the references to 69R and 69S from Schedule 5 of the Bill and delete sub-clauses 36(2), (3) and (4) which seek to give effect to the repeal of sections 69R and 69S and the s69r prohibition be extended to include cellular mobile telephone network services above layer 1 supporting infrastructure such as collocation and towers. Commission flexibility to introduce new backhaul variant or amend the existing service 47. While the Bill caters for DFAS to retained as a specific regulated service, the Commission is not permitted to recommend new variants or to amend the technical aspects of the regulated service. The Commission cannot consider revised maximum DFAS prices until at least This is, effect, a regulatory holiday from further regulatory oversight for fixed backhaul services. 48. The Bill provides for s207 reviews whereby the Commission may periodically review the price of the service used to support alternative networks (DFAS), but not consider whether there should be new variants or amended service performance to reflect technology change or how the service might be used by access seekers. Further, the Minister cannot recommend changes to the service without a recommendation from the Commission. 49. Therefore, as the Commission s ability to recommend change through s207 is severely constrained, the Commission would have limited ability, if any, to influence these input services to promote competition and competition. The framework does not provide for the Commission to amend service performance or develop new variants, Chorus has little incentive to improve service quality where it would promote competition for its own services or where it intends to expand in to these markets. Instead the future performance of 5G services and applications could well be constrained without a clear obligation on Chorus and LFCs to provide cost-effective, high quality DFAS inputs. 50. Further, proposed sections 69AG and 69AH prevent the Commission from amending current regulated backhaul services (these sit outside UFB fibre regulation) without a Schedule 3 investigation and recommendation to the Minister. The Commission won t be able to amend an existing regulated service through the usual s30r process as this process is not available to it. Telecommunications (New Regulatory Public Version 13

16 In practice, the Commission s ability to respond to changing market and competitive conditions will be severely constrained. 51. We don t know whether access to UFB fibre backhaul is important in the long term for ongoing competition or 5G deployment. While service providers are overlaying Chorus fibre network and more effective high capacity wireless linking is becoming available, Chorus retains control of the revenue guaranteed and public subsidised fibre network. 52. Nonetheless, where there is this uncertainty, the regulatory framework should leave the Commission with the flexibility to recommend technical and price changes, or new variants relating to, the regulated Direct Fibre Access Service. The Commission should have more control over wholesale services used by network operators to compete against Chorus. 53. We believe this could be simply achieved by adding the power to specify service quality in section 223, 224, and 225. For example, section 224 should be amended as follows (with subsection (2) and (3) omitted): 224 Direct fibre access services (1) The Governor-General may, by Order in Council made on the recommendation of the Minister, make regulations prescribing a fibre fixed line access service to be a direct fibre access service by prescribing in relation to the service (a) the name and technical specification of the service; (b) Any service quality metrics or requirements; and (c) any conditions; and (d) the period during which a regulated fibre service provider who is subject to price-quality regulation must provide the service; and (e) the maximum price that a regulated fibre service provider who is subject to price-quality regulation may charge for providing the service. 54. What is still missing however is the power for the Commission to make smaller, more regular or incremental changes to fibre services subject to price-quality regulation, such as exist in section 30R under Part 2 of the Telecommunications Act 2001 today. Such a power is required to enable the Commission to efficiently review and if necessary amend any element of a price or quality, including by introducing new variants or updating quality or technical specifications which must be able to move as dynamically as demand Telecommunications (New Regulatory Public Version 14

17 Part 6: the utility pricing model 55. The utility regulatory framework must be carefully designed and implemented, as there can be significant consequences for competition in the implementation. For example: a. An underlying principle of the model is that, once the regulatory asset base is set, it is "locked in" and regulated provider guaranteed a return on that value. Therefore, the costs of unearned or inefficient assets will inevitably be recovered from end users; b. Competition and innovation in related markets can be distorted by, for example, allowing assets applied in these markets to be included in the regulatory asset base, or by overallocating shared costs to the monopoly business. It is difficult for any firm to compete against a provider with guaranteed returns from the utility regulatory model. 56. Australian networks have been regulated by applying the same utility regulatory model as has been proposed for Chorus, and the results are sobering. The ACCC noted in its recent preliminary report relating to the Australian electricity sector that 9 One thing is clear from this consultation and information gathering: there is a severe electricity affordability problem across the NEM and the price increases over the past ten years are putting Australian businesses and consumers under unacceptable pressure. Retail electricity prices have significantly increased in the past decade, and many households cannot absorb these increases. An increasing number of consumers are reporting difficulties meeting their electricity costs, and some consumers have been forced to minimise their spending on other essential services, including food and health services, to afford electricity bills. Businesses across all sectors have faced even higher increases over the past 12 months, following renegotiation of long term contracts. Many of these businesses cannot pass the increased costs on and are considering reducing staff or relocating overseas. Some businesses have even been forced to close. 57. The ACCC reports that the increases in residential bills were primarily driven by higher network costs. However, the Commission noted that, to a significant extent, past decisions relating to network investment that has driven these cost increases are "locked-in" and will burden electricity users for decades to come. We need to be vigilant that we don't end up in the same situation here. 58. We need to ensure our Commerce Commission retains sufficient discretion to set all components of the regulated asset base, and building block model, and is not asked to work around one or two pre-determined components which lock end-users into higher costs than the Commission may, in future, determine are appropriate. 59. As it currently stands, the Bill asks the Commission to spend the next three years designing and implementing a new regulatory asset base and building block model for Chorus fibre access services. It acknowledges that this is a very complex and involved process with significant consequences for end-users. And yet it provides guidance to the Commission on two of the largest determinants of that regulatory asset base and building block model that pre-determines the Commission s decisions on those components. It does this without any of us understanding how those two locked-in components will affect the overall Commission-set regulatory asset, building block model, or end-user pricing. 9 See ACCC Electricity Inquiry report %20Preliminary%20report%20-%2013%20November% pdf Telecommunications (New Regulatory Public Version 15

18 60. In particular, the Bill proposes that the regulatory asset base (on which Chorus is permitted a guaranteed return) should include. Financial loses on UFB fibre services provided prior to the new regulatory framework. 61. Finally, we don t support the proposed purpose statement for Part 6 provided by the Bill in that it instructs the Commission to consider only the interests of end users of UFB fibre networks when all end users on the existing copper network and wireless networks that rely on fibre inputs are impacted by Commission decisions. The Bill provides asset valuation guidance, and the guidance should be clarified 62. The Bill provides for specific guidance to the Commission relating to the valuation of fibre assets which form the regulatory asset base for Chorus. The guidance should be removed. 63. In particular, the Bill proposes that the regulatory asset base (on which Chorus is permitted a guaranteed return) should include Financial loses on UFB fibre services provided prior to the new regulatory framework. 64. However, this direction is not clear in the best case it removes Commission discretion and options for considering how to treat this issue in Chorus regulatory asset base, and in the worst case it pre-determines the Commission s position on it, with significant implications for Chorus and end-users. Past losses 65. The Bill also requires the Commission to determine the financial losses incurred by Chorus in providing UFB service prior to implementation of the new regulatory framework. Any loses will be treated as an asset that end users will be passed on to consumers over time through higher prices: [176] (2) Each regulated fibre service provider is treated, as at the implementation date, as owning a fibre asset with an initial value equal to the financial losses, as determined by the Commission, incurred by the provider in providing fixed line access services under the UFB initiative for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date. 66. This is an unusual instruction - requiring a regulator to identify excess profits or losses in the transition between regulatory frameworks. The calculation of past losses is not something that regulators would typically do, nor would it be something a regulated firm would support. For a regulated entity, the more present danger is that the regulator would look back to recover past excess profits. 67. Further, it is technically very difficult to tease apart specific costs or investments in a business, particularly where the investment is the result of a natural migration from a legacy to replacement modern platform. For example, while Chorus may have made losses on its fibre access network in its early days, at that same time it was making very large profits on its copper access network. Why would anyone assume that the fibre access network was a standalone business, separate to the copper access business? Fibre is the natural next step for a copper based business. Chorus' copper based network would naturally transition to a fibre network overtime irrespective of the UFB programme because otherwise Chorus would not have a viable future as a fixed network provider - fibre is simply the modern way to build a fixed network. The framework should not look back in moving to a new regime 68. Given this, it is difficult to see how Chorus has made a loss under the current framework. At the same as rolling out a new fibre network, Chorus remains a highly profitable firm. At the same time as it is rolling out a new fibre network, Chorus is paying significant dividends, and has Telecommunications (New Regulatory Public Version 16

19 signalled increasing dividends for the foreseeable future. At the same time as it is rolling out a new fibre network, Chorus is being paid a replacement-cost price for each of its copper lines which is calculated to fund replacement of that copper access network with fibre notwithstanding that it is also receiving a separate taxpayer subsidy to fund deployment of a fibre network. And that replacement cost price is substantially higher by over 50% - than replacement cost prices seen in countries we typically compare ourselves to: Comparison of wholesale prices at time regulated prices were set In other words, the current regulatory framework has left Chorus highly profitable overall and with no genuine losses. 70. It makes no sense to then pick and choose which Chorus elements within the framework were profitable for Chorus and which were unprofitable. If the legislation were to permit "looking back", consumers should, logically, demand repayment of excess profits Chorus has made under the current regulatory framework. Accordingly, we do not support looking back when transitioning between regulatory frameworks - either to find excess losses or profits that need to be compensated. It is simply too difficult to determine whether these exist and where value should be attributed. We recommend that the clause 176(2) be omitted from the Bill. There is no indication that Chorus has made losses under the existing regulatory framework (arguably it has led to over-recovery), and therefore there is no loss that needs to be carried forward in to the future regulatory framework. 71. Industry commentators predict that this factor, alone, could conceivably add in the vicinity of $2 billion to the regulatory asset base and conceivably add up to a further $15 per month to end-user prices. It would be imprudent to think that any of us, today, can confidently predict the correct treatment of this issue within the regulatory asset base the Commission will finalise in two or three years time because we do not know what other decisions and assumptions the Commission will make in setting that asset base. The right thing to do is to remove legislative guidance on the matter from the Bill, therefore leaving the Commission to determine the right treatment of this item at the same time, and with the same purpose, as the rest of the decisions it will need to make. 10 Compares regulated prices of wholesale access services at the the Commission determined prices under the current regulatory framework. Telecommunications (New Regulatory Public Version 17

20 If the Commission must look back, it should consider the fibre benefits from the copper regulatory model 72. However, if the Committee, wished to retain the proposed provision it should clarify that the Commission must recognise, in the determination of any losses, the contribution and funding from the existing network and revenues to the fibre network. The copper prices were set on the basis of the cost of a fibre network, and this meant that part of that price would fund the fibre network. 73. At this stage, the proposed clause could be seen as an instruction that the Commission is to determine a loss based only on the costs and revenues relating to UFB fibre services, ignoring the wider contributions already made by consumers through current prices. Failing to account for the contribution from copper broadband customers will result in end users paying twice for fibre infrastructure (through existing copper broadband and future fibre broadband prices), and higher than necessary end user prices. 74. This could be done by, for example, amending the provision so that the Commission take account of the fibre cost model developed during the FPP process. [176] (2) Each regulated fibre service provider is treated, as at the implementation date, as owning a fibre asset with an initial value equal to the financial losses, as determined by the Commission, incurred by the provider in providing fixed line access services under the UFB initiative for the period starting on 1 December 2011 and ending on the close of the day immediately before the implementation date. [suggested new 176(2a)] In calculating the financial losses in 176(2), the Commission must take into account the range of direct and indirect revenues and associated benefits derived from providing telecommunications services to all end-users connected to existing lines, less the costs of providing those services to those end-users. Tax-payer contributions to the UFB are not properly accounted for in the framework 75. The Bill further requires the Commission to reduce the asset values on which Chorus is permitted a return to reflect the capital contribution from end users, access seekers or other parties identified by the Commission. 76. The initial value of a fibre asset is calculated by taking the cost of the asset, less any contributions from third parties to that asset. [176(1)(a)(i)] incurred by a regulated fibre service provider in constructing or acquiring the fibre asset, net of specified capital contributions specified capital contribution means a capital contribution received by a regulated fibre service provider from 1 or more of the following: (a) an access seeker: (b) an end-user: (c) any other person, as determined by the Commission 77. There has been significant public funding of fibre assets. The public has invested over $2b in fibre infrastructure, over $1.5b of which is in the Chorus network. Analyst reports indicate that taxpayer subsidies could over time make up around 1/4 of Chorus' fibre asset base, and the regulatory framework should take this funding into account. The IMs have taken capital contribution to mean the upfront contribution from persons, i.e. an end-user contribution to extend the electricity distribution network. Telecommunications (New Regulatory Public Version 18