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Question Marks Over Telecom Regulation

Please find attached a copy of an article that appeared in the Otago Daily Times today, 22 September 2006.

Question Marks Over Telecom Regulation

Parliament’s Finance and Expenditure Committee has been hearing submissions on the bill that, among other things, will force Telecom to allow competitors access to its network on mandated terms.

This is a major regulatory intervention at a time when the business sector has been complaining about over-regulation and when the government has set up an inquiry into regulatory frameworks.

The push for regulation has come mainly from Telecom’s competitors and user groups. Representative business organisations, including the Business Roundtable, Business New Zealand and Federated Farmers, have argued that the government has not adequately justified such a draconian step.

One analysis that appears to have had impact on the select committee is a 167-page submission by academic Bronwyn Howell of Victoria University. She rebuts claims that New Zealand is seriously lagging in broadband services, that this is harming economic performance, and that unbundling increases broadband uptake. It is a far more cogent analysis than the government has presented, and concludes that the case for further regulation is “not proven”.

It should be explained that the argument is not about whether Telecom should be opened up to competition. Deregulation of the telecommunications market accompanied corporatisation and privatisation. The government was concerned not to give Telecom any monopoly privileges. Many new entrants, ranging from Vodafone and TelstraClear to niche operators, have come into the market.

Rather, the argument is about whether normal competition should continue, with operators investing in new networks and facilities, or whether forced competition should be introduced, allowing access to Telecom’s network on other than freely negotiated commercial terms.

This has been called “parasitical competition” or “infrastructure socialism”. It is like forcing Karen Walker to stock Trelise Cooper’s lines in her shops. This may have short-term benefits for consumers but how many new outlets will Karen Walker open on that basis? The risk is that new investment that may deliver large benefits to telecommunications users will be slowed down.

In its submission, the Business Roundtable made two key points.

First, no cost benefit analysis was offered in the regulatory impact statement accompanying the bill. This is inexcusable. The Telecommunications Commissioner, Douglas Webb, presented such an analysis in his 2003 report on unbundling, which concluded that it was not justified.

It’s easy to generate short-term benefits to consumers by regulatory actions. The government could pass a law requiring airfares to be cut by 50%. This would benefit travellers for a time but would have major costs in the form of fewer air services and losses to investors. The relevant policy issue is whether the benefits exceed the costs.

We made a rough cost benefit calculation in our submission. The Telecommunications Commissioner estimated the benefits to consumers of unbundling to be under $100 million over a five year period. The losses to Telecom investors look like being in the order of $3-4 billion. Even if the consumer gains are an under-estimate, and allowing for other relevant factors, it is very difficult to see how the numbers stack up in favour of regulation. We said officials should be asked to do the job properly before parliament acts.

Secondly, we said that if a sound case for regulation in the public interest could be made, the costs should fall on the public at large, not just investors in Telecom. The issue of compensation should be addressed, just as it is when the government compulsorily acquires land under the Public Works Act. Michael Cullen has argued that other countries did not compensate investors for losses when local loops were unbundled, and that Telecom is merely being deprived of monopoly profits. However, two wrongs do not make a right, and the bill does not accuse Telecom of acting unlawfully or abusing a monopoly position.

There are other disturbing developments in network industry regulation in New Zealand. The government overrode the advice of its arm’s length Telecommunications Commissioner, Douglas Webb, on the grounds that it didn’t like it. Mr Webb informed the select committee that he has not changed his opinion on unbundling.

This month the government has sacked electricity industry regulator Roy Hemmingway for similar reasons. Interestingly, in a former role in the United States, Mr Hemmingway oversaw a process of telecommunications unbundling. It would be useful to have the benefit of his views on experience with it (the United States is moving away from unbundling).

We now have huge uncertainty in two vital infrastructure industries, telecommunications and electricity. The lack of due process, the prospects of ongoing regulatory debates and litigation, and the bad signals to domestic and foreign investors bode ill for the future.

With the government itself expressing concerns about over-regulation, the best thing parliament could do on the telecommunications bill might be to follow the medical axiom “first do no harm” and require it to be subjected to more competent and dispassionate scrutiny.

Roger Kerr is the executive director of the New Zealand Business Roundtable.


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