Structural separation is cheaper way ahead for FTTN

In a new report commissioned by Optus, analyst group CEG argues that structural separation of any future broadband network would be considerably cheaper to regulate than operational separation.

The report, prepared by analyst group Competition Economists Group, argues that the winning bidder for the building of the national broadband network should be subject to structural separation to ensure a better outcome for users, government and the industry.

Operational separation, the process by which regulators draft rules to ensure the wholesale and retail arms of a monopoly network owner are not conspiring to gain unfair advantage over competitors, is "likely to reduce the benefits of vertical integration [for the monopolist] without significantly deterring anti-competitive conduct," according to the report.

Structural separation, on the other hand, in which the infrastructure and retail arms of the business are divested from each other, reduces the cost of regulation and gives the monopoly network owner certainty over their position.

"Structural separation greatly reduces the job of regulating the monopoly network because the regulator no longer has to deal with the efforts of the network owner to 'get around' the access regulation and transfer its monopoly to the competitive part of the market," the report reads.

The report's co-author Jason Ockerby told ZDNet.com.au that operational separation "does not change the incentives for a monopoly network owner.

"We are still left with the problem of the potential for anti-competitive behaviour," he said. "We shouldn't underestimate the difficulty in trying to regulate that. The regulator under operational separation has to create rules to get [the monopolist's] divisions to deal with each other at arm's length. These rules are significant and detailed and they raise costs for both businesses and end users. I imagine the ACCC has spent considerable sums managing the competitive activities of Telstra."

According to the report, enforcing these rules is fraught with difficulty. "The assignment for the regulator to sift through 'good' and 'bad' discrimination is arduous and, inevitably, can only be done imperfectly."

Regulation would still be required under structural separation, just as it applies today in Australia's electricity networks, Ockerby said, but the ACCC would be far less burdened "in terms of staff and litigation costs" by not having to conduct imputation tests to ensure operational separation was in fact working.