Selling Telstra opens way for new monopoly

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Without heavy regulation a privatised Telstra will swamp
its
competitors, writes Kenneth Davidson.

The biggest losers from the passing of the Government's
legislation allowing the full privatisation of Telstra are likely
to be Telstra's competitors, such as Optus, AAPT and Primus.
Telstra's competitors make their money from arbitrage - accessing
at a lower price than the cost of providing the service the network
Telstra itself created. They use this cost advantage over Telstra
to undercut the Telstra retail price to gain market share and to
make a profit.

Telstra's competitors have vehemently denied they are middlemen
offering no real service and, worse, creaming off revenue that
could otherwise have been used to re-invest in the network or to
pay dividends without dipping into reserves.

Both the Government and the Australian Competition and Consumer
Commission went along with the competitors' argument for their own
reasons. The truth is now clear. Telstra CEO Sol Trujillo's case
that the network has been run down is backed by international
comparisons in the OECD's annual Communications Outlook.

When Telstra was a regulated monopoly at the beginning of the
1990s, the price of a standardised basket of services to households
was equal to the OECD average - which was a pretty good effort
given that Telstra's services covered an area bigger than Western
Europe - and it used its economies of scale and scope to support an
efficient telecommunications equipment manufacturing industry.

Since then, the OECD figures show that the cost of a
representative basket of services has increased relative to the
average by 15 per cent - equal to about an extra $140 a year on the
average household telephone bill. This is the effective tax
households pay annually to subsidise the Government's competition
fetish, excluding the additional burden placed on the balance of
payments deficit resulting from the destruction of the Australian
telecommunications equipment industry.

In this new environment of operational separation, it is
inconceivable that the ACCC will be able to do transparently what
it has been in effect doing covertly since the introduction of
competition: namely, forcing the retail arm of Telstra to pay a
higher wholesale price for access to its own network than its
competitors do.

It seems to me the advocates of costly ersatz competition have
scored an own goal. If they set a two-tier wholesale price that
discriminates against Telstra retail, they risk becoming a laughing
stock. Worse, they would earn the enmity of existing Telstra
shareholders and postpone the full sale of Telstra indefinitely,
because in the final analysis it is the regulatory regime that will
determine the value of Telstra shares. From the perspective of
Telstra retail's competitors, it doesn't matter whether the ACCC
sets the wholesale price too low or too high, even though the
wholesale price level will be crucial in determining the retail
price and the level of investment in the network. Providing there
is a level playing field in the wholesale price, the scope for
Telstra retail's competitors to exploit arbitrage disappears, and
with it their profits.

Because Telstra retail will have 80 per cent of the fixed-line
business, it will have an unbeatable competitive advantage. It will
be able to spread its overhead costs - mainly billing and
advertising - over a customer base that will be 10 times greater
than its next largest competitor, Optus.

Despite the blather from Barnaby Joyce, the bush has effectively
been left to its own devices. The bush will get a decent telephone
service only if the tax on retailers - which currently raises $240
million for community service obligations - is more than doubled to
$600 million.

The only independent, authoritative examination of these
obligations by the former Australian Communications Authority in
1999 estimated that the maintenance of minimum acceptable standards
in the bush would require $580 million a year in subsidies. The
interest on the promised $2 billion for the bush would raise only
$100 million a year - a drop in the bucket compared with the
cross-subsidy required to achieve parity in the bush.

Telstra wholesale won't service the bush unless it is legislated
to, and the private competitors can't. If the tax on retailers is
doubled to fund a sufficient service obligation to make a rural
service worthwhile for Telstra to do the job, the additional tax
will come right off the bottom line of retailers and further
undermine the viability of Telstra's competitors. But whatever the
competitive regime, the terrestrial network will be built and
operated by Telstra or it won't be built at all.

Universal access to broadband based on copper or fibre-optic
cable is the key technology to a sustainable future using
electronic communications as a substitute for energy-consuming
mobility. While wireless can sustain broadband in a few "hot spots"
such as airports, its speed and carrying capacity is limited by the
availability of the relevant wireless spectrum, which is already
fully allocated. Using electricity wires has been around for 20
years and is still experimental.

Ultimately, the quality of the network, service to the bush, the
future of broadband, the underlying value of Telstra (and hence the
share price) plus the survival of Telstra's competitors will all
depend on the regulatory regime. The national interest demands a
regulatory regime that allows Telstra to make substantial profits
and then ensures those profits are invested in a network accessible
to the whole community.

Kenneth Davidson is a staff columnist.

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