Submission to Productivity Commission's Review of Telecommunications Specific Competition Regulation

Submission

THE MARKET

Much has been written on the telecommunications market and this inquiry will generate more commentary.  For the purposes of this submission the important features of the market are:

• It is very large (about 4 per cent of GDP).
• It is growing very fast (about 11 per cent per annum).
• It is extremely diverse in all aspects and has avenues for further diversification as more cable and radio spectrum capacity become available to the industry.
• It is very rapidly changing in the range and complexity of its products, its means of production and delivery and its demand patterns.
• It is only partially substitutable by hard copy communications media such as post, courier and document exchanges.
• There are few direct regulatory restrictions on entry (there are now 40 plus carriers).
• It is strategically crucial to the rest of the economy and also socially very significant.
• There are monopoly elements, particularly in the local telephone loop.

These features imply that, although demand for telecommunications services is relatively or even absolutely inelastic, the possibilities for substitution within the market are large and growing.  Rapid advances in technology and the sheer range of available media are driving prices down.  Consumers have shown a strong willingness both to try and to pay for new technology even where the old technology is substantially cheaper, for example, in the use of mobile phones.

So monopolies are not stable.  Networks are being duplicated and even the local loop monopoly is being eroded by substitutes.

These features also imply a market that is highly politically sensitive and thus susceptible to complex and vigorous political bargaining and detailed regulatory interference.

GENERAL PRINCIPLES

Regulation is not good in itself.  It limits individual freedom and innovation.  It encourages behaviour that results in special deals for those favoured by the politicians and officials who themselves feed off the process.  Wealth and income transfers can be effected by the generally deadweight activity of lobbying and regulatory game playing.

Regulation begets more regulation as special interest groups and officials seek more power to impose "perfect" solutions and to enjoy power without direct responsibility for the consequences of their interventions.

Paradoxically, the more rules there are the easier it is to defend them.  It becomes more and more difficult to alter an interlocking maze of regulations where a multitude of vested interests are involved.

Regulations are inevitably clumsy.  They apply standard rules to diverse transactions.  They apply rules that are fixed in time so, even where government knows best, this only applies at the time when the rule is made.  The world changes and the rules don't.

Regulations are thus a necessary evil at best.  They are required to correct gross imperfections in private decision making where these have seriously adverse effects on other parties, in this case the effects of serious anti-competitive conduct.  The onus should always be on the proponents of regulations to justify their retention rather than on the opponents to justify removal.  We think this should apply in this review This applies even to sacred cows such as fixed price local calls (which do not seem to be included in this review).  The sacred cows graze off the herbage of more useful animals.

With all this in mind we maintain that the best approach to competition regulation for telecommunications is to have:

• Generic rather than industry specific regulation -- this will tend to be more equitable for the industry and more stable over time.
• A single competition regulator -- this will reduce the cost of the bureaucratic processes and should lead to greater consistency in decisions.

Nor should regulation try to compensate everyone for changes.  Uncompensated changes take place daily in the private sector as product lines and prices change and services adapt to new demands.

CURRENT REGULATION

The best that can be said of the current array of telecommunications competition regulation is that it is a mess.

There are numerous legislative provisions, regulations, guidelines and codes regulating or impinging upon competitive behaviour.  There is substantial duplication and overlap in these instruments and, presumably, in the relevant bureaucracies.

The language used is complicated and, at times, impenetrable.

There are up to a dozen entities involved in the numerous processes generated by the regulation.  Big regulation requires big bureaucratic apparatus.

This is the sort of regulation that provokes frustration and rage in those who have to comply with it.  It cries out for simplification.

The best that can be said about the intentions of government for regulation is that they are ambivalent.

Section 4 of the Telecommunications Act states Parliament's intention to promote self regulation.  But it is preceded by Section 3 which reads like a the preamble to a state plan for the industry.

The Reference to the Commission provides similarly mixed signals, although Section 151CN of the Trade Practices Act does specifically raise the question whether Part XIC of the Act should be repealed or amended and paragraph 4(c) of the reference raises that question more broadly.

The injunction against considering structural separation of Telstra eliminates one possible line of market reform.

The case for simplification at least seems indisputable and we would argue that the case for removing some of the burden of regulation is equally strong.  In the following sections of this submission we make a number of proposals, both general and specific.  Some of the former may subsume some of the latter.

We believe that the objective of the regulation should be to counter major and enduring abuse of market power as opposed to detailed supervision of competitive behaviour in this industry.

ANTI-COMPETITIVE CONDUCT

Consistent with the reasoning above we recommend the repeal of Part XIB of the TPA.

We accept that there is still a dominant firm in Australian telecommunications and that it controls crucial parts of the "any to any" network.  Telstra was a monopolist and regulation was required to require access to some of its facilities.  As is the case with all industries, there will be occasions where anti-competitive conduct takes place and the government will need to intervene.  But the case for repeal of this Part is strong:

• The general principles outlined above regarding the need to be highly critical and selective in the application of regulation apply here as anywhere else.
• They apply with added force to complex industries undergoing rapid technological change such as telecommunications.  In such cases the industry needs freedom to innovate.  It needs maximum certainty about the level of government interference so that it can take large and risky investment decisions on a very uncertain future.  Detailed regulation and direction by officials at the micro level carries considerable regulatory risk as that future unfolds in unpredictable ways.
• In particular, the criterion that action need only have the "likely" effect of substantially lessening competition introduces an element of speculation and subjectivity that increases bureaucratic power and business uncertainty.
• This implies that society and government needs to accept a few bumps along the way as rapid change takes place and some mistakes are made.  They should not try to fix everything through more rules.
• Nevertheless, consumers in this industry will have a growing range of substitutes for given media, products and suppliers.  There is convergence between telecommunications and broadcasting.  The same medium may deliver several products and each product may have several delivery options.  Customers for services are increasingly powerful both in terms of size and options available to them.  While future technology cannot be predicted with confidence, the intensity of future competition can be inferred from the market structure and past behaviour.
• It is an industry with no lack of new entrants and some of these are of a comparable or greater scale and technological sophistication than the principal incumbent.
• There seems little evidence of unwillingness on the part of the industry to make the large lumpy investments required to compete in this market.  Indeed the roll-out of duplicated cable in the race for pay television indicates a willingness and capacity to take substantial competitive risks.  In part this may reflect the high level of confidence in the growth prospects and flexibility of the industry to absorb or take advantage of apparent over-investment.  It may also reflect the expectation of the competing firms that they will all be successful, which is collectively irrational but quite normal behaviour in fast growing industries.  Some waste is possible but is not a cause for regulation.  Again, in pay television, the value of the large investment in the microwave spectrum, which was substantially downgraded after the demise of Australis Media, is being upgraded again in use for data transmission.  This sort of thing may not be a micro-economically efficient way to make and recover investments but it may well best fit the circumstances of businesses and the industry at this stage of its development.
• The relative complexity of the two competition notices approach and the infrequency of its use suggest a return to more generic approach.
• The general provisions for anti-competitive conduct and other trade practices legislation would remain in place and should be sufficient to deal with the dominant firm.  They are more than just a safety net.  These provisions have proved very powerful in detecting, restraining and punishing anti-competitive conduct.
• This industry does not present risks of such conduct that are sufficiently different in nature and scale to warrant special legislation.  Competition trends in the industry suggest that it will be more and more open as time goes on.

We realise that this part of the Act has only recently been amended and that Telstra retains market power but the generic provisions appear sufficient to protect competition.

ACCESS REGULATION

Given the dominance of Telstra conferred by its ownership of the most extensive telecommunications network in Australia there is potentially a case for continued access regulation.  We believe that this case is weakening over time.

Having said that, we do not see a case for continuation of Part XIC of the TPA.  The main reasons are:

• The rapid and continuing development of substitutes for all forms of communications and communications networks places constraints on monopoly behaviour over the medium term.  For example, the first trial for interactive television is due to take place soon and could be the harbinger of an entirely new medium of communications – a possible whole new network with video, data and voice capacity.
• The Commission has itself, in an earlier report on international bench marking, noted the likelihood that network capacity will be abundant with the adoption of new technologies.  This is a judgement that implicitly includes an assessment of future demand but seems consistent with current trends.  It suggests that carriers will be competing for content.  As in broadcasting, "content will be king".
• The access pricing regulation seems to rest on very shaky ground.  Apart from inherent inflexibility in prices determined by government agencies there will always be a tendency towards arbitrariness and to be seen to be doing something with its powers.  Moreover, getting the price "right" in economic terms may not imply use of standards such as world best practice if that leads to a price that is commercially unviable or discourages competitive investment.
• There is no suggestion that Part IIIA of the TPA be repealed as a result of this review.  While this might be a good thing in itself, the fact is that this power for regulation of access will remain in the TPA and serve as a "safety net" should there be abuses of Telstra's control of the network.  And the ACCC now has considerable experience and knowledge of the industry to back up its action.  Beyond that the provisions of Section 46 of the TPA, relating to misuse of market power are also available.

The Commission intends that this review be future-looking and this lends force to our conclusion.  This industry has shown great capacity to adapt and innovate and this will clearly continue.  At the same time, prices are being driven down so the products are becoming available to more of the population.  The currently dominant firm will become less able to exert leverage through the network and more concerned to attract and retain loyal customers to use its growing capacity.

Access rules should always be applied very sparingly.  They are highly interventionist and likely to create inequities and distortions.  There is probably no more need for specific legislation in telecommunications than in several other industries.

We recommend that Part XIC of the Act be repealed.

SPECIFIC ISSUES

The regulatory structure applies a number of seemingly innocuous but significant obligations on the industry.  These could be scaled back or abandoned without serious public detriment.

Also, consistent with simplification of the regulatory arrangements, we believe that some of the duties of the agencies could be rationalised.  As noted, we recommend repeal of parts XIB and XIC of the TPA and reliance on the more general provisions.

In addition we recommend that:

• The extensive reporting requirements of the two agencies be abandoned or at least scaled back and rationalised into one agency (preferably the ACA). The burdens imposed by these requirements can be very considerable and the information gathering activities of officials have a tendency to expand year by year with no real test of need.  The corporations are often powerless to resist, given the sweeping nature of regulation.  If there is a requirement for information-gathering and reporting to pursue a case of anti-competitive behaviour, there are general powers in the relevant rules.
• The monitoring of service performance be left to consumers backed up by the powers in Part V of the TPA. This is an extension of the previous point but has implications also for co-regulatory arrangements and standards.  These latter become more numerous over time and can become a form of backdoor regulation.  If governments believe that behaviour of a firm needs to be regulated then they should not use this weasel approach but do so up front.  In practice, this form of regulation can involve the transfer of considerable powers to the level of officials with minimal public scrutiny.
• The requirement for industry plans be repealed. This requirement has a long history in industry policy both at State and Commonwealth levels.  It is a form of state planning and industry protection so far as it is successful (which it generally isn't).  It is likely to distort decisions and impose extra costs both in devising the plan and in complying with the wishes of officials in respect of encouraging local suppliers.  Insofar as the plan prescribes equality of treatment to Australian suppliers the plan is redundant.
• The tariff filing and record keeping requirements be repealed. The rights of private business need to be balanced here against making life easier for the regulator.  The normal record keeping and reporting requirements for major corporations in Australia are very detailed and the large accounting/auditing firms protect their reputation by further checks and prescription of accounting practices.  These should be adequate for the purposes of regulating this industry.  Furthermore, the ACCC has extensive powers to demand information in cases where it is pursuing an investigation.  Similarly, the tariff filing requirement can be substituted by the powers of the ACCC to demand information (but only when it has cause to believe that observance of the law is at stake).
• The setting of standards be left to the industry. It is hard to see any justification for any involvement of the ACCC in the setting of technical standards.  Beyond this there seems no overriding reason for government involvement at all.  The industry can, if it wishes, enlist the services of Standards Australia in devising technical standards though their involvement should not be compulsory.  The development of the industry suggests that participants will have a strong competitive interest in efficient standards and it is difficult to envisage what public interest angle would be protected by the presence or veto of government.
• Licence conditions should be confined to requirements not specified in legislation. The inclusion of licence conditions such as the granting of access is not only superfluous but imposes double jeopardy on the licensee.  It can be penalised twice (or possibly more) for the same offence.  This is very comforting "belt and braces" for government but is grossly unfair to corporations or individuals and totally inconsistent with the notion that Australians be given a "fair go".

OVERSEAS EXPERIENCE

International comparisons are hazardous.  Differences in history, market characteristics, cross subsidies and many other features make it difficult to draw firm conclusions.

Most overseas regulatory regimes apply some form of competition regulation, in particular, they mandate interconnection by the dominant supplier.  In addition they may apply other forms of regulation such as price (see below) or operational performance or technical standards that affect overall performance and complicate results comparisons.

On the face of it, some regulatory regimes are more liberal than that of Australia, such as those of Finland, Sweden and New Zealand.  On one test, that of prices, the first two at least, do not seem to be suffering on that account.  It would be useful to conduct a thorough examination of a few of such cases (not just New Zealand) to test whether lighter-handed regulation actually exists and has worked as well as the more detailed interventions in Australia.

The intention of such a comparison should be to find means to achieve minimal regulation.

CODA

Everything is connected to everything else.  It is an incomplete discussion of competition regulation that ignores price controls.  Such controls affect costs, prices in the uncontrolled areas and the behaviour of telecommunications providers and users at all levels.

Although this review will not make recommendations on price controls, such as those for local calls and other price caps, we feel that these should be aired as an aspect of competition and the development of a world class Australian telecommunications industry.

The Australian set of price controls appear to be more extensive than applied in those countries studied in the Commission's recent benchmarking study.  Their justification on public interest grounds appears weak and is almost certainly becoming obsolete.  Their economic costs remain substantial.  There appears to be a willingness of consumers to pay the full price for some substitute services, for example, local calls on the mobile network.

It is always possible to generate a campaign to retain price controls, especially where they are long standing.  However, because justification becomes a mantra., we have tendency to hang on to vestigial regulation when its useful life is past and when the public would accept bold change

A perspective by the Commission on price controls would be illuminating.