KEY POINTS:
In another setback to Telecom's plan to split in two, Communications Minister David Cunliffe has cast doubt on the company's threat to stop investing in its network if its proposal is blocked.
His comments came as the Commerce Commission revealed statistics showing "very little has changed" for New Zealand phone and internet prices in the first three months of the year. New Zealand ranks 21 out of 30 OECD countries for broadband uptake.
Speaking yesterday at the Telecommunications Users Association of New Zealand conference, Cunliffe said he was determined to see a "robust separation" as soon as possible.
"Does that rule out some form of structural separation? No. But we must be confident that any form of structural separation better meets the objectives of the act and is overall better for New Zealand," he said.
Cunliffe said Telecom's move to table a new proposal rather than provide feedback on Government plans to separate the company into three divisions - retail, wholesale and network - was interesting, especially as its unsubstantiated general criticism flew in the face of overseas experience of regulation.
"Let me state clearly and for the record," he said. "We will not go backwards and reverse the Telecommunications Amendment Act or be changing what is a fundamentally sound, best practice regulatory framework."
Telecom has proposed selling its network assets and retaining the wholesale and retail units. In exchange it has asked for regulation of these units to be lifted.
It has said the Government's plan would leave it unable to afford network investment needed to meet the Government's digital strategy goal of having 5Mbps (megabits per second) broadband available to 90 per cent of the country by 2010.
Cunliffe said the Government recognised the importance of investment.
But other countries which had forced local loop unbundling - opening phone networks to competitors - had found the company which owned the network usually threatened to slow or stop investment.
"The evidence shows after unbundling happened, they could not avoid investing, because others moved quickly to invest and they had to match them to stay competitive."
Many of Telecom's competitors have objected to its separation plan, and last month outgoing Telecommunications Commissioner Douglas Webb said it was far from being a "fresh approach to regulation" as Telecom claimed.
The head of regulatory affairs at the European Competitive Telecommunications Association, Ilsa Godlovitch, told the conference the incumbents would complain regulation undermines investment.
"We found the opposite."
She said that in the UK, where incumbent British telecom has had a separation similar to that proposed for Telecom, per capita telecommunications investment was close to double the New Zealand figure.
Godlovitch said New Zealand's example of Telecom "having a holiday" from regulation had not resulted in any investment in infrastructure. "Now's the time to end the experiment and get New Zealand working."
Godlovitch also added telecommunications companies could expect "quite a bit of gaming" from Telecom over its plans for next generation networks.
She said any plans to run fibre closer to homes and businesses needed to be revealed so they could be regulated to future-proof against bottlenecks moving to a different point in the network.
Brokerage Morgan Stanley said in a report Telecom would be worth more under structural separation.
"Contrary to market expectations, we believe the structural separation of Telecom's network business would be positive for the share price," it said.
Utilities were valued at a higher earnings multiple than Telecom, so separating out the network could lead to it being re-rated "at a significant premium to its current multiple".
"Furthermore, separation would also provide some relief on retail/wholesale regulations, which would enhance [Telecom's] ability to compete more aggressively in the retail space."
In a report this year, Citigroup also suggested Telecom as a whole might be worth more under structural separation than under operational separation. Structural separation would also reduce regulatory risk.
Telecom shares closed up 3c yesterday at $4.85.
Doing the split
Government's plan
* Telecom will be split into wholesale, retail and network access units.
* The network access group should have its own brand and head office.
Telecom's Plan
* Telecom would have retail and wholesale operation units with light regulatory management.
* The network would be split off into a separate company that could be sold.
