Decision on telcos slammed

By JUHA SAARINEN

A scathing peer review commissioned by the Ministry of Economic Development says the Commerce Commission erred in under-estimating the net benefits of local loop unbundling and drew conclusions not supported by even its own analysis.

Local loop unbundling is the enforced wholesaling of Telecom's copper lines to its competitors, allowing them to install their own equipment as part of Telecom's network.

The commission reviewed unbundling but decided the benefit was too low to justify such an invasive level of regulation.

It said the benefit to customers over five years was a mere $30 million - not enough to justify local loop unbundling, said Telecommunications Commissioner Douglas Webb.

But the 38-page review by John Small of Auckland consultancy firm Covec says the commission itself suggested that the $30 million figure would probably double over five years, due to efficiencies brought on by competitors investing in equipment to provide cheaper services.

Even the $60 million figure could be too low. The commission hired British economic consultancy Oxford Economic Research Associates (Oxera) to produce a cost-benefit analysis of the unbundling.

Small's review says the modelling strategy understates the benefits of unbundling - its report estimated the value of the consumer benefit as $80 million.

Small said the likely figure for the consumer benefits was twice Oxera's overly conservative estimate, $160 million, and maybe more.

The review criticises Oxera's strategy of understatement as "excessive".

According to Small, the report got it wrong in several key areas. Oxera looked at four different ways of unbundling, but kept them separate from one another.

The review says combined scenarios would boost consumer benefits at the cost of a single investment for the provider.

Telecom's line rentals were said to fall by 5 per cent over five years without unbundling. This is despite Telecom historically raising line rentals each year, not lowering them.

The report assumes broadband uptake rates would be greater than Telecom's forecasts if local loop unbundling doesn't take place.

Small says Oxera's report made "several unnecessary and unrealistic assumptions that appear to go beyond the bounds of prudence".

Thus, as the review says, the modelling details in the report are not completely transparent.

The peer review formed the basis of the ministry's 50-page report released last month, which was strongly in favour of unbundling Telecom's services so that end-users could enjoy lower prices as greater competition in the broadband and telephony areas drove them down. The ministry recommended to Communications Minister Paul Swain that he ask the commission to reconsider several aspects of its recommendations, including the unbundled bitstream service so as to allow for higher speed and the ability to provide a full range of services over it.

Small described the commission's final decision as a "surprising conclusion" given the multimillion-dollar benefits to consumers.

His review slates the very limited bitstream wholesale offering suggested by the commission as "not efficient".

The commission was also "heavily influenced by the fear" that Telecom would not have an incentive to invest in its next generation network if more complete unbundling took place.

The review on the other hand says it is not clear the commission's fears are well founded, as Telecom isn't the only potential investor in new networks.

It should have considered network investment by TelstraClear, which might more than compensate for any shortfall.

TelstraClear spokesman Mathew Bolland said the company would be returning "tens of millions of dollars" in funds earmarked for investment in an unbundled telco environment.

"We were looking at spending $350 million over five years extending our network to the vast majority of small businesses but that's not an option now."

The unbundling saga

* A peer review of the Commerce Commission's analysis says the value of the benefits lost to customers due to no unbundling is at least $160 million and likely to be considerably more.

* A faulty analytical model used by the commission as well as its own assumptions made it estimate the benefits as merely $30 million, which telecommunications commissioner Douglas Webb considered too little to recommend unbundling.

* Unbundling would give competitors access to Telecom's existing network, thus ending its monopoly on delivering telephone and data services to New Zealanders.

* The commission rejected full unbundling, which would have enabled competitors to install equipment in exchanges and access customers directly.

* The commission recommended competitors be given limited access to parts of Telecom's data network only, and on a wholesale basis.

* Communications Minister Paul Swain accepted the commission's recommendations. From September, providers will be able to sell a low-speed, unbundled ADSL bitstream service, as well as medium-speed data circuits