New Zealanders will soon have a greater choice in purchasing telecommunication services, particularly in regional areas.

The Commerce Commission today released its final determination relating to the supply of services on a wholesale basis between Telecom New Zealand Limited and TelstraClear Limited under the Telecommunications Act 2001. Services covered by the Commission's determination include business line rental and local calling, fixed-to-mobile services, directory assistance, voice messaging, business and residential broadband access and data services outside the major centres.

"What this determination means for small businesses and customers is that they now have the choice of having either Telecom or TelstraClear as their supplier of many telecommunication services, even in areas beyond the reach of the TelstraClear access network," said Douglas Webb, Telecommunications Commissioner.

"The Commission has ordered that these services are to be made available by Telecom for resale to TelstraClear customers. The Commission has set a wholesale price of 16% off Telecom's standard retail prices."

Today's determination largely relates to the wholesaling of business services and residential broadband. TelstraClear has made a separate application in respect of residential local access and calling services, which is currently being investigated by the Commission. A draft determination on this second application will be released shortly.

Mr Webb said the Commission considered the state of competition in 18 product markets. The Commission identified the individual services TelstraClear will be able to resell in nine markets where competition is currently limited. A number of markets were found to be effectively competitive and the Commission declined to order resale in these markets.

Attached is a 4-page executive summary. The final determination is available on the Commission's website, www.comcom.govt.nz (select Telecommunications, Access Determinations).

The Commission's determination is effective for 18 months from today, 12 May 2003.

Media contact: Douglas Webb is available to the media.

Please contact Jackie Maitland, Communications Manager

Phone work (04) 924 3708, mobile 029 924 3708

Determination on the TelstraClear Application for Determination for "Wholesale" Designated Access Services

Decision 497 - 12 May 2003

EXECUTIVE SUMMARY

Introduction

i) The Telecommunications Act 2001 ("the Act") regulates the supply of telecommunications services in New Zealand.

ii) The Commerce Commission ("the Commission") has a range of responsibilities under the Act, including making determinations in respect of designated access services. An applicant may seek to apply to the Commission for a determination of terms for the resale of designated retail services offered by means of Telecom's fixed telecommunications network.

iii) Section 18 of the Act provides that the purpose of Part 2 and Schedule 1, under which this Determination is made, is to promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand by regulating, and providing for the regulation of, the supply of certain telecommunications services between service providers.

iv) There are four criteria that must be satisfied for a service in the Application to fall within the description of a Relevant Wholesale Service. The service must be:

· Non price-capped;

· A retail service;

· Offered by Telecom to end-users;

· By means of Telecom's fixed telecommunications network.

Background

v) On 16 May 2002, TelstraClear Limited applied for a Determination in respect of price and non-price terms for supply by Telecom to TelstraClear of:

· non price-capped retail services offered by means of Telecom's fixed telecommunications network;

· bundles of retail services offered by means of Telecom's fixed telecommunications network; and

· retail services offered by means of Telecom's fixed telecommunications network as part of a bundle of retail services.

vi) On 28 June, the Commission decided to investigate the Application, insofar as it concerns non price-capped retail services offered by means of Telecom's fixed telecommunications network. The Commission decided not to investigate bundles of retail services offered by means of Telecom's fixed telecommunications network and retail services offered by means of Telecom's fixed telecommunications network as part of a bundle of retail services.

vii) On 25 November, the Commission issued a draft Determination on the Wholesale Application and sought submissions from the industry on its preliminary findings. This was followed by an industry conference held in February 2003 on the draft Determination where the Commission heard from a number of parties and their experts.

viii) Matters to be decided by the Commission are:

a. Identification of markets where Telecom faces limited, or is likely to face lessened, competition for the services contained with the Application;

b. Identification of all, some, or no markets in which Telecom does not face limited, or likely to be lessened, competition for services contained within the Application;

c. Where a particular retail service falls within a market in which Telecom does not face limited, or likely to be lessened, competition, whether the Commission will require that particular retail service to be wholesaled in that market

ix) A summary of the Commission's Determination on the above matters is listed in the following table:

Summary of Relevant Markets

Service Market Customer and Geographic segmentation Competition Assessment

Local Access Services SME Metro Limited

SME Non-metro Limited

Corporate non-metro Limited

Toll-free services Business National Not limited

Business International Not limited

Fixed-to-mobile services SME National Limited

Corporate National Limited

Data services Business Metro Not limited

Business Non-metro Limited

Business International Not limited

Broadband Services Residential Non-metro Limited

Business Metro Not limited

Business Non-metro Limited

Premium Rate Services Business National Not limited

Customer Premises Equipment (CPE) Business National Not limited

Business information analysis Business National Not limited

Directory assistance Business National Limited

Operator services Business National Not limited

x) In assessing the state of competition in the markets relevant to this Determination, the Commission has considered both the structural elements of the market and the behaviour of market participants.

Services

xi) Based on the conclusions reached regarding the markets identified above, the Commission then identified the individual services that TelstraClear will be able to resell in the limited competition markets.

xii) TelstraClear's Wholesale Application originally described 308 services for which it sought a determination from the Commission.

xiii) After the exclusion of withdrawn services, 158 services remain under consideration by the Commission.

xiv) After completing its market definition and competition analyses, the Commission has determined that 98 services pass both the jurisdictional and competition thresholds and will be available to TelstraClear in specified markets on a resale basis.

Retail Price

xv) The Initial Pricing Principle requires that access seekers gain access to services designated for resale at the retail price less a discount benchmarked against discounts applying in comparable countries that apply a retail minus wholesale methodology.

xvi) The Commission requires that Telecom calculate the 'Standard Retail Price' of the designated services such that the calculated average modal price covers 80% of the observed price points for that service in the market.

xvii) The Commission requires that Telecom calculate the retail price for each designated service in each market including separate calculations for the Commission's determined customer and geographic segmentations, under the guidance of an independent auditor.

xviii) For Corporate customers, TelstraClear will be entitled to the maximum volume or other total customer spend discounts off the estimated spend of a churned customer, subject to any specific terms and conditions applying in order to receive that discount.

xix) Telecom will be required to maintain a comprehensive list of Designated Services and calculate the Standard Retail Prices by service and market of the services on a quarterly basis.

Calculation of the Discount

xx) The Commission has conducted a benchmark study of wholesale discounts in which data were gathered from a number of public sources. Forty-seven U.S. states were selected for the benchmark. As with the interconnection benchmark study, the Commission sought to refine the range of comparators based on a measure of comparability against factors considered to be relevant indicators of cost differentials. These factors were labour cost, population density, GSP, tele-density and urbanisation.

xxi) As indicated in its draft Determination the Commission believes that the selection of a discount rate from within the lower half of the benchmarked range continues to be appropriate. A relatively high discount may increase the risk that investment in infrastructure will be deterred, while inefficient investment in resale functions may be encouraged.

xxii) In determining how much weight to place on the need to protect incentives to invest and innovate at the infrastructural level, the Commission is mindful of the approach it took in the Interconnection Determination. In the current case, the Commission considers that the 25th percentile value of 16.0% is appropriate, taking into account both the theoretical merit of the relative factor cost arguments, as well as the Commission's concerns regarding incentives to invest in infrastructure.

Non-price terms

xxiii) TelstraClear applied for various wholesale non-price terms in its initial application. During the course of the Commission's investigation, the parties were able to progressively reach agreement on a number of terms initially in dispute.

xxiv) On 9 April 2003, Telecom and TelstraClear jointly notified the Commission that they had reached agreement in respect of the remaining non-price issues. The parties provided the Commission with agreed contractual language, which is included in Appendix 4 as a condition of the Determination under section 30(c) of the Act. These agreed terms are included as enforceable terms in this Determination.

Duration of the Determination

xxv) The Commission considers that the appropriate expiry date for its Determination is 18 months from the date of the Determination.