Australian Financial Review

I was quoted yesterday in the Australian Financial Review. Read the article below.

Model warfare as Regulator tackles Telstra
By Tony Boyd

The competition regulator is planning to spend up to $1 million to build a computer model of Australia's phone and internet network to help it score points in its wrangling with Telstra over whether the phone monopoly is overestimating its costs.

The Australian Competition and Consumer Commission's move has been welcomed by Telstra's rivals, but an economist who has worked for Telstra, which has its own computer model, said the ACCC is simply creating more hassle and cost for the company.

Henry Ergas said building a network-cost model was fraught with risk. "I think a note of caution one would inject into any effort by the ACCC to go off down this particular path is that building a model is complex, time consuming and costly," said Dr Ergas, head of the Asia Pacific operations of economic consultancy CRA International. "I think they would be extremely lucky if they can build a really robust model for $1 million."

Dr Ergas, who has worked for Telstra on many access pricing issues, said if the ACCC goes ahead with its own model Telstra would inevitably have to supply much of the source information.

The regulator has long been frustrated by Telstra's modelling, which the ACCC believes overstates the company's costs and produces access prices for competitors that are unreasonable. The ACCC also claims Telstra's model is not forward looking and overstates costs because it fails to take into account developments such as broadband internet.

"Telstra’s model is inappropriate, irrelevant and backward”

The new model will be used by the regulator to assist in its enforcement of the Trade Practices Act which involves, among other things, determining if the access prices are reasonable.

Telstra's fixed network cost model, known as PSTN ingres degress version 2 (PIE II), has been endorsed by the world's leading expert on hypothetical network models, Bridger Mitchell, the principal of CRA International.

Dr Mitchell, who built one of the first hypothetical network models in the 1980s in California, said in a report to the ACCC that the PIE I1 model was forward looking and included subscriber and traffic forecasts for 2006-07 and 2007-08.

Dr Mitchell said the model appropriately incorporated the principles for total element long run incremental cost modelling that have been developed and applied in international practice.
But the ACCC says PIE I1 is inappropriate, irrelevant and backward. Telstra's rivals and industry consultants have made similar criticisms.

Jasper Mikkelsen, senior economist at Marsden Jacob Associates, said PIE II failed to take account of non-voice traffic such as broadband resulting in inflated costs. "It is one of the models I have found most difficult to understand," he said.

The ACCC last month invited industry comment on what should be included in its new model when it goes ahead with a tender, which is likely to be published next month.