Communications minister Helen Coonan might have done a quick back-flip on the desirability of a Telstra structural separation last week, but reading between the lines of both her comments and those of other industry players there seems to be a residual affection for the idea.
However, no one seems to be actually addressing the core question: what problem is being solved by structural separation that isn’t already being solved by the existing regime?
The government has already imposed a fairly durable operational separation regime and to all intents and purposes it seems to be working.
Every three months the Australian Competition and Consumer Commission issues a so-called “accounting separation” report on Telstra. Every quarter we learn that Telstra actually discriminates in favour of its wholesale customers over its retail customers on measures such as connection times and fault repairs.
And we learn that Telstra probably supplies line rentals, local calls and ADSL services at a loss and timed long distance and fixed-to-mobile calls at a profit (and of course, that business users cross-subsidise retail users).
Access seekers, who can cherry pick markets, avoid the real costs of universal and national service provision obligations and buy inputs such as line sharing service at their marginal cost, can thus likely make a business case out of offering services based on Telstra unbundled and wholesale inputs.
Practical experience shows that many of them do just that and that their modest levels of profitability are more a function of scale and an unwillingness to consolidate, rather than any issue of discriminatory treatment on their wholesale inputs.
This whole edifice is also propped up by the complex series of internal cross-subsidies and interplays between non-fixed network parts of the Telstra business—mobiles, directories and so on.
Where the current regime arguably doesn’t work for access seekers is in its long lead times in establishing an access price, the one area in which Telstra’s bite matches its bark.
This leads to the interminable access dispute process and the fact that many access seekers don’t actually obtain the headline declared price until the ACCC gets around to arbitrating a dispute in their favour and setting the level of required refund. This clearly creates a short-term cashflow disadvantage for access seekers.
But apart from that issue, the regime seems to work fairly well for them.
What would a structurally separated wholesale network provider look like by comparison?
For a start, the punitive aspects of existing regulation would have to be tossed out the window.
It’s a little appreciated fact that the ACCC has constantly made pricing deliberations this decade in the absence of an actual cost price for the copper loop or for universal service and standard telephone service obligations (the USO “subsidy” is a politically-determined number set way below a previous regulatory estimate from the then-Australian Communications Authority).
The ACCC has already made an appreciable contribution to Australia’s broadband penetration by effectively determining that the LSS entry price for a DSL access seeker shall be just $2.50 a month per line on a standard national basis, compared to $13 for a metro ULL (voice and data) access seeker and more in the bush.
In other words, DSL penetration benefits from the platform’s ability to use the network at a marginal cost, not a genuine shared cost (a nice little fillip not shared by those broadband providers who actually run their own HFC, wireless and other access networks).
Thank you Telstra shareholders and voice customers, for you keep Australia looking respectable.
This pricing distortion would be unsustainable for a genuinely corporatised and properly governed wholesale-only operator, especially one charged with offering a universal service in loss-making areas without access to internal retail cross-subsidies.
And especially one set up with the purpose of making a multi-billion dollar investment in fibre rollout in a way that treats all access seekers as equals.
The reason for this is simple.
The whole idea of structural separation is to create an equal access playing field. Price games that reward DSL provision over voice provision contradicts this charter. Especially if billions of dollars of network upgrades are designed to boost DSL services, it would be untenable to expect voice customers to bear that cost.
So let’s call our new wholesale operator “Australia Netcom.”
NO MORE CROSS-SUBSIDIES: Under a genuinely fair and non-discriminatory pricing system, Australia Netcom’s unbundled and wholesale network elements would all need to be costed and priced the same way.
The patchwork approach of current pricing methodologies— national retail pricing parity, CPI linked price caps, de-averaged ULL, averaged and marginal cost LSS, averaged interconnect, retail cost–deducted line rental wholesale and so on—would have to be replaced by something more consistent in approach and topped up by a more explicit, honest and genuinely shared cross-subsidy—either built into the wholesale prices, a separate tax levied on all access seekers equally or directly funded by government, and, thus, the people.
I’d suggest that Netcom would no longer be offering national $2.50 LSS —that price would go up! Given that DSL uses more of the copper spectrum than voice, it might be more honest to flip the pricing if a correct cost-based methodology was employed: $2.50 for voice and, say $10-$13 for DSL!
I’d also say non-Telstra access seekers or taxpayers would be asked to pay more to Netcom for continuation of the standard telephone service and universal availability –after all it has no internal cash cow to paper over the costs.
Also, any actual investments in FTTN and FTTH undertaken by Australia Netcom would have to be cost-recovered from somewhere. When the public realise that broadband has, to date, been a cheap fare excursion based on depreciated copper and marginal cost access they would likely wonder exactly what all the broadband penetration fuss was about!
In fact the first tangible impact of the formation of Australia Netcom might possibly be a reduction in broadband usage and an OECD rankings slide into the 20s!
And given the antipathy of the current coterie of access seekers against Telstra’s FTTN proposal and their embrace of a FANOC proposal that transfers as much risk for new investment builds as is possible off their bottom lines, I’d say they’re happy with the industry status quo thank you very much!
Both sides of politics seem committed to a defacto separation of what I will generously call the “middle mile” or FTTN that can offer high-speed ADSL2+, for the first time, on just “open access” terms to the 20-30% of people who can’t get it now—if network maps are any guide, those down the ends of cul-de-sacs in Hunters Hill and Edgecliff for example.
I wonder if our leaders have really thought through what they are wishing for?
By Grahame Lynch
Inaccuracies
Grahame, Once again I find myself frustrated with your lack of knowledge of how access pricing actually works under Part XIC. Presumably you are fed your information by Telstra and have only ever skimmed ACCC reports on the issue. Two particular sentiments are particularly incorrect and misleading: - there is no 'marginal cost' pricing in telecommunications access pricing. The concept used in Australia is TSLRIC+ - long run incremental costs (where the increment is defined as the entire network) plus a contribution to common costs. It bears no relation to true marginal cost. - there is no pricing based on 'depreciated copper'. See my first point - TSLRIC as applied is a forward looking concept which allows for complete replacement of assets, even where they will never actually be replaced (e.g. trenches). Your LSS example also completely misleads - you should know that the reason there is no line cost contribution is because Telstra already fully recovers the costs of lines through wholesale line rental (which must be taken in conjunction with LSS)! I have not yet considered your structural separation arguments, but considering your inaccuracies about the current system are so blatant, I would find it unlikely that they would be credible.
REPLY FROM GRAHAME LYNCH: It is precisely because the ACCC judges that the line rental charges fully recover the line cost that I employ the term "marginal cost" - it refers to the fact that the LSS charge is based entirely on the cost of the systems used to provide it, not a share of the cost of the underlying line. Mine is a very precise and correct use of English to explain how the charge is arrived at. Indeed, to talk of TSLRIC+ in relation to that $2.50 price WOULD be misleading as that concept bares no relation to its composition.
As far as ULL and LSS charges being based on a forward looking "asset replacement" cost, how come the soaring cost of copper, rising cost of fuel and incrementally increasing cost of labour never seems to be reflected in the perpetually shrinking headline access rate? Would it be that the number being used perhaps isn't based on any actual empirical data? As you might well know, the lack of industry agreement on an appropriate cost model has been an ongoing issue - so while your appeal to the generosity of TSLRIC+ formulation might sound nominally persuasive, it basically ignores the reality that the entire pricing debate has taken place in the absence of accepted cost data about the fixed network.
You also appear to completely misunderstand my comment about depreciated copper - I bracket it alongside pricing deliberately. My point is very obviously that since the copper is largely depreciated and already paid for, if you add a new $4-9 billion fibre element into the network that WASN'T THERE BEFORE you clearly increase costs. That is precisely my point about a cheap fare excursion - broadband to date has been provided with little incremental "network build" cost.. FTTN changes that.
As far as having my information "fed" by Telstra, I actually have the luxury of being paid to read all the data and submissions for myself and making up my own mind. I think you might find there is plenty in my piece that Telstra would disagree with. My overall tone is that the policy options on the table - INCLUDING TELSTRA'S OWN FTTN PROPOSAL - won't necessarily be good for broadband penetration.