Editorial: Hold regulation threat in reserve for phone firms

New Zealand's "light-handed" regulation of markets is sometimes astonishingly tolerant. Never more so than in the long-awaited final report of the Commerce Commission on the amount telephone companies charge for admission to their mobile networks.

Two of the commission's three members have advised the Minister of Communications not to regulate the "termination" rate but to accept undertakings by the incumbents, Telecom and Vodafone, to reduce their charges to an acceptable level.

An acceptable level is one that does not present a barrier to new entrants such as 2degrees. Its attempt to break into the market has lent urgency to the commission's investigation.

The newcomer complained that the charges it faced to connect potential customers with Telecom and Vodafone's subscribers was many times that of the rate in most other countries and was deliberately set to preserve the New Zealand cellphone market for two dominant networks that have roughly equal numbers of customers.

The commission found that the networks often set retail prices for calls and text messages that are considerably lower for their own subscribers than their termination charge for calls from the rival or from fixed-line telephones. It concluded, obviously enough, that the termination rates were well above the costs of carrying the calls, permitting discounts to their own customers as well as blocking additional competition.

But Dr Ross Patterson and fellow commissioner Gowan Pickering believe regulating the rate would not serve the interests of consumers better than the final undertakings by Telecom and Vodafone, though these were reluctant concessions from the phone companies; an earlier undertaking in the course of the commission's inquiry was not accepted.

The two commissioners believe the rates now agreed with the companies will be low enough to permit others to enter the market. The third commission member, Anita Mazzoleni, is not so confident.

She says the undertakings would leave the rate 20 to 50 per cent above the price that would be set by the criteria used for regulation. The difference, she believes, would continue to present a barrier to competition.

It is not sufficient, she argues, for the commission to continue to wait and see whether the undertakings make competition possible. "Given the commission has been concerned about competition issues in this market since 2004, it is unacceptable to not now correct this issue once and for all."

She has no shortage of supporters for her advice to the minister, Steven Joyce, to regulate the terminate rate. The Telecommunications Users Association urges Mr Joyce to read her dissenting opinion carefully. He has called for submissions by March 8.

But the commission's majority view is probably the right one. Regulators have to be fair to suppliers as well as customers and potential competitors. Networks are costly to build and maintain and newcomers that want to sell services into them must expect to pay a fair price. The price must maintain the network owner's incentive to invest in it.

Clearly, the termination rates in this country were much higher than they needed to be to maintain the investment. Telecom and Vodafone have been using them to subsidise their subscribers and protect their equal market shares.

But their latest undertakings will more than halve their charges by 2014 and give a newcomer a fighting chance. Their undertakings can be policed by keeping the regulatory alternative in reserve.

Heavy-handed regulation usually has unintended consequences that are not in the interests of competition or consumers. Persistent shepherding and constant monitoring are best.