Telstra have announced that they will not be building ‘fibre to the node’ (FTTN); the next generation broadband network. Their claim is that the ACCC’s cost estimates are too low and that they will not be able to recover an adequate investment return on FTTN. Of course, they claim this about everything and up until yesterday they had continued investing regardless.
Let’s assume for the moment that this is it and Telstra wont be investing. How should the ACCC and government react? Remember that from an economics point of view, the ACCC has been giving Telstra a good deal on regulated prices; setting them above incremental costs and allocating capital costs to Telstra’s customers. This means that Telstra earns a margin on each second of call sales but also that some customers decide not to purchase call time even though they value it more than Telstra’s actual costs. It is an ongoing inefficiency that the ACCC allows so that Telstra can earn an acceptable return on current and past investments.
In effect, each time it makes a regulatory decision, the ACCC ‘pays it forward’ to provide Telstra with incentives for the next round of investing. That is OK so long as the investment continues but if it doesn’t then ‘paying it forward’ seems kind of silly. One is lead to speculate whether the ACCC should react to this by cutting away from the long-standing deal and instead go straight to efficient pricing based purely on short-run incremental cost. This would not only help consumers but would send a signal to others that the ACCC regulates that they have to invest in order to continue getting good pricing deals.
The alternative is that investment by private companies such as Telstra is leading edge infrastructure just isn’t profitable. In this case, the government needs to look into it and reconsider the privatisation decision. Certainly, it may be better not to proceed with T3 and use its controlling influence to compell the necessary investment.
For what it is worth, my opinion is that the government should compell these investments based on international comparisons. If leading countries are doing it, there is a good case for us to do it too. And if they are pricing it, we should base our prices on what they are doing and avoid the whole cost calculation and investment return morass.
[Update: this post was picked up by Crikey (8th August 2006). Not bad for something written before 7am while I singled handedly got myself and three kids out of the house by 7:15!]
The argument for public investment in infrastructure is that while private return on the investment is less than the private cost, the combined social return (public + private returns) may be high enough to justify public investment.
private return private cost
Now if Telstra was operating in a laissez faire market, and this was the case, you could argue the case for intervention. However when Telstra is subject to regulations that deliberately aim to reduce the private return in order to increase the public return (which is essentially what price controls do), how can you justify intervention?
Surely the solution is to remove the price controls and see if Telstra (or anyone else) is willing to invest then?
Or do you believe that the equity and efficiency arguments are strong enough to support the price controls even if they reduce private investment?
To the best of my knowledge, Telstra have never proposed a regulatory free period or access holiday despite the fact that it was always in their purview to do so and have it tested by the Australian Competition Tribunal. They don’t want to invest.
Other countries have these networks and that is prima facie evidence that the returns (socially) are there.
hmmm…so your posts are often insightful and too the point…but bugger that you can do it all whilst getting the 3 kids out of the house by 7:15 whilst my little’uns are still dragging the chain at 8!
hats off to you… you deserve more than 100 regular readers.
cheers,
Christopher
[...] To begin, a little background. As readers of this blog know, I have been worrying about competition in broadband for some time. Specifically, I am concerned that if it were valuable to invest in better broadband — say, optic fibre to the home — then the problem we face is that this decision is largely in the hands of one firm — Telstra. To solve this, I have suggested, (i) breaking up Telstra, (ii) separating the cable network from the rest, (iii) privatising the copper pair; or (iv) regulating access to the copper pair more stringently. None of these seem likely and at the moment we have a strange debate between the regulator and Telstra with Telstra refusing to make more investments until it receives protection from competition. This seemed frustrating to me as we appeared to lag behind the world in broadband investment. Moreover, there was a bunch of hypocracy in the debate as Telstra when it sought access seemed to dramatically change its tune. [...]