Australia: Telecommunications

Telecommunications regulation in Australia has long been a topic of intense political, and hence regulatory, attention. The fixed-line incumbent, Telstra Corporation, was corporatised and privatised as a vertically integrated company over the period from 1989 to 2006. Full competition in the telecommunications sector commenced in the late 1990s and has continued to develop at a gathering pace (particularly in the last five years). However, it has long been thought in some quarters that the continuing vertical integration of Telstra has stifled development of effective competition. The result, historically, has been the imposition of extensive regulatory obligations.

2010 saw a period of frenetic regulatory activity, aimed principally at addressing the perceived structural issues in the telecommunications sector. This activity followed the Australian government’s announcements the previous year of the development of a government owned national broadband network and of a landmark suite of other regulatory and structural reforms for the sector.

Telecommunications regulation in Australia

The federal Competition and Consumer Act 2010 (CCA) contains special provisions regulating competition in the telecommunications industry. In addition to the general application of the Australian Consumer Law and general restrictive trade practices prohibitions (described in other chapters), there is an ex post anti-competitive conduct regime for the telecommunications sector and an ex ante regime for access to certain telecommunications services. These are described in more detail below.

The CCA is supplemented by further regulation in the Telecommunications (Consumer Protection and Service Standards) Act 1999 and the Telecommunications Act 1997. The former includes provision for the Universal Service Obligation (which requires reasonable access to basic telephone services on an equitable basis throughout Australia), and certain customer service and fault rectification standards. The latter includes a wide range of technical regulation, as well as a facilities access regime¹ and an ‘operational separation’ regime (which has required Telstra to keep separate the operation of its retail, wholesale and network business units).²

The telecommunications anti-competitive conduct regime - Part XIB of the CCA

Part XIB picks up the general anti-competitive conduct provisions of Part IV of the CCA (described in other chapters) and applies them to telecommunications carriers and carriage service providers (CSP) via the so-called ‘competition rule’. A carrier or CSP may breach the competition rule if it contravenes any of the provisions of Part IV in respect of a telecommunications market.

A carrier may also breach the competition rule if it has a substantial degree of market power in a telecommunications market and takes advantage of that power with the effect or likely effect of substantially lessening competition in any telecommunications market, or takes advantage of that power and engages in other conduct and the combined effect or likely effect is to substantially lessen competition in any telecommunications market.

The principal telecommunications industry regulator is the Australian Competition and Consumer Commission (ACCC). The ACCC can issue ‘competition notices’ if it has reason to believe that a carrier or CSP has contravened or is contravening the competition rule. There are ‘Part A’ competition notices and ‘Part B’ competition notices. If (and only if) a carrier or CSP to whom a Part A notice has been issued continues to engage in the putative anti-competitive conduct the subject of the notice, the ACCC may apply to the Federal Court of Australia for pecuniary penalties against the carrier or CSP. A Part B competition notice will be more detailed than a Part A competition notice and is prima facie evidence of the information in it in any court proceedings against the carrier or CSP.

Pecuniary penalties under Part XIB of the CCA are severe. The maximum penalty per contravention is A$10 million, plus A$1 million for each day the contravention continues; or if the contravention continues for more than 21 days, up to A$31 million plus A$3 million per day in excess of 21 days. Injunctions and compensatory damages may also be ordered.

The telecommunications access regime - Part XIC of the CCA

Part XIC of the CCA is an ex ante access regime specific to the telecommunications industry.

The ACCC may, if it believes it to be in the long-term interests of end-users,³ declare that a particular telecommunications service is a ‘declared service’ and so must be supplied to access seekers upon request. Currently, the declared services include PSTN originating and terminating access, wholesale line rental, a local carriage service, an unbundled local loop service, a spectrum sharing service, transmission capacity and a mobile terminating access service.⁴

Part?XIC empowers the ACCC to determine the terms of access to declared services, taking into account the long-term interests of end-users and other criteria.5 Previously, the regime under Part XIC was described as a ‘negotiate-arbitrate’ model where the ACCC set prices primarily through arbitrating disputes between Telstra and individual access seekers (ie, disputes that arose after negotiations over the terms of access had failed). If negotiations were unsuccessful, the ACCC’s power to arbitrate the terms and conditions of access would prevail over any inconsistent terms in commercial agreements. However, this negotiate-arbitrate model was widely regarded as excessively uncertain and prone to delays and ‘regulatory gaming’ - and was superseded as a result of the amendments made by the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (CCS Act), which implemented a new system involving the ACCC setting terms on an up front and industry wide basis (ie, without waiting for disputes to arise).⁶

The ACCC’s main power to set the terms and conditions of access is its power to make ‘access determinations’, which set terms and conditions of access to the service for all access seekers (or only some access seekers, if appropriate), for a set period of time.⁷ The ACCC also has a broad power to make ‘binding rules of conduct’ where the ACCC considers there is an urgent need to do so (this power is expected to be used on a temporary basis only).⁸ The CCS Act also amended the regime to provide that terms of commercial agreements will prevail over regulated terms and conditions of access where there is any inconsistency - giving primacy to commercial negotiations.⁹,¹⁰

Previously, it has also been possible under Part XIC for an access provider to give undertakings to the ACCC setting out terms and conditions of access; this would enable the access provider to ‘get on the front foot’, after which the ACCC could either accept or reject the undertaking. While several existing or putative access providers sought to make use of this mechanism, the undertakings given have rarely been acceptable to the ACCC. The access undertaking mechanism has now been curtailed significantly by the recent amendments to Part XIC. It is no longer possible to offer the ACCC an ‘ordinary access undertaking’ which would prescribe the terms and conditions of access to an existing declared service.¹¹ The ability to give access undertakings is now limited to ‘special access undertakings’, which apply to services that are not yet declared - retaining the mechanism as a tool to provide certainty in respect of new investment.¹²

Part XIC is complemented by a separate facilities access regime in Schedule 1 to the Telecommunications Act 1997. This provides carriers (but not CSPs) with a right to request access to another carrier’s facilities (primarily, but not limited to, exchanges, towers and underground facilities)¹³ for the sole purpose of establishing their own facilities or providing competitive facilities or carriage services. The other carrier must comply if it is ‘reasonable’ to do so (which takes into account, again, the long-term interests of end-users).¹⁴ Disputes in relation to the terms and conditions of access may be arbitrated by the ACCC.¹⁵

Pricing for fixed-line declared services

Previously, the ACCC has taken the view that the prices of declared services should be cost based to reflect the ‘total service long-run incremental cost’ of providing the service.¹⁶ For some services the ACCC adopted a retail minus retail costs approach.¹⁷
In 2010, the ACCC proposed moving to a ‘building block’ model of pricing, which would set prices based on a regulated asset base (which is in turn based on a fixed initial valuation of Telstra’s fixed-line network, subsequently periodically adjusted based on depreciation, capital expenditure and certain other factors). The ACCC’s inquiry in 2010 was suspended owing to the passage of the CCS Act and the new access determination powers conferred on the ACCC. However, the new pricing model has been implemented on an interim basis in the ACCC’s first ‘interim access determinations’, made on 2 March 2011.¹⁸

The objectives of the CCS Act reforms

The shift to up front term-setting by the regulator and the adoption of a building block pricing model reflect an industry-wide desire for telecommunications services to be regulated in a manner more consistent with the regulation of access to utilities networks. In particular, the regulatory regimes created under the Australian National Electricity Law¹⁹ and National Gas Law²⁰ provided models which were frequently referred to in public consultations.²¹

However, there remain significant differences between the legislative frameworks underpinning the electricity and gas sectors’ regulatory regimes on the one hand, and the scheme now applying to telecommunications under Part XIC of the CCA on the other. The electricity and gas regimes are characterised by intricate prescription of detail in the legislation setting out the process for periodically determining pricing (and other terms of access). In contrast, the powers now given to the ACCC under Part XIC, especially the ‘access determination’ and ‘binding rules of conduct’ powers, are granted in broad terms that make the ACCC’s decisions highly discretionary. The regulatory model to be adopted is ultimately controlled only by the requirement that it further the very broadly stated purposes of Part XIC as a whole, namely, the promotion of the long-term interests of end-users of telecommunications services.²²

It is clear enough that the marked differences in the structure and process of the telecommunications access regime, as compared to the energy regimes, are connected with the continuing vertical integration of the telecommunications incumbent.²³ However, irrespective of the merits of competition concerns stemming from Telstra’s vertical integration, it may be questioned whether the new regime could have been designed so as to more effectively reduce the perceived regulatory risks associated with the telecommunications sector.

The position of Telstra under the CCA

While capable of applying to any of the major mobile carriers (Telstra, Optus and Vodafone Hutchison Australia (VHA)), Parts XIB and XIC have the greatest impact on Telstra in respect of its fixed-line operations. The ACCC has previously issued a number of Part A competition notices in relation to fixed-line services, including broadband pricing. The ACCC has said that:
Telstra continues to possess substantial market power from its ownership and control of the ubiquitous fixed-line CAN. HHI [Herfindahl-Hirschman Index] scores of 5559 and 3341 were observed in 2008-09 for fixed voice and fixed broadband services respectively. Telstra continued to dominate these highly concentrated fixed line service markets.²⁴

In 2010, Telstra incurred its first ever penalty for breach of its access obligations. In Australian Competition and Consumer Commission v Telstra Corporation Ltd [2010] FCA 790, the Federal Court of Australia imposed penalties totalling A$18.55 million on Telstra in relation to incorrect ‘capping’ of Telstra exchanges, contrary to its access obligations under Schedule 1 to the Telecommunications Act 1997 and Part XIC of the then Trade Practices Act 1974 (TPA, now the CCA). The ACCC alleged that Telstra had rejected requests by access seekers to interconnect their facilities with Telstra’s network by accessing certain exchanges, on the basis that there was no more room available for access seeker equipment in those exchanges and that it had made misrepresentations to the same effect (contrary to what was then section 52 of the TPA²⁵). Telstra admitted that it had engaged in this conduct on some 27 occasions in relation to seven specific exchanges (and the ACCC dropped its allegations in relation to other instances). The Federal Court proceedings therefore related only to the size of the penalty to be imposed.

In imposing its penalty, the court found that Telstra’s conduct was not deliberately anti-competitive and it was not directed by senior management or done for any reason relating to maximising Telstra’s revenue or profit.²⁶ The conduct involved decision making by lower level managers who had not been properly trained in relation to compliance with access obligations.²⁷ There was also no evidence of any harm being caused to access seekers or the general public.²⁸ However, the court did consider that Telstra had not shown ‘true remorse’ for its conduct.²⁹

The National Broadband Network

In April 2009, the Australian government announced its intention to fund, construct and operate, via a government owned company (NBN Co), a national broadband network (NBN). The NBN is to progressively replace Telstra’s copper customer-access network. It will incorporate fibre-to-the-premises (FTTP) infrastructure serving approximately 90 to 93 per cent of the Australian population (the remainder to be served by wireless and satellite facilities). At the time of publication, the roll out of the NBN has commenced in several locations around Australia.

NBN Co is intended to be a wholesale only operator, providing retailers (and certain utilities and public transport authorities) with the opportunity to access its network on regulated terms.³⁰ The terms of access to the wholesale bitstream services to be provided by NBN Co are not yet settled. NBN Co has foreshadowed its intention to develop generally applicable access prices and has published technical details of its wholesale network access services.³¹ These services and the terms of access to them are likely to be formalised in regulated terms of access under Part XIC of the CCA.

Several pieces of legislation are required to be passed to facilitate the construction of the NBN and the operations of NBN Co (including wholesale-only line-of-business restrictions). That legislation was drafted but not passed by the Australian parliament in 2010.³² However, the CCS Act’s reforms have paved the way for a regulatory scheme more appropriate to a wholesale-only network operator (though some further amendments are yet to be made specifically to accommodate NBN Co).

Preparation for the roll-out and future operation of the NBN has also involved the NBN Co and the Australian government negotiating a complex commercial agreement with the incumbent, Telstra Corporation, for the decommissioning of its legacy copper network. At the time of writing, this agreement had not been finally concluded, though an in-principle agreement had been reached on key terms.³³

The development of this agreement has also involved negotiation on additional regulatory reforms in a number of areas. One of these regulatory reforms is proposed to be the restructuring of the USO regime to progressively transfer that obligation from Telstra (as the current incumbent it is the primary ‘universal service provider’), to a new government-owned company (USO Co) as the NBN is rolled out.³⁴

Separation of Telstra: operational, functional and structural

Alongside the NBN, a central plank of the government’s telecommunications reform agenda has been to encourage the structural or functional separation of Telstra. The CCS Act established a novel regulatory scheme which allowed Telstra to, in effect, choose whether it would structurally separate or else submit to potentially onerous restrictions on its existing and future business activities.

Functional separation framework and excluded spectrum regime

On the one hand, the CCS Act introduced a framework permitting the government to require Telstra to implement an enhanced ‘functional’ separation of its business units,³⁵ which would supersede the existing operational separation regime.³⁶ The details of this new regime are not spelt out in the CCS Act, and as Telstra’s negotiations with NBN Co to decommission its copper network have continued to progress, the Government has not yet sought to implement functional separation.
In addition to the functional separation framework, the CCS Act provided a power for the federal minister for broadband to impose an ‘excluded spectrum regime’, which would deny Telstra access to new spectrum required for operating fourth generation (4G) wireless broadband networks.³⁷ The original version of the Bill that became the CCS Act included an automatic bar on access to this spectrum.³⁸ After extensive public consultation and political negotiation, this regime was amended so as to leave its implementation in the hands of the minister.³⁹

Voluntary structural separation

On the other hand, the CCS Act introduced provisions permitting Telstra to give to the ACCC a structural separation undertaking (SSU). This is an undertaking that Telstra will, after a specified day, ‘not supply fixed-line carriage services to retail customers in Australia using a telecommunications network over which Telstra is in a position to exercise control’.⁴⁰ Essentially, it is a means for Telstra to voluntarily divest its copper customer access network, under ACCC oversight (and subject to ACCC enforcement). The undertaking can specify the steps Telstra will take to give effect to this commitment.⁴¹ The undertaking can also prescribe transparency and equivalence measures to apply between the time the undertaking is accepted by the ACCC and the specified day from which the commitment to be structurally separated has effect.⁴²

The CCS Act also includes provisions for Telstra voluntarily to divest its HFC cable network⁴³ and its interest in the FOXTEL pay television network⁴⁴ in the same manner as with the SSU. However, these divestiture requirements can be waived in the discretion of the minister for broadband (ie, if the minister is satisfied that an SSU Telstra has given will address all relevant competition concerns).⁴⁵

The powers to impose an enhanced functional separation regime and excluded spectrum regime would become inapplicable if:⁴⁶

• Telstra gives a structural separation undertaking to the ACCC (and the undertaking is accepted); and
• either Telstra complies with the additional HFC and FOXTEL divestiture requirements or else those divestiture requirements are waived by the minister.

Thus, the functional separation framework and excluded spectrum regime, and perhaps also the HFC and FOXTEL divestiture requirements, operate as an incentive for Telstra to find a commercially acceptable means of divesting its copper network. In fact, the negotiation of a mutually acceptable commercial arrangement between Telstra and NBN Co (and the Government) commenced long before the legislation was passed.⁴⁷

From an international point of view, the legislative regime for structural separation is unprecedented. For instance, the break-up of AT&T in the United States occurred pursuant to a judicial determination (and with judicial oversight) following an antitrust suit by the federal government.⁴⁸ By contrast, in Telstra’s case, there has never been any finding, or even any substantiated allegation, of anti-competitive conduct of a kind the appropriate solution to which would be forcing Telstra to divest some or all of its network. Rather, the legislative regime was designed in pursuance of a policy the apparent assumption of which was that the ongoing vertical integration of the incumbent produced a less efficient and competitive market than would otherwise be the case. Hence, Telstra’s separation could be described, not as remedial or punitive, but as policy driven and forward looking.

Notes

1

Telecommunications Act 1997 Schedule 1 Parts 3-5. This regime is discussed further below, together with Part XIC of the CCA.

2

Telecommunications Act 1997 Schedule 1 Part 8.

3

See Competition and Consumer Act 2010 (Cth) s 152AB. The long-term interests of end-users raise a number of subsidiary considerations including the promotion of competition, and encouraging the economically efficient use of and investment in infrastructure.

4

In October 2010, the ACCC publicly raised the possibility of an inquiry into the declaration of wholesale ADSL services in geographic areas where facilities-based competition is unlikely to develop. To date, a formal inquiry has not been commenced.

5

See, eg, Competition and Consumer Act 2010 (Cth) ss 152BC and 152BCA.

6

These amendments have not however affected the facilities access regime under the Telecommunications Act 1997, which continues to confer power to arbitrate disputes.

7

Competition and Consumer Act 2010 (Cth) s 152BC.

8

Competition and Consumer Act 2010 (Cth) s 152BD.

9

See, eg, Competition and Consumer Act 2010 (Cth) s 152BCC.

10

Consistency between arbitrated decisions depended on the adoption of “pricing principles”, which the ACCC was required to consider in arbitrating disputes. See, eg, ACCC, Pricing principles and indicative prices for LCS, WLR, PSTN OTA, ULLS, LSS 1 August 2009 to 31 December 2010 (December 2009), available at http://www.accc.gov.au/content/index.phtml/itemId/753801 (accessed 8 March 2011). These pricing principles were made under the now-repealed s 152AQA of the Trade Practices Act 1974 (Cth) (the previous name for the Competition and Consumer Act 2010).

11

CCS Act Schedule 1 cl 161.

12

See Competition and Consumer Act 2010 (Cth) s 152CBA.

13

There is also a similar right to obtain access to network information: Telecommunications Act 1997 (Cth) Schedule 1 Part 4.

14

There are other limitations, including a requirement for reasonable notice, as well as protection for other parties’ contractual rights that were in existence before the request was made, and for towers and eligible underground facilities technical feasibility. See, eg, Telecommunications Act 1997 (Cth) Schedule 1 clauses 17, 33, 34, 35.

15

The parties may agree on an arbitrator, but failing agreement the arbitrator is to be the ACCC. In relation to questions of exemption from access for reasons of technical feasibility, the ACCC must also consult the Australian Communications and Media Authority (ACMA).

16

See, eg, ACCC, Access Pricing Principles - Telecommunications (July 1997), available at http://www.accc.gov.au/content/item.phtml?itemId=324346&nodeId=359f0b07ce6bf9362bd99ef124334523&fn=Access per cent20pricing per cent20principles.pdf

17

Specifically the Local Carriage Service (LCS) and Wholesale Line Rental (WLR) service: see ACCC, Pricing principles and indicative prices for LCS, WLR, PSTN OTA, ULLS, LSS 1 August 2009 to 31 December 2010 (December 2009), available at http://www.accc.gov.au/content/index.phtml/itemId/753801 (accessed 8 March 2011).

18

See ACCC, Interim Access Determinations Nos. 1 to 6 of 2011 for Fixed Line Services, http://www.accc.gov.au/content/item.phtml?itemId=976009&nodeId=65b3dd33f04b18f1c33a011c80d8c9a0&fn=Interim per cent20determination.PDF (accessed 8 March 2011).

19

The National Electricity Law (NEL) is a schedule to the National Electricity (South Australia) Act 1996 (SA). The National Electricity Rules are made under the NEL.

20

The National Gas Law (NGL) is contained in a schedule to the National Gas (South Australia) Act 2008 (SA). The NGL is supplemented by the National Gas Rules.

21

See, eg, Telstra, Submission to the National Broadband Network: Regulatory Reform for 21st Century Broadband Discussion Paper, 2009, p9-10; Competition Economists Group, Increasing regulatory certainty for telecommunications assets in Australia: A Report for Optus (June 2009); ACCC, Review of 1997 Guide to Telecommunications Access Pricing Principles for Fixed Line Services: Discussion Paper (December 2009), p29; Telstra, Response to the ACCC’s Discussion Paper (26 February 2010), p16; Frontier Economics, Access pricing principles for fixed line services: A Response to the ACCC’s Discussion Paper prepared for the CCC (February 2010).

22

See Competition and Consumer Act 2010 (Cth) s 152AB. Furthermore, the “self-regulation” model adopted under the electricity and gas regimes - focused around the network owner and access provider making a ”proposal” for pricing to apply during each regulatory period, which is accepted, modified or rejected by the regulator (see National Electricity Rules r 6A.10.1; National Gas Rules r 46) - has not been adopted under Part XIC. Rather, the introduction of further restrictions on the access undertaking mechanism represents a marked consolidation of the regulator’s control over the terms and conditions of access.

23

By contrast, electricity transmission and distribution network operators around Australia (whether publicly or privately owned) have generally been, and remain, structurally separated (or subject to strict ring-fencing) from electricity generators and retailers.

24

ACCC, Telecommunications competitive safeguards 2008-09 (15 November 2010), p11. http://www.accc.gov.au/content/item.phtml?itemId=956397&nodeId=2e3bd895284318f50eb4705930871917&fn=Telecommunications per cent20Reports per cent202008-09_WEB.pdf (accessed 4 March 2011).

25

Now section 18 of the Australian Consumer Law.

26

Australian Competition and Consumer Commission v Telstra Corporation Ltd [2010] FCA 790 (Telstra), [248]-[249] (Middleton J).

27

Telstra [2010] FCA 790, [256] (Middleton J).

28

Telstra [2010] FCA 790, [189]-[190] (Middleton J).

29

Telstra [2010] FCA 790, [280] (Middleton J).

30

See National Broadband Network Companies Bill 2010 cls 3(2) and 9.

31

NBN Co Ltd, NBN Co Wholesale Access Service: Product and Pricing Overview for Access Seekers (December 2010).

32

The National Broadband Network Companies Bill 2010 and the Telecommunications Legislation Amendment (National Broadband Network Measures - Access Arrangements) Bill 2010. See also Telecommunications Legislation Amendment (Fibre Deployment) Bill 2010.

33

Telstra, media release, Telstra reports encouraging sales momentum, confirms guidance, maintains dividend, reaches NBN milestone (10 February 2011) available at http://www.telstra.com.au/abouttelstra/media-centre/announcements/telstra-reports-encouraging-sales-momentum-confirms-guidance-maintains.xml#Links (accessed 7 March 2011).

34

Department of Broadband, Communications and the Digital Economy, “NBN Policy Statements”, available at http://www.dbcde.gov.au/broadband/national_broadband_network/nbn_policy_statements (accessed 15 March 2011).

35

Part 9 of Schedule 1 to the Telecommunications Act 1997 (Cth).

36

CCS Act Schedule 1 cl 56.

37

Telecommunications Act 1997 (Cth) s 577GA.

38

Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009, Schedule 1 item 21 (proposed new sections 577J, 577K, 577L of the Telecommunications Act 1997), item 22 (proposed new clauses 84-85 of Schedule 1 to the Telecommunications Act 1997). The 2009 Bill lapsed when the Australian Senate was prorogued for the 2010 federal election.

39

This excluded spectrum regime is entirely separate from provisions in the Radiocommunications Act 1992 (see s?60(5), (10)) which permit the Minister to impose limits, for competition reasons, on who may bid for and hold spectrum.

40

Telecommunications Act 1997 (Cth) s 577A(1)(a).

41

Telecommunications Act 1997 (Cth) s 577A(1)(b).

42

Telecommunications Act 1997 (Cth) s 577A(2).

43

Telecommunications Act 1997 (Cth) s 577C.

44

Telecommunications Act 1997 (Cth) s 577E.

45

Telecommunications Act 1997 (Cth) s 577J(3),(4),(5),(6).

46

Telecommunications Act 1997 (Cth) s 577J(2), 577K(2), 577L(2), Schedule 1 cl 82(2).

47

See Telstra, media release, Telstra Remains Committed to Working with the Federal Government (15 September 2009) available at http://www.telstra.com.au/abouttelstra/media-centre/announcements/telstra-remains-committed-to-working-with-federal-government.xml (accessed 8 March 2011). Terms of Engagement were agreed by Telstra and NBN Co on 18 December 2009: http://www.minister.dbcde.gov.au/media/media_releases/2009/117 (accessed 7 March 2011).

48

United States v AT&T, 552 F.Supp. 131 (DDC 1982).