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Population Distribution and Telecommunication Costs

Staff research paper

This paper by Peter Cribbett was released on 2 August 2000. The study is part of the Productivity Commission's research into the performance of Australia's Economic infrastructure industries. Its aim is to provide information on the influence of line density on cross-country price comparisons by estimating the differences in average line costs that can be attributed solely to differences in the way populations (and hence lines) are distributed.

A supplementary analysis to this paper has also been released and should be read in conjunction with that Paper. The supplementary analyses presented were undertaken at the suggestion of interested parties and because of the Commission's desire to enrich the analysis by examining other countries and US States.

This analysis covers the US States examined by Ovum in their study for the ACCC into overseas access charges where the influence of line density was considered.

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A staff research paper by Peter Cribbett on Population Distribution and Telecommunication Costs examines the impact of population distribution on the costs of providing local telephone service.

The study finds that the average cost of providing local telephone service is increased in Australia, because it has a relatively large proportion of its population (and hence lines) in areas with low population densities.

Depending on assumptions made about the cost of providing each line, average line costs in low-density areas of Australia of less than about two lines per square kilometre were found to be between six and ten times the average cost per line in the rest of Australia.

Similarly, low-density areas were estimated to account for some 25 per cent of the total cost of providing local telephone service, despite having only about 5 per cent of the total number of lines. This compares with a 10 per cent cost share for the equivalent low-density areas in Washington State and 5 per cent for those areas in California.

Previous benchmarking by the Commission indicated that Finland has lower prices than Australia. This new study suggests that this is not the result of cost advantages due to a more favourable population distribution.

This work is in support of the Commission's ongoing program of benchmarking the performance of Australia's economic infrastructure. It follows on from two international benchmarking studies of telecommunications prices.

Background information

Leonora Nicol, Media and Publications 02 6240 3239 / 0417 665 443

Preliminaries
Cover, Copyright, Preface, Acknowledgements, Contents, Abbreviations, Key Points

1 Introduction
1.1 Purpose
1.2 Recent studies
1.3 Scope
1.4 Consultation
1.5 Refereeing

2 Research method
2.1 Cost functions
2.2 Line density distributions
2.3 Cost estimates

3 Population and line density distributions
3.1 Population distributions
3.2 Line distributions

4 Line cost estimates
4.1 Estimates of relative line costs
4.2 Some qualifications
4.3 Robustness of the results
4.4 Further research

APPENDICES

A Recent studies
A.1 Ovum 1998 - An assessment of Telstra's access undertakings
A.2 Alger and Leung 1999 - The relative costs of telephony across five countries
A.3 Comment

B Methodology
B.1 Estimating population densities
B.2 Converting population to line densities
B.3 Choosing and constructing the cost functions

C Further results, sensitivity analysis and some qualifications
C.1 Cost schedules
C.2 Line distributions based on the concordance function
C.3 Line distributions based on simple proportionality
C.4 Results for high and low density areas

References