1. Case-by-case review

Issue 1.1:

What significant changes in cellular technology and in the cellular market do you foresee within the next 10-20 years? How might these changes affect the future use of the 800 MHz and 900 MHz bands?

5. In the next 10-20 years, TelstraClear considers that there will be accelerated growth in the use of cellular technologies. The main reasons for this will be the continuation of fixed-to-mobile substitution and the increasing importance of broadband delivered using wireless technologies.
6. As TelstraClear indicated in its submission on the Ministry’s discussion paper “Spectrum Allocations for Broadband Wireless Access”, the 800 MHz and 900 MHz bands are desirable bands for delivering cellular services because of their reach and non-line-of-sight performance. The discussion document indicates that Telecom uses the 800 MHz “for all of its existing cellular operations” while Vodafone uses the 900 MHz band “as its core network for 2G services”.² TelstraClear anticipates that both of these bands will be used for 2G and 3G services and, depending on decisions by the ITU, 4G.
7. As the Ministry is aware, TelstraClear’s parent company Telstra Corporation is in the process of deploying a 3G network in Australia using the 3GSM 3GPP standard in the 850 MHz band. TelstraClear is deploying services based on this standard in Tauranga but in the 2.1 GHz band. Were the Government to decide to make available 800 and/or 900 MHz spectrum available, TelstraClear’s preference would be to deploy services in these bands because of their better reach and non-line-of-sight performance and therefore lower deployment costs. TelstraClear does not consider that there are any constraints, such as the availability of suitable handsets, which would prevent deployment of 3GSM GPP services in these bands.
8. Because of the deployment cost advantages of 800 and 900 MHz spectrum, the lack of access to this spectrum by new entrants constitutes a barrier to entry. This is a likely reason why the New Zealand cellular market has fewer operators than in comparable countries and why New Zealand cellular prices are the highest in the OECD³.
9. TelstraClear considers that the lack of access to 800 and 900 MHz spectrum by new entrants is likely to act as a brake on the uptake of technology utilising these bands for delivering broadband wireless services. This is because the lack of competition in these bands will mean prices are higher than they would be in a competitive market.
10. TelstraClear anticipates that technological change may allow for some improvement in the efficiency of spectrum utilisation in these bands, though the extent to which this occurs will of course be constrained by physics. This would allow more operators to operate within these bands. In any event, as discussed below, TelstraClear considers that the current allocations to Telecom and Vodafone in the 800 and 900 MHz bands far exceed their actual current and future requirements given New Zealand’s characteristics.
11. TelstraClear therefore recommends that the Government take this opportunity to address the barrier to entry to the New Zealand cellular market resulting from the lack of access to the 800 and 900 MHz spectrum by new entrants.

Issue 1.2:

What is the current level of spectrum-related investment in the 800 MHz and 900 MHz bands?

12. TelstraClear has no spectrum-related investment in these bands because we do not hold spectrum in these bands. Under the Government’s present proposals to renew the existing Management Rights in their entirety, TelstraClear and other potential entrants will be prevented from making investments using these bands. This is a barrier to entry because entrants are forced to use higher frequency spectrum that involves higher deployment costs (because of its inferior reach and non-line-of-sight performance). Consequently, the overall cost for deployment of cellular networks is higher than it needs to be if entrants as well as incumbents had access to 800/900 MHz spectrum.

How might the use of these bands be optimised?

13. 13. Use of these bands would be optimised if some of the 800 and 900 MHz spectrum were reallocated to entrants. TelstraClear’s preliminary view⁴ is that 10 MHz paired is sufficient for a single operator. TelstraClear estimates that this would be sufficient for [    ]⁵ 3G HSDPA use and also includes an allowance for guard bands. TelstraClear notes that Telstra has 10 MHz paired spectrum in the 850 MHz band in metro areas. TelstraClear understands that most European countries allocate approximately 7 MHz of spectrum per operator in these bands.
14. Reallocation of rights to new entrants should be by auction. The current incumbents should only be able to participate in such an auction if they forgo the right to renew all of their existing rights. As stated above in response to issue 1.1, the current incumbents have access to spectrum that far exceeds their existing and future requirements. If half their current allocation is offered for renewal there would be no need for the incumbents to obtain additional spectrum in the band to which they do not currently have rights (ie 900 MHz for Telecom and 800 MHz for Vodafone).

What are your intentions in the next few years with respect to this spectrum?

15. TelstraClear has no plans for this spectrum at present because it does not hold Management Rights to it. However, TelstraClear considers that this spectrum would be ideal for services like TelstraClear’s proposed “Unplugged” service, which is being rolled out initially in Tauranga.

Issue 1.3:

Should rights to unused spectrum be renewed? Why or why not?

16. TelstraClear recommends that sufficient spectrum in these bands is set aside for viable entry by at least two new entrants, ie at least one block of 10 MHz paired in both the 800 and 900 MHz bands. Unused spectrum would be the most appropriate to reallocate to new entrants as this would minimise any reconfiguration costs for the incumbents.

Issue 1.4:

Which of the three options with respect to the length of the renewal period is appropriate?

17. TelstraClear’s preference would be that if some of this spectrum is reallocated to new entrants that it be Management Rights with a length of 20 years. This provides sufficient time for a new entrant to prepare a business case, deploy network infrastructure and recover the costs of the network.
18. In the event that no reallocation is made, TelstraClear considers that a renewal period of significantly less than 20 years, say 8 years, would be appropriate. This would ensure that the possibility of new entry into these bands is not precluded, for all intents and purposes, permanently.

If you do not agree with any of these options, what alternative timeframes do you suggest? Why?

19. See above.

Issue 1.5:

Do you have any comments on the appropriateness of applying the Covec formula to the New Zealand cellular market?

20. TelstraClear has several comments on this question.
21. First, TelstraClear notes that Covec advises Vodafone on regulatory proceedings, PriceWaterhouseCoopers and CRA International are advisors to Telecom, and NZIER has advised both Vodafone and Telecom. Undoubtedly, these advisors have provided their considered professional view on how best to price the renewal of these Managements Rights. However, TelstraClear is concerned about the potential conflict of interest here because the advisors providing advice to the Ministry on how renewal of spectrum rights should be priced are also advisors to the parties that will be subject to that price. TelstraClear therefore recommends that the Ministry: a. take steps to ensure that it does not seek advice for a matter such as the renewal of a price from advisors of parties directly affected by the advice in future; and b. commission a further review of the advice on renewal pricing from an independent advisor that has no professional relationship with either Vodafone or Telecom.
22. That said, TelstraClear agrees with the reservations that Covec identified about application of the Covec formula to the cellular market. In particular, the cellular market was immature when this spectrum was originally allocated and it has developed and changed substantially since that time. As a result, it is very likely that application of the Covec formula would not achieve the policy objective of a price that approximates market value⁶. TelstraClear therefore agrees that it is appropriate to examine other methods for pricing the renewal of the right.

Issue 1.6:

Do you have any comments on the approaches that were examined as alternatives to the Covec formula in valuing spectrum for the New Zealand cellular market?

23. In general, TelstraClear agrees with the assessment of the various options for establishing the renewal price in Table 1 of the Discussion Document.
24. However, TelstraClear disagrees with the assessment of benchmarking, which is assessed as neither transparent nor simple. Provided that the benchmarks used are publicly available, benchmarks would meet the transparency criterion. Undertaking benchmarking is a significantly less complex exercise than cost modelling. In fact, it is because benchmarking can be undertaken quickly, is transparent and provides a reasonable proxy for a market price that the Commerce Commission uses benchmarking as the basis for setting interim prices for some regulated services under the Telecommunications Act. TelstraClear does agree, however, with PWC-NZIER that benchmarking should not be the primary valuation approach because of the dramatic changes in the cellular services market and the difficulties associated with translating overseas benchmarks to New Zealand. Nevertheless, benchmarking provides a useful check on whether estimates using other pricing methods are suitable.

Are there any other approaches that should have been considered and why?

25. 25. If the Government follows TelstraClear’s recommendation that some of the 800 and 900 MHz spectrum should be reallocated by auction to new entrants, the auction price for these rights would provide an appropriate check on a calculated re-offer price. It would be inappropriate to set a renewal price below the price of rights reallocated by auction, as this would be inconsistent with the policy objective that the renewal price should approximate market value. In addition, it would imply that the incumbents’ renewal costs were in effect subsidised by the Government. TelstraClear therefore recommends that the renewal price should be no less than the price obtained for any 800 or 900 MHz spectrum reallocated to new entrants by auction.

³Ministry of Economic Development, Benchmarking the Comparative Performance of New Zealand’s Telecommunications Regime, 20 December 2005. New Zealand was ranked 30th out of 30 in price performance for medium users of cellular services.

⁴TelstraClear wishes to undertake further analysis before committing to a “final” view of a recommended amount.

⁵Please treat this information as commercial-in-confidence.

⁶TelstraClear notes that the Ministry interprets “market value” as the “price paid at auction” (paragraph 32 of the Discussion Paper). TelstraClear agrees with this interpretation.