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Environment and Communications Legislation Committee - 05/02/2016 - Telecommunications Legislation Amendment (Access Regime and NBN Companies) Bill 2015

GALLAGHER, Mr William, General Counsel, Corporate Affairs, Telstra Corporation Ltd

SHAW, Mr James, Director, Government Relations, Telstra Corporation Ltd

[13:14]

CHAIR: I now welcome representatives from Telstra. I understand, Mr Shaw and Mr Gallagher, that information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. Is that correct?

Mr Gallagher : Correct.

Mr Shaw : Correct.

CHAIR: The committee has Telstra's submission, so thank you very much for putting the submission in. I now invite you to make a brief opening statement, and then I will go to the committee to ask questions.

Mr Shaw : Telstra is well down the road in restructuring our organisation, refocusing our investment strategies and developing new products to compete in the market that is being transformed by the rollout of the NBN.

This bill impacts on the safeguards which apply to nbn as the primary provider of high-speed fixed broadband inputs that all retail service providers rely on to compete in this new world. There is much in this bill that we do not object to. However, we do have concerns about the adequacy of accountability standards around NBN, in particular accountability of the ACCC in making decisions around the terms in which nbn provides access to its services and accountability of the ministry in making decisions to expand nbn's permitted scope of business.

Currently, the ACCC's telecommunications access decisions are not subject to merits-based review, unlike its access decisions around the board of other utilities, such as gas and electricity. Telstra's position as an access provider in the old world of legacy networks has been that merits-based review should be reintroduced. As Telstra increasingly shifts to being an access seeker on the NBN, we continue to believe that the ability to seek merits-based review of access decisions is important—probably even more so. While the ACCC is an independent regulator, there are special challenges in regulating a government-owned dominant provider. Also, as nbn is usually the only fixed network provider, the consequences of regulatory error are much higher.

In our view, the bill in its current form misses an opportunity to take up the recommendations of both the Harper and Vertigan panels which both favour introducing merits-based review. While the government has not ruled out implementing these recommendations at sometime in the future, we believe now is the time to act for a couple of reasons. First, as the pace of the NBN rollout is accelerating, NBN is becoming the key focus of ACCC access decision making. Second, support for merits-based review is building. A number of our competitors, including Vodafone and Optus, support it. The ACCC itself generally supports merits-based review.

Turning to the bill's changes to the nbn line of business restrictions, we agree that nbn should be given the flexibility to engage in the activities which the explanatory memorandum gives as examples justifying the proposed changes, such as nbn being able to sell surplus inventory. However, giving the minister power by regulation to further expand the nbn scope of business in the future over-solves for these problems. The explanatory memorandum says that using the legislative pathway to make future changes in nbn's remit is difficult, but that should be the point—expanding nbn's activities should be difficult because it will usually be a zero-sum game between what is exclusively nbn's and what is open to competition.

Decisions around nbn scope of activities are so fundamental to the nbn model and industry participants that they should be subject to the full public debate and parliamentary scrutiny associated with legislative amendments. We appreciate the government's open and consultative approach to implementation of the Vertigan recommendations. However, on these two matters—a merit-based review and expanding the nbn's line of business—we believe that changes should be made to this bill to improve the robustness of the NBN regulatory framework and ensure nbn does not encroach into areas of competitor activity.

Thank you, Chair.

CHAIR: Thank you very much.

Senator URQUHART: Thanks, Mr Shaw and Mr Gallagher. I want to focus for a moment on Part 7 of the bill dealing with nbn's line of business restrictions. In your submission, you write:

When the NBN was launched, it was recognised that the line of business restrictions on NBN Co were so fundamental that they should be embedded in legislation to provide investors with the degree of certainty they needed.

Can you clarify this statement for the committee? Can you clarify what you mean by—

Mr Gallagher : The proposed amendments in Part 7 would have the effect of relaxing those restrictions. The restrictions apply to the wholesale-only nature of its business and then to nature of the services it can supply. So there are restraints on the type of goods and services it can supply and the investments it can make. So those restrictions were very important to industry to have certainty about the role that nbn co would perform and the areas of business activity that nbn would involve itself in. So our submission is that is very important and that the regulation power is open ended and would allow a future minister to relax those restrictions in a way which we think would be contrary to the original policy intent of the nbn.

Mr Shaw : Could I could add that, at the time of the original legislation, we argued for even stricter restrictions on the NBN side of the business, which the parliament decided not to pursue. So we are being quite consistent in taking this position.

Senator URQUHART: Is it Telstra's view that these changes are minor and machinery in nature, or is it your view that they are quite significant in how they actually impact nbn co's role as a wholesale monopoly provider of an access network?

Mr Gallagher : In broad terms, there are two changes. One change is, in effect, to give nbn co the ability to sell surplus goods. We do not object to that; we can see the sense in that. We are happy for that change, that specific relaxation, to be made because it is specific and we have certainty about what it would involve. The second change introduces a regulatory power. It is a broad, open-ended power, and that is what we object to.

Senator URQUHART: In your view, that is a significant one.

Mr Gallagher : It has the potential to be a significant change down the track, depending on how it is used.

Senator URQUHART: Telstra also writes in its submission, in relation to nbn co:

Its latest corporate plan suggests that there will be a larger than anticipated funding gap between the build costs and the capped funding commitment by the Government. NBN Co is reported to be considering new business directions as it tries to grow revenue.

I want to clarify that statement. When the government first announced its version of NBN, they said it would be funded entirely out of public equity. In December 2013, after their first $11 billion blow-out, they said that some $11 billion would be provided out of debt. In August 2015, after their second blow-out of up to $15 billion, they said that, potentially, $26.5 billion would have to be provided out of debt. Is Telstra saying here that this government's regular blow-outs on the NBN, which have resulted in an ever-larger gap between public funding and the total funding required for the project, have resulted in a situation where nbn co needs to find new revenue streams to plug that funding hole?

Mr Shaw : In that statement, we acknowledged those figures that are in the public domain. Our observation is that, in managing the economics of the NBN, the company management and the government should not be pursuing new areas of business outside the original intent of the NBN.

Senator URQUHART: But do you believe that the purpose of this is to try to plug that funding hole?

Mr Shaw : That is a question you should put to the government, I think, senator.

Senator URQUHART: But I am asking you what your view is.

Mr Shaw : Without being privy to the business plans of the—

CHAIR: I think that is straying into the realm of hypothetical questions, for Telstra to—

Senator URQUHART: No, it is question of whether or not—

CHAIR: hypothesise on the government's intent.

Senator URQUHART: No, it is a question for Telstra as to whether they believe that the reason behind the push for this bill is to try to get back some of the funding that the government—

CHAIR: I think Mr Shaw has actually answered that, but continue.

Mr Shaw : We are not privy to the government's thinking behind those particular provisions, senator. All we are saying is, recognising that the provisions are now in the bill, we do not believe they are appropriate.

Senator URQUHART: Okay. Telstra says in its submission that are virtually the entire telecommunications industry—that is: Telstra, iinet, Macquarie, Nextgen, Optus, TPG and Vodafone, just to name a few—all made clear in their submissions to the Vertigan review that the statutory limits on nbn co's lines-of-business restrictions should not be relaxed. Yet the proposal still turns up in this bill. Again, is this a desperate push by the government to plug that funding hole?

Mr Shaw : Again, I refer to my previous response. We are not privy to the thinking behind why they are going here.

Senator URQUHART: I understand that you do not want to answer that particular question because you do not know what the government's rationale is. But if there are so many telecommunications providers out there in the industry, such as some of the ones I named and others, that are making it very clear in their submissions that the statutory limits on nbn co's lines of business should not be relaxed, what is the rationale for doing it?

Mr Shaw : Because nbn co was set up for specific purposes around issues in the access network, we do not believe it is consistent with the original rationale for nbn co for it to move into areas where there is clearly competitive tension and where the market is performing.

Senator URQUHART: The only thing that I could come to terms with is that they want to move out into other areas in order to reap some revenue. If this passes, does that then not provide nbn with a way to recoup more revenue?

Mr Shaw : Our concern is they might move into areas of competition and start to interfere with areas where we think the market is performing now and there is no need for intervention.

Senator URQUHART: But that would create revenue for them, would it not—if they were able to do that?

Mr Shaw : Presumably if they move into a new line of business, they would be seeking to do it on a commercial basis.

Senator URQUHART: These amendments appear to provide a general power for the government to expand the services nbn co can provide. What is your understanding of 'general power'?

Mr Shaw : General power is exactly that—it is broad in nature. It is not specific.

Senator URQUHART: Is it intentionally open-ended?

Mr Shaw : There may be constraints from other parts of the legislation. I would have to get further advice on that. But a general power is not a specific power, so it is open to broad interpretation.

Senator URQUHART: So it could potentially be open-ended if it is not defined?

Mr Shaw : Again, there might be other ways of defining or limiting these things through a statement of expectations or other things. I think it is a little hypothetical in that respect.

Senator URQUHART: Can you summarise Telstra's position on the proposed amendments in part 7 of the bill for the committee? I know you talked about the two sections. Is that your summary of part 7?

Mr Shaw : It is. We think that the ability to dispose of excess inventory and the like is appropriate, but an open-ended power to look into other lines of business should, we believe—and as we said in our opening statement—if pursued, be subject to scrutiny by the parliament rather than through regulation.

Senator LUDLAM: Your comments are mostly focused on part 7. I will bring you back to those in a second. But are there any other areas in the bill as it stands that you want to pass comment on?

Mr Shaw : No. Our other comments related to what we see as omissions from the bill rather than the bill as drafted.

Senator LUDLAM: Yes, the merits review stuff. I will come to that in a second. I do not know if you were in the room for the evidence of the Optus representatives. They described a fair amount of the bill as being 'just housekeeping'. Is it Telstra's view that it should pass with amendments or do you think it needs to be pushed back to the drawing board?

Mr Shaw : Ultimately that is really a question for the Senate. We have offered a view about the bill as drafted—our concerns with one provision and about an omission. With respect to the other parts, its passage is not immediately crucial to our business, but for tidying up a number of the recommendations from the Vertigan review and addressing issues that are more for nbn than for us—that is where our views rest.

Senator LUDLAM: Let us go to the merits review issue. What is the current process for challenging ACCC decisions, or is there no process?

Mr Shaw : We have the Administrative Appeals—

Mr Gallagher : It depends on the decision, broadly. There is no merits review in part 11C anymore. There is still judicial review—an administrative law review. But there is no appeal to the Competition Tribunal against ACCC decisions.

Senator LUDLAM: Just remind me: was that issue addressed in the Vertigan review and then subsequently left out of this bill? Or is it older unfinished business for you guys?

Mr Gallagher : It was certainly touched on in the Vertigan review. The Vertigan panel I think expressed the view that merits review was desirable. I do not remember whether or not there was a specific recommendation to reintroduce a merits review, but there certainly were comments in favour of its reintroduction.

Senator LUDLAM: I will move to the line of business stuff, because I think that is fundamental. I think Telstra sometimes finds itself on the other side of the argument, but on this one I think you guys are pretty much lined up with everybody. Can you give us a couple of quick examples of where you think nbn could be trying to get outside its box? I take Senator Urquhart's point that they are looking at potentially massive shortfalls in funding given that the costs have blown out in such an extreme way. What are your specific concerns about areas where nbn might start moving outside its wholesale-only mandate?

Mr Shaw : We do not have any specific instances that we could discuss with the committee. It is a matter of principle here.

Senator LUDLAM: Okay. We are all for principle, but how could this actually affect the market in the real world? I am with you on the principle—I actually strongly agree. But what would it actually look like in practice?

Mr Shaw : There are any number of adjacencies within the telecommunications sector outside provision of the access network. If you look at any of the service offerings of telcos providing services in those competitive spaces, you could argue that there is scope for nbn to start to look at similar sorts of services.

Senator LUDLAM: You are not concerned about them taking up space as a retail service provider; it is rather what you refer to adjacencies—creeping out of the wholesale box.

Mr Shaw : Our concern is really the matter of principle. In my previous response, I gave a general view that they could move into adjacencies, but we are not saying that there is a certain area of services or products that they may or may not move into. We have not gone that far in our considerations. We are dealing with this, as I said, as a matter of principle. You may recall because I think you are the only remaining senator from the time the first legislation went through many years ago that we had an exchange with you in Sydney where we argued quite strongly that the current restraints should be even stronger.

Senator LUDLAM: That is right.

Mr Shaw : We are just maintaining that consistency in our view.

Senator LUDLAM: I am not having a go at you. I happen to agree on the point on principles. Maybe it would assist the committee if you could give us some examples of what you are to adjacencies?

Mr Gallagher : If I could step back slightly. The bill deals with the provision by nbn co of eligible services—what you might consider to be carriage services or services that facilitate carriage services. That is the line of business the wholesaler-only constraint applies to, and the changes that are proposed in this bill do not impact on any of that. As Mr Shaw said, we have concerns about the strength of the wholesale-only constraint, but this bill does not really go to the provision of eligible services or carriage services. It goes to the provision of noncommunication services or goods, and it goes to the ability for nbn co to make investments. I think we gave a few examples in our submission.

If the regulation power is used, nbn co might, for example, be able to move into the provision of systems integration services to large corporates or advice on retail product development. These are not eligible services; these are, in a sense, consulting services or IT data services. They are two examples we have given in our submission.

Senator LUDLAM: Thanks and thanks you for your time today.

Senator BACK: Thank you for being here. As I recall, the explanatory memorandum on page 7 notes: 'The bill also makes it clear that no change is intended to section 9—the requirement on nbn co to act on a wholesale-only basis—as this is fundamental to the structural and competition reforms nbn co is designed to bring about. That is, regulations will not be able to be made in relation to section 9.' Does that not give you the satisfaction or confidence that nbn will not be competing with you in the retail space?

Mr Gallagher : No, because that restraint only applies to eligible services—so to carriage services. It does not apply to the types of services which these amendments go to which are noncommunication services or noncommunication goods, or investments by nbn co.

Senator BACK: Okay. That is a matter we will need to take up with the department. A number of submissions raised the matter of pilots and trials, but you did not in your submission. Do you have any concerns about any matter related to pilots and trials that have been presented by others? You may, in fact, have even heard some of the earlier evidence.

Mr Gallagher : We did not make a submission on pilots and trials. We see the sense in it. There is an efficiency argument in favour of it. If nbn co is to be required to run pilots and trials with the entirety of industry each time it seeks to launch or test a new product in the market, there is an obvious cost associated with developing the capability and capacity to do that across potentially all service providers. So there is an efficiency element to it. On the other side of the coin, there may be a disincentive on nbn co if indeed the cost of building that capability—to be able to allow the entirety of the industry to participate—were to, in a sense, deter it from wanting to trial or test innovative new services which it might have a question mark over, which it might think are marginal, whereas, if it is a cheaper proposition for it to trial it, it might be more prepared to trial something which might be questionable or marginal.

Senator BACK: Sure. Thank you. I want to go to the merits review. I seem to recall—maybe it was the minister—that the concept of the merits review would be examined after the rollout is complete. That is again something we need further clarification on. Perhaps I could draw attention to this. Some of the submissions to the committee raised the role of the ACCC with regard to part 4, access determinations and consultation, and, in part 5, special access undertakings. Do you have any particular views on either or both of those?

Mr Gallagher : I do not think so. We understood the rationale for them. We did not object to them. I do not think we strongly favour them, but, equally, we do not strongly disagree with them.

Senator BACK: I think it is on the bottom of page 6 of your submission where you express concern about the safeguards included in the legislation, particularly with regard to the regulation-making power being subject to disallowance by the Senate. I am just not sure of your concerns. Are you concerned that there is a disallowance capacity within the regulation or not, and why?

Mr Gallagher : I think our point is that the line- of-business constraints are so fundamental to the policy and to the certainty the industry has around the space in which nbn co will operate in the market that, if there is going to be a material relaxation of that, that is something we believe should go back to full consideration by parliament, with all the processes, including Senate committees and the like, rather than a disallowance process through parliament.

Senator BACK: I can understand that. I can understand why you would come from that position.

CHAIR: I have one question of clarification, given that I am very new to this committee. There have been a number of discussions around reduction of competition in relation to nbn co, but, given nbn is a wholesaler and the rest are not, how could nbn co itself be competing unfairly with any of the retailers?

Mr Shaw : This is with respect to the line-of-business issue?

CHAIR: Yes.

Mr Shaw : As Mr Gallagher was saying, it is not with respect to those eligible services but the capacity to go into other areas of activity.

CHAIR: Do have an example of that, Mr Gallagher?

Mr Gallagher : There are the examples that I gave before—the provision of systems integration services or product development advice—

CHAIR: Could you expand on that a bit further for me? That is a quite generic response. I am not saying it is incorrect. Could you walk me through that just a little bit to demonstrate how it could be?

Mr Gallagher : This might oversimplify it, but nbn co—

CHAIR: Oversimplification is fine, thank you!

Mr Gallagher : Nbn co's remit is, essentially, in the connectivity space. It is to provide, broadly, carriage services across its network at the lowest level in the stack—the most basic, wholesale, layer 2 service. The policy originally was to try and constrain it to that part of the market—just to connectivity—and low in stack, leaving as much room for the RSPs, in essence, to capture the value in the market outside that. Our concern with the regulation power is that, at least in relation to non-communication services and goods which are not carriage services, such as products, IT systems or things other than the actual basic carriage of service, nbn co might stray into those markets where the rest of industry—all the RSPs—are currently competing.

CHAIR: So, currently, yours is a hypothetical concern that NBN might start straying into more of a retail market area?

Mr Shaw : Not a retail area around the provision of the connectivity, but other areas of activity in the industry.

CHAIR: But other areas of activity, which would be retail, that would then be going into the retail market in those particular areas in competition with existing retailers?

Mr Shaw : Yes. But let's be clear: when we talk about retail, we are not talking about the retail in the concept of an RSP selling services off the NBN.

CHAIR: But in terms of a strict definition of wholesale and retail you are talking about them going from an area where, as you said, they are currently the wholesaler, into areas where other commercial providers are currently providing services?

Mr Shaw : Correct.

CHAIR: So the nub of the issue is your hypothetical concern that in the future they might do that?

Mr Shaw : That has been a concern since the NBN was created. As we said in our exchange with Senator Ludlam, we have been arguing for very strong controls around the line of business since 2011, I think.

CHAIR: I think you were here for the last witness's testimony. The last witness expressed some concern that the trial arrangements might provide some commercial benefit to Telstra, particularly in relation to the copper network. Do you have any thoughts or comments on that?

Mr Shaw : Mr Gallagher spoke about the efficiency arguments that support trials. We are interested that it seems that the only innovation seems to come out of Telstra. The implications of that statement were that pilots will only involve us, and I do not think that is the case. The nbn may well want to engage with some very small and nimble RSPs for product development.

CHAIR: Could you take on notice the same question I asked of Optus and come back to the committee with a list of the trials that you have been involved in to date and also—obviously without breaching anything commercial—any that you are currently discussing, or additional proposals that you have put forward.

Mr Shaw : Certainly.

CHAIR: Senator Ludlam or Senator Urquhart, do you have any additional questions?

Senator URQUHART: No, I am fine thank you.

CHAIR: Thank you very much. I thank you both for your written submission and for taking the time to come and appear here today to give evidence.

Mr Shaw : Thank you.