New Zealand: Using Competition Law to Regulate Interconnection

New Zealand deregulated its telecommunications sector between 1987 and 1989, and privatized its incumbent telecommunications operator, Telecom New Zealand, in 1990.

“Light-Handed” Regulation

Contrary to common international practice, the New Zealand Government chose not to establish a sector specific regulator at that time. Instead, it implemented a “light-handed” regulatory framework to provide for competition in telecommunications.

The light-handed regulatory framework for telecommunications consisted of:

  • Reliance on New Zealand’s general competition law, the Commerce Act 1986, to prevent anti-competitive behavior. The Commerce Act can be enforced by the Commerce Commission (New Zealand’s competition authority), or privately through the courts,
  • Information disclosure requirements placed on Telecom New Zealand. These requirements are intended to inform access negotiations, and to assist the Government (and market participants) to identify competition problems, and
  • The threat of further regulation if Telecom abused its market power. This could take the form of price control (available under the Commerce Act), or changes to the regulatory regime.

Regulation of Other Matters

Technical regulation was covered by the Telecommunications Act 1987. This Act was administered by the Ministry of Commerce. Telecom itself was responsible for key elements of technical regulation, such as equipment approvals.

The Radiocommunications Act governed allocation of radiospectrum. The Ministry of Commerce administered this Act and managed the spectrum allocation process.

The regime relied on New Zealand’s general consumer protection law, the Fair Trading Act 1986, to protect the interests of telecommunications users. In addition, the terms of the sale of Telecom included some protection for residential and rural users in the form of the “Kiwi Share Obligation” (KSO). The KSO was a set of provisions in Telecom’s Articles of Association that required Telecom to:

  • Maintain a local free-calling option for all residential telephone customers,
  • Ensure that the rate of increase in the residential telephone line rental, including the cost of all local calls, did not result in the rental increasing in real terms above its 1 November 1989 level (unless this unreasonably impaired Telecom's profits),
  • Ensure that the line rental for residential users in rural areas was no higher that the standard residential line rental for all users,
  • Continue to make ordinary residential telephone services as widely available as it was at the date of adoption of the KSO.

Experience with the “Light Handed” Approach

Some competition did emerge under New Zealand’s light handed regulatory regime. However, the regime was characterized by sometimes lengthy disputes, and uncertainty over “acceptable” interconnection prices. These issues are illustrated by the dispute between Clear Communications (a new entrant) and Telecom, over terms and conditions for local access. The dispute took 5 years to resolve and cost the parties millions of dollars in legal fees, expert advice, and management time.

The Clear-Telecom dispute began in August 1991. Clear initiated legal proceedings under New Zealand’s competition law, after failing to negotiate terms and conditions for access to Telecom’s local loop. The parties appealed the case to New Zealand’s final appellate court, the Privy Council.

The central issue of the dispute was the interconnection price, and whether Telecom could lawfully charge a price based on the Efficient Component Pricing Rule. The Privy Council found that Telecom’s proposed pricing was lawful, even though it would allow Telecom to recover any loss of monopoly profits through its interconnection price. The Government subsequently stated that it was opposed to the use of the Efficient Component Pricing Rule because it had the potential to lessen competition. But the Government did not offer any clear guidance on what pricing methodology would be acceptable.

Clear and Telecom finally agreed on terms and conditions for local loop interconnection in 1996.

By the late 1990s, dissatisfaction with the light-handed approach to telecommunications regulation was wide-spread. Many commentators, citing the Clear-Telecom case, raised concerns about the cost and timeliness of access under the regime.

The Shift to Sector Specific Regulation

In 2000 the new Government announced a Ministerial Inquiry into Telecommunications. The purpose of the Inquiry was to assess the regulatory regime for telecommunications, and recommend changes.

As a result of the Inquiry process, the Government moved away from light-handed regulation, and introduced sector specific regulation of the telecommunications sector.

The Government established a Telecommunications Commissioner to regulate the telecommunications sector. The Telecommunications Commissioner is located within the Commerce Commission (New Zealand’s competition authority). The Commissioner has powers to:

  • Resolve disputes between industry players over key services,
  • Set prices and access obligations for “designated” services, where the parties are unable to agree. At the introduction of the regime, designated services were:

– Interconnection with Telecom's fixed telephone network,

– Wholesaling of Telecom's fixed network services, and

– Number portability, and

  • Make recommendations to the Minister of Communications for regulation of other services in the future.

Sources:

Ministry of Commerce and The Treasury Regulation of Access to Vertically-Integrated Natural Monopolies: A Discussion Paper, August 1995

Ministry of Commerce, Communications Division “New Zealand Regulatory Environment for Telecommunications” July 1997

Ministry of Economic Development, Resources and Networks Branch “ New Zealand Telecommunications 1987–2001”, August 2001

(Sources available from http://www.med.govt.nz.)

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