Review of the Telecommunications Service Obligations (TSO) for Local Residential Telephone Service Summary Document
ISBN 978-0-478-41367-0 (Online) Crown Copyright First published: July 2013 Resources Energy and Communications Branch Ministry of Business, Innovation and Employment PO Box 1473 Wellington 6140 New Zealand www.mbie.govt.nz Permission to reproduce: The copyright owner authorises reproduction of this work, in whole or in part, so long as no charge is made for the supply of copies, and the integrity and attribution of the work as a publication of the Ministry is not interfered with in any way. Important notice: The opinions and proposals contained in this document are those of the Ministry of Business, Innovation and Employment and do not reflect government policy. The Ministry does not accept any responsibility or liability whatsoever whether in contract, tort (including negligence), equity or otherwise for any action taken as a result of reading, or as a result of reliance placed on the Ministry because of having read, any part, or all, of the information in this discussion document or for any error, inadequacy, deficiency, flaw in or omission from the discussion document.
Contents Have your say on the future of the TSO... 4 What is the TSO? What is its purpose?... 5 Why is the TSO being reviewed?... 6 Do we still need a TSO?... 7 Why change the TSO: why not keep it as is?... 9 What are the options for updating the TSO?... 11 Option one: minimum change... 12 Option two: medium change... 13 Option three: contestable TSO in defined areas... 14 Other possible changes to the TSO... 15
Have your say on the future of the TSO The Government is reviewing the future of the Local Residential Telephone Service Telecommunications Service Obligations (TSO) which applies to Telecom and Chorus. The purpose of the TSO is to ensure that local residential telephone services are widely available throughout New Zealand and remain affordable. The Ministry of Business, Innovation and Employment (the Ministry) is required to report to the Minister for Communications and Information Technology by the end of 2013 on the future of the TSO. The Ministry has released a discussion document on the TSO and is seeking comments on the document to assist it to provide advice to the Minister. This paper summarises the discussion document. For a more detailed discussion of the issues, please read the full discussion document. This summary paper and the full discussion document can be accessed at: www.med.govt.nz/tsoreview You can make a submission: By email: tsoreview2013@mbie.govt.nz By post: TSO Review Team Ministry of Business, Innovation and Employment PO Box 1473 Wellington 6140 New Zealand Please make your submission by 20 August 2013 Say as little or as much as you like. The discussion document has a list of specific questions. You can respond to some or all of these questions or just comment on this summary.
What is the TSO? What is its purpose? The TSO consists of a Deed between the Crown (in effect the Government) and Telecom and a Deed between the Crown and Chorus. (A deed is a legally binding obligation which is enforceable by the parties). 1 The TSO Deeds only apply to residential premises that were connected to the Telecom network in December 2001 and require that Telecom provide: Continued availability of a connection that can provide voice calls, dial-up internet and dialup faxes A free local-calling option Monthly line rental charges that do not increase by more than the Consumer Price Index (CPI), 2 and that are no higher for rural areas than for urban areas Free 111 calls A listing in the White Pages telephone book. The TSO Deed with Chorus requires it to provide underlying network services to Telecom to enable Telecom to meet these TSO obligations. 3 The purpose of the TSO Deeds is to ensure that the basic telecommunications services for residential consumers that existed in 2001 remain widely available and affordable. The TSO originated in the Kiwi Share Obligations (KSO) entered into by the Government and Telecom in 1990 when Telecom was privatised. At that time, Telecom was a near monopoly provider of telecommunications services, although other providers were able to enter the market. The TSO replaced the KSO in 2001, when a new regulatory regime, including a Telecommunications Commissioner in the Commerce Commission, was put in place through the Telecommunications Act 2001. The TSO was split into two Deeds (one with Telecom and one with Chorus) with the structural separation of Telecom into two companies in 2011. 4 1 There is a separate TSO Deed for Telecommunications Relay Services for the hearing impaired. This Deed is not subject to review and is not covered in the discussion document. 2 This has averaged about 2.2% per year over the last twenty-five years 3 A copy of the Deeds is available on the Ministry s web-site at the following address: www.med.govt.nz/sectors-industries/technology-communication/communications/telecommunicationsservice-obligations 4 Chorus owns and maintains the copper and fibre wires running to your house, whereas Telecom provides retail services such as broadband over those wires.
Why is the TSO being reviewed? The Telecommunications (TSO, Broadband and Other Matters) Amendment Act 2011 requires the Ministry to review the TSO in 2013 and to report to the Minister by the end of 2013. Decisions on the future of the TSO will be made in 2014. The Ministry is required to consult with interested parties, including the Commerce Commission, industry participants, consumers and Maori. The review is required to consider: Changes to the telecommunications sector and the impact of those changes on the TSO The continued need for, and relevance of, the TSO Alternatives to the TSO Funding arrangements for the TSO The potential for contestable arrangements for the TSO.
Do we still need a TSO? The telecommunications market has changed dramatically since the TSO commenced in 2001, and even more so since the KSO was put in place in 1990. The main changes can be summarised as follows: Widespread use of mobile telephones. There are now more active mobile telephone connections than there are people in New Zealand. More recently, mobile telephones have become smartphones, allowing full access to the internet. Around 50 percent of mobile phones are now smartphones. This increasingly means telecommunications needs can be met from mobile devices. Decrease in reliance on landlines for voice calling. Around 13 percent of households did not have a fixed line connection in 2012 (although some may not have mobile phones either). Rapid uptake of broadband services for accessing the internet. Nearly 80 percent of homes with fixed telephone lines now have broadband. The use of dial-up connections to the internet has fallen from over 600,000 households in 2006 to around 100,000 now. Competition has developed steadily throughout the telecommunications sector. While Telecom is still the main provider of fixed line services its share of fixed line revenues has dropped from 100 percent to around 60 percent now. Consumers have much greater choice of telecommunications services and telecommunications providers than in 2001, and increasingly competitive prices are being offered in the marketplace (including mobile voice and some data from around $19 a month). The Government is assisting the private sector roll-out a nation-wide fibre network through the Ultra-fast Broadband Initiative (UFB), which will enable 75 percent of New Zealanders to access ultra-fast broadband with peak speeds of at least 100 Mbps by 2019. The Government is also assisting the private sector improve the delivery of broadband services to rural New Zealanders through the Rural Broadband Initiative (RBI). The UFB and the RBI together will ensure that nearly 98 percent of New Zealanders, including 86 percent of rural homes and businesses, can access broadband peak speeds of at least 5 Mbps by 2019. Service in remote areas is available from satellites and, increasingly, local wireless providers. These developments raise the question of whether the TSO is still needed and relevant and, if it is, whether it needs updating.
The Ministry s preliminary view is that while the need for TSO protections may have reduced, there remains a risk, if there was no TSO at all, that: Consumers in some areas, particularly more isolated smaller communities and rural areas, could face reduced service availability and quality, or higher prices, or both Free-local calling could come with conditions, such as a cap on use. What do you think? Do you think these risks are real and significant? Do they justify keeping a TSO?
Why change the TSO: why not keep it as is? If the TSO does need to be retained in some form, why not leave it as is, and avoid the costs of changing it? The current TSO is now dated, and has a number of limitations that are likely to become more problematic over time. The main issues are: The current TSO, by requiring Telecom to continue to make access available for dial-up internet and fax services, effectively locks Telecom into continuing to use older legacy technology that will be replaced over time. This older technology is the copper-based PSTN (or Public Switched Telephone Network), which is being superseded by data networks, particularly with the roll-out of fibre to replace traditional copper lines and the development of wireless and mobile radio technologies. That means the current TSO does not allow Telecom to use the most cost-effective and modern technology to provide TSO services, potentially delaying availability of cheaper and more innovative services The minimum speed requirements for internet access in the TSO (14.4 kb/s for 95 percent of lines and 9.6 kb/s for 99 percent of lines) are now very dated. Connection speeds are now usually measured in Mb/s (1 Mb/s is 1024 kb/s) The coverage of the TSO protections is confined to homes that were connected to an active line in 2001. The Ministry estimates that up to 300,000 homes are potentially not covered by TSO protections. While in practice Telecom (and Chorus) make service available to these premises on the same terms and conditions as homes covered by the TSO, there is no obligation for them to do so At the same time, TSO protections appear redundant for most homes (predominantly those in urban areas), because alternative services at attractive prices are available from competitors in most parts of the country The TSO is not competitively neutral, in that the obligations apply only to Telecom and Chorus. Other competitors are not affected in any way. Moreover, Telecom and Chorus are required to meet the costs of providing service to uneconomic customers (such as remote communities) by cross-subsidising from more profitable customers, particularly in urban areas. 5 The sustainability of the cross-subsidy system may decline if Telecom and Chorus lose market share 5 A backstop financial subsidy through the Telecommunications Development Levy (which is levied on all telecommunications providers) is available if Chorus can prove to the Commission that it incurs net costs from the requirement to provide TSO services across all homes covered by the TSO.
The use of the CPI as the index for maximum increases in the monthly line rental charge undoubtedly helps with sustaining the TSO cross-subsidy, but it is also generous. Telecom s (and Chorus s costs) are more likely to change in line with the Communications Input Producers Price Index (PPI) which historically has shown a much slower rate of increase than the CPI The TSO arrangements particularly free local calling combined with a relatively high monthly rental charge may have slowed the progress and uptake of newer services. We may be seeing less innovation and new products compared with other countries that do not have a free local calling requirement. On the other hand, there would be costs in changing the TSO. The main ones are: Consumers who currently use dial-up internet and dial-up fax machines, and other telecommunications devices which use the copper-based PSTN (in particular monitored alarms including medical alarms), would need to replace their existing equipment (such as modems) with new equipment which can provide similar services over data networks, as Telecom progressively moved away from PSTN technology. Replacement of equipment is happening anyway, particularly with the uptake of broadband and the use of the internet to email documents. However, at minimum, a transition period and information provision would be required for dial-up users, similar to that provided for the current switch-over to digital television. Any new requirements for the TSO would need to be negotiated with Telecom and Chorus, and may involve costs, or may need to be imposed by legislation.
What are the options for updating the TSO? The Ministry has identified three main options for updating the TSO. They are: A minimum change option A medium change option A contestable TSO option. The details of these options and their advantages and disadvantages are summarised in the next sections. There may be other options you think are better. The Ministry would be pleased to hear about them. Please note that the Ministry is not proposing any changes to Telecom s obligation to provide residential customers with free 111 calling or a free directory listing.
Option one: minimum change The first option involves: Updating coverage of the TSO (i.e. where it applies) to Chorus s fixed line network in 2013 Retaining the requirement to provide voice calling services including free local calling Removing the requirement to provide dial-up internet and fax services, and replacing it with a requirement to provide access to the internet 6 Replacing the CPI with the PPI (or some other alternative) as the index for maximum increases in the monthly line rental. The advantages of this option are: Removal of the requirement to provide dial-up services allows Telecom to use other networks and technologies instead of legacy technology (the copper-based PSTN). This may save costs and encourage innovation, which improves efficiency in the economy. The option is therefore technology-neutral The expansion of coverage guarantees TSO protections to more homes than currently The PPI is likely to better reflect changes in Telecom s costs than the CPI and result in a slower rate of maximum increase in monthly line rentals. The disadvantages of this option are: Customers who currently use dial-up internet, faxes and alarms may in time need to replace some equipment. At minimum a transition period and information assistance would be proposed as part of this option The use of the PPI locks-in any historic over-recovery by Telecom and Chorus of their costs, since the CPI index has been applied annually since November 1989 The option applies TSO protections where they may not be needed (that is, where competition provides consumers with attractive choices) The option is not competitively neutral (because it continues to apply only to Telecom and Chorus). 6 The speed of the new internet service would be as good as or better than dial-up internet.
Option two: medium change The second option involves: Applying the TSO only to areas where it is needed (called TSO-Zones in the discussion paper), for example remote rural communities or areas where there is currently insufficient competition or areas not covered by the Government s UFB and RBI programmes Within TSO-Zones: o Applying TSO protections to all homes with fixed lines provided by Chorus now and in future o Retaining the requirement to provide voice calling services including free local calling o Removing the requirement to provide dial-up internet and fax services, and replacing it with a requirement to provide access to the internet 7 o Replacing the CPI with the PPI (or some other alternative) as the index for maximum increases in the monthly line rental Outside TSO-Zones: o Retaining a requirement on Telecom to offer a free local calling option o But allowing Telecom to set a commercial price for monthly line rental The advantages of this option are: Providing for technology neutrality, as for option one, which should improve efficiency and innovation The TSO protections would not apply where they are not needed, but would apply to all fixed lines provided by Chorus in TSO-Zones. The option is therefore more future-proof than the current TSO The PPI is likely to better reflect changes in Telecom s costs than the CPI and result in a slower rate of increase in monthly line rentals, as for option one. The disadvantages of this option are: Customers who currently use dial-up internet, faxes and alarms may in time need to replace some equipment, as for option one. The use of the PPI locks-in any historic over-recovery by Telecom (and Chorus) of its costs, as for option one Defining the TSO-Zones would be a challenge (although not an insurmountable one) and consumers may feel vulnerable if they are not included in a TSO-Zone Within the TSO-Zones, the option is not competitively neutral. 7 The speed of the new internet service would be as good as or better than dial-up internet.
Option three: contestable TSO in defined areas The third option includes all the changes in option 2, and then later involves: Tendering for the supply of TSO services in TSO-Zones. The service would be to provide voice calling services and internet access (at defined minimum speeds) for all lines in return for a fixed monthly charge (probably around the same level as the current monthly line rental). The winning bidder would be the supplier which required the lowest subsidy from the Telecommunications Development Levy (TDL). 8 The contract would be for a set period (say 10 years) and then be re-tendered, and it would include penalties for under-performance As for option 2, the service would not require the provision of dial-up internet, fax and alarm services Outside TSO-Zones, retaining a residual requirement on Telecom (and perhaps other service providers) to offer free local calling, though allowing them to set a commercial price for the monthly line rental. The advantages of this option are: The competitive process should result in least-cost solutions and encourage innovation The option is competitively neutral, in that the obligation applies to the winning bidder rather than just Telecom and Chorus The TSO protections would only apply where they are needed (but with free-local calling retained nationwide) The costs of the TSO would be met by all telecommunications suppliers (and therefore all users) rather than just Telecom and Chorus customers. The disadvantages of this option are: There would be implementation costs and risks (including, as for option 2, the challenges of defining TSO-Zones) There may not be enough bidders to ensure a fully competitive process The costs are unknown (although this risk could be managed) Consumers may need to change suppliers, and those who currently use dial-up internet, faxes and alarms may need to replace some equipment. In addition, there is a wider question as to whether better use could be made of TDL funds, for example, to fund the extension (by tender) of the RBI to provide higher quality services to areas which currently only receive basic services, including slow-speed internet. 8 The TDL is currently set at $50m a year, and is levied on all telecommunications suppliers (and is therefore likely to be passed on to all or most telecommunications users). It is currently mainly used to fund the RBI. It is due to reduce to $10m a year from 2016, but under this option would likely need to increase.
Other possible changes to the TSO Do other changes need to be made to the TSO? Possible further changes are: Cost of connections Currently, new customers for telephone lines are required to pay the cost of connection (but they can get any provider to install the line). The cost is usually built into the cost of sections in new suburbs, and is usually a standard fee elsewhere, but it can be high for isolated new houses. Should there be a set maximum cost for new connections (which means other consumers would subsidise costly new connections)? Internet speeds The current minimum speed requirements for internet access are dated. Should they be updated, and if so, to what? Bear in mind that it can be difficult and costly to achieve high speeds in very remote areas and, even with the current low required minimums, competition has seen actual speeds increasing significantly. White Pages The TSO currently requires Telecom to provide a copy of the White Pages telephone directory to every premise covered by the TSO. Is this requirement still needed, given the availability of directory information on the internet? 018 directory calls The TSO requires Telecom to provide an 018 directory assistance service (including free service for customers with a disability). Should this service remain a TSO obligation? Free local calling The Ministry is not proposing to remove the TSO obligation on Telecom to offer free local calling. This is because, in the Ministry s view, residential customers value communicating with people in their area without worrying about the impact it might have on their monthly bill. At the same time the cost to Telecom of providing free local calling is likely to be negligible, particularly given declining call volumes on fixed lines.