Information Technology Reference
In-Depth Information
1987, the legislative right to determine charges
lay with the Postmaster General (politician), and
was subject to Parliamentary scrutiny. Whilst
commercial considerations could inform the
decision, ultimately charges were determined as
a matter of politics. When telecommunications
service provision was separated from the other
Post Office services as a State-Owned Enterprise
(SOE) in 1987, the direct nexus to political price-
setting was severed. However, as SOEs were still
bound by a government agency agreement, broad
political oversight of and accountability for price-
setting remained.
When Telecom was privatised in 1990, the
'price cap' obligation was invoked as a pragmatic
move to satisfy largely political concerns that
the Commerce Act alone might be insufficient
to constrain a private owner with market power
from setting excessive prices in a newly-privatised
and newly-competitive market where it was un-
certain what information would be available to
adequately assess market performance. In effect,
the 'price cap' protected consumers from the risk
of expropriation via prices to any greater extent
than that which they might have been exposed
under government ownership (at least in respect
of the residential line rental charge).
That the Minister of Communications (politi-
cal successor to the Postmaster General) could
approve price rises above the cap in the event of
sufficient compelling evidence being provided
offered some protection to Telecom's owners
from exposure to a legitimate risk of costs rising
above 1990 levels (presuming the Minister would
take into account the public benefit of Telecom
continuing to be financially viable when making
such a decision). That Ministerial approval must
be obtained for tariff increases above the cap or
any other change to the 'Kiwi Share' contractual
obligations preserved the long tradition of political
input into price-setting, at least in respect of deter-
mining the tariff structure and upper price bound.
The requirement also ensured an ongoing need for
ministerial monitoring of the sector (initially via
the Ministry of Commerce (MoC), subsequently
the Ministry of Economic Development (MED)).
Ministerial approval to alter 'Kiwi Share' terms
has been sought only once, in 1999 when Telecom
applied for a variation to the 'free local calling'
obligation in respect of dial-up internet calls in
excess of ten hours per month. The Minister ap-
proved the charge.
The 'price cap' obligation also signalled impor-
tant information about the margins the government
believed were incorporated into Telecom's prices
at the time of sale. As the government had provided
all telephony services up to 1990, and had been
operating the telephony segment as a stand-alone
entity separate from other Post Office operations
since 1987, it had access to all information avail-
able about the relationship between Telecom's
prices and costs. This information could logically
be assumed to have been incorporated into the
decision-making at the time of sale.
If the government believed that the line rental
prices in place on September 12 1990 incorpo-
rated profits in excess of those required to cover
'Kiwi Share' 'universal service' and 'free local
calling' costs (which were embedded in existing
product cost and price structures), then it begs
the question of why the 'price cap' obligation
established a cpi-x incentive with x=0. If it had
been known that excessive profits were being
garnered, then it would appear irresponsible for
the government to set x at 0. Rather, the rational
action would have been to set x at a small positive
value, thereby 'ratcheting' allowable prices down
over time and eliminating supra-normal profits
(Milgrom & Roberts, 1992:232-6). That this was
not done could be interpreted as a signal that the
government believed the prices at the time did not
incorporate any supra-normal returns, meaning a
'price cap' was required only to prevent oppor-
tunistic price-setting above this historically 'fair'
level 5 . The price paid for the firm and accepted
by the government would have reflected these
assumptions.
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