Research Note no. 39 2003-04
Enhancing Competition in Telecommunications: Accounting Separation
of Telstra's Operations
Grahame O'Leary
Economics, Commerce and Industrial Relations Group
1 March 2004
Accounting Separation
Accounting separation provides separate accounts for
wholesale and retail operations. In June 2003, the Government directed
the Australian Competition and Consumer Commission (ACCC) to implement
an enhanced form of accounting separation of Telstra. As a result, the
cost-basis for the charges which Telstra imposes on its competitors for
access to its telecommunications network is to be made more transparent.
This is a potentially significant development in enhancing competition
in telecommunications as the bulk of the Australian network is in Telstra
ownership.
Background
The accounting separation regime has evolved into its
current form over a number of years.(1) Its legislative basis
is section 151BU of the Trade Practices Act 1974 (TPA) which enables
the ACCC to make record keeping rules (RKR) that require Telstra
(and other telecommunications carriers) to provide the ACCC with information
to carry out its regulatory responsibilities.(2)
Towards this end, in May 2001, the ACCC introduced
the telecommunications industry Regulatory Accounting Framework (RAF).(3)
The RAF requires carriers(4) to provide basic regulatory accounting
separation, including a set of core reports covering financial information
and network usage.
The Government introduced additional measures in December
2002 with the Telecommunications Competition Act 2002 which provides
for full accounting separation of Telstra's wholesale and retail operations.(5)
The objective of the measures is to further competition by better informing
both the regulator and the market of Telstra's costs and revenues (on
a current cost basis) and its comparative treatment of its retail arm
and its wholesale customers.
The accounting separation direction Australian Competition
and Consumer Commission (Accounting SeparationTelstra Corporation Limited)
Direction (No. 1) 2003 requires Telstra to produce reports consistent
with the RAF that provide:
regulatory accounting
records for core services based on current costs as well as an
historical cost basis;
an imputation
analysis comparing Telstra's retail prices with the costs (to competitors)
of Telstra's core wholesale services; and
key performance indicators
on non-price terms and conditions that compare Telstra's service
performance between its retail and wholesale customers.
The reports are required to be compiled on both a six-monthly
and yearly basis. As well, the ACCC is required to report on the accuracy
of the reports and the extent to which the reports comply with the RAF.
The ACCC is also required to make its report, and the financial statements,
available to the public. In December 2003, the ACCC released its report,
Initial
Reports Relating to Accounting Separation of Telstra.
Why Use Current Costs?
Historical costs have been criticised as providing
a poor guide to resource allocation and investment decisions.(6)
This is considered particularly so in the case of telecommunications where
technological change is rapid. Hence, economic decisions regarding allocation
and investment in telecommunications services or infrastructure are most
often forward looking.
Current cost reporting requires Telstra to produce
accounting records that reflect current costs (i.e., the costs Telstra
would incur if its network was built today) as well as historical costs
(costs incurred when the network asset was purchased or built).
In general, current costs are considered to better
reflect the price of access to a network, as measured by the costs that
would be faced by a hypothetical new entrant (i.e., an efficient competitor).
Current cost accounting measures are currently the preferred method in
the UK, the European Union and
are gaining broader use in North America.
Current Cost Report
The ACCC report noted that the timeframe imposed for
submission of the initial reports allowed little time for Telstra to change
its internal accounting procedures to generate current cost information.
As such, the initial reports are somewhat a 'work in progress'.
Both the ACCC and Telstra note that the initial current
cost report is limited in that current cost adjustments have only been
made to fixed assets, and no profit and loss and capital employed statements
have been provided. As well, only 60 per cent of reported asset classes
were able to be valued using the modified current replacement cost (MRC)
approach. The remaining assets have been valued using an indexation method.(7)
The ACCC expects the methodologies used and content of the reports to
be developed further for the next set of reports.(8)
The current cost report shows that, while current cost
valuations for individual assets vary, the total value of all fixed
assets reported is higher under current cost valuation ($2925m) than under
historical cost ($2105m). This is particularly so for local carriage services
and the unconditioned local loop. However, the full impact of the current
cost valuations will not be known until the subsequent (and more detailed)
current cost reports are published.
What is an Imputation Analysis?
An imputation test is used to detect anti-competitive
behaviour through the existence of a vertical price squeeze in a retail
market.(9) A price squeeze can occur where an operator with
market power controls services that are key inputs for competitors in
downstream markets. The imputation test required of Telstra under the
framework involves comparison of:
the retail price charged by Telstra for a particular
service; and
the wholesale price charged by Telstra for an essential
input to that service plus any retail costs incurred to deliver that service.
If the retail price is less than the sum of the wholesale
access price and the retail costs (i.e. a negative margin) a price squeeze
may exist.
The Imputation Report
The imputation report shows that Telstra passes the
imputation tests for domestic long distance, international long distance
and fixed-to-mobile calls but fails for local calls and line rental. However,
this failure may not be indicative of anti-competitive behaviour for two
reasons. First, it is common for telecommunications carriers (either network
owners or resellers) to discount local calls in order to promote long
distance carriage. Second, line rental and local call prices are regulated
under the Telstra price control arrangements.
The imputation analysis shows that the imputed margin
(available to Telstra's competitors) varies between 21and 64 per cent
for non-local call services and between 12 and 15 per cent for bundled
services. For local calls and line rentals it is minus 5 and minus 7 per
cent for business and residential services respectively. This suggests
sufficient margins are available across a range of services for competition
to occur.
Why a Report on Non-price
Terms and Conditions of Access?
A key competition concern has been that Telstra does
not provide the same level of service (e.g., provision of new service
installations, fault repair and maintenance) to its wholesale customers
that it provides to itself. Key performance indicators (KPIs) on non-price
terms and conditions of access measure the difference between the percentage
of Telstra wholesale and retail customers that meet a required performance
standard (set out in the Customer Service Guarantee).
Non-price Terms and Conditions Report
KPIs for basic access are provided for ordering and
provisioning, and faults and maintenance. The report shows that for business
customers, Telstra's relative service performance is better for its
wholesale customers than for its retail customers. In contrast, for its
residential customers, Telstra's relative service performance is
better for its retail than its wholesale customers. The ACCC concluded
that while there were some variances requiring further investigation there
is no evidence to suggest that there is any bias by Telstra in favour
of its own retail customers.
Conclusions
The ACCC noted that the accounting separation reports
comply with the RAF (as required for the initial reports) and that there
is no sign of any systemic discrimination against Telstra's wholesale
customers for the services reported. There also appears sufficient margin
for competition to occur across most core services (including bundled
services).
The accounting separation reports will undergo further
refinement and improvement. The subsequent reports should provide a greater
level of transparency of Telstra's operations.
- The notion of network or structural separation of
Telstra has been strongly advocated in recent times. Accounting separation
is often seen as a 'half-way' measure.
- The ACCC's specific regulatory responsibilities under
Parts XIB and XIC of the TPA and other relevant Acts are designed to
maintain and enhance competition and deal with network access and anti-competitive
conduct in telecommunications.
- Regulatory accounting differs from the normal concept
of accounting in that its objective is to provide information to enhance
the regulatory function rather than provide a statement of financial
position.
- Telstra, Optus, Vodafone, Primus and AAPT are required
to report under the RAF.
- Telstra is considered a dominant firm, particularly
in the supply of local call services.
- See Henry Ergas,
(1998) Valuation and Costing Issues in the ACCC's Guidelines for
Telecommunications Access Pricing.
- Indexation is not the ACCC's preferred approach as
it tends to overvalue assets and overstate depreciation charges. However,
its use has been accepted for the initial reports.
- The subsequent accounting separation reports for the
six months ending 31 December 2003 are due in April 2004.
- For more information see S. King, and R. Maddock,,
(2002) Imputation rules and a vertical price squeeze, Australian
Business Law Review, 30(1), pp. 43--60.
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