Consumers are paying more for telecommunications services than they need to because of regulations which are intended to reduce prices, according to Professor Martin Cave of Brunel University in London.

Cable & Wireless Optus estimates that on average consumers would be over $60 per year better off if the Government permitted Telstra to "rebalance" its charges for a range of services.

"The broad price control regulations which exist in Australia encourage companies like Telstra to maintain high prices where they have monopoly power and inflate the prices they charge competitors for access to their networks," said Professor Cave.

"This type of regulation was designed to apply to monopoly services only and to bring about price reductions similar to those which would be achieved through competition. Where they apply to both monopoly and non monopoly services they can distort competition rather than substitute for it."

Professor Cave, a consultant to Cable & Wireless Optus, is in Australia to meet with the Minister, Senator Alston and key Government officials.

Stephen Wilks, Director, Regulatory and Public Affairs at Cable & Wireless Optus noted that the Minister is reviewing the price cap regulations and will make a decision shortly.

"The Government should restrict the regulations to monopoly services where they can work effectively. Telstra should be given the flexibility to "rebalance" charges so that it cannot argue that the price caps oblige it to charge its competitors high access prices," said Mr Wilks.

Professor Cave said that in the United Kingdom when British Telecom was given the ability to rebalance prices it slightly increased line rental charges. At the same time there were massive falls in prices across a range of other services.

"The UK also introduced a safety net for low spend users who were quarantined from any increase in line rental charges," said Professor Cave. "The Australian Government should introduce a similar scheme so that nobody is disadvantaged."

Mr Wilks said that Cable & Wireless Optus has recommended that the Government adopt such a scheme.

For more information:
Bruce Meagher
Cable & Wireless Optus
Phone: 02 9342 8202
Mobile: 0412 254 690

Backgrounder

The "price cap" regulations exist to ensure that consumers get the benefits of efficiency gains in telecommunications where competition does not exist. By requiring a carrier to reduce its prices the regulations seek to replicate the benefits that competition would provide.

Where competition does exist prices should fall without regulatory intervention.

The existing price caps require Telstra to lower its prices on a range of services by CPI - 7.5% each year. Those services include local, domestic long distance, international and fixed to mobile calls and line rental charges.

Because Telstra can meet its obligations by reducing prices on average across the basket of services it is not obliged to reduce the prices of individual services.

In practice Telstra reduces prices for competitive services while maintaining prices in relation to monopoly services. It also meets its obligations by aggressively cutting prices to induce customers who have moved to competitors to come back or to keep high value customers.

At the same time, Telstra relies on the fact that it is restricted in what it can charge for line rental to justify levying an "access deficit charge" (ADC) on its competitors. This keeps prices in competitive markets higher than they need to be.

An access deficit is the amount by which the cost of maintaining a line differs from the amount recovered in line rental. Line rental is currently capped at $11.65 per month for residential customers.

Cable & Wireless Optus has proposed that the price cap should be limited to non competitive services: local calls, fixed to mobile and line rental charges and that it be set at a rate of CPI - 0%. This would permit Telstra to rebalance its charges while not seeing a real increase beyond the CPI.

Telstra would then not be able to justify an ADC as a result prices for competitive services, such as domestic long distance would fall further. The new, more focused, price caps would also cause prices for non competitive services to be reduced.

Recognising that some people who do not make many calls might be disadvantaged by any increase in line rental charges, Cable & Wireless Optus has also suggested a low user protection scheme. Under this scheme people who do not use their phone enough to benefit from price reductions would be quarantined from line rental increases.