I would like to start by thanking TUANZ for inviting me to talk to you today.
The focus of this event is on the state of New Zealand's telecommunications services and what can be done to lift our performance relative to our OECD comparators.
This focus is central to the regulatory system, expressed in the Telecommunications Act as the promotion of competition for the long-term benefit of consumers.
I am delighted that TUANZ was able to arrange for us to hear first hand from a regulator as eminent as Denmark's Jorgen Andersen, at this conference.
The Danish telecommunications market appears to have performed exceedingly well, on most indicators, during his period as director general of his country's national IT and telecom agency.
All regulators are very modest people when it comes to taking blame for unfavourable outcomes in our various markets;
And as modest people, we will, of course, cheerfully take all the credit where things happen to go right.
I have no doubt however that in his case, a great deal of credit does genuinely rest with him and his colleagues, for the work they've done.
In addition, of course, Jorgen Andersen serves as Chairman of the European Regulators' Group.
Through that group he plays an influential role in ensuring the consistency of regulatory outcomes, across the whole of the European Union.
It is a pleasure and a privilege to have him with us today.
In my role I often meet with telecommunications regulators from other countries.
In those discussions, we look at the similarities and the differences in our approaches to regulation.
As you would expect, issues of market structure and the use of market power to deter entry by competitors of the incumbent are similar in most countries.
Regulatory systems and their operating rules also are generally quite consistent on the role of regulation in ensuring that the competitive process is alive and well.
Where there are differences in regulatory approach, they are mostly the outcome of rather minor differences in public policy or in the particular legislative settings that the regulator is administering.
Regulators in European Union countries operate, for example, with policy directives set by the EU and binding on member countries.
A harmonising factor is therefore built into their approach that we don't share here in New Zealand and it may, of course, at times, produce differences of outcome.
On the other hand, it is also evident, comparing countries, that a large number of cases exist round the world where regulators take more or less identical approaches.
But perhaps surprisingly the outcomes prove to be substantially different.
In other cases, where policy settings are different, the outcomes can be remarkably similar.
Cross-country comparison is not a simple exercise. Comparison data is often static and does not present the dynamism of changes between periods.
For example, South Korea and Hong Kong, both high performing countries in broadband penetration, are now showing very low growth rates and may have reached saturation levels.
New Zealand and Australia, by contrast, are regularly reported to be in the top ten countries in the world by rate of broadband growth. Of course, that partly reflects our low starting point.
Our experience shows that cross-country comparisons can be used to support virtually any, and every, point anyone wants to make.
Which leaves the question of what are cross-country comparisons really good for?
They can only rarely provide you with easy answers, but they may help you ask more penetrating questions:
- Is what they offer a starting point for analysis?
- What's going on underneath these various comparators?
- What is really driving this set of outcomes?
Because for sure, in most cases, it's not going to be any one easily identifiable difference standing out from all the rest of the factors involved.
Far more often, it's some subtle combination of elements and factors that will, in most cases, be a very long way from transparent or self-explanatory.
In my own experience to date, it's difficult to isolate, in a meaningful way, any clearly identifiable set of explanatory factors that will allow you, at the end of the day, to say:
"now I understand why what happens here is this, not that, and why, in addition, although it happens here, it's not happening over there."
Look at the countries of the European Union itself.
Notwithstanding broadly harmonised regulatory systems, and economies that are, to a significant degree, integrated, the EU continues to show a diversity of results on many of these measures.
When you look at countries like New Zealand and Australia, on the one hand, alongside any particular European, Asian or North American economy, the differences are inevitably even larger.
Bearing in mind the differences between countries in population distribution, the extent of central and local government subsidies for telecommunications infrastructure, the intensity of platform competition, as well as variations in regulatory systems themselves, we should not be surprised by differences in outcomes.
I can illustrate the impact of regulatory differences with a couple of topical examples.
Mobile termination
The first example is the regulation of calls from landlines to mobile phones.
Recently, the Commission reported to the Minister of Communications on the outcome of our investigation into regulation of mobile termination.
As you know, we concluded that there were competition problems.
The wholesale market for termination of voice calls to mobiles is essentially operator-specific, and there is little incentive to restrain prices.
This is linked in turn to insufficient competition in downstream retail markets.
The Commission therefore recommended to the minister that the termination of voice calls from landlines to mobiles should be regulated.
That conclusion is closely aligned with the views taken by regulators in various other jurisdictions such as the European Union, UK and Australia.
Those countries all reached a similar conclusion on the welfare benefits of regulating landline-to-mobile calls.
But regulators in those jurisdictions have come to slightly different conclusions about the extent of regulation and whether or not it should include new 3G networks.
Our recommendation was that there were risks in regulation of 3G voice call terminations.
Vodafone has not yet launched its 3G network and potential new entrants are in the wings.
Regulators always face a problem balancing the objective of encouraging new investment, on the one hand, and on the other hand, preserving access for competitors to critical infrastructure to allow them to compete at retail.
It's a difficult area of regulatory policy. Regulators often draw the line in different places. But the need to ensure that there are strong incentives to invest is a well-accepted principle. In the long-term, there are likely to be more benefits to consumers from investment and resulting innovation than from regulated price falls.
Some countries, Australia among them, have regulated all mobile voice services, without distinguishing between 2 and 3G networks.
The ACCC has argued that changes in investment decisions at the margin based on a more efficient pricing structure for mobile termination would be consistent with the promotion of efficient investment.
Another dimension to regulatory risk is uncertainty about future regulated returns from new investment.
The response is to provide a regulated return on the new investment that reflects the demand and technology risks of that investment.
In other words, the regulator allows a higher return on new riskier investments than on past sunk investments.
Still, this is an exercise in managing risk, rather than eliminating it.
We have in general preferred to hold back from regulating in areas of significant new investment, to maximise the likelihood that the investment takes place.
It is important to remember though that forbearance in the face of network bottlenecks is for a specific purpose, to ensure that New Zealand gets the increased investment it needs in its telecommunications infrastructure.
If after a reasonable time, the expected investment doesn't occur, there must be other explanations than regulatory risk.
That's when we may decide the balance has shifted in favour of improving access by competitors to existing network elements.
Broadband
This leads me to the second major issue I want to touch on:
Broadband access.
In 2003,the commission decided against following down the path of the many countries that have opted to unbundle the local copper loop as a means to improve competition in voice and broadband markets. We decided that bitstream unbundling would deliver faster and more targeted gains to consumers, particularly residential consumers, and small and medium businesses.
We were also concerned that unbundled loops would be supplied only in major business districts, where the primary beneficiaries would be larger corporates, who are already reasonably well served by a range of networks and service providers.
The overseas evidence we looked at, and the New Zealand demand forecasts were both quite clear that this was the likely outcome.
Even today Australia with seven times the number of access lines as New Zealand, has only around 30,000 unbundled loops – and those are concentrated in central business districts.
We see the bitstream service as a tailored means of providing access by competitors to the data stream from the local ATM switch to the customer's premises, and to backhaul from the ATM to a competitor point-of-presence.
Because this is a lower cost entry than full local loop unbundling, and is significantly less demanding to implement, our expectation is that bitstream will encourage broadband competition in a wide range of settings.
Though there has been a good deal of criticism of the bitstream service, it is worth noting that at 31 March there were 18,000 competitor bitstream connections.
I expect that number to rise sharply following completion by the Commission of the current application by TelstraClear for access to an unconstrained downstream bitstream service.
TelstraClear makes no secret of its intention to use this service to offer new and different retail broadband products.
TelstraClear's active participation in the broadband market, along with other ISP's, will be a key driver of increased broadband uptake in this country, both directly through their ability to offer different products that will appeal to different consumer segments, and indirectly through marketing to stimulate new demand.
As in other telecommunications markets where competition has gained traction, Telecom will no doubt respond through a sharper focus on the value proposition.
That is all to the benefit of consumers.
Conclusion
The mobile termination report and the bitstream decision are both then about striking the right balance for New Zealand between the conflicting priorities of regulatory policy:
On the one hand, we want increased competition, driven off fair and reasonable access, to bottleneck network assets.
But equally, on the other hand, we must preserve strong incentives for network owners to continue to invest vigorously in networks, new technology and innovation, for the future.
Get that balance right, and you find the sweet spot where the long-term interests of consumers are maximised.
Thank you.
