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coonan address

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    Senator the Hon Helen Coonan
    Minister for Communications,
    Information Technology
    and the Arts

    2005 – A Telecommunications Odyssey Address to Deutsche Bank
    14 December 2005

    It is three months to the day since the Senate passed five pieces of legislation that will change the face of telecommunications in Australia.
    And as 2005 comes to a close I think all the telecommunications players would agree - and agreement is a rarity I can assure you - that securing Parliament’s authority to sell the Government’s remaining share in Telstra is overwhelmingly positive for the industry and for the nation.
    We are closer than ever to removing the Government’s burdensome conflict of interest in being both the rule-setter for the entire telecommunications industry and the majority shareholder in the dominant telecommunications provider.
    Of course, there were other important components of the Government’s historic Connect Australia package.
    We have $3.1 billion to improve mobile phone coverage across Australia, continue to connect Australians to broadband and rollout innovative health and education initiatives to keep this country connected and to protect regional communications into the future.
    The Government also strengthened and maintained key consumer safeguards including the Customer Service Guarantee, the Universal Service Obligation, the Network Reliability Framework and price controls.
    And we reviewed the competition and regulatory framework that applies to the telecommunications sector to ensure it continues to be responsive and allow competition to deliver real benefits for consumers.
    The competitive framework has served all Australians well.
    The economy is $12.4 billion larger than it would have been had the Government not introduced competition and we have more than 100 telecommunications providers.
    In the last year alone, 40 new carrier licences were issued, 26 of them with plans to launch wireless services.
    Competition encouraging new services The Government’s framework, while promoting competition has also been successful in encouraging investment by industry.
    Companies like iiNet, Primus and Internode have been investing in infrastructure that offers consumers high speed ADSL services over the copper phone network.
    Optus has announced that it will be investing more than $100 million in broadband infrastructure and there is a lot of investment in alternative ways to deliver high speed internet access.
    Next generation satellite technology from IPStar has arrived on our shores, there are promising commercial trials of broadband over powerlines and continued rollout of wireless technologies including plans for regional wireless broadband from Austar.
    And Telstra proposes to undertake major upgrades and investments in its wireless, core and fixed access networks. These plans will create new high speed platforms which can provide customers with highly integrated services rich in content and functionality.
    Given its success, the Government will continue to encourage competition and efficient investment in the industry; maintain important consumer safeguards such as the Universal Service Obligation and continue to provide targeted funding in areas of demonstrable market failure. The Government is not about over-regulating, or regulation for the sake of it. And we are not about spending taxpayers’ money for things that the private sector would otherwise do.
    We are not about mandating technology that has the potential to be superseded in a short timeframe.
    We want to maximise the commercial opportunities for the telecommunications companies that have committed to Australia. But, in doing so, we want to avoid inefficient investment or unnecessary network duplication.
    Regulation in Australia
    There is nothing anomalous about Australia’s regulatory regime.

    It contains the same fundamental elements as other jurisdictions:
    Access regulation to deal with bottlenecks and to ensure efficient investment;
    Rules to deal with anti-competitive conduct;
    Price controls;
    Universal service obligations.

    In many respects our regime has a much lighter touch than other countries.
    For instance:
    The regulator in Australia does not and cannot set wholesale prices other than by approving prices proposed by a company in an undertaking;
    Our dominant telco, Telstra, retains a high degree of horizontal and vertical integration with fixed line, mobiles, directories and a pay-TV cable platform.
    Unlike some jurisdictions, such as the UK, the entire industry makes a contribution to Telstra towards the cost of providing the universal service.

    Australia’s telecommunications regulatory regime, like other jurisdictions, also requires the owner of bottleneck infrastructure to provide third party access at fair prices.
    The ACCC must ensure a network owner is able to price at levels sufficient to recover costs. In fact when setting access prices, the ACCC assumes new networks are being built – rather than just recovering the cost of the depreciated assets.
    The access regime applies to all network owners, not just Telstra. And, Optus, Vodafone and Hutchison are all currently subject to regulation under the access regime.
    Access providers can obtain certainty from the ACCC through the existing mechanisms in Part XIC of the Trade Practices Act 1974. These provisions allow the ACCC to provide a regulatory exemption if it concludes that this exemption would be in the long term interests of consumers – the LTIE test.
    The provisions were specifically introduced to allow the ACCC to make decisions before an investment is made; or before a service is regulated.
    The Government recognises that regulatory certainty is important for all investors, including Telstra. For this reason the Government reviewed the current arrangements and decided to strengthen them by making the changes that were part of the legislative package passed by Parliament in September.
    Central to these changes were the introduction of operational separation for Telstra’s internal operations; the capacity for the regulator to determine its own procedural rules and the explicit requirement for the regulator to take account of the costs and risks when making access decisions about new investments.
    With these changes the Government believes the framework is settled, and therefore we believe that certainty, in terms of the rules, has been delivered.
    We will review the regulatory arrangements again in 2009 and until then we expect all companies to plan and operate within the rules that have been set – including Telstra.
    If you follow these kinds of things you could be forgiven for believing that the Government is on the cusp of introducing major regulatory changes. Nothing is further from the truth.
    Some are keen to give the impression that uncertainty abounds in the regulatory sphere.
    I would emphasise that there is a significant distinction between regulatory uncertainty stemming from the Government reviewing the rules (which we have concluded) and any uncertainty arising from the regulator doing its job in applying the rules.
    I guess in an industry as fast-paced and dynamic as telecommunications, it is futile to think that debates about regulation will ever abate.
    There are many voices in the continuing regulatory debate. Some louder than others.
    One thing I am sure of is that both Telstra and its competitors would like further changes to the regulatory regime – unfortunately these changes would be mutually exclusive.
    Telstra wants less regulation while the competitors want more. No surprises there.
    As with most dominant telecommunications providers around the world, and their competitors, it always comes back to the legacy network and access arrangements.
    Globally, fixed access networks, either cable or copper, continue to dominate the telecommunications landscape.
    Alternative platforms though they have their place, cannot yet replicate the functionality of fixed networks. Neither can they replicate the ubiquity of fixed networks.
    Telstra’s planned investment to upgrade its fixed access networks, announced recently, immediately poses technical challenges in terms of the point of interconnection; economic challenges as companies try to determine the viability of existing investment plans; and regulatory challenges as regulators grapple with whether or not to regulate and, if so, how.
    Telstra suggested recently that there is a caveat or two on its fibre to the node investment including the need for a permanent regulatory holiday – regulatory retirement if you will.
    In publicly putting forward its case there are two frequently mentioned points:
    That the prospect of regulation means investors cannot be certain they will get a reasonable return; and
    That the current regulatory arrangements were designed for legacy networks and should not apply to new investments.

    I understand that investors want to get a reasonable return on their investment, and despite suggestions to the contrary, I am very aware that investors desire regulatory certainty. I just believe that certainty is achievable within the current framework.
    This is because the current framework allows a company to submit an undertaking or to seek an exemption from the access regime, prior to making the investment. These provisions have never been properly tested.
    I recently made the comment that simply because a service is new, it does not mean that it is automatically regulated. That is because there is no automatic presumption of regulation in Australia. Regulation is only applied where required.
    Telstra itself uses mobiles as a good example of how a market can flourish without regulation. This is a good example – there is little regulation of mobiles, but the reason is not because they are exempted, but because there is competition.
    Telstra also likes to compare itself to other networked industries such as water, gas, and electricity. And there are similarities, hence it is no surprise that all of these industries are subject to some form of competition regulation.
    But there are also features unique to telecommunications which warrant telecommunications specific competition and access regulation, at least until competition is more established, namely:
    • The high rate of technological change; the requirement for interconnection of all networks; and the complexity and multiplicity of services that are offered over the infrastructure.
    For example a telecommunications cable can be used to deliver voice telephony, internet access, pay TV (or free to air TV) services, video-on demand and a host of things that we haven’t thought of yet.
    Whereas a gas pipe line delivers one thing – yes, you guessed it, gas. And it only comes in one flavour.
    The Foxtel example Another argument that has been put forward in calls for a regulatory carve out, is that the only time the exemption provisions of the TPA have been used, resulted in the safe harbour being overturned by the Australian Competition Tribunal.
    This was in relation to the digitisation of the Foxtel Pay TV network. However the reasons for the ACCC’s decision being overturned are important to understand and illustrate the fact that the provisions have never been properly tested.
    In simple terms the ACT overturned the decision because it considered that the exemption was unnecessary. Telstra had decided to invest irrespective of whether the exemption was granted.
    This case turns on its facts and cannot be considered to have general application for the overall operation of the access regime.
    Again, I note that a new service is not automatically subject to the access regime and that the ACCC must conduct a public inquiry before it can declare a service – a reasonably lengthy process by anyone’s measure.
    The international experience In attempts to argue for a carve out from competition for a fibre to the node investment, comparisons have also been made between Australia and regulatory decisions in both Europe and the US.
    At the broad level, the issues in the UK, or in Germany, or in the US or
    Canada bear some similarity to the debate in Australia. However I would
    not be disposed to adopting a US approach without carefully evaluating the

    The major difference is the market structure. The debate in the US has
    been about the role of regulation in facilitating a third access provider into
    a customer’s house.
    The first access line is the traditional copper phone line.

    Cable TV networks provide a second access line into most US homes. This means that there was immediate competition between network owners for the broadband customer.
    The regulator in the US has concluded, based upon the state of competition between the telecommunications and cable TV companies, that it will not regulate new fibre networks.
    The situation in Australia is very different:
    Our cable TV networks are not as ubiquitous as those of the US;
    In Australia, the company that owns the copper telephone network also owns the largest cable TV network;
    Finally, and perhaps most critically, the takeup of pay TV is much lower in Australia (23 per cent) compared to the US ( more than 80 per cent) which means that much of the hard work of acquiring customers and connecting them to the network had already occurred in the US before broadband became available.

    Europe is perhaps a more relevant point of comparison although no less different an example. Rather than providing clear examples of far-sighted regulators agreeing to regulatory holidays, the European experience simply demonstrates that there is an evolving debate on this issue.
    Germany and the UK provide two interesting and contrasting perspectives. In Germany the Government committed to, and the regulator confirmed, that Deutsche Telekom should have an access holiday for new investments.
    However the detail on why this decision has been made are unclear. The likely answer is that the regulator has determined that the market is mature enough to support access holidays for the dominant telco.
    The European Commission, on the other hand, has expressed concern about the granting of an access holiday. Ultimately, as I said earlier, these decisions are best left to impartial regulators operating within the rules set by Government.
    And, an important difference between Australia and Germany, is the fact that in Germany the regulator forced Deutsche Telekom to divest itself of its cable network.
    In the UK, the regulator and BT are deeply engaged in the detail of a regulatory compact. Rather than regulatory holidays, BT is looking at commitments not to offer new retail products, until appropriate access to core bottlenecks can be provided to competitors.
    One clear message from Europe is that the European Commission considers access to fixed access networks is critical to the development of sustainable competition.
    Telstra’s investment?
    So, I guess the obvious question is what happens if Telstra doesn’t invest in
    new networks?

    From my perspective, I think it is inevitable that Telstra will invest in new networks. It has already said there are no caveats on its new high speed data mobile network.
    Telstra is looking for growth opportunities and has identified integrated services, content and applications as the likely source of this growth.
    It is in a unique position in being able to leverage its existing network to introduce the next generation of broadband which is essential to support the new growth opportunities.
    Will Telstra make these investments without talking to the regulator about future access requirements? Probably not. But can the regulator provide the comfort Telstra requires? The answer is yes, the existing access regime includes scope either for decisions along the lines of those made by the US regulator, or for undertakings from Telstra along the lines of those submitted by BT in the UK.
    Another lesson from BT is that a dominant telecommunications provider, the regulator and the industry more broadly can benefit from operational separation of an incumbent telco’s internal operations.
    Operational Separation
    Despite impressions to the contrary, the Government has been working closely and constructively with Telstra, its competitors and the ACCC on fleshing out the details of the operational separation model that will apply to Telstra.
    This will address concerns about Telstra’s level of vertical integration without the costs and risks of structural separation and will ensure that Telstra, as the dominant carrier, treats its wholesale customers on a fair basis.
    As announced in August, operational separation will require Telstra to maintain separate retail, wholesale and network business units.
    There will be a pricing tool that establishes internal wholesale pricing arrangements for Telstra to ensure its retail businesses receive no more favourable treatment than its wholesale customers; and
    Telstra will be required to publish internal contracts setting out non-price terms and conditions. For example, the timeframes for supply of services, and grades of service provided.
    Importantly compliance with operational separation will be enforceable by the ACCC and the Minister.
    The next stage of operational separation involves me making a number of statutory instruments.
    Therefore I am releasing today two draft determinations that set out:
    o The list of designated services that will be subject to the operational separation plan; and
    o Requirements that the operational separation plan must address.

    Perhaps the two most critical elements of these determinations are those relating to the role for the ACCC and the range of wholesale services covered.
    On the first point, we intend that the ACCC have a broad role, consistent with the powers it already has under the Trade Practices Act in relation to price and non-price terms and conditions.
    The ACCC is not being granted new powers. But the ACCC will be able to request information from Telstra in order to monitor Telstra’s compliance with the operational separation plan.
    On the question of services covered, the draft determination reflects the list of services in the Explanatory Memorandum of the legislation with one addition – namely backhaul. The services listed are all declared, or regulated services, under the access regime with one exception – wholesale ADSL.
    Wholesale ADSL has been one of the most contentious wholesale services in recent times, and hence it is appropriate that it be subject to the additional transparency obligations of operational separation.
    On this point it is important to understand that operational separation will complement rather than replace or override Part XIC and XIB of the Trade Practices Act. This might disappoint some, but it is the only reasonable approach.
    Operational separation is not a mechanism by which Telstra will be forced to offer wholesale products – that is handled through the tests and processes of the access regime. The determination listing the services covered by operational separation does not have the effect of requiring Telstra to offer new wholesale services. Further it is not appropriate to include in the list wholesale services which Telstra is not yet offering.
    There will be a short consultation period on these instruments and, subject to the outcomes of the consultation process, it would be my preference to finalise them before the end of the year.
    Following the finalisation of these determinations Telstra will have a 90 day period to submit its operational separation plan to me for approval. The plan must detail how Telstra will fulfil its obligations, and how it will be measured for compliance purposes.
    If the plan submitted meets the Government’s objectives then I envisage operational separation being in place in the first half of 2006.
    Pricing equivalence
    I have also established a working group comprising Telstra, the ACCC, and my Department along with an expert consultant to work on a model to deliver pricing equivalence.
    Pricing equivalence is the most complex component of operational separation – and may take longer to resolve than non-price equivalence arrangements.
    There are inevitably going to be varying opinions on pricing equivalence and I do not underestimate the difficulty in resolving this issue. But I am confident that operational separation will provide real benefits to Telstra as well as to its wholesale customers.
    As the ACCC itself has acknowledged, operational separation can give Telstra a higher degree of assurance about how its behaviour will be assessed by the regulator.
    This in turn provides some certainty and clarity to Telstra’s wholesale customers.
    Operational separation has not been designed to reduce Telstra’s capacity to compete. Neither equivalence of treatment nor transparency should inhibit Telstra’s capacity to legitimately compete in the market.
    Operational Separation is also not a mechanism for proving anti-competitive conduct.
    Again, this is something that is addressed through the provisions and processes of Part XIB and the judicial system.
    But operational separation is an opportunity for Telstra to gain confidence about how its behaviour will likely be treated under the Trade Practices Act.
    By allowing Telstra to develop its own operational separation plan, Telstra can ensure that the arrangements are compatible with its business requirements. It is not putting the fox in charge of the henhouse as some have claimed.
    The detail and the internal arrangements are complex, and no-one outside Telstra should be given the power to micro-manage Telstra’s internal company arrangements.
    The ULL It has been quite a year for telecommunications judging by the level of publicity surrounding the regulatory debate.
    By taking a forceful stance about the purported impacts of government regulation, Telstra is doing what it can to build value on behalf of its shareholders. I respect this objective.
    However, the company risks overstating the impacts not only to its shareholders but to the general public, and misrepresenting the government’s intent when it comes to regulation.
    Whereas Telstra’s self-interest is understandable, the Government has a broader obligation that requires it to strike the right balance and regulate in the interests of consumers, industry and the broader economy.
    This is particularly apparent in debate surrounding the price of access to Telstra’s copper phone lines, known as the Unconditioned Local Loop (ULL) service.
    In Australia the ULL was ‘declared’ as a regulated service by the ACCC in 1999 for the express purpose of encouraging competition by enabling Telstra’s competitors to connect their own equipment to Telstra’s copper phone lines.
    The debate is now about the price of access for Telstra’s competitors. Telstra has submitted an undertaking to the ACCC proposing geographically de-averaged ULL prices and has recently argued to the ACCC that it should accept the undertaking.
    In essence the current debate about the ULL comes down to whether or not the Government should intervene in regulatory access pricing decisions.
    The case for intervention hangs on the assumption that there is currently a large internal cross-subsidy in Telstra’s retail pricing structure, and that de-averaged wholesale prices will see this cross subsidy competed away.
    Although no decision has been taken, from the public debate at least, it is difficult to conclude that there is an immediate threat to Telstra’s capacity to profitably supply services, even in regional Australia.
    And the role of Government is clearly not to make decisions based on protecting current levels of profitability.
    While the detail is being debated and contested, a fundamental point is that Government sets the rules but does not adjudicate the rules.
    Determining efficient prices for any regulated service is complex and technical and in the normal course is appropriately left to the regulator rather than the Government.
    However, connected to the question of ULL access pricing, is the question of retail pricing parity between the cities and the bush.
    It has been argued that the approach to ULL pricing proposed, and generally supported by industry, will force Telstra to increase its regional line rental prices.
    While there are some tensions between the ULL and retail pricing parity, the decisions that the ACCC might make will not automatically force Telstra to increase line rental prices in rural Australia.
    For example, fixed to mobile substitution - where customers opt not to have a home phone and only have a mobile - is occurring more and more in Australia and leading to a reduction in fixed lines. Any dramatic increase in line rentals would only speed up this substitution.
    Regardless, the Government has committed to pricing parity for phone services, including line rental services, for Australians living in rural, regional and remote Australia. We have also committed to equitable access to broadband services across the country.
    We do this by targeted investment for broadband and by retail price controls for phone services. Undoubtedly there are pressures on Telstra’s fixed line revenues, but this is the case across the world for dominant telecommunications providers with legacy networks.
    Telstra’s estimates, presented at its own regulatory briefing, suggest that the ULL impact on Telstra’s fixed line profits does not immediately make their network unprofitable.
    According to Telstra, even if its assumptions about ULL take-up and price competition are accepted, the full impact is not felt until 2009.
    And none of Telstra’s assumptions factor in the Government subsidies that Telstra will undoubtedly benefit from to deliver broadband into regional Australia nor the current funding arrangements for the Universal Service Obligation.
    And, then none of these assumptions factor in the prospect of future voice telephony services being delivered as part of a broadband bundled package rather than as a stand alone service. Finally, these assumptions are all premised on a continuation of the current network architecture.
    More significant than the price of ULL access is the fact that Telstra’s proposed fibre to the node investment will fundamentally change the economics for ULL type investment.
    This debate might be redundant within the next three years.
    What must be remembered is that the ACCC has not yet made its decisions about ULL pricing. Even if the ACCC does make a pricing decision it does not change the costs that Telstra currently faces. Despite suggestions to the contrary, the Government does listen to arguments put forward by Telstra and its competitors, about the ULL and its impacts.
    We have listened, the arguments have had time to mature and there has been an opportunity for stakeholders, including Telstra, to have a say.
    We will be making a decision shortly on the threshold question of whether a case exists for the Government to intervene and, if so, what should be done?
    I knew there was a reason I titled this speech 2005 – a telecommunications odyssey – for it has been such an adventurous journey for this part of the portfolio over the last 12 months.
    And while the journey has not been completed, I believe we are at a real turning point for the industry.
    We have a settled regulatory framework, the very real prospect of T3 for 2006, an historic funding package of $1.1 billion for telecommunications services and a $2 billion perpetual Communications Fund to ensure that Australians will continue to enjoy world class telecommunications services into the future.
    I thank you for the opportunity to address you today. Analysts are a key component of the mosaic of opinion on telecommunications issues in this country and your close attention to the debate is appreciated.
    I hope you have found my remarks today a useful summary of the state of play. I wish you all a happy festive season.
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