The ACCC and potholes on the path away from regulation

Over time, a successful regulator makes themselves redundant. The regulator is not needed when competition in the market is working. But the path away from regulation and towards competition is uncertain.

The ACCC’s Telstra decision

For example, consider the recent ACCC’s pricing decision for Telstra’s fixed line services.

In the 1990s, Telstra’s ‘last mile’ network was clearly monopoly infrastructure, both for telephone calls and for data services. Most people made fixed line calls and the only way to access most businesses and households was through the Telstra ‘copper pairs’. And no-one relied on analogue and 2G digital mobile connections for the internet.

But technology has changed. People are switching off their fixed line phones and moving to mobile. And as the NBN is rolled out it takes over the old Telstra network. In NBN areas, Telstra is just another telecommunications company.

Unfortunately, our regulations haven’t changed. But they need to.

The ACCC has “demanded the telco cut the price it charges for access to its ageing copper network by almost 10 per cent.” There are good reasons for this. Interest rates are low and this means that the cost of capital to Telstra – which is the regulatory compensation for its investment in a big, sunk asset like its copper network – should also be low. Telstra might complain but this just reflects other regulatory decisions, for example in electricity.

However, the real issue is in the user numbers. How does the ACCC deal with falling demand? Does it fix the value of the network and raise the price to remaining users? This can lead to a potential death spiral, as higher prices chase users away from the regulated network.

Or does the regulator recognise that competition has made at least some of the regulation redundant?

Unfortunately the ACCC has done neither. It recognises the problem. But it has two solutions.

For the NBN: “the ACCC does not consider that it is appropriate for access seekers to bear the costs of declining demand due to the migration of services to the NBN” (p.xii).

For mobile competition: “the effect on unit costs of declining demand for fixed line services that is due to substitution of mobile services will be shared proportionally across all users of the network” (p.xii).

Further, the ACCC has increased, not decreased, its regulatory reach in recent years.

“In April 2014, … [i]n respect of [two services], the ACCC decided that [access obligations] would apply to all access providers nationally, extending the declaration to [the two services] supplied in CBD areas” (p.210).

These CBD areas had been exempt from this telecommunciations regulation for more than a decade.

So as competition is increasing, so too is the scope of regulation. And the ACCC’s approach is inconsistent between the NBN and other forms of competition.

The problem for the regulator

How do regulators deal with change that increases competition over time? When does a regulator put itself out of a job so that competition can do its job in former monopoly markets?

In the longer term, for telecommunications and the ACCC, the answer is easy. Leave it to the NBN. As the NBN is rolled out, the ‘Telstra problem’ disappears. The size of the regulated Telstra assets falls as the assets will be allocated to the NBN instead.

Unfortunately, technology and competition is not just a problem for telecommunications. It is also an issue in electricity. Embedded generation and renewables may make Australia’s long stringy transmission networks redundant. And there is no NBN equivalent to pick up the slack. Rather the regulated assets will just become less valuable and, as competition grows, the price for using these assets should fall. But how does the Australian Energy Regulator manage this path to obsolescence?

Using light-handed regulation

One alternative is to look at gas. Interfuel competition means that gas distribution pipelines may not present a regulatory problem. And the National Competition Council has recently determined that some distribution networks can be moved from ‘heavy handed’ regulation to ‘light handed’ regulation. This means that if competition is doing its job, these networks can avoid arduous and expensive price determinations. But if competition doesn’t work, then access seekers can seek an arbitrated decision.

The negotiate/arbitrate framework of light-handed regulation allows regulators to have ‘a bit each way’. If competition works, then regulatory costs are low. But if access seekers – who are often large companies themselves – think they are getting ripped off, they can bring in an umpire.

However, timing is a critical issue. Earlier attempts at negotiation and arbitration in telecommunications led to long, expensive fights. There really was no alternative to Telstra and they had little incentive to negotiate for anything less than a monopoly price. Conversely, it has worked for gas pipelines. And it has worked for airports, where even the threat of regulatory intervention has brought parties to the bargaining table.

We can see the future, where current energy and telecommunications regulators are redundant. However, to get there we need to work out a transition path away from current heavy-handed regulation. And we need to time these regulatory changes with appropriate safeguards for consumers. What we cannot do is to maintain the status quo.

Disclosure

Stephen King is a member of the National Competition Council.