Addressing the CommsDay and Communications Alliance event in Sydney, ACCC Chairman Rod Sims discusses infrastructure based competition; one of the key themes pervading the Vertigan review findings. Mr Sims also comments on the current Fixed Services Review including the challenges when regulating services facing declining demand. He also addresses some criticisms of the ACCC’s historical regulatory decisions that have been said to have influenced the direction of NBN policy.
Check against delivery
Once again I would like to thank Comms Day and Communications Alliance for inviting me to speak at this event.
I recall this time last year at this event there was a sense of anticipation and also a little uncertainty about the future of the NBN. There was talk of the many challenges that lay ahead and I’m sure we will hear more on this today.
This year NBN Rebooted is focusing on ‘Solving the Multi-Technology Puzzle’.
While I do not have all the solutions to that puzzle – I think Mr Vertigan and his colleagues have given that a good shake recently – I do have some remarks to make about the ACCC’s perspective on a few of the key issues.
As a starting point, under the multi-technology model, the government’s current renegotiations with Telstra raise much the same competition concerns as were raised previously in relation to equivalence and transparency. In that regard, we particularly welcome the government’s recognition in its Statement of Expectations of the potential benefits of NBN Co acting in a much more transparent fashion.
My remarks today will have a particular focus on infrastructure based competition; one of the key themes pervading the Vertigan review findings. The ACCC has been a long-term advocate of efficient infrastructure based competition as a means of delivering economic efficiency and benefits in the long term interests of end users.
I’d also like to make some comments on our current Fixed Services Review, including some brief comments about the challenges when regulating services facing declining demand.
But first I’d like to directly address some criticisms of the ACCC’s historical regulatory decisions that have been said to have influenced the direction of NBN policy. It is worthwhile providing the ACCC’s perspective on these issues.
ULLS pricing and criticism of the ACCC’s role
It is to be totally expected for the regulator to be criticised for its regulatory decisions from stakeholders on both sides of the debate, given the range of competing interests so that, in essence, what some stakeholders will gain from the decisions, others will lose.
It is more unusual, however, for the regulator to be criticised over advice sought by government to inform policy decisions, as has been the case recently with reviews around how the NBN came to be and the ACCC’s various roles in that.
Some of those criticisms demonstrate a misunderstanding of the ACCC’s role in providing advice requested by the then government and I have commented on those issues previously.
However, I would like to address the claim that the ACCC has stifled infrastructure-based competition through low ULLS regulated prices. It is an extremely one-sided view of the world.
Firstly, the nature of regulatory pricing task is that it is inherently controversial, complex and involves regulatory judgement. There will always be claims of regulatory error, which is inevitable given that there is no one single correct answer or approach to determine the ‘right price’. This of itself is a search for false precision. Instead, the task of the regulator is necessarily one of exercising judgement in balancing different considerations involved in the pricing decision. There will always be differing views on whether that balance, as determined by the regulator, is right or not.
Secondly, the regulated prices for ULLS set by the ACCC in the 2000s were not particularly low by global standards. For example, in 2009 the (weighted average) regulated price in Australia at that time for ULLS was $15.75 which was comparable to the range of prices between $12.45 and $16.95 in countries including the UK, Germany, France and Sweden. The ACCC sought to benchmark its prices against international comparators and this demonstrated the ACCC’s determinations were reasonable.
The ACCC used TSLRIC and the optimised forward looking incremental cost approach to mimic the build-buy decision and to encourage efficient investment in otherwise competitive markets. Other countries that adopted the same pricing methodology came up with similar pricing outcomes for their services.
Thirdly, there are always competing views on the appropriate level of regulated prices for services such as ULLS. Clearly, it would be unusual for an infrastructure owner not to complain that regulated prices are too low. On the other hand, access seekers always claim prices are too high.
To illustrate this point, in 2009 it was Telstra’s view that pricing of ULLS should have been set at $30 (Band 2). Other stakeholders submitted prices should be much lower. For example, Optus advocated for a price of below $12, describing the ACCC’s draft proposal of $23.60 for metro areas “astonishing” and one that would “instantly halt competition in the fixed line sector.”
It is also very important to note that Telstra’s three appeals to the Australian Competition Tribunal in relation to access undertakings it offered were found not to be reasonable and were dismissed.
Finally, criticism of the ACCC’s approach to regulated pricing ignores the role lowering prices had in driving the take-up of ULLS services, investment in DSLAMs by RSPs and innovation by access seekers (including the launch of ADSL2+ services). This helped drive competition between broadband suppliers and the benefits that flowed to consumers as demonstrated by the massive take-up of ADSL services from the late 2000s. These are developments that have been welcomed by consumers and should not be forgotten when discussing the impact of historical ULLS pricing.
Governments in other countries have been able to negotiate upgrades to broadband networks. Why this didn’t happen in Australia has already filled books, but some of the circumstances were certainly unusual.
Vertigan review findings
At the heart of the Vertigan review findings was a focus on the benefits that infrastructure-based competition can deliver for Australians. This is a welcome finding and one that the ACCC has supported and promoted over a long period of time.
Some of you will recall that as far back as 2003 the ACCC recommended to government that it require Telstra’s divestiture of its HFC network and 50 per cent interest in Foxtel to ensure the development of infrastructure-based competition between copper and cable in telecommunications and pay TV services.
Telstra’s 50 per cent interest in Foxtel is a key difference between Australia and many other countries.
Recently, the ACCC made submissions to the Vertigan inquiry about the benefits of infrastructure-based competition. We said that economically efficient infrastructure-based competition is likely to promote the long term interests of end-users. We also said that where efficient network duplication can occur, competition between networks can drive dynamic efficiencies in terms of product differentiation, innovation and timely investment.
One feature of the debate about NBN policy is the recognition that we are not beginning with a ‘clean slate’. Deviation from some decisions already made is no longer practical. However I note the Vertigan panel’s comments around the unique opportunity that presents itself at this point in time:
'In short, [disaggregation of NBN Co] would, for the first time in Australian experience, put in place a market structure that had the potential for effective infrastructure-based competition through leveraging existing assets.'
The ACCC agrees. While in the past, the ACCC and others have advocated for the principle of infrastructure based competition, the present opportunity to shape the future market structure through control and decisions over the major infrastructure assets in this country has not previously existed.
In saying all of this, let me recognise that the government faces the present very difficult challenge of ensuring the roll-out proceeds expeditiously. It has stated that, given this challenge, it does not intend to go down the disaggregation path at this point in time. The ACCC understands this position.
However, the ACCC stresses that if NBN Co is not disaggregated in the near future, it is imperative that measures are put in place now to facilitate future infrastructure-based competition. In this regard NBN Co should put in place arrangements that provide for future separation of NBN Co at an appropriate time.
Such arrangements should include internal systems, accounting and reporting arrangements. The ACCC’s experience is that if this is not done early it will be extremely difficult to do down the track. While putting in place such arrangements may come at some initial cost, the benefit of doing so when it comes to separating the business in future will be far in excess.
Let me make a suggestion on separation timing. It should be done prior to any privatisation of NBN Co. After that time, it is highly unlikely that separation will ever occur.
NBN Co should be privatised in future. When contemplating this the Government should not limit competition in order to maximise the proceeds from the sale; there is too much at stake for that.
It will be strongly in Australia’s long term interests for, say, three separate entities based on delivery technology to be sold that can provide a platform for future infrastructure based competition.
I will always prefer competition between infrastructure providers rather than entrench a monopoly.
Other Vertigan findings
I note that the Vertigan panel found a high level of stakeholder satisfaction with the access regime in the Competition and Consumer Act and recommended that the regime should be maintained largely unchanged.
This is also something on which the ACCC would certainly agree.
We consider the framework to be fit-for-purpose and generally working well to provide effective access regulation for telecommunications services. The significant reforms introduced in 2011, following extensive consultation by government, have generally achieved the policy aims of providing a flexible and robust framework, promoting the long-term interests of end-users.
The Vertigan panel has recommended the reintroduction of a form of merits review. The ACCC supports the view that there should be appropriate oversight mechanisms for regulatory decisions. However, the form of merits review that applies to a regulatory regime is critical given gaming in the past.
Several attempts to refine the regime were unsuccessful in addressing its fundamental flaws.
The appeals regime started with a complete rehearing of the regulator’s decision. This was recognised to provide incentives for gaming and delay and was quickly abandoned.
The most recent form of merits review previously applied to the regime allowed the Australian Competition Tribunal jurisdiction to consider afresh certain Part XIC regulatory decisions having regard to any information given to the ACCC or referred to in the ACCC’s reasons. The scope of such a review still remained a very broad re-hearing of the efficiency and competition assessment.
Our view is that review mechanisms should not merely duplicate the effort and expertise of the regulator. The review mechanism should not allow for the appellant to “pick-off” individual points of difference.
In that regard, the re-design of the merits review regime that applies to the decisions of the Australian Energy Regulator may be a useful starting point, although that system has not yet been used. However, the approach taken there where the central premise is that a decision would need to deliver “materially preferable” outcomes, seems like a sensible starting point.
Finally, the Vertigan panel has made a number of recommendations that would involve legislative changes and potentially new roles for the ACCC in regulatory oversight of telecommunications. Some of these recommendations, such as giving greater clarity to the regulatory framework, are welcomed by us. Other recommendations may have broader implications and we are in the process of thinking these through.
We will continue to discuss these issues to government as it considers its response to the Vertigan recommendations.
Fixed Services Review and declining demand
Finally today, I’d like to touch on our current Fixed Services Review and make some brief comments about regulating declining demand services.
The industry is, of course, currently undergoing a long transition process brought about by technological developments, changes in consumer usage and, most significantly, policy-induced structural change. Despite these changes, the majority of end-users will remain on the copper network for some time. It is important to continue to regulate these fixed line services, until the NBN is further progressed.
We are considering a number of complex pricing issues. Most significant are: how to account for the impacts of the transition to the NBN in prices for Telstra’s declared fixed line services; the more general decline in use of Telstra’s fixed line network; and the approach to the allocation of costs to access services.
In the transition to the NBN, the valuation of transactions including the sale, leasing and decommissioning of Telstra’s fixed line assets will be significant for prices.
Last month we released a statement on how we intend to account for the arrangements between Telstra and NBN Co, regarding the migration of customers to the NBN and NBN Co's use of Telstra's infrastructure, in determining primary prices. While we considered this to be a straightforward regulatory decision, it was the subject of great interest by stakeholders.
The ACCC will use the regulatory value of Telstra’s assets, not the higher payments agreed between Telstra and NBN Co in their Definitive Agreements, to adjust the cost base for NBN effects when determining regulated charges.
Most of you will be familiar with the issue of declining demand which has been a hot topic at just about every regulatory conference I have attended lately.
Demand for the declared services is falling for three main reasons: migration of customers to the NBN; loss of market share due to increased competition by access seekers; and substitution to mobile technologies.
We have encountered this issue in energy with the increased role of local solar generation and in postal services due to the increase of electronic commerce.
This is a complex issue and one that has no easy answer.
The ACCC's 2011 approach to cost allocation resulted in prices that did not vary with declining demand, resulting in Telstra bearing the impact of declining demand. Under Telstra's current cost allocation proposal, the impacts of declining demand would increasingly be borne by access seekers through higher prices.
In general, there are risks in exacerbating the declining demand problem in choosing to raise prices; faced with higher prices, users may have even more incentives to switch to alternative services.
On the other hand, where the access provider bears all of the risk of declining demand this can affect investment.
There are hybrid options available too whereby risk is shared among access providers and access seekers.
There are a range of very complex considerations in determining how to do this and we will continue to work through these with the industry in the coming months.
As all of the above indicates that there are many fascinating policy and regulatory issues ahead of us for years to come.
None of us will get bored.
Thank you for your time today.
 Vertigan, National Broadband Network – Market and Regulatory Report, p.35, 152-153
 Ovum, Telstra ULLS Undertaking – ULLS International Benchmarking: An advisory note to the ACCC, 26 February 2009
 Optus, submission to draft, October 2009
 ACCC, Report to Senator Alston, Minister for Communications, Information Technology and the Arts, on Emerging Market Structures in the Communications Sector, June 2003, p.xvi-xvii
 Vertigan, p.67