Tuesday, 13 June 2017

The future of the telco regulatory regime

Late last week Simon Bridges, the Communications Minister, reappointed Stephen Gale for a three-year term as Telecommunications Commissioner. It's a good move: like his two predecessors, Douglas Webb and Ross Patterson, Stephen's capable, intelligent and congenial, and - belatedly - a bit of continuity could go a long way.

We've also got a clearer idea of the regulatory agenda Stephen will manage: earlier the Minister had announced the final decisions on reform of our current telco regulation regime and included a helpful Q&A thingie for the non-obsessed. True telco tragics can read the detailed Cabinet paper.

A lot of the agenda had been signalled from afar - you can follow the trail here - and there have been no major last minute surprises. We've known for a while, for example, that from 2020 Chorus and the other companies rolling out fibre networks will  be regulated as utilities, using the same sort of rate-of-return 'building blocks' regulation that has been applied to electricity lines businesses under Part 4 of the Commerce Act.

Can't say I'm enthralled by the form of regulation: it's a clunky and expensive 1950s process, and you'd think we'd have been better off with something off a more modern 'incentive regulation' menu. And as a side effect we're going to get another process where the Commission (as it currently does for Transpower) will need to approve new investments going into the regulated asset base.

I can see the rationale as an anti-gold-plating device, but government agencies choosing which private sector investment projects get the go-ahead is a bit on the medieval side for me, and is another argument for something more hands-off, with a greater role for Chorus (and others) wearing more of the downside but potentially keeping more of the winnings. But here we are. At least we won't have to reinvent the wheel as we've already given the Part 4 process a thorough going over in the courts, and if you're going to go the rate of return route, the Commission's way of going about it is as good as any.

But rate of return regulation aside, there's quite a lot to like in this policy package. There's a useful focus on rolling back regulation when it's no longer needed, most obviously deregulation of the Chorus copper network in areas where fibre has been rolled out, but also more generally. As an earlier 2016 Cabinet paper had said (reproduced in para 73 of Appendix 1 of this latest Cabinet paper)
Another important regulatory design principle is to provide for active deregulation where appropriate. I propose that the Commission be required to review whether any geographic area, service, asset or market should be deregulated prior to each regulatory reset. This would include looking at whether any competition has emerged for rural copper services such that they could be deregulated
Oddly, though, the current requirement  in s157AA to periodically revisit the Telco Act itself  has been dropped. I'm no fan of makework policy analysis, but I do wonder whether the package should have included an ongoing requirement to review the telco regime from time to time.

The two hot spots that Stephen Gale and his team will have to deal with are the wholesale mobile market, and the bunch of issues around service quality and customer complaints.

On the mobile side, there's no knock-out evidence that the wholesale mobile market isn't working as well as it might: the low level of 'MVNOs' (mobile virtual network operators, who stick their retail brand on a wholesale input they get from the big guys) is suggestive, but by no means definitive. If there are issues, the sticky points appear to be the efficacy or otherwise of colocation and roaming agreements, and the Commission is going to get a more streamlined process for more effective regulation if needs be. Currently colocation is a 'specified' service, which means that the non-price elements are set by the Commission, but it could be tightened up a notch to 'designated', which would also set the price.

The Minister said that he will "be writing to the Commission requesting that they undertake a study of the wholesale mobile market". Good. But that yet again underlines how stupid our current arrangements are on what the Commission can or cannot look at. The Telecommunications Commissioner (who is part of the Commission) must report annually on the state of the telco market. And the Minister (as he's just said he's going to) can also ask him to look at particular telco issues. But the rest of the Commission can't take a proactive look at anything else. The sooner this nonsense collapses under the weight of its own absurdity, the better.

The other hot spot is the sector's poor customer record, and that's something senior management in the industry should have thought harder about earlier on: when you have papers going to Cabinet pointing out that "The telecommunications sector generates more consumer complaints than any other sector in New Zealand", you're positively inviting the government to wade into your industry. As it has: the Commission will start reporting on the level of quality (yet another bizarre example of how it's allowed to look at some things but not others), will have the power to devise and impose codes of conduct, and will periodically review how the industry's own Telecommunications Disputes Resolution Scheme (TDRS) is travelling, with the explicit threat that it will be replaced by a new body if it doesn't hit the spot.

The Cabinet paper says (para 8) that "the current regulatory settings...are over-reliant on industry self-regulation". Maybe that's right in this case, and in any event self-regulation has been falling out of favour as a a consumer protection policy option. Personally I think it's the first option that should be on the table, not least because if there are problems, the onus for fixing them should lie on the problem-makers in the first instance. If that falls over, then of course tougher measures should follow, but we should try and make the light-touch options work first. Hopefully the TDRS will get the message.

Quite apart for doing a better job for their customers, I also think industry sectors ought to get their self-regulatory act together in their own enlightened self-interest. If, for example, the various parties in the electricity sector hadn't feuded among themselves over the shape of an industry-led Electricity Governance Board, they wouldn't have had the price control provisions of Part 4 of the Commerce Act and an Electricity Authority foisted on them.

It's only a minor detail in the whole package, but I was irritated by the flimsy rationale for hiding the increased costs the Commission would face from its new consumer roles. It can't be a huge or sensitive number - might be perhaps a couple of million dollars a year, chickenfeed in the greater fiscal scheme of things - but the dollar number has been redacted from the Cabinet paper.  The excuse is the section of the OIA that says hiding it is "necessary to..maintain the constitutional conventions for the time being which protect...the confidentiality of advice tendered by Ministers of the Crown and officials", which translates into "it's being kept secret because if we told you what we said it wouldn't be secret anymore". Give us a break: we ought to be able to see the cost of what's been proposed.

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