Information Technology Reference
In-Depth Information
into the market on 19 July 1991, as agreed in the
terms of sale). As part of its manifesto for the
1999 election, the Labour Party promised a new
inquiry into New Zealand's telecommunications
regulatory framework. Support from the opposi-
tion naturally invoked political and regulatory
uncertainty, due to the inability of a government
to bind its successors to maintain any specific
policies or laws (Howell, 2008).
A Labour-led coalition formed the government
after the 1999 election and moved rapidly in 2000
to instigate a formal inquiry. Given the nature of its
political origins, the 2000 Inquiry was instructed
in its terms of reference to address (amongst
other issues): “alternative means of establishing
interconnection terms and conditions; pricing
principles and other terms and conditions (such
as service quality standards) for current and future
forms of interconnection; processes applying to
interconnection negotiations, including dispute
resolution and enforcement mechanisms; local
loop unbundling; resale of telecommunications
services; information disclosure;”
12
and the 'Kiwi
Share' obligations.
The Inquiry reported back on September 27
2000
13
, with the finding that, as Telecom's inter-
connection prices still contained elements above
cost, an industry-specific regulator with the power
to regulate prices using TSLRIC (cost-based)
methodology for a range of Telecom-provided
non-internet services should be installed, and
that Telecom alone should bear all of the costs
of the 'Kiwi Share' until such time as it could
satisfy the Minister that it should be allowed to
increase its charges in order to maintain financial
solvency. Telecom's internet-based retail services
were spared from TSLRIC pricing, instead to be
offered as wholesaled products to competitors
at the retail price minus a regulator-determined
discount (Howell, 2007:38)
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. The inquiry also
recommended that local loop unbundling should
not proceed, as there was evidence of competi-
tion already emerging in the broadband market.
However, a further inquiry into the feasibility of
unbundling access was to be undertaken within
two years.
Industry-Specific Regulation
and the TSO Tax
The Labour-led government accepted most of
the Inquiry recommendations. The Telecommu-
nications Act 2001 established the office of the
Telecommunications Commissioner. The Com-
missioner was granted powers to regulate prices
for designated services and to advise on other
services which should become subject to regula-
tion. However, due to their clear incompatibility
with universal service objectives, the Inquiry's
'Kiwi Share' recommendations were rejected.
Whilst Telecom was still required to maintain its
existing contractual obligations in respect of its
retail pricing and service quality levels, the Act
created a new obligation, the 'Telecommunications
Service Obligation' (TSO). Under the TSO, the
Commissioner would annually allocate the costs
of Telecom meeting its social obligations across
all firms participating in the market.
The price regulations removed any question
of Telecom charging competitors prices above
(TSLRIC-based) cost, but the TSO obligations
introduced a 'tax' on entrants. The TSO 'tax' effec-
tively appropriated the 'free profits' entrants made
from arbitraging upon social costs that Telecom
alone had to bear, and transferred them to Telecom,
thereby restoring it to the financial position that
would have prevailed to what it would have been
had selective entry not occurred in the low-cost
areas. As per Armstrong (2001), the incidence of
the TSO tax thus substantially reduced the risk of
inefficient entry occurring in low-cost markets by
firms with higher costs than Telecom.
However, the TSO has been very unpopular
with Telecom's competitors, who have continued
to engage in political lobbying on the basis that
they should not be taxed to compensate Telecom's
losses, especially when they provide services in
the same areas using alternative technologies (e.g.
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