Structural separation a bonus, but transparency is vital now

Telecom’s announcement on Monday that its revised bid to participate in the UFB project includes a structural separation of Chorus is a bonus, but not a panacea.

It’s important to keep in mind that with UFB, Telecom isn’t the only option. They are a viable bidder but so are other parties, as is evident from the range of bids that have been lodged.  The Regional Fibre Group is no doubt as ready to get laying fibre as Chorus is. With that caveat aside, back to separation.

InternetNZ has been advocating structural separation since it first looked at the Telecommunications Act in 2006. We thought then, and think now, that a clean split between the monopoly elements of the communications network and the sale & marketing of services that use it, would lead to the most competitive possible environment for service providers – and thus would be in the best interests of consumers.

Structural separation, in other words, was and is in line with our vision of an open and uncapturable Internet.

Operational separation was always a second best option: lacking the clarity of a legal separation, it tried to create the same incentives through virtual splits between network, wholesale and retail. The model was pretty robust, and it had to be given where the starting point was: a Telecom highly prone to discriminating against third party service providers, almost whenever it could.

The change in leadership at Telecom and the implementation of operational separation have together led to a significant turnaround in its treatment of other companies. The ideals of the operational separation policy have perhaps been best realised by Chorus, which really has become an organisation that tries to do its best by all its customers without fear or favour. The relationship with service providers is sight out of mind better than it was half a decade ago, and Telecom deserves a large part of the credit for that shift.

Now, the next step is on the table. Telecom has been talking about structural separation with the Government for months, and it is a relief that CEO Paul Reynolds and others have at last started to talk about it publicly in more recent times.

Let’s be clear here: Telecom is putting (and has to put) the interests of its shareholders first. Two things have pushed the company towards suggest structural separation. First is the UFB’s structure, which precludes Telecom’s long-run involvement if it is vertically integrated.  Second is the ongoing pressure of operational separation – which means that going the next step to a structural split is a less giant leap than it otherwise would be.

We know, from public discussion, that Telecom has offered structural separation in return for being part of the UFB, and that it has suggested a joined up approach to the (investment based) UFB and the (grants based) rural broadband initiative (RBI). Telecom has also made it clear that it no longer wishes to carry the cost and responsibility of providing emergency services calling. Further, Telecom has not been a fan of the TSO obligations for some time – and the changes last year to that scheme massively increased the real cost to it of meeting those obligations.

What we don’t know is what bundle of issues Telecom has chosen to wrap up in its UFB bid. 

Have they made a conditional bid, where Telecom becoming the UFB partner leads to an end to the TSO, an SOE taking over emergency services calls, an end to other retail regulation, the ditching of operational separation, and a migration of Telecom’s copper customers onto the UFB?

One can reasonably assume that the answer to that is “probably” – both from gossip around the traps, and from the fact that in the grand scheme of Telecom’s investment and capital programme, $1.35bn just isn’t that big a lump of money. There would need to be more than that on the table to justify to shareholders the costs and risks of a structural separation of Chorus.

So, while InternetNZ welcomes the appearance of structural separation as a live option, the details need to be spelled out. A straight up negotiation with Crown Fibre Holdings to participate in UFB is one thing, with all the parties accepting the regulatory and policy framework as it is. That’s a commercial process that can run on its current basis.

A conditional bid from one player, involving a fundamental set of changes to the market structure and regulatory framework applying to telecommunications, is quite another.

Structural separation, coupled with Telecom being a UFB partner, really would change everything. Operational separation would eventually be a thing of the past. The prospect of copper competition being a discipline on the pricing of fibre would be out the window. The ten year regulatory holiday on pricing for the fibre network would become a whole lot more problematic than it already is (and that’s saying something). The transition from today’s regulatory regime to tomorrow’s would need to be carefully thought through and agreed. Legislation to amend the Telecommunications Act would be required.

These are big changes that can’t be decided by CFH alone. They should not be considered behind closed doors, if the outcome is to be in the public interest. They are not a matter for commercial negotiation – they are vital public policy issues that should be decided in the public interest.

It’s time for the Government to bring these debates out into the public domain, so that everyone has the chance to understand what’s going on and to provide considered input as to how best to make this investment work for New Zealand.

Jordan