Chris Barton: The joy of competition

Ross Patterson: 'I didn't get reappointed. Others haven't been reappointed. It comes with the territory.' Photo / Sarah Ivey

Chris Barton talks to Ross Patterson, the watchdog who tackled fortress Telecom, to deliver lower prices for consumers.

Dr Ross Patterson hadn't intended to apply for a second term. Five years as Telecommunications Commissioner felt long enough. But when a number of people in the telecomms industry urged him to reapply, he thought again.

His tenure as the country's telecommunications regulator had its ups and downs, including a 10-month leave of absence. Overall, he had garnered considerable respect for his even-handed decisions in introducing a new era of competition to New Zealand. He told officials he was prepared to do another three years. "I thought another five was too long." The government had other plans.

There was already gossip in the marketplace that Patterson wasn't wanted and when the job was advertised in March there was a further message: no mention that the existing commissioner would be reapplying. So when it was announced this month that Dr Stephen Gale would be the commissioner, Patterson wasn't surprised.

"From a personal perspective I wasn't at all concerned because I had other options available to me," says Patterson when we meet in the Auckland boardroom of his former legal firm, Minter Ellison Rudd Watts. He's just back from an overseas job interview, but can't say what it was for. "I've got various options - regulatory roles, commercial roles, consulting roles. I'm pursuing a number of those at the moment. I just have to really decide what I want to do."

How does he feel about not getting the job? "I didn't expect reappointment and only put my name forward because of a request from the industry." Was it unusual not to get a second term? "I didn't get reappointed. Others haven't been reappointed. It comes with the territory," he says diplomatically. "I've always said if you entered into a role like this relying on reappointment, then you wouldn't be doing your job because you would be more concerned how your decisions were viewed by government. You've got to be independent."

Was he concerned about the job application process? "I'm not going to comment on that. From my perspective it's ancient history. I've moved on."

Ancient history, decisions made. Patterson steadfastly refuses to be drawn. "The appointment decision is political. My appointment was a political decision," he says. "My skill set was what the minister at the time wanted for the role, so my predecessor wasn't reappointed. My skill set isn't required for the current role - that's fine."

For some in the industry, it's not fine. Many are concerned that not reappointing Patterson - a highly regarded commissioner seen to be doing a good job - signals a regulatory change of heart. In May Ernie Newman, former chief executive of TUANZ, the Telecommunications Users Association, posed the question: "Could the government be poised to return telecommunications to the ugly, unregulated, anti-competitive state of the nineteen nineties?"

He's talking about the decade following the sale of Telecom in 1990, when the government's "light-handed" regulation gave the newly privatised monopoly free rein to virtually do as it pleased to restrict competition. The subsequent Telecommunications Act 2001 - essentially a cumbersome set of rules for disputes arbitration - wasn't a lot better. Competition finally dawned in New Zealand with the 2006 amendments to the Act. It was those changes that attracted Patterson to the job.

"I saw the 2006 reforms as being vital and appropriate. I said publicly that had it been the 2001 regime I wouldn't have been interested in the role," he says. "I felt the New Zealand regulatory regime had moved into the mainstream and there was a real opportunity to make a real difference."

The 2006 Act introduced STDs - not sexually transmitted diseases, but rather "standard terms determinations". From Telecom's point of view they may as well have been the former, because the first of them - a series of STDs that introduced unbundling of monopoly services, including the copper local loop to consumers' premises - would change the telecommunications landscape forever.

Before taking the Telecommunications Commissioner role in July 2007, Patterson headed Minter Ellison's competition and regulatory practice group in Sydney, where he lived for 10 years.

"I'd seen the impact of unbundling in Australia and how effective that had been. I was convinced it would be effective here as well," he says. A decade earlier, at Minter Ellison's Auckland office, he had acted for Bell South, before it was bought by Vodafone, and had seen how difficult it could be for a new entrant in New Zealand. "I knew consumers were badly served in this market. I saw unbundling as an opportunity to drive competition into this market to deliver real benefits to consumers."

But the path to unbundling wasn't easy. Because New Zealand was so late to this type of regulation - Mexico was the only other OECD country that hadn't yet unbundled - many thought the intervention would fail. It was also being put in place when Telecom was massively upgrading its copper network with a programme of "cabinetisation" which shortened the lengths of copper running to premises. In Patterson's favour were international examples of unbundling, especially in Europe, which had shown huge competitive benefits for consumers. "Of course the incumbent [Telecom] had been arguing it was a complete waste of time."

Undeterred, Patterson started on the STDs to get unbundling underway, beginning with setting the price for the copper local loop and network co-location. By November 2007 it was done - $19.84 a month for urban exchanges and $36.63 for rural exchanges - enabling competitors to put their own equipment inside Telecom exchanges and offer competing services over Telecom's copper wires. Fortress Telecom had been breached and real competition arrived.

Other unbundling STDs followed - bitstream access enabling broadband services in December 2007, and bitstream backhaul in June 2008 to improve competition on the trunk components of Telecom's network. It was all going so well, but for Patterson things were about to go terribly wrong. In September 2008 the Commerce Commission issued a brief press release announcing he would be taking a leave of absence "for health reasons." Commission chair Paula Rebstock added: "Dr Patterson has asked me to convey that his health issue is alcohol related and that he is seeking the appropriate treatment. I would ask that the media respect Dr Patterson's right to privacy at this time." Rumours abounded. There was talk of a gathering at the Commission; alcohol was involved and harsh words were said. The seemingly logical assumption was that Patterson was an alcoholic.

Many assumed there was no way back. Patterson doesn't want to talk about what happened. But he will talk about his road back to the job.

"I discovered I had Hashimoto's disease. It was a surprise. I'd had lots of medicals, but it was not something that was ever tested for." The autoimmune condition which attacks the thyroid gland has a side effect of stopping the metabolising of alcohol, but can be treated with thyroid hormone replacement. "Basically, my thyroid doesn't work so the thyroxine does what your thyroid would normally do and keeps your thyroid working." The condition is also worsened by stress. "It was a challenge - character building I think is the term. I don't drink at all now, because the medication still affects alcohol. It's almost four years now I haven't had a drink."

In July 2009 the then Commerce Minister Simon Power issued another brief press release announcing Patterson's return to work: "He has received medical treatment, and I have received independent medical advice on that treatment and have considered very carefully all aspects of the matter." Patterson had two doctor's certificates showing alcohol was not an issue and the Hashimoto's disease was now being treated. But some bloggers - Cactus Kate and Whaleoil - greeted his return with scepticism, convinced he was a recovering alcoholic. Was he hurt by those reactions? "They are completely untrue, but you just put up with that," he says.

Patterson was back and keen to finish what he had started. When he took the job he said the acid test of how successful he had been would show in the level of market competition. "People will think back to the bad old days and realise they are so much better now." He points to the fact that as of March 2012, 150 exchanges have been unbundled, exceeding the estimated upper limit of 100 exchanges. And to New Zealand's rise in the rankings for broadband penetration among OECD countries - from 22nd or 23rd in 2001-2005 to 17th, now ahead of Australia, by December 2010.

"We have had a complete reversal, so you would say a combination of the 2006 regime and unbundling implementation means that's a tick," says Patterson.

At times Patterson has seemed very cautious in his decisions. Some are critical that he didn't unbundle the bitstream for VDSL - a broadband technology over copper that is faster than the ADSL most use today.

Others saw it as a measure of his balanced approach to regulation - holding off to allow Telecom time to recover its investment in cabinetisation. Patterson says the main reason was that there wasn't the demand for VDSL and the commission didn't want to set a price for a market that had yet to be established.

"The real issue today is that we now have a world class copper network through the Chorus rollout of 3600 roadside cabinets," he says. "As a consequence of that we have a copper network that delivers very high quality broadband services." So good that Patterson says some of the market research shows some consumers on the copper network think they are connected to fibre.

Patterson was similarly reticent on setting mobile termination rates - the fees mobile providers pay each other to interconnect to each others' networks. In a split decision he and fellow commissioner Gowan Pickering accepted an undertaking by Vodafone and Telecom to reduce rates voluntarily. Commissioner Anita Mazzoleni disagreed because of the risk that the parties could exploit the differential in costs it created.

"I thought it would be completely irrational for a party having given an undertaking to do such a thing," says Patterson. "Anita to her credit felt that was a real risk. It turned out we were wrong."

Following the decision, Vodafone did launch a product that exploited the differential in costs. "That really was a lesson to me," says Patterson. "The reality is if parties have some market power, some ability to exploit an advantage, and there is an economic benefit in it, they take the risk."

Lesson learned, Patterson followed Mazzoleni's view and set lower termination rates which - largely thanks to the arrival of a third mobile provider, 2degrees - has resulted in reduced mobile calling costs for consumers.

Perhaps Patterson's greatest success was in doing something that had never been done before - bringing Telecom to heel voluntarily and getting it pay $33.2 million in compensation to its competitors.

The outcome related to the no discrimination rules, put in place as part of operational separation undertakings of 2006, which would see Telecom separate into a network company and retail business. Under the rules, Telecom could not discriminate in favour of itself against other competitors for services on its network.

Telecom had agreed in principle to these undertakings and the level playing field they represented, but at heart it was still a monopoly. And one that was not at all pleased with the success of unbundling. So it put in place two discriminatory schemes - one a loyalty system whereby internet providers got a discount if they put all their business with Telecom; the other a cunningly complex "sub loop extension service" for its own retail arm, but not available to other internet providers.

"The effect was to undermine the business case for unbundling. Had they survived, unbundling would not have gone on outside Auckland," says Patterson. "It was important there was compensation, but more important was that the conduct be fixed. Ultimately both of them were settled, which is to Telecom's credit."

Where Patterson appears to have got offside with government thinking on regulation is in two more recent actions he has taken. The first was a demand side study under Section 9A of the Telecommunications Act to identify issues that might affect the uptake of high speed broadband in New Zealand. As Patterson points out, it wasn't a regulatory intervention. "What we were endeavouring to do was to raise awareness of issues. It's for other parties and policy makers to follow up." The study highlighted the importance of video on demand content to broadband uptake, and how Sky held considerable market power in that field. It also resulted in rumours that Sky was lobbying for Patterson not to be reappointed - rumours the company has denied.

"When a large number of people have internet-enabled TVs, clearly that is going to be a game changer," says Patterson, referring to American surveys showing consumers move from cable to broadband-delivered TV when the technology is widely available.

The second decision that attracted flak was to reassess pricing for the unbundled copper local loop now owned by Chorus. "The price for the copper loop is mandated in the legislation as being cost, so we were reassessing whether the prices we had in the market were still cost or not," he says. "The preliminary view is that the cost has fallen and therefore the price must fall. That's absolutely required by the legislation."

Disagreement came mostly from investment advisers concerned about the effect on Chorus' share price. "The attacks seem to be: 'This will make fibre less attractive and therefore that's a bad thing.' This is said by people who supposedly believe in the free market. What they are really saying is if copper is less expensive it should be increased in price. Consumers should pay more for copper for the next eight years so they might take up fibre when fibre arrives."

He says it would be a very odd regime that manipulated or distorted prices to make them above cost so a more expensive service is more attractive. "It's inconsistent with the fundamental principles of regulatory regimes. People saying that are of course those who have perhaps invested in Chorus. Consumers wouldn't be saying that."

Patterson's pro-competition legacy is now in the hands of Gale. Many in the industry will be watching closely to see how he completes the draft copper loop pricing decision.

Patterson's future now lies offshore. He has no regrets. "The job description when I came in was described as being strategic, proactive and robust. I think I've been all of those things."

ROSS PATTERSON'S REIGN

June 2007 - July 2012: Telecommunications Commissioner

July 2012: Stephen Gale appointed for a 5-year term

Big calls:

* Instigated unbundling, setting the price paid by rivals to access Telecom's - and later Chorus' - copper network

* Cut mobile termination rates - the fee telcos charge each other to receive calls and texts from rival networks

* Oversaw operational and structural split of Telecom

* Reached negotiated settlement with Telecom on two discrimination cases resulting in $33.2 million in compensation to competitors

* Launched study into the barriers to the uptake of ultrafast broadband; raised concerns about Sky's video on demand contracts with ISPs and Sky's control of online content rights