When I started at TUANZ nearly three years ago we immediately jumped in to the debate around the government’s new Telecommunications Bill and its ten-year regulatory holiday for whoever built the fibre network.

We pushed hard for the Commerce Commission to have oversight of the industry. TUANZ and various other organisations had worked too hard to get a regulatory regime in the first place to let it get thrown away as a bargaining chip.

The reason we fought so hard is because the previous decade had seen government after government gamed by the incumbent to the point where investment was at an all-time low, competition was non-existent and customers were paying some of the highest prices for the poorest services in the world.

Direct government ownership of the industry had been replaced by complete lack of involvement, to the detriment of both competitors and customers alike.

Finally, in 2001, we saw an inquiry, a review and the introduction of an extremely light-handed regulatory regime that didn’t really work, but was a start. In 2006 the regime was beefed up and finally given the teeth it needed to ensure competition was robust but fair and that consumers were the beneficiaries of the telco sector rather than the victims.

Today, all that has been swept aside. The government has introduced three options for the regulation of the fixed-line copper network for the rest of the decade and all of them involve the Beehive setting the price for wholesale service.

In many ways this harkens back to the 1970s when MPs would debate the price of butter in the House, only this time there will be no debate. The price will be set by the executive and that’s that.

Chorus will be very happy about this. It ensures that the pesky Commerce Commission with its pesky “cost based” pricing model doesn’t get a look in. Instead of reducing the cost of copper broadband to ISPs, the price will remain roughly the same or drop by a couple of dollars.

Telecom will be happy because the government allows Telecom’s homeline service to continue as is, unmolested by change. That means other ISPs, that don’t own the PSTN (ie everyone else) will end up paying more for the same service. Telecom won’t have to unbundle because unbundling is deemed an inefficient use of resources but still gets to sit pretty while its competitors costs increase.

The smaller ISPs, CallPlus, Orcon and the like, who have unbundled will end up seeing their investment derailed completely. The government’s three solutions are a nightmare for these guys as the government will potentially put up the price of an unbundled line.

Customers see no change to their pricing whatsoever. No ISP will pass on a saving of a couple of dollars and that’s the best you could hope for out of this.

The government is the major investor in the UFB and has now usurped the role of regulator as well. Instead of having an arm’s length, independent Commerce Commission, we will have prices set by the minister or, at best a Commission that can only act in a manner that can only be described highly prescriptive.

Instead of an international benchmark, the Commission would only be allowed to set copper pricing by directly comparing with the UFB pricing model, putting aside any consideration of the different service speeds, capabilities, network age and all the rest. The price would be limited to a range set around the cost of the entry level fibre price and that’s that.

I wonder what Vector’s view of this sudden renegotiation of the terms will be. I wonder what international investors think of a government that is willing to usurp the regulator in such a stellar fashion. I wonder what our trading partners think of a regime that allows politicians to replace regulators at a time when the government is also the investor.

I wonder what customers think the outcome will be if we allow the needs of one company to override the needs of both the industry and the users.

The Prime Minister versus the Commerce Commission

The Prime Minister’s level of engagement over the Commerce
draft determination on wholesale prices raises many questions. I’m not a lawyer but here goes.

John Key has taken the lead on this – aside from her initial
press release, minister Amy Adams has said little – and has repeated his
willingness to change the law in order to protect Chorus’s shareholders.

A change in law is indeed what would be needed because the
remit of the Commerce Commission and the Telco Commissioner has little to do
with shareholders and, in the instance of a regulated determination, does not
allow for political intervention.

The Commerce Commission primarily relies on three Acts to
make up its remit with regard to the telco sector: the Commerce Act, the Telecommunications
and the Crown Entities Act.

The Commerce Act (1986) makes it quite clear in Part One (8)
paragraph 2

the Commission must act independently in performing its statutory
functions and duties, and exercising its statutory powers

The Crown
Entities Act (2004) defines itself (Part One – Preliminary Provisions) as:

to reform the law relating to Crown entities to provide a consistent
framework for the establishment, governance, and operation of Crown entities
and to clarify accountability relationships between Crown entities, their board
members, their responsible Ministers on behalf of the Crown, and the House of

Which again,
speaks to this idea of independence from the Crown and the relationship between
Commission and the government of the day.

Finally, the
Telecommunications Act (2001) has plenty to say on the role of the Commissioner
in overseeing the industry, not least of which is the Commissioner’s ability to
deal with various service either as “designated services” or as “specified
services”.  I won’t bore you with the
detail but in essence a designated service is one in which the Commission sets
the price.  Chorus’s wholesale price is
one such designated service.

The Commission
gets to make the final determination – it doesn’t then refer it as a
recommendation to the Crown for approval. It weighs up all the factors, holds a
conference, uses its best judgement, compares the local market with international
markets and delivers a final decision.

There is no
appeal to the minister in the Act.  It’s
quite clear – the Commission must deliver the decision and the industry will
abide by it.

Part of the
Commission’s decision making is shaped by the government of the day, however. Section
19 (A)
of the Telco Act says:

In the exercise of its powers underr Schedule 3,  the Commission must have regard to any economic policies of
the Government that are transmitted, in writing, to the Commission by the

Although it does
then go on to say this isn’t “a direction for the purposes of Part 3 of the
Crown Entities Act” which seems to imply a certain amount of fudging going on
by the drafters of this piece of legislation. In essence, I read that as the
Commission must consider the broader economic agenda of the government when it
makes its rulings but isn’t to be directed by the government on its particular

Which is of
course precisely what the Prime Minister has said he’ll do.

In an exchange
with Labour’s Clare Curran in the House yesterday, the Prime Minister made it
clear that the government can and will intervene if it wants to.

From the Hansard
draft transcript:

Clare Curran: Does he believe that it is a fundamental
principle of our telecommunications regulatory regime that the regulator is
independent to carry out its role without interference or undue political

Rt Hon JOHN KEY: Of course. They are free to go about their
work. The Government then is free to decide whether it wants to adopt that.

Unfortunately for
the Prime Minister, the Telco Act as it stands doesn’t allow the government to “decide
whether it wants to adopt that” at all. Far from it – the Act requires the
Commissioner to make the decision.

This was all
introduced to ensure that governments don’t simply overturn the decisions made
by their hand-picked, trained, informed decision makers. They’ve handed over
responsibility for the industry in large part to the Telecommunications
Commissioner under the auspices of the Acts mentioned here.

Over the years
the Commissioner has not always handed down rulings I’ve supported or even
remotely agreed with, yet in recent years we’ve seen a Commission that is
willing to painstakingly guide all the parties on a journey through its
decision-making process. Tediously transparent, is how I’ve described the
Commission’s work in the past and I’ve suggested to other government agencies
they might like to adopt the same approach.

You can talk to
any of the telcos and they’ll all tell you the same thing – they want certainty
from the regulatory process. They want to see what the problem is, see how the
Commission will address it, see where the outcome lies and plan accordingly. Independence
and transparency are critical to providing that certainty. Now that
independence is being challenged, not by the industry itself but by the Prime

Shop till you drop

The Australian government is looking at the vexing issue of
international companies charging more for products in Australia
than they
elsewhere in the world.

It has become apparent in recent years that in our corner of
the world we pay well above the average for all manner of products. While there’s
some justification for charging more for large items because of shipping costs,
there seems little justification for charging more for software or smaller
consumer items.

The big corporates will tell us it’s all about price points,
about what the local market can bear and what is deemed acceptable in each geographic

The price for calling on a mobile in India is a fraction of
the cost of calling on a mobile in New Zealand but the downside is you have to
live in a country with a billion citizens and all that goes with it.

So do we get charged more here? Should we enact laws to
change this?

Who knows. Certainly our government has said nothing on the
matter, despite the Australian inquiry. We’re remarkably silent on the issue of
what is being described in Australia as “price gouging” by the electronics
industry in particular

Indeed, when Adidas decided we should pay more for World Cup
simply because we’re New Zealanders and are likely to be more willing
to pay more, we didn’t make too much of a fuss, we simply voted with our
wallets and bought online. Until they decided not to sell online to anyone with
a New Zealand based IP address

I know of at least one major corporate in New Zealand that
buys all its software via a US subsidiary because it saves around 30% on the
asking price. CHOICE Australia’s submission to the government hearing on the matter
paints a darker picture – price differentials of up to 50% on software, content
and electronic goods.

That software prices can vary by that much puts the lie to
the idea that corporates simply try to hit local currency sweet spots and
reveals the truth of the matter: they will charge what the market can bear, and
without legislative support, we apparently can bear to pay more.

When you combine this pricing structure concept with the
corporates’ cavalier attitude towards taking part in these kinds of inquiries
and also their unwillingness to pay tax to support local jurisdictions, we start
to paint a picture of a world where the corporates increasingly control the ebb
and flow of commerce and the governmental structure is increasingly irrelevant.

I can only presume our own government isn’t interested in
pursuing these corporates out of fear they’ll simply stop selling products to New
Zealand altogether. That somehow the corporates are willing and able to take
their ball and go home.

Corporates, of course, are coin-operated; they will go where
the money is and so long as we show we’re willing to shop, they’ll be willing
to sell. Already we see NZ Post offering a US address to shoppers so we can buy
online and import directly from those companies that decline to sell outside
the US itself. That NZ Post, a government-owned agency, is willing to do that
speaks volumes about the issue.

But there is another issue at stake – tax revenue. New
Zealand, like most western countries, now gathers a significant proportion of
its tax take from GST. Shoppers who buy goods online often end up paying less
tax locally than shoppers who buy from a New Zealand-based vendor.

That will have huge ramifications for governments in the months
and years ahead.

Meanwhile the best advice would be if you want to pay less
for exactly the same product, you’ll do well to lie about where you live and if
you want a government that will stand up to corporates, you might want to
consider Australia.