Invitation for revised proposals for the UFB initiative

Changes to the UFB initiative, signalled over recent weeks, were confirmed in an announcement on 1 July 2010 by Hon Steven Joyce, Communications and Information Technology Minister. 

Respondents to the Crown's ITP in January are to be invited to provide revised proposals to Crown Fibre Holdings (CFH).  CFH is the Crown-owned investment company carrying out the government's partner selection process and will manage the government's investment in the UFB initiative.  CFH's formal request for revised proposals will be posted shortly on MED's website.

The changes to the proposal: fine-tuning or more?

In a speech on 29 June 2010, the Minister described the issue of a refined ITP as a "commonly used tool in RFP processes to deliver greater value to the requestor" and said it would allow CFH "to fine tune" its original request. 

The "refinements", in fact, are reasonably significant changes to the government's original proposals.  Understandably, the government is driven by a desire to optimise the use of both the substantial public funds it is making available and also existing and future national infrastructure.  The changes also seem to be driven by a wish to accommodate changes in regulatory settings sought by ITP respondents.

Specifically, in a change attributed to respondents, the revised model will provide for both layer 1 (passive fibre optic network infrastructure) services and also now layer 2 (active fibre optic network infrastructure or "lit" fibre) services.  All services will be provided on an open access basis, i.e. they will be provided to all service providers on equal terms.  The move is reportedly seen as stimulating the earlier introduction of "layer 3" competitive web-based products and services.  The New Zealand Regional Fibre Group (NZRFG), comprising some 19 electricity lines and local fibre companies, has provisionally welcomed this proposal while waiting for the detail of the revised ITP.

The Minister further announced that the scope for regulatory intervention by the Commerce Commission will be limited for a period.  Instead, pricing for layer 1 and 2 services is to be set by CFH in negotiation with successful tenderers.  NZRFG has endorsed the regulatory certainty provided by the change.  The users' representative organisation, TUANZ, has cautiously accepted the planned regulatory holiday as providing certainty for investors but it remains wary about the detail. 

How the government's decisions (which also affect the government in its capacity as co-investor) will be implemented is as yet unclear.  While they will initially be set out in the refined ITP, they could also involve the issue of a government economic policy statement to the Commerce Commission and legislative change.

The Minister also announced that CFH will be seeking wider industry views on UFB architectural options and UFB product specifications during July and August 2010.

The deadline for revised proposals is not yet known.  Remarkably, despite the significance of the above changes and the extent of the remaining tasks, CFH has been given only one extra month beyond the original September target to make its recommendations to Ministers.  Decisions by Telecom on its voluntary structural separation (see below), may also affect timing.

Proposed variations to Telecom's operational separation undertakings

The Minister announced on 1 July 2010 that he is seeking submissions on Telecom's 24 May 2010 proposal for a fourth variation to its separation undertakings - which provide for its split into network, wholesale and retail arms. 

Telecom considers that operational separation creates high costs, congestion, complexity, customer risk, and a highly uncertain and heavy regulatory environment.  Telecom says that it wants "drastic regulatory simplification" to fit with the fibre future.

Telecom says that the variations it is seeking are needed to stop the risk of disruption and avoid costly investments in systems that will become redundant as a result of the UFB initiative.  At this stage, Telecom wishes to:

• Suspend the forced bulk migration of broadband customers being served by the wholesale broadband service onto the new wholesale broadband service
• Remove the requirement for Telecom to migrate 17,000 customers onto a new VoIP over copper service by 31 December 2010
• Remove the requirement for Telecom to build a new set of wholesale operational support systems that are not consistent with the industry structure implied by UFB. 

The Minister noted that the proposed variations may have implications for later milestones that Telecom must meet under the undertakings.  It is therefore possible that later variations will follow.

No changes are proposed to Telecom's fibre-to-the-node (FTTN) programme, which is set out in the separation undertakings.  Telecom has confirmed that this programme is continuing.  However, it seems that the changes will temporarily slow the migration of customers to faster broadband services.  MED has identified some questions for submitters to focus on, with submissions due by 23 July 2010. 

Telecom actively considering voluntary structural separation

Telecom's consideration of structural separation is linked to the UFB proposal.

The initial UFB ITP last October contained significant restrictions on Board appointments to LFCs by would be LFC co-investment partners who own or control retail telecommunications services.

Telecom announced on 29 January 2010 that it had submitted both a fully compliant proposal on the ITP and an alternative proposal, focused on delivering a national network using Telecom's FTTN programme.  In addition, it reported that it was open to discussing other alternative proposals. 

Telecom's CEO, Paul Reynolds then foreshadowed to shareholders on 15 April 2010 that Telecom needed to reposition itself for the UFB environment and also focus on the implications of the current regulatory settings in a fibre world. 

Telecom subsequently advised the Minister, in its proposed variations to the operational separation undertakings, that it intended to assess structural separation in order to fully participate in the government's UFB initiative.  The scope of the separation envisaged remains unclear but it is a significant step beyond operational separation, under which Telecom is still a single entity, albeit with distinct operating arms.

On 29 June 2010 its Chairman, Wayne Boyd, advised Telecom shareholders that Telecom is only at the start of understanding the cost and benefits of any such separation.  However, given that Telecom's CEO said in a May investor's presentation that full participation in the UFB initiative may depend on some form of further separation, it seems likely that such a scenario has already been canvassed with the government.  One assumes that proposals on structural separation will form part of Telecom's formal response to the revised ITP. 

Any such structural separation proposal and resulting substantial participation by Telecom in the UFB initiative would seem to require changes to the separation undertakings and possibly also to the Telecommunications Act 2001.

Rural broadband initiative (RBI)

The purpose of the RBI as finalised in March 2010 is to:

• Enable 97% of New Zealand households and enterprises to access broadband services of 5Mbps or better and the remaining 3% to achieve speeds of at least 1Mbps, initially focusing on the 16% of the population that will be beyond the footprint of Telecom's FTTN programme and the UFB initiative
• Connect 97% of schools to fibre, enabling speeds of at least 100Mbps with the remaining 3% to achieve speeds of at least 10Mbps.

Funding for the RBI of around NZ$300m is being raised from a NZ$48m direct government grant plus NZ$252m (over 6 years) from a new telecommunications development levy.

Hon Steven Joyce confirmed last week that MED still intends to release a RFP in August 2010 as the second stage of the RBI tender process.  In the first stage, the government received 39 expressions of interest.  These included EOIs from Telecom and Vodafone, and also collaborative proposals from members of the NZRFG covering the 19 zones specified by the government using inter-operable fibre, wireless and mobile technologies. 

MED has already foreshadowed that eventual bidders for RBI funding will be required to meet a series of access, service and performance, and technical standard minimum requirements, including enduring open access for any in-school government-funded fibre infrastructure.  MED envisaged in its March RBI overview that funding would be allocated to successful bidders in October/November 2010 with RBI-funded deployment of rural broadband infrastructure beginning in early 2011. 

On 30 June 2010 the government also announced under its national education network plan the first 239 schools to receive funding from the NZ$37m allocated in the May budget for school network upgrades in preparation for the UFB roll-out. 

Facilitating the deployment of broadband infrastructure

As highlighted by Hon Steven Joyce in his speech on 29 June 2010, a key complementary objective of the government to the UFB initiative (and presumably the RBI) is to take steps to facilitate broadband deployment and to lower the cost of, and speed-up, its implementation. 

In October 2009, MED released a discussion document on the desirability of further measures related to access to support structures on services and land and RMA controls.  Following submissions, a more focused proposal was released by MED on 14 June 2010.  This sets out MED's preliminary views on an initiative to develop nationwide fibre deployment standards and to seek EOIs on pilot projects to test the feasibility of standards covering shallow trenching and other fibre cable deployment techniques.

The government's Infrastructure Bill, currently at its Committee of the Whole House stage in Parliament, is expected to result in part in a separate "Utilities Access Act".  This will provide for a Utilities Code, which subject to statutory parameters and government approval will have regulation status.  The proposed standards are seen as feeding into the development of that Code. 

Comments on MED's June proposal are sought by Friday 9 July 2010.

For further information, please contact a member of our team - Nick Crang, Steve Nightingale, Philip Wood, Mark Odlin or Andrew Matangi.