Submission
BACKGROUND
In June 2001, the Australian Communications Authority (ACA) issued a discussion paper on the pre-selection arrangements for telephone.
These arrangements allow telephone users to pre-select a single telephone company to provide certain specified services in a single basket. Pre-selection results in automatic use of the pre-selected company's services. The fixed basket comprises long distance and international calls, operator assisted calls, fixed line to mobile calls and international ring-back price. The arrangements are prescribed by regulation.
Users can opt out of pre-selection on a call-by-call basis, using an over-ride code.
The ACA sought the views of members of the public on a number of matters including:
- The effectiveness of existing arrangements.
- Whether they should be extended to cover other types of calls.
- Whether the arrangements should be several different baskets of services (multi-basket) rather than a single basket.
- Whether smaller telephony service providers should be exempt from the obligations.
- Other issues relating to over-ride codes and wireless local loop.
The issues surrounding pre-selection are important insofar as they change the range of choices open to consumers. At the same time, they distort the pattern of services offered by the providers in an industry that is already extremely heavily regulated.
The ACA had investigated some of these matters previously and declined to disturb them in any significant way. Our submission focuses on the major questions posed by the ACA.
INTRODUCTION
We welcome the opportunity to make a submission on this matter given its long-term implications for the development of the telecommunications market in Australia.
For largely historical and political reasons this is a market that has always been intensively regulated and the tide of regulation, which was receding to some degree, has risen again significantly in recent years. It is now no longer possible for telecommunications providers to make rational pricing decisions among the welter of rules for access, pricing, quality of service and technical requirements. Nor can they predict with any certainty the future of important commercial variables that are open to routine change by government at the executive and political levels.
The expressed intention of policy was to reduce that uncertainty by reducing regulation over time and allow the market for telecommunications services to develop through the interaction between suppliers and consumers. The free operation of markets is the objective standard which is most likely to result in the fullest expression of consumer preferences matched by the most efficient delivery by suppliers at a price that sustains production. We think that it is against this policy background that proposed additional regulation ought to be judged.
We recognise that markets in Australia are both imperfect and corrupted by existing levels of intervention. Proposals for additional rules need to take account of this. Nevertheless, if we abandon the principle that the market should be the basic determinant of the range, quality and price of services, then we have a process driven by competing pressure groups seeking special deals which will be judged on grounds of possibly transitory political advantage.
This would be damaging to the development of a strong, independent and diverse telecommunications sector in Australia. It leads to continuing uncertainty for current and prospective suppliers and distorts the demand and supply of services in ways that impose hidden costs on the Australian economy.
THE THRESHOLD QUESTION
Having said this, it is not immediately clear why the Government is regulating this matter at all. Pre-selection exists and there is no suggestion that the Government is considering rolling the regulation back, but perhaps it should. It is worth thinking through whether this regulatory support is now needed and whether a more open market which allowed the suppliers to meet their customers' needs in a more differentiated way might not be better than the existing Procrustean regime.
We think that the questions ought not just to be do we stand still or go forward, but do we go back to a freer system? It is unlikely that this would result in the complete abandonment of pre-selection and it might give consumers a more diverse and cheaper set of options. At present there is a single legislated product.
Perhaps unintentionally, the Issues Paper swings entirely in the other direction. The onus seems to be on the opponents of regulation to justify why further regulation should not be put in place -- vide question 9 in 5.4.2. Are we so compromised in our policies that we can only conduct the discussion on the assumption of incremental growth in state intervention and control, recalling that this in an industry that is growing and changing faster than regulation can ever match?
As an aside we would also note that pre-selection appears to be mainly a competition issue rather than a technical matter. The principal question is not whether the additional options are technically feasible but whether providers are failing to provide services owing to some imperfection in the market. If there is no imperfection in the market, then mere technical capacity to provide a service ought not to determine its provision.
Nor can we see a case on welfare grounds for extending the regulation of pre-selection. If there were such a case, the solution would be to provide support directly to those in need of it.
FURTHER REGULATION
The case for further regulation presumably rests on the perceived need to force suppliers to give a wider range of choice to consumers. Currently, we cannot be sure what choice might otherwise be available because this is determined by regulation and consists in one combination only.
One option would be to allow an enrichment of the pre-selection offering if any supplier wished to do it. This might not result in an immediate rush of new products but it would open the doors to competition and the testing of market preferences. Often, new products are a matter of time and the ordering of consumer preferences and supplier investment. Regulation simply wrenches all of these out of order.
Moreover, economic freedom does not only consist in there being the maximum possibilities for consumers to accept or refuse offers of services. For our system to work we also need to ensure that, so far as possible, there is the maximum scope for suppliers to offer or decline to offer services. When government mandates products it distorts investment and production patterns. But it also takes away an important right to conduct business freely subject to not harming others.
Looking at the question of further regulation in the broad, we see the Government being drawn deeper into judgements of a commercial nature of an increasingly minute and firm-specific type. We comment on this in more detail below but the general point is that there has to be a very significant market failure, a very strong case to rectify it and an assurance that the intervention will substantially improve matters to increase regulation at this time.
First, we do not see a major market failure. There may be some consumers who would like more from their telecommunications providers than they are willing or able to provide, but this is not a case in itself. Many products of which we can dream are not available nor should they necessarily be. This is a world of finite resources in the short term and the long, and products are provided through the expression of effective preferences. How much expressed dissatisfaction is there and how broadly based is it? How much is the usual wish list of professional consumer advocates?
Second, we are not talking about a product on which life depends. Pre-selection is a "nice to have". Lack of pre-selection does not deny anyone a telephone service nor prevent them from calling whoever they want using whichever service they prefer. It is a matter of convenience. We would not dream of mandating that McDonalds be obliged to serve a package of Burger King products (single basket pre-selection) let alone a mixture of other suppliers' products (multi-basket). Even allowing for the unique features of the telecommunications delivery system, we think that the proposals being discussed here are beginning to take on the nature of the command economy, trying to satisfy all wants and distorting the production system badly in the process. So we do not see a strong case to rectify even if we thought there was a market failure.
Third, we think that further intervention will not necessarily improve matters. Regulation is a very blunt instrument and mandating forms of production (which is what this is) has a very bad record. The proposals would enlarge consumer choice in some areas but we do not know at what cost (though it will be high) nor do we know what other investment and choice of products will be displaced. What we can be sure of is that government is not best placed to make these judgements. Furthermore, regulation as a means of deciding consumer choices is necessarily inflexible both as to the range of products permitted and the time span over which they must be offered. There is a tendency for the public to believe that a government-mandated service comes cost-free but this is not the case. It is important that the public is aware that such policy choices impose unavoidable costs on them.
Fourth, the government will inevitably be drawn into decisions that affect the welfare of individual firms. The lack of commercial qualifications combined with the absence of responsibility for risk is a well-known and little loved feature in other areas of regulation of this and other industries. Equally, the potential for wasteful lobbying activities and corruption is also there. This is already an industry subject to extensive and intensive regulatory gaming.
Finally, we are concerned that the more extensive, detailed and complex the regime becomes the harder it will become to undo when it no longer serves any public interest. One only has to consider the increasingly complex tariff and quota arrangements for textiles clothing and footwear imports built up over the 1970s and 1980s. The vested interests which were built up over the years were immensely difficult to dismantle as they conferred significant contrived benefits on a very large number of individuals and businesses.
THE SPECIFICS
MULTI-BASKET PRE-SELECTION
Multi-basket pre-selection is, no doubt, technically feasible at some cost and providers should be permitted to offer it if they wish. We believe that it should not be mandated. The general reasons are outlined above and relate to the undesirability of further complicating and extending the regulation of this industry.
The Authority raises the difficulty most clearly in its question on segmentation of call types for the creation of multiple baskets.
At one extreme, we might envisage a wide range of call types each in a separate basket with the regulation applied to all carriers and CSPs. This would be technically difficult and expensive. It is not clear that the additional benefits to consumers would be greater than the costs. Nor does this allow for providers to specialise voluntarily, differentiate their products or take advantage of any unique efficiencies they may have.
At the other extreme, there might be only two baskets applied to one or a few major providers. The gain to consumers, and presumably the cost, is less but the balance is still not clear. In this case an inequity is created as many providers escape the obligation (even though there will be commercial pressure on new network operators to match the product range of the majors). This absolves them from costs borne by the majors. They are likely to configure their production to factor in this regulatory benefit permanently and this creates a regulation-dependent class of suppliers. Alternatively, they may fear withdrawal of the privilege and move to exploit it in an imprudent way, leading to disruptive and temporary advantage to the consumer. The risk of this is the greater when important pricing decisions are made by the ACCC. As we have seen recently, anticipation of favourable ACCC pricing decisions, which may apply retroactively, can encourage the offer of unsustainable end-product prices.
There is also the difficulty of choosing the privileged, exempted group (see also next section). Confining it to existing network operators runs the risk of entrenching the current production configuration and loading costs onto a few players who just happen to be large in the Australian market.
SMALLER CARRIAGE SERVICE PROVIDERS (CSPS)
The drawbacks of further regulation are also well illustrated by the proposal to exempt "smaller CSPs" from the pre-selection requirements.
There is always unfairness in giving start-up and small firms (often not the same thing) special advantages against those firms which have risked their capital to build a viable business. This would also be yet another hidden subsidy for which the cost is not apparent to the public and parliamentary supervision and removal is doubly difficult. There has to be some special reason for doing this and given the rate at which new CSPs have been entering the market in recent years, it is not immediately apparent that such a reason exists. There does not seem to be a serious market failure here requiring correction nor is it apparent that the proposal would produce major benefits.
If the purpose is to allow smaller firms more opportunity to specialise, then why deny that possibility to larger firms? A simpler and better course would be to simply remove the regulation as argued above.
Providing the protection against regulation also creates a "step" over which a firm must progress at a certain point in its growth. This will inevitably be a step requiring significant additional costs. The firm will then try to defer such costs by arguing for continued special treatment for other reasons. It may well also adopt distorting stratagems such as splitting its operations or creating multiple enterprises to continue to qualify for exemption. Such stratagems can be countered but the regulatory cost can be high and enforcement can be slow and litigious. There would be endless disputes. In the meantime, the regulator will become deeply involved in detailed commercial matters as it tries to advise on, and enforce, qualifying and non-qualifying behaviour.
How should we specify the qualifying step?
It is obvious that specification will have to be determined by government as the prospect of an industry-agreed definition would be small and too subject to special pleading. Industry participants vary not only in size but also in their product range and production capacities. The operation of existing regulations designed to encourage entry and competition, which already strengthens the capability of smaller players, would need to be taken into account.
What should be the threshold size? Should it be a set of financial criteria? Or a range of operational characteristics? Or a level of market power? Some combination of these would be best but we cannot envisage how these could be specified in a fair and enforceable way. This ought to send a clear message that the Authority is contemplating the impossible here.
ON-NET CALLS
Virtual private networks present some special features. Although they simulate private networks, they are owned and operated by the provider. We would argue that if the customer decides to use the network of the supplier instead of going to the expense and trouble of establishing its own facilities, then it is fair for the supplier to insist on the use of that network for a package of calls including long-distance. We should not be misled by the fact of the virtual functionality into believing that it disposes of the rights of ownership. Of course, if the regulation did not exist, the parties would be free to trade off these factors without interference.
We also doubt that there is a lack of competition in this market that justifies further intervention.
A virtual private network is a package agreed between the supplier and the customer corporation. It is an offer and acceptance of a specified range of services. If government were to break open the package now, presumably all the existing packages would need to be renegotiated in time to reflect the changed costs which would be involved. This would be to extend the existing government created pre-selection artificiality to another area of business.
On these grounds alone we think that it would be best to let well alone in virtual private networks. As an alternative, why not allow CSPs to offer such a deal if they wish to do so? Over time the viability of the product could then be tested.
MOBILE CALL PRE-SELECTION
There is no theoretical (nor, probably, practical) reason why calls from mobiles should not be pre-selectable (question 21). There are solid theoretical (and possibly practical) reasons why this should not be mandated.
Those reasons are mainly those of a general kind set out above relating to the inadvisability of any further extension of regulation in this industry.
Again we should establish whether there is a demand for this option. The rapid and widespread take up and use of mobile phone services in Australia indicates that the service is not seriously deficient. Is there a significant groundswell of opinion in favour of mobile call pre-selection? Are consumers willing to pay the extra cost? It would be a mistake to assess the strength of effective consumer demand on the basis of the demands of advocacy groups.
One option for a mobile customer seeking a better or cheaper service is to change providers. The imminent introduction of mobile number portability will facilitate this.
On balance we do not see strong evidence of the need to extend regulation to this new area. This is a highly competitive market segment and new product innovations can be safely left to the multitude of firms in it.
CONCLUSION
We believe that the Authority should consider whether the existing pre-selection regulations ought to be dismantled. It should be extremely cautious in considering new regulations or tinkering with those that exist. There is already an excess of uncertainty in the telecommunications market brought about by rapid technological change, swiftly changing consumer preferences, fickle consumers, all overlaid with uncertain and changing regulations covering all the important commercial decisions.
Pre-selection is not a life or death matter. It is a matter of convenience. Governments ought not to be regulating for matters of convenience. It is not a matter of sufficient importance to warrant creating the sort of uncertainty and damage that the requisite complex new regulations would bring about.
If the Government is serious about encouraging innovation in this most important industry, then the best it can do is to provide it with a stable and commercially sound environment. It is currently doing the opposite.
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