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Relative Performance Assessment

5. The following table summarises New Zealand's comparative pricing performance for fixed telephone services relative to OECD countries, using input price data as at August 2006. The results for the USA are based on the PacBell data.¹

6. The specifications of the OECD fixed public switched telephone network (PSTN) services baskets were comprehensively revised in 2005 and were introduced in Feb 2006. In particular the basket specifications now include: low, medium and high residential user baskets; a small office/home office business user basket; and a small to medium enterprise user basket.

7. The ratio of fixed-to-mobile (FTM) calls to fixed network only calls in the baskets now vary between 25% and 47%, compared to 10 % previously. FTM calls are now considered to be a standard component of the fixed telephone service calls basket and consequently a separate (non-standard) FTM basket result is no longer necessary for standard benchmark reporting and has not been provided.

8. The rankings from the revised OECD fixed public switched telephone service comparison baskets place New Zealand generally in the fourth quartile for residential PSTN, small and medium business PSTN services. In order for New Zealand to place in the first quartile for OECD fixed PSTN pricing and performance:

• residential fixed PSTN services would need to reduce in price by approximately 30 percent;
• business fixed PSTN services would need to reduce in price by approximately 35 percent.

Composite (High, Medium and Low) Residential Telephone Service OECD Benchmark

Larger version of "Composite (High, Medium and Low) Residential Telephone Service OECD Benchmark" [37 kB PDF]

Previous OECD Benchmark Relative Performance

9. In previous years New Zealand's relative performance, assessed using the official OECD fixed telephone service tariff comparison basket, improved from ~22nd (in 2004) to about 18th as per the following table. These results did not include FTM calls at that time.

10. The apparent decline in 2006 in New Zealand's fixed telephone service relative performance (~18th to ~24th) arises from the adoption of the new fixed OECD PSTN services baskets which now include a substantial proportion of FTM calls. The relative ranking of the composite residential basket without FTM calls was roughly in line with previous years ranking as the following table results confirm.

Other Relevant Factors

11. New Zealand is one of a small number of OECD countries where residential telephone users have capped price calling options that provide capped pricing of local, national and international calls. The benefits of such plans are generally not well represented by OECD price comparison baskets. However, such options are becoming more available across OECD countries in respect of broadband service based VoIP calling options.

12. The business telephone service price used in the comparison did not take into account lower prices in some areas, such as central business districts, where there is competitive provision of business access service for larger business users.²

13. On 21 April 2006 the Commission provided its Mobile Termination Reconsideration Final Report to the Minister of Communications, recommending that the termination rate for fixed-to-mobile calls be regulated. The responsible Minister's decision is pending.

14. The following infrastructure and service related factors should be borne in mind when considering relative performance issues. At the time:

• there was no infrastructure based alternative supplier of residential telephone service with a national reach;
• there was limited infrastructure-based competitive provision of residential and small business telephone service by TelstraClear in parts of Wellington, Kapiti and Christchurch;
• there was infrastructure-based alternative supply of business telephone service by TelstraClear in larger central business districts;
• there was limited infrastructure based competitive provision of residential and small business telephone service by Woosh in parts of Auckland, Wellington, Christchurch and Southland;
• the price of residential telephone service is capped, in real terms, under the local telephone service TSO provisions;
• TelstraClear and some other service providers resell Telecom's residential telephone service under a regulated wholesaling agreement. The agreement is applicable in areas where TelstraClear does not have access line infrastructure.

15. At the time that the data applies to the following regulatory reforms announced on or after 3 May 2006 and enacted in December 2006 had yet to take effect:

• unbundling of Telecom's local loop and sub-loop copper-wire lines between telephone exchanges and users premises;
• removal of upload speed constraints on the existing regulated unbundled bitstream service and the inclusion of a requirement to provide bitstream access without a requirement to rent a telephone service;
• accounting separation and information disclosure of Telecom's fixed network business operations;
• a requirement for a robust three way operational separation split of Telecom's fixed network operations to address discriminatory supply behaviour.

Cellular Telephone Service Performance

16. The following table summarises New Zealand's ranking for the low, medium and high user OECD cellular service baskets using input price data as at August 2006. The OECD Teligen results were based on Vodafone plans that require a three year commitment by a subscriber to the particular plan.

17. The following table summarises New Zealand's ranking for the low, medium and high user OECD cellular service baskets using cellular plans that do not require a 36 month contract.

18. In general New Zealand's relative cellular service pricing performance ranks in the bottom half of the OECD for pricing based on Vodafone plans that require a three year commitment. If a three year plan option was excluded, New Zealand's relative performance ranks in the bottom quartile of the OECD.

19. The following graph shows the results for the cellular low user OECD basket. It is likely that this result is reasonably representative of many prepaid cellular service users in New Zealand, text messaging usage aside.

Low User OECD Mobile Basket - August 2006 - Excluding Tax in US$ PPP

Larger version of "Low User OECD Mobile Basket - August 2006 - Excluding Tax in US$ PPP" [29 kB PDF]

20. The following table shows New Zealand's relative rankings for 2005 and 2006 as a percentage of the OECD country average for the different user baskets. The table suggests that there has been a significant relative performance improvement. However, to the extent that three year commitment plans are the basis of this improvement, the improvement may not be representative of more widely used cellular service plans.

Comment

21. There is a question about the relevance of including plans requiring a three year term commitment in the OECD price comparison basket. At present there are no rules that specifically exclude inclusion of such options in the comparison basket methodology. The Ministry intends to take this issue up with the OECD Secretariat with responsibility for OECD telecommunication service price benchmark methodology.

22. The benchmark results do not include larger users, such as those with total cellular handset usage in excess of about 20,000 minutes a month, because such business is usually subject to competitive bidding and the average per minute pricing is not available.

23. The Vodafone three year cellular plan options have a number of limitations. For example, Vodafone Base plans are available on a 36 month contract and penalty fees apply for early withdrawal, although users can transfer to another Base plan for no charge or another contract plan (fees may apply). International roaming is not available on Base plans, and the plans are not eligible for any other Vodafone special, promotion or incentive.

Other Relevant Factors

24. A number of capped price and special deal calling options are available; the benefits of which are generally not well represented by OECD price comparison baskets. Some examples of these are set out below.

• capped price off-peak calls, such as up to 60 minutes for a low set price;
• international calling for the same price as domestic calling;
• capped text pricing;
• Vodafone Bestmate option where for $6 a month, unlimited calling, texting and video calling to any one other Vodafone customer.

25. In July 2006 TelstraClear announced a $50m investment in Tauranga starting in 2007, to develop a high-speed wireless network that will provide a range of voice, broadband and mobile access telecommunications services to more than 100,000 household and business customers.

26. On 10 May 2006 the Commerce Commission announced that it will examine the reasons for the lack of new entry into the mobile services market as a prelude to deciding whether or not to commence an investigation into possible changes to the regulatory framework.

27. On 10 October 2006 the Commerce Commission announced the conclusions of its mobile services market review. The main conclusions of the review were that the mobile services market is characterised by significant fixed costs and, in relation to voice calls, relatively high prices and low usage compared to most other OECD countries. In such a market, competition would be expected to lead to existing operators seeking to increase usage on their networks in order to benefit from economies of scale. In the prevailing market conditions the Commission would ordinarily expect new entry.

28. The Commission also announced its intentions to commence Schedule 3 investigations:

• into whether or not to amend some of the terms of the current roaming service, such as whether the service should be moved from a specified service to a designated service dealing with both price and non-price terms, clarifying aspects of the service description dealing with matters such as, roll-out obligations, roaming on 3G networks and inter-network roaming.
• into whether or not to amend some of the terms of the current co-location service, such as whether the service should change to become a designated service, which will allow the Commission to set price terms. Should the Commission's current review of the co-location code submitted by the Telecommunications Carriers Forum reveal unresolved issues with non-price terms, the Commission may decide to expand the scope of its investigation to include such issues.

29. The Commission also said that there were reasonable grounds to commence an investigation under Schedule 3 of the Act into whether or not to regulate wholesale access to capacity on mobile networks, but decided not to begin such an investigation at this time. Instead, the Commission will monitor the commercial developments that are taking place around wholesale access and will wait to see if there is entry at the network level. If facilities-based entry does not occur in the near term, the Commission will reassess whether to commence such an investigation.