Telco watchdog taking 'extreme' positions on regulation

The success of the Government's ultra-fast broadband initiative is at risk from the Commerce Commission's approach to regulation, says Andrew Bascand. Photo / Chorus

New Zealand is gaining an international reputation for "extreme" and unpredictable regulation by its competition watchdog, the Commerce Commission, says Andrew Bascand, managing director of fund manager Harbour Asset Management.

In a submission to the telecommunications commissioner, Ross Patterson, Bascand says the commission's approach puts the success of the Government's ultra-fast broadband initiative at risk, and could be a turn-off for foreign investors considering buying shares in partially privatised state-owned energy companies.

His comments follow what he describes as last month's "policy shock" of draft regulations for the unbundled copper local loop - the traditional mainstay infrastructure of the national telephone system, which fibre-optic cable will replace as ultra-fast broadband rolls out nationwide.

The Government's $1.5 billion subsidy plan is intended to accelerate uptake of UFB, but the Commerce Commission's approach suggests it "has a mandate to tilt the playing field back to copper", while using a flawed benchmarking approach to regulation, Bascand said.

"Telco industry regulation needs to have a policy anchor that is consistent across a broad range of objectives involving customer outcomes, the allocation of capital, and the recognition of the benefits to society in the move to fibre that may not just be consumer-related," he said.

"Regulated returns need to have a cost of capital framework, not a benchmarking framework," said Bascand.

While releasing draft regulations for consultation was a good practice, "some market participants observe that the commission seems to take an extreme position initially on some issues".

That raised risk premiums for investors at odds with the commission's role as a "core player" in New Zealand's capital markets.

The commission's drafts appeared to adopt tactical positions "to be used as a bargaining tool with companies", or to allow it conduct "goal-seeking exercises".

Bascand said if a benchmarking approach had to be used, it would make most sense to use the agreed price for basic UFB service of $37.50 a month, since that had been "tested in the real world through a long, robust and hard-negotiated tender process" overseen by Crown Fibre Holdings.

Telecom, which split off its infrastructure unit Chorus earlier this year to participate in the UFB roll-out, won the lion's share of the UFB funding in a process that policymakers were anxious to ensure did not force pricing for copper-based serviced to fall so far that uptake of UFB stalled.

However, last month's draft decision had led Goldman Sachs to cut its forecast of UFB uptake by 10 per cent, suggesting outcomes that "run entirely counter to Government policy", tilting the playing field in favour of copper and forcing Chorus to accept uneconomic returns on its copper network.

However the issue was handled, the Government should be aware international investors now look askance at New Zealand regulators, making them wary of investing in partially privatised assets where regulatory risk remains high, such as the electricity sector.

"The Government should contemplate legislation to ensure Chorus earns an appropriate return on their entire copper network and settles this matter before they embark on talking to global investors about IPOs of the SOEs," Bascand told Patterson.

"Our recommendation is to set aside the UCLL and all other copper based investigations
pending the full telco sector review."

While the review was scheduled for 2016, enough evidence of UFB uptake may have emerged in time for it to be held a year earlier instead.