A Pendulous Progression: New Zealand's Telecommunications Regulation 1987-2007

Abstract

New Zealand was the first country in the OECD to adopt a 'light-handed' approach to telecommunications regulation when in 1987 it eschewed industry-specific regulation for a generic competition law-based approach. The 'light-handed' regulatory environment prevailed throughout the 1990s during the privatisation of the incumbent provider the entry of competitive fixed-line infrastructure and services suppliers the establishment and growth of mobile market competition the expansion of the commercial internet and the consequent emergence of the 'information economy'. Over this period New Zealand emerged as one of the earliest-adopting and highest-utilising OECD countries with its ADSL services amongst the earliest highest quality most widely-available and lowest-priced in the OECD. Since 2000 however there has been a sea-change in the New Zealand approach to telecommunications regulation. Following a Ministerial Inquiry into the industry in 2000 industry-specific regulation was introduced in 2001 limited bitstream unbundling was imposed in 2004 full unbundling and the ability to undertake standard terms determinations were mandated in 2006 and in 2007 operational separation overseen by the Minister and not the regulator was imposed. Regulated mobile termination was also rejected in 2007 in favour of ministerially-brokered agreements. By tracing the economic performance of the New Zealand telecommunications sector during the periods of regulatory change in terms of productive allocative and dynamic efficiency this paper finds that there is little evidence to suggest that the 'light-handed' regime performed any worse than comparable industry-specific regimes over the same period. Rather the return to industry-specific regulation and each successive increasing of regulatory pressure appears to have been associated with reduced economic performance and reductions in competition relative to the regime replaced. Increased regulatory tension has also been associated with replacement of pursuit of economic efficiency as the sector objective with pursuit of competition in isolation from the efficiency consequences of this policy change. It is therefore unlikely that the latest changes including direct political control will deliver greater welfare to the New Zealand market. The paper suggests that an unjustified focus upon the incumbent's dominance as the underlying cause of poor competition metrics has resulted in policy-makers overlooking the role of the contribution of different regulations to the competition metrics observed. In particular the only regulations forming part of the light-handed regime which have not been overturned a universal service obligation and a mandatory tariff requiring no charges be levied for residential local telephony calls are materially connected with all of the poor performance indicators which have been used to justify increased sector regulation. These requirements persisted with because of political rather than economic efficiency imperatives provide a more plausible explanation for practically all of the positive and negative efficiency competition and strategic interaction observations observed in the New Zealand sector over the past 20 years than the alternative hypotheses that competition law has failed and the incumbent has exercised its dominant position unduly.