Controlling the Unleashed Telstra
At the Sty we believe the best form of price control is unbridled competition. When companies earn obscene profits, there's usually some impediment that prevents competition from gaining a foothold. Examples that come to mind are the banks, computer software and telecommunications.
This post supplements two previous posts from the Sty on the subject of Telstra and competition. (It's also a bit long!)
With the full privatisation of Telstra almost inevitable, it was interesting to hear the Australian Competition & Consumer Commission's (ACCC) Graeme Samuel talk about competition and Telstra this morning on Radio National.
The presenter Richard Aedy started with this ....
Richard Aedy: Whether or not T3 actually goes ahead, and there are one or two reasons why it might not, (though we're not going to talk about that today, that's another program) Telstra occupies a unique position. It owns the copper network that runs into pretty much every home in the country, making it the de facto gatekeeper to the internet.
It's one reason why Australia lags behind much of the developed world when it comes to broadband takeup. Telstra, being a service company that also control the infrastructure, has no reason to be nice and give competitors unbridled access to its network.
Graeme Samuel: Because I don't want to get into slanging matches with Telstra, I don't think that's appropriate for a regulator to do, but let me say this, that it is not unsurprising for any monopoly owner of monopoly infrastructure to attempt to, if you like covet that infrastructure to itself, bring it into itself, and to hold it and protect it from competitors. I mean why would you, if you're a monopolist, want to try and encourage your competitors to get access to your infrastructure to be able to compete against you?
Aedy then asks about the obvious solution ...
Richard Aedy: Why not go the whole hog, and push the structural separation? I mean it offers greater transparency, it’ll necessarily encourage competition in the retailing of services through the copper network, and it'll all be much more reassuring for customers and consumers, if we're talking about two separate companies.
... and we get the obvious answer.
Graeme Samuel: Well two reasons. The first I'd have to do is refer you to government policy and to say that the government's policy as currently stated, is that full structural separation is not a matter that's on their radar screen. But I think the other element of it is that without having undertaken a very detailed analysis, it might be that the cost of structurally separating that network out from Telstra exceeds, or had the potential to exceed, the benefits.
Yep, it's government policy not to. They have a vested interest in maximising the return for their (read 'our') interest in Telstra and a monopoly is more valuable than a company that has to deal with the inconvenience of competition.
Samuel then goes on to describe the government's preferred strategy for keeping Telstra honest ....
Graeme Samuel: Now operational separation is very similar, except we don't have a change of ownership. So that the Telstra wholesale operations are retained, wholly owned by Telstra, as Telstra retail operations are wholly owned by Telstra. But they're managed by separate management, they're staffed by separate staff, the remuneration that attaches to each of the staff and management of each division is adjudged and measured according to the performance of each division separately, not the totality of Telstra as a whole, there are proper separation of accounting regimes and accounting reports in respect of both divisions, very transparent transfer pricing between the two divisions, and they're required by law to deal with each other at a commercial arm's length.
Who's he trying to kid? It's hard enough to prove that completely separate companies in the same industry are colluding. It's impossible between two divisions within the same corporation.
This was not lost on Aedy ...
Richard Aedy: Well I know I'm being perhaps a little slow on the uptake here Graeme, but given that the head of Telstra Wholesale answers to the head of Telstra, what is to stop that person saying, 'Well we make more money out of the retail end; go a bit harder on Optus and we’ll hide it in the accounting'?Graeme Samuel: Well the essence of operational separation, of virtual separation of this nature is that the accounting needs to be transparent, it'll need to be audited, so it needs to be checked to make sure that there is no hidden little glosses or Chinese figures, or whatever might be, that are hiding what occurs. Operational separation really makes everything very transparent, everything accountable, fully audited, any questions, any qualifications are drawn to the attention of the ACCC. It takes you to the point of virtual structural separation without having structural separation.
Bollocks! By his own admission, when Telstra offered retail broadband internet for prices less than the wholesale prices it charged competitors, it took ....
... a period of long examination and long debate and discussions and negotiations with Telstra, [and] on January 1st this year, we managed to achieve a bit of a breakthrough with Telstra making a substantial adjustment of its wholesale prices to its wholesale customers.
If it takes "long examination and long debate" to solve a competitive problem as obvious as that one, how on earth do they think they'll be able to gain full visibility of Telstra's operation and finances to enable them to satisfactorily regulate it?
The answer is obvious. They can't.
For the good of the country at the expense of short term government gain, Telstra needs to be broken up. If they intend to run the two divisions completely separately anyway, why not go the one extra step and sell the company as two totally independent organisations?
The service provider division of the company needs to be totally separate from the division that install and maintain the telecommunications infrastructure. If this doesn't happen, consumers will be beholden to a company for years to come that can, and has, stymied competition.
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