Telstra has announced that it will not be building “fibre to the
node” (FttN); the next generation broadband network. Its claim is
that the ACCC’s cost estimates are too low and that it will not be
able to recover an adequate investment return on FttN. Of course,
Telstra claims this about everything and up until yesterday it had
continued
investing regardless.

Let’s assume for the moment that this is it and Telstra won’t be
investing. How should the ACCC and government react? Remember that from
an economics point of view, the ACCC has been giving Telstra a good
deal on regulated prices; setting them above incremental costs and
allocating capital costs to Telstra’s customers. This means that
Telstra earns a margin on each second of call sales but also that some
customers decide not to purchase call time even though they value it
more than Telstra’s actual costs. It is an ongoing inefficiency that
the ACCC allows so that Telstra can earn an acceptable return on
current and past investments.

In effect, each time it makes a regulatory decision, the ACCC “pays
it forward” to provide Telstra with incentives for the next round of
investing. That is OK so long as the investment continues, but if it
doesn’t then “paying it forward” seems kind of silly. One is led to
speculate whether the ACCC should react to this by cutting away from
the long-standing deal and instead going straight to efficient pricing
based purely on short-run incremental cost. This would not only help
consumers but would also send a signal to others regulated by the ACCC
that they have to invest in order to continue getting good pricing
deals.

The alternative is that investment by private companies such as
Telstra in leading edge infrastructure just isn’t profitable. In this
case, the government needs to look into it and reconsider the
privatisation decision. Certainly, it may be better not to proceed with
T3 and use its controlling influence to compel the necessary
investment.

For what it is worth, my opinion is that the government should
compel these investments based on international comparisons. If
leading countries are doing it, there is a good case for us to do it
too. And if they are pricing it, we should base our prices on what they
are doing and avoid the whole cost calculation and investment return
morass.