• Home
• ICT
• Telecommunications
• Operational Separation
• Operational Separation process
• Consultation Document
• 8. Governance

• Telecommunications

• Operational Separation

• Operational Separation process

• Side letter - info disclosure
• Telecom's side letter - rural
• Minister's letter to Telecom
• Telecom's Separation Plan
• Notice of Requirements
• Submissions on Telecom’s
• The Amending Determination
• The Amended Separation Plan
• Submissions on Undertakings
• T'com Draft Plan
• Determination
• Submissions Regarding Telecom
• Consultation on T'com Proposal
• Submissions
• Consultation Document
• Background Documents
• Media Statements

165. The preceding sections are focussed on defining the separated units within Telecom and the application of specific service-level equivalence obligations to key wholesale services. Defining the separated units is only one half of the equation. The other half is establishing the rules governing how those units operate and the transactions between those units.

166. Part 2A of the Act requires:

1. That Telecom must operate the fixed network access service business unit (the proposed ANS Unit) on a stand alone basis, at arms length from any other Telecom business unit; and
2. That Telecom must operate its wholesale business unit or units (the proposed Wholesale Unit) at arms length from any business unit that provides retail functions; and
3. That Telecom must operate any business unit that provides retail functions (the proposed Retail Unit and other retail units within Telecom) at arms length from any of Telecom's fixed network business units (which would include the proposed ANS Unit, the proposed Wholesale Unit, and any other fixed network business unit within Telecom).¹⁸

167. These requirements are partly achieved through the application of specific equivalence requirements such as EOI (as discussed in the previous section), which require the separated units to "trade" with both internal Telecom customers and external wholesale customers using the same processes in a way that can be verified transparently.

168. However, achieving arms-length or "stand-alone" relationships between the separated units will require a number of additional specific organisational and behavioural changes within Telecom.

169. 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).

170. It is important any fixed network units that are not part of ANS or Wholesale are still subject to rules that require them to be operated at arms-length from Telecom's retail units, for example so as to ensure that those retail units do not have preferential access to information about network changes. Accordingly, most of the arms length rules set out in this section will also apply to any fixed network business units that are not part of ANS or Wholesale.

171. The following table summarises some of the key requirements being proposed to achieve "arms-length" and "stand-alone" separation between relevant units as required by the Act.

8.1 Governance and Reporting Lines

172. This section proposes a number of corporate governance requirements for delivering on the "arms-length" and "stand-alone" requirements under Part 2A of the Act and achieving the purposes set out in s69A. In particular, this section covers:

• Requirements regarding the managers of the ANS and Wholesale units and who those managers report to;
• Requirements for setting and implementing ANS policies to ensure that ANS operates on a stand-alone basis;
• Arms-length rules that will apply to certain Telecom personnel;
• Staffing restrictions for ANS and Wholesale and the role of shared corporate functions; and
• Other governance issues.

173. Operational separation is defined in the Act as not including a requirement that any business unit can be operated by different owners. That definition also prevents the Minister from requiring Telecom to operate its different business units as separate subsidiaries, but Telecom may voluntarily offer such an arrangement. Inherent in the model of operational separation is some retention of control over the separated units at a group level within Telecom. This draft operational separation model does not seek to remove this, e.g. under any operational separation model, the Telecom Corporation of New Zealand Limited (TCNZ) Board will retain overall management responsibility for all of Telecom.

174. Additionally, Telecom is required to comply with a number of corporate governance obligations as a result of being a publicly listed company in both New Zealand and overseas which are managed by the Board.

175. Nevertheless, it is considered that a number of specific corporate governance requirements are necessary for delivering a robust operational separation and achieving the purposes of Part 2A of the Act.

8.1.1 Management and Reporting Lines for the ANS and Wholesale Units

176. The following governance requirements are proposed for the ANS Unit and the Wholesale Unit. These arrangements are necessary to ensure that ANS operates on a stand-alone and arms-length basis and to ensure that Wholesale operates on an arms-length basis from Telecom's retail units:

1. Telecom must appoint a person to have responsibility for the management of the ANS Unit and another person to have responsibility for the management of the Wholesale Unit. Telecom will have discretion to determine the titles of those people. Each of those people shall:
   1. Work solely on matters pertaining to their respective unit and not have any responsibility for other units within Telecom. The only exception would be that the manager of the Wholesale Unit would not be prevented from also having responsibility for any other unit that provides a wholesale function in relation to services that are not "relevant services".
   2. Manage their respective unit in a way designed to secure compliance with the sections of Telecom's operational separation plan applicable to the unit.
   3. Report directly to the Telecom CEO.

8.1.2 Setting and Implementing ANS Unit Policies

177. In order to ensure that the ANS Unit is stand-alone, it is considered that a number of additional requirements should apply in respect of setting and implementing ANS Unit policies.

178. There are a variety of ways that the ANS Unit could be given sufficient independence in this area. The simplest is to require it to act fully independently of the remainder of Telecom. However, the nature of operational separation requires the TCNZ Board to be able to continue to oversee the operation of the entire Telecom Group so the Board will need to continue to make strategic decisions in relation to all of ANS, Wholesale and retail. In addition, it is likely to be difficult for the Board to make effective and informed decisions if it is unable to be advised by the Telecom CEO and senior executives on significant ANS decisions and how those decisions affect the Telecom Group's overall operations.

179. The BT Undertakings have given Openreach a high level of autonomy by including requirements that:

1. Openreach must establish an annual operating plan, which includes plans, targets and budgets for Openreach and is submitted to the BT Group Board for approval.
2. Once approved, the execution of that plan is the responsibility of the Openreach CEO and the Openreach Management Board.
3. The Openreach CEO has delegated authority from the BT Group Board to authorise capital expenditure up to 75 million pounds within the annual operating plan, with this limit able to be varied by the BT Group Board.

180. It is proposed that similar requirements be included in relation to Telecom, with additional requirements to clarify the extent to which the Telecom CEO and executives are permitted to be involved in ANS-related issues:

1. Annual and long-term corporate plans and technology plans (or equivalent documents) for the ANS Unit (or the ANS Unit parts of overall Telecom plans) must be developed by the ANS Unit and submitted to the TCNZ Board for approval.
2. Once those plans have been approved by the Board, all ANS Unit matters must be solely implemented by the ANS Unit.
3. The manager of the ANS Unit must have sufficient delegations from the TCNZ Board to allow him or her to independently manage ANS in accordance with the approved plans. This delegation should be the same as the Telecom CEO's delegation in relation to other Telecom business units and, in relation to ANS issues, should replace the Telecom CEO's delegation. The Telecom CEO and any other employees outside ANS must not have a delegation that permits him or her to independently make or veto any ANS decisions.
4. If an ANS decision exceeds the delegated authority of the head of ANS, then that matter must be referred to the TCNZ Board for approval. The Telecom CEO and non-retail executives may be involved, but the IOG will have a role in scrutinising ANS plans and major investment decisions such that changes made after the involvement of the CEO and executives are transparent.¹⁹

8.1.3 Arms Length Rules

181. Section 69D of the Act requires that:

1. ANS must operate at arms length from any other Telecom business units;
2. Wholesale must operate at arms length from Telecom's retail business units; and
3. Telecom's fixed network business units (whether part of ANS or not) must operate at arms length from Telecom's retail business units.

182. These requirements to operate on an arms-length basis are partly achieved by specific requirements regarding the use of confidential and commercial information and the influencing of other units' commercial policy. Those specific requirements are set out in section 8.2 below. However, operational separation is not just about imposing a few specific requirements about matters like confidentiality. It requires a more general cultural shift amongst the personnel of each of the separated units whereby they are making the decisions that are in the best interests of their unit, even where those decisions may be unfavourable to Telecom's retail units. Accordingly, several general non-discrimination obligations are proposed. These obligations will be relevant to all personnel working for ANS, Wholesale or the fixed network units and will be supplemented by Codes of Conduct.

183. As noted above, operational separation necessarily involves the TCNZ Board continuing to have overall responsibility for the management of Telecom. Due to the structure and size of Telecom, there will also be other people that continue to have responsibilities that span more than one unit, e.g. the Boards of Telecom New Zealand Limited (TNZL) and any other relevant subsidiaries, the Telecom CEO and certain senior executives and certain shared corporate functions. The arms length rules will also be particularly relevant to these personnel.

184. It is proposed that the arms length rules should require Telecom personnel to:

1. Not disclose ANS, Wholesale or fixed network unit commercial or confidential information to another unit (see section 8.2 for more details).
2. Not enter into a related party transaction if the terms of the transaction are terms which unrelated parties in the position of the parties to the transaction, each acting independently and in its own best interests, would not have agreed to (a related party transaction will mean any transaction (i) between ANS and any other Telecom unit, or (ii) between Wholesale and Retail).
3. When making any ANS, Wholesale or fixed network unit investment decisions or product development decisions, ensure that those decisions are considered solely on their own merits, without taking into account the potential impact on the products or activities of (i) in the case of ANS, any other Telecom unit or (ii) in the case of Wholesale or fixed networks units, Retail; other than in relation to:
   1. The effect of other Telecom units on aggregate demand forecasts; or
   2. The need to make trade-offs to allocate limited capital resources, provided that any such trade-off decisions are made in a transparent and non-discriminatory manner;
4. In the case of people that are permitted to influence more than one unit (i.e. the Boards of TCNZ and any relevant subsidiaries, the Telecom CEO and relevant shared corporate groups), those people will also be required to:
   1. Not unduly discriminate in favour of any other Telecom unit or the customers, suppliers or members of that unit when making decisions in relation to ANS; or
   2. Not unduly discriminate in favour of any Telecom retail unit or the customers, suppliers or members of a Telecom retail unit when making decisions in relation to Wholesale or any fixed network business unit.

185. However, nothing in these arms-length rules will require Telecom to provide to third party access seekers any service that is not regulated by the Telecommunications Act, even if ANS provides that service to another Telecom unit. The arms-length rules in (a) to (c) would apply to all Telecom personnel (including the Boards and Telecom CEO) but the rule in (d) above would only apply to people that are permitted to influence more than one unit.

186. The TCNZ Board will be required to certify annually (by all directors signing on behalf of the company) that, to the best of their knowledge after making reasonable enquiry, the Telecom Group has complied with these arms-length rules, except for any breaches that have been reported to the Independent Oversight Group and the Commerce Commission. Telecom will also be required to ensure that the following people annually certify to the Board that they have complied with these arms-length rules:

1. The Telecom CEO.
2. The heads of ANS and Wholesale.
3. The heads of any unit or units that operate parts of the fixed network that are not included in ANS or Wholesale.
4. The heads of those shared corporate services groups that have the potential to influence ANS or Wholesale corporate policies (see section 8.1.4 below).

8.1.4 Staffing Restrictions for ANS and Wholesale and the Role of Shared Corporate Functions

187. It is an obvious requirement of operational separation that the ANS, Wholesale and Retail units must be staffed by different personnel and that employees cannot work for more than one of those units at any one time. This obligation needs to be backed up by information restrictions that prevent the personnel from the various units sharing confidential information, as well as restrictions on other Telecom personnel attempting to influence the policies of ANS, Wholesale or the fixed network business units. Those restrictions are set out in more detail in section 8.2 below.

188. There will however need to be exceptions to those restrictions to reflect the fact that Telecom remains one company and that certain parts of the company need to be able to take an overall perspective and know what is occurring in all units within the company. There are also a number of corporate service functions where a requirement to split them between the various units would simply lead to inefficient duplication without producing any benefits.

189. Accordingly, the confidentiality restrictions and restrictions on influencing commercial policies should not apply to personnel working for specified shared corporate service groups. There will be a list of the relevant corporate groups, which will be similar to the lists in Appendix 2 to the BT Undertakings.

190. For most shared corporate services, where there is no material risk of them influencing ANS or Wholesale policies in a way that could favour retail, no special requirements will apply other than a basic requirement that those personnel must not abuse their positions to circumvent the intent of the Separation Plan.

191. However, there are some corporate service functions where, due to the nature of the services that they provide, the personnel in those units could have significant influence on ANS or Wholesale policies and could influence those policies in a way that favours retail. The functions that have been identified as falling within this group are finance, group strategy, regulatory and legal. The following restrictions will apply to the groups that provide those functions:

1. The heads of each of those groups must certify to the board annually that they and their groups have complied with the arms-length requirements; and
2. The legal and regulatory groups will be required to treat ANS, Wholesale and Retail as if they were separate clients and implement "Chinese walls" between the work that they do for those units, including a rule that legal or regulatory staff that advise one unit cannot also advise another unit on that issue or any related issue. For example, it is expected that the legal and regulatory staff that would work on a Commerce Commission LLU determination must do so as advisers to the ANS Unit only and could not also advise retail on issues related to retail broadband. This may result in Telecom deciding to establish separate legal and regulatory teams for each of the three units.

8.1.5 Other Governance Requirements

192. Telecom Corporation of New Zealand Limited (TCNZ) is the holding company of the Telecom Group and it is most consistent with the Act if the Undertakings are given solely in the name TCNZ. However, most (if not all) of the relevant services will be provided by Telecom New Zealand Limited (TNZL) and TNZL will employ most of the relevant personnel. Accordingly, TCNZ will be required to put in place arrangements and undertake to ensure that all related companies, officers, employees, agents and contractors comply with the Separation Plan. TCNZ will be responsible for any breach by its personnel or related companies.

193. TCNZ will be required to provide evidence to the Independent Oversight Group of the steps that it has taken to ensure that all related companies and personnel comply, e.g. shareholders communications to TNZL and other subsidiaries and implementing codes of conduct for employees and contractors.

8.2 Restrictions on Sharing Information and Influencing Commercial Policy

8.2.1 Obligations not to Disclose Customer Confidential Information

194. The BT Undertakings include a number of obligations not to disclose Customer Confidential Information except under specified circumstances, where Customer Confidential Information means any confidential information that is clearly designated by a Communications Provider²⁰ as being commercially confidential.

195. This type of obligation addresses non-price discrimination arising from undue use of information. Undue use of information can arise where an access provider obtains certain information about the customers of its downstream competitors. Based on this information, the access provider can target its competitor's customers with tailor-made offers and so can restrict its competitors' sales and raise its rivals' costs.

196. In New Zealand, the use by Telecom of confidential customer information is currently restricted by existing legal requirements including the Commerce Act, Commerce Commission determinations, and commercial wholesale and interconnection agreements.

197. For example, the Interconnection Terms in Appendix 2 to the Commission's Telecom-TelstraClear Interconnection Determination (Decision 477) prevent Telecom and its personnel from using Confidential Customer Information for sales and marketing purposes. Confidential Customer Information is defined in those terms as information which another carrier provides to Telecom on a confidential basis, or which Telecom holds or obtains, concerning a particular person who is or intends to become a customer of the other carrier. The key differences between this definition and the BT Undertakings definition are that:

1. The BT Undertakings definition only applies to information that is clearly designated by the provider as being commercially confidential, while there is no such restriction in the Interconnection Terms definition;
2. The Interconnection Terms definition only applies to information that identifies a particular Customer of the other provider, while there is no such restriction in the BT Undertakings definition.

198. It is proposed that the Minister's Determination will adopt the BT Undertakings restrictions on the disclosure of Customer Confidential Information. It is proposed that the definition of Customer Confidential Information be similar to the BT Undertakings definition, except that it will not be limited to information that is clearly designated as commercially confidential and will instead apply to all commercially confidential information that the relevant unit holds concerning other providers or Customers of other providers. The following restrictions on the sharing of Customer Confidential Information are proposed:

1. Telecom employees, agents or contractors working for the ANS Unit shall not disclose Customer Confidential Information to any other Telecom business units (except under specified circumstances)
2. Telecom employees, agents or contractors working for the Wholesale Unit shall not disclose Customer Confidential Information to any Telecom business unit that provides retail functions (except under specified circumstances)
3. Telecom employees, agents or contractors working for Telecom fixed network business units shall not disclose Customer Confidential Information to any Telecom business unit that provides retail functions (except under specified circumstances)

199. These requirements would not limit any additional confidentiality obligations that Telecom has under existing laws or commercial agreements.

8.2.2 Obligations not to Disclose Commercial Information

200. The BT Undertakings include obligations not to disclose Commercial Information unless it is of a nature that would be provided to other Communications Providers during the ordinary course of business. Commercial Information is defined as information of a commercially confidential nature relating to specified products (essentially SMP products to which EOI applies and some additional products managed by BTS), and which relates to any or all of the following:

• Product development
• Pricing
• Marketing Strategy and Intelligence
• Product Launch dates
• Cost
• Projected sales volumes or
• Network Coverage and Capabilities

201. This type of obligation addresses non-price discrimination arising from discriminatory use of information by preventing the relevant business unit from providing its retail arm with information that it does not provide to access-seekers. For example, if the fixed network operator refuses to provide its retail competitors with information about future changes to the network topology. This could lead to increased costs for competitors and in the worst case, the competitor may not be able to provide the retail service.

202. In order to achieve a robust operational separation of Telecom, it is proposed that the following obligations should apply in respect of Commercial Information:

1. Employees, agents or contractors of ANS shall not disclose ANS Commercial Information to any other Telecom business units, unless that information is also available to other service providers.
2. No employee, agent or contractor of Telecom who is not working for the ANS Unit shall have access to Commercial Information of ANS unless that information is also available to other service providers.
3. Employees, agents or contractors of the Wholesale Unit shall not disclose Wholesale Unit Commercial Information to any Telecom business units that provide retail functions, unless that information is also available to other service providers.
4. Employees, agents or contractors of fixed network business units shall not disclose their Commercial Information to any Telecom business units that provide retail functions, unless that information is also available to other service providers.

8.2.3 Obligations not to Unduly Influence Commercial Policy

203. The BT Undertakings include obligations not to unduly influence the "Commercial Policy" of specified units except through such mechanisms available to other Communications Providers. "Commercial Policy" means policies and plans in relation to the same set of products specified above and which relates to any of the following:

• Product development
• Pricing
• Marketing Strategy and Intelligence
• Product Launch dates
• Cost
• Payment terms
• Product specific forecasting, or
• Network coverage and capabilities

204. This type of obligation addresses non-price discrimination arising from strategic design of product characteristics. Strategic design can embrace all types of product characteristics like design, compatibility, norms and standards etc. The access provider may, for example, use standards which are easy to meet for their own retail arm but not for alternative operators. The alternative operators are thus forced to make additional investments to ensure compatibility.

205. By requiring internal units to use the same mechanisms as third party access-seekers, this should also ensure greater equivalence in the ability of Telecom's wholesale customers to influence changes in services that arise through the lifecycle of services, such as provisioning, fault management and billing.

206. In order to achieve a robust operational separation of Telecom, it is proposed that the following obligations should apply in respect of Commercial Policy:

1. No employee, agent or contractor of Telecom who is not working for the ANS Unit shall directly or indirectly participate in the formulation of making of, or influence or attempt to influence, the Commercial Policy of the ANS Unit, except through such mechanisms and processes that are also available to other service providers.
2. Employees, agents or contractors of Telecom units that supply retail functions shall not influence or attempt to influence the Commercial Policy of ANS, Wholesale or Telecom fixed network business units, except through such mechanisms and processes that are also available to other service providers.

8.3 Localised Incentive Arrangements

207. A key feature of the BT Undertakings is localised incentive arrangements, whereby the incentive remuneration of those employees in the separated Openreach unit and the BTWS group reflects solely the objectives of their respective groups.

208. Adoption of this feature of the BT Undertakings is considered essential to delivering on a robust operational separation of Telecom NZ and facilitating responsiveness by Telecom in meeting its wholesale customers' needs in relation to relevant services (as required under Part 2A of the Act).

209. Absent new incentive requirements, employees within the operationally separated units will likely maximise group shareholder value rather than divisional profits. Telecom has a number of incentive arrangements in place whereby staff are bonused on the overall performance of Telecom group. This may lead employees within the operationally separated units to discriminate against competitors in downstream markets in order to maximise group profits and their own bonuses.

210. To prevent this, the following localised incentive requirements are proposed:

1. All incentive remuneration for the ANS Unit shall reflect solely the objectives of the ANS Unit. Remuneration for the ANS Unit cannot comprise any Telecom Group shares or any incentives that are directly or indirectly linked to the Telecom Group's overall performance.
2. All incentive remuneration for the Wholesale Unit shall reflect solely the objectives of that unit. Remuneration for the Wholesale Unit cannot comprise any Telecom Group shares or any incentives that are directly or indirectly linked to the Telecom Group's overall performance.
3. For the avoidance of doubt, Telecom employees will not be prevented from owning Telecom Group shares. However, it is likely to be inappropriate for senior executives within the Wholesale and ANS Units to own significant amounts of Telecom shares.
4. These rules would apply to both short term incentive schemes (such as annual bonuses) and long term incentive and remuneration schemes.

8.4 Accommodation and Branding

211. The BT Undertakings required the Openreach Headquarter Management Team to move to access-controlled accommodation that was separately secured from businesses downstream from Openreach in the short term. After 18 months, the Openreach Headquarter team was required to move to accommodation which was separately located. Accommodation requirements only apply to the Openreach Headquarter Management Team, which means the Openreach CEO and his London-based direct reports. Other Openreach personnel were not required to be located in separate premises, nor were any Wholesale unit personnel. However, it is understood that a majority of Openreach personnel are field engineers. It is likely that there was little value in relocating such a large number of field staff that spend the majority of their time outside the physical premises of BT.

212. It is proposed that a similar requirement for separate premises be adopted in respect of all ANS Unit employees. It is not proposed that any separate premises requirements be imposed on the Wholesale Unit.

213. The BT Undertakings required BT to develop a separate brand for Openreach. It is considered that there is potential value in creating a separate identity for the ANS Unit. Separate branding may be less of an issue in New Zealand given that Telecom has outsourced much of its field engineering force. However, a requirement for a separate brand for the ANS unit is likely to reinforce its stand-alone nature and help drive a culture shift.