USOs: The New Zealand Government's View

Thank you for inviting me to speak this evening and for the opportunity to present the perspective of the New Zealand Government.

My congratulations to TUANZ and the Centre for Research in Network Economics in assembling an excellent line-up of speakers for this symposium, some of whom we have already heard from today. As Alex Arena, the Director-General of the telecommunications regulator in Hong Kong has said, the topic of universal service is indeed one of the fundamental issues underlying telecommunications regulatory reform around the world. In my comments this evening, I would like to point out some differences between New Zealand's Kiwi Share provisions and what are known as universal service obligations overseas.

I would then like to raise some questions about the need for additional universal service obligations in New Zealand beyond those minimum safeguards that are already in place in the Kiwi Share.

I will finish by mentioning some of the recent developments relating to the regulatory regime for telecommunications in New Zealand. As I understand you have already heard today of the obligations imposed upon Telecom through the Kiwi Share.

These are held, by some, to be New Zealand's version of what are known as universal service obligations.

As most of you know, the Kiwi Share is a single share, retained by the Government during Telecom's privatisation.

Through Telecom's Articles of Association, the Kiwi Share imposes upon Telecom four obligations. These obligations are:

(a) to restrict the rate of increase of Telecom's standard residential line rentals to the rate of increase in the consumer price index;

(b) to charge rural residential users no more than the standard residential line rental;

(c) to maintain a local free-calling option (in New Zealand local residential calls are unmeasured); and

(d) to maintain the extent of the network as it was in November 1990. Before I go any further I would like to make clear the Governments position on the Kiwi Share provisions.

I would like to make it clear that the Government supports the objectives embodied in the Kiwi Share and has no plans to change the requirements of the Kiwi Share, now or in the future.

New Zealand participants will recall that the Government at the time of Telecom's privatisation made much of the fact that the Kiwi Share commitments were set in stone.

However, the television prop used to demonstrate this turned out to be made of polystyrene! (styrofoam for our American guests).

A few years later a television journalists set out to find this stone tablet.

He expected to see it displayed proudly in a glass case in one of the offices or corridors of Parliament.

After weeks of fruitless searching, his best guess was that it was under several metres of land fill at the Wellington rubbish tip.

Notwithstanding that, I want to confirm that from the Governments perspective, the Kiwi Share objectives are set in virtual stone and will not be altered by this Government.

Having said that, I remain interested in promoting efficiency and innovativeness in telecommunications markets, in general, and in the handling of the Kiwi Share, in particular, provided that doing so does not conflict with the underlying objectives.

Thus, if this symposium can establish means of delivering the Kiwi Share outcomes more effectively, I would not close my mind to them.

Turning now to the Kiwi Share, I mentioned earlier that these provisions are held by some to be equivalent to what is known overseas as universal service obligations.

I would like to raise some questions about just how the provisions embodied in the Kiwi Share relate to what are known as universal service obligations overseas.

The concept of universal service overseas relates to the provision, as widely as possible, of basic telecommunications services at an affordable price.

This typically involves some form of Government regulatory intervention or subsidy.

The Kiwi Share does have some facets that seem to reflect overseas universal service requirements.

The Kiwi Share does, for example, limit the price that Telecom can charge for its residential line rentals and does mandate that Telecom maintain the extent of the network.

However, we can distinguish the Kiwi Share provisions from traditional universal service obligations on at least a couple of grounds.

First, the Kiwi Share does not require Telecom New Zealand to make residential service available, at geographically averaged prices, to all who request it (as British Telecom is required to do).

Instead, Telecom is only required to maintain the extent of the network.

New rural users can be (and are) charged higher prices by Telecom for new service.

In fact Telecom charges new rural users 30% of the installation cost above the first $3000.

Second, unlike the situation in the US, the Kiwi Share does not require Telecom to offer the option of a discounted line rental to all or some residential customers.

Instead, the Kiwi Share requires Telecom to maintain a free-calling option, which would be expected to lead to higher (not lower) charges for access, amongst the range of calling plans that Telecom offers.

We can see that, although the Kiwi Share has similarities to universal service obligations overseas, it is not identical with those obligations.

One question that I hope this symposium will answer therefore, is: just what is the Kiwi Share trying to achieve?

Should it best be understood as promoting universal service, or as something else, such as a form of control of Telecom's residential prices?

The second issue that I would like to discuss with you relates to the concept of universal service itself.

International policy debate surrounding universal service focuses on questions such as What minimum level of telecommunications services should be available to all people?

What functionality should be provided? Should we require the telecommunications carrier to provide optical fibre to the kerb? To provide ISDN? and What level of penetration constitutes universal service?.

Behind these questions is the assumption that the Government will, by regulatory intervention or subsidy, require some services to be provided. But, is such regulatory action necessary or appropriate in the New Zealand economic environment? We might make the following points:

First, in a modern economy we rely primarily upon free and competitive markets to provide the vast majority of the goods and services demanded by consumers.

If we were to separate out certain goods and services as somehow being more important than others, it seems to me that food, clothing and housing would at least rival access to telecommunications services as being of fundamental importance.

Yet, we rely primarily upon competitive markets to provide these products.

Why then, should we not rely upon competitive markets to provide the telecommunications services that consumers wish to purchase and in the price-quality combinations that consumers desire?

Why, in telecommunications, does the Government need to get involved to require some services to be provided?

Especially in this industry where technological change is so rapid, attempts to regulate the provision of particular services risks rapid obsolescence and may be directly harmful, even for those whom the regulation is intended to benefit.

The Government does not necessarily know best.

Second, undoubtedly some form of access to a telephone line is essential for full participation in society.

There may be members of our society who, through poverty, might be unable to afford a telephone line.

However, rather than direct regulation or subsidy of the telephone carrier, it seems more appropriate to assist these members of our society through the normal Government social assistance programmes, such as those programmes administered by the Department of Social Welfare in New Zealand.

Unlike the telecommunications carriers, these agencies have the specialist skills and resources to be able to identify the particular needs of individuals in the community and the best mechanisms for addressing those needs.

Last, it is in each carriers own interests to expand the availability of its telephone service by whatever clever and innovative techniques it develops. Telecom already voluntarily undertakes plans which seek to enhance the take-up of telephone service amongst consumers who may otherwise not take up telephone service.

For example, Telecom's 60 plus programme offers a discounted line rental and higher usage charges for the elderly.

Telecom's Budget Link programme makes telephone lines available at half price to low income households who agree to receive budget advice.

If Telecom already has incentives to enhance network penetration through programmes such as these, why should the Government attempt to do what Telecom already does and is in a position to do better?

To summarise, then, I question whether overseas ideas about universal service can be profitably imported into the New Zealand economic environment.

Let me reiterate, at this point, that although I question whether overseas concepts of universal service are appropriate for the New Zealand context, I do not question the provisions embodied in the Kiwi Share.

Those provisions provide basic safeguards for the New Zealand consumer, to which this Government remains committed.

In my remaining time, let me highlight some recent developments in the regulatory regime governing telecommunications.

As you all know, the New Zealand telecommunications regime is virtually unique in the OECD in that there is no specialist regulator.

Instead, the Government relies (primarily) upon generic competition law to ensure that the dominant firm does not abuse its dominant position. In many ways, this regime has been successful.

As I have pointed out many times, New Zealand has experienced price reductions, service quality improvements and productivity improvements that meet or exceed the levels achieved in countries with far more intrusive regulation.

The New Zealand regime has lead the world in demonstrating the extent to which generic competition law can be relied upon as the sole regulator of the telecommunications industry. As most of you are aware, the Government released a discussion document last year in response to the long-running interconnection dispute between Telecom and Clear.

Many of you here made detailed submissions in response to that document. To those of you involved, I want to say thank you. The quality of the debate has been high.

After considering those responses, officials prepared a report which was considered by my Cabinet colleagues last week.

The Cabinet decisions were announced in a press statement on 26 June. I would like to take this opportunity to reiterate and explain those decisions. First, we recognise the complexity of telecommunications access issues. There are no simple answers to these problems. Each option which we evaluated involved trade-offs.

In the press statement we reiterated what has been the position of the Government for many years, that it relies primarily upon competition to achieve the objective of efficient markets in telecommunications goods and service.

However, competition must have a fair chance to develop therefore we emphasise that we would be very concerned to see any firm acting in an anti-competitive manner, whether through delaying tactics, offering restrictive terms and conditions for interconnection or charging high access prices.

Over the past several months we have had an opportunity to fully consider the rule for pricing access known as the Baumol-Willig rule.

As you all know, the economic arguments for and against the use of the Baumol-Willig rule are rather subtle.

However, it is widely accepted that the Baumol-Willig rule does not facilitate the ability of the entrant to compete away any monopoly profits that might exist.

This much is common ground.

The Baumol-Willig rule was not designed to achieve that end.

In the context of the New Zealand regime, where there are no other regulatory measures to eliminate any monopoly profits, we consider that it is desirable for competition to play some role in the competing away any excess returns. In addition, we consider that the Baumol-Willig rule may hinder some entry by an equally-efficient competitor.

Therefore we have concluded that use of the Baumol-Willig rule in the New Zealand context has the potential to restrict competition, limiting the introduction of new products and technology and the benefits to consumers. We do not want to see the Baumol-Willig rule being used in future. With the signing of the Telecom/Clear agreement in March, the largest outstanding issue in the telecommunications sector has now been resolved.

This agreement may provide a basis or framework which facilitates future interconnection agreements.

Of course, I realise that resolving one outstanding issue simply makes the next issue the outstanding one.

The agreement should, however, provide some precedent for at least interconnection of comparable networks.

There are also some promising developments in this industry (such as the entry of Telstra) which suggest that new sources of competition may be emerging.

Telstra recently installed an Ericsson switch in the Stock Exchange building in the main street of Auckland.

Saturn's cable television network also offers residential local access competition prospects.

In the light of these developments, the Government has decided to retain the existing regime and to continue to closely monitor developments.

We will continue to evaluate options that may improve the regime and will make sure that we remain in a position to take additional measures should they prove necessary.

We recognise that commercial negotiations over issues as complex as telecommunications interconnection can take time, however, we are tired of grandstanding and posturing from both sides.

We would like to see both sides negotiating in good faith and interconnection being offered at reasonable and economically efficient terms and conditions. On the particular issue of number portability, the Government is concerned with the lack of progress achieved to date in multilateral negotiations between the carriers.

As a result we have directed officials to report further on a possible set of principles for establishing number portability. Given the importance of the telecommunications sector to the New Zealand economy, it is important that this industry is performing at least as well and preferably better than similar industries overseas. The Government is eager to maximise the contribution of this sector to the overall growth of the economy.

Thank you, once again, for the opportunity to speak to you this evening. I wish you all the best for the remainder of your symposium.