NEW ZEALAND TO ORDER LOCAL LOOP UNBUNDLING

UNCLAS SECTION 01 OF 02 WELLINGTON 000344

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/CIP AND EAP/ANP FOR DRICCI
STATE PASS TO USTR FOR BWEISEL
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ARI BENAISSA
COMMERCE FOR 6920/ITA/OTEC/MYLES DENNY-BROWN
SYDNEY FOR CS

E.O. 12958: N/A
TAGS: ECPS ECON ETRD NZ
SUBJECT: NEW ZEALAND TO ORDER LOCAL LOOP UNBUNDLING

REF: A. WELLINGTON 230


B. 2004 WELLINGTON 428

C. 2004 WELLINGTON 66


1. (U) Summary: The New Zealand government announced May 3
that it would compel Telecom Corp., the country's former
state monopoly, to open its fixed-line telephone service to
competition. New Zealand has been one of only two OECD
countries that had not mandated unbundling of the local loop.
The decision aims to improve New Zealand's dismal record on
broadband access, which has been a reason cited by U.S.
businesses for not increasing their investment in the
country. The move is considered the biggest shakeup of the
New Zealand telecommunications sector since Telecom was
privatized in 1990. End summary.


2. (U) The decision by Cabinet, which must be approved by
Parliament, would give competitors access to Telecom's copper
network and allow them to provide alternative phone and
Internet services to any land-line customer. The resulting
competition would be expected to spur lower prices for
telephone services and increase broadband access in the
country. New Zealand's broadband uptake ranks at 22 out of
30 OECD countries, at 6.4 percent of households. Prices for
mobile, residential and business telephone services in New
Zealand are significantly higher than the average for other
OECD countries.


3. (U) Under the government's plan, the rates that Telecom
charges Internet service providers would be regulated.
Telecom also would have to offer competitors access to the
fastest speeds available on its network. Telephone services
would be separated from broadband services, allowing
competing providers to sell one and not the other if they
choose. Telecom also would be required to separate
accounting of its wholesale and retail businesses, to ensure
that any cross-subsidization is disclosed.


4. (U) The announcement followed a government review of the
telecommunications sector that began in December 2005. The
Cabinet on May 3 approved the proposed legislation to
unbundle the local loop, which Communications Minister
Cunliffe said he expected to be introduced soon in
Parliament. Approval is expected by the end of the year,
with implementation of the law beginning in 2007.


5. (U) The government will continue to look into other
measures to improve the country's broadband performance,
including the possible structural separation of Telecom's
retail and lines operations.


6. (SBU) The decision indicates the government is finally fed
up with Telecom, after waiting years for the utility's
promises to voluntarily improve broadband access and prices
to bear fruit. Telecom also had used its status as the
country's largest listed company as a threat, warning that
regulation would cause both its profitability and its share
price to suffer, along with the value of government pension
funds that are heavily invested in the company. Telecom is
by far the largest publicly traded company headquartered in
New Zealand and is the only New Zealand business in the
Fortune 2000 list of major global firms.


7. (SBU) As recently as May 2004, the Cabinet disregarded the
advice of the Ministry of Economic Development and then
Communications Minister Swain to unbundle the local loop (ref
B). The Cabinet's decision against unbundling also preserved
a bargaining chip that could be used in possible free-trade
negotiations with the United States, which New Zealand
officials quietly concede are now less likely. The
government in 2004 instead required that Telecom provide its
rivals with a basic high-speed Internet service and took the
threat of unbundling off the table so long as Telecom met
certain targets. The company reached the goal of having
250,000 residential broadband customers by the end of 2005,
but failed to meet the goal of having one-third of those
customers served through non-Telecom providers. Instead,
only 22 percent of such customers came through the wholesale
channel.


8. (U) The government had intended to showcase the
telecommunications announcement during its annual budget
release on May 18. However, news of the Cabinet's decision

WELLINGTON 00000344 002 OF 002


was leaked to Telecom within hours of the decision. So, the
government made the decision public soon after Telecom called
Minister Cunliffe and told him it had the Cabinet paper. The
announcement delivered on one of Telecom's dire predictions:
Telecom's stock price dived 7 percent in after-hours trading
in Australia. It continued its decline May 4, falling 9
percent since its May 3 close to NZ $5.06 (US $3.24) a share
in New Zealand.


9. (U) As expected, Telecom -- which controls 92 percent of
the country's broadband connections -- lashed out at the
decision, saying it would not boost broadband use and uptake
and would put its investment in its copper network at risk.
On the other hand, TelstraClear, a subsidiary of Telstra
Corp. of Australia and Telecom's land-line rival in New
Zealand, implied that the decision could prompt it to
increase its investment in New Zealand.


10. (SBU) Comment: The government has come under increasing
pressure to boost investment in the country's aging
infrastructure, including telecommunications, roads and
energy. With the economy slowing after six years of
significant growth, the government also is seeking ways to
strengthen and diversify the economy away from
agriculture-based commodities. Increasing its broadband
performance and stepping up competition in the
telecommunications sector should help. Also, by resolving
the unbundling issue at this time, the New Zealand government
is acknowledging that it no longer can afford to hold on to
this bargaining chip for the uncertain possibility of
free-trade negotiations with us in the future (ref A).
McCormick