KEY POINTS:
Telecom stunned market commentators with its blunt statement in Sydney last week that the board will not invest in next-generation internet for New Zealand because the Government's strategy for opening the lines to competing providers would prevent the company earning the necessary return.
Chairman Wayne Boyd even entertained the possibility that the board could decide to break up the company and sell parts of it if the Government insisted on dividing Telecom into three business units - wholesale, retail and network operations.
"We're quite staunch about this," Mr Boyd said. "Their proposal won't work." Outgoing chief executive Theresa Gattung was equally forthright: "If we stay on the path we are on, there is going to be a train wreck."
Telecom has been warning of an investment consequence since unbundling was a gleam in the Labour Government's eye, but its Sydney announcement - part of a third-quarter report showing flat revenue growth, higher costs in New Zealand and an improvement in Australia - does not sound like bluff.
If the Government is determined upon a three-way split it might have to buy back the wire network. It might get that opportunity if Telecom went ahead with its preferred two-way separation, keeping wholesale and retail sales together and setting up a separate network company.
Communications Minister David Cunliffe has called for submissions on Telecom's proposal and, predictably, rival telcos do not like it. The plan would leave Telecom dominant at both ends of the market with an undercapitalised network in the middle. But that is exactly the shape of the other big wire network service, electricity.
It is hard to see why the Government is hell-bent on a three-way split when the state's experience with electricity suggests it is impractical. When electricity was generated and transmitted by a Government department its local distribution was managed by separate retail authorities, and when the sector was restructured for competition all three components were separated.
But soon the previous Government felt obliged to forcibly divide line operations from the retail companies, much as generating companies were separate from the national grid. And it took only two seasons of water shortage, reflected in very high spot prices, to send exposed retailing companies into the arms of the wholesale generators. Markets left alone find their most efficient form.
Lessons can surely be taken from one line network for the other. There would seem no harm in Telecom retaining wholesale and retail interests if its network is open to all competitors and managed as a distinct business. Probably the network would return to state ownership like the electricity grid.
The regulation of network services is still a voyage of discovery everywhere. Australia's Telstra is also at loggerheads with its regulator and has cancelled plans to build a high-speed network. Governments must respect the preferences of boards answerable to shareholders. Their need to show a return on any investment is exactly the reason the service was put in their hands.
If Telecom has underinvested in the wire network, it is probably farsighted. Rapid developments in wireless technology suggest the telephone lines could soon be the railway of telecommunications - carrying bulk cargo but not much human traffic. The national rail track is back under the taxpayers' care and the phone lines might not be far behind.
