Peter Nowak: Commerce Commission needs fixing too

The Government has made it very clear it considers telecommunications competition in this country to be broken. The impressive regulatory package, announced this month, is its best effort to fix it.

But there's another big problem: the Commerce Commission is just as broken, on two levels. On a policy level, the commission is handcuffed by a faulty framework and on the leadership front it is constrained by a demonstrated inability to understand the complex markets it is supposed to govern.

If both these problems aren't fixed immediately, all the Government's effort will be for naught - competition will remain non-existent, broadband and mobile phone services will remain shoddy and expensive, and our economy will remain a laggard.

To its credit, the Government at least seems to be aware of the issue. In July, Labour will introduce legislation designed to boost competition between telcos, much of it involving amendments to the Telecommunications Act.

Labour long ago identified serious flaws with the act, created in 2001 to govern the industry, and has been talking about changing it for ages.

The act forms the framework of what the commission can legally do, and the proposed changes will grant it considerably more power. The telecommunications commissioner will be able to initiate investigations into the industry, a huge step up from the current regime where such a move must be instigated by a market player.

The commissioner will also be able to apply any decisions to the entire industry, as opposed to a single player. A perfect example of this failing came in January - TelstraClear squandered a hard-fought victory for better wholesale broadband terms from Telecom by cutting a deal that would supposedly result in it getting to market faster. TelstraClear still isn't in the market, and all other players were denied the faster and cheaper broadband services that would have entailed. Five months later, CallPlus and ihug are still trying to get the same result from the commission.

A third proposed change will also allow the Government to accept or reject parts of a recommendation from the commission. This is a key amendment as it will cut down on the time it takes to make changes - the commission won't need to sweat every single detail to make sure it's right, and the Government will be able to fine-tune regulations as it desires.

These are great amendments that should make it into law by the end of the year. But changing the act is only half the battle.

All the newly regulated broadband services - the unbundled local loop, unconstrained bitstream and naked DSL - will also be added to the act. The commission's first task, once the ink on the legislation is dry, will be to set the all-important prices of these services.

Any error in one of these prices is likely to have a spillover effect into the others, thus rendering them all moot. If the unbundling price is set too high or if the unconstrained bitstream price is too low, Telecom's competitors won't build infrastructure. If the unbundling price is too low, Telecom is likely to fight it. If the unbundling or unconstrained prices are too high, we're back to square one.

There are no two ways about it - when it comes to important decisions, the commission has a very poor track record. In its current iteration, it cannot be trusted to arrive at the right prices in a timely fashion.

Telecommunications Commissioner Douglas Webb recommended unbundling Telecom's local loop in September 2003, then completely reversed his position a scant three months later, astonishing everyone including Prime Minister Helen Clark. But the Government was bound by his decision - overruling the man it had recently appointed to do the job would have been a huge loss of face for everyone involved.

Last August, Webb issued a recommendation on how to lower mobile termination rates and inexplicably thought newer 3G phones should be exempt from the regulation. Telecommunications Minister David Cunliffe sent him back to the drawing board and last month Webb took his second crack. This time around, his recommendation included 3G phones but showed no real evidence that consumers would benefit.

The Prime Minister recently lambasted Webb over the job he has done. She criticised the unbundling fiasco and expressed frustration at the termination rate mess. By the looks of it, the Government is also thinking about a new commissioner.

If so, that someone needs to understand telecommunications and have overseas experience. A full understanding of the pricing importance and a familiarity with how incumbents elsewhere have gamed the system is absolutely vital. Lastly, a new commissioner needs to be installed as soon as possible in order to get up to speed on the local market.

The legislation will be ready for the commissioner in six or seven months and with the country already at least three years behind the rest of the OECD, according to Cunliffe, there has never been a greater urgency to get it right.