1. Overview of the New Zealand Telecommunications Market 1987-1997
1. This section provides a summary of regulatory and market development up until the end of 1997. More recent events are included in section 2.
1.1 Summary
2. Up until 1988 the New Zealand Post Office had a statutory monopoly in the provision of public telecommunications services in New Zealand. The New Zealand Government comprehensively reformed the telecommunications regulatory environment over the period 1987-89. The aim of the reform was to improve the industry's economic performance and increase consumer benefits by creating competitive, open entry telecommunications markets supported by general competition law.
3. On 1 April 1987 a new State-owned Enterprise (SOE), Telecom Corporation of New Zealand Ltd was formed, by the separation of the telecommunications element of the Post Office from its postal and banking arms. The regulatory and policy advice functions of the former Post Office were transferred to the Department of Trade & Industry (now the Ministry of Commerce).
4. Between 1 October 1987 and 1 April 1989 the supply of customer premises equipment was progressively deregulated. On 1 April 1989, all legal restrictions on telecommunications services market entry were removed. Telecom was privatised in September 1990, and competition in telecommunications services developed from 1991 with the signing of the first interconnection agreement.
5. Key benefits of telecommunications deregulation have been:
- Substantial price reductions for telecommunications consumers;
- Improved service availability, in terms of access to new services, fault service response, and new service installation times;
- Ongoing investment in the New Zealand telecommunications market. Particularly from BCL, Clear, Global One, Saturn, TeamTalk, Telecom NZ, Telstra NZ, Vodafone (formerly BellSouth NZ) and WorldxChange;
- The development of competition in the provision of leased circuits and data services, cellular service, long distance calls and freephone service;
- The development of competition for business telephone services in metropolitan business centres and in 1998 for residential telephone service in the Wellington area.
1.2 Background to Deregulation
6. In the late 1970s and early 1980s New Zealand's economic performance declined significantly. A significant period of economic reform followed focusing on the removal of protection and the development of competitive markets. As part of this reform process in the 1980s, it was clear that export diversification and import substitution alone would not be enough to restore the New Zealand economy to its former strength. In particular, it was recognised that the so-called non-(internationally) traded goods sector, was not subject to significant economic pressures to perform. A number of studies highlighted the need for improved efficiency in such areas to assist economic recovery.
7. In telecommunications as in many other sectors, such as airlines, railways and banking, the Government recognised that private ownership could provide a better ongoing basis for the efficient operation of these enterprises.
8. The New Zealand Post Office was a key public enterprise in the mid 1980s and included telecommunications, banking and postal operations. In 1984, it was New Zealand's largest single employer, with 41,000 staff. A review in 1985 (the Mason/Morris report) highlighted the inadequacies of the existing organisational structure, recommending that the Post Office be re-organised into specific business units. In the telecommunications area, opening up enhanced services and the customer premises equipment markets to competition were recommended.
1.3 Deregulation of the Telecommunications Service Industry
9. Telecom commenced business as a separate corporation on 1 April 1987 with 26,500 staff. Regulatory and policy advice functions and management of the radio frequency spectrum were transferred to the Department of Trade & Industry (now the Ministry of Commerce).
10. In 1987, the Touche Ross report, commissioned by the Government, identified a need for considerable improvement in Telecom's operations. For example, the report highlighted that the corporation was engineering rather than market-driven, did not achieve a level of efficiency comparable to the best practice of overseas telephone companies, and Telecom's management systems were inadequate.
11. The report identified large cross-subsidies between long distance call charges and access (i.e. line rental) charges, meaning that price reductions for toll call services could increase local access charges substantially.
12. The report concluded that competition in network services was sustainable, provided satisfactory interconnection arrangements could be made. In July 1989, the Chairman of Telecom gave an undertaking that Telecom would ensure that interconnection would be provided to competitors on a fair and reasonable basis.
13. In September 1990, the Government sold Telecom to a consortium led by Ameritech of Chicago and Bell Atlantic of Philadelphia for $NZ4.25 billion. The proceeds were used to retire public debt.
1.4 Telecommunications Regulatory Environment
14. Since the telecommunications sector was liberalised, successive governments have taken the view that a market-driven, light-handed telecommunications regulatory framework is an effective means of achieving consumer benefits and efficient economic outcomes.
15. To maintain conditions of effective competition, the Government placed primary reliance on general competition law, the Commerce Act 1986, in particular those parts of the legislation which deal with misuse of a dominant position in the market and prohibition of business acquisitions which create or strengthen market dominance.
16. Government policy statements on telecommunications competition have spelt out the general policy, along with a reserved position that, if it proves to be necessary the Government would consider the introduction of other statutory measures or regulation.
17. Consumers' rights in the supply of telecommunications services are covered by the Fair Trading Act 1986, which prohibits certain conduct and practices in trade and provides for the disclosure of consumer information relating to the supply of goods and services.
1.4.1 Kiwi Share Obligations (KSO)
18. Recognising that Telecom was in a dominant position in the telecommunications market, the Government placed particular provisions known as the Kiwi Share Obligation (KSO) in Telecom's Articles of Association (now its Constitution). Specifically, the KSO requires Telecom to:
- Maintain a local free-calling option for all residential telephone customers;
- Ensure that the rate of increase in the residential telephone line rental, which includes the cost of all local calls, does not result in the rental increasing in real terms above its 1 November 1989 rate of $NZ27.80 per month (excluding GST), unless Telecom's profits are unreasonably impaired. The rental itself was reduced in August 1997, to offset the charge introduced by Telecom for directory assistance for residential customers;
- Ensure that the line rental for residential users in rural areas is no higher that the standard residential line rental;
- Continue to make ordinary residential telephone services as widely available as at the date of adoption of the KSO.
19. The Minister of Finance is the Kiwi Shareholder. The Ministry of Commerce monitors and reports to Ministers on Telecom's compliance with the KSO.
1.4.2 Information Disclosure
20. Telecom as the dominant player in the New Zealand market is required to disclose certain information to improve transparency and facilitate market entry. The Telecommunications (Disclosure) Regulations 1990 required Telecom to disclose:
- Price information about certain prescribed services, e.g. leased circuits and discounts on prescribed services in excess of 10%;
- The full text of interconnection agreements within a specified time after their conclusion; and
- The financial statements of Telecom New Zealand Ltd.
1.4.3 Numbering
21. The New Zealand Telecommunications Numbering Advisory Group (NZTNAG) was established in December 1992 to assist in the co-ordination of numbering issues such as number administration and the portability of numbers between competing carriers. The NZTNAG has been chaired by the Ministry of Commerce and included representatives of carriers and users. NZTNAG operated on a consensus basis and was wound up in November 1999 as a result of agreement to new procedures for number administration.
1.4.4 Interconnection
22. In New Zealand the resolution of interconnection disputes is provided for by general competition law, with access to the courts to resolve specific matters.
23. There have been a number of legal disputes over interconnection, particularly that of 1991-96 between Clear and Telecom concerning local access terms. Clear sought interconnection at incremental cost, with payments between the two companies on a reciprocal basis. Telecom subsequently offered pricing terms based on the "Efficient Component Pricing Rule" (ECPR), also known as the Baumol-Willig rule, which would have required Clear to pay Telecom the opportunity cost of providing interconnection together with a contribution to common costs and profits including any monopoly profit foregone by Telecom from business lost to Clear.
24. The case went to the Privy Council, which held that the Baumol-Willig rule did not breach section 36 of the Commerce Act. The Government subsequently stated that it was opposed to the use of this pricing principle because it had the potential to lessen competition. The terms finally agreed between the companies set access prices at levels below those implied by the Baumol-Willig rule. In June 1996, the Government reaffirmed its reliance on general competition law to achieve its objectives in telecommunications and stated its expectation that interconnection would be provided based on terms that would promote efficiency and deliver the benefits of competition to consumers.
1.4.5 Access to Radio Spectrum and Frequencies
25. Operators who require spectrum can either purchase the right to use some frequencies or purchase a use licence for specific frequencies from the Ministry of Commerce. Radio spectrum transmissions are subject to the Radio-communications Act 1989, which provides for the creation and registering of:
- A tradeable management right over any defined frequency band for a specified period, to a maximum of 20 years;
- A tradeable spectrum licence by the owner of a management right for frequencies within the band covered by the management right;
- A non-tradeable radio licence by the Ministry of Commerce where no management right exists.
26. A public register of spectrum rights and radio licences is maintained by the Ministry of Commerce. Among other things, this enables adequate interference co-ordination to be maintained.
27. Government's general policy is to progressively convert spectrum used by commercial radio-communications services to the spectrum rights regime, usually by way of a public auction. Where new radio-communications, telecommunications or broadcasting technologies are developed which use unused or under-utilised spectrum, the Ministry of Commerce consults with interested parties with a view to facilitating access to that spectrum.
1.4.6 Network Operator Status
28. In 1989, the Government introduced a special provision, Network Operator status, to provide a company with the right to apply for a court order to install telecommunications plant on public and private property. It is not a pre-requisite for conducting business as a carrier but companies can find it useful, especially when dealing with local authorities. Designation is automatic on application for those that qualify, and no fee is payable.
A list of companies which have network operator status is at Annex I.
1.4.7 International Services Regulations
29. The Telecommunications (International Services) Regulations 1994 require companies that wish to operate facilities-based international services to be registered. . Registration is not required for call-back type services. Registration is, effectively, automatic on application. Originally, the payment of an annual fee was also required. Companies currently registered are listed in Annex II.
1.4.8 Telecommunications Equipment
30. The Ministry of Commerce is responsible for the administration of equipment standards for telecommunications equipment where electrical safety and electro-magnetic compatibility are concerned. The responsibility for setting the standards for equipment to be attached to telecommunications networks lies with the network operators themselves: it is not a regulatory function.
31. One operator, Telecom New Zealand, has established a formal process for setting standards for equipment which may be attached to its public switched telecommunications network. Specifically, Telecom operates a permit to connect approval system for equipment to be attached to its network. Such standards are developed in consultation with interested parties. Test results from overseas laboratories that meet New Zealand equipment standards are accepted. Both the range of equipment and the number of suppliers have increased substantially. Further information can be obtained from the Telecom New Zealand Access Standards website: http://www.telepermit.co.nz.
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