Chris Barton: Commissioner's unbundling bungling

COMMENT

There are many questions to ask about Telecommunications Commissioner Douglas Webb's decision not to order local loop unbundling - the opening up of Telecom's monopoly on telephone lines to competition. But they all lead to the same imponderable point. What or who caused the u-turn, the about-face?

In his draft report, Webb was all for unbundling. But a funny thing happened on the way to the final report and Webb, who, it has to be said, is no spring chicken, performed with the agility of an Olympic gymnast an unbelievable back flip, a flip flop with a half twist - a volte-face. Unbelievable, because commissioners don't generally change tack from draft to final report. They may make a few refinements, but normally stay with what they've discovered from their earlier investigations.

It's tempting to jump to the conclusion that Webb succumbed to Telecom's powerful lobbying team, or to die-hard "Rogernomic" Government ministers and officials. But the buzz from the Beehive says all the ministers in the loop on local loop - Paul Swain, Michael Cullen and even the PM - were expecting a mandate to unbundle, and were shocked by Webb's change of heart.

So what happened to bring about such a reversal? Webb, who is a lawyer by trade, doesn't say much publicly, preferring to let the report - all 222 pages of it - do the talking.

The nattily titled Investigation into Unbundling the Local Loop Network and the Fixed Public Data Network is excellent medication for insomniacs.

The oddest aspect is the way it builds strongly in support of unbundling, but then comes up with conclusions that don't match - almost as though the report was written by one person and the conclusion by someone else.

Step by step it dismisses the objections to unbundling. Yes, the commission foresees that regulation may undermine Telecom's property rights but points out: " ... the gains in dynamically efficient innovation from competition through unbundling the local loop and fixed PDN [public data network] are likely to be greater than the losses that might be generated by any disruption to investment plans caused by unbundling."

No, the fledgling competitive fixed wireless access networks promoted by Woosh Wireless, state-owned network provider BCL and Counties Power are "unlikely to represent a sufficient competitive constraint on Telecom in terms of customer access during the next five years ... "

And yes, unbundling is a good thing: "The results show that there is a positive gain to consumers from regulation in all options and scenarios ... " And: "Consumers might expect to benefit from regulatory intervention through lower prices and potentially more and better services."

So far so good. But the first sign Webb has bungled this investigation is in the amended draft report of October where the "present value of consumer surplus" for full unbundling - allowing competitors access to the total copper wire - is a whopping $180.6 million. By the time we get to the full report this has somehow shrunk to $83.8 million.

These are the broad figures on how much consumers would benefit by unbundling over a five-year period, derived from a dreadfully conservative cost-benefit analysis. By various mathematical sleights of hand the number gets whittled down to $47.5 million.

That's primarily because Webb removes several key exchanges where he believes there already is competition, but also acknowledges there would be substantial consumer welfare benefits if unbundling occurred.

Then Webb cuts it again to a benefit of just $30.1 million taking into account the costs of regulation.

Another mistake, because the Oxera cost benefit analysis had already taken such costs into account.

With only $30.1 million of benefits, full unbundling is not worth the trouble, says Webb.

Taken in isolation, the figure is insignificant. But full unbundling doesn't have to be viewed alone, the figure itself is highly suspect, and its discrepancy with the draft report is not explained.

There are more mathematical high jinks when Webb looks at line-sharing, which is when competitors get to use part of Telecom's line for data while Telecom keeps another part - the voice services. In the draft report, line-sharing barely registers, providing only $38.1 million of consumer surplus. But by the final report, these benefits have ballooned to $113.3 million. Huge in anyone's book, but Webb rules against it because TelstraClear doesn't ask for it. Why not? Well, because like everyone else, it's expecting full unbundling to proceed.

But the most peculiar turnaround comes in Webb's decision to allow bitstream access - giving competitors wholesale rights to the raw data flow (the bitstream) of Telecom's Jetstream service. In the draft report the benefits to consumers are a decent $151.9 million and yet Webb doesn't recommend designation. Why? Because, as he tells me at the time, the benefits are better with full unbundling - once gain demonstrating flawed logic.

Two months later in the final report, the benefits of bitstream access have swelled to $170.8 million and Webb is recommending full steam ahead, but no full unbundling.

Even after making the necessary adjustments for the cost of regulation and so on, the benefits of bitstream access are still $75.3 million. Fantastic. Combine that with full unbundling and the consumer is more than $100 million better off.

But Webb can't seem to do simple addition. For him it's one road or the other, not both. Worse still is that Webb has castrated bitstream access before it's even begun by requiring a low grade 128 kilobit per second (Kbps) upstream and 256Kbps downstream service that specifically excludes voice, video and other multimedia services.

Which shows more than ever that Webb has lost the plot. Any internet user knows such a connection can be used for all of the above, but just does it slower than on a faster connection. He also seems to have forgotten that the minimum requirement of the Government's Probe project, which aims to provide fast access to all schools and their surrounding community, is 512Kbps in both directions to specifically allow for video conferencing.

For bitstream unbundling to work, competitors must have access to variety of speeds so they can bring their own added value to the raw data flow to provide a variety of services. Limiting the bitstream to low-grade access is nonsensical in terms of promoting competition.

There's much more criticism that can be levelled at this report. Such as the acceptance of Telecom's eleventh-hour offer to provide reasonable terms for some data circuits. And the highly selective reading of overseas evidence about the effects of unbundling. Not to mention that Webb has suddenly become concerned about protecting Telecom's "'first mover' advantages of providing new products via an upgraded network".

Good grief, since when did a monopoly need protection?

But above all, Webb has lost sight of the prime purpose of the Telecommunications Act, namely: "To promote competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand."

In the face of such an objective and with the report clearly showing substantial consumer benefits for all types of unbundling, Webb's sea change can't be justified.

Which leads to the disturbing conclusion that this report, not helped by bad writing, bad maths and bad logic, is a bungle.

* Email Chris Barton