Monday, June 07, 2010

Teleommunications Policy

I was trying to decide whether to head this post "Telecommunications Policy" or "Communications Policy". The choice occurred because I am going to write about existing regulation and convergence. But I've decided on the former because I've decided that it is time we accepted that electronic broadcasting always has been a subset of telecommunications, it is just that it has been one to many rathr than one to one. However, "communications" includes a whole lot that has nothing to do with the "distance" (tele) component.

Telecommunications Policy in Australia since 1988 has been built around an objective of increasing competition in the provision of telecommunications services. The principle theory for this has been the supposed static efficiency benefit of confiscating monopoly rent. This is the well known propositon that a monopolist reduces capacity to below the "efficient" level thus boosting prices to capture "rent" and producing a "deadweight loss". As Steve Keen has reminded us in the context of the RSPT, the theory overstates the static benefit. I suspect (and will one day soon try to measure) that the supposed benefits of competition in telco have been completely illusory.

There is however a dynamic benefit in the innovation and choice presented as firms compete. The consequences of this benefit are far harder to measure, but the examples are readily easy to note. Until the Unbundled Local Loop was declared there had been little action on broadband services in Australia (and I do note that once it was declared Telstra was prohibitted from offering services till their competitors did). More significantly ADSL2+ services were offered by competitors before Telstra and 3G mobile services were also offered first by a non-Telstra player (3).

But the question to ask is how well competition actually works to achieve this objective and whether there are any other losses on the way. An example of a loss is that the nature of competiton in industries with high sunk costs is that firms can end up with either incentives to price at short run marginal cost or be able to because assets were revalued. That typically occurs if the industry suffers from excess capacity. The consequence of this will be an investment drought as no one recovers a return on their capital.

When we do get to the competitive space, we notice that in practical reality we are already operating effectively in a rate of return regulation regime, not a competition regime. Fixed telephony and broadband both depend for competition on access to the Telstra "distribution" network. The process for reaching prices was meant to be a negotiate/arbitrate model, but in practical reality it has devolved into the regulator setting a wholesale price to allow Telstra to recover its Weighted Average Cost of Capital (WACC). That is little more than a rate of return regulation model.

The marketplace has been distorted by the access prvider also competing downstream in retail services which throws up an additional set of regulatory issues, not least of which is the opportunity for price squeezes, discrimination on terms and conditions and misuse of information (see note below). The move under the NBN to a structurally separated access provider is designed to remove some of these impediments. But the change is not coming with a mindset to try to mimic markets in seting wholesale prices. Indeed the opposite seems to be the case. In announcing the new Principal Regulatory Affairs for NBNCo today the company seemed to reaffirm a view that the way they will go to market is via a Special Access Undertaking lodged ith the ACCC.

So despite fixing the structure there is going to be no attempt to use market mimicing mechanisms to set the prices and terms and conditions of access to the NBN.

Meanwhile the other side of the competition agenda is also broken. Telcos maintain they compete on service not just price, but you wouldn't recognise this from customers' perceptions. This is often described as the "failure of self-regulation". This is resulting in calls for more regulation of the industry. I argue in this paper that self-regulation hasn't failed because we haven't really tried it.

Meanwhile the Government is proposing a "convergence review" of aspects of the regulatory regime in 2011. I'm wondering whether that review will get beyond the rhetoric of competition and into the way the market actually works and the options for future market design.

Note 1. There have been two interesting recent pieces of litigation, one by Optus against Telstra over whether Telstra was misusing information obtained from Optus about its customers. The second is the ACCC against Telstra over what used to be called "lost keys to the exchange." I'm actually pretty leased with both for two reasons. The first are both cases that would never arise in the structurally separated model. The second is that they vindicate the views I expressed in he years from 2000-2005 that (a) Telstra was nopt misusing wholesale customer information - the practice had stopped well before then and (b) that the process of frustrating access to exchanges was staff being over-zealous and acting outside of instruction not an intentioonal management process of frustration.

Note 2. The kind of "market mimicing mechanism" I have in mind has been covered in some of the literature on Experimental Economics. I particular the kind of access bidding model I favour used to be used by a central programming group for public broadcasters in the US, and the process was successfully modelled in a "laboratory" setting.

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