Local Loop Unbundling process completed

The process of unbundling Telecom's local loop was completed last month when the Commerce Commission published its Final Determination setting out the standard terms for connection to Telecom's local copper loop. This determination sets both the price and non-price terms. In this article, Bell Gully senior associate David Blacktop provides some insight on the determination process and the likely impact the final decision will have on the industry and end users.

Standard terms approach appears to be an improved process

There is no question that local loop unbundling was a major regulatory step for New Zealand. However, the standard terms determination process was also a testing ground for the new "standard terms determination" model introduced into the Telecommunications Act concurrently with the amendments to allow local loop unbundling. The standard terms process is, in essence, a multilateral process with the end goal of allowing access seekers to quickly access the local loop by simply relying on standard terms.

Previously, the Telecommunications Act relied on the Commission essentially taking the role of an arbitrator in bilateral disputes. This process was criticised on the grounds that:

• when combined with the obligation of parties to make reasonable attempts to negotiate, it created ample opportunity for infrastructure owners to game the system by drawing out negotiations preventing new entrants getting to market; and

• access seekers were not simply able to rely on previous processes, which again when coupled with a requirement to negotiate, led to accusations of gaming.

While, as with any adjudicative process undertaken, interested parties in the LLU determination will no doubt have some concerns about aspects of the final decision, the introduction of the standard terms process itself appears to have been a success.

The standard terms process was introduced into the Telecommunications Act at the same time as the amendments unbundling the local loop. This occurred in December 2006 and the fact we have a standard terms determination in place and Telecom has launched a website for access seekers (www.ucll.co.nz/n6,2.html) indicates the improvement this process has made.

Price of access

An access seeker has to pay two prices in order to be able to offer services to residential customers over Telecom's local loop. The first is a connection charge and the second is the monthly rental cost. These costs are similar in concept to the costs users pay Telecom for use of their services – when I connect my phone I pay Telecom an on-off fee to connect me and then pay a monthly rental charge each month.

From an entry perspective, the key price is the monthly charge. The Telecommunications Act requires that this price is set initially by assessing the charges paid in other countries (the so-called benchmarking approach). The final price will be set on the basis of what is known as TSLRIC (total system long run incremental cost) which is a cost based pricing methodology. Determining TSLRIC is a more time and data intensive process and the initial pricing process is designed to be a bit more quick and dirty.

Accordingly, the Commerce Commission selected a "peer group" bundle of comparable jurisdictions and calculated that median NZ$ price charged in those countries was $24.29. The Commission them conducted an econometric analysis to test the validity of that number.

Different prices for urban and non-urban areas

What this $24.29 means is that this is the average price that should be charged by Telecom per month. However, the Commission proposed in its draft decision that a different price should be charged for urban and non-urban areas. This was because the costs of serving urban areas is lower than serving non-urban areas. If one cost were set for both areas it would provide incentives leading to over investment in non-urban areas and under-investment in urban areas.

There was broad consensus from the economic experts involved that setting separate prices for urban and non-urban areas was appropriate. This is unsurprising as it is more likely to reflect the underlying costs of providing services. While it might be thought that this process would expose rural customers, it appears more appropriate for those concerns to be dealt with via social welfare initiatives (such as the TSO) rather than undermining the very incentives for competition and the benefits that LLU is designed to create.

Accordingly, the Commission set the monthly rental fee for urban exchange at $19.84 and for a non-urban exchange at $36.63. This was an increase from the draft prices which were $16.49 per month in urban areas, and $32.20 per month in non-urban areas.

Impact of differing prices for urban and non-urban prices

The Commission has specified that urban areas are exchanges in: Auckland, Wellington, Whangarei, Te Awamutu, Wanganui, Tauranga, Rotorua, Paraparaumu, Palmerston North, New Plymouth, Nelson, Hawkes Bay, Invercargill, Hibiscus Coast, Hamilton, Gisborne, and Dunedin. Accordingly, the Commission has not taken an overly narrow approach to what amounts to an urban area, although some areas such as Wairarapa and the West Coast of the South Island are excluded.

Where does this leave non-urban customers? Well, Telecom advertises on its website a homeline as costing $43.60 a month (including GST) with the exception of Wellington and Christchurch city and most suburbs where the cost is $36. The difference between $43.60 and $36.63 is not nearly as great as the difference between $43.60 and $19.84. It seems likely that this will (all else being equal) make it less likely that LLU will occur in non-urban markets. Of course, all else is not equal – already Telecom charges lower prices in areas where TelstraClear has a fixed line network.

When can we switch?

The final determination includes an implementation plan for implementing LLU. The roll-out phase is 15 months and includes:

• a 13 week soft launch period to test and refine the service; and

• a 10 month period during which Telecom is required to meet certain roll-out performance objectives relating to the service.

Telecom will be required to roll-out LLU to 15 exchanges every three months during the implementation phase meaning at the end of 15 months, Telecom will have rolled out LLU to 75 exchanges throughout New Zealand. While Telecom will be required to meet its service obligations during this period, it will not be exposed to performance penalties if it fails to do so.

Will LLU work?

LLU applies only to Telecom's copper local loop. Telecom has announced plans to invest NZ$1.4b in a fibre network based in roadside cabinets. Various access seekers have raised concerns that that investment undermines the business case for investing in LLU. While that might be correct, the counter argument might be that when viewed more dynamically, LLU has provided the spur for Telecom to invest in fibre – which is likely to be of benefit to New Zealand. Should similar problems arise in relation to Telecom's fibre network, recent history would suggest a regulatory response would be forthcoming. One would hope that Telecom would have priced this in to its fibre roll out business case.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.