Reading between the lines, the Australian Competition and Consumer Commission appears to be engaged in a subtle process of making significant changes in its approach to the regulatory "declaration" of telecommunications facilities.
A declaration is the prelude to the ACCC essentially seizing control of an asset and determining the access price and other supply features its nominal owner must offer to other users, including its competitors. The measure is reserved for (non-manufacturing) services with high degrees of monopoly power. Once a service is declared, its owner is compelled to offer access to competitors at whatever price the ACCC determines.
This effective seizure of property causes considerable caution on the part of businesses contemplating innovative decisions.
Even for services which represent only modest advances on existing services, "reasonable" charges set by a regulator will normally be below the appropriate market price. This is because a business, in establishing a new investment program, will see a profile of possible investment return outcomes. These will range perhaps from 50 per cent a year if really successful to losses if the project fails to attract patronage. Such a failure may stem from the emergence of unanticipated competition, excessive costs or inadequate demand.
A regulator would never allow a high rate even for an extremely successful new product and hence its activities would have a chilling effect on all innovation.
For major innovations -- the so-called killer applications -- regulatory seizure has the even more dramatic downside of discouraging investment. Microsoft, for example, with virtual or actual monopolies for most of its products, secures an average 100 per cent annual return on its tangible capital assets. Had it been controlled by a regulator and compelled to charge "reasonable" rates, it is unlikely to have been so successful. For this reason, courts are reluctant to assume control over facilities.
US courts have been more articulate than our own in explaining the reasons behind this reluctance. The US Supreme Court, in a recent telco case, found that "mere possession of monopoly power and ... charging of monopoly prices is not only not unlawful; it is an important element of the free market system". The court recognised that the right to command very high prices for successful undertakings encouraged innovation, risk-taking and economic growth.
US courts also recognise that in making the equivalent of an Australian declaration, they are required to set business terms and conditions -- decisions they are not qualified to make.
Australia has shown less trepidation in these matters. The Trade Practices Act opens many more doors to intervention. Where the US threshold test allows for government involvement where it would be "impractical to duplicate" an asset, Australia uses the term "uneconomical to develop", which opens many vistas for regulatory imperialism.
The ACCC refused to offer Telstra comfort from regulatory control if it spent $4 billion to build a national fibre to the node network. In doing so, commission chairman Graeme Samuel argued that he was bound by the Trade Practices Act, "the central objective of [which] is to promote the long-term interests of 20 million Australian end-users". Such laudable objectives appeared to prevent some people getting benefits unless they were available to all!
Having caused the fibre to the node plans to be shelved, the ACCC took the extraordinary step of arguing that, in any case, highly efficient alternatives were available. Venturing into technological decision-making in this way is hazardous enough; acknowledging the existence of alternatives obviates the case for a regulatory declaration in the first place.
Samuel is now signalling that the ACCC will not declare Telstra's new 3G mobile network or the telco's upgraded copper networks, which the fibre to the node was to replace.
As US courts and regulatory institutions have recognised, wide discretion for regulatory intervention is a recipe for inconsistency and institutional suppression of innovation.
The ACCC has made a poor fist of handling access provisions in telecommunications. The lessons learned surely make a case for the winding back of legislative measures and regulatory activities to levels something like those which prevail in the US.
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