On separation

Separation of telecoms providers has become an incredibly topical discussion of late, and not just in Australia. The issue has recently aired in Japan with KDD calling for the separation of NTT.

It has been particularly robust in Europe. A few opponents of separation have fallen gleefully on a recent Eli Noam column in the Financial Times. This column was referred to by Henry Ergas at the Sydney Institute last Tuesday and by Barbara Esbin of the Progress and Freedom Foundation.

It is worth reflecting on what Noam really had to say. Once you get past the "literary" allusion to The Communist Manifesto in the opening line ("A spectre is haunting European telecommunications companies") the items has a simple core. The forced separation of incumbents carries such a high burden of transaction costs tht it is better to look to other means to achieve the same outcomes. His approach is a "compact" of behaviours from incumbents to avoid separation. He notes however that this incentive may not be sufficient, saying;

In addition to the carrot of non-separation, there is a stick. If these negotiated compacts would not be met in letter and spirit, then Brussels and European states should proceed speedily to an anti-monopoly challenge, seeking the full break-up of the offenders (and in ways simpler than in America a generation ago).

That is, he is really advocating the route largely already followed by Ofcom with BT. However, there is a fundamental flaw in the reasoning - if the stick is a meaningful stick, then it should be capble of being used now. Put another way the stick is not a credible threat if the reason for not exercising it is the transaction costs of doing so.

Strangely though I agree with Noam in some ways. A problem with enforced separation is that the firm being separated controls the costs of separation and has an incentive to make it as expensve as possible. That is why I've previously favoured weaker forms like operational separation. However, I've also favoured the creation of strong incentives for the voluntary separation of the incumbent. This can be through the differential application of the services access and land access regimes, and indeed the anti-competitive conduct regime, based on the functional form of the regulated firm.

What I do take great joy in is the repeated statements by the ACCC that operational separation hasn't worked. Yesterday Ed Willett said to a conference in Sydney;

There have been attempts in recent years to address these issues by imposing accounting and operational separation regimes. However, these measures have been ineffective in constraining Telstra’s incentives and ability to discriminate against access seekers.

This gives me particular thrill because of an exchange I had at a Senate Committee with Senator Brandis (my CEO referred to it as my "bonding" with the Senator". I quote from Hansard;

Mr Havyatt— I move on to operational separation. Operational separation as currently outlined in this legislation may never happen. The minister gets the power to approve or reject a plan. The minister does have more power than the ACCC has with undertakings—they can at least direct Telstra on how to amend the plan—but there is nothing stopping Telstra making other changes, as it does with its undertakings processes. Telstra is a master of the art of gaming this kind of process. Under the legislation as drafted, there would be no operational separation plan. If there ever were an operational separation plan, it is actually not orceable. Clause 55(3) of the schedule 1 amendments makes it clear that the plan itself is not enforceable and it only becomes enforceable if the minister has formed a view that they have breached the plan—I do not know you breach something that is not enforceable—and directs Telstra to rectify it. So the plan itself, even if it comes into being, is not enforceable.

It is unworkable because, at page 46 of the bill, the inclusion of 151CP and 152EQ in the Trade Practices Act means that all the rest of the regulatory regime has to stop and pay heed to what occurs in the operational separation plan—a plan that itself is not subject to scrutiny and will result in endless appeals under judicial review about whether the ACCC has exercised its powers appropriately.

Finally, the real question is: what is the role of the ACCC in all this? The Minister gets to approve the operational separation plan only considering the ACCC as one of the unwashed public. There is no requirement that the ACCC be specifically asked for an opinion and that the minister be required to pay attention to that opinion. That is at paragraphs 54 and 61 of the proposals. I do not know if everyone else in this room understands regulatory language in the way I do, but I heard Graeme Samuel today in this room say, ‘The ACCC does not support these amendments.’ For him to have answered those questions in the way that he did makes it
abundantly clear, to me at least, that the ACCC does not support these amendments.

Senator BRANDIS—That is certainly not what he said, because he was answering my
questions. You have totally misrepresented what Mr Samuel said.

CHAIR—Let us let Mr Havyatt finish and then we will come back to this under the
relevant heading.

Senator BRANDIS—Do not tell us what we have been told in answer to our own
questions, Mr Havyatt—what a cheek!

CHAIR—Please proceed, Mr Havyatt.

We returned to the matter later.

Senator BRANDIS—Before Mr Havyatt leaves, in fairness to him, I wanted to point out something to him. Mr Havyatt, as I understood you this morning, you asserted that earlier in the morning Mr Samuel and the ACCC witnesses had indicated their opposition to operational separation. I am going to read to you from page 4 of the proof Hansard the relevant answers. Mr Samuel said, quoting himself from his interview with Alan Kohler on Inside Business on 21 August:
Operational separation is simply designed to produce some transparency in the dealings between Telstra’s wholesale division and its retail businesses, and then to ensure that there is some equivalence of dealing in those dealings between its wholesale and retail businesses and Telstra’s other wholesale customers.

Having quoted himself on what it meant, he then went on in his evidence this morning to say:
The government’s proposed model for the operational separation of Telstra maintains the balanced approach of the existing regulatory regime. The proposal recognises that Telstra is in the unique position, through its monopoly over the local access network, of being able to stifle competition and innovation by frustrating its competitors’ investment plans. For this reason, the ACCC welcomes changes which would increase transparency and equivalence in the way Telstra provides key access
services to its own downstream operations relative to those of its competitors.

In answer to a question from Senator Conroy, and this is on page 7, Mr Samuels said:
The proposal announced by the minister back in the middle of August was one that we considered would provide an acceptable outcome in terms of the objectives as we saw them being achieved.

(discussion of a point of order left out)

And then, at the foot of page 9,in response to me, Mr Willett said:
The bottom line is that, subject to the resolution of the issues that Mr Samuel referred to, the ACCC believes this model can lead to an appropriate set of operational separation rules....

In the light of that evidence, Mr Havyatt, do you want to withdraw your assertion that the ACCC, in its evidence this morning, said it was opposed to operational separation?

Mr Havyatt—I do not have the benefits of the proof Hansard—

Senator BRANDIS—Would you like to get it?

Mr Havyatt—but I do not believe that my comment said that the ACCC opposed
operational separation. I have said that the ACCC, when asked a question about whether they supported the government’s model of operational separation, came as close as you will find the ACCC to saying no. I was basing that—

Senator BRANDIS—Well, that is not what—

Mr Havyatt—Senator Brandis, may I answer the question?

Senator BRANDIS—That is not what we just went to.

Mr Havyatt—May I answer the question, Senator Brandis?

Senator BRANDIS—The questions were about not just operational separation but the government’s model—to quote Mr Samuel: ‘acceptable to us’.

Mr Havyatt—May I—

CHAIR—Finish your answer, Mr Havyatt.

Mr Havyatt—May I refer to the comment you made—that is, the answers from
Commissioner Willett which said ‘subject to the resolution of these issues’, which was the point of my statement, which was that the proposal as we see it before us does not have all the issues reconciled. That is the only point I was trying to raise.

Senator BRANDIS—If that is the only point you were trying to make, Mr Havyatt,
perhaps you overstated the point. We know that there are unresolved issues. That is not controversial. But Mr Samuel’s own words were that the proposal announced ‘would providean acceptable outcome’. There you are. Read it for yourself.

I will claim with hindsight that I was right. None of the items on which the ACCC sought resolution were resolved, and as such it currently publicly states that the operational separation regime as enacted is inadequate. (I also particularly enjoyed the attempts at that hearing to try to stick me in conflict with my parent company in New Zealand - successfully avoided)