How to tame a gorilla

Telecom chief executive Theresa Gattung's suit said it all. As one of New Zealand's most high-profile women, she prides herself on promoting local fashion.

She usually favours colours or avant garde styles. But this week, walking into Parliament flanked by dozens of reporters and a Telecom entourage that would have done a 70s rock band proud, Gattung wore black of a conservative cut.

It was clear she recognised the gravity of the situation.

She was already the loser. The Government's disclosure that it planned to open up Telecom's network to all comers had already wiped more than $2.5 billion from its sharemarket value.

Now politicians including Nandor Tanczos (filling in for Jeanette Fitzsimons) and Hone Harawira - neither known for their knowledge of high finance - sat in judgment, revelling in the popular support for a clampdown on this country's largest listed company.

Those two MPs and their 11 colleagues on the finance and expenditure select committee were considering the workings of the Telecommunications Amendment Bill. While the Government had signalled its intention to open up Telecom's network, the select committee would determine how it actually worked.

And Telecom - the 400-pound gorilla of telecommunications in New Zealand - wanted its say.

Gattung knew she had perhaps one of her last chances to remedy a disaster that had already sparked the departure of Telecom chairman Roderick Deane and a chorus of calls for her head as well.

Calling the packed select committee room to order, Labour's Shane Jones said what was on the mind of perhaps everybody there: "Theresa's about to make the career-defining speech of her life."

Silence as Gattung's snappy, Kiwi vernacular filled the room: "We are not here to oppose this bill. We are absolutely committed to making the telecommunications regime work."

After the cheery start, she was quick to point out one of the weapons in Telecom's defence - its model of how it wanted the company to be split - which has already sparked major debate.

There are three main tiers to separation in the telecommunications world - accounting, operational and structural - which, as Gattung said this week, had caused confusion.

Telecom is against compulsory accounting separation as the bill proposes. Instead, it wants to split its company into wholesale and retail units, known as operational separation.

Placing the broad public mistrust of Telecom aside, one of the company's strengths in these proceedings lies in the fact that it is the biggest telecommunications company. It knows its established network better than anyone else, so it could be argued that it is the best placed to design an adequate regulatory model.

As Gattung told the select committee, the Telecom proposal "could and should be made possible".

It is against an accounting split. That would require Telecom to disclose its accounts to the public - perhaps in its annual report. The financial data would reveal whether Telecom was abusing its monopoly position as the owner of the phone network.

But Internet NZ said Telecom's proposal was light on detail of how its accounts would be disclosed. Observers said in private that Telecom was trying to avoid making public full details of its accounts.

Telecom is on a desperate campaign to sell its intent that its separation model will deliver transparency and certainty to its wholesale customers. That is, that providers on its network will get the same pricing structure and conditions as Telecom's retail division.

It seems Gattung is of the school that believes if you repeat the same words often enough - "transparency", "level playing field" and "genuine conversation" - people will start to believe them.

Gattung told the hearing that its proposed independent monitoring group and the Commerce Commission would police and monitor the company's performance. She said this was a "rock solid guarantee" to ensure transparency and that its competitors were treated on equal terms.

Telecom's worst nightmare is structural separation - breaking it into two separate companies.

While Telecom is doing all it can to push its model, others have a different view. Telecom's competitors and major users of its network believe the commission should have the power to break up Telecom if it abuses its market dominance.

Telecom said this would lead to higher consumer prices and poor customer services and harm investment incentives because it would rely on continuing commitment from wholesale customers - which are small players.

Whatever the outcome, there is no doubting the Government's determination to drive change through the telecommunications industry.

It has labelled faster broadband at more competitive prices as critical for achieving greater productivity and transforming the economy.

New Zealand sits at the bottom of the Organisation of Economic Co-operation and Development for broadband uptake. This revelation has added fuel to a Government already furious about a company that appeared to be abusing its monopoly position.

The Government's impatience with Telecom was made crystal clear in March when Gattung made a speech approving the use of confusion as a marketing tool. Prime Minister Helen Clark lashed out, saying her comments were "inappropriate".

Telecom was already on the slide, then the bomb dropped. A bicycle messenger - of all people - from the Prime Minister's department leaked the Cabinet paper about the Government's intentions to force Telecom to open its network. It was all on.

Telecom - to its credit - responded quickly, firing out glowing messages about how it would co-operate with the Government. The company clearly wants to be seen as being completely on top of reform and a step ahead of the Government.

This was not typical of the approach incumbent telcos took, said not-for-profit policy organisation Internet NZ. "Arguably, to come up first with positive strategies is to try to gain strategic advantage."

Telecom is in the fast lane. It has already established a separate wholesale unit headed by Matt Crockett - who is consulting wholesale customers on the proposal and has begun to approach people to be part of an independent oversight group.

Yet scepticism is rife. National's John Key was scathing at Wednesday's hearing when Gattung could not answer his query about how much business would go to the wholesale and retail units.

Gattung, a bit flustered, said it would depend on how good the wholesale customers were at driving their services.

"You are the chief executive of the company, you must have an idea," said Key.

Internet NZ has gone through Telecom's proposal with a fine tooth-comb. The group is unconvinced by Telecom's claim that its model is essentially based on the Government's favoured British model - with minor differences. It said the differences were "very significant".

Telecom has one wholesale division while BT has two - a network group called Openreach and a wholesale group called BT Wholesale.

Crucially, the financial incentives for Telecom's wholesale staff were based on Telecom's performance in the long run, said Internet NZ.

However, the performance incentives for BT's wholesale group, Openreach, are based on Openreach's own performance.

Also, Telecom's proposal covers competitors' interconnection only to faster internet services called unbundled bitstream and naked DSL, while BT's covers a much wider array of services, such as data services.

Telecommunications lawyer Michael Wigley - who represents internet service providers - said: "If the Telecom model does not cover a high proportion of Telecom's access services, we are in for ongoing problems."

Internet NZ said that while Telecom's proposed independent oversight group was the same as BT's on the surface - three independent members and two from Telecom - the devil was in the details.

The monitoring group overseeing BT has a board and support staff. It is not clear whether Telecom's group will be so well resourced.

Telecom chief financial officer Marko Bogoeivski said the company was facing not just regulatory reform but a cataclysmic network shift from a basic telephone model to communication delivered across an IT infrastructure - the Next Generation Network. He said this type of technology was expensive and risky and required large amounts of investment and a player with scale, not just financial resources.

"Our biggest question is around the level of incremental investment - most of the stuff we are talking about regulating is yet to be built, so whether it gets built in the timeframes goes entirely to the incentives."

The committee will hear the last of the planned oral submissions on Wednesday, but can schedule more hearings if it needs to. The legislation is expected to be finalised by the end of the year, but there will be a lot of arguing before then.

Hanging on the line: Telecom's options

Three ways to split a telco:

* Accounting separation
Public disclosure of regulated accounts.

* Operational separation
Splits a company's wholesale and retail divisions with rules around how the two parts of the business interact to achieve a truly competitive environment.

* Structural separation
Divides a company into two separate companies with different chief executives and boards.

Unbundling - why and how
The Government wants to open Telecom's network to its competitors to achieve a fair competitive environment - a process known as unbundling.

The tool that will be used is the Telecommunications Amendment Bill - an amendment to the existing act.

The bill requires Telecom to allow competitors to use equipment and lines running to homes and businesses and gives the Commerce Commission powers to regulate access.