I want to thank the organisers for the invitation to speak to you today.
The theme of this conference, of stepping towards New Zealand's digital future, is especially timely in the light of the Government's announcement of the broadband package and yesterday's introduction of the Bill to Parliament. That package reflects a view of the future where competition delivers improved outcomes for consumers and where broadband becomes a truly mass market product.
I believe there are several major elements underlying that vision. First is a deliberate attempt to neutralise Telecom's market power in its dealings with its wholesale customers. This can be seen in the accounting separation regime, the standard access terms instrument, the elimination of contracting-out of regulated access, and the upcoming review of geographic price discrimination.
Next is a willingness to consider operational and structural separation should milder means of removing discrimination in the wholesale market be insufficient.
Then there is the new set of fixed network access options that will provide incentives for expanded entry and therefore greater competition in the broadband market.
Finally, and importantly, there is a recognition that more needs to be done to improve broadband services in remote and rural areas.
This is obviously a large and complex agenda and needs to be seen as a medium-to-longer term shift in the competitive and regulatory environment rather than a short-term regulatory fix.
Seen from my perspective as the industry regulator, there are two conclusions I want to highlight today.
One is that, while the functions and powers of the Commission will be expanded, the fundamental values and goals of the access regime are preserved. Important features of the current regime, such as open and consultative Commission processes, and sensitivity to incentives for investment for all players, will remain.
The other is the importance of attitudinal and behavioural change by Telecom and the opportunity that presents of bringing forward some of the competition benefits, even though the full impacts of the package will take time to work through.
While all of this is happening, it is important that we don't lose sight of other industry trends, such as the convergence of fixed and mobile services, the transition to or addition of new platforms and delivery mechanisms such as fibre and wireless, and the need for mechanisms to balance the interests of content providers and infrastructure providers.
The Regulatory Process
The regulatory process is hard-wired to provide scope for the parties to have their say and to challenge one another's arguments, as well as the Commission's own thinking.
At times, this can be seen as frustrating and difficult, especially because of the increased costs it gives rise to. However, this is a consequence of an open and fair process. From a public interest perspective, the cost is worth paying to get quality decisions.
As regulator, the Commission aims to strike a balance between hearing what the parties have to say, on the one hand, and getting the business done as quickly as possible, on the other.
To make time frames effective and to deliver to end users, there must be a willingness for the regulator and the industry to work together to find more common ground in terms of the process and what will, and will not be, challenged.
Last year at this event, I called for a change in the behaviour of Telecom and the way in which it approached the regulatory process. While it is important that Telecom raises, and we deal with, the key arguments and issues, some aspects of the way in which it chose to participate over the last few years has unnecessarily prolonged the outcome.
It is true to say that the regulatory regime has been relatively free of formal legal challenges, of the kind that dogged the market in the Nineties. However, there has been a price to pay for avoiding this outcome, in terms of sifting painstakingly through fine grained arguments, and dealing comprehensively with them in our reports. This has added to the time taken to resolve disputes, and has often sidetracked the focus of the debate away from the big issues, and away from the primary focus of efficient markets and competition.
This topic of responsible use of the protections built in to the regulatory process brings me to another point about the way the Commission makes decisions. There has been some criticism that in the course of issuing a regulatory decision, the position of the Commission has sometimes seemed to change. Concerns have been voiced that this is a negative feature and by implication, the process is in some way faulty.
I accept that carrying out a decision-making process in public, with all its twists and turns, means that no-one can be sure of the outcome until the very end. But that simply reflects the reality of dealing with highly complex technical and commercial issues in an environment where the parties are in dispute.
In a sound consultation process of the type the Commission aims to run, information often comes into the process incrementally. Once the Commission issues a preliminary view, the parties typically will react by providing new arguments and additional facts. In this type of process, a draft decision or report is a statement of the Commission's understanding of the issues at that moment in time, based on the information available to date. The information needed to reach a final conclusion often emerges quite late in the process.
This is what meaningful consultation is about: a process where the outcomes are not pre-committed or pre-determined. We shouldn't want it to be any other way, and I wouldn't expect that in this respect there will be any change in the Commission's processes going forward.
Investment
In the same way, as I mentioned earlier, the Commission remains committed to preserving incentives for the industry to keep on investing.
The promotion of competition, properly managed, should lead to increased investment in telecommunications infrastructure either by the new entrants, the incumbent, or both. This is a central theme in the thinking behind the new package. The concept of the "ladder of investment" is one where the regulator is responsible for setting access prices in ways that over time will encourage the entrant to move up the ladder towards increasingly intensive use of the entrant's own infrastructure. In turn, the increasingly stronger competitive pressures on the incumbent are expected to spur its own investment.
Seen from the entrant perspective, entry initially is at a low point on the ladder, where the entrant faces a largely variable cost for using the incumbent's infrastructure. Once a customer base has been built, there is an incentive to shift those customers onto the entrant's own infrastructure, and to gain the benefits of scale that will support the sunk costs caused by that investment.
It is important to notice that setting access prices in a way that will encourage competitors to move up the ladder is rather different to the current system of access pricing. Today, the access services are priced independently from one another. Interconnection for example, has a cost-based price, whereas resale of retail services and the current bitstream service are priced relative to retail prices after deducting a discount to reflect the avoided costs of the retailing function.
Adding an investment relativity feature means that the price for bitstream, for example, must be set having regard to its relationship with the unbundled loop price, and similarly for naked DSL, which allows a competitor to use the high frequency band to deliver broadband services without taking the voice service provided in the low frequency band.
That relativity may also change over time, depending on the state of competition in the broadband markets.
Striking the right balance to induce efficient investment is an extremely complex issue that is challenging regulators in many countries. In Australia, the regulatory debate around Telstra's fibre to the node investment plan is exactly around these pricing issues. It is not a matter of whether competitors will get access to the bottleneck represented by the fibre once laid, but on what conditions?
Incumbents are concerned that where a service is potentially to be regulated, the fact of regulation creates uncertainty as to the return that will be allowed and therefore whether the investment can be justified in the first place.
Regulatory risk in this context refers both to the risk of regulation occurring and also to the risk that the design and implementation of the regulated services will be inefficient - in other words, that the regulator will for whatever reason, fail to set the "right" access price that delivers a reasonable return reflecting the commercial risks and a proper return on capital.
The Commission is well aware of the need to provide a reasonable rate of return for the risks associated with making investments and to ensure that investors have the expectation of recovering efficiently incurred costs. The goal is to set a regulated price commensurate with investment risks, bearing in mind that we are attempting through a single price point to encourage investment by both the incumbent and competitors.
The broadband package includes both full local loop unbundling and sub-loop unbundling. The fibre backhaul between the exchange and the cabinet and between the exchange and the interconnect point will be regulated. The threshold of risk of regulation of fibre has therefore been crossed. It is not a case of whether to regulate that new investment, but how to regulate. Importantly, this should avoid the risk of stranding of competitor investments at the exchange level when Telecom decides to shift its own DSLAMs out to cabinets.
Changing Attitudes and Behaviours
Theresa Gattung has been clear in her recent comments that Telecom has got the message and is committed to making the new environment work.
I welcome that response and its promise of a different model of industry interaction.
It suggests that for its part, Telecom is willing to step away from the past and to engage in new ways of working with the regulator and its competitors.
It also suggests that we may have a window of opportunity to change the way that the industry responds to such challenges. The telecommunications industry has typically approached competitive access issues in a highly polarised fashion treating them as a zero-sum game. This is, perhaps, not surprising given the concentrated structure of the industry, which doesn't encourage a relaxed dialogue amongst peers.
To deliver on the goals of the Government's package will take not just the enactment of legislation, but also the willingness of all parties to engage and implement the detail without stalling and delaying.
I intentionally say parties, as it is a two-way street. It will not be easy to implement a complex package like this and all industry players will have a role to play in moving the process forward. I do not expect it will be easy for "the lion to lay down with the lamb" without provoking suspicion and uneasiness, on the part of both the lion and the lamb. There will also be times when commercial interests diverge so acutely that no useful discussion is possible. What we must not lose sight of is the goal of achieving the best outcome for the long term benefit of consumers.
Telecom's invitation to its wholesale customers to work together on the implementation of the new services is an important first step. It is a clear break with the past and is in contrast to the way in which Telecom handled the launch in 2004 of commercial bitstream services, which had features designed to bypass the regulatory process altogether.
It provides in particular an opportunity to get the fully unconstrained bitstream service into the market quickly. The technical, operational and pricing issues have been largely worked through during the TelstraClear, CallPlus and ihug applications for access to the current upstream-constrained service.
The naked DSL version of the bitstream service will be more challenging. Naked DSL will allow a competitor to use the high frequency bandwidth to provide broadband services, including VoIP. The key issue will be resolving the pricing for that service when divorced from a PSTN voice service.
The full unbundled loop service will be the most demanding and require the most development. As some commentators have noted, there are effective technical codes that have been developed by industry in Australia and other countries that will provide useful learning and surely can be used as a starting point for working models. The Telecommunication Carriers Forum could have a role to play here.
I expect, then, that the working groups will give priority to achieving some early wins in terms of improved broadband. From the consumer point of view, priority for the provision of fully unconstrained bitstream probably makes sense. This would be a strategy which would allow the early roll-out of Telecom's ADSL2 DSLAMs, with competitor access to the full unconstrained bitstream on a basis of equivalence with Telecom's retail channel.
I do at this point want to acknowledge the concerns that have been raised by some in the rural community that the focus of the new services in the package is very much about urban users. I want to assure you that the Commission's focus in the implementation of the package is on all end users collectively. This includes, of course rural users. At the same time, there is definitely a balancing of overall public good. This balancing allows for the possibility that some people may benefit proportionally more than others.
A key success factor for the industry consultation process will be openness from Telecom about the network-related issues related to the rollout of the new services. The availability to everyone of comprehensive information about the network is essential to building trust and to an effective process.
Those of you who are aware of the UK regulatory regime, will see that what Telecom is proposing is not dissimilar to the very successful forum approach taken by British Telecom with the UK regulator Ofcom. Such forum have been built on clear principles and have led to a level of industry co-operation on issues that otherwise would have required regulatory intervention.
There, the more heavily regulated UK framework was the key incentive for the development of industry led forums for exchanging technical information. The New Zealand lighter handed regime also has scope for industry led initiatives. The principles on which they are based will be crucial to their success
Obviously there are risks with any voluntary industry initiative, but there are also risks in waiting and folding everything into the regulatory process with its inevitable process milestones. So long as there is broad participation and full co-operation, the potential gains for all industry players is one of the reasons the Commission is willing to be part of the industry discussions.
At the same time, everyone needs to be aware that the outcomes must be consistent with the changes to the regulatory system. Though the Commission will participate in the discussions, we will do so in a way that preserves our independence. It should not be expected that the Commission will endorse proposals put forward by any one party. Rather, the point of these discussions from my perspective is to encourage the industry to share information, to resolve practical issues, and to get benefits for consumers sooner rather than later. We will therefore have no tolerance for game-playing or attempts to pre-empt the legislative and regulatory package.
I would also note that it is often the case that much of the "grunt" work in such a process falls on the larger players. In this instance, I am glad to see the support from ISPANZ and InternetNZ for the process. Those groups can provide a way of involving internet service providers and ensuring that their needs are considered.
The Mobile Review
I would like to finish my comments today with some brief remarks on the mobile sector review we are currently conducting. The review is focused on the lack of new entry into the market and the possible need for a regulatory response.
We are in the middle of wide-ranging discussions with the industry and are also examining experiences in overseas markets.
At this early stage there are several things that stand out.
First there is argument even about whether or not there really is a problem, breaking cleanly between the existing players and everyone else.
Views have been strongly put that the market is working well and while there are challenges to building out networks in New Zealand, these are no different to those that both Telecom and Vodafone encountered when they entered the market. That there isn't a case for providing incentives for new infrastructure if there isn't a business case for it.
Equally, there are strong and different views about the barriers to entry facing potential entrants. Amongst those who believe there is a significant problem that should get regulatory attention, there are quite a number of suggested actions that need to be taken and a concern that no single response will be sufficient. The argument is that something needs to be done and it will require several interacting services or controls on behavior to stimulate additional competition.
A third theme is whether the issue is a lack of infrastructure competition or service based competition. There is a clear preference, implicit in the current regulated roaming and collocation services, for new mobile entry in the form of major network build. Experience in other markets suggests that service-based competition based on the ability to purchase bulk wholesale mobile minutes can be a complement to facilities-based entry, and possibly an alternative where facilities entry does not occur.
All of these issues, along with others, are on the table. I am expecting that the Commission will complete the information-gathering and initial analysis phase of the mobile review by the end of August. At that stage we will make a decision on whether to move to the next level of a formal investigation of regulatory action or not.
Conclusion
The regulatory regime is about to undergo a major period of change, with the goal of contributing to the Government's objectives of improving New Zealand's performance in telecommunications services. While the changes are quite fundamental, and will make a big difference to the effectiveness of competition, I believe we have quite a long way to go.
We can use the next few months to find ways to develop sensible arrangements for improved broadband access and to smooth the transition to the new regulatory environment. If we can be successful in this, there will be benefits both for consumers in the short-term and to the prospects for a new way of working together in the longer term.
I expect that we will resolve shortly the issue of changes to the regulatory settings for mobile services. The present two-player environment has delivered many good things, but I would like to think that more competitive diversity would bring about even better outcomes. Whether regulatory changes are needed to encourage that diversity, or would be counter-productive, is still an open question.
Thank you.
