• Home
• ICT
• Telecommunications
• TSO (service obligations)
• TSO Review (2007)
• Discussion Document
• 9. TSO Requirements

• Telecommunications

• TSO (service obligations)

• TSO Review (2007)

• Submissions
• Discussion Document
• Have Your Say
• Supporting Information
• Media Statements

9.1 Telephone and Broadband Network Infrastructure

198. New Zealand's fixed telephone network has been built up over many years. In line with common practice worldwide Telecom's fixed access network was designed around a regime of copper cables that started at the local telephone exchange and ran all the way to the customer.

199. During most of this time the network was primarily required to support low frequency voice telephone service and it was optimised for this purpose. In more recent times DSL broadband modem technology has developed to provide high frequency broadband services over the same telephone access line to users' premises, and cost effective fibre optic based data transmission systems were developed to deliver large quantities of data to and from broadband users.

9.1.1 Broadband Access Speed

200. DSL based broadband access circuit speed capability is dependant on the DSL technology and the length of the local loop access circuit. The access loop speed capability is highest for shorter loops, drops off substantially for loops over three kilometres, and in practice will usually only work over access loops that are less than about five kilometres in total length.

201. The following diagram¹³ illustrates the theoretical throughput speed capability of a DSL broadband access loop circuit for given lengths of copper local loops and different types of DSL modem technologies.¹⁴ In particular this highlights the problem of providing DSL services in remote rural locations where many users are likely to have local access circuit lengths in excess of five kilometres.¹⁵

Diagram 1: DSL Reach and Bit Rate

202. The following diagram shows the distribution of local loop access circuit lengths for a number of countries. Telecom New Zealand's access loop distribution is understood to lie between the USA and Germany loop length distributions.

Diagram 2: Distribution of access circuit lengths for a number of OECD countries.¹⁶

→ Full size version of Diagram 2 [126 kB GIF]

203. Telecom New Zealand is the only provider of fixed network access and associated regional backhaul capacity in many areas of New Zealand. A number of other service providers have installed fixed network access infrastructure in some urban areas.

204. Although other fixed network access technologies, such as fibre and wireless, are now increasingly being deployed, Telecom's copper cable based fixed network access circuits will continue to be the only practical method of providing a telephone service connection to many urban and rural premises throughout New Zealand for some considerable time.

205. The high cost and risk associated with installing alternative access and regional backhaul network infrastructure in many areas of New Zealand means that it is unlikely that fixed network access competition will develop outside of the existing competitive footprints in the medium term.

206. In recent times the fixed access network design rules have included requirements to better support broadband service delivery, at least in urban areas.

207. In order to improve broadband availability and speeds, New Zealand will have to make sizeable investments in the roll-out of fibre deeper into the local access network to shorten the copper local loop access network and/or investments in deploying radio based broadband access systems.

208. Further investment would be required to install fibre to the premises. A number of operators, including Telecom have installed fibre to the premises on a trial basis.

209. In general urban areas have higher density of users than rural areas. This means that a higher proportion of urban access circuits are typically shorter in length and will consequently have a higher broadband access circuit speed capability. The speed capability referred to here is the maximum speed capability of the access circuit, as opposed to the overall broadband service speed capability.

210. The following guide from BT shows approximately what proportion of BT Broadband customers can expect which maximum ADSL based broadband line speeds.

Table 1: Broadband Max Line Speeds (Source: BT Wholesale)

211. Given the similarity of BT and Telecom New Zealand access network design rules in urban areas it is likely that Telecom's urban access network will have an ADSL broadband speed capability profile that is similar to the BT network, despite the differences in urban area population densities. The corresponding ADSL2+ profile will in general be higher for access loops less than two kilometres.

212. The following diagram outlines Alcatel-Lucent's view of the access circuit speed capability required to support so called triple play broadband services that include Internet access, PSTN quality VoIP and high definition IPTV services. In general such services are likely to require VDSL2 enabled access loops with lengths under 1.5 kilometres.

213. Where the full potential of VDSL2 in the local loop is required the design rules should restrict loop length to less than about 400 metres.

Diagram 3: DSL Benchmark Performance

→ Full size version of Diagram 3 [38 kB GIF]

9.1.2 Network Infrastructure Investment

214. The following graph reports Telecom's total per annum investment in New Zealand since 1990 in nominal $NZ (i.e. no account of cost inflation has been made).

Graph 1: Telecom NZ Investment (per annum)

→ Full size version of Graph 1 [20 kB GIF]

215. The following graph reports an indicative estimate of the real investment trend per access service, averaged across all access services, relative to the 1989 base year level (set at 100).

216. The access services included were telephone service lines, cellular connections, broadband connections, and dial-up-Internet service connections. A weight of one was used for each except for dial-up-connections which were assigned a weight of 0.5. These weights are proxies of the likely relative level of capital investment required to support each access service category. The Communications PPI for inputs was used as a deflator.

217. A number of services were not included in this assessment because reliable demand data or a suitable proxy is not available, such as point-to-point data connections, customer premises equipment, 0800 service connections, international call transit, valued added services such as CLI etc. In general it is likely that such services connections have increased over the period and consequently the non-inclusion is unlikely to invalidate the trend level of average investment per access service.

218. It is well known that there are substantial scale and scope economies in the supply of telecommunications services. The question that the indicative estimates raise is whether the downward trend in per capita real investment is purely driven by scale and scope economies as opposed to the possibility that some of the downward trend may be due to underinvestment relative to the efficient level.

Graph 2: Indicative Estimate of Telecom NZ's Average Real Investment Per Access Service

→ Full size version of Graph 2 [11 kB GIF]

219. For the 2006 financial year, Telecom's planned rural expenditure was $59 million, including $8.5 million on its cellular network and $16.5 million on broadband infrastructure.¹⁷

220. Network Strategies estimated that Telecom's average annual level of rural fixed network access infrastructure investment for both growth and network replacement since 1994 has been less than half the depreciation allowance for an equivalent efficient replacement network that for assets with an economic life of between 15 to 20 years is estimated to fall between $50-70 million per annum.¹⁸

221. Network Strategies estimates did not specifically consider Local TSO related payments to Telecom by liable persons. Such payments to Telecom include a substantial depreciation element in recognition of the importance of maintaining the provider's incentive to reinvest in infrastructure. It is notable that such payments have been nearly on a par with the average annual level of rural fixed network access infrastructure investment.

9.2 Rural Broadband User Requirements

222. New Zealand has approximately 564,000 people living in rural regions, representing 13.8% of the population.¹⁹ Over 100,000 business enterprises operate in rural areas, and produce approximately 25% of New Zealand's Gross Domestic Product.²⁰ Exports from the New Zealand's rural agricultural, horticultural and forestry sectors accounted for 66% of New Zealand's total exports in 2006.²¹

223. Because of New Zealand's high dependence on its rural sector for economic growth and productivity improvements, the benefits from broadband use in rural New Zealand could potentially be very significant. See Annex C for information about user broadband trends.

224. Fonterra, for example, has a strategy aimed at reducing on farm costs and helping to improve dairy industry productivity. Fonterra says that it considers that fast Internet will not only provide another tool to suppliers in improving productivity in their farm businesses, but also serve to benefit the suppliers' families by opening up greater communication avenues.

225. Fonterra is working to improve farm to factory practices. For example, it is further developing animal traceability systems and undertaking the Milk Collection Programme of Work (MCPOW) which involves changing the way Fonterra operates across milk collection, from the farm to the factory to increase efficiency while maintaining high levels of service to suppliers, Fonterra factories and external customers. Such developments will involve innovative use of telecommunications at various points.

226. A recent example of a farm productivity development is the 2007 eFarmer of the year award for a program called Crop Report that uses the mobile broadband network to provide a simple, secure, and easy to use real-time reporting system that enables anyone on a farm to remotely access and update the farm's database.

227. Access to high speed broadband is likely to spur development of innovative new services, help transform sectors and deliver benefits for users. In particular, broadband has the potential to increase innovation and productivity on the farm and related industries.

228. ICT applications combined with access to broadband are likely to be important tools for maintaining and enhancing New Zealand's competitive advantage in farming where pasture management, stock management, weather monitoring, bio-security, traceability and farm–to-the factory coordination issues arise.

229. In addition to supporting the Internet uses outlined in the above discussion of urban broadband issues, access to higher bandwidth services is likely to facilitate social development, remote working, and the improved delivery of education via distance learning, health and community services, in rural New Zealand.

230. Currently about 50% of Telecom's rural telephone lines are capable of supporting DSL based broadband services. Satellite based broadband service is available throughout New Zealand. In addition, terrestrial wireless based services, such as via Telecom cellular, Vodafone, or Kordia's Extend network, are available in some areas.

231. Since 2002 the New Zealand government has taken an active role in facilitating the deployment of rural broadband infrastructure through the Broadband Challenge Fund and Project PROBE²² initiatives. Through PROBE, 891 additional New Zealand schools were provided with broadband access, which also had the effect of enabling broadband access for surrounding communities.

232. The current round of grants from the Broadband Challenge Fund is supporting three initiatives for deploy of broadband infrastructure in rural/underserved areas.

9.3 Availability of Rural Broadband Services

233. The willingness of service providers to offer rural broadband services is limited by the high costs of providing infrastructure in remote low density areas, the difficult topography in many areas, a lack of high-intensity users and the comparatively low returns on investment.

234. There are potentially two basic capability barriers that could be addressed to accelerate the widespread adoption of broadband in rural New Zealand:

• investment in regional backhaul infrastructure (connecting the access network back to the core network, i.e. linking provincial centres to the core network). It is evident that the key constraint to providing widespread broadband access to rural New Zealand is the cost associated with provisioning regional backhaul over long distances and difficult topography; and
• investment in rural access technologies (the wired or wireless "last mile"). A further issue is that the low population densities in rural areas means the business case for investing in rural access technologies (in conjunction with regional backhaul) is often more difficult than for investing in urban centres, particularly where loop shortening is required to improve potential broadband speed.

235. Over the past several years developed countries have become increasingly concerned about the delivery of broadband services to more remote regions and many have sought to accelerate the deployment of broadband infrastructure, including through:

• Aggregating demand to improve the business case for investment (e.g. UK, Australia, Wales);
• Contestable funding to support local communities (e.g. Ireland, Canada, the United States, and the Broadband Challenge Fund in New Zealand);
• A regional tendering process (e.g. Australia, Wales, Sweden);
• Low interest loans for providers to accelerate investment (e.g. the United States);
• One-off "per connection" grants to providers for connecting rural users (e.g. Australia); and
• Directly subsidising end-users (e.g. Wales)

236. A number of countries require basic voice telephone services to be provided on a universal basis (in a comparable manner to New Zealand's Local Service TSO); however, with the exception of Switzerland, many countries have been reluctant to include broadband access as part of their universal service obligations. Nevertheless, there may be merit in utilising New Zealand's TSO framework to improve access to broadband for rural users. Possible options include:

• extending the service requirements of the Local Service TSO (i.e. from dial-up to broadband); and/or
• establishing a new TSO instruments to supply broadband services.

9.4 TSO Role in Improving Broadband Connectivity

237. Where the market is not expected to ensure supply broadband services of a quality and quantity adequate to meet the government objective for improved broadband connectivity there may be a case for intervention. This could potentially focus on stimulating capability deployment (supply push) and/or improving the ability of consumers to purchase service (demand pull) for achieving this objective. The TSO framework is one type of policy mechanism which is being considered for this purpose.

238. TSO instruments established for particular telecommunications services must conform to a set of criteria prescribed in the Telecommunications Act. These require that the TSO be for a certain telecommunications service targeted at a particular set of users if this service would otherwise not be made available commercially. As a policy mechanism, TSO instruments involve market intervention which can potentially have a detrimental impact on the competitive development of a market.

239. Whether broadband access should be part of TSO requirements has greater relevance now as the transition to NGN moves into the phase of converting access lines from analogue to digital for the supply of telephone access services. The bandwidth required for access lines depends on what other service applications need to be supported in addition to telephone service, and the quality of service standards applied.

240. Although broadband penetration levels have been rising generally on a global basis, the deployment of broadband NGN has been variable, with broadband deployment concentrated in urban areas. Hence there are concerns that the broadband needs of rural users will be neglected. Such concerns have led a few developed countries (e.g. UK, US and Switzerland) to consider mandating broadband access for all households, as part of their respective universal service obligations frameworks, with the aim of addressing the potential for "social exclusion" by those who are denied the opportunity to be supplied broadband access.

241. It has been noted in other jurisdictions that although broadband has significant benefits generally, a lack of broadband access is not a serious contributor to "social exclusion", especially if people have adequate dial-up internet access. It is also noted that USO intervention can stifle greater competitive commercial supply of broadband access. Some rules²³ for deciding whether to include broadband in universal service obligations (USO) frameworks have been postulated by an ITU expert as follows:

Rules for Systematically Considering Whether Broadband Should be a USO (i.e. TSO)

1. Consideration of whether broadband is an essential service of significant "social importance".
2. Estimation of the degree of expected market penetration of broadband service.
3. Estimation of the nature and extent to which broadband will not be made available by the market and why.
4. Identification and specification of objectives and desired outcomes clearly and specifically.
5. Assessment of the extent to which market demand and delivery can/will meet the specified objectives.
6. Consideration of the social and economic disadvantages incurred by those without access to broadband if there is no government intervention in this expected market situation.
7. Estimation of the costs of intervention to widen broadband deployment through the use of the USO mechanism.
8. Establishment that the benefits of intervention through the USO exceed the costs of doing so, taking into account the incidence of such benefits and costs; and of effects on other communications and broader policy objectives.

9.5 Design Principles for TSO Instruments

242. Some guiding design principles for TSO instruments to address the telecommunications connectivity needs of New Zealand households are suggested below:

• contribute to the long term interest of telecommunications users
• preserve the availability of free local calling for residential users;
• ensure the availability of telephone service to residential users going forward at least to the extent required under the Kiwi Share;
• ensure that the reliability of fixed telephone access for users in rural areas without cellular mobile coverage is not vulnerable to electricity outages;
• ensure emergency call service continues to be an integral component of TSO local service;
• ensure the price of TSO local telephone service is set at a competitively neutral and sustainable level;
• ensure there are adequate incentives for TSO providers to renew capability so users benefit from the cost savings/productivity gains and innovation of technological advances;;
• adjust the price cap for TSO local telephone service so it is not an impediment to greater competition in telecommunications markets;
• define TSO service requirements in a manner that is technologically neutral and minimises the administrative cost for the respective TSO instruments; and
• ensure service requirements in each TSO instrument are periodic reviewed to test whether they still necessary and if they would continue to be commercially non-viable without TSO subsidisation.