Telecommunications economics and policy issues

Industry Commission staff information paper

This paper was released in March 1997.

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Contents

Efficiency gains and cheaper phone calls are possible from telecommunications price restructuring, according to an Industry Commission staff information paper released today.

The new regulatory framework that takes effect from 1 July is designed to increase competition in the telecommunications industry. The paper looks at whether this framework will allow price restructuring and more benefits from greater competition.

The paper estimates that with modest price restructuring, economy-wide efficiency gains of $300 million a year are possible with no change in Telstra's operating profit. However, the paper notes that the regulatory price caps on a range of Telstra charges limit the scope for achieving this outcome.

Under the paper's proposals, STD and international call prices would fall and subscriber access charges would rise to better reflect costs. The paper notes that a minor reduction in Telstra's costs would be sufficient to fund compensation for households adversely affected by the increase in the residential subscriber access charge.

The new regulatory framework will also establish the terms and conditions on which new competitors will be given access to existing networks. The paper finds that a price of 2.5 cents per minute for local network access would be consistent with lower call prices, without undermining the viability of existing carriers. The paper argues that the access price should not include customer access network costs, overhead costs or contributions to universal or community service obligations. To do so 'would distract attention from more efficient ways of recovering those costs and merely perpetuate current inefficiencies', the paper notes.

The paper identifies problems with Telstra providing access to its rivals as well as to itself - inefficient and inconsistent use of the local exchange network, and the potential for anti-competitive conduct and retail product market collusion. The paper suggests that while regulation may have a role, splitting off the local network under independent ownership would be the best approach to all three problems.

Background information

02 6240 3330

Preliminaries
Cover, Copyright, Acknowledgements, Contents, Abbreviations, Summary

PART A TELECOMMUNICATIONS ECONOMICS

1 Supply of telecommunications services
1.1 Telecommunications networks
1.2 Customer premises equipment
1.3 Transmission facilities
1.4 Switching equipment
1.5 Summary

2 Economies of scale and scope in telecommunications
2.1 Characteristics of a natural monopoly
2.2 Review of empirical studies examining natural monopoly in the local network
2.3 Conclusion

3 Demand for telecommunications services
3.1 Telecommunications demand
3.2 Customer access
3.3 Local calls
3.4 Long-distance calls
3.5 International calls
3.6 Broadband services
3.7 Summary

4 Efficient pricing of telecommunications services
4.1 Public utility pricing principles
4.2 Efficiency and cost recovery in telecommunications pricing
4.3 Importance of network externalities in telecommunications
4.4 Regulation of telecommunications pricing
4.5 Conclusion

5 Competition in basic telecommunications services
5.1 Reasons for network competition
5.2 Network competition through interconnection to the essential facility
5.3 Interconnection access pricing principles
5.4 Institutional basis for the provision of access
5.5 Conclusion

PART B TELECOMMUNICATIONS POLICY ISSUES

6 Introduction to the policy issues
6.1 Changes to Australian telecommunications since 1975
6.2 The issues considered in this study

7 Benefits and costs of two local networks
7.1 The evolution in international thinking about natural monopoly in the local network
7.2 The evolution in thinking about natural monopoly in Australian telecommunications
7.3 The cases for and against two pay-TV/local communications networks
7.4 Conclusion

8 Regulation and the efficiency of final product pricing
8.1 Regulatory influences on Australian telecommunications pricing
8.2 The broad structure of Australian telecommunications pricing
8.3 Efficiency gains from price rebalancing
8.4 Distributional implications of price rebalancing on households

9 Interconnect access pricing
9.1 Early Australian experience with interconnect access pricing
9.2 Access pricing for Optus under duopolistic network competition
9.3 Conclusion

10 Institutional structure for competition
10.1 Existing structural arrangements
10.2 Difficulties with the existing structure
10.3 Approaches to reform
10.4 Conclusion

PART C APPENDICES

A Demand studies

B Data on telecommunications traffic, revenues and costs for 1995-96

C Details of estimating the efficiency gains from price rebalancing

References

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