Ministry of Economic Development Home| Contact MED|


Jump to Site Navigation Links
 
 
 

Links to this page were:

Section Subnavigation Links:

3. Executive Summary


Development of Requirements for the Operational Separation of Telecom: Consultation Document

Information Technology and Telecommunications Policy, Energy and Communications Branch
[ Last Updated 3 September 2007 ]


Within this section…

Background

1. In May 2006, the Government announced the outcomes of the Telecommunications Stocktake (the "Stocktake"). The Stocktake package (and the Telecommunications Amendment Bill 2006)1 aimed to improve competition in telecommunications markets for the long-term benefit of end-users by:

  • Improving access at the wholesale level to the fixed local loop telecommunications network. In particular, by introducing Local Loop Unbundling (LLU) and amending the existing Unbundled Bitstream Service to remove the constraint on the upstream speed and clarify that it could be bought as "naked DSL".
  • Improving the existing regulatory system by improving the speed, decisiveness and equity of outcomes.
  • Improving transparency of Telecom's costs and pricing via the accounting separation of Telecom NZ.
  • Addressing rural telecommunications needs by developing a developing a package to address rural infrastructure issues and reviewing the Telecommunications Service Obligations (TSOs).
  • Future-proofing the regulatory environment to technology change and market dynamics by enhancing the role of the Telecommunications Commissioner and empowering the Telecommunications Commissioner to undertake strategic reviews of sector performance.
  • Stimulating efficient investment through enhanced competitive conditions.

2. In addition, the Government noted that the operational or structural separation of Telecom were options that the Government was prepared to consider in order to facilitate non-discrimination and equality of access to wholesale telecommunications markets. In particular, provided that the full benefits of separation could be achieved by an operational split then a full structural split might not be required. The Government invited the Select Committee, charged with considering legislation implementing the Stocktake package, to consider the need for further separation measures.

3. The Telecommunications Amendment Bill, which implemented the Stocktake decisions, was referred to the Finance and Expenditure Select Committee (FEC) on 29 June 2006. On 28 November 2006, the FEC reported an amended Bill to Parliament which included a new Part 2A of the Telecommunications Act that required a robust three way operational separation of Telecom.

4. The Telecommunications Amendment Act (No.2) 2006 came into force on 22 December 2006.

Operational Separation Process

5. Section 69F (Part 2A) of the Telecommunications Act 2001 requires the Minister of Communications to issue a Determination of further requirements with which Telecom's Separation Plan (including the Undertakings that form part of that separation plan) must comply. This consultation document seeks comment on the Ministry's preferred model for implementation of Telecom's operational separation as outlined in this document, upon which it is intended the Minister's Determination will be based.

6. Following the issuing of the Minister's Determination, Telecom will have 20 working days to prepare their draft Separation Plan and further public comment will be invited. It is anticipated that the Minister's Determination will be released mid-2007.

High-Level Model and Policy Approach

7. The purposes of Part 2A of the Act "Operational Separation of Telecom" are:

  • To promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services in New Zealand; and
  • To require transparency, non-discrimination, and equivalence of supply in relation to certain telecommunications services; and
  • To facilitate efficient investment in telecommunications infrastructure and services.

8. The operational separation of British Telecom by the UK regulator, Ofcom, provides a useful reference model and has greatly informed the policy rationale upon which the proposed separation model is based. However, there are a number of relevant differences between the UK and New Zealand that result in differences between the draft separation model outlined in this paper and the UK model.

9. The key features of the proposed operational separation model outlined in this paper are:

  1. The separation of Telecom into separate Access Network Services, Wholesale and Retail business units;
  2. A requirement for Access Network Services to be operated on a stand-alone basis and for Telecom Wholesale to be operated at arms-length from any retail business units;
  3. The establishment of an Independent Oversight Group, backed up by Commerce Commission enforcement, to ensure Telecom faithfully implements the Separation Plan;
  4. A requirement that relevant products, especially Local Loop Unbundling (LLU)2 and unbundled bitstream access services,3 are available to all market participants on equivalent terms.

10. It is intended that the operational separation model fits coherently with the existing telecommunications regulatory regime rather than replace it. For example, the operational separation model does not set specific terms and conditions of access to regulated wholesale services which are currently set under the Part 2 access regime in the Act (i.e. via the Commerce Commission's Standard Terms Determination process). Rather, the regulatory changes proposed under the model focus on which Telecom unit should provision certain services, the behavioural rules that should govern that unit, and ensuring that Telecom supplies those services to itself on an equivalent basis to how it supplies those services to access-seekers.

11. The key features of the model are summarised further below.

The Access Network Services (ANS) Unit

12. The ANS Unit will be a completely new unit within Telecom that will operate on a stand-alone basis from other units within Telecom. The ANS Unit will:

  • Be separately branded.
  • Have a separate physical location.
  • Have separate staff that are unable to work for other Telecom units whilst they are working for the ANS Unit.
  • Have localised incentives where remuneration reflects solely the objectives of the ANS Unit.
  • Have obligations not to disclose ANS commercial information or customer confidential information to other Telecom units except in specified circumstances.
  • Have separate commercial policy, whereby other units are required not to unduly influence the commercial policy of the ANS Unit except through such mechanisms available to other service providers.
  • Develop and implement relevant corporate plans and policies for their own unit which would continue to be approved by the Telecom Board.
  • Have a person responsible for the management of the ANS Unit that reports to the CEO but has sufficient delegations from the Telecom Board for independently managing the ANS Unit in accordance with relevant corporate plans.
  • Be responsible for controlling, maintaining and investing in Telecom's Access Network assets.

13. It is intended that the ANS will be a "one stop shop" for Local Loop Unbundling (LLU) services to wholesale customers, including other Telecom business units, by providing them with unbundled copper loops, co-location and LLU backhaul services. It will provision the following services to the following levels of equivalence:

Services Level of Equivalence required for service delivery
Unbundled copper local loops (LLU) Equivalence of Inputs
LLU Backhaul services Equivalence of Inputs
LLU co-location services Equivalence of Inputs
Future regulated fixed network services primarily delivered by Telecom's Access Network Equivalence of Inputs

14. The ANS will be forward-looking and will be the Telecom unit responsible for supplying all present and future wholesale services that are primarily delivered by Telecom's Access Network assets, which comprise the current and future Local Access Network and Regional Backhaul Network assets (as defined in this paper). It is proposed that the ANS Unit will be responsible for controlling, operating and undertaking investment in Telecom's Access Network assets.

15. This consultation document outlines a preferred model for implementation of Telecom's operational separation upon which it is intended the Minister's Determination will be based. Key choices that have been made in arriving at an initial policy position on the ANS Unit include:

  • Adopting the same starting point as Ofcom by separating enduring economic bottleneck assets into the control of ANS Unit.
  • Aligning ANS services and assets closely, such that ANSwill not include "value added" services such as basic telephone services, leased lines or number portability.
  • Taking a forward-looking view of the access network, and placing regional backhaul assets under the control of the ANS Unit.
  • Including relevant transport electronics in the Local Access and Regional Backhaul Networks under the control of the ANS Unit.
  • Emphasising a technology neutral and future-proofed approach to the assets under the control of the ANS Unit such that it includes fibre assets, wireless local loops, future access assets, and is not just limited to the existing copper network.

16. The above approach includes future access assets (such as yet-to-be-deployed fibre) within the control of the ANS Unit. It is not the intention to compel Telecom to provide wholesale access to fibre assets which Telecom is not compelled to supply by the access regime in Part 2 of the Act. If, in the future, Telecom is required by the access regime to provide services to access seekers (such as fibre), then equivalence requirements would apply to the provision of those services.

Wholesale

17. A single Wholesale Unit will be required that operates on an arms length basis from the Telecom units that provide retail functions. The Wholesale Unit will:

  • Have separate staff that are unable to work for other Telecom units whilst they are working for the Wholesale Unit.
  • Have localised incentives where remuneration reflects solely the objectives of the Wholesale Unit.
  • Have obligations not to disclose Wholesale commercial information or customer confidential information to retail units except in specified circumstances.
  • Have separate commercial policy, whereby retail units are required not to unduly influence the commercial policy of the ANS Unit except through such mechanisms available to other service providers.
  • Have a person responsible for the management of the Wholesale Unit that reports to the CEO.

18. The Wholesale Unit will be required to provision a minimum set of key regulated fixed network services to the following levels of equivalence:

Services Level of Equivalence required for service delivery
Unbundled bitstream access services (UBA)4 – this would include all variants of bitstream access, including "naked DSL" Equivalence of Inputs
UBA backhaul Equivalence of Inputs
Resale services, including basic telephone service and future resale services It is likely that a high equivalence standard other than "Equivalence of Inputs" will need to be applied
Future regulated fixed network services not otherwise required to be provided by the ANS Unit and excluding interconnect services and multi-network services Equivalence of Inputs

19. Key choices that have been made in arriving at an initial policy position on the shape of the Wholesale Unit include:

  • Taking a targeted approach to the Wholesale Unit by requiring Telecom to include a minimum set of key wholesale services and leaving Telecom flexibility regarding how their wider wholesale service set should be provisioned.
  • Not requiring any specific assets to be controlled by the Wholesale Unit though Telecom would be free to do so. Wholesale will be primarily a service management and provisioning desk for relevant wholesale services.
  • Not requiring two Wholesale Units or subdivision of the Wholesale Unit as this appears to create unnecessary complexity for Telecom and third party service providers.

20. Strict "Chinese Walls", equivalent service delivery requirements, arms length obligations and incentive arrangements are being applied to the Wholesale Unit in order to facilitate transparency, equivalence and responsiveness by Telecom in meeting its wholesale customers' needs. It is considered that such obligations should be targeted at key regulated wholesale services where the greatest benefits for competition are likely to accrue rather than to the wider set of commercial wholesale services currently supplied by Telecom. These requirements would not compel Telecom to supply non-regulated services to other service providers.

21. In practice, it is expected that the Wholesale Unit will retain a strong level of integration with the parts of Telecom responsible for technology planning and control of fixed network assets that are not required to be part of ANS. Whilst such fixed network functions are not required to be within the Wholesale Unit, the operational separation model still provides for separation of these upstream network and wholesale functions from downstream retail functions by virtue of the proposed arms length requirements.

22. Telecom would be able to continue to supply all wholesale services out of the Wholesale Unit in order to reduce the number of potential "wholesale desks" for access-seekers.

Separation of Upstream and Downstream Divisions

23. The Act is primarily based on a "three-box model" of separation between ANS, Wholesale and Retail units. However, section 69D(1)(d) allows for the possibility that not all of Telecom's network will be controlled by ANS and Wholesale and that the non-access parts of the network may continue to be operated by a separate unit (e.g. the remainder of Telecom's current Technology and Enterprise unit).

24. It is not considered necessary to define the services, people or assets that should reside in other fixed network units within Telecom or that should reside in units that provide retail functions. However, there will be a separation of upstream fixed network units (which includes but is not limited to ANS and the Wholesale Unit) from downstream units that provide retail functions. This will include:

  • Fixed network business units must be operated at arms-length from Telecom retail units.
  • Fixed network business units will be obliged not to disclose relevant commercial information or customer confidential information to retail units except in specified circumstances.
  • Retail units shall not attempt to unduly influence the commercial policy of fixed network business units.

Equivalence Standards for Service Delivery

25. Services that will be required to have strong and specific equivalence standards of service delivery have been outlined in the previous sections on the ANS and Wholesale Units. Consideration was given to a number of equivalence models. In particular, the two equivalence models - "Equivalence of Inputs" and "Equivalence of Outcomes" - that Ofcom defined as part of their Strategic Review have been the subject of much comment and debate.

26. Key choices that have been made in arriving at an initial policy position on equivalence standards for service delivery and how they should be applied include:

  • Adopting the "Equivalence of Inputs" (EOI) standard from the BT Undertakings as the most meaningful and effective definition of an equivalence standard for service delivery.
  • Not requiring EOI for services such as interconnection and multi-network services (such as number portability) which are not a good fit with equivalence concepts. A consequence of this is that these services are not required to be provisioned by either the ANS Unit or Wholesale Unit under this model.

27. The operational separation model in this paper adopts the definition provided in the BT Undertakings, which means that all upstream consumers of a wholesale service (including Telecom) must receive those wholesale services on the same terms, by means of the same systems, and receive the same commercial information. EOI requires Telecom consume its own EOI services, which is a critical success factor for achieving equivalence at a service delivery level.

28. In practice, there are a number of particular implementation complexities regarding delivery of services on an EOI basis. These are generally considered surmountable issues that will be managed through an appropriate implementation timetable. However, re-sale services do not easily fit a strict EOI approach, suggesting a different equivalence approach is required. The eventual approach to re-sale services used will be a practical balance between implementation factors (cost and time) and the benefit to competition.

Enforcement and Oversight

29. There will be an Independent Oversight Group (IOG) that will be responsible for monitoring implementation and compliance with Telecom's Separation Plan. The IOG will play an important internal scrutiny role within Telecom and will be charged with monitoring Telecom's operational separation commitments. The IOG will be important to maximising stakeholder confidence in the operational separation process and implementation.

30. Key features of the IOG are that it will:

  • Be appointed by the Telecom Board in consultation with the Commerce Commission, and will have a majority of independent members, including an independent chair.
  • Be supported by an IOG office which has access to necessary information required for it to fulfil its functions.
  • Not be a sub-committee of the Telecom Board, nor will it perform any management functions, or approve any management or capital plans. It may, however, have a role in investigating and reporting on the consistency of any corporate plans with relevant obligations on Telecom under the operational Separation Plan.

31. The Commerce Commission has formal responsibility for enforcing Telecom's operational separation undertakings and the Commission's existing investigative and enforcement functions will not be constrained by the establishment and operation of the IOG. However, in practice, there is likely to be a practical delineation between the work of the Commerce Commission and the IOG that will evolve over time.

Implementation

32. A clear timetable for the implementation of the Undertakings based on priorities will be required.

33. Some of the organisational elements such as the timetable for the establishment of the Access Network Services (ANS) unit and the IOG will be able to be implemented quickly (indicatively 2-6 months after the Minister approves Telecom's separation plan). Other areas such as delivery and migration of all customers to full EOI products for existing services will take longer as they require the realignment or redevelopment of systems and processes. It is initially considered that full Equivalence of Inputs (EOI) on the provisioning and delivery of all EOI services can be achieved within approximately 2-5 years of the date on which the Minister approves Telecom's separation plan. Partial implementation of EOI can be achieved more quickly.

34. Setting a specific and enforceable implementation timetable through binding undertakings will have regard to cost and implementation issues. It will also consider incentives to migrate customers and services to Next Generation Networks (NGNs) and the impact of emerging convergence issues between fixed, mobile and media services.

35. It will be important for Telecom NZ to display strong leadership to achieve the Undertakings and the Undertakings will need to recognise the importance of both incentives and counterfactuals to underpin the change process.

Illustration

36. The following diagram illustrates what the new organisation structure of Telecom would likely look like as a result of the operational separation model outlined in this paper.

Diagram 1: Potential New Organisational Structure of Telecom

Diagram 1:Potential New Organisational Structure of Telecom

→ Full size version of Diagram 1 [54 kB GIF]

1 The Telecommunications Amendment Bill implemented changes arising from the 2004 Implementation Review of the Telecommunications Act 2001 in addition to the "Stocktake" package.

2 Local Loop Unbundling is a requirement on the incumbent telecommunications provider (Telecom) to allow other service providers to access and use the copper circuit from the telephone exchange (or cabinet) to the customer premises.

3 Bitstream services are the primary connectivity services that deliver broadband.

4 Bitstream services are a wholesale connectivity service for delivery of broadband. Unbundled Bitstream Access is regulated under Schedule 1 of the Act.


Back to Top



Jump to main page content.