Submission
We understand that the Commission is soon to report to the Government on telecommunications price controls and that the deadline for submissions has passed. However, given the smallness of the window for submissions, the intervention of the holiday period and the importance of the subject, we request that the Commission take the following short submission into account in its final deliberations.
GENERAL
Price controls ought always to be a measure of last resort and maintained for as short a time period as possible. Their distorting and inequitable effects are well known and their long-term existence is an admission of policy failure. It was intended that these controls be removed expeditiously and that they should be structured and administered to achieve that end.
What we now have is not just 'belt and braces' but two price belts (retail price caps and sub caps) and two sets of competition braces (Parts 111A/1V of the Trade Practices Act and Parts X1B and X1C of the Act, including wholesale price control). We have suggested elsewhere that we could dispense with one set of braces (Parts X1B and X1C) without any loss of trouser support. We think that we could also get rid of the two belts (the retail price caps and sub caps) without serious adverse effects and with some significant benefits.
A regime where all the major wholesale prices are controlled as well as 75 per cent of the retail prices seems to denote a certain timidity and an associated unwillingness to allow market forces to operate at any level.
Having said this, we commend the draft recommendations of the Commission to remove at least part of one belt.
MONOPOLY
Much of the Commission's reasoning in support of retaining the bulk of the price controls is that a Telstra monopoly continues to exist; or, more precisely 'monopoly characteristics' continue to exist. In turn this rests on the presumed persistence of some natural monopoly characteristics.
Natural monopolies are hard to find and there is a respectable argument that none exist. In this case, the liberalisation of the market, technological advances and normal entrepreneurial activity by large and small competitors has, in a few years, substantially narrowed what was once thought to be unassailable market dominance by the incumbent. Competitors have entered the higher return areas first. This process continues.
The only real and enduring monopolies are those conferred by governments. These have a long and dishonourable tradition from the salt monopolies granted by medieval monarchs to the industrial monopolies enjoyed by government-owned enterprises in coal and transport in the 20th century. Even these tended to collapse eventually under the weight of their inefficiency.
There is a degree to which the current persistence of monopoly in telecommunications in Australia can be attributed to government interference. The imposition of low returns for certain services discourages entry. If it is correct that the setting of unrealistic access and retail prices prevents entry then we may have a government-perpetuated monopoly in, for example, the local loop (albeit imposed on an unwilling monopolist).
Certainly, the unwillingness of Cable and Wireless/Optus to offer local connections on a scale commensurate with their network seems to support the thesis. Indeed, much of the attention the Commission devoted to protecting the CWO pay television interests several years ago was ultimately focussed on the need to give CWO the opportunity to roll out its cable network to the bulk of homes so as to compete directly with Telstra in the much more important telecommunications market. CWO has been given a lot of protection by the ACCC and could have been expected to enter the local connection market much more vigorously.
The Commission's paper, in discussing the monopoly characteristics appears to mix causes, symptoms and results. Brand name and incumbency are not natural monopoly characteristics as they are not permanent. Nor are dominance and pricing independence, which simply constitute a state of affairs, which may or may not persist and, in this case, is seen to be eroding. Concentration measures are less relevant when a market is opening up as rapidly as this. Even declaration of services by the Commission is only a judgement at a certain point in time.
Equally, a large market share does not preclude highly developed competition and contestability. This would be 'effective competition'. We need to bear in mind that the size of many of the competitors relative to the incumbent and the speed and diversity of technological change implies a capacity to exploit commercial opportunity in a way not historically characteristic of this sector. Nevertheless, we will not ultimately arrive at perfect competition; we need to consider the tolerable degree of imperfection.
We believe that the monopoly elements of this market are breaking down rapidly. Competition both over the wires and through other modes is both actual and potential for all of the services covered by the retail price controls.
The existence of the Part IIIA access provisions would be sufficient to encourage or require good behaviour on the part of the incumbent. In persisting with numerous controls the Government runs the risk of itself perpetuating bottlenecks and the elements of monopoly they bring about.
INSTRUMENTS AND OBJECTIVES
The assertion that removal of most of the current price controls would not lead to the unbridled play of monopoly power by Telstra does not dispose of the matter. The price and other controls are part of a hopelessly confused matrix of policy objectives and instruments and monopoly is only one of the concerns.
The Commission states that low-income groups and rural areas are a principal focus of this review. These are equity concerns (broadly speaking) rather than concerns with monopoly/efficiency. Moreover, the price controls of various kinds on local calls, line rentals and for low spend consumers have little to do with the exercise of monopoly power although they do incorporate efficiency requirements over time.
The result of the application of this mixture of disparate instruments (caps) is what would be expected. They conflict. The individual and overall result is something of a lottery. Some of the adverse consequences are:
- There are efficiency losses from lower than cost prices for access and for some services.
- This gives rise to distorted investment (the whole community suffers the loss) and massive cross subsidies (paid by users of other services, many of whom may not be well off).
- Poor people in the metropolitan areas subsidise the services of well-off people in the non-metropolitan areas.
- Struggling business users of services subsidise wealthy residential users.
- Poor, intensive users of services subsidise wealthy, light users (who have access to business lines).
The equity results of the use of the controls are as uncertain as the efficiency results.
All in all, this is not good policy.
And when we take into account that many of the reductions in prices in recent years would have occurred anyway under the pressure of competition, these controls begin to look redundant and perverse. The efficiency of these controls in achieving their stated aims is very much open to question.
We believe it is time to progress to a simpler regime. In particular we agree with the thrust of the Commission's thinking that the equity concerns are poorly addressed by the differential pricing of services. These concerns are better and more transparently met through the tax and transfer system.
Incidentally we do not agree that industry funding is the right way to go. The less wealthy would still be contributing to cross subsidies through charges for the services they use. The only purpose served would be the rather contemptible one of hiding this implicit form of taxation from public and parliamentary scrutiny.
THE COMMISSION'S RECOMMENDATIONS
The Commission's recommendation to remove most of the sub caps is therefore welcome in that it removes a series of distortions without much affecting overall equity. We agree that it should benefit regional and intensive users.
But we believe that the Commission is being too timid in freeing the market as this sector matures.
We would argue that all of the sub caps could go, including the 22 cent local call. Under the access provisions, competitors to the incumbent are already offering lower local call prices. Removal of the controls might also encourage investment in new facilities in the regions.
We would also argue that the broad price controls be removed, not just the controls on charges for leased lines and mobile other than fixed to mobile calls, as recommended by the Commission. We believe that there will be sufficient competition to continue to generate price reductions in line with costs, although we do think it is a leap of faith to assume that productivity in this sector will continue to proceed at current rates. The need for such a bold ex ante assumption illustrates one of the major weaknesses of the control regime.
Furthermore, the difficulty with partial change to a set of controls is that the prices and cross-subsidies are created and adapted as a set. STD and IDD markets appear to be very competitive with returns in both declining dramatically in the last 3 years. Even fixed to mobile services do not appear to justify price control. But removal of these services from the bundle leaves nothing left with which to subsidise local calls and line rentals. This need for cross subsidy almost necessitates the conclusion on the (non) competitiveness of mobile, STD and IDD services.
At the very least, removal of the two elements proposed by the Commission suggests a need to look closely at the CPI minus figure again as they presumably reduce the cross subsidy pool.
We also need to consider the dynamic of a very fast changing sector. Further competition is developing and will develop well within the time frame allowed for the next phase of control envisaged by the Commission. The controls would retard this.
CONCLUSION
If we were to stand back and consider what sort of new regime we would put in place now if no regulation currently existed, we do not believe that we would install the complex and restrictive apparatus that would remain if the Commission's draft recommendations were accepted. They are likely to perpetuate the bottlenecks they are supposed to remove.
We continue to believe that this sector, including its consumers, would be best served with much lighter-handed regulation through the general competition provisions of the Trade Practices Act. As the Commission states, there is 'at best overlap and at worst conflict' between the control regimes.
Much of the price control is directed at equity concerns which are more fairly dealt with through the tax and transfer system.
Accordingly, we would favour the complete abandonment of the price caps including the 22 cent local call and the local call parity. Extensive controls at the wholesale level would persist.
Rebalancing could not take place instantaneously and some transition period would be required. We suggest that effort of this kind, directed to planning and implementing the end of controls, would be more fruitful than administering their continuance for an indefinite period.
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