Fletcher telco inquiry on wrong track

By TONY WARREN*

New Zealand appears doomed to repeat Australia's mistakes in telecommunications, judging by the Fletcher inquiry's provisional report.

It seems to draw lessons from Australia that bear little resemblance to what is happening in telecommunications on the other side of the Tasman.

The report appears to recommend an Australian-style regime but without the checks and balances on the regulator. The key failing of the Australian system is that it has grown almost uncontrollably. The regulator, the Australian Competition and Consumer Commission, has managed to expand its role over the past three years to the point where it now effectively micro-manages most wholesale services, from analogue pay TV cable through to local call resale services.

The commission has been given the job of defining what services an incumbent operator is required to provide to its competitors and at what price. The Fletcher report proposes a similar role for the Electronic Communications Commissioner.

Since June 1997, 17 Australian services have been regulated, despite the fact that there are solid economic grounds for control in only one case. It is generally agreed that the wires connecting customers to the exchange (the local access network) should be controlled in areas where there is only one access provider.

Yet inter-capital transmission services are also regulated, despite being supplied by multiple carriers.

As a direct consequence of this over-regulation, the regime is drowning in disputes over terms and conditions of access. At last count, there were 20 ongoing access disputes before the commission, many of which do not even involve Telstra.

The costs are high by any measure. The disputes generate millions of dollars in legal and consulting fees and create significant uncertainty within an industry that is meant to be responding to the changing needs of its customers.

Importantly, regulatory overreach eats up valuable commission resources that would be better directed at real competition issues.

For example, in November 1997, Telstra first sought approval for its proposed charges on access to its core network infrastructure. The commission's final decision was released only this week.

At this rate, the New Zealand approach of going all the way to the Privy Council to determine access terms and conditions looks positively rushed.

The real costs of the Australian regime, however, are only just becoming apparent. Unlike New Zealand, Australia has seen no significant competitive investment in the local access network since 1997. Why invest in new infrastructure when you can get access to old infrastructure from the incumbent at unrealistically low, regulated prices?

No one knows what the best way of delivering telecommunications services in the future will be - copper pairs, hybrid fibre coax, wireless local loop or one of the many other options now opening up. Regulators are poorly placed to decide, and it should be left to the market.

In Australia, the commission is making this choice when it prices the copper pairs so low that it crowds out copper's competitors. The costs to Australia of such limits on choice of technology could be very high.

New Zealand should think very carefully about following the Australian example. That would be ironic since an increasing number of Australians are questioning why they need a system that imposes such significant costs when the current light-handed New Zealand regime has produced consumer outcomes that, if anything, seem at least as good.

New Zealand has experienced the same price reductions, the same increases in output and the same growth in the range of services that Australia has, without the burden of full regulatory paraphernalia.

Contrary to the implicit message in the Fletcher provisional report, Australia is no telecommunications nirvana. One can only hope that the inquiry will think again.

* Dr Tony Warren is a principal of the Network Economics Consulting Group. He has worked for incumbents Telecom New Zealand and Telstra on various regulatory issues.