Roundtable consultant slays inquiry report

Another attack was mounted last week on the findings of the telecommunications industry inquiry.

Another attack was mounted last week on the findings of the telecommunications industry inquiry.

Bryce Wilkinson, director of Wellington consultancy Capital Economics, lambasted the inquiry report's findings at the Competition and Regulation in Telecommunications conference in Wellington. Wilkinson appeared in place of Roger Kerr, chief executive of the Business Roundtable, but said that even though the Roundtable is one of Capital Economics' major clients he was putting forward his own point of view.

Last week the Auckland University-based Centre for Research in Network Economics and Communications (CRNEC), which prepared the economic model used in the report, came under fire from analyst firms NECG and NZIER over the savings CRNEC calculated would result from regulation.

Wilkinson said there were uncertainties attached to crucial figures used in the analysis. More fundamentally, he said, the same uncertainties surround the government objectives that the new regime was trying to satisfy. This provoked strong reaction from inquiry panel chairman Hugh Fletcher, who said at one point that Wilkinson was talking "nonsense".

"I'm afraid when he said that, I responded in kind," says Wilkinson, adding that the debate became less constructive than it might have been.

The government's stated policy objective for telecommunications is to achieve "cost-efficient, timely and innovative services on a fair and equitable basis to all existing and potential users".

"How is the regulator to determine what is cost-efficient?" asks Wilkinson, "particularly when technologies are rapidly changing costs in unpredictable ways?"

The report, for example, settles on an appropriate interconnection price of 1.5 cents a minute. Wilkinson challenged Fletcher at the conference to substantiate that as the most efficient figure, and Fletcher acknowledged there was some uncertainty in it; that the most efficient level "might be one cent or it might be two".

"If he doesn't know [with all the analysis that went into the report], how can a regulator be expected to know?" asks Wilkinson. Fletcher's view as expressed at the conference "is honest, but the presumption in the inquiry's report is that the regulator can find these things out".

Costs and charges depend partly on the depreciation of assets, which in the case of telecommunications, depends on the speed with which new technologies develop, and this is fundamentally unpredictable, Wilkinson contends.

The government's objectives involve trade-offs. "What is fair and equitable?" he asks. "Is the principle that the user should pay more equitable than the principle that those on lower incomes . or who live in remoter areas should not get left behind even if they cannot pay the full cost?

"What if the most timely and innovative investments are uncommercial? Who should be made to pay the difference?" None of these questions have been covered by the government in launching the report, he says.

Like the report by NECG (Wrangle over telco report continues), Wilkinson says the situation as it might be in the absence of a regulator has been insufficiently assessed.

"It appears that the alternative against which the report's recommendations are compared is that of a static world in which a monopolist can indefinitely derive an average interconnection revenue well above 1.5c per minute."

The core contention of the report, that the existing network is a natural monopoly, is disproved by the erosion of Telecom's market share under competition, says Wilkinson. To assert, as the inquiry panel did, that Telstra-Saturn is not a direct competitor, because it supplies additional services "seems to be akin to arguing that because electricity provides a larger ... set of services than gas, electric light would not be able to compete with gas light".

The report and other discussions at the conference place undue emphasis on Telecom's supposed opportunity for monopoly profits; this should not be the only criterion for judging the state of competition; amonopoly's higher prices also lead to "unconsummated transactions" - business not conducted, to the detriment of society, because potential customers consider the price too high.

There are other alternative worlds which the inquiry did not assess, Wilkinson says, such as regulating interconnection prices down to 1.5c a minute.

"The report does not appear to consider this alternative. It thereby fails to establish that its proposals are necessary."

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