The Bill as introduced identified that some additional legislative amendments may be required in support of the Government’s initiatives, depending on the forthcoming results from the Ultra-fast Broadband Initiative and Rural Broadband Initiative competitive tender process. The Bill as introduced flagged that a Supplementary Order Paper would deal with various issues that would arise in the following areas:
access rights to multi-unit complexes, private land, and the road reserve when constructing or maintaining telecommunications networks:
amendments to enable the structural separation of Telecom NZ in the event that Telecom is selected as a preferred supplier under the UFB Initiative and that it accordingly decides to proceed with a demerger of its access network business:
other amendments to support the implementation of the Government’s telecommunications policy programme.
This Supplementary Order Paper contains some indicative amendments in these areas, which reflect the Government's proposals on these issues based on the current available information. It is anticipated that the indicative amendments will, however, require refinement as the process continues.
Access rights to multi-unit complexes, private land, and the road reserve when constructing or maintaining telecommunications networks
New clause 17B inserts a new subpart 3 of Part 4 into the Telecommunications Act 2001 (the 2001 Act) to provide a process for access to multi-unit complexes that fibre-to-the-premises (FTTP) service providers may use if an access agreement cannot be obtained. Owners may opt out of the process, in which case the service provider has to apply for a court order for access. The new process involves the following steps on the part of the FTTP service provider:
agreement to be bound by a Code prepared by the Minister relating to access to multi-unit complexes by FTTP service providers; and
the taking of all reasonable steps to negotiate an agreement for entry with the owner in accordance with the Code; and
the service of a preliminary notice on each owner of the affected part of the multi-unit complex; and
the service of a second notice on each owner of the affected part of the multi-unit complex who has not opted out; and
application to the District Court for an access order in respect of each owner of the affected part of the multi-unit complex who has opted out (which the Court may grant if the owner has acted unreasonably in opting out); and
membership of a consumer complaints system that provides for the resolution of complaints about access.
This new FTTP access regime applies instead of certain of the existing land access rights that are currently contained in subpart 2 of Part 4 of the 2001 Act. Those existing rights are, first, a right for other network operators to obtain access orders from the District Court, subject to conditions and, secondly, a right of entry in respect of existing works and existing lines built before 1988/1989. The existing rights apply for the purpose of constructing, erecting, laying, or maintaining lines. The new FTTP access regime also applies to upgrades.
All of the other land access rights in existing Part 4 of the 2001 Act will apply to FTTP service providers, for example, access rights to the road reserve.
New clause 19(3) and Schedule 1 propose amendments to sections 135 to 153 of the 2001 Act to give wireless or mobile network operators the same rights of entry onto road reserves in order to install and maintain works as other network operators currently have in respect of lines.
Amendments to enable the structural separation of Telecom NZ in the event that Telecom is selected as a preferred supplier under the UFB Initiative and that it accordingly decides to proceed with a demerger of its access network business
A new Part 1A is inserted into the Bill to deal with the structural separation of Telecom as follows:
subpart 1 of new Part 1A comes into force immediately and contains machinery provisions that are in preparation for separation day. It sets out a process for the Minister to approve an asset allocation between Telecom and Chorus, for the purpose of ensuring that Telecom provides information about the proposed asset allocation to the Minister, and that an overview of the asset allocation plan is made publicly available on or before the demerger of Telecom takes place in accordance with an arrangement to be approved by the High Court under the Companies Act 1993. It also sets out a process for the Minister to approve Chorus undertakings:
subpart 2 of new Part 1A comes into force on separation day. It repeals the existing Part of the 2001 Act (that deals with operational separation), and substitutes a new Part 2A that contains the substantive rules that will apply after structural separation. Separation day is the day on which Telecom distributes 100% of the ordinary shares it will hold in Chorus to the holders of ordinary shares in Telecom in accordance with the demerger arrangement:
subpart 3 of new Part 1A contains consequential amendments, saving and transitional provisions, and miscellaneous matters. The first batch (clauses 23HA to 23S) come into force on separation day. The rest (clauses 23T to 23ZE) come into force immediately.
Approval of asset allocation plan
Subpart 1 of new Part 1A requires Telecom to submit a plan to the Minister (an asset allocation plan) that specifies how all of Telecom's assets and liabilities on the day that the company separates will be allocated between Telecom and Chorus, how those assets and liabilities will be transferred or vested, how assets will be used to provide telecommunications services, and key terms of sharing arrangements between Chorus and Telecom (new clause 23B). After receipt of the plan, the Minister must decide whether to recommend the making of an Order in Council approving it. The only basis on which the Minister may decline to recommend that the plan be approved is that it does not meet the information requirements in new clause 23B. However, if approval is declined, the Minister must give reasons and may invite Telecom to submit a revised plan. After approval (but no later than separation day), Telecom is required to make an outline of the asset allocation plan publicly available by publishing it on an Internet site. There is a power for Telecom to withhold confidential information from the overview that is made public. Under new clause 23G, Telecom must ensure that the separation of Telecom is in accordance with, and gives effect to, the asset allocation plan as approved.
Approval of Chorus undertakings
Subpart 1 of new Part 1A also sets out a process for the Minister to approve Chorus undertakings (see subpart 4 of new Part 2A below).
New Part 2A — substantive rules that will apply after structural separation
Subpart 1 of new Part 2A contains preliminary provisions around structural separation.
Monitoring of shared assets, services, and systems
Subpart 2 of new Part 2A relates to arrangements for continued sharing after separation day of systems, services, or assets that will be owned by one or other of the separated entities and that were owned by Telecom on the day before separation day. It establishes a regime under which the Commission will receive executed copies of such arrangements and may monitor and direct the parties to amend any arrangement that does not meet certain requirements (which include that the arrangement must be on arms-length terms between Telecom and Chorus and not be likely to harm competition in telecommunications markets). There are certain enforcement mechanisms to compel alteration of the arrangements, but these do not extend to performance of the written arrangements. New section 69N gives the Minister the power to grant an exemption from the requirements of the subpart (which, under the transitional provisions in subpart 3 of new Part 1A of the Bill, may be exercised before separation day).
Line of business restrictions
Subpart 3 of new Part 2A prohibits Chorus, or any related party of Chorus, from participating in the supply of retail telecommunications services. This will ensure, on an ongoing basis, a separation of functions and interests between the ownership of the copper local loop and other legacy assets on the one hand, and the provision of retail services on the other hand. The prohibition assumes, as does the rest of the Act, that Chorus will continue after separation day to hold the assets in accordance with the asset allocation plan.
Undertakings by Chorus
Subpart 4 of new Part 2A requires Chorus to give undertakings to supply wholesale services using its copper access network on a non-discrimination basis and to provide a subset of those services, which Chorus consumes and which it supplies to its competitors, on an equivalence basis. It must also give further undertakings relating to the assurance of achievement and monitoring of those standards (new section 69X). The penalties that apply for a breach of the undertakings are currently the same as those that apply to a breach by Telecom of its operational separation undertakings.
Subpart 5 of new Part 2A deals with miscellaneous issues, including the following:
Public Works Act 1981
New section 69XF relates to the application of sections 40 to 42 of the Public Works Act 1981. In simple terms, these apply when land, including Maori land, is no longer required for
“public work”. Sections 40 and 41 set out an offer-back process, requiring the land to be offered for sale to the person (or successor) from whom it was acquired. Where the structural separation of Telecom involves the transfer of land from Telecom to Chorus, that transfer, in the case of both land originally acquired by the Post Office and by Telecom under the State-Owned Enterprises Act 1986, would be likely to trigger the application of these provisions. New section 69XF(1) ensures that the transfer of such land from Telecom to Chorus does not have this effect. However, the requirements of sections 40 and 41 of the Public Works Act 1981 do apply to any future disposals or transfers of the land by Chorus and the new section sets out requirements in relation to the offer-back process (subsections (3) and (4)).
Resource Management Act 1991 issues
In order to ensure that, after separation day, Chorus and Telecom are in an equivalent position to that which Telecom was in immediately before separation day, new sections 69XG and 69XH—
confer requiring authority status on Chorus:
transfer specified designations from Telecom to Chorus:
given the transfer of designations from Telecom to Chorus, grant additional specified designations back to Telecom.
Requiring authority status for Chorus is approved for an equivalent purpose to that for which Telecom was approved immediately before separation day. The status will be able to be revoked under the Resource Management Act 1991.
The designations transferred to Chorus, and granted additionally to Telecom, are in the same form and content as Telecom’s designations were immediately before separation day. The designations transferred to Chorus are to be treated as earlier designations, for the purposes of section 177 of the Resource Management Act 1991, with respect to the designations additionally granted to Telecom. Those designations are subject to the ongoing application of the Resource Management Act 1991, including any notification requirements.
New section 69XI relates to land that Telecom transfers to Chorus on separation day. The benefit of any covenants that affect that land will automatically transfer to Chorus, under normal operation of law. New section 69XI provides that Telecom will also continue to get the benefit of those covenants, along with Chorus.
Government Superannuation Fund Act 1956
Employees of Telecom or its subsidiaries who were members of the Government Superannuation Fund (GSF) before 1 January 1988 are currently entitled to continue that membership as if employment with Telecom or its subsidiaries were Government service. Telecom pre-1988 GSF-member employees will continue to be protected by existing protection that currently applies to Telecom. New section 69XJ gives corresponding protection for pre-1988 GSF-member employees of Chorus. It also means that if a pre-1988 GSF-member employee of Chorus were later to become an employee of Telecom, or vice versa, the protection continues. The payment of GSF contributions by Chorus to the Crown is intended to be addressed by deed.
Taxation consequences of structural separation
Subpart 6 of new Part 2A provides for the tax treatment of the transfer of assets and liabilities (designated assets and liabilities) to the Chorus Group from Telecom, as well as providing for the tax treatment of the demerger distribution to Telecom Corporation of New Zealand Limited shareholders, as part of demerging the Chorus Group out of Telecom. The transfer of the designated assets and liabilities to the Chorus Group will not give rise to any tax consequences under the Inland Revenue Acts that would not have arisen if Telecom and the Chorus Group were the same person. The demerger distribution to Telecom Corporation of New Zealand Limited shareholders, as part of demerging the Chorus Group out of Telecom, will not give rise to any tax consequences that would not have arisen if the transfer of the designated assets and liabilities and the demerging of the Chorus Group out of Telecom had not occurred.
Commerce Act 1986 authorisations
Subpart 7 of new Part 2A exempts from the Commerce Act 1986 certain aspects of the arrangements with the Crown to provide ultra-fast broadband to New Zealanders. The effect is that sections 27 and 29 (which relate to restrictive trade practices) and Part 3 (which relates to business acquisitions) of that Act will not apply to the UFB arrangements that include Telecom.
The restrictive trade practice exemption in new section 69XZA applies to—
any contracts between the Crown and Telecom that are necessary to give effect to the selection of Telecom as a UFB partner. This exemption covers all arrangements, understandings, and acquisitions that, at any time, may flow from the selection to the extent that they are “necessary to give effect to” the selection:
any contract between the Crown, Telecom and a UFB partner in a particular region or regions, under which Telecom transfers fibre optic network assets to a local fibre company owned by the Crown and the UFB partner.
The business acquisition exemption in new section 69XZB(1)(a) and (b) is intended to provide for a scenario in which—
Chorus and a number of regional lines or fibre companies (local partners) are selected as the Crown’s partners in different regions:
in each region, a new company will be established with responsibility for the implementation of the UFB initiative:
the shareholders in the new company will be Chorus, the local partner, and Crown Fibre Holdings Limited:
the new company will acquire any existing fibre assets from Chorus and the local partner.
This acquisition might result in a lessening of competition under Part 3 of the Commerce Act 1986 to the extent that these assets are pooled under the control of one company.
The business acquisition exemption in new section 69XZB(1)(c) is intended to provide for a scenario in which Chorus might be selected as the only partner in a region. The Crown may provide UFB funding in these circumstances through investment in Chorus shares or assets. The section authorises any acquisition by the Crown of Telecom’s shares or assets pursuant to its selection as a partner.
Under existing provisions in the Commerce Act 1986, the Commerce Commission may grant authorisations from the Part 2 requirements, and from the Part 3 requirements (for example, if satisfied that the acquisition will result in a benefit to the public). However, this is likely to be difficult to complete in a time frame that will allow the timely completion of the UFB partner selection process. New subpart 7 instead grants statutory authorisations which will avoid the need for the usual Commerce Commission processes.
Telecommunications service obligations
After the separation day, the deemed TSO instrument known as the Local Service TSO (the Telecommunications Service Obligations (TSO) Deed for Local Residential Telephone Service dated December 2001, provided by Telecom) will no longer be operable because the assets and inputs required to meet the obligations under the instrument will be split between Telecom and Chorus. Amendments are therefore made to—
accommodate the split of the Local Service TSO obligations across 2 separate TSO providers:
ensure that the obligations continue to be included within the definition of a deemed TSO instrument:
provide for liability for breaches of obligations where a TSO service is delivered by 2 providers.
These amendments, made by new clauses 23HA to 23HH, do not come into force until separation day (see new clause 2(2)), by which stage the amendments relating to TSO obligations made by Part 1 of the Bill would already be in force (see new clause 2(1)). The amendments in new clauses 23HA to 23HH are therefore made to the 2001 Act as if it had already been amended by Part 1 of the Bill.
New section 101A, inserted by new clause 17A, requires the Ministry to commence a review of the deemed TSO arrangements and report to the Minister on its findings not later than the end of 2013.
Amendments to Schedule 1 of 2001 Act
New Schedule 2A sets out a number of amendments to the regime for designated access services in Schedule 1 to ensure that it still functions after structural separation of Telecom. These fall into 2 categories—
amendments to subpart 1 of Part 1 of Schedule 1, primarily to introduce new pricing rules:
new clause 4A of subpart 1 of Part 1 requires the Commission to determine regulated prices for the unbundled copper local loop network service and the unbundled bitstream access services that are averaged across the national geographic footprint of New Zealand. Under the transitional provision in new clause 23X(1) of the Bill, the Commission is required to make reasonable efforts to review the existing standard terms determinations for these services before separation day for the purpose of making changes required to implement this amendment. However, no changes may take effect until after separation day and, in the case of the unbundled copper local loop network service, the effect of new clause 23X(2) of the Bill is that the national geographic average price will not become effective until 3 years after separation day:
new clause 4B of subpart 1 of Part 1 sets out a new pricing rule that requires the Commission, when implementing any initial or a final pricing principle for a designated service, to ensure that there is no double recovery of costs by an access provider in circumstances where multiple services are supplied over the same infrastructure:
amendments to the service descriptions in subpart 2 of Part 1. Key amendments made have the effect of—
changing the pricing principles for unbundled bitstream access service from retail-minus to cost-based:
ensuring that the unbundled bitstream access service, rather than the POTS (plain old telephone service), recovers the line costs where unbundled bitstream access is purchased:
ensuring that the pricing principles for the residential local access and calling service match the changes to the unbundled bitstream access pricing principles:
introducing a new unbundled copper low frequency service to ensure access seekers can provide their own POTS voice services in combination with naked unbundled bitstream access or the amended unbundled bitstream access service. Under the transitional provisions, the Commission must make reasonable efforts to make a standard terms determination for this service before separation day (new clause 23Y).
Transitional provisions in new clauses 23Z to 23ZC also have the effect of
“freezing” the unbundled bitstream access service—
new clause 23X(1)(a) requires the Commission to make reasonable efforts to complete a review of the standard determination for this service before separation day, for the purpose of making any changes necessary to implement any changes to Schedule 1, except the pricing principles applicable after the expiry of 3 years from separation day. Clause 23ZB requires the Commission to make reasonable efforts to conduct a review before the expiry of 1 year after separation day for the purpose of making any changes necessary to implement the pricing principles applicable after the expiry of 3 years from separation day, although no changes may take effect before the expiry of that 3-year period. Within 25 working days after the Commission notifies the results of the latter review, a party to the standard terms determination can apply for a pricing review (new clause 23ZC). With the exception of the 2 reviews required under new clauses 23X and 23ZB, new clause 23ZA prohibits the Commission from initiating or commencing, for a period of 3 years from separation day, a Schedule 3 investigation under clause 1(1) of Schedule 3, a review under section 30R, an application for a residual terms determination under section 30V, or a reconsideration under section 59 in respect of the unbundled bitstream access service:
access seekers for the unbundled bitstream access service will have contracted with end-users for the provision of services in reliance on the wholesale prices prevailing at the time. One impact of the amendments made to Schedule 1 is to average the price of unbundled bitstream access, which will materially increase the price of one form of unbundled bitstream access for access seekers taking the wholesale service. To protect access seekers who have contracted retail obligations in reliance on this unbundled bitstream access wholesale price, the wholesale price is therefore
“grandfathered” on the day before separation day. The effect of new clause 23ZD is that it grandfathers the price of Chorus's unbundled bitstream access service for services purchased by access seekers before separation day, the grandfathered price being the regulated price that applies under the standard terms determination for 1 April 2011, or the price set out in the determination on the day before separation day, whichever is the lower.
Other amendments to support the implementation of the Government’s telecommunications policy programme
New clause 33 exempts from the Commerce Act 1986 certain aspects of the arrangements with the Crown to provide rural broadband to New Zealanders. The effect is that sections 27 and 29 of that Act (which relate to restrictive trade practices) will not apply to the rural broadband arrangements in so far as they relate to Telecom and Vodafone.