Senator ALSTON (Minister for Communications and the Arts)(3.48 p.m.) —I will elaborate on the way in which the model would work. An instrument would be made under the price cap arrangements in the Telstra Corporation Act to provide for equity in local call prices nationally by requiring price reductions in capital cities—I would envisage all capital cities being included, and possibly some other regional areas—where local competition is the most likely to occur, and for that to be reflected—

Senator Schacht —Most likely to occur; not where it is occurring.

Senator ALSTON —No, where it is most likely to occur. You would include capital cities as a matter of course because they are the places where competition is most likely to occur. There is no competition anywhere, as yet, on local calls. That would be reflected in the maximum untimed local call prices that Telstra could charge nationally.

In terms of actual price control arrangements, the following is proposed: in year one—that is, 1997-98—Telstra's local call prices would be subject to an initial price ceiling—for example, 25c. Every 12 months, the revenue-weighted average price of a Telstra untimed local call would be calculated where competition was occurring or likely to occur in the provision of local calls. This would reflect any reduction in local call prices across these areas. Every 12 months, the national local call price ceiling for Telstra would be replaced by the new revenue-weighted average. Telstra would then have a short period, probably three months, to reduce local call prices in all areas where they would exceed the new cap to that level. Price control instruments are disallowable by parliament.

It is proposed that the competitive revenue-weighted average would initially be calculated using data from all or specific mainland capital cities, including those areas where broadband cabling is being laid and where local call competition is most likely to develop in the short term. The geographic areas for the purposes of calculating the competitive revenue-weighted average would need to be reviewed regularly, probably every two years, to ensure that competitive developments continued to be taken into account. The government would retain the power to reduce the national cap on the maximum price for an untimed local call below the revenue-weighted average should this be considered appropriate.

Where there was a universal service provider other than Telstra, the government would tie the maximum price it could charge for an untimed local call to the adjustments to Telstra's national cap. These pricing arrangements only need to apply to Telstra—or the universal service provider, should Telstra not have that obligation for an area—not other local call service providers because Telstra's dominance in the market means that it is the price setter.

The effect of prohibiting price discrimination would be to severely chill competition by inhibiting Telstra's responding to vigorous competition in particular localised markets because of the revenue effects of having to drop prices across the board. As an example of how this would work, at the present time, as we know, 25c applies across the board. At the end of year one, if you had prices in Sydney of 22c, Melbourne 21c, Brisbane 23c and Adelaide 18c, the revenue-weighted average calculated by dividing total revenue by the number of calls would fall to 21.4c. A new maximum applicable across the country for local calls of 21.4c would then be determined.

Telstra would have three months to reduce all higher untimed local call prices to this level. Prices below the new maximum cap could stay below. Under the approach, Telstra is able to respond to competitive imperatives on a market-by-market basis. It is not deterred from offering 18c in Adelaide, because it does not face the cost—that is, loss in revenue—of having to offer 18c nationally. All consumers benefit however from competition forcing prices below the maximum cap as price competition is reflected in each successive new revenue weighted average. The lower prices go in competitive markets, the greater will be the reduction for all consumers.

Let me just add a few more things. The fact is that, ever since 1991, section 185(a)(ii) of the Telecommunications Act has provided for cost justified price differential. So do not be under any illusion that we are suddenly proposing that prices can vary both within Australia and within markets. They can, and it is provided for under the current legislation, and that is a reflection of precisely what we say is important now. You are wanting to regress, in effect, back to—

Senator Schacht —No; progress.

Senator ALSTON —No, you are not. You are actually wanting to go back beyond 1991, and the reason why that is highly antipathetic to the interests of consumers is that it will simply mean that you will only get marginal reductions in pricing, because people will not be able to afford to provide across-the-board—

Senator Schacht —That's an assertion, Richard; you can't prove that.

Senator ALSTON —I think you know that, if you hope to get anything out of competition, even under your model, you would expect local call prices to fall. Senator Allison seems to think that the only reason that prices fall is because of improvements in technology. Quite clearly they fall for productivity reasons—because of better work practices—and the key, of course, that competition delivers is to ensure that you do not simply have monopoly rents that are creamed off and not distributed to consumers. The purpose of having a price cap is to ensure that those benefits are passed on and distributed across the country.

So you continue to have a maximum price cap there to protect consumers; you reserve the right to bring that down at any time. What you are trying to do here is, on the one hand, promote maximum competition, and then ensure that the benefits are distributed on a nationwide basis. But, if you do it on an across-the-board basis, that is absolutely the opposite of competition. That is not allowing any competition to occur, because the moment that you contemplate offering a reduced price to meet a local product, you have to offer it on a nationwide basis.

Senator Lundy is not here now, but she did ask how the USO could sit alongside the competitive model. The USO simply guarantees the standard telephone service, and that is not a function of competition. That is a function of a minimum standard being set by the parliament to ensure that everyone around Australia has access to a standard telephone—in other words, a handset that delivers the normal voice call. That has nothing to do with the level of prices. No-one has ever pretended that this is a perfectly free market where players are able to do what they like. There is always a social overlay; that is why you have community service obligations and that is why we want a weighted average model to ensure that the real benefits of competition are distributed. There is a very big `if' there. You will not have those real benefits in the first instance, if you have this stultifying single standard across the board.

Although I agree with Senator Schacht that openness and transparency are important, it does not follow that because you have got a model that is readily understood, it is in any shape or form in the interests of consumers. It is just a logical inconsistency. It may be a great virtue to have a transparent model. It does not follow that it is in anyone's best interests. I am simply saying that you cannot claim that that therefore justifies you in taking an approach which is quite inimical to competitive price reductions.

There is nothing else I wanted to say except to stress once again that, in the government's view, this is the single most important initiative contained in this package of bills. It is a very important process that we are embarking on. We are setting the environment post-1997 against which we hope there will be a lot of new players coming into the marketplace. We want to provide them with every opportunity to compete, drive down prices and maintain quality of service.

I think we can all be confident, on the basis of what has happened not only in this country but everywhere else, that you are very likely to see those sorts of benefits. But, once you start to put blockers into the system that fundamentally restrict the ability of players to offer deep discounts, because you want to regard them as national players by definition, you are tearing the heart out of the competitive model.

What we are proposing is not something the carriers want. It is very much something that they are opposed to, but it is a recognition of the social desirability of ensuring that benefits flow to non-metropolitan areas. You can have the best of both worlds by going down this path, because you can ensure real benefits, ensure deep discounts and ensure that the bush gets the benefit. Under your model, you will get marginal incremental reductions across the board and that is not in anyone's best interests.