Lyn Allison (Victoria, Australian Democrats) Share this | Hansard source

The Democrats support Senator Conroy’s motion to disallow the Telecommunications (Operational Separation—Designated Services) Determination (No. 1) 2005 and the Telecommunications (Requirements for Operational Separation Plan) Determination (No. 1) 2005. We were very critical of the government’s legislation establishing the operational separation plan of Telstra—one of Australia’s biggest companies and one of the world’s most vertically and horizontally integrated telecommunications companies—arguing that it was flawed, very weak and had enormous potential to be exploited by Telstra.

Our view has not changed from that time. If anything, it is reinforced by the news last week that Telstra pulled out of negotiations with the ACCC on fibre to the node, ending yet another round of game playing by Telstra. The editorial in the Australian on 9 August said:

Telstra’s withdrawal from talks on a fibre network has less to do with arguments over when, and at what level, to set a rate for third-party access, and everything to do with maintaining investment uncertainty for its competitors and keeping them off existing distribution lines for as long as possible.

Telstra’s recent behaviour follows a long line of competition failures, like dragging its feet on ADSL 2 Plus access and installation, stalling the ACCC negotiations on the unbundled local loop, putting up barriers to competition access to the ULL and undercutting the retail broadband price. The situation might not be so serious if it were not for the fact that telecommunications is absolutely vital to the national security and economic and social development of Australia.

High-speed internet is essential for successful engagement with the modern economy and society and should pave the way for productivity gains right across global economies. Yet Australia is still behind the OECD average in broadband penetration, ranking 17th amongst 30 OECD countries. We believe the major problem, and the reason Australia is so far behind on broadband, is the government’s failure to deal with structural issues in the telecommunications market and within Telstra while simultaneously pushing the privatisation of Telstra in a light-touch regulatory environment.

The government’s failure has resulted in one of Australia’s largest companies being allowed to put up barriers to competition on a continuous basis and to reduce its investment in infrastructure. The simple fact is that, while competition has improved in telecommunications markets over the years, especially in mobile phones, Telstra with its ownership of the copper network and the HFC cable is still the dominant player in most other telecommunications markets. There are features of telecommunications markets that, in the absence of effective regulation or competition, give an incumbent provider the ability and incentive to hinder competition. The cost of duplicating infrastructure, particularly the access network, is a significant barrier to entry in most markets and therefore a significant impediment to facilities based competition.

This feature alone gives Telstra considerable market power in many wholesale markets. Compounding the challenge posed by Telstra’s power over these important elements of the physical network is that it is vertically integrated. This vertical integration creates the ability and, critically, the incentive for it to favour its own interests over those of its competitors. For instance, Telstra might do this by providing services to its own retail division on better terms than those on which it provides the same services to competitors, providing the same service at a price which is notionally lower than its external wholesale price, providing the same services at a different standard or providing services to itself which it does not provide to its competitors. Telstra therefore has both the ability to favour itself through its ownership of the essential elements of the infrastructure and the incentive, because of its vertical integration, to favour its own interests.

The government tried to deal with this issue through accounting separation, which in our view has monumentally failed. Even the Minister for Communications, Information Technology and the Arts is on the record as saying that accounting separation has been inadequate. Rather than learn from their mistakes, rather than learn from what is happening around the world and rather than learn from and listen to the ACCC, the National Competition Council and the OECD, this government again took the soft option on operational separation. The Telecommunications Legislation Amendment (Competition and Consumer Issues) Bill 2005, passed last year, provided the framework for the operational separation regime. It had the express objective of operationally separating Telstra to promote the ‘principle of equivalence’ in the terms of supply by Telstra of a limited set of services to Telstra’s retail business and Telstra’s wholesale business customers—that is, its retail competitors.

Equivalence is intended to be achieved by allowing scrutiny of the terms, including price, on which Telstra supplies those wholesale services to itself. This was supposed to enable the ACCC to assess whether Telstra is engaging in anticompetitive conduct in relation to the supply of those wholesale services. However, the legislation and the accompanying regulations, in our view and in the view of many in the industry, will fail to achieve their objectives.

What amazed us at the time was that the government rejected the ACCC’s model in favour of a model that gave almost complete control of the process to Telstra without requiring Telstra to comply with the final separation plan. At the time, many in the industry tentatively supported the aims of operational separation. However, there was overwhelming criticism, including from the ACCC, of the government’s model. Mr Graeme Samuel, Chairman of the ACCC, during the hearings into the bill was at pains to say that if certain things were done then the model could meet the government’s aims. The ACCC was reluctant to say the model was good or that they were satisfied with the model. At the hearings, Senator Brandis asked Mr Samuel whether the committee could:

... take it that the ACCC’s position and advice to this committee is that it is satisfied with the government’s operational separation model?

Mr Samuel replied:

I have indicated that there are about five outstanding issues that need to be developed. It would depend on the satisfactory development of those issues, which are quite significant issues, including compliance, investigatory powers and the like, before I could give an opinion on that.

Other witnesses were able to be less circumspect and pointed out the following. Telstra is able to develop the plan themselves. The minister and not the ACCC will oversee the development and implementation of the plan. The operational separation plan is not a licence condition. Enforcement of a breach of operational separation by the ACCC is not available until after a rectification plan has been developed. There is no requirement for the ACCC to be involved in the development of the draft plan or a requirement that the minister take advice from the ACCC with respect to the draft plan. The legislation does not allow the minister to designate new services. There is an absence of a formal advisory role for the ACCC in the internal wholesale pricing and pricing equivalence regime. The possible length of time in setting prices and the interaction between XIA and XIB of the Trade Practices Act and the operation separation plan were also mentioned.

ATUG gave evidence to the sale inquiry that the operational model created the:

... possibility for delay, obfuscation or gaming, which is something that we have been quite concerned about in the past. Giving such a central role to the operational separation plan developed by Telstra alone is too broad and the implications still remain unclear and worrying.

The Democrats moved amendments to address many of these issues. We also moved amendments to strengthen the Trade Practices Act, including divestiture of power to the ACCC to step in and break up Telstra if their structure was an impediment to competition. If my memory serves me correctly, the Senate was not even given the time to debate the merit of these amendments, nor did the government accept any of them.

I must say on behalf of my colleague Senator Murray that we are again disappointed that this government continues to reject our amendments to strengthen the Trade Practices Act, particularly ones that would strengthen the position of small players competing in markets where large companies like Telstra compete.

The government also just does not seem to understand that telecommunications and media are now absolutely intertwined and have to be considered together. Telstra already has a foothold in the media market through its shares in Foxtel and ownership of the HFC cable. More and more media is being delivered over traditional telecommunications lines, and there is huge potential to grow this area and to give consumers more options. However, Telstra’s current dominance of the telecommunications market and infrastructure is likely to stifle growth and competition in this area.

As a result of Telstra’s ownership of both the copper wire and the HFC network, plus the lack of competition and Telstra’s strategy to maximise shareholder value, there has been no incentive for Telstra to invest in its infrastructure, including high-speed broadband. Evidence shows that since privatisation began there has been a steady decrease in infrastructure spending as a percentage of Telstra’s sales revenue. The Environment, Communications, Information Technology and the Arts References Committee report The performance of the Australian telecommunications regulatory regime said:

... during the 1980s under full government ownership of Telstra, 70 to 80 per cent of the annual surplus was reinvested in the network.

Telstra’s capital expenditure as a percentage of revenue declined from 23.4 per cent in 1999 to just 14.1 per cent in 2004.

At the Senate inquiry into the final sale bill and accompanying competition bills, Telstra said it would be reluctant to increase its investment in infrastructure under the conditions imposed by the Telstra sale package. Telstra’s Managing Director, Regulatory, Ms McKenzie, told the committee,

The bill appears to require us to give away to our competitors, whenever they ask, value added services in which we have invested. Why would anyone invest in these circumstances?

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The regulations we face here increase our costs and hamper our ability to expand revenues. In fact, our ability to deliver the next generation of products and services for Australia is severely constrained by regulations that prevent us from earning a commercial return for our 1.6 million shareholders.

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Telstra is a commercial operation. We have to act in the best interests of our customers and our shareholders. If there is no money and we are not making any money, then it will not be there to invest.

There we have it—Telstra telling the committee that they are now overregulated so they will not invest in infrastructure. We have Telstra owning both the copper network and the HFC cable, so there is no competition in infrastructure; we have a part-privatised Telstra trying to maximise their shareholder value by reducing investment capital works; we have a vertically integrated Telstra putting up barriers to their infrastructure; and we have a government that has failed to adequately deal with these issues.

The Democrats have argued for the last five years that if the government insist on going down the privatisation path then at the very minimum Telstra should be required to divest its ownership in the HFC cable. This would open up more competition in the market. The ACCC have argued that, in protecting the revenue of both the copper wire and the HFC cable, investment will not be made or will be delayed in services that would cannibalise the revenue of the other network.

To have fair and transparent competition in Australian telecommunications the government must move down the path of structural separation—that is, separate the wholesale from the retail. We opposed each tranche of the sale of Telstra but, now it is done, this is the only sensible course of action. The government argues that the cost of structural separation may outweigh the benefits, but there has been absolutely no evidence to support those claims because no real investigation has been done. The OECD made strong recommendations that its members consider structural separation as a means of promoting competition in utilities as an alternative to regulation. This is also supported by the National Competition Council.

With its remaining shareholding, the government could still own the infrastructure to guarantee fair access and some sort of parity for regional users. The Democrats argue that telecommunications is as essential as decent roads and power, it should be treated as a critical part of our nation’s infrastructure, and the wires, the pipes and the exchanges should remain in public hands. We say it is time for the government to bite the bullet and structurally separate Telstra—keep the infrastructure in government hands, divest Foxtel and the HFC cable and use those funds to roll out fibre.