Wednesday, June 22, 2011

The NBN and the ACCC

In an iTnews column in March I commented on the NBN PoI decision and the fact that ACCC acceptance of the NBN Co special access undertaking shouldn't be considered a foregone conclusion.

Today new ACCC Chair Rod Sims has been reported as saying the NBN is not something to be regulated "in a light-handed way", noting;

I'm someone who thinks that if you have a monopoly you have to regulate it. If it's a monopoly -- and I don't mean a duopoly -- a straight-out monopoly, you have to regulate it. Any monopoly needs regulations, whether it is in communications, electricity, gas or whatever.

There is a whole essay potentially inherent in this and it is a subject to which I will return both here and in the working papers I publish on the DigEcon Research site. The observation to make here is the three step process Australia has taken to traditional "utility regulation" of telecommunications.

Up until 1988 the PMG and Telecom were under direct Government control on prices, resulting in prices that were variously perceived as being excessively high to achieve dividends (or reduce capital costs) or excessively low to curry political favour in the regions. The reality was a bit of both - high metro prices and low regional - at least when compared to cost.

Ultimately the call for competition was driven by two things. The first was the general idea that prices should be "cost reflective" to generate "efficiency" (using the flawed economic definition). The second was the tension between telcos and computer companies as convergence was first discussed.

The second phase followed corporatisation in 1988 and was based on the then new idea (from Littlechild I believe) of "incentive based" regulation. This was a concept designed to replace pre-existing Rate of Return regulation as was current in the US at the time. The idea was a global cap on a weighted index of retail prices, the cap being CPI - X where X was a forward estimate of Total Factor Productivity (whereas CPI was the actual CPI).

This was still the main element of price control up to 1997 - while there were infrastructure access prices from 1991 to 1997 the model in the fixed duopoloy/mobile triopoly really was based on infrastructure competition - a probably naive expectation that competition could develop this way.

The 1997 reforms signalled an even greater faith, they were premised on the idea that there were sufficient competing networks that there was potential for a market to develop in interconnection services, and hence the "negotiate/arbitrate" model was introduced. The model failed for a host of reasons, not least the fact that there was an asymmetry between the regulation of the fixed and mobile networks so that interconnection negotiations between these networks never looked like a two-way access negotiation. More generally access pricing didn't distinguish between one-way access (where a long distance provider buys both PSTN originating and terminating access from the fixed network operator) and two-way access in which two networks of directly connected customers interconnect. The latter was the market of PSTN termination on non-Telstra networks and of mobile-fixed interconnection both ways.

Ultimately the policy makers have recognised the failure of the theory of infrastructure based competition for the fixed network, a failure that is not only clear in the pseudo facilities based model of naked DSL, but was also apparent in the contending views on FttN.

What this has been matched with is really a version of "rate of return" regulation. This is how the new mandated pricing structure for access to the Telstra network works, and will be the basis for NBN Co regulation. It is, however, a forward looking version of RoR regulation.

The weakness is that such price calculation becomes incredibly sensitive to the demand forecasts in the pricing model.

I happen to believe that there are other market mimicking ways to price that generate the kind of information exchange for which we really should value markets.

I just don't think I can convince the policy makers, the regulators or the commercial firms.

Novae Meridianae Demetae Dexter delenda est

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