Toing and froing in telecommunications

Bell Gully senior solicitor David Blacktop provides an overview of developments in the telecommunications sector this quarter where the toing and froing and posturing in relation to regulation continues.

Mobile termination rates

Until the Government’s decision to mandate local loop unbundling was leaked in May 2006, a key battleground had been the Commerce Commission’s investigation into whether to recommend regulation of mobile termination rates (MTRs) – the price paid by a caller’s network to connect a call to a mobile network customer.

The Commission originally recommended that MTRs for 2G mobile networks should be regulated but that MTRs on 3G networks should not because of a concern over investment incentives.  The Minister did not accept that recommendation and asked the Commission to reconsider that position as well as to consider commercial offers put forward by the two mobile operators Vodafone and Telecom.

The Commission reconsidered its recommendations and concluded  that MTRs for both 2G and 3G networks should be regulated.  However, on 30 April 2007, the Minister again rejected the Commission’s revised recommendation and instead accepted commercial undertakings from Telecom and Vodafone under which Telecom will reduce its MTR from 20 cents per minute (cpm) to 12 cpm and Vodafone will reduce its MTR from 20 cpm to 14 cpm over the next five years. 

The outcome is that while Telecom and Vodafone have avoided specific legislation, they are now subject to informal price control. 

Telecom’s separation

The Ministry of Economic Development (MED) has embarked on a further round of consultation on the operational separation of Telecom’s wholesale, retail and fixed line businesses as a result of Telecom’s proposal to structurally separate its business.  The proposal involves three components:

• Telecom selling its existing fixed line local access bottleneck network into a Netco reinforced by a new regulatory contract between the Netco and the Government;

• a simpler form of operational separation for the remainder of Telecom’s businesses; and

• tighter co-ordination of future regulatory priorities and activity.

The recurring theme in this debate, as it was in the MTR investigation and seemingly all regulatory debates, is the requirement for a business to earn a return on capital so as to provide investment incentives.  In its proposal, Telecom has noted that to achieve the Government’s objectives for ICT in New Zealand, it would need to invest NZ$1.5 billion in the local access network.  Telecom has argued that the Government’s proposal would result in high risks and low returns for the company that it could only justify investing around NZ$500 million.

The debate over returns to Telecom is by no means unique.  Telstra and the ACCC are currently engaged in a very public debate over the incentives for Telstra to invest in new fibre to underpin a Australian broadband network following the ACCC’s decisions in relation to the prices Telstra can charge access seekers for using that network.  Similarly in August 2006, Vector threatened to suspend its investment plans after the Commerce Commission declared an intention to place Vector under price control. 

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