Prepared by Joel Cayford Policy &
Communications Manager for TUANZ – July 1997
Published NZ Herald
Insufficient competition is costing the economy $250 million a year in excessive telephone charges, writes JOEL CAYFORD, and the Commerce Act needs to be changed to fix the problem.
If you listen to Government statements you
could be forgiven for thinking that competition was alive and well in
deregulated New Zealand. But a look behind the scenes will convince you that
while competition might be alive it is certainly not healthy in the
telecommunications industry, and that it is protecting monopoly profits which
Treasury officials have estimated to be a deadweight loss on the economy
costing up to $250 million a year.
This needs to be addressed rapidly because
monopoly profit costs are reflected in unnecessarily high telecommunications
service prices that put the competitiveness of business at risk.
The issue of telecommunications industry deadweight
losses has come to light recently in documents obtained under the Official
Information Act by The Telecommunications Users Association of New Zealand.
These show that in 1996 there were major Government department differences over
how to promote increased competition in the telecommunications industry.
Treasury officials at the time argued that the
case for more stringent regulation than the Commerce Act was weak – a view that
was directly contradicted by Ministry of Commerce officials.
The question officials were grappling with was
essentially this: can the Commerce Act be relied upon to allow new competitors
in the telecommunications industry to compete and drive telecommunications
service prices down toward costs?
The documents reveal that Treasury and Ministry
of Commerce officials estimated Telecom’s annual profit to be about $500
million. They agreed that the deadweight losses to the economy in 1996 of
monopoly rents associated with the telecommunications industry ranged between
$50 million and $250 million a year.
A deadweight loss in economics is normally
associated with a tax. It is money lost to the consumer through Government
actions. In the telecommunications industry the deadweight loss referred to by
Government officials is the benefit lost by the telecommunications user through
the premium profit gained by the monopolist. In effect it is a Telecom tax.
Ever since privatisation, the
Telecommunications Users Association, whose members include Government
departments, small companies and some of the biggest corporates in New Zealand,
has advocated open competition in the telecommunications marketplace.
And while interconnection agreements have been
signed over the past few years, significant sectors of the telecommunications
market – including residential and commercial local networks and the provision
of high-speed services – have remained devoid of open competition.
This is heresy, some will say, and point to the
big price reductions that have taken place. Just recently Telecom celebrated
its 10th birthday claiming that a one-minute toll call to Wellington
from Auckland that cost $2.58 in 1987 now costs 29c.
While that statement is true it masks the whole
story. On average national toll calls have fallen 82 percent since 1987. Three-quarters
of that drop happened before 1990 while Telecom was in public ownership. Just
one-quarter of the drop has occurred in the seven years since Telecom was
privatised. Yes during those years costs have continued to fall sharply as
Telecom completed the digitisation of its network and dramatically reduced
staff.
International toll call prices have been
tracked by an independent survey conducted over the past 10 years by
Sydney-based NUS Pty Ltd. This records that while a toll call from Wellington
to New York has fallen in price by 58 percent since 1992, New Zealand is now
ranked the most expensive country of all 12 OECD countries to make that call,
compared to fourth most expensive five years ago.
The survey shows that though toll call prices
are falling, we are getting relatively more expensive compared to other
countries for international and national toll calls.
Another part of the price story is the line
charge and the cost of local business calls. This is where there is almost no
competition and nor is there likely to be because of the enormous cost of
duplicating the entire Telecom local network. Since 1987 the residential line
charge has nearly doubled from $18.23 a month to $35.97 a month.
It is worse for business because local phone
calls cost nothing in 1987 but now cost 4c a minute. Ignoring the increases in
business line charges, and assuming 10 local calls a day lasting three minutes
apiece, a local business phone service costs $24 more today each month than it
did 10 years ago.
And it isn’t just plain old phone services that
are pricey. A 1996 ministry of Commerce survey into the popular integrated
service digital network concluded that New Zealand rates for local, low-use
ISDN applications were 69 percent higher than the average of the other
countries surveyed (Australia, Britain, the USA, Sweden and Finland).
And national and international high-use ISDN
applications were 97 percent higher than the average of these other countries.
Telecommunications services are one of the most
important strategic inputs to every New Zealand business and one of their most
significant costs.
The prices they pay for those services and the
environment that delivers those prices, is subject to the Commerce Act. The act
and its enforcer, the Commerce Commission, determines the state of competition
law.
The Telecommunications Users Association does
not accept that users must go on paying over the odds. The Commerce Act needs
to be changed to encourage competition to ensure the momentum of price reductions
is stepped up, in the best interests of the economy and of all New Zealanders
who use telecommunications.
ENDS