A new separation variation requested by Telecom NZ amounts to the end of operational separation and could kill the New Zealand government’s NZ$1.5 billion ultrafast broadband project, claims InternetNZ..

The organisation, which represents the interests of New Zealand internet companies and users, made these claims as part of its submission to communications minister Steven Joyce.

Earlier this month, the minister asked interested parties for feedback on yet another set of changes proposed by Telecom NZ. Each variation request has asked for progressively more concessions. The three previous variations have all been granted – but the most recent set involve material changes that will have knock-on effects elsewhere.

At the time of the request Joyce said Telecom NZ’s proposed changes had implications for later undertakings and asked submitters to answer a number of detailed questions. Friday was the deadline for submissions on Telecom’s fourth proposed variation to its operational separations undertakings.

InternetNZ policy director Jordan Carter (right) told CommsDay his organisation is strongly opposed to Telecom NZ’s fourth variation request and said: “There is a an unholy mix of things going on”.

He said this variation is the latest in a series and effectively ends operational separation. Carter said the original separation determination, introduced in 2007 by the communications minister of the time, David Cunliffe, can only be overturned by legislation.

Telecom NZ’s operational separation is based on a so-called ‘three box’ model. This puts borders around Chorus, Telecom Wholesale and Telecom Retail. More recently the company has talked openly about structural separation where, instead of Chinese walls between units, one or more of the units becomes a fully separate company. This has been floated as a way of allowing Telecom NZ to participate in the UFB project which specifically doesn’t allow retail operations to own or control fibre.

However, the latest variation could change everything.

Carter said under the existing model, Layer 1 and Layer 2 UFB services must sit in separate Telecom NZ business units. In its proposed variation Telecom NZ has asked that the three box model be “re-aligned to a two box model.” The variation would leave Chorus in control of both Layer 1 and Layer 2.

Carter said such a move would effectively eliminate operation separation in practice and legally.

He said: “To us, it’s a matter of principle. Don’t play with structural separation.”  He went on to say there may be a case for revisiting operational separation in the future, but it is important for the government to get all the benefits from separation first before giving anything away. He says ending operation separation should only be considered after the structural separation proposal has been made.

InternetNZ’s submission said Telecom NZ’s variation request poses a serious threat to the whole UFB project. “Contrary to Telecom’s requirement that Variation 4 be agreed before Telecom participates further in the UFB process, the opposite is the case. Alternatively, Telecom would be in a substantially stronger negotiating position against CFH and government,” it said. “That is because operational separation is driving Telecom toward structural separation and the UFB initiative. The Minister’s choice has heavy implications for the success or failure of UFB. To blink now is to play to Telecom’s strategy, built up over a series of variations.”

Carter makes a direct link between the fourth variation request and the recently announced amendments to the UFB model. The changes mean Local Fibre Companies, the public-private partnerships which will manage the UFB roll-out, will have a ten-year regulatory holiday.

The move gives investors certainty and increases the attractiveness of the project from their point of view. Carter said this tilt the playing field away from consumers in favour of investors – a move which, he says, also plays directly into Telecom NZ’s hands.

He said: “There was no policy debate about these changes.”

Carter said there’s a possible “nightmare” scenario where Telecom NZ can further delay the entire UFB process, then turn around and say “we’re not doing this.” The government goes ahead with the build, but Telecom NZ uses its fibre to the node network to compete aggressively to ensure the LFCs never get traction. Then when the project collapses, Telecom NZ can step in a pick-up the government-subsidised fibre assets at a fire-sale price and control an unregulated monopoly.

Bill Bennett