ACCC remains cautious on Telco Competition: report
A cautious approach needs to be taken in assessing the level of competition in telecommunications markets, despite observing price falls in the price of some telecommunications services in recent years, Australian Competition and Consumer Commission Chairman, Professor Allan Fels, said today.
The ACCC has issued three annual reports. They cover competitiveness in the telecommunications industry, changes in prices of telecommunications services and Telstra's price control compliance. This follows the tabling of the reports in Federal Parliament yesterday by the Minister for Communications, Information Technology and the Arts.
The reports revealed mixed results, prompting the ACCC to take a cautious approach in its consideration of the current and future state of competition in the telecommunications industry.
The report on competitiveness in the telecommunications industry notes that Telstra's extensive market power is likely to remain in many telecommunications markets in the future. This is largely a result of Telstra's high level of vertical integration and the reliance its competitors have on accessing Telstra's network.
The report also notes the ACCC is currently considering the effect of convergence of services on the structure of telecommunications services.
"The ACCC observes that Telstra's high level of vertical integration, and the significant position it holds in the market for PSTN services gives it considerable scope to expand its market power into a large range of converging markets", Professor Fels said.
The report covering Changes in the prices paid for telecommunications services in Australia 1997-98 to 2000-01, does, however, reveal some encouraging results. The report finds that, overall, consumers are now paying less for the majority of telecommunications services. In particular, the report shows that the price of a broad basket of telecommunications services decreased by 21.4 per cent on average between 1997-98 and 2000-01.
"The ACCC warns, however, that in most cases these retail price decreases have yet to make substantial inroads into the considerable gap between price and cost for some telecommunications services.
"For some markets, including local call and fixed-to-mobile - and even national long distance and international services - the emergence of effective competition appears to still be some time away.
"Indeed, the third report, Telstra's price control compliance report for 2000-01, seems to indicate that Telstra is decreasing prices for most telecommunications services at a slower rate than for the industry as a whole".
In this report, the ACCC also observed that Telstra complied with its price control obligations for the 2000-01 financial year.
"In reaching this conclusion, however, a number of concerns have emerged from the ACCC’s analysis of Telstra's price control report", Professor Fels said. "The ACCC believes that the present methodology has allowed Telstra a high degree of discretion in evaluating price movements, such that it has the potential to raise questions about the integrity of Telstra's report.”
"To preserve the report's credibility, the ACCC initiated a review of the methodology used to determine price movements and the auditing of Telstra's price control report.
"The ACCC is presently implementing changes recommended by this review, to apply in the next reporting period. These changes should ensure that confidence in Telstra’s report will continue".
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The ACCC telecommunications report 2000-01 is in response to the ACCC's three annual telecommunications reporting requirements under Division 11 and 12 of Part XIB of the Trade Practices Act 1974. The ACCC must report to the Minister for Communications, Information Technology and the Arts on these matters as soon as practicable after the end of each financial year.
Background information in relation to each report is provided below.
Under sub-section 151CL(1) of the Act, the ACCC is required to review and report each financial year on competitive safeguards within the Australian telecommunications industry.
In addition to reporting on matters relating to the operation of Parts XIB and XIC of the Act, this year’s report also comments on the current state of competition in telecommunications markets, and the emerging competition issues likely to affect the industry in the future. In particular, the report observes that further challenges are likely to arise in the near future such as the effect of the convergence of services, and the increase in next generation infrastructure deployment.
Changes in prices paid for telecommunications service in Australia report 2000-01
Under paragraph 151CM(1)(a) of the Act, the ACCC is required to monitor and report each financial year on charges paid by consumers for telecommunications services.
Some of the other main findings of the report are:
over the period from 1997-98 to 2000-01, the price of the full basket for business consumers decreased by 22.6 per cent, which is greater than the price decrease for residential consumers of 17.4 per cent over the same period. In the 2000-01 financial year, the price of the business basket (11.4 per cent) continued to decrease at a faster rate than the price of the residential basket (5.6 per cent)
for individual services, the report shows that the largest price decrease over the period from 1997-98 to 2000-01 was for international calls, averaging almost 55 per cent. For the 2000-01 financial year, the largest price decrease was for local calls (averaging almost 19 per cent). The smallest decrease for the 2000-01 financial year occurred in the price of fixed-to-mobile calls, which dropped by less than six per cent
in comparing the trend in prices in capital and non-capital city areas for the period between 1996-97 and 1999-00, the price of a range of traditional telecommunications services decreased at a faster rate (25 per cent) in the city areas than for non-capital areas (22.4 per cent) on average for the industry as a whole.
Telstra's compliance with price control arrangements
Under paragraph 151CM(1)(b) of the Act, the ACCC is required to report each financial year on the adequacy of Telstra’s compliance with the price control arrangements.
The price control arrangements affecting Telstra for the 2000-01 financial year are set out in the Telstra Carrier Charges - Price Control Arrangements, Notification and Disallowance Determination No.1 of 2000 (the Determination). Under the Determination, price movements are to be calculated according to a Methodology "developed by the ACCC in consultation with Telstra". This methodology requires Telstra to provide a final, independently audited report within three months of the end of the reporting period. The audit itself is conducted according to the terms of reference outlined in the methodology.
The ACCC analysed Telstra's price control report and the independent auditor's report. As a result of that analysis a number of concerns were identified and raised with Telstra. These included:
inconsistent choice for calculating price movements for services subject to the price control arrangements. In particular, in seven out of eight services subject to price control, Telstra chose to apply the ‘yield method’ whereas for the other services it chose an alternative method
there was no specification on how the yield method should be calculated. This allowed Telstra to apply a differing basis for calculating the yield for different products. No consistent basis was applied. Several different methods were used including averaging the yield over the last month of the year for some, over the final three months for others and over the three months immediately preceding the final two months of the year for still other products
the Determination allowed price movements for each product in a basket of services to be measured between periods at the end of the financial years in question. Telstra interpreted this as meaning a day close to the end of the financial year. However Telstra did not apply this interpretation consistently using different days in different months toward the end of the financial year.
In the light of these concerns and others, the ACCC commenced a review of the methodology and the independent auditing process in February this year.
That review has made several recommendations that will:
introduce specific, consistent rules for the calculation of yield
apply a consistent, transparent period over which price changes will be measured
remove inconsistent measurement of the price effects of specials and discounts that could over-state price reductions
ensure a consistent measure is applied for price movements for bundled products
