Dr Ross Patterson: current framework not appropriate to support transition to fibre

In an independent report prepared for and included as part of Chorus’ submission on the Government’s Discussion Document entitled “Review of the Telecommunications Act 2001” (Discussion Document), Dr Patterson, the previous Telecommunications Commissioner, states that the current regulatory framework is not appropriate to support the transition to fibre.  

“The ladder of investment regulatory framework that is currently in place is designed to encourage network competition that over time will remove the natural monopoly aspects of the access network,” said Dr Patterson.

“However, the structural separation model adopted through UFB accepts that the access network is a natural monopoly and building competing networks is inefficient.  The two frameworks cannot co-exist efficiently.”

He makes key recommendations to address the issues created by the out of date regulatory framework, in order to achieve a more efficient delivery of fibre through to 2020.

“A new statement should be added to the framework that makes it clear that the UFB initiative is to replace the existing copper network, and that outcome is for the long term benefit of end users of telecommunications services within New Zealand,” he said.

Dr Patterson also says that the uncertainty caused by a regulatory framework that is no longer fit for purpose has led to the Government being required to intervene on copper pricing. 

In this context he recommends that UCLL and UBA prices should be set by legislation until 2020.

“The relative pricing of copper and fibre services was a key element of the migration strategy that was built into the contractual component of the regulatory environment,” he said.

“The contracts Crown Fibre Holdings (CFH) negotiated with the Local Fibre Companies included a loss leader entry-level product at a wholesale price of $37.50, deliberately set to undercut the then anticipated copper price.  The tentative changes to UCLL and UBA pricing which the existing copper regime may deliver would completely undermine the loss leader fibre pricing strategy in the CFH contracts.

“The Government has made it clear that it does not intend to provide a demand side subsidy to incentivise migration to fibre.  Under those circumstances the only practical option is to adjust copper pricing along the lines proposed in the Discussion Document.”

Making changes along the lines of option 3 in the Discussion Document means that  the UFB reforms will result in a large reduction in the pre UFB copper access price for rural customers (as a consequence of UCLL averaging) and a smaller reduction for urban customers.  Provided fibre and copper prices are “roughly equivalent” a major barrier to uptake is removed.

Dr Patterson also suggested two further changes that could be made in the next phase of the review to apply from 1 January 2020 once the UFB build is complete.  This includes a mandatory migration process from the end of the build period to avoid inefficiency of two networks operating at sub-optimal capacity and reference offers approved by the Commission.

Alongside Dr Patterson’s report, the Chorus submission also includes submissions from Richard Hooper CBE, ex-deputy Chairman of Ofcom in the UK, and Professor Stephen Littlechild, Emeritus Professor, University of Birmingham and the first UK Director General of Electricity Supply.

Chorus has included these independent views from three internationally respected ex-regulators to support the development of a high quality, predictable regulatory environment in New Zealand.

ENDS

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