Chapter 3
Regulatory Revolution Required?
Introduction
3.1
When the government announced the National Broadband Network (NBN) Request
for Proposals (RFP), it also announced that submissions would be invited for suggested
regulatory changes, in a process running in parallel with the RFP process. The
committee sees this as an acknowledgement of the common criticisms received
from a broad range of broadband stakeholders regarding the shortfalls of the
current regulatory regime. This chapter will explore those criticisms and
outline the common themes for regulatory change, and related regulatory issues.
3.2
The overview of the RFP sets the framework for submissions to provide
suggestions for changes to the regulatory regime of the telecommunications
industry. The submissions to the Department of Broadband, Communications and
the Digital Economy (the department) were invited on their website, which
stated that:
The Government is prepared to consider changes to
existing telecommunications regulations to facilitate the roll-out of this
network. ... The Panel of Experts, which will be assessing proposals to
roll out the National Broadband Network, will have access to all submissions
and will be able to take them into account in evaluating proposals.[1]
3.3
Following the 25 June 2008 closing date, the department published all
submissions on its website, making them available for prospective proponents to
consider when preparing their proposals.
3.4
There are six evaluation criteria against which proposals will be assessed;
criterion three refers to assessing any suggested changes to regulation, and is
as follows:
the nature, scope and impact of any legislative and/or
regulatory changes that are necessary to facilitate the Proposal;[2]
3.5
The RFP later infers that there may be constraints to the nature of the
changes that the government will consider:
...these changes will be limited to those necessary to directly
facilitate investment in the NBN, and [those which] will not jeopardise the
Commonwealth's other objectives...[3]
Seizing the unique opportunity to make regulatory change
3.6
The majority of the submissions received by this committee have highlighted
that the NBN initiative provides the government and the industry a prime opportunity
to address the shortfalls of the current regulatory regime. Many strongly urged
the government to make regulatory changes that would prevent duplication of the
current regulatory failures. Comments made by Google in their submission are
typical of those received by the committee:
...fully embrac[e] this historic opportunity to construct an
appropriate regulatory environment ... that does not replicate known problems
with the existing regulatory environment.[4]
3.7
Infrastructure Partnerships Australia (IPA) focussed their entire
submission to this inquiry on the current regulatory framework and the changes they
believe are required to achieve competition in the NBN environment, while
safeguarding consumers and delivering on the government's vision. They believe
that the NBN initiative:
...provides an opportunity for the Government to consider a new
approach to telecommunications' regulation which fosters competitive outcomes,
encourages innovation and delivers the greatest social and economic return to Australia's
business and domestic consumers.[5]
3.8
Terria acknowledges that, if the NBN was designed to develop the optimum
capability for next generation telecommunications, Australia could produce a
telecommunications industry that is 'second to none':
This unique opportunity is not simply about technology or
consumer, it is first and foremost about setting up an industry environment
where competition and, therefore, consumer benefits come first. ... [I]t needs to
provide investor certainty and an effective regulatory framework.[6]
3.9
The Vodafone submission is also of the view that, if the new regulatory
regime is carefully drafted and implemented, Australia could lead the world in
achieving optimal outcomes through a competitive and innovative
telecommunications environment:
The NBN regulatory environment provides a unique opportunity ...
for the Government to become a global leader in reforming the telecommunications
sector in a manner which enhances economic growth and consumer welfare as well
as providing incentives for continued innovation and investment in the sector.[7]
3.10
The inquiry has heard claims that the current regime is in need of a
thorough review, particularly in light of the rapid technological developments
within the industry over the last decade. In fact, the Western Australian
Chamber of Commerce and Industry (WA CCI) believes that because the changes are
so significant, with no review of telecommunications legislation occurring over
the last ten years, a 'full review of Commonwealth telecommuncations
legislation' is now justifiable.[8]
3.11
In their submission, iiNet makes the comment that the NBN provides an
opportunity to address some of the 'shortcomings inherent in the existing
regulatory regime.'[9]
Noting the unique opportunity to address these shortcomings that building the
new network provides, iiNet makes the strong statement that:
Critically, the network's construction is not only an historic
step, but a major and historic opportunity to set in place an access and
regulatory regime that will secure the future growth, innovation and
competition in the information, communication and telecommunications sector.[10]
3.12
Building on this, iiNet believes that the government should establish a
statutory access regime prior to awarding the contract to build the NBN:
... the recent High Court judgement in Telstra Corporation v The
Commonwealth (6 March 2008) reinforces the critical importance of setting in
place a statutory access regime in advance of awarding any consortium the
rights to build the National Broadband Network.[11]
3.13
Emphasising this point, the iiNet submission continues that the success of
entire NBN initiative will be measured on the government's ability to establish
an appropriate regulatory framework:
The future access and regulatory regime will be a key
determinant of the ability of the Federal Government to successfully implement
its election policy and deliver on its commitment ...[12]
3.14
In evidence given at the Sydney public hearing, Mr Clive Poolman from
AAPT also made reference to the NBN providing a chance to make the changes that
his company believed are required to the existing regulations. He stated that:
...with the advent of a new network ... there is an opportunity now
to do things in a different way, particularly from a regulatory perspective, to
enhance and facilitate competition in the market.[13]
3.15
The committee also heard from those who believed that, because of the
substantial contribution of public money to facilitate the roll-out of the new
network, the government should insist on appropriate regulatory changes that
would protect this investment of public money and ensure its objectives are
achieved:
...the fact that there will be a public investment in the National
Broadband Network will ensure that there is some [government] control over the
future of regulatory developments ...[14]
3.16
The Western Australian Department of Industry and Resources aired
similar views in their submission, also noting that appropriate regulation
should not only support the government's stated objectives for the NBN, but
would subsequently have a positive impact on investment in the industry:
...regulation has a significant impact on investment incentives.
The significant investment being committed by the Commonwealth Government ... at
this time presents an opportunity to adjust the current regulatory regime with
minimal disruption to market outcomes. If the right changes are made then
there is a good chance that a reformed regulatory framework will help to
enhance investment signals.[15]
3.17
There is a general understanding that while there remains uncertainty in
the level of protection offered by regulation for investors, there is no
incentive for future investment and innovation, whatever the industry.
What not to allow in the new
regulatory regime
3.18
Another view made clear to the committee was that the new framework
should not provide any form of regulatory 'holiday' for the owner/builder of
the network. This seems to be in direct reference to Telstra's submission to the
department on their suggestions for regulatory changes to support the
implementation of the NBN.
Telstra's contrary views on regulation
3.19
While Telstra's submission echoes industry calls for significant reform
of Part XIB and XIC of the Trade Practices Act 1974, it subsequently
requests that these sections of legislation should not to apply to the NBN
deployment. Some of the suggestions for regulatory changes in the Telstra
submission are as follows:
-
Existing ULLS and LSS access regulation should be removed within
the NBN footprint;
-
The access regulation is rolled back in competitive areas;
-
New access pricing principles that would move from "cost-based"
regulated pricing to "value-based" pricing approach;
-
The NBN operator should not be required to provide wholesale
versions of its own retail products;
-
There is pricing flexibility at retail and wholesale levels, with
scope to "experiment to discover demand and price levels"; and
-
Ameliorate land access risks for the successful bidder to ensure
they can meet the "aggressive build timeframe".[16]
3.20
Like other industry participants, Telstra raises throughout their
submission that there is a 'fundamental flaw' in the current legislation.
However, they believe that the answer lies in softening (or removing) the
legislation and weakening the role and the powers of the Australian Competition
and Consumer Commission (ACCC), whereas the majority of industry proponents
call for regulations and the role and power of the ACCC to be strengthened.
Telstra makes the statement that:
The central problem is regulatory uncertainty. The cause of
this uncertainty is the excessive discretion vested in the ACCC in both
determining its own remit by declaring which services will be regulated and
then in determining the terms of access.[17]
3.21
Their submission subsequently requests that the current role of the ACCC
is significantly reduced, almost removed, so that there is a 'single process',[18]
inferring that the ACCC acts to hinder rather than protect the industry and its
customers:
The burden to satisfy the ACCC, which can reject an undertaking
on fairly arbitrary grounds, is virtually impossible ...[19]
3.22
These requests by Telstra are precisely what the industry has warned the
government not to allow, as noted by Optus in their submission:
The consequences for competition and Australian consumers under
[Telstra's regulatory] proposal would be dire. Telstra's position must be
rejected.[20]
Appropriate regulation with
consistent application
3.23
While the AAPT strongly criticises the current regime, their submission
continues that the solution will not lie in merely increasing the level of regulation:
AAPT submits that it is clear that the current regulatory regime
is both inefficient and ineffective. It does little to mitigate the
anti-competitive conduct of Telstra as the largest network provider and instead
results in an environment fraught with anti-competitive conduct, gaming and
uncertainty. ... However, more regulation is not the answer, appropriate
legislation is.[21]
3.24
According to AAPT, an 'appropriate' framework for legislation or
regulation would be achieved through the alignment of incentives within the
appropriate market structure, which in turn would support the key principles of
regulation required for the new network.[22]
AAPT are not alone in their views; however the issue of how the successful
bidder should structure its business will be discussed later in this chapter.
3.25
Competitive Carriers Coalition (CCC) believes that regulation should aim
to shape the competitive market, given that the NBN will most likely be a
natural monopoly. Their submission compares the regulation of the
telecommunications industry to that of other basic utilities and their
supporting infrastructures:
In areas where there is not substitutability between two
[infrastructure providers], we regulate to create competitive retail markets by
separating the monopoly deliver[ed] infrastructure from the sale of the actual
product. ... We regulate this way because consumers buy services, not wires or
empty pipes.[23]
3.26
Vodafone points to another shortfall in the manner in which the current
regulations are inconsistently applied. Vodafone contends that currently there
is a bias towards fixed networks, and that any new regime must be applied
equally to all parties. As Australian and global digital economies become
increasingly reliant on the convergence of fixed and wireless networks, the
regulatory environment will need to support this convergence, rather than
favour one technology platform over another:
Australia's future prosperity and the growth of the digital
economy will be supported through a combination of fixed and wireless networks.
In this environment it is important to avoid a regulatory regime that
inconsistently applies the principles on which it is based.[24]
3.27
The submission highlights this inconsistency with the example where the
current regime maintains:
...higher levels of regulation in respect of privately funded
mobile networks operating in highly competitive markets, while conceding lower
levels of regulation to monopoly infrastructure that has also enjoyed the
benefits of Government funding.[25]
Objectives for devising appropriate
regulation
3.28
The government has clear objectives (see appendix 2) that the new
broadband network must achieve; it is critical that any new regulations will
facilitate achieving these objectives and provide ongoing support to
maintaining them.
3.29
In addition to specifying the footprint coverage and speed of the
network, these objectives include that the network continues to promote the long-term
interests of end-users (LTIE), that it has the capacity to be upgradeable over
the lifetime of the project, that it facilitates competition through open
access, and that it enables low access cost-based prices while allowing
proponents a rate of return on their investment.
3.30
Given the commitment of public monies to fund this initiative, the new
regime should also be guided by basic public policy principles. An additional
consideration should also be the 'social inclusion' focus that the government
has placed as a priority in its overall policy agenda. However, Professor Trevor
Barr argues that inclusive public policy is actually one of the 'neglected
agendas' in this debate. Professor Barr discusses the complex social and
cultural factors that affect consumer choice of technology and services and
states that consequently:
The best new technologies and services will be those that are
created, designed constructed and marketed in ways that will be highly adaptive
to human needs in user environments of the future.[26]
[bolded italics copied]
3.31
When discussing the broad principles that should underpin new
regulation, Professor Joshua Gans made the comment that:
The Government should view itself as designing a market
rather than a regulatory bureaucracy and process.[27]
[bolding copied]
WA Chamber of Commerce and
Industry's principles
3.32
The Western Australian Chamber of Commerce and Industry (WA CCI) provided
the inquiry with a submission that outlined basic principles that would lead to
the creation of a sound regulatory regime for the NBN. The WA CCI stated that
when drafting the new framework, the government should aim to achieve a 'reasonable
balance between protection and regulatory cost':
Regulatory design should achieve competitive neutrality,
transparency and have minimal overlap and duplication.[28]
3.33
When drafting new regulations, the WA CCI advises that there needs to be
an appropriate balance between efficiency and effectiveness of the new regulations,
which should foster competition, economic growth, innovation and prime social
objectives.
3.34
The WA CCI submission included a discussion paper they had published in
2006, which had determined key principles that government departments could
apply to shape and inform regulatory activity. Of the seven basic principles
within this discussion paper, the WA CCI notes that five are very relevant to
the implementation of the NBN; these five principles are as follows:
-
government
intervention should be minimal and the least preferred option for achieving
policy outcomes;
-
regulation should be outcomes based rather than process
based;
-
regulation
should not be overly prescriptive with minimum requirements such as speed
limits;
-
regulation
should be created with sound social and economic purpose, requiring governments
to fully asses all legislative and regulatory proposals against a regulatory
impact statement; and
-
the
Government should regularly review and remove redundant regulation.[29]
3.35
The WA CCI 'strongly recommends' that these principles guide the
creation of any new regulatory framework for the NBN.
3.36
Within the WA CCI discussion paper was another set of regulation
principles that was drafted by the Business Council of Australia (BCA). These
principles were drafted by the BCA as a solution to 'curtail the tide of
government red tape' and were intended for use by both Commonwealth and state
government departments. The BCA principles mirrored those of the WA CCI, and
included that:
-
regulation should be the last, not first, response of Government
and the benefits of proposed regulation should always outweigh the costs of
administration and compliance;
-
regulation should set a framework, not try to cover the field;
-
all businesses, whether large or small, should be treated
equally; and
-
there must be full transparency and accountability around the
processes for making and administering regulation.[30]
3.37
Apart from the suggestions for general principles that would produce an efficient
and effective regulation regime for the new network, there was a stated need
for the regulatory principles to strive for social benefits, considering the
use of taxpayers' dollars to fund the NBN. This view was expressed by iiNet in
the submission on regulatory issues that they provided to this inquiry as a
supplementary submission:
The General principles that need to be applied to the regulatory
improvements are those aimed at a social dividend, that have been in place for
some time and are expressed by government policy:
3.38
The Communications Expert Group (CEG) stated that having clear policy
objectives was one of the key issues for the development of the NBN, with the 'core'
objectives incorporating the long-term interests of end-users (LTIE).[32]
3.39
The objectives stated within the RFP certainly address several common principles
highlighted by submitters and witnesses alike, such as the promotion of the
LTIE, facilitating competition through open access arrangements, and ensuring
equivalence of price and non-price terms and conditions.
Regulatory certainty a priority
issue
3.40
There has been criticism that the objectives within the RFP were not
sufficiently specific for prospective proponents attempting to frame their
proposals. In particular, criticism was levelled at the government for not putting
in place a basic regulatory framework within the RFP on which
prospective bidders could build a business model, thus providing greater surety
that bids would compete, and be subsequently assessed, on truly equal terms.
3.41
Dr Ross Kelso was asked his views on the manner in which the RFP was
released without the government providing guidance on the regime under which
the NBN might operate:
I totally agree with the sentiment that the cart has been put
before the horse; the regulatory arrangement of the framework should have been
done first.[33]
3.42
At the first Canberra public hearing, the committee heard a similar call
from the Executive Director of IPA. When questioned whether IPA believed that
any regulatory changes should be completed prior to the RFP being released, Mr Lyon
replied:
Of course, ... [w]e would view getting the regulatory frameworks
as being fundamental and necessary. ... [Y]ou need to provide a level of
regulatory certainty around the future shape of the market. ... We would say that
legislation would need to be in place and that certainty will need to be around
the future shape of the market and a regulatory regime that exists ...[34]
3.43
At the Perth hearing, iiNet stated that they believed that the NBN would
not provide the right solution for Australia, and also made comment about the
lack of a new regulatory framework being in place prior to the RFP being
released, and called for a bipartisan approach to resolving the regulatory
issues:
...[service providers] will not return to this until they have the
confidence to invest back in the sector.
That, again, comes down to the government coming forward – and I
mean all of you, both sides – and saying, 'Here is the rule book, guys.' Even
of the news is bad for us, at least our investors can make informed choices.[35]
3.44
Mr Malone was further questioned on whether he believed that it would
therefore be preferrable to delay the NBN until effective legislation was in
place, to which he responded quite emphatically:
I would rather a deferred solution rather than a stupid one. At
the moment, you are delivering me a stupid one.[36]
3.45
Ms Deanne Weir from AUSTAR was also adamant that there should have been
regulatory certainty in place prior to the NBN RFP being released:
...we think it is actually very critical that there be proper
regulatory rules. That is one thing that concerns us about how this is played
out – that the regulatory rules have not been set prior to the tenders being
called for ...[37]
3.46
Criticism was also made in relation to there being no regulatory regime
to guide the actual assessment of the NBN tenders. At the Melbourne public
hearing, Mr Kevin Morgan commented to this effect:
You have to have an objective set of criteria to assess a tender
if you do not want to end up in the courts.
How can you possibly objectively assess a tender where the key
regulatory inputs are not known? Regulation goes to the issue of risk and you
cannot build a business case without understanding the risk because no-one will
give you money. ...Unfortunately, I have to say this process is fatally flawed. ...
Until you have regulatory reform this cannot go ahead. Until
you have set regulatory rules you cannot go ahead.[38]
3.47
There are also strong calls for the regulation to incorporate or even
mandate some form of separation within the owner/operator of the NBN. The
issue of restructuring the industry is pivotal within the NBN debate, and will
be discussed later in this chapter.
Conclusion
3.48
The committee considers that the government should have provided a
regulatory framework within the RFP; this would have provided proponents with
greater certainty in building their business case for the NBN, while also
providing a legal framework for the assessment of proposals.
Telstra's current conflict of
interest
3.49
Despite the almost universal criticism of Telstra's vertical integration
that facilitates its abuse of the strong market position it holds, the committee
heard from a number of people who identified an almost 'catch-22' situation for
Telstra.
3.50
Being now totally owned by shareholders, Telstra is bound by commercial
law to ensure that it acts in the best interests of its shareholders.
Conversely, Telstra is the owner of telecommunications infrastructure, which
provides essential services for Australian homes and businesses. As a service
provider, Telstra is also bound by legislation to serve the best interests of
its customers. As an example of these comments, Adam Internet stated in their
submission that:
It is unreasonable to expect a listed corporate entity to put
the interests of its competitors, the broader industry or Government policy
ahead of its fiduciary obligations to its shareholders.[39]
3.51
The WA Chamber of Commerce and Industry also recognised this in their
submission:
...a conflict of interest arises when a monopoly carrier is
required by law to provide network access to its retail competitors, and is
also required by law to maximise the return to its shareholders.[40]
3.52
Although the WA CCI welcomes the government's commitment to constructing
the NBN as an open access network and to implement regulatory reform to achieve
this, the submission continues:
...the Chamber does not believe that an open access network goes
far enough [and] considers the structural separation of the wholesale and
retail infrastructure of the NBN to be an effective model.[41]
3.53
The WA CCI also submits that by separating the wholesale and retail
units, the government will actually 'reduce the need for long term government
regulation.'[42]
3.54
Although Telstra's motive for its anti-competitive behaviour has been
generally acknowledged, this fact does not change the impact this behaviour has
on the industry and Australian consumers alike:
While Telstra's anti-competitive activities can be seen as
rational attempts to protect its market share, these actions are clearly not in
the national interest. The national interest is best served through
competition in the telecommunications sector.[43]
3.55
The committee heard on a number of occasions the opinion that this conflict
of interest cannot be resolved unless the vertical integration of Telstra's
business operations and units is further separated. Witnesses expressed
concern that without this separation, Telstra would continue to place the
interests of its shareholders above the interests of its customers and the Australian
people, and ultimately affect the ability of Australian businesses to compete
internationally.
Conclusion
3.56
The committee concludes that omitting to specify the structure of the
new network has caused confusion and uncertainty among potential bidders and
industry stakeholders.
Failures of the current regime
3.57
The extent of the failure of the current regulatory regime can be
highlighted by the fact that even Telstra, which holds unrivalled market power
in the Australian telecommunications industry, has called for a complete review
of the legislation. The submissions to the inquiry are mostly general in their
areas of criticism, although a number have given considerably detailed
descriptions of legislative amendments that would be desirable. This Interim Report
will report on the general areas of failure of the current regime, with the
final report providing more in-depth examination of those changes.
Original intent of the legislation
3.58
When the government first offered shares in Telstra, significant changes
were made to the Trade Practices Act 1974; the objective of these
changes was to facilitate competition in the telecommunications industry
through the application of general competition law principles combined with
telecommunications specific access regulation. This regime was introduced in
1997, leaving Telstra as a vertically integrated entity, on the assumption that
the ACCC could exercise effective control over Telstra with the aid of
telco-specific powers. Part XIB of the new regime was to deal with any future
abuses of market power while Part XIC was to regulate access to services.
However, that assumption was soon proven to be misguided:
With over eleven years experience, we now know that these
provisions have proved inadequate to control Telstra and to provide a genuine
level playing field for competitors seeking to compete with Telstra in the
provision of fixed line services.[44]
'Gaming' the regime
3.59
The practice of 'gaming' the regulatory system was a common complaint to
this inquiry. Under Part XIC, access seekers are to 'negotiate' access terms,
conditions and prices with Telstra. However, the concept of negotiation is
reliant on two parties striving for a win/win outcome; negotiation is not
possible if one side, particularly the side with the market power, is not
motivated to even come to the negotiating table. Many have commented that this
negotiate/arbitrate model is an abject failure because of this:
The negotiate/arbitrate model under Part XIC has proven to be a
failure. It has provided Telstra with both the incentive and the means to game
the system to its advantage.[45]
3.60
Optus elaborates on how Telstra is able to frustrate the decision making
process, succinctly summarising statements made by others, as follows:
-
It
employs a take it or leave it approach to commercial negotiations, which are
treated merely as stalling devices. It rarely engages on issues and blatantly
uses information asymmetries to undermine the negotiating process.
-
The
undertaking process is used as a means to undermine the ACCC's price signalling
processes and delay arbitral decisions.
-
The
arbitral process is stymied by constant questioning of the due process and
issues of jurisdiction.[46]
3.61
The gaming process utilised by Telstra can cause significant delays to
access seekers, which are consequently unable to provide terms and conditions
of access, or even basic pricing of access, to their potential customers, who
are often subsequently wooed to Telstra.
3.62
The provisions of Part XIB were to provide an alternative mechanism for
the ACCC to use in cases where there was a need for efficient and effective
enforcement action to address anti-competitive behaviour. However, these have
also proved to be ineffective over the years. Optus claims that the provisions
are 'far too weak', in addition to being expensive to pursue. According to
Optus:
Telstra can enjoy months and even years of benefit from
anti-competitive conduct before a matter is investigated and sanctions imposed.[47]
3.63
Not only are they ineffective, but even when an anti-competitive notice
is applied, Telstra is able to ignore it for months, and even then is only
required to pay a small monetary amount, which Optus likens to a 'minor
speeding ticket type fine.'[48]
This has resulted in the ACCC signalling an unwillingness to use its powers
under Part XIB. According to Optus, this is due to the fact that the ACCC's
powers to regulate access are:
...often ill-defined and limited by various rights of appeal. ...
The legal strait jacket within which the ACCC has to operate is demonstrated by
the ACCC's recent revelation that it is currently involved in 47 legal actions
initiated by Telstra.[49]
3.64
These claims are in sharp contradiction to the claims made by Telstra in
their submission to the department requesting regulatory changes. According to
Telstra, it is the ACCC which is the cause of delay in the decision making
process, and consequently Telstra calls for the powers of the ACCC to be curtailed
and indeed for their role to be all but eliminated in the decision making
process.
3.65
In an attempt to address the emerging increase of anti-competitive
behaviour, Telstra was required in 2005 to implement operational separation.
However it seems that these requirements have also been ineffective. The ACCC
itself was asked whether it believed that the current form of operational
separation had proven effective for promoting equivalence between Telstra and
its competitors; their response was:
...probably no. We continue to receive complaints of conduct that
suggest that the objective of equivalence, which was the objective of the
regime, is not being achieved.[50]
3.66
The Competitive Carriers Coalition makes the comment that, after years
of unsatisfactory policy advice, the industry now has little confidence that
the department fully understands the 'needs and motivations of non-Telstra
businesses'. Using as an example the 2005 amendments that required Telstra to
operationally separate, the CCC submits that:
Warnings, both public and private, by the non-Telstra industry
that the proposed arrangements would fail completely were ignored by the
Department. These warnings have subsequently been completely vindicated.[51]
More than a new regime required
3.67
As previously mentioned, stakeholders have highlighted that open access
must be supported by appropriate changes to regulation, with many advocating
structural changes to the industry itself to prevent anti-competitive behaviour
by what will undoubtedly become a powerful monopoly provider. Although the
definition of open access may appear to be reasonably clear within the RFP, the
fact that the advocated restructure of the industry is not assured as a
component of the NBN is a cause for concern.
3.68
This concern was exacerbated when Telstra openly stated that it will not
be a part of the NBN process if structural separation is a mandated
prerequisite. During their appearance before the committee, Telstra reiterated
their media statements to this effect, categorically stating that:
Telstra's position is that if further separation is part of the
NBN then we are not in a position either to build or to bid for the NBN.[52]
3.69
At the Canberra public hearing, representatives of the Competitive
Carriers Coalition discussed at length the disadvantages of the current
industry structure and its close relationship with the availability open
access. Mr Matthew Healy stated that:
... it is the structure of the industry rather than simply the
regulatory settings that we have at the moment that makes it difficult, if not
impossible, to have open access. ... It is not so much the regulatory settings as
it is the structure of the industry that militates against an open access
arrangement.[53]
3.70
At the same hearing, representatives from the Terria consortium, which
is one of the major proponents for the NBN, also tied the achievement of open
access to the structure of the successful owner of the NBN. Mr Michael Egan,
Terria's Chairman, made the statement that:
If the national broadband network is to fulfil its potential, it
must be an assured open access network ... and we believe that will happen only
if the NBN is properly regulated ... [and] is an independent network not
controlled by any retailer or group of retailers, and not providing its own
retail services.[54]
3.71
Mr Michael Simmons continued this line of association when he added
that:
Terria's position on open access is that all access seekers
would have equivalent both non-price and price access terms in accessing the
network and that would be guaranteed by having a separated and independent
network between the network owner-operator and all access seekers.[55]
Options for separation
3.72
There was a general consensus that any new regulations that underpin the
NBN should ensure that any operator/owner of the new network cannot participate
in anti-competitive behaviour. This is reinforced by the objective of the NBN
which states that there is to be open access to the network and that the NBN
regime facilitates and supports competition and innovation in the
telecommunications sector.
3.73
Many have made calls for the network owner to be structurally separated
from any downstream retail business units. The common thought is that this
would be the most effective way to ensure true open access, and would actually
reduce the need for regulations. This is because, if the NBN owner has no
retail interests, then its business imperative will be to its own interests and
business performance, which will consequently drive incentives to maximise the
use of the network by access seekers. As Optus comments in their submission:
This change in incentives ... can be expected to flow through to a
more competitive and diverse broadband market. This in turn will deliver very
tangible benefits to customers in the form of lower prices and more innovative
services.[56]
3.74
Mr Paul Budde echoed this sentiment in the closing statement of his
submission:
Sound infrastructure based (structural) regulations based on
open networks will also reduce the currently high level of regulations required
for the services carried out over this infrastructure.[57]
3.75
In a report commissioned by Optus, the statement is made that if the
owner is vertically separated, this automatically removes the incentives for
the owner to act in an anti-competitive manner. Where there is less incentive
for such behaviour, it follows that there will be a reduction in the amount and
extent of regulation that would be required for the NBN. The report builds on
this concept, stating that:
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.[58]
3.76
However there are other comments that not only is the operational
separation model implemented under current Australian regulations not effective
in even reducing, let alone eliminating, anti-competitive behaviour, the model
used in Australia is not as effective as others in use internationally:
...current arrangements in Australia for dealing with
non-discrimination and the leverage of market power are weak and do not
constitute the robust models of functional or operational separation applied in
New Zealand and the UK.[59]
3.77
It is perhaps beneficial at this point to summarise the variations in
the degrees of vertical separation, which range from full vertical integration
through to full structural separation. The table below has been taken from the
report within the Optus submission, authored by the Competition Economists
Group, Structural Separation for a National Broadband Network: A Report for
Sing-Tel Optus. The lowest degree of vertical separation shown is accounting
separation; the highest is structural or ownership separation:
Table 1: Forms of vertical separation.
|
Rating |
Type of organisational separation |
Features |
|
7 |
Ownership separation |
Full structural separation
– may involve club ownership of bottleneck |
|
6 |
Legal separation (separate
legal entities under common ownership) |
Legal separation (which may
or may not embody elements of functional separation) |
|
5 |
Functional separation with
localised incentives and/or separate governance arrangements |
Variants on functional
separation |
|
4 |
Functional separation |
|
3 |
Virtual separation |
Variants on accounting
separation |
|
2 |
Creation of wholesale
division |
|
1 |
Accounting separation |
3.78
Accounting separation involves the organisation compiling separate
profit and loss statements and balance sheets for all separate entities within,
and can be accompanied by the creation of a special, separately named wholesale
unit. This appears to be the current form of separation under which Telstra,
and its wholesale subsidiary, BigPond, operate.[60]
3.79
Virtual separation requires organisations to establish retail, access
and wholesale divisions, creating service level agreements intended to ensure
that no discrimination occurs. In practice it will necessitate new training
for the workforce to ensure that employees respect the new but virtual divisions
within the company.
3.80
Functional separation will see the provision of incentives for senior
managers in the separated entity, and/or separate governance arrangements. The
next step would be legal separation, seeing the creation of a separate board
and the filing of separate statutory accounts.[61]
3.81
The greatest degree of vertical separation is structural separation,
where there is separate ownership of the separated assets.[62]
3.82
The mammoth policy question facing the department is to what degree
should the regulations mandate separation for the new network operator. There
are those who believe that structural separation is not the only answer or in
fact may not be necessary, as long as the appropriate regulations are in place:
...strictly speaking, [structural separation] is not absolutely
necessary. It is desirable ... but it is not absolutely necessary. If you set
up the correct regime, you can achieve open access without structural
separation.[63]
3.83
However, Dr Kelso later gave the constraint that if structural
separation was not implemented, the new regime would need to clearly prescribe
the conditions of open access, which he explained as similar to everyone having
the right to use the roads in Australia:
The Trade Practices Act does not prescribe open access. Open
access means a right of access. Under Part XIC of the Trade Practices Act we
do not have a right of access.[64]
3.84
A form of functional or operational separation would be another
alternative, although some believe this to be a less effective model which
would most likely require a comparatively greater degree of regulatory control:
Operational separation simply does not work. A value chain
where the supplier of a critical service to a market also competes with each of
its customers in that market is simply dysfunctional.[65]
3.85
Vodafone has submitted that their preference would be for structural
separation to be implemented as an NBN component, and concedes that functional
separation would be an inferior alternative:
Vodafone considers that the only viable alternative to
structural separation (albeit less suitable) is to implement a model of full
functional separation ... similar to that which has been implemented in the
United Kingdom ... and will be implemented in New Zealand.[66]
3.86
Optus agrees with the fact that operational separation would not be as
effective as structural separation, stating that:
The operational separation arrangements that apply to Telstra
are wholly ineffective.[67]
3.87
Both the department and the minister have claimed that the government
does not favour any model of separation, and that the RFP remains non-prescriptive
to allow the greatest level of flexibility for proponent network design. At
the Canberra public hearing, Mr Colin Lyons from the department commented that:
... the request for proposal is an outcome focused document, not a
mechanism focused document. It does not prescribe that certain structures or
mechanisms are essential to achieve particular outcomes.[68]
Conclusion
3.88
The committee supports the general consensus that any new regulations
that underpin the NBN should ensure that any operator/owner of the new network
cannot participate in anti-competitive behaviour.
Is no regulatory
change an option?
3.89
The committee heard from the Canadian telco company, Axia NetMedia, at a
Canberra public hearing; this organisation gave a totally new perspective on
the issue of separation. The Chief Executive Officer of Axia NetMedia, Mr Art Price,
explained that the degree of separation depends on the objective of the network
implementation, and based the following explanation on examples where Axia NetMedia
had rolled out a new broadband infrastructure in three international locations,
each with varying demographics and geographic issues to overcome.
3.90
According to Mr Price, the issue comes down to a simple principle that
has been applied in all three initiatives. This principle is: 'Competing With
Your Customer Does Not Work'.[69]
3.91
Mr Price explained that, wherever you have the network owner also
supplying network services, they are automatically placed in a position where
they need to compete with the very customers on whom they also rely for
business, which in the case of the NBN would be all access seekers. This
naturally leads the network operator to favour their own services in pricing
and conditions of service over those of their 'customers'. As Mr Price said:
The practical thing is that the owner of [a non-vertically
integrated] network needs to survive based on the success of their customers,
as opposed to surviving based on their customers failing, and the success of
the [vertically integrated] incumbent is actually better if they keep those
retail services themselves.[70]
3.92
Mr Price advocates that Axia aims to completely reverse this objective,
so that the survival of the operator/owner depends on the survival of their
customers. This will automatically create the incentive for the operator to
attract the greatest possible volume of business – i.e. access seekers – to
utilise the new network, with the consequence of creating competitive marketing
tension that is beneficial to the network operator, to its customers, the
access seekers, and particularly to the benefit of the long term interest of
end users:
...to get a high performing end result and choice for the end
users, the party who has the next generation network should not be competing
with its own customers.[71]
3.93
In the implementation of their solution for broadband in the state of Alberta,
Canada, Mr Price noted that the state has no jurisdiction for regulating
broadband infrastructure and operation. An astounding revelation in the
evidence given by Mr Price was that, as there was no jurisdiction for
creating new regulation, Axia merely applied this principle of the operator not
competing with its customers.
3.94
Axia NetMedia has succeeded in providing 100 per cent of the state's population
with access to a high technological solution, with high service quality levels,
yet without any regulation being applied to the sector. By
merely adhering to the above principle, they have been able to create an
environment where the market thrives and there is no need for regulation:
That is quite different than saying the incumbent must
structurally separate. ... if you think of the three places we did this, the
government did not require the incumbent in any of those places to structurally
separate, but they got a structurally separated outcome ... from a party other
than the incumbent.[72]
3.95
When examined more closely, the application of this fundamental
principle actually addresses many of objectives or principles that were cited
earlier in this chapter, including the following:
-
Professor Joshua Gans' view that the government should create
regulations that design a shape the market environment;
-
The WA Chamber of Commerce and Industry's comment on the need to
design regulation that will achieve competitive neutrality and transparency, and
that government regulations should be minimal and be outcomes based rather than
process based;
-
The Business Council of Australia's similar view that regulation
should be the last, not first, response of government; and
-
iiNet's view that regulation should promote competition, promote
the long term interest of end users and ensure equitable service provision to
all Australians.
3.96
The Axia NetMedia principle underscores the previously stated views that
separation of the operator from upstream retail services will reduce, or indeed
remove the need for regulation.
A flawed process?
3.97
Criticism of the timeframe for the assessment and evaluation of the
proposals has already been discussed in chapter 2. However, in the context of
the regulatory changes that have been called for to support the new network,
this timeframe is highlighted again in this chapter.
3.98
When the government announced the Request for Proposals in April 2008,
it also announced that the general public and the industry was invited to
provide the department with submissions on regulatory changes that might
facilitate and underpin the smooth implementation and operation of the NBN.
Submissions closed on 25 June 2008 and were published on the department's
website, so that prospective bidders could augment their proposals with the
suggestions for change. The response by the public, and in particular the
industry, was substantial, with over eighty submissions, many of which had
multiple supplementary attachments.
3.99
While the government did invite suggestions for regulatory changes, and
has published them, criticism of their actions comes on two levels. Firstly
there is the criticism that the timeframe not only for the assessment of
proposals, but for the legislative and parliamentary processes required to make
the changes to the regulations and legislation, is inadequate. Secondly, there
is the call for public consultation, or at least consultation with the
industry, on any drafted changes to legislation or regulations, prior to the
legislation commencing the usual course through parliamentary process.
Lack of time
3.100
The RFP states that the rollout of the network will commence early in
2009; however, with the closing date for proposals being pushed back until
26 November 2008, and the required eight week evaluation of those
proposals, this date will obviously not be met. Although the government has
been criticised for this delay, this is not the main concern of the industry.
3.101
The criticism levelled by the industry is that the government should now
actually further delay the roll-out of the NBN to allow time for consultation
on the proposed regulatory changes:
I would recommend ... for the government to issue a discussion
paper based on its assessment of the submissions on the regulatory framework
and this discussion paper then be open for public evaluation. ...[73]
3.102
The industry is very cognoscente of the time taken to draft legislation,
and the need to allow for its passage through due parliamentary process. There
is genuine concern that if the government endeavours to meet the timeframe it
set as an election commitment, there will be insufficient time to enable thorough
consideration of all issues raised in the regulatory submissions to the department.
3.103
The strong preference expressed to this inquiry is for sufficient time
to be taken to enable the appropriate regulation and/or legislation to be
drafted, to ensure that the government 'gets it right' the first time, rather
than draft ineffective regulations that would hinder the progress of the NBN
implementation, and may well require ongoing amendments to support the
operation of the NBN. As the Australian Telecommunications Users Group notes in
their submission:
If more time in the planning and coordination phase is needed ...
that time should be taken.[74]
3.104
In fact, at the Brisbane hearing, Dr Kelso took this further by saying
that the restriction of the assessment period to eight week is not critical and
should be extended:
...I would say that the eight-week and six-week time lines ... are
really not that critical. There is nothing urgent about implementing this
national broadband network. Things can slip by for a few more weeks, a few
more months or whatever.[75]
Time in context of the contract
3.105
A key objective of the RFP quite clearly states that the time required
for the completion of the NBN rollout to 98 per cent of all Australian homes
and businesses is five years:
[the NBN] is rolled out and made operational progressively over
five years from the date of execution of a contract between the Commonwealth
and the successful proponent.[76]
At the time of writing this Interim Report, the government
remained firmly committed to a five year completion schedule, as stated in the
RFP.
3.106
Given that this time commences on the signing of a contract, at the
Senate Estimates hearings in October the minister was also questioned in
relation to the timing of the contract signing once the successful bidder had
been announced.
3.107
Senators on this committee questioned whether it was feasible for any
contractor to commence work on the build of the NBN when the terms and
conditions, i.e. the regulatory framework, had not been finalised. In the
context of the RFP, should the successful bid be conditional on changes to
regulation and/or legislation, then passage of those changes must be subject to
parliamentary scrutiny. Consequently any 'successful' bid that was based upon
changes to legislation may actually fail if the legislation is not passed. Logically
then, contract negotiations could not be confidently completed to the
satisfaction of either party until required changes to legislation was passed.
3.108
In this discussion at Estimates, Senator Minchin asked the minister:
What we are putting to you is that there is no way on earth that
a final contract can be signed to allow the rollout of the NBN until the proponent
and the government know the outcome of the legislative process that you wish to
put in place or that is required to be put in place ...[77]
Although the
minister attempted to remain non-committal throughout the discussion, he did
state that:
...the only reason there would be any uncertainty about the
regulatory framework once we have reached an agreement is if your party decided
to block it in the chamber.
...let us be clear: we will reach an agreement and we will put
forward – depending on the outcome of that [agreement] – any regulatory
changes.[78]
3.109
A subsequent question from Senator Birmingham sought further
clarification on this, when he asked:
...does that mean that you intend to negotiate a contract with the
successful bidder and put a package of regulatory framework changes on the
table in the Australian Senate on a take-it-or-leave-it basis because of that
contract you have negotiated?[79]
3.110
The minister then replied:
We are not going to be negotiating with your good selves about
this once we have reached an agreement with the successful bidder.[80]
3.111
As stated at the commencement of this chapter, the NBN has afforded the government
an historic opportunity to correct failures of the current regime. By rushing the
legislative process, government would not only severely jeopardise this
opportunity, but may also place at risk the validity of any contract signed on
the premise of regulatory changes that must face the full scrutiny and approval
of parliament.
Conclusion
3.112
The committee encourages the government to effectively utilises this
historic opportunity for regulatory change.
Lack of true 'consultation'
3.113
The other area of criticism by many is the consultation process itself.
The submission process in the NBN initiative could be described as extensive,
with submissions requested by the department on:
-
the design of the RFP;
-
the design of instruments for the provision of industry
information to assist proponents with their bids;
-
suggestions for regulatory changes; and
-
how to address the provision of services to the remaining two per
cent of Australian homes and businesses that may not have access to the NBN.
3.114
Notwithstanding the extent of the submission process, the criticism has
been that this process is purely a one-way transfer of information. As it now
stands, the government has merely asked for advice from the industry and the
general public; it has given no undertaking to comment on that advice or to
provide a summary of the advice that the government considers relevant to the
ongoing RFP process. The RFP document merely states that:
The Commonwealth will publish regulatory changes proposed by the
successful proponent which have been agreed by the Commonwealth.[81]
3.115
Giving evidence in Brisbane, Dr Kelso drew attention to the lack of
opportunity for public consultation:
The submissions are to be evaluated by the expert panel, and who
knows what their conclusion shall be? ... The only time at which there will be
public exposure about the regulatory framework will be when parliament resumes
next year and presumably changes to the legislation will be sought.[82]
3.116
Dr Kelso went on to compare this process with historical examples of major
changes to the telecommunications industry, including the move away from the
government monopoly of the Post Master General's Department and the creation of
the then government-owned Telecom Australia:
Until now, all the changes that the telecommunications have
undergone ... have been supported by significant public disclosure and
discussion.[83]
3.117
Vodafone highlights the importance of the structure of the regulatory
regime in their submission, making a strong statement that the government
should go much further to facilitate and consider industry discussion of all
proponents' suggested regulatory changes, not just those of the successful
bidder, to inform the final decision making process:
...the Commonwealth should provide an opportunity for interested
parties to review and comment upon the changes to the existing regulatory
regime proposed by various proponents, prior to the Expert Panel making its
final decision.[84]
3.118
Generally, if the government is to create any new regulatory regime, it
would follow that the affected industry, in this case the telecommunications
sector, would be afforded the opportunity to review and discuss what the government
may be considering and thus the opportunity to provide true input to the
regulatory process. However, the RFP suggests that the government may (or may
not) discuss with only the successful bidder their proposed regulatory regime before
coming to an agreement with them on the changes, which will subsequently be
announced to the rest of Australia. It makes no mention of discussing changes
that are put forward by all proponents.
3.119
This does not mitigate the claims made earlier in this chapter that the
process lacks transparency and accountability. Without allowing two-way
consultation, the government could stand accused of merely playing lip-service
to the consultation process, albeit via multiple calls for submissions.
Possible legal challenges
3.120
Given that the NBN will become such a significant component of Australia's
infrastructure, the stakes are high and competition could be fierce for the
right to be the provider of this infrastructure. The CCC has taken the
criticism of the RFP process one step further, and believes that the department
has placed too much emphasis on commercial issues within the process, rather
than following 'best practice processes' for the development of the policy and
regulation:
Under the law of the land today, no proposed investment that
seeks, through an undertaking to the ACCC, what is in effect a license to
operate a monopoly ... would ever be negotiated in private. ...
Yet the Department has consistently placed its concerns about
the commercial aspects of the NBN process above the need to ensure public
scrutiny and input to decision-making around the regulatory issues.[85]
3.121
This issue takes on additional importance in the context of the
discussion earlier in this chapter regarding the signing of any contract that
may be contingent on the passage of as yet undisclosed regulatory changes. The
cancellation of a contract due to the failure of legislation could provide
additional grounds for a legal challenge.
3.122
The CCC submission highlights further flaws in the process, noting that:
...the Department appears to have given some participants in the
RFP process the impression that they are constrained in what they can provide
by way of response to the call for regulatory submissions. This raises serious
risk of legal challenge.[86]
3.123
The CCC submits that the NBN will impact on the business of every
current Australian fixed-line communication company, and that as such:
...the likelihood of legal challenges against any decision are
high.[87]
Conclusion
3.124
The committee believes that it is in the interest of the government, the
industry and the Australian people to ensure that delays to the timeframe for
implementation of the NBN are kept to a minimum. Notwithstanding this, the
committee considers that the government should incorporate appropriate and
timely opportunities for consultation with the industry on suggested regulatory
changes.
3.125
The committee also believes that the government could easily remove
several avenues of possible legal challenge by incorporating industry
consultation into the process, even at this late stage.
Navigation: Previous Page | Contents | Next Page