ATUG 2004 Conference

4 March 2004
Sydney

Broadband Competition

The fundamental dichotomy presented by competition policy is that if it is just set and then followed to its logical conclusion, it inevitably will result in a monopoly.

This truism makes it necessary to continually finesse competition policy, ensuring that competitive tension is perpetuated in the market. 

Strategic and timely finessing of competition policy will:

It is also true that weak and outdated changes to competition policy have the same effect as if it is 'set and left', ie: allow the dominant to increase dominance, only worse. This is because the ineffectual policy, legislative and regulatory activity masks the real political inertia, and therefore the damage being done.

This is the situation we find ourselves in with respect to competition policy as it relates to converging telecommunications markets in Australia today.  There seems to be activity, but the situation is not improving.

Today, my will focus on broadband competition.  Broadband networks are the pipes through which converged digital content and applications will deliver the life-changing services and experiences to citizens and consumers. 

In the 21^st century much of the scope and magnitude for social, cultural and economic opportunity for Australia to realise is tied up in the potential for new broadband networks and the possibilities for better use of existing broadband networks.

My comments are informed by the experiences reported to me by citizens around the country and the evidence gathered to date through the Broadband Services Competition Inquiry being conducted by the Senate Environment, Communications, IT and the Arts References Committee.  This Committee is continuing and has more hearings scheduled next week in Canberra.

I begin by illustrating the worsening state of competition in telecommunications through the nature of the complaints received by my office and through the inquiry.

I will reflect on the Howard Government's so-called National Broadband Strategy which was supposed to intervene and rectify Australia's poor broadband penetration .

I also make some observations on the operational impact of the Telecommunications Competition Act 2000, which the Federal Parliament passed in December 2002.

And I will conclude by revisiting the wisdom contained in the parting shot delivered

by Professor Allan Fels in the form of the Emerging Markets Report and commenting on the subsequent complacency since his departure.

Allow me first to turn the nature of the latest complaints and problems that come across my desk.  By far the greatest problem is the pervasive use of pair gains in Telstra's Network.  I still get emails on a daily basis from people who have just discovered that it is a pair gain that is the root cause of their connectivity difficulties and frustrations.

It is worth noting that a recommendation from the Estens Report – the Regional Telecommunications Inquiry,  dealing specifically with the remediation of pair gains systems has been treated with complete contempt by Telstra.  The recommendation, which was accepted by the Howard Government, was that the older types of pair gain systems that inhibited dial-up speeds to ridiculously low levels would be replaced. 

However, inquiries I have made through Senate estimates have exposed the fact that theses systems are only replaced when they become congested!  In other words, when enough customers complain.  Obviously Telstra’s interpretation of this recommendation is to only act when they decide there is a commercial case for replacement.

This is a disgrace.  The systems are archaic.  Some are unable to provide a dial tone on demand let alone a dial up connection speed of 19.2kbps! 

Another complaint is the failure of Telstra to enable exchanges to upgrade to ADSL when requested by the local community.  We now know that Telstra use complete discretion as to what constitutes a commercially viable demand for a given Exchange Service Area. 

This renders their broadband register of little use a mechanism for building a case at the community level for an upgrade.   Take the Tugun exchange in the Gold Coast area.  This exchange services a hospital and do you think Telstra have assessed it as being worthy? No. This is despite an articulate case having been presented by the local council, business and residents.  It is only when this issue is specifically raised at Senate estimates that Telstra concede that it may be worth another look.

The anecdotes I hear of suggest that Telstra use registrants to cross-promote bundled services and alternative internet connectivity products like ISDN and satellite services. 

Evidence to the Senate inquiry from other carriers explicitly alleges that Telstra wholesale pass on information (necessarily shared by competitors to gain access) to Telstra retail to help them market Telstra products, while the competitor is forced to wait for Telstra to process their request.  I have asked the ACCC whether they have any power either in the third line forcing or other provisions of the Trade Practices Act to address this complaint and if so, to take action.  I am awaiting their response.

This behaviour is a symptom of the continuing games Telstra play with regulatory authorities, citizens and their competition.  Games that the Howard Government has shown they are willing to allow to continue.

This takes me to my second point:  Yesterday, the Howard Government re-released a series of funding commitments they made in response the Estens Inquiry and called it a National Broadband Strategy. 

This embarrassingly shallow exercise clearly only got passed the Minister because he’s new and did not realise it had been released before.

The Victorian Government refused to sign up to the strategy because there is no accompanying action plan.  The states have led the way on issues like aggregating demand strategies and have watched the federal government struggle to get basic issues like the eligibility criteria for their tilt at supporting demand aggregation sorted out.

It is not lost on any of them that Telstra have stated that the ‘last sweat’ is being extracted from the copper network.  While the Howard Government just covered their ears, it is the states that have worked hard to find ways to get competitive higher bandwidth services into regional centres.

A week ago a Pacific Internet AC Neilson Broadband Barometer found that 55% of metropolitan small businesses had broadband compared to only 20% of non-metropolitan small businesses. The report also found that the city-country small business broadband gap is widening. The report found the number one barrier to broadband take-up amongst non-metropolitan small businesses is availability.

The reality remains that the ADSL network is patchy in CBDs and unavailable in many metropolitan, outer metropolitan, regional and rural towns. Many regional Australians are not signing up to broadband because their only option is satellite. This technology remains prohibitively expensive and sees country Australians paying far more for broadband than their city cousins.

The latest 2003 OECD broadband table has Australia falling to 20^th out of 30 amongst OECD countries. Australia’s broadband penetration rate only betters Luxembourg, New Zealand, Hungary, Ireland, the Czech Republic, Mexico, Poland, Turkey, Greece, and the Slovak Republic. Key OECD countries like the USA, Canada, Japan and Korea have rates that far exceed Australia’s very low broadband penetration rate of 2.65 per hundred inhabitants.

So you will not be surprised that Labor has described the National Broadband Strategy is nothing more than a series of glib platitudes. There is not one new program in the statement to improve broadband roll out in Australia.

This suite of funding commitments, which include Higher Bandwidth Incentive Scheme (HiBIS), the Coordinated Communications Infrastructure Fund (CCIF) etc. as I have said before, are in large part are funded through re-badged responses to previous complaints.  For example, a substantial proportion of the HiBIS funds came for Building Advanced Broadband Networks, where there was a serious, $35m underspend.

In other words, the same dollars are circulating and promoted by the Howard Government as a new commitment.

But the games I referred to earlier also relate to how Telstra can now get a hold of this money and how their commercial decisions have been shaped by the eligibility criteria.  HiBIS is the worst offender. 

HiBIS was established out of recommendation 6.3 of the Estens Inquiry, which calls for the establishment of an incentive scheme for the provision of higher bandwidth services to regional, rural and remote Australia.  Unlike the BARN fund, Telstra are able to access up to 60% of HiBIS funds and this fact no doubt contributed to Telstra's decision to tighten up their commercial criteria for enabling exchanges for ADSL.

In effect, Telstra have now set their bar higher for "commercial viability".  Presumably because they knew that they would be able to access a tax-payer funded subsidy to do it in the future, through HiBIS.    

Communities up in arms about the lack of ADSL will now be encouraged by retail ADSL providers, be they Telstra or resellers, to support an application for HiBIS funding to pay for the installation of DSLAMS.

The additional rub is that Telstra's vastly superior information about the current locations of pair gains, RIMs, network design and configuration and copper quality will advantage them specifically in determining the commercial viability of such installations and upgrades. 

The result is that taxpayers will foot the bill; Telstra's capex will be that little bit less and no doubt the Howard Govt will send along Liberal representative to announce the new service, given government funding was spent.  Oh, by the way, Telstra's position in the market will consolidate.

But perhaps with a view to the big picture, most importantly and most disturbingly HiBIS will be ADSL focussed.  This represents a serious retrograde step in public policy, even the BARN fund, from which half of the HiBIS funding is derived, insisted on real broadband. The bulk of the evidence presented to the Senate Broadband inquiry to date describes ADSL as limited, and many suggest it is already outdated.  Even Telstra described the longevity of its copper network, through which ADSL services are delivered, as being 'five minutes to midnight'. 

HiBIS can be characterised as an investment in the past and an investment in strengthening Telstra's dominance. This is not smart public policy.

But then, a lot has happened that is not smart policy.  I would now like to turn to the most recent round of Telecommunications Competition Legislation, which was passed in 2002.

One of the key aspects of the Legislation was the model terms and conditions able to be set by the ACCC. 

The model terms and conditions provisions were supposed to provide guidance and certainty, with Telstra lodging undertakings and then the ACCC determining indicative pricing, all with a view to facilitating commercial negotiations and avoiding long disputes.

These provisions were designed to close off regulatory gaming tactics employed by Telstra.  It was of course, Telstra’s habit of prolonging such negotiations to maintain their market dominance that led to these legislative provisions.  But the gaming continues.

Since that bill passed into law, it has transpired that undertakings were indeed lodged, and model terms and conditions within a band were established by the ACCC.  This is where the games begin again. 

The ACCC confirmed that Telstra’s justification for the original undertakings relating to inter connection prices provided to assist the establishment of the model terms and conditions were higher that the model terms set by the ACCC.

When I asked whether the modelling the Commission used to set their model terms was based on the same logic as Telstra.   The ACCC replied “No, Telstra would say their modelling means that access prices should be significantly north of indicative prices we have set”.

However, once the ACCC set their model terms, Telstra withdrew their original undertakings and lodged new ones that matched the ACCC’s the upper band of the ACCC’s model terms.

This has the effect of preventing the ACCC from arbitrating in the case of a dispute because it meant that the only scenario where the ACCC would or could be motivated to arbitrate was if Telstra insisted on prices higher than their undertakings, and a dispute occurred.  This is not likely because Telstra would obviously adhere to their undertakings.  Telstra are also not likely to offer anything lower than their undertakings, but if disputed, the ACCC would be unlikely to arbitrate in favour of a lower price given these undertakings sit at the top of the ACCC’s band.

So the real effect of Telstra lodging a revised set of undertakings at the top of the ACCC band has been to establish a floor – effectively setting a minium price.  This has not had the effect of facilitating commercial negotiations.

This was not the intent of the Act but this has been the effect through Telstra’s manipulation. Telstra’s tricky tactics have once again made mincemeat of the ACCC and the law.

This raises the question about what changed in Telstra’s own modelling between the lodgement of their original and revised undertakings? Did Telstra’s cost structure change?  Did they achieve new operational efficiencies that led to a cost reduction. 

Well, it is not clear, but it is a reasonable assumption that nothing changed in Telstra’s costs.  All I suspect changed was one of the dozens of lawyers in Telstra regulatory has identified the latest loophole in the recently amended competition laws.

Again the ACCC have been rendered powerless.  Not only has price-setting effectively occurred but the ACCC have little room to move to test the effect on the market.  When asked specifically if they were aware whether interconnection access prices had been negotiated below the model terms/conditions the answer was no.

The ACCC has said they were considering investigating access prices since they handed down model terms and conditions, but up till the Ballarat hearing of Senate Committee, they had not.  The underlying question is really this:  How real are the costs that Telstra claim guide their undertakings?

Endless modelling is costing a fortune and complexity itself becomes part of Telstra’s armoury against competition.  Fels made the observation in the Emerging Markets Report “over-regulation” itself was a sign that competition was not working. 

Evidence suggest these so called ‘costs’ incurred by Telstra are indeed arbitrary and are expressed in such a way to assist Telstra to retain a sufficiently high barrier to competition.  But it is also a complexity barrier, ensuring regulatory intervention is bogged down in the minutiae of econometric assessment and debate about competing methodologies.

This points to the ineffectiveness of the legislative framework designed to increase transparency, specifically the weak accounting separation provisions in the 2002 legislative amendments.

This ongoing manipulation clearly needs more legislative attention.  But I argue for less complexity and greater clarity.  This points strongly towards addressing the structural issues in the sector and specifically within Telstra.

But perhaps it is the events of the last week or so that confirmed in my mind that formal ring-fencing of Telstra Wholesale and Retail is necessary, if the ACCC is to be able to operate as an effective and credible competition regulator.

Telstra’s decision to dramatically drop the price of a new ADSL residential product demonstrates that there is no link between costs incurred by Telstra wholesale and prices charged by Telstra retail.

So what has changed to motivate Telstra to offer a new, lower wholesale price a week after the announcement to competitors, albeit not a new price that will allow genuine competition anyway?

Telstra will point to the 'draconian bullying' of the ACCC.  No doubt the ACCC will put their hand up and say they forced Telstra to act as a result of their issuing an advisory notice.

But these two responses ignore the obvious duping of the ACCC by Telstra once again.  What happened to the cost-based modelling prior to this change?  Surely it cannot have any credibility now. Will this be ignored? It certainly shouldn't be, rather the ACCC now has what it needs to treat Telstra's cost methodologies with the contempt they deserve.

And even if Telstra argue that they are set to incur a loss, and try to insist there is some consistency with their cost methodologies, then we can expect consumers to be stung by 15 cents per megabyte over the 200MB limit to pay the difference.  I guess it is a possibility that Telstra are relying on the ignorance of a proportion of new entrants to download limited ADSL products to cash in.  It crossed my mind that if this is argued by Telstra, then there may be an unconscionable conduct complaint in there somewhere.

A re-think is required.  Why should tax-payers money be wasted by the ACCC on assessing Telstra’s cost methodologies and painstakingly constructing their own, only to have all that work wiped out in a single Telstra press conference?

How devastating - for the ACCC, for the Government and for all who spends hard earned revenue on managing a regulatory system that is so blatantly flouted by Telstra.

Labor is wise to this and we have been for a long time, as our original report that exposed the extent of Telstra’s regulatory gaming shows.  The Howard Governments' passive acceptance, and therefore political endorsement, of Telstra’s manipulation is contrasted by the willingness of the Labor Opposition to test new ideas.

It is worth reflecting that the issues of structure are the subject of the Emerging Markets Report and it is important to remember that the ACCC recommendation for Telstra to divest itself of the HIC cable and Foxtel interest was in the context that structural separation of Telstra had not yet been assessed in any formal way by the Government and sat outside the specific terms of reference, leaving the ACCC to note that "The 1993 Hilmer Review of national competition policy strongly supported structural reforms over more intrusive forms of conduct regulation."

Evidence continues to gather that points to the necessity to rectify the structural bias Telstra not only possesses, but actively exploits in known and unknown ways.  Recent events have highlighted the renewed importance of genuine transparency between the wholesale and retail parts of Telstra's business.

I return to my opening point: the fundamental dichotomy of competition policy is that if it is just set and then followed to its logical conclusion, you inevitably end up with a monopoly.  If this inevitable outcome is to be avoided, as it should be, then attention to the competitive tensions within the telecommunications market structure and diligence to finessing the competition policy is essential.

Only then can the public policy outcomes:

Only then can we stand up and say that the government is serving the best interests of its citizens in the 21^st century.

I will conclude, in the context of the Minister's comment yesterday that the Howard Government intends to try again to fully privatise Telstra, by reaffirming Labor's immovable opposition to any further sale of Telstra.  This would take Australian telecommunications in the wrong direction and worsen already poor outcomes for many Australians.