Broadband policy faces probability of repeated political intervention

Thursday 4th July 2013

The regime governing New Zealand's ultra-fast broadband roll-out risks "the real probability of repeated political intervention as those in public office exercise their legislated powers to safeguard taxpayer investments and secure their political objectives."

That warning comes in a briefing paper from Victoria University's Institute for the Study of Competition and Regulation, which is convening a day-long seminar to probe growing tensions between the government's role as both investor in and regulator of the nationwide UFB network.

The government has made UFB rollout a flagship policy and created a $1.35 billion revolving fund to subsidise its construction by telecoms infrastructure company Chorus and several regional fibre providers.

However, competition regulators are threatening the scheme's viability by recommending low prices for fast broadband delivered on the country's existing network of copper wires, which UFB players say will undercut fibre services and stifle customer uptake for the new generation technology.

In reaction, the government has brought forward a review of telecommunications regulation, but is caught between its role as an investor in the UFB network, with political goals, and the regulator of the industry, where consumers will expect lowest cost services.

The ISCR paper says at the heart of the New Zealand regulatory regime's difficulties are three key problems. The first is that the current regime is backward-looking and tries to deal with the industry as it was in the past, before Telecom and Chorus were structurally separated.

Secondly, the regime seeks to control specific entities operating in the telecommunications market, rather than setting rules for the market as a whole.

And thirdly, the government needs to untangle the conflict of interest it faces as both investor in and regulator of the UFB initiative.

The paper also suggests Chorus and other players agreed to contracts for the UFB roll-out on the expectation that if things went wrong, the government would bail them out.

"Government as a major fibre investor exposes the New Zealand regulatory regime to the real probability of repeated political intervention as those in public office exercise their legislated powers to safeguard taxpayer investments and secure political objectives," ISCR says.

"Intervention will become the norm in the event that either environmental factors or copper regulatory decisions conflict with government objectives.

"It would be naïve to assume that firms that have invested as partners with the government in the UFB networks ... have not relied upon this presumption of government intervention when setting financial expectations and negotiating their public-private partnership agreements."

Deutsche Bank issued a "sell" notice on Chorus shares in mid-June, complaining that the government was unwilling to bend for Chorus, which is struggling with expected cost over-runs of around $500 million on the $3 billion-plus UFB roll-out.

"This raises the question of whether it is feasible for the current regulatory regime to be adapted to meet the additional demands placed upon it by the government being both legislator and investor in a network that competes head-on with networks owned by private sector investors."

The backward-looking focus of the current regulatory regime also threatened to fail UFB operators, which assumed previously dominant market positions would remain, when in fact competition "from emerging alternative technologies will gradually erode this dominant position."

The paper suggests European regulatory settings have proven both more effective at regulating emerging new sources of competition, and had survived without significant change for long periods of time.

"The European approach has been to specify the regulatory regime in terms of particular markets, regardless of whether the firms that may current have, or could have in the future assume dominance."

The paper also suggests a total rethink of the current, controversial Telecommunications Service Obligations levy.

"If copper prices are set in isolation from the prices for fibre networks, then as they are in fact competing infrastructures, should the fibre network operators contribute to the taxes paid to the copper operator and vice-versa as consumers switch between them?"

The July 12 seminar in Wellington, to be chaired by the New Zealand Telecommunications Forum, had expected to be reacting to a government discussion paper on the issues, due at the end of June, but which has yet to emerge.

BusinessDesk.co.nz

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