Separation from a different point of view

Sometimes going away from a policy debate helps you see it more clearly. With all the debate and constant flow of news, submissions, discussions and so on, putting the Kiwi debate on separation in context has been a nice thing to do this week. 

The opportunity has come in Brussels, where I’ve attended a conference on “Vertical separation in telecoms” organised by WIK, a reputable consulting and analytics firm based in Germany. It has been a timely event given the debate in New Zealand on the future of the telecommunications industry and the separation of Telecom in particular.

This post records a few key impressions that struck me. Apologies it's a bit wordy!

First is that functional (operational) separation is finally a remedy that European regulators are able to impose on dominant telcos, thanks to the reforms from last year’s EU telecommunications package. Until now, it has been achieved only on a voluntary basis and only in a few markets (with the UK the most famous example). 

(As an aside, the term “voluntary” is only in the legal sense – for example, in the UK BT faced the choice of accepting an operational separation settlement, or being referred to the competition regulators with unknown but potentially far-reaching consequences – possibly including enforced structural separation.)

Secondly, separation can never be imposed without thinking through the effect it would have on other market players, and on the rest of the regulatory framework. That’s because the remedy is part of the overall regulatory framework, not a separate intervention.  In deciding to use it, all the other regulations have to be taken into account. The European Commission has to authorise the step – unusually strict oversight and presenting a high hurdle for national regulators to get over. 

Thirdly, the objective remains non-discrimination – creating fair access to monopoly assets to drive competition and investment.  Functional separation is a last resort to help deliver that. It’s not an end in itself, and the policy arguments that surround the pros and cons of it as a remedy are real.

There was a lively debate at the conference on that point, with the main difference appearing to be between those who see functional separation as a way to finally remove the ability and incentive to discriminate against third party access seekers (and allowing innovation to flourish), and those who see it causing the lost of efficiencies and innovations allowed by vertical integration leading to less investment and lost efficiency for consumers and producers of telco services.

The only way for this debate to be resolved is empirically, in my view, market by market, with an understanding of business culture and specific market characteristics. The case studies seem to show that behaviour by incumbent operators does improve when separation is imposed – but it is a readily observable case with a counterfactual of earlier behaviour that was less access-seeker friendly. 

The impact on other issues like innovation and investment will only play out over time, and the huge range of factors at play in the telco industry mean isolating positive or negative effects of separation cannot likely be easy. So that part of the empirical story is harder to prove either way.

So what does this tell us for New Zealand? 

The idea of structural separation is on the table at home, but it is not in Europe. All of the above discussion has been about functional or operational separation. For us who legislated for the remedy in 2006 and imposed it in 2008, it feels a little bit like deja-vu.

Added to that, the conference has brought home to me again the degree of political intervention in our regulatory processes. Ever since we introduced sector regulation through the Telecommunications Act in 2001, it has been a model where the Commission and the Minister together have to agree on regulation. This political role seems less and less useful to me the more I think about it – regulators should make their judgements within the law and based on technical, legal and economic considerations. Having a political decisionmaker at the top of the regulatory tree is unusual, to say the least, and when the policy area has become unhelpfully politicised, it assumes a bigger status as an issue.

In my view, New Zealand policymakers should pay careful attention to the way the Europeans balance all these issues. 

A telling comment made by a European Commission speaker was that in any separation scenario – and he was discussing voluntary functional separation at the time – two key principles had to be that the objectives of the regulatory system were upheld, and that access seekers would be left no worse off by any voluntary undertakings or changes than they were under the existing regulatory settlement. (And it’s a good point to note that no regulatory holidays – of any sort – are possible under the EU framework.)

Telecom’s current proposal for structural separation (at least, what we know of it today) will leave access seekers worse off. It’s at least questionable whether that possible separation (or, on a related note, the idea of Telecom and Vodafone ‘burying the hatchet’ to cooperate in rural broadband) can give effect to the principles of the Telecommunications Act framework – which aim put consumers first. 

Our politicians, officials, regulators (and in our strange system Crown Fibre Holdings as well), should consider the lesson provided by the European situation.

A more deliberative, less rushed, less politicised regulatory approach could help make sure that any prospective structural changes are in the interests of users. It could also help us avoid costly mistakes and improve the chances of private sector investment being able to play the largest possible role in the forthcoming fibre rollout.

It was good to see David Stone from the TCF at the conference, as well as our New Zealand regulator Dr Ross Patterson. It was unfortunate though that there was nobody in attendance from the Ministry of Economic Development – the subject is on point, and precedes by a few days the E.C.T.A regulatory conference which is the best learning opportunity for those guiding telecommunications policy under legal frameworks like the European one, and like ours. The higher the degree of knowledge, and the more tested it is with others facing the same difficult decisions, the better our outcomes in New Zealand are likely to be.

Anyhow, I’ll have a further blog post from that conference next week. 

Interested in your thoughts, comments and feedback.

Jordan