Paul G Scott and David de Joux

This paper considers the telecommunications sector and also briefly discusses the electricity sector. It examines the relationships these industries have with regulation in New Zealand. The paper sets out the historical background of these industries, analyses the events of these network industries and outlines the main points including policy options and whether they addressed the perceived problems. This discussion leads to an analysis of what events in the industries tell us about uncertainty. The paper identifies the type of uncertainty that is specific to these network industries and discusses whether the uncertainty experienced had effects on capital investment and innovation, and if so what those effects were.

Telecommunications

The paper first considers the degree of government control in the telecommunications market. It articulates a cycle of regulation whereby the sector went from full government control to privatisation back to high levels of government control. The first stage of the regulation cycle was the massive liberalisation and privatisation of the sector with regulation entrusted to the courts and general competition law. The major problems that arose from this were (a) the vertical integration of a natural monopolist (Telecom was not only responsible for running the network, but was also active at wholesale and retail levels) and (b) the privatisation of a natural monopoly resulted in a lack of investment in the telecommunications infrastructure. The second stage can be found in the Telecommunications Act 2001. It acknowledged that there was a lack of competition in the market and that light-handed regulation had failed. It saw the creation of an industry specific regulator, the Telecommunications Commissioner. The third stage comprised of the 2005 stock take. This was a Ministry of Economic Development inquiry which resulted in the operational separation of Telecom’s wholesale and retail functions into different business units. Finally, the election of the National Government in 2008 saw the creation of the Ultra-Fast Broadband Initiative (UFBI) which started a process whereby significant parts of the telecommunications network went back into government ownership and control. The development of UFBI showed that lessons had been learnt from the vertical integration of Telecom; operators of the fibre network cannot be active at the retail level.

The paper also examines the evolution of social welfare obligations in the sector resulting from the Kiwi Share, which were aimed at ensuring the availability and affordability of basic telecommunications services such as a price cap obligation, the same prices being charged in both rural and urban areas, the wide availability of phone services and free local calling. The major issue is who should fund these obligations? The paper considers four aspects of this issue. The first is the efficient component pricing rule (upheld by the Privy Council) which allowed Telecom to receive compensation for the expense of the Kiwi Share through charges in interconnection agreements made to other providers. The second area is the Telecommunications Service Obligation (TSO) whereby legislation prevented Telecom from spreading the cost through private interconnection agreements but instead would receive compensation through a levy on all market participation. The third area is the calculation of the TSO. The fourth area is the Telecommunications Development Levy which fundamentally changed the TSO by making Telecom entirely responsible for meeting the cost of the Kiwi Share. This section then remarks on the tremendous impact that the Kiwi Share has had on the development of the communications industry including the distortion on pricing and competition, the loss of efficiency, the artificial decrease of dial-up internet pricing and incentivising an increase in Digital Subscriber Lines (DSL). This section concludes that the TSO has had wide-sweeping costs. While universal service and price caps seem to be legitimate policy objectives, local-free calling is not.

Next the paper examines the UFBI. While the initiative intuitively is sound and logical, there has been no economic study on the economic impact of the initiative. The paper surveys a number of studies that show conflicting views on the deployment of the fibre network. A number of key considerations have been overlooked including (a) any public development scheme should be decided upon local costs, returns and expected economic development, (b) such studies should show that the benefits of the initiative depend on higher broadband offers, (c) studies should establish that Fibre-to-the-Home (FTTH) is the way that benefits can be realised, and (d) the studies should reflect a demand for these new speeds otherwise there is no commercial case for UFBI. A number of arguments critiquing the initiative are made before the authors reach the conclusion that the government deprived itself of essential economic indicators leading it to make a decision based on assumptions rather than facts.

Electricity

The electricity sector went through a process of light-handed regulation with competition law as the only check, which failed, to heavier state intervention. Electricity is a natural monopoly. As it was not feasible to eliminate the natural monopoly, the choice was made to regulate the price the monopolies would charge. The aim of such regulation was to produce lower prices for consumers and reduced profits and a lower rate of return on investments for the monopolies. The authors firstly discuss the social welfare obligations on the sector such as distribution companies being obliged to maintain connections to customers in isolated areas (even if not economically viable), the following of certain guidelines concerning vulnerable and dependent consumers who cannot pay their accounts, and the imposition of a domestic tariff with a fixed charge portion. Second, the authors highlight how parliamentary uncertainty in the area has reduced regulatory certainty and done nothing to attract investment in the industry. Finally they suggest that the existence of appeals against the regulator in this sector does not demonstrate uncertainty. It should be expected that market participants will appeal decisions over new legislation; this will be inevitable until the courts have the final say and bed things down.  

The paper concludes by saying that New Zealand’s history of experimenting with different regulatory regimes has done nothing to encourage investment in these sectors and demonstrates that a fixed regulatory framework that does not change just because of a change in government is what is best for network industry regulation.