Turnbull moves to undermine the ACCC

The Turnbull government has moved to undermine the Australian Competition and Consumer Commission at a time when monopoly infrastructure regulation is critical for the future of the Australian telecommunications industry and in Business Spectator Turnbull's effort to justify the move using yet another dodgy review is discussed.

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The Turnbull government has adopted a threatening stance towards the Australian Competition and Consumer Commission (ACCC) and the antagonism could potentially lead to a series of negative outcomes, as far as consumer outcomes are concerned.

Over the past two years, the Coalition government has amply demonstrated its mastery of the age old tactic of commissioning reviews and audits designed to buttress its policy positions. The Harper Review of competition policy, completed in March 2015, sticks to that script with its suggestions of a significant reduction to the ACCC’s monopoly infrastructure regulatory role.

The ACCC chair Rod Sims recently railed at the government’s suggestion that price monitoring for monopoly infrastructure should replace the monopoly infrastructure regulation currently carried out by the competition watchdog.

At the Gilbert + Tobin infrastructure workshop held in Melbourne on October 29 2015 Sims argued that the suggestion of a light handed approach to monopoly infrastructure price monitoring “is not only ill-conceived in economic theory, it has failed in practice.”

Sims added that the price monitoring approach restricts the ability of parties to negotiate with a monopolist. “They cannot threaten not to use the facility, so at least give them the threat of referring a dispute over prices or terms to binding arbitration.”

“Indeed, I believe a negotiate/arbitrate framework is true light handed regulation. It actually allows a commercial negotiation, where both parties have some negotiating leverage; without this there is no ability to negotiate commercially.”

Sims called “for a return to the approach to regulation of monopoly infrastructure envisaged by the Hilmer Committee.” The Hilmer Report (PDF), released in August 1993, outlined a need for a regulator with the legislative backing to be able to set prices after consultation with monopoly infrastructure operators, the public and industry.

In some respects the suggestions in the Harper Review and by the government that theACCC should be broken up and a regime put in place that applies a “light handed” approach to regulation of natural monopolies has particular relevance to the telecommunications industry because this approach would permit Telstra and NBN Co to set wholesale product prices without an independent regulatory review.

Telstra vs. ACCC

The ACCC’s recent decision to reduce wholesale fixed-line prices for other telcos to use Telstra’s copper access network to provide telecommunication services to consumers by 9.4 per cent has prompted Telstra to appeal the decision in the Federal Court.

Telstra had recommended a 7.2 per cent increase in wholesale fixed-line prices and when the telco’s view on pricing is viewed in the light of the suggestion that the ACCC be prevented from regulating monopoly infrastructure prices there’s little doubt that Sims has a strong point regarding what would happen if Telstra and NBN Co are given carte blanche on wholesale product pricing.

The ACCC’s decision incorporated the government’s unusual directive, the reasoning for which was articulated in this letter (PDF),  that it not take into account the agreements between NBN Co and Telstra while determining what the wholesale fixed-line pricing should be.

As the National Broadband Network (NBN) is rolled out ownership of the copper network is being progressively transferred to NBN Co from Telstra and the copper network is either being decommissioned in areas where Fibre to the Premises (FTTP), fixed wireless and Hybrid Fibre Coax are being rolled out or significantly reduced in size in areas where Fibre to the Node (FTTN) is being rolled out.

What this means is the copper access network owned by Telstra is progressively getting smaller and the customer base is reducing, albeit slowly due to the speed of the NBN rollout, thus Telstra will be forced to spread the cost of operating and maintaining the copper access network across an ever decreasing number of customers.

In a major coup, as part of the latest agreement with NBN Co, Telstra was able to offload the cost of infrastructure and asbestos remediation carried out during the NBN rollout saving Telstra many hundreds of millions of dollars prompting the question why this was not accounted for with an overall reduction in the total agreement price.

Telstra has had a series of wins, particularly with the outcomes of the second agreement with NBN Co, and this was to be expected as Telstra had the fledgling Coalition government over a barrel.

Telstra’s rivals have argued that the incumbent’s agreements with NBN Co should be included in any fixed-line price determination made by the ACCC as the agreements more than fairly compensate Telstra for the transition of Telstra customers onto the NBN and for the decommissioning of the existing copper access network.

The details of the NBN Co agreements with Telstra have not been released so it is difficult to judge both sides of the argument, but the $11 billion to be paid to Telstra far outweighs the cost of shifting customers onto the NBN and the potential ongoing revenues attracted from the ageing copper access network, a network that Telstra would have had to maintain and upgrade eventually anyway to slow the loss of customers shifting to mobile cellular as a data solution as prices reduce and speeds increase beyond those offered by ADSL, which in many areas are significantly less than 12 Mbps.

Having successfully argued for the NBN payments to be taken off the table, Telstra argued for a 7.2 per cent increase in wholesale fixed-line access charges, however, the ACCC found that the cost of maintaining and operating the copper network had decreased leading to a 9.4 per cent pricing reduction and this is in line with the ACCC’s recent determination that similar maintenance and operating cost reductions have occurred for regulated domestic transmission capacity services (DTCS) which is known as backhaul.

In a response to the ACCC’s draft decision in July 2015 Telstra Executive Director of Regulatory Affairs Jane van Beelen wrote that “having accepted our cost and demand forecast, the ACCC's approach then effectively pretends that the NBN is not happening, thereby assuming higher demand for Telstra's services and accordingly lower average costs. The ACCC has also mischaracterised the deal we did with the government to facilitate the NBN, which is about a loss of future revenue after services are disconnected from the copper network, not the cost of maintaining our network for those customers who remain on it as the NBN is rolled out.”

“The ACCC’s decision would apply to both our existing infrastructure and new infrastructure Telstra might invest in to provide services in areas where the NBN is not yet available. It would also mean service providers would have a profit motive to keep their customers on the higher margin copper network for as long as possible, rather than move their customers across to the NBN.  This would make migration to the NBN even harder to achieve and put important revenue to NBN Co at risk.  In this way, a cut to prices on the legacy network poses a serious danger to the success of the NBN policy.”

A key to Telstra’s and the government’s demands for the copper access network price to go up rather than down is identified when van Beelen wrote that “the impact of a 9.6% cut in wholesale prices would be significant. It would mean the prices other companies pay to use our network would be below our actual cost to the tune of hundreds of millions of dollars over several years, with consequences for both Telstra’s network and the new NBN.

Ms van Beelen has attempted to link Telstra’s fortunes with that of NBN Co by arguing that an access network price reduction would not only affect Telstra’s bottom line but could put NBN Co under significant pressure to also reduce wholesale product pricing, and for many in the telecommunications industry this linkage would be seen as a convenient argument to run in an effort to shore up government support.

But there’s little support for Telstra’s position because Australia has significantly higher access network and backhaul infrastructure charges than found in other major international markets.

In response to growing industry pressure for a further reduction in NBN Co’s throughput related connectivity virtual circuit charge CEO Bill Morrow has announced a six-week pricing review. NBN Co has previously reduced the CVC charge which now sits at $17.50 per Mbps per month and is anticipated to fall further due to the sharp increase in data usage caused by the growth of media streaming services.

The government’s efforts to undermine the ACCC could lead to operators of monopoly infrastructure being given the freedom to set unacceptably high prices at a time when Australia retains some of the highest monopoly infrastructure access prices in the world. Sims is right to argue that a shift to price monitoring would be a backwards step that will harm consumer interests.

Mark Gregory is a senior lecturer in the School of Electrical and Computer Engineering at RMIT University.