On this 25th anniversary of the founding of TUANZ, the focus is on looking ahead rather than looking back. However, as we all know, those who forget the past are doomed to repeat it. It is therefore appropriate, before we focus on the future, to look back over the last 25 years and identify the key lessons which we need to keep in mind for the future.
I might add that, in discussing this approach with the organisers of TUANZ Telecommunications Day, I have negotiated an amnesty from the fine which applies to all other speakers who use the word "regulation".
The last 25 years breaks down quite neatly into 3 quite different regulatory regimes. The first 15 years, up until 2001, was a period without any sector specific regulation. Between 2001 and 2006, a sector-specific arbitration regulatory model was adopted, and from 2007 to today, a determinations-based regulatory model.
Accordingly we are uniquely placed to assess how competition has developed under these three different regulatory models, and from that analysis, draw some conclusions about what is important for the future.
The period to 2001 has been described by its supporters as light-handed regulation; its detractors as "hands-off" or worse. An Australian commentator described the regime as "the telecommunications swamp in the shaky isles" [Warren Pengilley, (1993-4) 1 CCLJ 163]
The four elements of that regime were:
- The removal of statutory or regulatory barriers to entry
- Regulations which dealt with information disclosure
- Primary reliance on the misuse of market power provision in the Commerce Act
- An overriding "threat" of intervention through the price control mechanism in part 4 of the Commerce Act.
The Commission concluded in a 1992 report (which the Court later ruled was beyond its power )that the information disclosure regulations were of virtually no assistance in removing obstacles to the development of competition in telecommunications, while the Commerce Act might be of some help it was of a protracted, expensive and uncertain kind, and that the regime was not one of light-handed regulation but one where Telecom was the de facto regulator - "Telecom makes the rules and other parties in the industry, by and large, play by them."
It was a period in which lawyers prospered. Interconnection disputes were determined by members of the House of Lords in London. Even they noted that New Zealand's approach was unique:
"So far it has been discovered, in all other countries where private competition has been introduced into a public telephone system…would-be competitors have been given statutory rights to interconnect with the public system, the terms on which such rights are to be granted being settled in default of agreement by a statutory body. New Zealand has taken a different course."
Even in this inhospitable environment, competition came. In 1991 Clear Communications entered the market, and by 1996 had an estimated 20% market share of the domestic tolls market. Bell South entered in 1993 to offer a competing mobile service to Telecom, and in the same year Saturn Communications was established providing telephone and cable TV services. But the stumbling block to real competition was difficulty in negotiating reasonable interconnection agreements. The Telecom/Clear interconnection dispute ran for over six years, with a cost in legal fees of around $8 million.
This was because, as the Privy Council noted : "Competitors have no statutory right to be connected to Telecom's PSTN; no guidance has been given to the terms on which such interconnection is to be granted; and no independent body has been established to resolve the position if it should prove impossible for the parties to reach agreement".
Bell South faced its own difficulties in negotiating interconnection, and estimated that the cost of entry into the NZ telecommunications market was at least $250 million. Saturn, for its part, faced pocket pricing from the incumbent as it rolled out its cable network.
All were gone by or shortly after the end of the decade. Clear Communications and Saturn were both acquired by Telstra, Bell South by Vodafone.
Concern that the benefits of competition were not accruing to New Zealand's consumers of telecommunications services led in 2000 to the Fletcher Inquiry, the objective of which was "to ensure that the regulatory environment delivers cost-efficient, timely and innovative telecommunications services on an on-going, fair and equitable basis to all existing and potential users".
A report done for the Fletcher Inquiry in September 2000 noted that interconnection charges remained significantly above cost, and while the period from 1997 to 2000 had seen major price reductions in international calling, but for other services prices had remained static. The report had two interesting graphs showing how Telecom's profitability had grown strongly over the decade, while its capital investment had fallen sharply.
That Fletcher Inquiry led to the introduction of industry specific regulation in the form of the Telecommunications Act 2001. It created the role of the Telecommunications Commissioner, and introduced a formal and transparent process for establishing whether or not a service should be regulated. There was an expectation that parties would negotiate access agreements for regulated services, but application could be made to the Commission for a Determination if they failed to reach agreement.
While the Fletcher Report noted that this approach "would still see New Zealand at very much the light-handed end of the regulatory spectrum, arguably the lightest within the OECD", it represented a dramatic change in the regulatory settings .
Not surprisingly, the initial focus of the new regime was to address the build-up in interconnection disputes. The telecommunications landscape did begin to alter however, as some of the smaller player became more active, although compared to other OECD countries the level of competition remained limited.
In 2005 the Government commenced a review of the telecommunications sector. It focussed on the broadband market, and specifically broadband performance as a factor in economic performance. Of concern was that New Zealand's position in the OECD broadband penetration figures had not improved over the period since 2001.
The review also considered overall performance in the telecommunications sector, and concluded the sector was performing poorly, primarily because of a lack of effective competition. The arbitration regime was considered to be ineffective because it was expensive, and therefore beyond the reach of smaller operators. As a result the Telecommunications Act was significantly amended in 2006.
The Commission was empowered to set the terms and conditions of the supply of regulated services on an industry-wide (rather than bi-lateral) basis, and unbundled local loop was introduced as a regulated service, together with a new unbundled bitstream service. New investigative and inquiry powers were granted, and enforcement options were increased. Operational and Accounting Separation was introduced. The 2006 reforms, under which the industry currently operates, moved New Zealand from the light-handed end of the spectrum of OECD regulation into the main-stream.
The Commission's monitoring powers has enabled it to collect market data and produce annual monitoring reports since 2006. These reports show over the past five years an increase in competition resulting in increased investment, greater choice, lower prices and better quality across the spectrum of telecommunications services in New Zealand.
We have seen local loop unbundling develop very strongly at first, and then at a slower pace as a consequence of the impact of cabinetisation on unbundlers' business plans. Currently more than 100 exchanges have been unbundled, and 8% of DSL broadband-enabled lines have services provided by an unbundled operator. And, for some the holy grail, the OECD broadband penetration rankings, has seen New Zealand climb from 22nd to 17th over that period, most recently passing Australia.
In mobile networks we have of course seen a third entrant and with regulated termination rates, an expectation that retail prices will fall, and voice volumes will increase.
What are the lessons that we draw from this quick overview of the last 25 years?
The first is that regulatory settings matter.
In the telecommunications industry, competition could not develop by itself. The regulatory settings had to be designed to promote competition. It is clear that the current regime has succeeded in this regard for the benefit of all New Zealand consumers where previous models have failed.
The second is that competition stimulates investment, and regulation which promotes competition leads to greater, not less investment.
Although incumbents in all jurisdictions have, during regulatory processes, made the investment boycott threat - if you regulate we will cease investment- the reality is that the incumbent is forced to invest (often unwillingly) in response to competitive pressure. A regulatory regime which promotes competition stimulates investment. This phenomenon is, I think well demonstrated in this slide showing Telecom's investment between March 1988 and March 2010 - a dramatic fall in investment after privatisation under a 'light-handed' regulatory setting, a spike in investment following the introduction of industry specific regulation in 2001, and a dramatic increase since the 2006 amendments came into effect.
While the Telecommunications Amendment Bill currently before Parliament will move to a new model, with undertakings becoming the primary regulatory instrument for the fibre network, the essential elements of the existing regime remain. The Commission's role in monitoring and enforcing those undertakings will ensure that the benefits that the 2006 Amendments have delivered will not be lost as we move to the next stage in this fast-evolving industry.
I wish to finish on this reflection of the past 25 years by paying tribute to the role that TUANZ has played to ensure that the consumer's interest are well articulated in the regulatory process.
The telecommunications sector is well-served by the very effective consumer voice that TUANZ has provided over the years,, and for that thanks go to Grant Forsyth, to Ernie Newman, to Paul Brislen and to the TUANZ Board for ensuring the consumer's voice is not forgotten. We wish you well for the next 25 years.