VZCZCXRO3599
RR RUEHNZ
DE RUEHWL #0344/01 1240635
ZNR UUUUU ZZH
R 040635Z MAY 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 2751
INFO RUEHBY/AMEMBASSY CANBERRA 4391
RUEHNZ/AMCONSUL AUCKLAND 0737
RUEHDN/AMCONSUL SYDNEY 0438
RUCPDOC/USDOC WASHDC 0045

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