Regulatory Implications of Structural Separation

Abstract:     
The New Zealand Government is subsidising the nationwide deployment of an Ultrafast Broadband Network (UFB). However, government funds will not be provided to firms that have a significant retail broadband market presence. If the incumbent telecommunications provider Telecom New Zealand (already functionally separated into network, wholesale and retail operations since 2008) is to participate in the UFB, it must structurally separate into network and retail components.

This paper was prepared in October 2010 in response to a Ministry of Economic Development discussion paper on the regulatory implications of Telecom's proposed separation in order to participate in the UFB. Although motivated by New Zealand-specific activities, the paper has great general relevance for policy-making and regulation in markets where either or both of 'ladder of investment' and separation (either functional or structural) exist or are contemplated.

The paper begins with a general discussion on the rationale for regulation in telecommunications markets, and offers a widely applicable framework for consideration of telecommunications regulation policy principles. The framework clearly distinguishes between the role of regulation supporting the end of ensuring a sustainable industry pursuing increased economic efficiency, and the trade-offs that need to be considered amongst the various means of achieving that end – the promotion of competition, the incentivising of investment in infrastructure, and the role of consumer choice in the range of networks available. The paper further explores the distinctions between the different types of competition that could be pursued (infrastructure, services or benchmark) and how the design of regulation to support the industry will depend upon whether the key motivation underpinning the government's technology-specific network subsidy choice is to promote infrastructure competition (between copper and fibre) or to accelerate the rate at which one natural monopoly infrastructure (copper) is superseded by another (fibre). In particular, the paper highlights the anomalies generated in the regulatory environment by maintaining 'ladder of investment'-motivated access regulation and functional separation obligations for the copper network and structurally separate fibre provider requirements.

Number of Pages in PDF File: 39

Keywords: Telecommunications, Regulation, Structural Separation, Access Regulation, Ladder of Investment

JEL Classification: L51, L52, L96, L16

working papers series