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 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 few 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 on Telstra.

The last three 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 the Telecommunications (Consumer Protection and Service Standards) Act 1999, which currently includes provision for the Universal Service Obligation (USO) and certain customer service and fault rectification standards.

The CCA is also supplemented by the Telecommunications Act 1997, which includes a wide range of technical regulation, as well as a facilities access regime.¹ As part of the Australian government’s regulatory changes to facilitate the NBN, the Telecommunications Act 1997 was amended to require Telstra to either structurally separate, or to face a range of additional regulatory restraints including mandatory 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 (CSPs) via the so-called ‘competition rule’. A ‘carrier’ is a person holding a carrier licence to own a ‘network unit’ (generally a telecommunications line or radiocommunications facility) used to supply a carriage service to the public. 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, 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, wholesale ADSL, a local bitstream access 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, on an upfront and industry-wide basis (and without waiting for disputes to arise).⁶ The terms of access are determined by the ACCC under ‘access determinations’ that set terms and conditions of access to declared services for all access seekers (or only some access seekers, if appropriate), for a set period of time.⁷ However, any alternative terms and conditions that are agreed between an access provider and access seeker will prevail to the extent of any inconsistency, so the regime essentially gives primacy to commercial negotiations.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.⁹

Access providers also have the ability to propose terms and conditions of access to services that have not yet been declared by the ACCC under ‘special access undertakings’, a mechanism intended to ensure that new investors will have certainty about the terms and conditions on which they will be required to provide wholesale access to new services.¹⁰

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)¹¹ 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).¹² Disputes in relation to the terms and conditions of access may be arbitrated by the ACCC.¹³

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.¹⁴ For some services, the ACCC adopted a ‘retail minus retail costs’ approach.¹⁵

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). While the ACCC’s inquiry in 2010 was suspended pending the passage of regulatory reforms, to part XIC of the CCA, the new pricing model has since been implemented under the ACCC’s first ‘final access determinations’ for fixed line services made on 20 July 2011.¹⁶ In contrast, the ACCC recently determined that a domestic benchmarking model was the most appropriate pricing model for domestic transmission and local bitstream access services.¹⁷

The rationale for setting upfront terms of access

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 Law¹⁸ and National Gas Law¹⁹ provided models that were frequently referred to in public consultations.²⁰

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.²¹

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.²² However, irrespective of the merits of competition concerns stemming from Telstra’s vertical integration, it may be questioned whether, in light of the NBN (which is intended to create structural separation in the sector) and Telstra’s decision to structurally separate, 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 to Telstra 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, and has since remained steady. ²³

The Herfindahl-Hirschmann Index (HHI) for fixed broadband services declined from 2,838 to 2,554 in the 2009–2010 financial year reporting period, indicating an improvement in competition in the sector over the reporting period.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 refusals to allow carriers access to Telstra exchanges, contrary to its facilities access obligations.²⁵ 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 that it was not directed by senior management or done for any reason relating to maximising Telstra’s revenue or profit.²⁶

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 other entities) with the opportunity to access its network on regulated terms.²⁷ 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,²⁸ sets out a regime to facilitate NBN Co offering uniform national pricing,²⁹ and imposes access, transparency and non-discrimination obligations on the supply of wholesale services by NBN Co.³⁰

While all NBN Co services will be ‘declared services’ and subject to supply and non-discrimination requirements (and the ACCC has power to make NBN-specific access determinations),³¹ the terms on which NBN Co will provide access to wholesale bitstream services are not yet finally settled. NBN Co has published an interim standard form of agreement for the provision of NBN services, the ‘Short-Term Wholesale Broadband Agreement’, to be complemented by a special access undertaking once it is accepted by the ACCC.³² The Short-Term Wholesale Broadband Agreement is subject to further consultation and review, and NBN Co’s special access undertaking is currently the subject of public consultation by the ACCC.³³

Preparation for the roll-out and future operation of the NBN has also involved the NBN Co and the Australian government negotiating complex commercial agreements with Telstra for the decommissioning of Telstra’s legacy copper network and the use of Telstra’s passive network infrastructure for the NBN. These agreements were authorised under the Telecommunications Act so that they would not breach competition laws, despite containing commitments by Telstra not to compete with the NBN.

The development of this agreement involved a number of ancillary regulatory reforms, including an overhaul of the USO delivery model. Under the previous model, Telstra was obliged to provide reasonable access to basic telephone services on an equitable basis throughout Australia. Following the passage of the Telecommunications Universal Service Management Agency Act 2012, the Communications Minister is now empowered to relieve Telstra of its USO regulatory obligations, and a statutory agency, the Telecommunications Universal Service Management Agency, has been established to take over primary responsibility for delivery of the USO. The Agency will deliver the USO via entry into contractual arrangements with carriers to deliver USO services, including a 20-year contract with Telstra that commenced in July 2012.

A number of other NBN-related regulatory reforms have recently come into effect. They include new obligations for property developers to install optic fibre cables in certain new property developments, a regime that is intended to ensure new developments are ‘fibre ready’ and to promote faster deployment of NBN services. Carriers who install, upgrade or extend their fixed-line networks to provide ‘superfast’ carriage services (ie, services with speeds of over 25 Mb/s) wholly or predominantly to residential and small business customers are also now obliged (like NBN Co) to do so only on a wholesale, open-access basis.³⁴

Separation of Telstra

Alongside the NBN, a central plank of the government’s telecommunications reform agenda has been to encourage the structural or functional separation of Telstra. Amendments to the Telecommunications Act in 2010 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 mandatory functional separation and being denied access to certain new spectrum). Consequently, in connection with the commercial agreements it struck with NBN Co and the Australian government, Telstra elected to structurally separate.

The Telecommunications Act was amended in 2010 to introduce 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’.³⁵ Essentially, it is a means for Telstra to voluntarily divest its copper customer access network, under ACCC oversight (and subject to ACCC enforcement).

In February 2012 the ACCC accepted Telstra’s submitted SSU,³⁶ under which Telstra commits to structurally separate by 2018 by progressively disconnecting its copper and hybrid fibre-coaxial local access networks as the NBN is rolled out. The SSU includes assurances from Telstra intended to ensure that while Telstra continues to provide regulated fixed-line wholesale services, it does so on an equivalent and transparent basis; it also includes extensive obligations to report to the ACCC on Telstra’s compliance with the SSU. The ACCC is responsible for monitoring and enforcing this compliance and, on application by the ACCC, the Federal Court of Australia has power to make orders against Telstra to secure Telstra’s compliance with the SSU. This includes orders requiring Telstra to compensate wholesale customers if they suffer loss as a result of Telstra’s breach of the SSU, and pecuniary penalties of up to A$10 million per contravention.³⁷

The Telecommunications Act also includes provisions allowing Telstra voluntarily to divest its HFC cable network and its interest in the FOXTEL pay television network, failing which Telstra could be prevented from participating in certain upcoming spectrum auctions.³⁸ However, these divestiture requirements were waived by the Communications Minister on the basis that Telstra’s SSU was sufficient to address competition concerns.³⁹

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.⁴⁰ 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 the 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, encouraging the economically efficient use of and investment in infrastructure, and achieving any-to-any connectivity.
5. Competition and Consumer Act 2010 (Cth), section 152CJA.
6. See, for example, the Competition and Consumer Act 2010 (Cth), sections 152BC and 152BCA. In contrast, under the facilities access regime under the Telecommunications Act 1997 (Cth), the ACCC continues to have power to arbitrate disputes.
7. Competition and Consumer Act 2010 (Cth), section 152BC.
8. Competition and Consumer Act 2010 (Cth), section 152BCC.
9. Competition and Consumer Act 2010 (Cth), section 152BD.
10. Competition and Consumer Act 2010 (Cth), section 152CBA.
11. There is also a similar right to obtain access to network information: Telecommunications Act 1997 (Cth), schedule 1, part 4, clause 21.
12. 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, the Telecommunications Act 1997 (Cth), schedule 1, clauses 17, 33, 34, 35.
13. 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).
14. 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 14 December 2012).
15. 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/item.phtml?itemId=904438&nodeId=e1597c6a60252ac95402010c7875fa78&fn=Final%20report.pdf (accessed 14 December 2012).
16. See ACCC, Final Access Determinations Nos. 1 to 6 of 2011 for Fixed Line Services, available at www.accc.gov.au/content/item.phtml?itemId=1062619&nodeId=070c262152a987c1277355843cd76318&fn=Final%20access%20determinations%20as%20varied.pdf (accessed 14 December 2012).
17. ACCC, Explanatory Statement to the domestic transmission capacity service final access determination, available at www.accc.gov.au/content/item.phtml?itemId=1060660&nodeId=94799c6338c1540f57ea5be0d5be91cf&fn=Explanatory%20Statement%20to%20the%20DTCS%20FAD%20-%20June%202012.pdf (accessed 14 December 2012), and ACCC, Explanatory Statement to the local bitstream access service final access determination, available at www.accc.gov.au/content/item.phtml?itemId=1082827&nodeId=a117d956a5cf37aacaaacb08759ac8b8&fn=Local%20bitstream%20access%20service%20FAD%20and%20explanatory%20statement.pdf(accessed 14 December 2012).
18. The National Electricity Law (NEL) is contained in a schedule to the National Electricity (South Australia) Act 1996 (SA). The National Electricity Rules are made under the NEL.
19. 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.
20. See, for example, Telstra, Submission to the National Broadband Network: Regulatory Reform for 21st Century Broadband Discussion Paper (2009), pp.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), p.29; Telstra, Response to the ACCC’s Discussion Paper (26 February 2010), p.16; Frontier Economics, Access pricing principles for fixed line services: A Response to the ACCC’s Discussion Paper prepared for the CCC (February 2010).
21. See the 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.
22. 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.
23. 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 14 December 2012); ACCC, Telecommunications competitive safeguards 2010-2011 (1 May 2012), p.28, available at www.accc.gov.au/content/index.phtml/itemId/1060713 (accessed 14 December 2012).)
24. Ibid.
25. Under schedule 1 to the Telecommunications Act 1997 and part XIC of the then Trade Practices Act 1974 (now CCA).
26. Australian Competition and Consumer Commission v Telstra Corporation Ltd (2010) FCA 790, [248] – [249] (Middleton J).
27. National Broadband Network Companies Act 2011 (Cth), section 9.
28. National Broadband Network Companies Act 2011 (Cth), part 2, divisions 3 and 4.
29. Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011 (Cth), division 16.
30. Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Act 2011 (Cth).
31. Competition and Consumer Act 2010 (Cth), sections 152AL(1), (8A), (8D), (8E), 152BC(4A)-(4C) and 152CJA(1).
32. NBN Co’s Wholesale Broadband Agreement is available at www.nbnco.com.au/getting-connected/service-providers/agreements/wba.html accessed 16 December 2012). NBN Co’s proposed special access undertaking, and details of the ACCC’s assessment process for the special access undertaking, are available at www.accc.gov.au/content/index.phtml/itemId/1080594 (accessed 16 December 2012).
33. Details of the further consultation and review processes for NBN Co’s Wholesale Broadband Agreement are set out in NBN Co’s Contract Development Process, available at www.nbnco.com.au/assets/documents/wba-contract-development-process-sfaa-v1-30-nov-11.pdf (accessed 16 December 2012).
34. Telecommunications Legislation Amendment (National Broadband Network – Access Arrangements) Act 2011.
35. Telecommunications Act 1997 (Cth), section 577A(1)(a).
36. See ACCC, ACCC accepts Telstra’s structural separation undertaking, available at www.accc.gov.au/content/index.phtml/itemId/1035833/fromItemId/142 (accessed 16 December 2012). Telstra’s SSU is available at telstrawholesale.com.au/about/structural-separation-undertaking/index.htm (accessed 16 December 2012).
37. Telecommunications Act 1997 (Cth), section 577G.
38. Telecommunications Act 1997 (Cth), sections 577C and 577E.
39. Telecommunications Act 1997 (Cth), sections 577J(3), (4), (5), (6).
40. United States v AT&T, 552, federal supplement 131 (DDC 1982).