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Regulatory Update – May 2018

Home Insights Regulatory Update – May 2018

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Contributed by: Craig Shrive, Hamish Saunders and Ben Gregson

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Published on: May 07, 2018


Last Friday the Economic Development, Science and Innovation Committee (Select Committee) reported on the Telecommunications (New Regulatory Framework) Amendment Bill (Bill).

The key focus of the Bill is to implement a new regulatory regime for fixed line fibre services – modelled on 'utility style' regulation under Part 4 of the Commerce Act. Chorus will be subject to price-quality control and information disclosure; and local fibre companies (LFCs) will be subject to information disclosure only. The Bill will also introduce a mechanism for copper services to be deregulated in fibre roll-out areas, with prices for copper services in non-fibre areas restricted to increase at the rate of inflation.

The implementation date for the introduction of the new regulatory framework is 1 January 2020. However, the Bill allows the Minister to defer this date by up to 2 years at the request of the New Zealand Commerce Commission (Commission) – in which case, prices under existing UFB contracts continue to apply. The Commission has already publicly noted that it will seek this deferral. Given the tight timeframes involved, it has recently launched a Section 9A study of fibre networks, which will allow it to commence gathering relevant information in advance of the Bill being passed. The terms of reference for the study can be found here.

Although the overall framework is unchanged, the Select Committee has recommended some important changes to the Bill.

Framework for fibre services

The Select Committee has recommended the following changes to the fibre regulation framework:

  • Amending the definition of 'fibre network' so that the regulated footprint would cover an end-user premise or access point, such as a mobile tower, to the defined fibre handover point;
  • The purpose statement has been modified so that the Commission and the Minister must consider in any recommendations or determinations all end users' interests, rather than the interests of fibre users, in markets for fibre fixed line access services;
  • Unlike Part 4, the Bill includes direction on how fibre assets should be valued. It must be the actual costs incurred – or for Chorus assets constructed prior to 2011, the value recorded in its financial statements as at 1 December 2011 – minus depreciation. The Committee believes it is reasonable for the asset valuation input methodology to give UFB providers the opportunity to recover, through future revenue or prices, the actual financing costs they have incurred. However, it has emphasised that this should be limited to actual costs, so the concessional element of government funding must be taken into account. The Bill will direct that revenues should be set no higher than necessary to meet the actual financing costs incurred in respect of the Crown's investment; and
  • The maximum penalty for a breach of price-quality regulation under the Bill has been decreased to $5 million, in line with the maximum penalty under the Commerce Act.

The Select Committee also noted that consideration is being given to an amendment by SOP that would provide a maximum price for anchor services based on the price path published when Chorus launched the service in 2014, to ensure that consumers would not be subject to price shocks. The purpose of the anchor service is to ensure that a voice service and a basic broadband service are available to consumers at reasonable prices, and to provide an 'anchor' on the price and quality of other fibre services. Under the Bill, anchor services and their maximum price will be specified in regulations.

Other changes

The Select Committee has recommended against repealing the restrictions on the business activities that Chorus can be involved with. The Bill previously retained a prohibition on Chorus being involved in retail, but repealed sections 69R and 69S of the Act, thereby removing:

  • restrictions on Chorus providing more sophisticated wholesale services (known as “above layer 2” services); and
  • restrictions on Chorus linking its wholesale service inputs together to provide an end-to-end service which resembles a retail product.

The Select Committee thought that repealing the restrictions would leave Chorus with both the ability and incentive to expand into competitive markets, which risks distorting competition and innovation. It has recommended that the Commission be given the ability to provide exemptions for particular services on a case-by-case basis after the first regulatory period.

Other changes recommended by the Select Committee include:

  • The definition of 'telecommunication' has been amended to include broadcasting transmission services (although this will not include content and aggregation services). This may mean that some entities will now be required to contribute industry levies;
  • The Commission will have the ability to declare a geographic area a 'specified fibre area' (where copper withdrawal can occur) from 1 January 2020 rather than from the implementation date of the regulatory regime (which can be up to two years after at the request of the Commission); and
  • The levy funding the Commerce Commission's regulatory activities will start on 1 July 2018, and the range of the work that can be funded has been extended to include the Commission's work under Parts 2AA (copper deregulation) and Part 7 (reviews). The Commission is currently consulting on its proposed budget of $12 million for the implementation of the new framework. The consultation document can be found here. Ultimately, the Government will decide how much to appropriate to the Commission for this work, and how much will be recovered by levies.

The full report from the Committee can be found here.

This article 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. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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