Operational Separation

Transcription

1 Operational Separation New Zealand s experience Dr Ross Patterson Telecommunications Commissioner Vertical Separation in Telecoms: International Conference 23 November 2010 Brussels

2 Table of Contents 2 1. NZ telecommunications regime The introduction of Operational Separation the 2006 Reforms 3. The NZ Operational Separation Model 4. Results of Operational Separation 5. The next chapter structural separation under Ultrafast Broadband (UFB) initiative

3 1. NZ telecommunications regime Regulatory environment Statutory monopoly until 31 March 1989, privatised September 1990 No industry specific regulation Reliance on competition law alone with a threat of price control intervention Interconnection issues determined by litigation New Zealand adopted a unique strategy of eschewing sector specific regulation and relying instead on generic competition law and the courts to regulate the sector. This approach is widely regarded as having been a disaster. (Walden and Angel Telecommunications Law and Regulation page 649.)

4 1. NZ telecommunications regime inquiry into telecommunications (the Fletcher Inquiry) 4 Fletcher Inquiry concluded that: the reliance on courts, arbitration or self regulation led to delays and costs for new entrants there was no clear access framework access prices were not cost based Industry specific regulation necessary as a backstop

5 1. NZ telecommunications regime Telecommunications Act (the Act) 5 Position of Telecommunications Commissioner established as part of the New Zealand Commerce Commission Introduced a process for resolving access disputes Established a process for investigating new (or changes to) regulated services The Commission was also given powers to: Determine the cost of the TSO and how these costs were to be allocated Determine terms and conditions for access to specified telecommunications services

6 1. NZ telecommunications regime /6 Telecommunications Stocktake 6 Identified key problems with existing regime: Arbitration model not accessible to small players Incumbent behaviour including gaming investigation process and locking small players into sub-optimal agreements Price and non price discrimination vertically integrated incumbent supplying wholesale services on less favourable terms and conditions than it supplies its own retail arm Lack of robust enforcement provisions Dispute over incumbents voluntary commitments on investment and deployment New Zealand's broadband penetration low by OECD standards (22 nd )

7 2. The introduction of Operational Separation the 2006 Reforms Changes to the Telco Act Introduced industry wide processes (Standard Terms Determinations). New regulated services: Local loop and sub-loop unbundling Naked DSL Unbundled bitstream access Co-location in cabinets and exchanges Operational Separation of Telecom Accounting Separation (regulatory accounts)

8 2. The introduction of Operational Separation the 2006 Reforms 8 First reading of the Bill provided for accounting separation and information disclosure only. Select Committee process also sought submissions on structural and operational separation options. Submissions overwhelmingly supported operational separation Operational Separation of Telecom enacted as Part2A of the Act in December 2006 (6 pages).

9 2. The introduction of Operational Separation the 2006 Reforms 9 Part 2A provided for robust operational separation of Telecom into: a stand-alone arms length network access services business wholesale business unit(s) operated at arms length from retail business retail business operated at arms length from any fixed network business. and provided for transparency, non-discrimination and equivalence of supply, Details to be set out in a Ministerial Determination, and incorporated into a Separation Plan to be drafted by Telecom and approved by the Minister MED issued a Consultation Document on the terms of the Ministerial Determination in April 2007

10 2. The introduction of Operational Separation the 2006 Reforms 10 Telecom proposal for structural separation Telecom submitted by proposing a fresh approach to regulation including: Structural (ownership) separation of the fixed line local access bottleneck in Netco A simpler form of separation of the remaining Telecom business, with arms length rules applying to regulated services, not business units.

11 2. The introduction of Operational Separation the 2006 Reforms Telecom proposal for structural separation (cont) A new regulatory contract between Netco and the Government which: Guaranteed a reasonable rate of return on existing assets and future investment Reduced the role of the regulator to monitoring and enforcing the obligations in the regulatory contract Allowed for the progressive deregulation of the existing regulated access products, and, Possibly of an exclusive licence for a period.

12 2. The introduction of Operational Separation the 2006 Reforms 12 Commission s response to Telecom s proposal The Commission s response focussed on conditions attached to the proposal, which it said were: Inconsistent with regulatory best practice. Sought to bypass the independent regulator by contract with the Government shielded from regulatory scrutiny. Would deliver pricing certainty to Netco as the cost of higher access prices, weakened regulatory oversight, distorted entry and investment signals, and likely higher prices for consumers.

13 2. The introduction of Operational separation the 2006 Reforms 13 Telecommunications (Operational Separation) Determination 2007 Determination issued 26 September 2007 (70 pages) Retained the original three box model Provided for a Separation Day no later than 31 March 2008

14 2. The introduction of Operational separation the 2006 Reforms Telecom Separation Undertakings Telecom provided a Draft Separation Plan to the Minister on 25 October 2007 which was released for public comments. Telecom provided Telecom Separation Plan to the Minister 19 December 2007, incorporating amendments to the Draft Plan as a result of public comments. After further negotiations with the Minister, Telecom provided its Telecom Separation Undertakings to the Minister on 25 March 3008 (167 pages). Undertakings approved by the Minister on 30 March Separation Day was 31 March 2008.

15 3. The NZ Operational Separation Model Key principles of Operational Separation 15 Arms length separation of Retail and Wholesale, and arms length and stand alone separation of Access Network Business Unit Non Discrimination rules (price, non-price, terms and conditions) Migration to Equivalence of Input (EOI) (same systems and processes) Information flow restrictions Transparency Compliance monitoring Enforcement

16 3. The NZ Operational Separation Model Key Principle: Non Discrimination 16 Chorus and Telecom Wholesale will not discriminate between Service Providers and other Telecom Business Units, or between Service Providers. it applies to all relevant services, including services provided commercially using the access network. Some differences are allowed: for example where the differences reflect different requirements of the recipients. The Commission has interpreted discrimination to mean differences which cannot be objectively justified and/or are likely to harm competition.

17 3. The NZ Operational Separation Model Key Principles: Equivalence of Input 17 If required to provide Service Providers with a Relevant Service, Telecom must provide itself and the Service Providers : with the same service; on the same time-scales and on the same terms and conditions (including price and service levels); by means of the same systems and processes (including operational support processes); with the same Commercial Information about that service and those same systems and processes; and in the same way, and with the same degree of reliability and performance Some (mainly trivial) differences are allowed As it requires use of the same systems and processes, a migration path to EOI with a series of milestones was included in the Undertakings Non discrimination on steroids

18 3. The NZ Operational Separation Model Migration to EOI: UCLL and UBA 18

19 3. The NZ Operational Separation Model Key Principles: Information flow restrictions 19 Physical separation: Chorus employees are located in access-controlled accommodation separately secured from the rest of Telecom. Telecom Wholesale employees are located in access-controlled accommodation separately secured from the Retail Units. Behavioural controls: processes, systems and training have been put in place so that Telecom employees, agents and contractors comply with all Undertakings requirements. Systems separation: access to customer confidential information contained in Telecom s systems is adequately protected by Telecom. Confidential Chorus and Wholesale customer information can only be accessed by the business unit who owns the information and by defined groups listed in the Undertakings.

20 3. The NZ Operational Separation Model Key Principles: Transparency 20 Monitoring of compliance by Independent Oversight Group (IOG), responsibilities include: Processing complaints Carrying out investigations Reviewing Telecom s performance against service-level agreements in respect of Relevant Services Development and monitoring of compliance performance measures Information disclosure regime introduced, to improve transparency of the financial performance of Telecom s separated business units

21 3. The NZ Operational Separation Model Independent Oversight Group ( 21 IOG snapshot of web page

22 3. The NZ Operational Separation Model Key Principles: Enforcement 22 The Commission s role is to enforce the Undertakings A breach of the Undertakings can attract a penalty up to $10m plus $500k per day for continuing breaches Private enforcement regime was introduced allowing initiation of civil action for any enforceable matter, including Operational Separation Undertakings.

23 3. The NZ Operational Separation Model The FTTN Undertaking 23 Determination provided that existing legacy PSTN services either: be migrated to EoI, or alternately that the those services be moved to EOI Compliant infrastructure. Telecom chose the latter, (however if it fails to meet the related migration plans the option becomes void and migration to full EOI by Dec 2011 is still be required. ) FTTN rollout to 80% of lines (all towns 500+ people) to a minimum 10 Mbp/s by end of Transition from PSTN to VOIP services

24 3. The NZ Operational Separation Model The FTTN Undertaking cabinets to be installed with ADSL2+ in less than 4 years 506 Cabinets Cabinets Cabinets Cabinets 2011

25 3. The NZ Operational Separation Model FTTN Undertaking 25

26 3. The NZ Operational Separation Model PSTN migration plan - milestones 26

27 3. The NZ Operational Separation Model Practical aspects of Operational Separation: variations to the Undertakings 27 Variation #1, proposed on 31 March 2009 and agreed by the Minister in June 2009 Variation #2, proposed on 13 August 2009 and agreed by the Minister in November 2009 Bringing forward the date on which service providers would have access to certain systems to provision UCLL, UBA and UBA backhaul (front-end equivalence systems) Adding new requirements for delivering equivalence using FMO systems Delaying the consumption by TBUs of UCLL, UBA and UBA backhaul by 6-18 months Delaying by nine months the separation of information systems, shared by the Telecom business units, containing customer confidential information

28 3. The NZ Operational Separation Model Practical aspects of Operational Separation: variations to the Undertakings 28 Variation #3, proposed on 17 December 2009 and agreed by the Minister in May As part of the agreement Telecom was required to compensate third parties for costs incurred on the systems upgrades (FMO) Telecom had promised Variation #4, proposed on 24 May, revised on 11 October 2010 and agreed by the Minister in October 2010 Delaying the implementation of various systems used for provisioning of Wholesale services (including the dates proposed by Telecom in its first variation request) Allowing Telecom to meet the new extended deadlines using existing systems rather than the new FMO systems agreed in the first variation UBA - Delaying the consumption of UBA services in the delivery of retail BB services (required to provide retail broadband services on a full EOI basis PLV - Resolving systems issues, expanding external trials and consulting with industry to resolve current PLV issues Wholesale FMO - Consulting industry on the delivery of certain FMO systems

29 3. The NZ Operational Separation Model Practical aspects of Operational Separation: Complaints 29 There is a graduated process to raise an Operational Separation complaint: Complaining directly to Telecom Complaining to the IOG Complaining to the Commission Both the IOG and the Commission have processes in place to deal with the complaints. Telecom has an internal complaints system - Telecom staff lodge details in the Honesty Box, which are investigated according to their internal processes.

30 3. The NZ Operational Separation Model Practical aspects of Operational Separation: KPIs 30 KPIs have been introduced by the IOG to monitor Telecom s compliance with the Undertakings The IOG monitors various indicators, including staff training, various undertakings milestones and SLAs for regulated products In addition the IOG surveys Chorus and Telecom Wholesale s customers to verify compliance with the Undertakings, the questions asked are: Are you aware of any instances where Chorus / Telecom Wholesale is not protecting your customer confidential information in relation to Chorus Relevant Services? Are you aware of any instances where Telecom s wholesale or retail units are influencing Chorus s commercial policy about Relevant Services, except through customer mechanisms that you can also use?

31 3. The NZ Operational Separation Model Practical aspects of Operational Separation: Annual Certification process 31 The Undertakings require Certification by the Board, CEO and relevant managers that the Undertakings are complied with. This is an annual certification to be provided by all directors signing personally (or by another director appointed as their agent for this purpose). The directors certify that, to the best of their knowledge, after making reasonable inquiry, TCNS and its subsidiaries have complied with the Undertakings. Telecom issued reasonable inquiry guidelines (internal guidelines) and created a framework enabling the directors to confidently sign (hand on hearth).

32 4. Results of Operational Separation 32 Results to date indicate that Operational Separation has been an important contributor to the improvement in competition which has resulted from the 2006 amendments. Telecom has met most of the key milestones, although it has been granted a number of variations, which have extended some key milestones. The Telecommunications Users Association Chairman has said from the moment the government announced the Separation Plan on 3 May 2006, Telecom s behaviours in the market place changed. Before Separation it viewed its wholesale customers as unwelcome campers on its network. The moment separation became inevitable, it immediately started to recognise them as valued business partners.

33 4. Results of Operational Separation Key competition indicators 33

34 4. Results of Operational Separation Key competition indicators 34

35 4. Results of Operational Separation Key competition indicators 35

36 4. Results of Operational Separation Access Network Services Rebranded as Chorus 36

37 4. Results of Operational Separation Access Network Services Change of Culture From a Field Services group within Telecom to Chorus - A customer focused organisation - World class network services company - Delivering services for all access network providers -Chorus is exceeding access seekers expectations. We are valued as customers and treated accordingly.

38 4. Results of Operational Separation Challenges for Telecom Wholesale 38 Telecom Wholesale has found the structure challenging. It is an arms length business with its own commercial incentives, facing competition for the first time as a result of the 2006 reforms particularly wholesale competition from unbundlers Telecom Wholesale has found it difficult to balance its wish to reduce the speed of market share decline with its obligations under the Undertakings.

39 4. Results of Operational Separation Enforcement actions: Wholesale Loyalty Offers 39 Telecom offered substantial discounts in return for a commitment from the service providers to maintain current and future customers on Telecom Wholesale s service rather than take wholesale services from an unbundler. Telecom s Independent Oversight Group (IOG) investigated industry complaints and determined that Telecom Wholesale s loyalty offers were nontrivial breaches of the Undertakings. Telecom then withdrew the discounts. The Commission the investigated to determine whether enforcement action was appropriate. It concluded that the loyalty offers were likely to constitute breaches of the Undertakings and in particular of clause 56 (the Wholesale Unit will not discriminate) and that enforcement proceedings should be issued.

40 4. Results of Operational Separation Enforcement actions: Wholesale Loyalty Offers 40 In July 2010 the Commission reached a settlement with Telecom without issuing proceedings whereby Telecom acknowledged that the loyalty offer risked breaching the Telecom Undertakings (specifically the nondiscrimination obligations) and was likely to have affected competition in the wholesale market. Telecom paid $800,000 to each of the two wholesale unbundlers affected by its conduct,and $100,000 to the Commission towards the cost of the investigation.

41 4. Results of Operational Separation Enforcement actions: SLES/UBA investigation 41 On 15 October 2010 the Commission announced the launch of an investigation into an alleged breach of Separation Undertakings by Telecom Wholesale The Commission s concerns arose from the price at which Telecom Wholesale offered the unbundled bitstream access (UBA) service to telecommunications providers (who had unbundled exchanges and intended to take up a sub-loop extension service (SLES) from Chorus) compared with the price Telecom Wholesale charged to Telecom Retail

42 4. Results of Operational Separation Enforcement actions: SLES/UBA investigation 42 The sub-loop extension service (SLES) is a commercial service provided by Chorus to enable service providers to supply an exchange-based voice service in conjunction with a cabinet-based UBA broadband service, where they have previously taken UCLL and provided services over lines which have been subsequently cabinetised. The investigation is at the information gathering stage

43 5. The next chapter structural separation under UFB 43 Objective of the Ultrafast Broadband Initiative: To accelerate rollout of ultrafast broadband (100Mbps/50Mbps) to 75% of New Zealanders over 10 years. Principles making a significant contribution to economic growth; neither discouraging, nor substituting for, private sector investment; avoiding entrenching the position, or lining the pockets, of existing broadband network providers; avoiding excessive infrastructure duplication; focussing on building new infrastructure, and not unduly preserving the legacy assets of the past; and ensuring affordable broadband services.

44 5. The next chapter structural separation under UFB Key aspects of UFB 44 Open access fibre infrastructure $1.5 billion of Government funding through Crown Fibre Holdings (CFH) alongside private sector co-investors Creation of private Local Fibre Companies (LFC) Rolling out FTTH in the first six years (priority) to schools, hospitals, businesses and tranches of residential areas LFC s to provide Layer 1 and 2 services and prohibited from entering the retail market To participate in UFB, Telecom has indicated it is prepared to structurally separate (subject to conditions).

45 5. The next chapter structural separation under UFB Key Regulatory changes: 10 year Regulatory Holiday 45 Layer 1 as an input into mass market layer 2 services is not required to be provided to access seekers during the forbearance period The Commission cannot commence a regulatory investigation of fibre pricing until January The reason for the policy is to provide price certainty for respondents until This price certainty is also expected to assist in reducing prices The (Graham Mitchell, CEO of CFH)

46 5. The next chapter structural separation under UFB Conditions of Telecom s Separation proposal 46 Auckland is a minimum requirement we certainly wouldn t go through any form of separation and lose out on the biggest commercial and residential centre in the country. looking for a package of profound change which includes regulatory reform and legislative change. The right incentives What was important was that the Government's and Telecom's interests were aligned and that the right incentives were in place to ensure the migration of customers from copper to fibre Shareholder approval of structural separation is required Details of regulatory changes requested are confidential

47 5. The next chapter structural separation under UFB Telecom s structural separation proposal 47

48 5. The next chapter structural separation under UFB Telecoms structural separation proposal 48

49 5. The next chapter structural separation under UFB ServCo explained 49

50 5. The next chapter structural separation under UFB Transition of Services 50

51 5. The next chapter structural separation under UFB The proposed asset split 51

52 5. The next chapter structural separation under UFB MED consultation document regulatory implications of structural separation 52 The document sort industry views on a number of issues including: Line of Business restrictions on Chorus 2 and ServCo Current regulatory pricing methodologies for UBA pricing Should UBA prices be average nationally using a weighted average of urban and non urban lines? What transitional measures are necessary? Should Chorus2 or ServiceTel be the access provider of the regulated clothed UBA service?

53 5. The next chapter structural separation under UFB MED consultation document regulatory implications of structural separation (cont) 53 Should Equivalence as a principle for regulatory design be maintained? Was moving to a two box model without separate business units within the new entities appropriate. Should the rules governing the treatment of confidential information be continued Should the IOG be retained Was the residual regulation of standards of supply ( eg non discrimination) necessary for Chorus2 Should the obligation to maintain regulatory accounts for copper services be reconstituted to apply to Chorus2.

54 5. The next chapter structural separation under UFB Commission submission to MED consultation document 54 Structural Issues: Naked UBA (bitstream and POTS) should be supplied by Chorus2. No objection to national backhaul being in ServCo. Pricing issues: Agreed a move from retail minus to cost-based pricing for UBA is appropriate. Opposed averaging of naked UBA (and by implication UCLL) prices (the Commission had set different urban and non urban prices in the STD process). Averaging would increase retail prices by 20%, flowing through to increase backhaul prices for 70% of consumers, and could undermine the business case for unbundling exchanges.

55 5. The next chapter structural separation under UFB Commission submission to MED consultation document 55 Deregulation: Some relaxation of existing regulatory regime would be justified Rules relating to accounting separation, information disclosure and confidentiality could be simplified Some form of separation between the access network and bitstream services (which remain vertically integrated) is required, and existing equivalence and non-discrimination obligations must be retained

56 Next Steps 56 December 2010 CFH announces first agreements with Local Fibre companies First reading of amendment to the Telco Act CFH begins next tranche of negotiations with bidders Telecom must decide if it will proceed with structural separation January/February Select Committee hearing Commercial negotiations continue