Chapter 5 - Regulatory and competition issues
5.1
While previous chapters have examined the two key
functions of the Australian telecommunications network to provide voice and
data services on the basis of the available technology, the state of the
network, and Government programs intended to improve access, in this chapter
the Committee will explore some regulatory and competition issues. Once again the prominence of Telstras role
has skewed the discussion in this chapter towards its operations, despite the
fact that it is only one of several infrastructure suppliers.
Customer Service Guarantee
5.2
The Customer Service Guarantee (CSG) is intended to
provide customers with an automatic remedy if their telephone service suffers
from a fault which is not rectified within certain timeframes. Occasionally disruptions to
telecommunications services affect a significant number of customers in a
particular area. Where the cause of that
disruption is beyond a carriers control, such as a major cable being
inadvertently damaged by a roads contractor, the carrier can be relieved of its
obligations under the CSG in relation to the time taken to rectify faults in
the supply of services. This also
automatically relieves the carrier of the requirement to make compensation payments
under the CSG if it is unable to restore services within the timeframe set out
in the CSG. These events are generally
described as mass service disruptions (MSDs).
5.3
The loss of phone service can have quite dramatic
consequences for consumers, especially businesses:
I represent 18 companies in close proximity to Albion Park
Rail on the Princes Highway. On 7
February 2002, the telephone services were severely disrupted for a
period of 13 days. Seventeen to 18 businesses in close proximity to our premises
were severely affected, and a domestic house on the opposite side of the street
were also disrupted. Trying to operate a
business with a mobile phone is not the most ideal situation. This disruption resulted in the loss of
revenue, our auto banking facilities such as cheque, savings and bankcard
facilities, fax modem facilities and sales, and the convenience of sending and
receiving orders. We were unable to
offer our service and communications through our sales department, losing more
than 700 calls.[315]
5.4
Several witnesses were concerned about the process of
MSD declarations, including the absence of publicly available, clearly defined,
criteria setting out what constitutes an MSD.
In the absence of such documentation, suspicions were voiced that
Telstra is excessively resorting to MSDs as a means of bypassing the
requirements of the CSG:
it is our opinion that they are using this [MSD] as a
means of bypassing their CSG obligations; therefore, they are saving on
compensation. It is a means of denying Tasmanians
their rightful access to a reliable telecommunications service by way of
putting the necessary capex into the ground.[316]
5.5
Some witnesses considered that Telstra too frequently
blamed the weather for MSDs when factors within its control were responsible. Several union representatives suggested that
the majority of recent MSDs could be traced to inadequate maintenance and
investment:
Our submission is that the cable network is deteriorating,
particularly the older air cord cable, and this is largely due to a lack of
maintenance. The situation that was
referred to in the previous submission [an MSD at Albion
Park] was, we are informed
by our members, avoidable and should not have happened in normal circumstances.[317]
Right now we have mass service disruption and, in the view
of the union in New South Wales,
the only reason for that is the lack of investment over the last few years in
the Telstra network. Had that not been
the case, we would not be seeing this number of faults in the network each time
it rains.[318]
There is more capital rationing happening at a time when
more capital investment is required.
That is the broad difficulty.[319]
On the one hand, you do have to make allowance for
extraordinary events; I think that is not unreasonable. But on the other hand, the mass service
disruption mechanism can mask, as we believe it does, a more fundamental
problem with the infrastructure. It
should not be the case ideally that when it rains you get a whole lot of faults
because your cables are in a state of disrepair.[320]
5.6
Other witnesses pointed to deficiencies in Telstras
management practices as contributing to the number of MSDs. These included staff cuts, increased reliance
on contractors rather than full-time employees and the concentration of
expertise in Melbourne:
I am aware that between Helensborough, at the northern end
of the region, and Albion Park
over the last four years the technical staff have been cut by 53 per cent; I am
advised from 150 to 70 technicians.
I think the rationalisation of staff and not having a
central core to deal with these problems on a region by region basis
exacerbates the problem when breakdowns occur.[321]
With Telstra getting rid of all the staff, the maintenance
has fallen over. The main cable problem
is that Telstra have contracted out to a company called NDC, which is an
arms-length company of Telstra, to provide the cable pressure systems that keep
these main cables under pressure and the numbers they use in them are
inadequate. That is where the problem
is: the air flows in these main cables.[322]
They centralised all the maintenance to one area is a great
engineering achievement, in some ways.
It took out a lot of expertise from the capital cities Sydney
and Adelaide. All the capitals except Hobart,
had their own technical experts available.
They were all centralised to VictoriaI
reckon it was a very bad thing to do.
They made a lot of savings allegedly.
A lot of good people, who had all the expertise, did not want to go to Melbourne
so they left the company. It did provide
a great source of highly qualified technical staff for Vodafone and the other
companies.[323]
5.7
It was also suggested that Telstra is concentrating its
maintenance efforts on quick fix, band aid solutions at the expense of major
networking structural problems. This
approach shows positive levels of CSG compliance, arguably to boost the case
for privatisation, but increases the potential for MSD declarations because it
directs attention away from more significant, underlying problems:
Because Telstra has become focused, for political reasons,
on getting the CSG figures to a certain level because we know that they are
supposed to be a trigger for further privatisation it has led to a rather
one-sided focus on a certain form of performance, which can have an adverse
effect on actual maintenance. Employees
are encouraged to get the quick fix at the maintenance level in order to get
those time frames right for the CSG, and that means that everything is fine
with the employees productivity and performance and the local managers
performance. But that quick fix is not
addressing the basic maintenance problem, and that is what we saw in the
Boulding incident.[324]
5.8
Another concern was the inadequate warning of the
declaration of an MSD:
So people were not warned at the start of it, [MSD at Albion
Park] but Telstra was saying that
it was a problem with wear and tear and water.
It was only after some several days and weeks that they [constituents]
were finally advised that it was an MSD.
That is why I contend that they hid behind that to obscure some of the
other issues that went to the source of the problem.[325]
Telstra response
5.9
In evidence provided to the Committee, Telstra set out
its criteria for determining when a MSD has occurred and its management and
compliance processes for dealing with MSDs.[326] It also advised the Committee that:
Following the governments amendments to the
telecommunications carrier licence on 15
May 2002, Telstra has developed and enhanced the criteria used to
assess eligibility for CSG exemption declaration. This has included a much shorter time frame
for notifying ACA, TIO and customers.[327]
5.10 Telstra
pointed out that the Australian Communications Authority (ACA) has not
expressed concern with the way in which the MSD notices are issued:
Telstra has not had any feedback from the ACA that has
indicated any fundamental problems with the way in which Telstra has issued MSD
notices.[328]
5.11 Telstra
explained that all of its repair and maintenance work, whether undertaken by
Telstra staff or by contract labour, was subject to strict quality
controls. As an example, it set out its
minimum standards for temporary repairs as follows:
The minimum standard for temporary repair of a phone service
is to provide the customer with the ability to make and receive telephone
calls. In making a temporary repair,
consideration is made of any safety hazard associated with the solution and the
risks of future failure of the customers service. In the case of a customer with a disability
service the temporary repair will allow them to use their existing teletype.[329]
5.12 Telstra
disputed claims that contractors are paid significantly less than Telstras
permanent staff for comparable work:
Benchmarking between Telstra service and contractors shows
that there is not generally a significant difference in cost for installation
and maintenance costs. Without detailing
the rates, the difference is largely due to the different activities.[330]
5.13 It
explained that contractors work is monitored for quality and did not dispute
union claims that only one in ten jobs, on average, is inspected:
Telstra undertakes contract inspections in accordance with
Australian Standard 1199. The Australian
Standard takes an approach based on sampling completed work. The standard sets out sample sizes based on
the volume and type of activity that ensures high levels of statistical
validity. A one in ten sampling rate is
typical.[331]
5.14 Telstra
also did not dispute the union claim that staff numbers have decreased but
maintained that levels of service had not been affected:
As I advised the Committee in May, a combination of the
significant upgrading of the technology used in the Telstra network, the
delivery of a more robust network through better targeted programs and improved
work practices has created a situation where fewer staff are now needed for
maintenance purposes. We are in fact
able to do more with less, with staffing levels now being reduced without
service levels being jeopardised.[332]
5.15 Telstra
took exception to the claims of witnesses, including union representatives,
about the degraded and vulnerable condition of the telecommunications network:
some witnesses have claimed that Telstras network would
collapse under the weight of heavy rain and sought to use the committees Sydney
hearing on May 10 to continue with this claim.
However, it is fair to say that this claim has proven to be simply
wrong. In May, despite some of the worst
rains in Sydney
in 40 years, the Telstra network did not collapse... I make this point simply
to ask the committee to be as demanding on the claims of other witnesses as you
are entitled to be on Telstras.[333]
5.16 A
Telstra witness pointed out that, in fact, MSDs are quite rare.
less than one per cent of all CSG services were affected
by CSG exemptions in the year 2002-2003.
For the financial year 2002-2003 Telstra declared 65[334] CSG
exemptions. There has been an increase
in the number of exemptions, due to the smaller area of declaration. This actually goes to the heart of some of
the questions that have been put to Telstra, in particular; if you make a
declaration, how wide is that declaration?
Telstra makes that declaration as small as possible with regard to the
impact on customers and the impact on its productivity.[335]
Role of the Australian Communications
Authority and the Telecommunications Industry Ombudsman
5.17 Representatives
of the ACA explained that the organisation is constrained in assessing the need
for an MSD declaration because any such assessment is essentially based upon information
provided to it by Telstra. It agreed that
Telstra can declare an MSD without recourse to anybody and that those adversely
affected by such a declaration can seek redress only through the
Telecommunications Industry Ombudsman or the courts, including through class
action.[336]
5.18 ACA
Deputy Chair, Dr Bob
Horton, would not venture an opinion on the
acceptability of this situation, but commented:
I do not know if it is good enough or not. Certainly, from the strength of feedback that
we are getting, there is a lot of concern about it.[337]
5.19 The
Telecommunications Industry Ombudsman, Mr
John Pinnock,
disputed the ACA interpretation of its role with respect to an MSD:
It is not true, in my view, though, to say that the
Authority, if it had doubts about the applicability of an MSD in any given
circumstance in other words, its veracity would not be able to look at the
issue. I just do not agree with that.
if the Authority is satisfied with that methodology [used
in declaring an MSD] then even if I have some qualms from time to time, again
the guarantee is its regulation. But if
the authority is saying to the committee, We do not have any powers to inquire
into this, I just do not agree with that.
It may not wish to or feel that there are grounds to do so, but the
authority has very extensive powers under its Act.[338]
5.20 The
Committees attention was drawn to a review the ACA was conducting into MSD
declarations:
the ACA is currently conducting a review of information
supplied by Telstra in the event of a MSD declaration. The review will consider the format and timing
of information provided by Telstra to the ACA,
the TIO and Telstras customers. It will
also consider the creation of appropriate processes to ensure that MSD notices
are only issued for areas that are affected by the cause of the outage or by
the need to move staff or equipment from another associated area to attend the
outage.[339]
5.21 Mr
Pinnock explained that he is advised only of
the MSD notifications that are problematic.[340] While he had no particular concerns with the
existing MSD declaration process he considered there was scope for greater
scrutiny in oversighting it, especially on the part of the ACA, and that
existing protocols essentially amounted to self regulation on the part of
Telstra:
It is true that the authority has said, essentially, that this
is a notification process, but it is more than a notification process because
you are essentially allowing the carrier to self-declare an exemption under the
guarantee. I have always had a
conceptual difficulty with that. I have always taken the view that there should
be much greater rigour in looking at the basis on which you calculate the
methodology but that is not a matter I have control over. All I am left to do is look at individual
complaints about whether an MSD properly applies to that customer service.[341]
5.22 Mr
Pinnock discussed the difficulty of defining
extreme weather conditions in Australia
as the basis for declaration of an MSD[342] but
concluded that in fact Telstras assessment of productivity is now the sole
basis for declaration of an MSD. He
considered this was an inherently problematic approach:
My concern. I guess, is that the methodology Telstra has
used to underpin the MSD regime is wholly and solely based on productivity
aspects. That means that the regime of notices can vary from time to time not
only because of things such as staff leave commitments and these sorts of
things but also because of decisions Telstra takes in a commercial sense as to
what staff are going to be available as a whole.I am not saying that if it
[Telstra] further reduces staff, the length of MSDs we will see in future will
blow out. I do not think it is as unsophisticated a relationship as that. But I
have never been entirely satisfied that this is the proper basis for assessing
an MSD notice.[343]
Review of the Customer Service
Guarantee
5.23
In June 2004 the Government released its review of the
USO and the CSG. Although the review
mentioned that the issue of exemptions from the CSG had been raised in
submissions it did not explore the issue in any detail[344]. The review concluded that:
No further major changes to the CSG Standard are required at
this time but it should continue to be monitored.[345]
Summary
5.24 The
Committee acknowledges that the telecommunications carriers should not be
liable for compensation payments for matters beyond their control and that some
form of exemption from the provisions of the CSG is appropriate. The issue is whether the current MSD
notification system is appropriate, or whether it simply represents a loophole
in the CSG system that enables carriers to evade their responsibilities to
their customers to provide adequate services.
5.25 This
issue is one where the union and Telstra management have engaged in an argument
of the glass half-full nature. While
the union has highlighted what it considers to be unacceptable behaviour by
Telstra in relation to MSD declarations, Telstra has countered with its own,
seemingly equally valid, interpretations.
It will be a matter for the ACA review to resolve fact from fiction and
to ensure that an appropriate system is developed.
5.26 Given
the inconvenience and financial consequences for customers subject to MSDs, the
Committee is particularly concerned at the apparent lack of independence in the
MSD declaration process. It is this lack
of independent oversight of the declaration process that gives the appearance
of a loophole that is wide open for carrier exploitation.
Role and powers of the Australian Communications Authority
5.27
The Australian Communications Authority (ACA) has
responsibility for a range of technical and service standards issues. It licenses telecommunications carriers,
reports to the Minister on carrier performance, administers the USO, CSG and
NRF regimes. However, its ability to
effectively regulate the telecommunications sector has been brought into doubt
during this inquiry.
5.28
The ACA has
been established as very much a 'hands off' regulator, relying heavily on
self-regulation and information
monitoring rather than direct intervention.
As such, it has not been particularly pro-active in ensuring that the
Australian telecommunications network is capable of delivering adequate
standards and levels of service to all Australians. The ACA monitors the compliance of carriers
with the customer service guarantee and Telstra's performance under the Network
Reliability Framework. However, the
figures it produces through these processes are published well after the period
to which they relate and measure the past performance of the network. They do not provide any information
or guidance on the current state of the network, or on whether the network will
continue to be able to meet acceptable standards of performance. Since
the Besley report, the ACA has been required to report more regularly (i.e.
monthly) under the Network Reliability Framework. This reporting has identified particularly
poorly performing exchanges, with the ACA recently requiring Telstra to
undertake remedial work in 54 rural exchanges.[346] This has marked a change in emphasis in the
role of the ACA, which the Committee welcomes and argues needs to be extended
to improve network reliability.
5.29
A related issue is the limited range of monitoring
undertaken by the ACA. The ACA's regular
Performance Monitoring Bulletins are restricted in their focus to the provision
of voice services. They do not examine
the ability of the network to support adequate data services.
5.30
An issue of considerable concern is that the ACA's
monitoring does not quickly show the true state of the Telstra network. In Chapter 2 of this report the Committee
examined the available evidence on the level of faults in the Telstra
network. The Committee received
extensive evidence from the CEPU about the deterioration of the Telstra network
as a result of falling capital expenditure and stop-gap repairs. As noted in that chapter the concerns of the
CEPU were borne out by evidence from Telstra's own internal documents. However, at the same time that Telstra was
recording sharply rising and record fault levels in its internal document, the
ACA issued a Media Release saying that 'an analysis of faults occurring on
Telstra's network between August and October 2003 showed an improvement in
performance over the last quarter'.[347] The ACA's most recent Performance Monitoring
Bulletin, published at the end of March 2004, does identify 'a progressive
decline in the monthly percentage of Telstra fault-free services as measured by
the Network Reliability Framework' but the ACA then goes on to state that
'declines in Telstra performance in the December and March quarters are typical
of the seasonal patterns in the CSG figures'.[348]
5.31
On 1 April 2004
the ACA announced a review of the Network Reliability Framework and called for
public comment on the effectiveness of its operation.[349]
5.32
Another weakness in the ACA's regulatory framework
relates to the declaration of mass service disruptions by Telstra. As discussed earlier in this chapter the ACA
has no independent role in gathering its own evidence about whether Telstra is
justified in declaring a MSD. Nor has
the ACA used these MSDs as triggers to investigate whether MSDs are indicative
of underlying problems with the Telstra network.
5.33
The Committee is deeply concerned that the current
light touch regulatory regime is failing to ensure that the Australian
telecommunications network is being adequately maintained.
5.34
Another recurring issue in Telecommunications is the
location of telecommunications infrastructure.
At present neither the ACA, nor any other body, has comprehensive and
publicly available maps setting out the location of existing and planned telecommunications
infrastructure. This lack of information
make it very difficult for state governments, local councils and regional
organisations to understand what infrastructure is already available in a
particular area and how that existing infrastructure can be used to improve
access to services and increase competition.
As most of the infrastructure is controlled by Telstra it enjoys a
considerable competitive advantage through being the only party with a sound
knowledge of the existing infrastructure.
5.35
A fundamental requirement in planning future
telecommunications infrastructure is a knowledge of what infrastructure
currently exists and where it is located.
This is an issue which the regulatory regime should address.
Competition
5.36
For most of its history the Australian
telecommunications industry has been a government monopoly, run by a single
company and regulated by Commonwealth legislation. More recently, as outlined in Chapter 1, the
industry has been opened up to competition.
5.37
While these changes have undermined Telstras monopoly
position in the telecommunications industry, it remains the dominant player,
especially in the provision of infrastructure:
While there is a froth of competitive behaviour in the
market place, the bulk of the profit in the industry is earned by one
company. Telstra, the former monopoly
incumbent is still the dominant player in many telecommunications markets.[350]
After 10 years competition, Telstra earns 75% of the
industry revenue, spends 67% of industry capex [capital expenditure], earns 95%
of the industry profit, and has received $625 million of the $650 million spent
by government on infrastructure projects.
Over that time the industry has doubled in revenue to about $30 billion.[351]
Without effective infrastructure competition, services
delivered are reliant on using existing facilities and technologies from
incumbent infrastructure. The range of
services available is limited to what the dominant provider chooses to supply. As the incumbent has control over access it
has considerable control over prices.[352]
5.38 While
Telstra representatives did not dispute the dominance of the company's position,
they considered that it has been overstated:
The first myth is that Telstra is the Australian
telecommunications network. Plainly and
clearly, it is not. We believe Telstras
network represents approximately 70 per cent of telecommunications
infrastructure and is now subject to vigorous facilities based competition in
most sectors.[353]
5.39 Mr
Lawrence Paratz of Telstra Country Wide informed the Committee that there are
27 owners and carriers with physical infrastructure in Australia,
600 ISPs and more than 100 licensed carriers and mobile operators.[354]
5.40 A
number of witnesses suggested that Telstra uses its dominant position to engage
in anti-competitive conduct, such as obstructing new entrants to the market and
maintaining prices to consumers at unnecessarily high levels:
New entrants face considerable disadvantage and without
strong competition regulation can be driven from the market. The existing telecommunications specific
competition regulations have been beneficial in opening up Telstras monopoly
bottleneck facilities to facilitate new entry.
However, Telstra continues to have significant control over facilities
and key markets. More needs to be done
to open up the playing field to promote real genuine competition.[355]
Even in the face of clear indications that policy makers
are committed to increasing and strengthening competition, Telstra is seemingly
intent on extending the market power it gains from its vertical
integration. For example, Telstra has
made it very clear to the market that, although it will allow other pay TV
operators to use the Foxtel cable, it will not allow telecommunications competitors
to offer Internet or high-speed data services via that cable
infrastructure. In effect, it plans to
lock up that communications gateway to the consumer and further suffocate the
opportunity for competition in the market.[356]
it [is] the view of the ACA [Australian Consumers
Association] that the dominance of the market by Telstra, particularly in terms
of revenue and profit, based on ownership of the vital core network, means that
economically persuasive offers to consumers are hard to find.[357]
5.41 It
was suggested that Telstras anti-competitive practices have had a particularly
deleterious effect on consumers in rural and regional areas:
Outside those primary telecommunications markets in Australia,
[Sydney and Melbourne]
you do not have competitive infrastructure providers. The extreme case is the one with respect to
the whole state of Tasmania where
in fact there is only one provider of that underlying infrastructure. As a result, that has held back the
deployment of separate connectivity and application services in those markets. That is, I think, the basic problem in most
markets outside Sydney and Melbourne.[358]
Telstras pricing in the intercapital markets, where there
is most competition, has reduced dramatically over the past few years and yet
in regional areas, where they do not face the same level of competition,
pricing is much higher.[359]
5.42 It
is claimed that the existence of such practices shows that moves since 1991 to
open up the Australian telecommunications industry to competition have failed:
It is undeniable that competition in telecommunications has
failed. Telstra controls most of the infrastructure and is a major shareholder
in Foxtel which is seeking to merge with Optus at the services level. Because of its dominant market position, based
on its ownership of infrastructure, Telstra is travelling quite well relative
to telcos elsewhere in the world.
Despite a very complex regulatory regime, Telstras role as both network
and service provider is at the heart of the problem. Telstra is totally focused on short-term,
bottom-line performance in order to pay dividends to its shareholders (both
public and private). Meeting the
telecommunications needs of the public now and in the future is not its main
focus.[360]
5.43 The Australian Telecommunications Users Group
summarised some of these failures as follows:
After five years of open competition in telecommunications,
we now know:
A privatised incumbent operating in a competitive industry
will always focus on maximising shareholder returns forget promoting
competition or end user interests.
The light touch/industry self-regulation approach has not
been effective in protecting end users and must be reversed.
the one size fits all focus on infrastructure
(facilities) competition rather than services competition has resulted in
wasted capital and a negative reaction from the capital markets to further
innovation.
The size and spread of the market have created difficulty in
diffusing competition beyond the CBDs.
Progress has only been achieved by direct Government funding.[361]
5.44
Lack of information
about existing infrastructure is argued to be a barrier to the development of
competing infrastructure. Without ready
access to information about what
infrastructure exists, and where it is located, Telstra's potential competitors
are at a significant disadvantage in planning the deployment of new
infrastructure. During its inquiry the
Committee found that little information about
the location of existing infrastructure was available, although that situation
improved somewhat as the inquiry proceeded.
This issue will be discussed in more detail in the Committee's report on
broadband competition.
5.45
Some commentators have suggested that Australias
population is too small and too scattered and Australias
terrain too difficult to support more than one successful telecommunications
carrier, at least as regards the provision of infrastructure. This is the case for the country as a whole
but is a particularly pertinent observation with respect to rural areas:
The reality of telecommunications infrastructure is that the
access network (between the consumer and the local exchange) almost certainly
constitutes a natural monopoly particularly in outer metropolitan and rural
areas.[362]
5.46 A
number of submissions went on to suggest that, since telecommunications infrastructure
is a natural monopoly, it can most efficiently be provided by a single carrier
under public control:
When considering the provision of services, such as
telecommunications, in Australia,
I believe that it is necessary to remember that we are in a unique
situation. We have a very large landmass
(comparatively, on a nation-wide basis), which is very sparsely populated over
much of its area. Therefore, economic
motivators such as profit will not induce private companies to invest in the
interior of Australia,
thus denying approximately 30% of Australians adequate services if they are not
provided by the state.[363]
It may be that in a country with a large landmass and
relatively small and concentrated urban population, there is room for only one
network, especially at the long haul and inter-exchange level, and especially
to the residential consumer. If so, then that network should be considered a
public infrastructure asset.[364]
5.47 A
further area of concern is Telstra's involvement in Foxtel. The Communications Expert Group submitted
that:
the power utility broadband networks are
under serious threat if the Telstra/Foxtel/Optus monopoly can restrict or
control the provision of content to other cable distribution services. While the power utilities can reduce
installation costs, they will not be financially viable unless they can offer
cable TV, broadband and telephone services to compete with Telstras bundled
customer services.[365]
5.48 Some
witnesses suggested that the extent of Telstra's anti-competitive conduct is
moderated by current levels of government regulation and oversight. With the full privatisation of Telstra this
oversight will be greatly reduced and existing anti-competitive conduct can be
expected to increase:
Little competition exists outside the mobile and
terrestrial markets and with the sale of the remaining portion of Telstra on
the government agenda, any chance of preventing the core infrastructure falling
into a monopolies control, is diminishing fast.
As Australians, we cannot let the full privatisation of
Telstra [to] go ahead, without seriously considering the monopoly it will
create in the wholesale market.[366]
5.49 Various
approaches were suggested to the Committee to avoid the emergence of a
privatised, monopolistic Telstra exempt from any form of control. One suggestion was for the Government to buy
back that portion of Telstra already in private ownership so that it can
maintain its regulatory role and ensure that telecommunications developments
meet national objectives:
The Government has to realise that if it sells Telstra, it
will still have to provide continual support to Telstra countrywide and it has
to run in a business approach (as it already does).
In this situation Telstra CountryWide is not a sale item but
a main Government infrastructure provider.
Likewise, Telstra Residential is not a sale item as it makes no
money. That leaves Telstra
Business/Government and its role is also therefore to support Telstra
CountryWide with funds and expertise, such that the Government does not have to
fund Telstra CountryWide!
It makes common economic sense for the Government to buy
back at a reduced price the part of Telstra that was sold and leave it an
arms length Government business![367]
5.50 Another
suggestion was that it should not proceed with the sale of the balance of
Telstra. This, it was argued, would have
a number of benefits including continued government oversight:
We oppose the sale of the 50.1 per cent balance of Telstra
for a number of reasons. Firstly, there is the issue of ownership and the sale
of public infrastructure to private interests, with a potential lack of control
by the Australian government in ensuring service delivery, competitive pricing
and high standards.[368]
5.51 A
further suggestion was that the Government should delay the sale of the
remaining portion of Telstra until steps can be taken to ensure a more
competitive environment is in place.
During this transition period the Government could intensify its current
efforts to enhance competition through support to new players. Some successful models were brought to the
Committees attention:
the government needs to think very carefully about
competition consequences of its policies and decisions as well as positive
mechanisms that promote new players and new technologies. We are seeing significant steps in the right
direction. I think the best example of this is the National Communications
Fund, which came out of the Besley inquiry.
It provided $50 million for health and education communication
services. It encouraged partnerships
between carriers, state and territory governments and industry groups. It promoted large projects and operated in a
way that was genuinely contestable.[369]
That [the Coorong project, funded under the Networking the
Nation program] is an instance where there has been a marriage between local
government and private enterprise. They
have successfully bypassed the Telstra network and have obtained significantly
cheaper telephone calls within the district, the state and Australia.
Calls cost a fraction of the normal rate.
So that is an example of where federal government funding acted as a
trigger. It got them over the hurdle,
and they were able to establish the network.
That is probably the most successful one that I know of, and it has been
going for a number of years.[370]
5.52 It
was suggested that other models have been less successful and would need to be
modified before wider implementation:
our view is that, if we are talking about national
availability, we need to have a national program, or a policy framework at
least, designed to do more than just encourage regional experiments some of
which may be successful for a time, some of which already have failed and some
of which will probably be casualties of this current downturn. The problem with a lot of the funding so far,
in our view, from Networking the Nation and such programs is that it has not
been very well coordinated. It has not
been part of a larger strategy.[371]
In Optus view, considerable opportunities to support new
technologies, and new entrants into regional Australia
have been wasted. In bolstering the
incumbents already dominant position, ongoing prospects to promote competition
in regional Australia
has been considerably undermined. But
worse, some funding has actually promoted anti-competitive behaviour and
destroyed competition in emerging markets.[372]
5.53 A
number of participants pointed to the need to minimise anti-competitive
behaviour in a fully privatised Telstra through enhancements to the regulatory
regime, which many considered is not particularly effective in its present
form:
There is a clear need for tough regulation. The current powers of the ACCC and the TIO
are far from adequate to control a fully privatised Telstra.[373]
I believe that it is necessary to regulate to ensure that
rural and regional Australians receive adequate telecommunications services now
and in the future. This is particularly
true if the telecommunications service providers are privately owned, as
opposed to publicly owned, where there is (or should be) public accountability.[374]
Competition policy and its application are key to achieving
progress. Users want strong competition to deliver choice of world class
services at world class prices. ATUG
feels focus is needed now on information based
regulatory supervision in the face of decreasing opportunity for infrastructure
and investment based competition.[375]
5.54 In
recognition of the constraints on telecommunications operators in Australia
and of the tendency to a natural monopoly in infrastructure, several witnesses
suggested that one solution might be to retain the infrastructure in one
company in public ownership while privatising the retail side of its
operations:
In the opinion of the ACA [Australian Consumers'
Association], what is needed is to split Telstra into separately owned
portions, one of which has custody of the critical core network. This network is a natural monopoly, and
should remain in government hands for the foreseeable future. However, we would not endorse a policy that
might purport to stop the development of competitors to this network. Were competitive pressures to emerge to
confront the government owned network, in our view these should be encouraged
and the consequences played out.When the retail components of Telstra compete
on equal terms for access to the core network with other companies, we might
see real, sustainable competition deliver telecommunications benefits to
Australian consumers. In our view, fully
and finally privatising the vertically integrated and horizontally sprawling
behemoth that is Telstra unreformed would not assist build genuine competitive
pressures in the market, but would appreciably diminish the capacity for
Government to bring the corporation to heel.[376]
A combination of regulation and careful break-up of Telstra
can offer Australia
what it needs. Breaking Telstra down the middle into wholesale and retail
components, where the retail arm of Telstra would become fully privatised and
the wholesale arm remain fully government controlled. In effect, the wholesale arm would take on
the form of a conventional public utility, where wholesale prices would be
published publicly, allowing wholesale customers to compete on even terms.[377]
We propose the formation of a cable network authority to
design, manage and maintain Australias
line, terminal and cable infrastructure.
Part of this infrastructure would have to be purchased from the
privatised portion of Telstra. It would
leave Telstra with its subscriber base, exchanges and ancillary services. The cable network authority concept means
that ownership of the Australian cable network would be retained in public
hands and subject to government control and regulation. It would help to solve the problem of
parallel networks and the ownership issue.
It would also foster true competition, free of the burden of cable
ownership, by giving equitable access to all telcos, helping them to ensure
quality of service delivery and competitive pricing for all Australians.[378]
We are evolving a model very much like the roads network where
on our roads we have all sorts of taxi companies, courier companies and
transport companies competing and using whatever technology they want in order
to compete. The only thing that makes it
essential to compete is that they get free and fair access to the roads. That is the sort of model we believe perhaps
needs examination in the context of telecommunications.[379]
5.55 The
case for structural separation was also supported by ACIL Tasman, with the
support of the Competitive Carriers Coalition, in its submission to this
Committee's inquiry into broadband competition.
ACIL Tasman stated that the telecommunications sector is being curtailed
by insufficient competition and that while Government reforms aimed at
improving the competition regime were welcome, they are limited in scope. The submission referred to research in the US
which suggests that agreements on access tend to be reached under vertical
separation than vertical integration, that the incumbent was systematically
more exploitative in negotiating under vertical integration; and that entry was
systematically lower in regions served by the integrated incumbent.[380]
5.56 ACIL
Tasman also provided the Committee with a detailed study of the impact of
structural change on shareholder value.
This study found that economic theory does not predict an adverse effect
for shareholders. The study went on to
examine three cases of structural separation which showed that structural
separation can enhance shareholder value.[381]
5.57 Support
for the possible benefits of structural change also comes from the OECD. In 2003 it issued a recommendation stating
that:
When faced with a situation in which a regulated firm is or
may in the future be operating simultaneously in a non-competitive activity and
a potentially competitive complementary activity, Member countries should
carefully balance the benefits and costs of structural measures against the
benefits and costs of behavioural measures.
The benefits and costs to be balanced include the effects on
competition, effects on the quality and cost of regulation, the transition
costs of structural modifications and the economic and public benefits of
vertical integration, based on the economic characteristics of the industry in the
country under review.
The benefits and costs to be balanced should be those
recognised by the relevant agency(ies) including the competition authority,
based on principles defined by the Member country. This balancing should occur especially in the
context of privatisation, liberalisation or regulatory reform.[382]
5.58 While
many witnesses favoured the structural separation of Telstra into its wholesale
and retail components, others noted that it was important to retain competition
in wholesale as well as retail operations.
Some pointed to the success of existing competition in infrastructure,
with Reefnet in Queensland a
prime example.[383] Others suggested that the price of reliance
on a single carrier was greatly increased regulation:
So one of the consequences of going back to a single carrier
is that you will need to introduce a whole lot more regulation to make sure you
get the best possible outlook.
Fundamentally, I do not believe in single carrier solutions
but that again is reinforced by the fact that I think we do have the demand
coming downstream that will support more than one carrier.
Another point with respect to a purely wholesale carrier is
that you do not get vertical integration unless that wholesale carrier has a
retail arm, and then there is the issue of how you regulate its relationship
with its retail arm as opposed to its relationship with other retail
competitors. So, again, you need
regulatory apparatus to control thatI do not see that there is a compelling
case to go to a single carrier.[384]
5.59 Comindico
suggested that the most effective means of enhancing the regulatory regime in
telecommunications would be to extend the divestiture powers of the ACCC to
include telecommunications, in situations of gross anticompetitive conduct:
We believe that only a fresh approach to the regulatory
regime offers a hope of shifting Telstras mindset and reinvigorating the
market. We believe that can be achieved
through the addition to the Trade Practices Act of the new last resort remedy
we speak about in our submission the ability of the ACCC to apply to the Federal
Court to order a company to divest itself of certain assets if it believes that
a structural response is the only viable response to persistent anticompetitive
behaviour.[385]
5.60 In
March 2002 the then Minister for Communications, Information Technology and the
Arts, the Hon Richard Alston, asked the Australian Competition and Consumer
Commission to provide him with advice on the 'extent to which emerging market
structures are likely to affect competition across the communications sector'. In response the ACCC provided the Minister
with its report on Emerging Market Structures in the Communications Sector
in June 2003.[386] That report examined competition in
telecommunications and found that:
The Commissions analysis indicates that the progress of
competition in telecommunications markets is slowing. To date, the type of benefits that have
arisen from the introduction of competition in telecommunications markets have
largely flowed from competition at the retail level of the market as opposed to
competition between telecommunications infrastructure providers (the wholesale
level of the market).
The incumbent, Telstra, remains a dominant firm in
telecommunications. It is one of the
most integrated communications companies in the world, continuing to be the major
wholesale and retail supplier of telecommunications services, including:
-
local, national,
long-distance, international and mobile telephony
-
dial-up and
broadband Internet
-
printed and
on-line directories
-
pay TV (through
its 50 per cent ownership interest in Foxtel).
Importantly, Telstra owns two of the three major local
access networks outside the CBDs of major cities. In addition to owning the
copper (PSTN) network that connects virtually every household in Australia,
Telstra owns the largest cable (HFC) network, which passes 2.5 million
homes. The second largest carrier in Australia,
Optus, owns the other HFC network. This
network passes approximately 2.2 million homes.
The extent of Telstras dominance of the sector is
demonstrated by the fact it receives almost 60 per cent of total industry
revenue, which is almost four times the revenue that its closest rival, Optus,
receives. It is reported to receive over
90 per cent of total industry profits.[387]
5.61 The
ACCC findings are broadly consistent with the evidence received by the
Committee during its inquiry. The ACCC
examined the possibility of enhancing competition by requiring Telstra to
divest its HFC network:
For so long as Telstra owns or has an interest in a copper
network and an HFC network, Telstra will be concerned about maximising the
combined revenues of both networks, and will therefore be hesitant to introduce
new services or pricing on one network which cannibalises its revenues on the
other.
Divestiture of the HFC network by Telstra would address this
problem by introducing a new infrastructure competitor into the market against
Optus and Telstra, establishing conditions for increased rivalry and innovation
in the supply of a full range of telecommunications services. This competitor would have the potential to
supply voice, broadband Internet and pay TV services directly to 2.5 million
households passed by the HFC.
Increased competition would also provide better incentives
for Telstra to invest actively in its copper network to provide for the
delivery of a range of advanced broadband services. Overseas experience and independent analysis
(including by the OECD) strongly suggest that the enhanced competition between
independent networks should improve broadband price and service offerings and
thereby increase the take-up of broadband services.[388]
5.62 The
ACCC recommended that the Government introduce legislation requiring Telstra to
divest the HFC network in full and divest its 50% shareholding in Foxtel unless
it can be shown that the costs of such divestiture outweigh the benefits.[389]
Summary
5.63 Evidence
to the Committee suggests that there is widespread unease at Telstras
continuing dominance of the Australian telecommunications network and the
limited extent of competition in the provision of telecommunications
infrastructure. While the reasons for
this might be complex, as might be demonstrated by the lack of success of
several major telecommunications infrastructure projects, the full
privatisation of Telstra was nonetheless seen as potentially detrimental
because it would be likely to give Telstra greater freedom to exploit its
dominance of the Australian telecommunications network. The Committee notes that, through the
Networking the Nation grants program, the Government has enabled some positive
outcomes in rural and remote Australia,
but only on a relatively small, localised basis. This is no substitute for a buoyant
competitive marketplace where choice of delivery platforms will better meet
consumer needs at competitive prices.
5.64 The
evidence presented to the Committee strongly suggests that full privatisation
of Telstra should not proceed until a more competitive market for
telecommunication services is established.
Given statements by Telstra CEO, Dr
Ziggy Switkowski,
at the Telstra AGM
in August 2003 that he was unhappy with the companys slide to 65 per cent
market share from its former 100 per cent monopoly, the Committee is concerned
that Telstra may, in fact, engage in practices that will lessen what little
competition already exists.
The role and powers of the Australian Competition and Consumer Commission
5.65 The
1997 reforms inserted into the Trade Practices Act 1974 specific provisions to
deal with anti-competitive conduct in relation to telecommunications and to
establish an access regime to give competitors access to key infrastructure and
services. Responsibility for
administering these competition provisions was vested with the Australian
Competition and Consumer Commission (ACCC), Australia's
national competition regulator. A brief
outline of the ACCCs role is contained in Appendix 5.
5.66 The
ACCC's recommendation that Telstra be required to divest its interests in its
HFC network and Foxtel raises the issue of the adequacy of the ACCCs powers and
its ability to foster competition in an industry which is already dominated by
a single provider. The Senate Economics
References Committee recently examined some of these issues and considered the
issue of divestiture powers.[390] That report found that:
Australian trade practices law currently lacks the access to
divestiture powers enjoyed by overseas jurisdictions; as a result, our
competition authorities are limited in their ability to use divestiture either
as a threat or as a remedy.[391]
5.67 That
Committee found that the existing divestiture power in section 81 of the Trade Practices Act 1974 should be
expanded so that divestiture becomes a remedy for other breaches of the Act.[392]
5.68 The
Committee is currently examining competition in broadband services in a
concurrent inquiry. It will discuss the
issue of the ACCC's powers as they relate to competition in the provision of
particular services in its report on that inquiry.