"3 to get deadly" serious about shopping

Time is flying by and yes its only trhee days to go. eeeek.

K@Willy is addicted to the net and loves broadband so was interested to read this article today

Missed opportunities in copper's evolution
Kenneth Davidson
December 22, 2008 from The Age

Telstra is the ideal choice to deliver our high-speed broadband network.

THE telecommunications chickens are coming home to roost in a way that spells bad news for the Federal Government unless it can show some understanding of how the fixed network was built and how it should be developed.

Until the late '80s, the telephone network around the world was built on a two-part tariff. The first part was a below-cost connection fee that encouraged households to have the telephone installed, and the cost of building the network was recouped by charging above cost for calls.

This suited everybody. Poorer households got the security of a telephone with access to essential services, while business users got the external benefit associated with an extensive network that covered practically the whole population.

The market fundamentalists and the opportunists argued that the pricing system was inefficient because the usage cost of a fixed line once it is in place is close to zero. A combination of free market ideology and greed saw this as an opportunity for arbitrage dressed up as competition.

In Australia, this led to the introduction of competition in the form of a second licence in 1991. The successful tenderer, Optus, paid $800 million for the licence, took Aussat off the government's hands and in return gained the right to interconnect with the then Telecom network at a subsidised price estimated to be worth at least $2 billion in 1990 dollars.

Today, Optus rents 400,000 unbundled lines from Telstra for $15 a month each and typically charges its customers $30 a month, which is pure arbitrage worth about $70 million a year. Every day Telstra's competitors can delay the introduction of fibre to the node at the end of the street (which bypasses the exchanges where the arbitrageurs interconnect with the network) adds at least $500,000 to their bottom line at the expense of Telstra.

If Telstra's fixed network monopoly had been maintained so that its economic rents had been retained instead of distributed to its competitors via arbitrage, the introduction of fibre to the node would probably now have been connected to up to 80 per cent of network customers.

Telstra failed to explain that investment in fibre was simply a further evolution of its network. It should have explained to the public, the regulators and the politicians that the copper network was run down and needed replacement with fibre.

Telstra had so little faith in the regulators and the ability of the government to comprehend the nature of the network that it feared if it was upfront and explained the implications of this natural progression in the network that the Australian Competition and Consumer Commission would have blocked it by extending the current pro-competitive regime, meaning an inadequate return on capital that would have destroyed the investment case.

Instead, fibre was sold as a new network that would bring the politically desirable goal of high-speed broadband. As a result, the high-speed fibre cable is now incorrectly seen as separate from the existing copper network in the minds of lay people, which unfortunately includes the politicians and regulators responsible for the rules governing the network.

Communications MinisterStephen Conroy betrayed his lack of understanding by implicitly suggesting there were two networks when he responded to a question about the exclusion of Telstra from the broadband tender: "If we didn't think anyone other than Telstra were capable of building the network, we wouldn't have set out to have an open and competitive process, we would be just sitting down at the table with Telstra."

If, for example, Optus were to win the tender, it could only proceed if it had unfettered access to Telstra's local network. In effect, it would mean that Telstra would have to hand over a $30 billion asset to Optus. It would require anti-competitive legislation and at least $30 billion in compensation to Telstra shareholders before even one centimetre of additional fibre is laid. There is no way Optus will pay this.

Does Conroy seriously want to put the Commonwealth in danger of a multibillion-dollar compensation claim from Telstra shareholders when the alternative is to abort the tender or let it run its course and admit that there is no practical, economic alternative to letting Telstra continue upgrading the network? All the Government has to do then is change the regulatory structure to put adequate return on capital for new investment ahead of the present ersatz competition requirements and let Telstra get on with the job without cost to the taxpayer.

kdavidson@theage.com.au