Control of subsidised FTTH will bring structural separation to Telecom NZ

New Zealand is getting closer to its ultra-fast broadband dream. The government issued a 'draft proposal for comment', basically to set up a PPP for constructing the network.

As promised earlier, the government will contribute half of the cost (NZD 1.5bn) of building out an open access FTTH network to 75% of the people (in 25 towns - note that 29.5% of all homes are in Auckland). During the first six years, focus is on schools, businesses, the health industry and greenfields. However, FTTH must be deployed within 10 years.

The big issue of course is: what will Telecom NZ do? Will they overplay their hand the way Telstra did in Australia? The document clearly demands structural separation of Telecom NZ, should it want to invest in the passive infrastructure; unless it would hold a minority stake (comparable to KPN holding 41% in the new Reggefiber Group), in which case functional separation (which it already implemented) would suffice. In other words: if Telecom NZ steps in with a minority share, it wouldn't have to change its structure, but (unlike KPN) it would need to be structurally separated once it would gain a majority stake in any LFC.

Here are the Key Principles from the document:

• 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;
• ensuring affordable broadband services.

Here are some conditions:

• The vehicle for investing the subsidy will be crown-owned: Crown Fibre Investment Co (CFIC). It will invest, alongside co-investors, in Local Fibre Cos (LFCs). CFIC will hold up to 50% of the shares of the LFCs.
• "Selection criteria will be focused on several aspects – the amount of additional fibre coverage being proposed, the proposed capital structure (including the parties’ relative capital contribution requirements), the commercial viability of the proposal, consistency with government objectives, and the track-record of the partner."
• "The government’s shareholding may be concessionary, and in particular may be subject to a lower rate of return than the partner for an initial period (for example, up to ten years). These provisions will be negotiable."
• "LFCs will not provide retail services. However, the government will not exclude partners that own or operate telecommunications retail operations, but such partners may not have the majority of voting control on the board of LFC (unless they divest themselves of any retail business). Telecom, and other telecommunications operators with retail operations, will therefore be able to participate in the contestable selection process, subject to the above requirement."

And here are some more details:

Time line

Comments due end of April, report back to the government end of May, appointmnet of the vehicle mid June, RfP to be released mid August, proposals due mid October, initial decisions due January 2010. All submissions, due April 27, will be published at www.med.govt.nz/broadband.

Wholesale

The network owner will primarily sell dark fiber, and "potentially other approved wholesale broadband services. (...) LFC may: provide a wholesale bitstream service; and enable the provision of interim solutions by wholesale customers, such as wireless last mile or ADSL2+ or VDSL2 solutions, provided that this is consistent with the LFCs achieving the government’s objective of FTTH within ten years; and subject to the CFIC’s approval, provide any other wholesale broadband service."

"The government investment will be in fibre networks that will operate only at the wholesale level, selling dark fibre based services enabling telecommunications providers to design and specify their own downstream services. This approach will ensure that all decisions regarding active network technology options are left to private sector investors."

"By keeping the new fibre business out of retailing, it will have no incentives to act anti-competitively, and there will be little need for regulation of its prices. In fact, there will be considerable initial incentives for it to keep the fibre rental prices low to facilitate use by downstream providers."

"The new network will provide dark fibre services to any ISP or telecommunications service provider, and will operate as an infrastructure ‘utility’ at the passive level of the market. The aim is to provide a new fibre platform upon which service providers can develop their own services and create unique, innovative offerings."

Services

The usual suspects are there, including: "There is also a strong likelihood of new applications being developed in the future that will require residential users to have fibre broadband connections to operate them effectively, particularly as increasing numbers of services are delivered digitally."