The ACCC has authorised the NBN-Optus deal. So where do the public benefits come from? As background, remember that the ACCC can only authorise an otherwise anticompetitive agreement if the public benefits outweigh the public detriments. I have previously expressed my skepticism about this.
So where are the benefits? The Box 1 on page 27 of the decision has the answer. And it illustrates the problem of the hidden cross subsidies built into the NBN.
Suppose that the cost of providing broadband services to Optus’ broadband customers is lower on the NBN (formally, incremental costs are lower) but for some reason the NBN charges Optus (and other broadband retailers) a wholesale price that exceeds Optus’ own incremental cost. Then, in the retail marketplace, Optus will undercut the NBN and keep its customers despite it being cheaper to service them on the NBN. Hence, the customers must be forced to the NBN to achieve the incremental cost savings (albeit at the cost of creating an allocative loss as the end users face higher prices).
So the question is – why is the NBN charging a wholesale price that is so high that it can be undercut by an inefficient competitor? The ACCC give two reasons. First, that the NBN must recover its fixed costs (which presumably Optus have written off). Unfortunately, if this argument is correct it undermines the benefit test. If, taking new investment into account, it is less costly to continue using the Optus network then the best outcome would be to not role out the NBN in areas covered by the Optus network. Of course, this is what the NBN is threatening, so taking the NBN at their word, if the fixed costs of the NBN rollout eliminates any incremental cost advantage, then the agreement should not be authorised and Optus can service that part of Australia. Of course the ACCC may not believe the NBNCo …
The second argument is more convincing. Excessive pricing by the NBN. It is cheaper to provide services to the Optus customers using the NBN but the wholesale prices that the NBN will charge are so over inflated that this cost gain will be more than eaten up by the NBN monopoly pricing in the Optus service regions. In this case, the Optus customers must be forced onto the NBN to save the relevant costs, albeit to then be exploited by the NBN monopoly pricing.
Now normally the ACCC would roll around the floor laughing if someone put this sort of argument to them. However, in the case of the NBN, monopoly pricing in city areas is necessary to create a uniform national price. The city will subsidise the bush. So the monopoly pricing is really just a hidden tax and, of course, the customers must be forced to pay this tax.
So in brief the ACCC has authorised the NBN-Optus deal because (a) it believes that the cost of servicing the Optus customers is cheaper on the NBN and (b) it can’t be left to the market to sort this out because the NBN prices are so inflated by a hidden tax that the Optus customers would probably stay with Optus.
Hmmm. So Optus is being paid $800m to shut down a tax-avoidance scheme?
Well, that is what happens when you get bad policy. I have no trouble with a uniform national broadband price. But have the NBN set prices to reflect cost. And then provide a transparent subsidy to those consumers who the government believes should receive a lower price. Don’t hide the tax – it just leads to problems like that faced by the ACCC.