‘Retail-minus’ approach haunts Telco Bill

ISPs have plenty to be concerned about in the bill

As you would expect, the Finance and Expenditure Select Committee reported back to the house a very long and detail Telecommunications Amendment Bill. It's 143 pages worth of deliberations — some good, others showing too much desire to compromise and rely on the mythical power of commercial arrangements.

Telecom's intense lobbying against the three-way split that the committee added to the bill has failed. However, at the same time, the telco won the concession that no further threat of true separation, a structural split into three independent companies, hangs over it.

This removes the one big stick that the government could've applied, should Telecom be intransigent and drag its heels on regulation. History shows that this is exactly how Telecom has acted in the past, so it's baffling that the committee decided to remove the backstop of structural separation.

Even more so when you consider that the committee used a little-known measure in the existing Act that justifies new regulation should competition suffer in telecommunications because of Telecom's dominant position. Without that piece of forward thinking, Telecom may have been eligible for billions of dollars worth of compensation.

A maximum fine of $10 million may seem plenty to keep Telecom in line but that figure is just the one-off amount relating to the operations separation requirement. In comparison, Telstra in Australia faces a A$10 million initial fine if it is issued a competition notice. On top of that, there is A$1 million a day in fines until the situation is rectified.

This time around, it looks like Telecom has got the message and is already getting ready for the new regulatory reality. Telecom Wholesale is quietly preparing itself to become an independent unit, indicating that there was early warning for the telco as to which way the wind was blowing.

While Telecom's future wholesale customers, the ISPs, have largely been silent over the contents of the bill coming out of the Commitee, industry organisations are already welcoming it. Such back-slapping is premature however. The whitepaper pushers and conference organisers are more interested in the politics of the issue and are not by the coalface, directly exposed to the vagaries of the 800 pound Telecom gorilla.

ISPs have plenty to be concerned about in the bill. Take the new regulated Unbundled Bitstream Service for instance: this will retain the retail-minus pricing principle, instead of moving to a cost-based model as used in Australia and the UK.

The official reason given by the committee to go with retail-minus is because it was concerned that cost-based pricing would delay the implementation of regulated unconstrained bitstream service.

However, the real reason seems to be convenience. Economist John Small of Covec explains that retail-minus is much easier to do, as the subtracted part often doesn't have much science behind it. Small says it's just the avoided cost of retailing and uses standard benchmarks, like the Commerce Commission's 16% discount.

Seeing that retail-minus pricing is one reason ISPs are losing money on broadband and it provides an incentive for Telecom to keep retail prices high, you have to ask why it is being retained in the bill. The reason for that is lost in mill of telecommunications regulation bureaucracy, together with the explanation why so much of the modelling follows the Federal Communications Commission (FCC), when the US and New Zealand couldn't be more different as countries and markets.

Either way, not cleaning up that mistake of the past is a lost opportunity that will hurt competition in the future, and lead to more artificial industry consolidation.

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Tags ISPseparationtelecomwholesalebill

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