Call-waiting signal as Govt settles telco rules

By JOHN SMALL*

The telecommunications policy development process entered its political phase when the Fletcher inquiry gave its final report to the minister.

Since then, members of the industry have been lobbying to secure the outcomes they regard as desirable.

Officials from the key agencies (the Ministry of Economic Development and the Treasury) have recorded their views in confidential reports to the Government.

But some possible policies can be gleaned from comments made at a post-inquiry conference in Wellington.

The Minister of Communications, Paul Swain, opened this by confirming that there will be a policy change announced in mid-December. After thanking the inquiry team, he revealed nothing of substance about his views on their recommendations.

Telecom then surprised the conference by acknowledging that regulation does have a role in the industry. Chief executive Theresa Gattung said that regulation could be useful, but should be confined to just interconnection and number portability.

This leaves a small group of Wellington economists as the only defenders of the present regime.

For everyone else, the questions are not about whether change should occur, but about details of the new policy.

Even the NZ Business Roundtable economist Bryce Wilkinson, the most explicit promoter of what could be called the Wellingtonomist doctrine, must see that for the Government to do nothing now would completely erase any credibility that the threat of regulation might once have had.

Having explained to the conference that any regulation would begin a long chain of events ending in the downfall of civilisation as we know it, he argued that entrants should simply pay Telecom's prices as any other approach would violate property rights, thereby setting us on the slippery slope to ruin.

This brought a reaction from inquiry chairman Hugh Fletcher, who quoted Richard Prebble, formerly the minister responsible for selling Telecom and now head of the Act Party, to the effect that Telecom's buyers knew from the outset that regulation was an option for the Government. There would, in other words, be no violation of Telecom's property rights. Theresa Gattung seems to agree.

Given that some controls seem inevitable, what are the key issues?

On this there is a surprising amount of agreement. The main tasks are to ensure that the regime includes rapid, impartial dispute resolution, and is flexible while being constrained from the undue expansion of regulation that is apparent in Australia.

The inquiry's final report addresses these issues carefully and while some modifications to the proposed design could certainly be useful, most of the critics at this conference were more interested in forestalling the inevitable than proposing improvements.

A notable exception was the constructive contribution by Peter Stiffe from Vodafone, who said an arbitrator who was independent of the proposed commissioner would be useful.

The idea was to separate the design of pricing principles from their implementation, on the grounds that this would lead to more objective decision making and provide more flexibility in appointing good people.

Apart from regulatory design matters, the Kiwi Share is the most important outstanding item. The issue is not about free local calling, which is under no threat, but about the long-term arrangements that will secure universal access to telecommunications. It is apparent that no one is terribly happy about the rural infrastructure, though Wellingtonomists try to divert attention from this by showing that provincial New Zealanders are about as likely to use e-mail as the rest of us.

The network is undeniably in a poor state after a decade in which little investment has been directed to the quality of the rural copper.

The fact that there are very sound commercial reasons for this lack of investment is of no consolation to those who suffer from low-quality access as a result of it.

Whatever its merits in general, local loop unbundling is not a solution to the rural network problem because entrants using this service will concentrate on areas with good copper.

Wireless technologies could help in some places, though these are at present unlikely to be cheaper than upgrading the copper. And cost matters because someone has to pay for it.

This is where things get interesting. Telecom wants an industry-funded scheme to support what are effectively social objectives for uneconomic areas, and this approach is certainly consistent with the international norm.

The design of universal service obligation funding schemes is a fairly standard regulatory problem, provided the objectives of the scheme have first been clearly specified by the Government.

But how could we make the transition to such an environment? It seems reasonable for recent industry entrants to contribute regular maintenance funding to support a well functioning rural network. After all, their customers do benefit from the ability to contact rural users.

The problem is that the rural network now needs much more than just regular maintenance and the initial upgrade costs are effectively a liability created by the deferral of maintenance over the past decade. Telecom looks like the rightful owner of this liability.

It is apparent that ministers will need to address the rural network issues explicitly in order to develop a full policy package for the industry. One alternative to the inquiry's recommendations, which would leave the obligation on Telecom indefinitely, is to require Telecom to commit the funds required to upgrade the network, and to delegate the design to the proposed commissioner.

This would certainly be a better deal for Telecom than the one suggested by the inquiry, a fact that may allow the Government to extract further concessions from the company.

The end result will say much about this Government's commercial acumen.

* Dr John Small is director of the Centre for Research in Network Economics and Communications at the University of Auckland.