Section 6: Governance settings in ‘other’ local fibre company constitutions

Background

LFCs were established to deliver the UFB initiative. The companies entered into partnership with the Crown to deliver UFB in one or more ‘candidate areas’. The ‘Invitation to Participate’ document that sought proposals from private partners (available on the CIP website) included a list of objectives for LFCs, once established. This included maximising the availability of fibre within agreed areas, specifically layer 1 services and layer 2 services (being loosely defined here as wholesale fibre services) where it was agreed with the Crown.

Four LFCs were established to deliver the UFB initiative: Chorus, Enable, Northpower Fibre, and Tuatahi First Fibre. In order to mitigate the monopoly characteristics that would be inherent in the networks when built, each company’s Deed of Open Access Undertakings for Fibre Services provides for various matters relating to the build of the UFB network. This includes the supply of unbundled services, non-discrimination and equivalence of supply. These obligations ensure that all retail service providers are being offered the same price and terms for a wholesale product. These settings have underpinned the delivery of high quality fibre services and competition in retail markets.

In addition, each LFC has a company constitution. For the three smaller LFCs, these constitutions include the permitted activities of the company and a restriction on retailing and supplying services directly to consumers, as well as other controls. For Chorus, similar restrictions sit in the Act.

Issue 1: Governance of permitted business activities

This section distinguishes between Chorus and the ‘other’ LFCs in order to focus on requests for constitutional amendments that the Government has received from Enable, Tuatahi First Fibre, and Northpower Fibre.

The company constitutions of the other LFCs govern all of their business activities. The other LFCs are restricted to providing wholesale fibre infrastructure and cannot enter other markets, such as wireless. The constitutions further restrict the LFCs’ operations to layer 1 and 2 of the OSI model. LFCs, as wholesalers, can only build the physical layer of fibre networks (layer 1) and offer the data link layer to retail service providers (layer 2). Retail service providers typically operate at layer 3 and above. The constitutions also prevent the companies from being able to retail or supply any services directly to consumers.

The Government added restrictions in the company constitutions to ensure that the other LFCs met their UFB objectives, given the significant government investment in the UFB initiative. The restrictions also give effect to the split between wholesale and retail fibre services that became a fundamental aspect of the Act after the 2018 amendments.

As the government holds a non-voting share in the companies, agreement from the Government Shareholder is required to amend most clauses in the companies’ constitutions. This reflects the ongoing interest of the government in the operation and maintenance of the UFB networks.

There is nothing in the companies’ constitutions that indicates the constitutions, or the regulatory controls within them, would change once the build of the UFB network was complete. The expectation is that the other LFCs will continue to build and maintain wholesale fibre networks.

The governance of the other LFCs is different to the regulation of Chorus. The Act regulates Chorus’ fibre network business and copper network business but does not impose limits on other business activities. For example, Chorus can use wireless technology to connect premises to its network and is able to provide other wholesale services, such as data centre co-location facilities. Chorus has restrictions related to retailing services to end users, and restrictions related to having company directors who are also engaged in retail telecommunications businesses.

Problem definition 

With the completion of phases one and two of the UFB, the other LFCs have raised questions about the role of their companies in telecommunications markets and the controls that sit in the company constitutions. We understand the other LFCs consider that the settings in their constitutions are too restrictive and prevent them from expanding their networks and developing services for consumers (which could contribute to addressing existing connectivity challenges, including in rural areas).

The other LFCs have requested amendments to certain constitutional settings. The requests themselves are commercially sensitive, but the themes include:

• more flexibility around what markets the other LFCs can operate in beyond fibre. This would potentially include venturing into other telecommunications markets such as wireless networks
• a desire for the scope of the constitutions to be more closely aligned with the Deeds of Open Access relating to UFB, rather than governing all business activities of the company, and
• in some cases, being able to supply end users or retail services (for example, supplying consumers with connectivity solutions, selling connectivity equipment or services like networking).

We agree that the completion of phases one and two of the UFB build is an appropriate time to consider questions about constitutional settings for the other LFCs. Feedback on this section will be used to inform the Government’s decision on the requested amendments from the other LFCs.

Out of scope

For clarity we consider some matters to be out of scope for any changes, these are outlined below along with our supporting reasoning:

• any changes that allow the other LFCs to retail or supply telecommunications services to end users (a restriction that Chorus is also subject to), given the importance of the split between wholesaling and retailing fibre services to the regulatory regime
• removing the Government Share from the other LFCs, or its role in the constitutions. The Government made a significant investment into LFCs and has an ongoing interest in ensuring fibre networks are maintained
• any options that place new obligations on the other LFCs via their constitutions, given that the other LFCs are unlikely to agree to any such changes and their agreement is required to amend the constitutions
• other aspects of wider LFC regulatory settings, including any significant changes to the wider regulatory framework for fibre, given a major review was completed in 2018.

Questions for stakeholders

Options

Option 1: Status quo – no changes to the constitutional settings for other LFCs

The status quo would see us retain existing settings in the constitutions of Enable, Northpower Fibre and Tuatahi First Fibre. As described above, these ‘other’ LFCs would continue to have different levels of control in regard to permitted activities compared to Chorus.

We note that under this option, the Government may still agree to other minor changes to the LFC constitutions, on a case-by-case basis.

Option 2: Allow the other LFCs to operate in any market, with a restriction on supplying telecommunications services to end users (preferred option)

This option would alter the restriction on the other LFCs only providing wholesale fibre services. The companies could operate in other markets, or deliver any other service, as long as it is not a retail telecommunications service.

This is MBIE’s current preferred option. We consider it offers the best balance between addressing the concerns of the other LFCs, with our preference to maintain the wholesale/retail split for telecommunications services. The wholesale/retail split is a fundamental part of the telecommunications regulatory framework.

Benefits

• Opportunity to develop new telecommunications solutions – potential positive impact on connectivity options for end users.
• Closest to equivalence with Chorus.

Considerations

• Potential impact on competition in other markets.
• Focused and continued investment in fibre could be impacted if companies move into non-telecommunications markets.

Questions for stakeholders

Issue 2: Process to seek agreement to operate at layer 3 or 4

The other LFC constitutions restrict them to providing wholesale fibre services. However, these constitutions do include a mechanism for the Minister for Media and Communications and CIP to consent to the other LFCs providing layer 3 (the network layer) or layer 4 (the transport layer) services. These parts of the fibre network are typically provided by internet service providers.

There is no standard or formalised process for the three other LFCs to seek agreement from the Minister and CIP to deliver these services. There is also no standard criteria that the Minister or CIP is required to take into account before granting consent.

Chorus also has the ability to request an exemption to operate at layer 3 and 4, via a different process, where the Commerce Commission assesses the application. Before agreeing to an exemption, the Commission must have regard to matters listed in the Act, including whether the exemption will harm (or is likely to harm) competition.

Problem definition

Requests to deliver layer 3 and 4 services through this process are not common. However, we note that the lack of clarity around the process may impact decisions by the other LFCs to seek such an exemption. We understand that the lack of a formal process to seek consent can create uncertainty for the other LFCs, particularly around timeframes and the priority for processing requests. We also note that the need to have CIP as part of the decision-making process may no longer be relevant now phases one and two of the UFB are complete.

Options

Option 1: Status quo – no change to the process

The status quo would result in no changes to the mechanism that sits in the other LFCs’ constitutions.

Option 2: Shift the mechanism for other LFCs to seek consent to operate at layer 3 and 4 into the Act (to align with Chorus’ process)

This option would remove the mechanism to operate at layer 3 and 4 from the constitutions and add it to the Act, aligning it with the process and criteria that Chorus has. The Commerce Commission would be the decision maker.

Benefits

• Provides the most certainty for the LFCs – clear criteria and process set out in the Act (which is binding).
• Consultation with affected parties is built into the process.

Considerations

• Potential impact on Commerce Commission – additional workload to assess applications.

MBIE comment

MBIE does not have a preferred option. We are interested in feedback on whether the status quo is creating barriers to innovative solutions that would have benefits for end users, and on the implications of any potential changes.

Questions for stakeholders

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