Australian Telecom Cisco Lecture Series
Regulation and the Future of the Telecommunication Industry
26th March, 2001
The Regent Hotel, Sydney
Professor Allan Fels
Chairman
Australian Competition and Consumer Commission
I have been asked to speak on regulation and the future of the
telecommunication industry.
This is a big question, and I would like to break it up a bit. Regulatory
arrangements are obviously a major part of the environment within which the
telecommunications industry operates. Consequently, the nature of that
regulation (and any changes to it) will affect the way the telecommunication
industry develops. But it is also the case that the way the telecommunication
market develops will affect the regulatory response that is needed. This
interaction means that it is important to look at both aspects.
I would like to begin by looking at the regulatory outcomes we have seen in
the telecommunications market to date.
I will then look at how our own regulatory priorities have changed, as the
market itself has changed. In doing this, I will outline several examples of
issues which are before the Commission at the moment, which will influence
the future development of telecommunications and related markets.
Finally, and because the regulatory framework itself is currently under
scrutiny by the Productivity Commission, I would like to comment briefly on
some of the broader questions about the appropriate nature and form of
regulation for this industry.
Regulatory outcomes to date
Australia’s telecommunications market is now one of the most open in the
world. It has undergone rapid change since deregulation in mid-1997. The way
telecommunications companies do business in Australia, and the expectations
of consumers, are very different from those of just a few years ago. Not all of
this is due to regulation. But the threshold decisions which made it possible
were regulatory ones. They, in turn, were supported by other regulatory
structures, such as the arrangements under which operators of different
networks are able to access the networks of others. The first years of open
competition have inevitably involved putting in place the regulatory processes
and decisions to ensure that all participants understand the parameters within
which they are expected to operate.
It was the intent of the government when the competition provisions were
implemented that the regulation should generally be facilitative rather than
prescriptive. That is, that it should not dictate where or how particular
companies do business, but instead provide the environment in which
businesses can enter the market, seek opportunities to offer and differentiate
their services, take risks they judge acceptable and so bring a competitive
dynamic to the market. This was expressed in provisions ensuring that
operators could access particular input services, connect to each other’s
networks and achieve swift sanctions in the case of anti-competitive conduct.
These were important in an environment where the longest-established
incumbent operator, Telstra, had market power in most basic
telecommunications services and a number of emerging services.
Let me state the Commission’s responsibilities here. The legislation requires
the Commission to promote the long-term interests of end-users, having
regard to the effect on competition, efficient infrastructure investment,
efficient use of infrastructure and the achievement of any-to-any connectivity.
It also empowers the Commission to act swiftly against instances of anticompetitive conduct.
People’s perceptions of how well this has worked inevitably reflect their
expectations of the regulatory process in the first place. Those who expected
Telstra’s market power in all areas to be quickly eroded are likely to have been
disappointed. Telstra now faces competition in most areas of its business,
including almost all its retail areas, but retains control over the local loop,
giving it virtual monopoly over the critical element of consumer access. This
has given rise to a lot of disputation concerning terms and conditions of access
to wholesale services.
Some also seem to have expected Telstra’s profits to have been quickly eroded.
They regard profitability as an indicator of regulatory failure. However, the
existence or otherwise of profits does not by itself signify efficiency or the lack
of it. The question is how large the profits are relative to the capital and risks
associated with new investment, how they are derived and how they are
dispersed.
In fact, the realities of the situation are more encouraging. Telstra does still
have market power in critical areas of the market, but this is largely due to the
nature of the infrastructure it commands. Much of that infrastructure – and
particularly the local loop – still exhibits some natural monopoly
characteristics. In these circumstances, the breakdown of market power
through the development of alternative facilities is unlikely to be economically
efficient. Instead, what is required is reasonable access to the infrastructure by
potential competitors in downstream markets, so that Telstra’s market power
cannot be exploited in a way which disadvantages competitors and consumers.
The regulation enables this to happen. Under the Telecommunications Access
Regime in Part XIC of the Trade Practices Act, the Commission’s ability to
‘declare’ services ensures that those services are made available to access
seekers on reasonable terms and conditions. In its role as arbitrator, the
Commission resolves disputes concerning the terms and conditions of access.
The Commission’s approach to pricing for infrastructure access is generally
based on what we calculate, from Telstra’s own accounting and network
information and other material available to us, to be the efficient costs of
provision. We are still working through the details of some of our pricing
principles, but we believe that, for basic fixed line access services, the
principle of pricing based on forward-looking efficient costs is right. So do
most other regulators in industrialised countries.
On the question of profits, a look at Telstra’s most recent results is
illuminating. Telstra has just announced a profit increase of over 5 per cent in
the second half of the calendar year 2000 over the first-half results. This
reflected significant traffic growth in a number of services, as well as a
reduction in customer loss and improvements in cost control. Traffic growth
in telecommunications tends to raise revenue faster than costs, as many costs
are fixed in nature. The revenue growth was greatest in non-basic services
(mobiles, data, text and Internet access), and in wholesale and intercarrier
services.
It does not seem to me that these profits support Telstra’s view, expressed in a
number of forums over the last year or so, that the regulatory regime is stifling
its incentives to invest and maintain its infrastructure. The returns are clearly
there. Not unnaturally, Telstra is concerned to see regulatory changes made
which will enable it to retain them.
It is not the Commission’s job to regulate Telstra’s profits or control excess
profits. My own view is that, as long as genuine competitive forces are at work
in the industry, excessive profits cannot be sustained. While they persist, they
are an incentive to others to enter the market. The Commission’s role is to
ensure that such competition can emerge and flourish, and that access charges
are efficient.
A level of disappointment has also been expressed by many in the industry –
and by the Commission itself – about the level of disputation concerning
terms and conditions of access and delays in resolving those disputes through
the arbitral process. We have made reference to the causes of these delays,
and suggested some solutions, in our submissions to the current Productivity
Commission review. However, the issue arises again with Telstra’s appeal
against an ACCC arbitration decision. It seems likely that the Tribunal’s
decision will not be handed down until 2002. The United States regime is
often criticised for being excessively litigious, but here in Australia we appear
to have the even more difficult problem that basic decisions made by
regulators can be reviewed from scratch, with all the further delays and
uncertainty which that implies.
Changing regulatory priorities
As many of the regulatory arrangements for basic PSTN services are now in
place, or even (as in the case of intercapital transmission capacity) being
reduced or removed where competition is judged effective, the Commission’s
priorities are changing. They are moving to newer services where competition
issues are arising, and to more light-handed forms of regulation.
I mentioned earlier the objectives specified in the legislation which the
Commission implements – to promote the long-term interests of end-users,
having regard to the effect on competition, efficient infrastructure use and
investment, and the achievement of any-to-any connectivity.
In an environment where industry structure, consumer demand and
infrastructure are changing, achieving these objectives can mean changing the
focus of the regulatory approach in response to changing conditions. I have
said on a number of occasions that I believe we still have a considerable way to
go in this industry. Telstra retains control over the customer access network
for all but a tiny proportion of residential customers in Australia, and prices
are still well above costs for some services. In other services, oligopolistic
market structures are emerging. In both cases, the opportunity and the
incentive to exploit market power against the general community interest may
arise. Strong access and anti-competitive conduct regulation will be required
in order to protect and enhance the competitive environment where facilitiesbased competition is emerging only slowly or in limited areas.
Technologies
The rollout of new telecommunications services and infrastructure in
Australia has been one of the most important drivers of new competitive
forces in the market. New investment has been the vehicle by which new costreducing technologies and new services are being introduced to the market,
and generally produces the most effective forms of new competition. However,
much of the new infrastructure has been concentrated in the more denselypopulated metropolitan and regional areas. It has also been slowed recently by
developments in the financial market and the uncertainty surrounding the
future role and structure of C&W Optus.
These new technologies offer broadband and wireless capabilities which
extend well beyond the provision of telecommunications services alone. They
are increasingly being used to provide comprehensive service packages to
household consumers, including pay television, telecommunications and data
and Internet services, and a range of business-to-business applications. In the
process, they are creating new products, new sources of supply, new means of
distribution and greater efficiency.
I am sometimes asked if competition and consumer protection law will one
day become unnecessary as a result of such developments. My answer is ‘no’.
As long as there is the opportunity and the incentive for businesses to increase
their profits by engaging in forms of anti-competitive behaviour, these
developments will merely change the nature of consumer and competition
problems, not eliminate them. However, our responses must adapt to
recognise that the new forces at work in the economy are lessening the need
for application of competition and consumer protection in some areas, while
increasing it in others.
Let me outline some examples.
Mobile phone services
Mobile phone services in Australia are provided by three major network
operators and two smaller, still-developing networks. The market is
continuing to expand rapidly. Consequently, the regulatory arrangements
must reflect the greater retail competitiveness and changing cost
characteristics in the sector compared with the fixed-line sector.
GSM origination and termination services are ‘declared’ services under Part
XIC of the Trade Practices Act. However, the determination of terms and
conditions of access to those services remains the subject of some discussion.
The Commission recently released a draft report on the determination of
termination charges for calls to mobile phones. The release was in response to
several (ongoing) arbitrations between mobile carriers and fixed carriers
wanting to supply retail services. Fixed carriers had been seeking arbitrations
from the ACCC to reduce the price of mobile termination and hence fixed-tomobile calls, and suggested that cost-based regulation was required.
In reply, the mobile carriers submitted that the industry was increasingly
dynamic and competitive and that the Commission should not get involved.
They argued that retail charges had fallen in recent years, and that regulatory
intervention might adversely affect investment in the industry (including the
3G spectrum auctions currently underway).
The Commission sought to establish whether the industry was delivering
efficient outcomes. It received advice indicating that, although there are
multiple suppliers of the mobile (GSM) termination service, mobile carriers
retain market power in relation to access to their own customers, and that
normal market constraints are avoided because consumers receiving mobile
calls are not generally aware of the charges levied by their carrier for
terminating those calls. It also found that the price of terminating calls on
mobile networks in Australia remains high relative to cost, resulting in higher
retail charges than would otherwise be possible. It concluded that some
regulation of these charges was warranted.
This is not just an Australian phenomenon. Other regulators are also
exploring similar questions. The UK regulator, Oftel, for example, is
conducting a review on mobile termination charges at present.
Nevertheless, the Commission reached the draft view that ‘heavy-handed’
regulation is not appropriate in such a dynamic industry. Cost-based pricing,
while generally preferred as a pricing rule by the Commission, is better suited
to well-developed and less dynamic services.
Consequently, the Commission proposed in its draft report to ‘benchmark’ or
tie changes in retail prices to wholesale termination charges. The approach
has the advantages of linking more competitive (retail) outcomes with less
competitive (wholesale) outcomes and allowing carriers to retain some pricing
flexibility. This approach relies on the overall competitiveness of the market to
drive changes, while ensuring that the benefits of that competition are not
focused on retail mobile customers at the expense of fixed-to-mobile
customers. It is also a more light-handed approach. The Commission
proposed to review the approach in two years time.
Broadband access
Broadband infrastructure is of particular and growing importance to the
future of all digital services, and Australia, along with other countries, is
progressively developing its broadband infrastructure networks. These include
fixed networks like broadband cable and various radio-based technologies of
both the stationary and mobile type, such as LMDS, satellite and prospective
3rd Generation mobile technologies. However, it is the potential to utilise the
existing telephony copper network, a network that passes almost every
Australian household, to deliver high speed Internet access which opens the
possibility of achieving high levels of broadband penetration in the residential
space. Digital subscriber line (DSL) technologies utilising the unconditioned
local loop (ULL) are the vehicle by which this is likely to be achieved.
However, the rate and ultimate extent of takeup of such services is clearly
dependent on their price, among other things. The Commission is monitoring
the pricing of the regulated unconditioned local loop, together with other
factors likely to affect the speed at which DSL services can be delivered to a
broader audience.
Australia was at the forefront of moves around the world to open up hitherto
closed monopoly controlled local loops when the Commission mandated
direct access to Telstra’s copper in August 1999. Declaration was expected to
influence significantly the development of competition for local telephony
services and high bandwidth carriage services and to enhance competition for
long distance telephony services, including via ADSL technology.
Following the declaration of the unconditioned local loop, the industry
undertook the enormous task of developing operational and technical codes to
support DSL. However, in mid 2000 as Telstra began preparing to release its
retail ADSL services the Commission began to see signs that suggested that
competition was, in part, being frustrated by access seekers not being granted
timely access to exchanges.
The Commission spoke to both access seekers and Telstra about these
concerns. We felt that, as Telstra was both a wholesaler and retailer of ADSL
services and controlled access to exchanges, it was necessary to make Telstra’s
role in the delivery of high-speed data services more transparent. It was also
important to gain a commitment from Telstra that it would not launch its
retail ADSL products before its competitors had available a wholesale product
to ensure competition at the retail level. As a result of those inquiries, the
Commission now requires Telstra to provide us with extensive detail on a
weekly basis on the way in which Telstra plans to provide access seekers with
prompt access to exchanges as well as the scope and timeframes in which it
delivers services on the unconditioned local loop to itself and to other access
seekers.
The Commission is also monitoring some other unresolved issues surrounding
ADSL services. These include the differential between Telstra’s wholesale and
retail ADSL prices and the identification of costs directly attributable to the
unconditioned local loop.
Our efforts are intended to increase the penetration of broadband services and
we are confident that this will occur. However, it will be progressive rather
than immediate. At present, services are still being rolled out and equipment
costs are still high. It is probably not surprising that larger users, including
corporate customers, are being targeted first. It is also evident that
competitors are facing a more severe financial environment and mass-market
applications are still evolving. Nonetheless, the Commission’s efforts to
improve the processes of ULL and ADSL provision, including further
scrutinising the pricing of these services, along with wider applications for the
services, should see a progressively greater takeup by residential consumers
over time.
Cable broadband networks
I would also like to say something about the Commission’s approach to the
regulation of cable broadband networks. The Commission has mandated
access to cable (HFC) networks to enable service providers to deliver analogue
pay TV services in competition to those already provided by Foxtel and Optus.
However, the Commission has so far refrained from regulating access to HFC
and satellite networks for the delivery of digital Pay TV or any other digital
services.
When it last looked at this matter, in 1999, the Commission considered that
there was too much uncertainty about the emerging digital environment to
conclude that regulation was necessary to promote the long-term interests of
end users, but that it would keep this under review.
There has been some speculation recently, with rumours of the impending
digitisation of the Telstra and Optus HFC cable networks, about whether the
Commission would or should revisit this issue and make a more definitive
decision about the need for regulation of digital services. Some parties have
also expressed concern that the possibility of regulation of these networks may
be acting as a brake on investment to digitise these networks.
The Commission believes that it is in the interests of both service providers
and customers for broadband platforms to be open rather than closed. An
open access environment ensures the competitive provision of services and
can also mean a more efficient and more effective use of broadband networks.
An open access environment is one characterised by non-discriminatory
access, that is, where the owners of digital platforms provide access to service
providers on similar terms and conditions as those provided to their own
internal service providers.
However, the effectiveness of such a regime will depend on its acceptance by
the parties involved. An open access environment is likely to be well-received
by infrastructure owners, but the Commission’s experience with existing cable
regulation shows that access can be frustrated for long periods by access
providers. Telstra and Foxtel have engaged in a lengthy campaign to prevent
access to HFC cable networks for the analogue pay TV services and slow down
related processes, and are clearly able to devote considerable energy and
resources to such activities.
The case for regulation of other access platforms, however, is not as clear-cut.
For example, unlike the copper network, digital platforms are likely to be
characterised by greater degrees of competition and new entry over time.
Digital networks will have enormous carrying capacity – for example, digital
cable networks are expected to have nearly ten times the capacity of that
currently available on analogue Pay TV networks. It is also likely that over
time competition between different digital platforms will intensify, providing
even greater choices and benefits to consumers.
Digital platform providers therefore have a choice. They can take the early
initiative in opening up their networks for digital services, thereby creating
significant opportunities and benefits for both themselves and their customers
or they can take the regressive step of maintaining closed shops - and then
facing the diversity of demands from service providers, governments and
customers for regulatory intervention.
In the Commission’s view, regulation of other digital platforms will only need
to be considered where commercial forces are being deliberately undermined
and where the objective of an open access environment is being stifled.
Legitimate market drivers should be given the opportunity to do their job.
The regulatory framework
The regulatory framework itself is currently under review. Indeed, the
Productivity Commission will release later this week the draft report of its
current review of the telecommunications-specific competition provisions in
the Trade Practices Act and other regulation. The review team has been
considering issues as fundamental as whether industry-specific regulation
should be retained for telecommunications and, if so, in what form.
The Commission has expressed its views on these matters to the Productivity
Commission in a number of formal submissions. We have drawn on our
experience in implementing the provisions over the last four years to indicate
where we believe amendments to the provisions would improve the speed and
effectiveness with which they operate. Many of these relate to the causes of
disputation within the industry and the processes by which disputes are
arbitrated by the Commission.
More importantly, we have reiterated our conviction that market forces,
operating through competitive structures, are the best way of promoting the
long-term interests of end-users in this, as in any other, market. However,
where industry characteristics and structures prevent the effective operation
of competition, we believe that regulation will continue to be required. As I
noted previously, both monopolistic and oligopolistic structures are still
apparent and are not likely to change quickly. In such an environment,
appropriate access and anti-competitive conduct regulation will be required in
order to protect and enhance the competitive environment.
Like all of you, we are looking forward to examining the outcomes of the
Productivity Commission’s deliberations.
Conclusion
The telecommunications market is still a market in transition. I believe there
is still a job to do to ensure that competition can continue to develop and
flourish.
The future of the telecommunications industry in Australia is about
competition. The current regulation establishes the mechanisms for achieving
both facilities-based and access-based competition and the efficient balance
between them, and for ensuring that anti-competitive conduct is subject to
swift sanctions. The Commission has shown that it is prepared to pursue a
hard line where it believes that is necessary (as in the case of ADSL rollout),
but to adopt more light-handed solutions where those are warranted. The
draft principles for the regulation of mobile termination charges are an
example of the latter.
Similarly, our stance on digital cable services is one of allowing incumbent
operators to take the initiative to establish access arrangements which benefit
themselves and potential access seekers, rather than to mandate access
through regulation.
I believe that this flexible, responsive approach will continue to serve well the
telecommunications industry and Australians generally.