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.

The last number of years have seen significant regulatory reform. Areas of particular focus included establishing the regulatory settings for the government-owned National Broadband Network (NBN), implementing more severe vertical separation of Telstra and a renewed focus on consumer protection standards.

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, which are 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 (USO) (that 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. To date, the regime has required Telstra to keep separate the operation of its retail, wholesale and network business units, but under recent reforms, Telstra is required to elect to either structurally separate or face a range of regulatory restraints including functional separation and the possibility of being prevented from participating in certain upcoming spectrum auctions.2

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

Part XIB applies certain general anti-competitive conduct provisions of part IV of the CCA (described in other chapters) to telecommunications carriers and carriage service providers (CSP) via the so-called ‘competition rule’. A ‘carrier’ is a person holding a carrier licence to supply a carriage service to the public via a ‘network unit’ (generally a telecommunications line or radiocommunications facility). A ‘CSP’ is a person who supplies a carriage service to the public using a network unit owned by a carrier.3

A carrier or CSP may breach the competition rule if it contravenes certain provisions of part IV in respect of a telecommunications market.

A carrier or CSP 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 regulator of competition matters in the telecommunications industry is the Australian Competition and Consumer Commission (ACCC). The ACCC can issue two types of ‘competition notices’ (a ‘part A’ notice or a ‘part B’ notice) if it has reason to believe that a carrier or CSP has contravened or is contravening the competition rule. 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 within 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 for each day the contravention continues 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,4 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. All services supplied by an NBN corporation are also ‘declared services’5.

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.6 The previous ‘negotiate-arbitrate’ access 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) that implemented a new system involving the ACCC setting terms on an upfront and industry-wide basis (namely, without waiting for disputes to arise).7

The ACCC’s main power to set the terms and conditions of access is its power to make ‘access determinations’ that 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.8

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).9 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.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, which the ACCC could either accept or reject. As a result of the recent amendments to part XIC, however, it is no longer possible to offer the ACCC an ‘ordinary access undertaking’ that 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’ that apply to services which 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 generally 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 took 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 since been implemented in the ACCC’s first ‘final access determinations’, made on 20 July 2011.18

The objectives of the CCS Act reforms

The shift to upfront term-setting by the regulator and 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 that 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 guided only by the requirement that it furthers 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 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 that whether in light of the NBN (which is intended to create structural separation in the sector), 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), parts XIB and XIC have the greatest impact on Telstra as service provider 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, but the ACCC has since noted increased competition in this sector.

Although Telstra remains the dominant provider of fixed broadband services (which includes both digital subscriber line (DSL) and hybrid fibre coaxial (HFC) services), its market share declined from 44 per cent to 41 per cent during the 2009-2010 financial year reporting period.24

The Herfindahl-Hirschmann Index (HHI) for fixed broadband services declined from 2,838 to 2,554, indicating an improvement in competition in the sector over the reporting period.25

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 refusals to allow carriers access to Telstra exchanges, contrary to its facilities access obligations.26 Telstra admitted that it had engaged in this conduct. The court imposed the penalty despite finding 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.27

The National Broadband Network (NBN)

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

NBN Co is intended to be a wholesale-only operator, providing retail service providers (and certain utilities and public transport authorities) with the opportunity to access its network on regulated terms.28 The legislation governing NBN Co also provides a framework for the government to require functional separation or divestiture of assets of NBN Co in the future,29 sets out a regime to facilitate NBN Co offering uniform national pricing,30 and imposes access, transparency and non-discrimination obligations on the supply of wholesale services by NBN Co.31

The terms of access to the wholesale bitstream services to be provided by NBN Co are not yet settled although NBN Co has consulted on multiple drafts of its proposed Wholesale Broadband Agreement. All NBN Co services will be ‘declared services’ and subject to supply and non-discrimination requirements.32 The CCA also empowers the ACCC to make NBN-specific access determinations.33

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 Telstra for the decommissioning of its legacy copper network and the use of its passive network infrastructure for the NBN. At the time of writing, the acceptance by the ACCC of Telstra’s undertaking to structurally separate remains one of the few conditions precedent to this agreement not yet satisfied.

The development of this agreement has also involved additional regulatory reforms in a number of areas. In November 2011, the minister introduced a three-bill package of reforms to the USO.34 The bills provide for the establishment of a new statutory agency, the Telecommunications Universal Service Management Agency, to be responsible for entering into and administering service agreements from 1 July 201235 and would enable the minister to remove the regulatory obligations on Telstra to provide USO services.36

In addition, the government has introduced legislative reform to require the installation of optical-fibre cables in new residential developments 37 and ensure ‘superfast’ broadband networks are (like the NBN) offered on a wholesale basis.38

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 that 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 (including being denied access to certain new spectrum).

If Telstra’s SSU is not accepted or does not come into force, the framework permitting the government to require Telstra to implement an enhanced ‘functional’ separation of its business units39 will apply, superseding the existing operational separation regime.40 The details of this new regime are not spelt out in the CCS Act, and the government’s preference to date has been to encourage Telstra to proceed with structural separation.

Not proceeding with structural separation would also permit the federal minister responsible for telecommunications to impose an ‘excluded spectrum regime’ that would deny Telstra access to new spectrum required for operating fourth generation (4G) wireless broadband networks.41

Voluntary structural separation

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’.42 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.43 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.44 In late 2011, Telstra lodged its SSU with the ACCC, which is (at time of writing) currently being considered by the ACCC.45

The CCS Act also includes provisions for Telstra voluntarily to divest its HFC cable network46 and its interest in the FOXTEL pay television network47 in the same manner as with the SSU. However, these divestiture requirements can be waived at the discretion of the minister for broadband (namely, if the minister is satisfied that an undertaking SSU Telstra has given will address all relevant competition concerns).48 Telstra’s proposed SSU is conditional on the minister waiving the requirement on Telstra to divest its HFC cable assets and interest in subscription television broadcaster FOXTEL.

The powers to impose functional separation and exclude Telstra from acquiring new spectrum would become inapplicable if:49

• 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, operated 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, and an agreement for the migration of subscribers from Telstra’s network to the NBN was completed in June 2011.50 The agreement was reached, together with a package of regulatory concessions from the government, including in relation to Telstra’s ongoing obligation to fulfil the USO.

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.51 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 (Cth). schedule 1, parts 3-5. This regime is discussed further below, together with part XIC of the CCA.

2

Telecommunications Act 1997 (Cth), schedule 1, part 8.

3

(or a network unit in relation to which a nominated declaration is in force).

4

See Competition and Consumer Act 2010 (Cth), section 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.

5

Competition and Consumer Act 2010 (Cth), section 152CJA.

6

See, for example, Competition and Consumer Act 2010 (Cth), sections 152BC and 152BCA.

7

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

8

Competition and Consumer Act 2010 (Cth), section 152BC.

9

Competition and Consumer Act 2010 (Cth), section 152BD.

10

See, for example, Competition and Consumer Act 2010 (Cth), section 152BCC. Previously, consistency between arbitrated decisions depended on the adoption of ‘pricing principles’, which the ACCC was required to consider in arbitrating disputes. See, for example, ACCC, Pricing principles and indicative prices for LCS, WLR, PSTN OTA, ULLS, LSS 1 August 2009 to 31 December 2010 (December 2009), available at www.accc.gov.au/content/index.phtml/itemId/753801 (accessed 29 November 2011). These pricing principles were made under the now repealed section 152AQA of the Trade Practices Act 1974 (Cth) (the previous name for the Competition and Consumer Act 2010 (Cth)).

11

CCS Act, schedule 1, clause 161.

12

See Competition and Consumer Act 2010 (Cth) section 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, for example, 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, for example, ACCC, Access Pricing Principles – Telecommunications (July 1997), available at www.accc.gov.au/content/item.phtml?itemId=324346&nodeId=359f0b07ce6bf9362bd99ef124334523&fn=Access%20pricing%20principles.pdf (accessed 29 November 2011).

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 www.accc.gov.au/content/index.phtml/itemId/753801 (accessed 29 November 2011).

18

See ACCC, Final Access Determinations Nos. 1 to 6 of 2011 for Fixed Line Services, www.accc.gov.au/content/item.phtml?itemId=998519&nodeId=e12afd053c71edd52dd3f687329fd63d&fn=Final%20Access%20Determinations.pdf (accessed 29 November 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, for example, Telstra, Submission to the National Broadband Network: Regulatory Reform for 21st Century Broadband Discussion Paper (2009), pages 9-10; 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), page 29; 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) section 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, rule 6A.10.1; National Gas Rules, rule 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 2009-2010 (27 May 2011), p 10, available at www.accc.gov.au/content/item.phtml?itemId=1008839&nodeId=a20f85595d7bab75674dccde14ba5331&fn=ACCC%20Telecommunications%20report%202009-10.pdf (accessed 29 November 2011).

25

Ibid.

26

Under schedule 1 to the Telecommunications Act 1997 and part XIC of the then Trade Practices Act 1974 (TPA, now CCA).

27

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

28

See National Broadband Network Companies Act (Cth), section 9.

29

National Broadband Network Companies Act (Cth), part 2, divisions 3 and 4.

30

Telecommunications Legislation Amendment (National Broadband Network Measures - Access Arrangements) Bill 2010.

31

Telecommunications Legislation Amendment (National Broadband Network Measures - Access Arrangements) Act 2011 (Cth).

32

Competition and Consumer Act 2010 (Cth) sections 152AL(1), (8A), (8D), (8E), 152CJA(1).

33

Section 152BC.

34

DBCDE, Universal Service Policy in the National Broadband Network environment, available at www.dbcde.gov.au/funding_and_programs/national_broadband_network/universal_service_policy (accessed 29 November 2011).

35

See further, Telecommunications Universal Service Management Agency Bill 2011.

36

See further, Telecommunications Legislation Amendment (Universal Service Reform) Bill 2011; Telecommunications (Industry Levy) Bill 2011.

37

«Telecommunications Legislation Amendment (Fibre Deployment) Act 2011.

38

Telecommunications Legislation Amendment (National Broadband Network - Access Arrangements) Act 2011.

39

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

40

CCS Act, schedule 1 cl 56.

41

Telecommunications Act 1997 (Cth), section 577GA. This excluded spectrum regime is entirely separate from provisions in the Radiocommunications Act 1992 (see section 60(5), (10)) that permit the minister to impose limits, for competition reasons, on who may bid for and hold spectrum.

42

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

43

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

44

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

45

Telecommunications Act 1997 schedule 1 part 9.

46

Telecommunications Act 1997 (Cth) section 577C.

47

Telecommunications Act 1997 (Cth) section 577E.

48

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

49

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

50

See Telstra, media release, Telstra Signs NBN Definitive Agreements (23 June 2011) available at www.telstra.com.au/abouttelstra/media-centre/announcements/telstra-signs-nbn-definitive-agreements-2.xml (accessed 29 November 2011).

51

United States v AT&T, 552, federal supplement 131 (DDC 1982).