There has to be a better way. And there is

I'm convinced there's a better way to get a good fix on some of our more contentious, and important, regulated telecoms prices. Let's deal to some jargon first, and then we'll get properly underway.

If you've got broadband, you get it from an Internet Service Provider (your ISP). And chances are it arrives over the copper wire phone line to your house. You could be on wireless broadband, or you might have signed up for the flashy new fibre network that's being rolled out, but most of us are still on the old copper based system. It's owned by Chorus, and your ISP pays Chorus for the use of that copper line from your house to the nearest telephone exchange. That service is known as the Unbundled Copper Local Loop, or UCLL. ISPs can put their own equipment in the exchange and take the feed from there, or they can rent some gear from Chorus instead of providing their own: that's the Unbundled Bitstream Access service, or UBA.

And finally - and this is where things come closer to your wallet - you've likely noticed that your ISP has said it'll be raising its price to you by $4 a month or so, because the Commerce Commission, which regulates the copper line UCLL price, is in the process of raising it from $23.52 a month (its first stab at the right price to charge) to $28.42 a month (its estimate after going through a full cost modelling exercise).

There's a consultation process going on before the Commission's proposed UCLL goes final (all you can eat here). As part of that process, Spark has come up with this graph, which shows how the Commission's proposed price compares with the price charged for the same service in a range of other developed countries.

You may have seen this already - the Herald's technology columnist, Chris Barton ran with it in a recent article, "Something rotten in our Commerce Commission", where among other things he concluded that "by a curious combination [of] free market ideology and caving to political pressure, it's [i.e. the Commission is] promoting monopoly power and a haughty "let them [the end-users] eat cake"." No doubt the Commissioners sacrifice children to the Great Werewolf, too.

In any event the graph does give you pause for thought about various aspects of how telco prices are set by regulation. My main point: I think there's greater room for using information on overseas prices as a guide to setting our own.

We do it a bit, at the moment: that "first stab" the Commission had at setting the price was required, under our Telecommunications Act, to be set by "benchmarking" against prices overseas. Unfortunately the benchmarking was tightly circumscribed in the Act, and had to be "Benchmarking against prices for similar services in comparable countries that use a forward-looking cost-based pricing method".

You can understand the logic. You wouldn't want prices to be set here solely on the basis of countries that weren't at all like us (eg a highly dense conurbation like Hong Kong), hence the "comparable" test, and you wouldn't want prices to be imported into New Zealand that had all been plucked out of the air on some cockamamie basis. And that's a real risk: regulatory proceedings can easily get captured by one vested interest or another. Money politics can see incumbents' prices set on too-favourable terms; populist politics can set prices that don't cover incumbents' costs. So you can see why the legislation saw fit to use prices only if they were set in a particular way.

Trouble is, you can take intellectual purity too far. After filtering according to the Act,  the latest benchmarking exercise, for the UBA service, ended up with only Denmark and Sweden to look at, which left everyone feeling a bit uneasy. I doubt if even the framers of the Act would have liked a benchmarking process that featured only two smallish Scandinavian countries.

So why don't we take a different tack? Why don't we go the Spark route, and look at the whole range of prices overseas? It would make sense to keep some element of comparability, so we might want to restrict it to say the OECD countries, but even that would leave us with a largeish group of 33. Some prices may well be off, and unfairly tilted towards suppliers or consumers, but on average you'd be inclined to think that the truth will appear somewhere in the middle. You might worry that New Zealand has got some special features that make it impracticable to compare with the average overseas experience: people like to raise the "long and stringy" argument, for example (though you'd think places like Norway and Sweden are much the same). All I can say is that I've seen a lot of folks argue both sides of the "New Zealand is unique" case, and I still don't see a knock-out case for our conditions being completely idiosyncratic.

Regular readers - God bless both of you - will know that I've banged on before (for example here and here) about using benchmarking more extensively in our price regulation, and I'd like to see our revised telco regime, when it eventually materialises, reaching more often for the regulatory equivalent of Number 8 fencing wire. It may be low tech, but it's admirably cheap and serviceable.

KISS

This morning the Commerce Commission released the wholesale price Chorus is allowed to charge to Internet service providers (ISPs), and which therefore is the core component of the retail prices those ISPs charge you for your fixed line broadband.

It's made up of two parts, the first being the bit for the cost of the copper line from your place to a Chorus switch (the 'local loop' or UCLL) and the second ('UBA') being the cost of the fancy electronics that Chorus can (optionally) provide to ISPs to save them having to use their own. The local loop bit will be $28.22 a month and the UBA bit will be $10.17 a month, making a total of $38.39. This compared with the previous price allowed, of $44.98.

These prices are based on explicit, detailed and complex modelling of the costs involved, and are intended to replace the interim hold-the-fort prices that the Commission had previously set, based on the cost of the same services overseas in countries who do things much the same way as we do. This 'benchmarking' exercise had set a local loop price of $23.52 and a UBA price of $10.92, making a total of $34.44.

There are all sorts of issues involved here, big and small, affecting everything from the profitability of  Chorus through to uptake of the country's shiny new ultra fast fibre network. And they directly affect you, too: already some ISPs are saying that the drop in the wholesale price (from $44.98 to $38.39) had already been passed on to you, so you won't be getting any further joy out of it.
In any event, I'd like to pick on one small aspect of the process, even though it's largely moot now, and it's about those interim 'benchmarked' prices.

I think they did a good job of providing a quick, cheap and reasonably accurate initial estimate of the eventual wholesale price. They were pretty much spot-on when it came to the UBA part ($10.92 versus $10.17), which is remarkable given that everyone was agreed that the benchmarking process had only a couple of countries overseas to use as sighting shots. And they weren't far off when it came to the local loop component, either ($23.52 versus $28.22) - especially when you consider that the fully modelled cost estimate involves a whole swathe of judgement calls made by the Commission and its modellers, and is not a glimpse into some eternal truth held in the mind of an omniscient Being.

So I'd take two lessons away from this, both involving the KISS principle.

The first is that over the next couple of years we're going to be taking a close look at the shape of our telco regulatory regime, and I'd like to suggest that we keep the cheap and cheerful benchmarking process. It's relatively fast - a particularly important consideration in fast moving markets like ICT - it's relatively transparent, it's understandable, it's relatively cheap, and it's accurate within some rough-and-ready-justice tolerance. I'd go further, and make it harder for parties to invoke the full cost modelling approach, which introduces layers of cost, delay and complexity, and all for a gain in 'accuracy' that (because of multiple modelling options) may be more illusory than real. And in general I'd like to see the 'good enough' option chosen over the one that keeps consultancies on three continents in business.

The second is that we need to think harder about the increasing complexity and cost of regulation across all sectors, and not just the telco business. I agree with Eric Crampton of the NZ Initiative, when he said on Interest.co.nz that "Too much of New Zealand’s regulatory apparatus would suit a country of forty million rather than the one we have". He's got his own examples: one I came across recently was the Commerce Commission's needing to sign off a $3 million increase in capex spending on a little Transpower project in South Canterbury. The process will take five months from start to finish, and has already spawned a 54 page initial draft decision.

That's a bit of an extreme example, and I should make it clear that it's not the Commerce Commission's fault: it's been lumbered with this ludicrously over-engineered regulatory regime. And I should add that from next April the Commission won't have to get out of bed for anything under $20 million - which is, of course, where the threshold for its involvement should have been in the first place (if not higher again). And I'd have to note that bloodymindedness on the part of Transpower and its customers drew this intrusive regime on their own heads, and a bit of enlightened give and take could have avoided the whole mess.

But it's there now, and it's holding up the sector, and its cousins in other sectors are also increasingly clunky and costly. It's time for more people in the policy analyst community to do what the MD of one company I know used to do: hold up the sign that says, "Does it make the boat go faster?"