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Joint Committee on the National Broadband Network - 25/10/2011 - Rollout of the National Broadband Network

COSGRAVE, Mr Michael, General Manager, Communications Group, Australian Competition and Consumer Commission

HOME, Mr Richard, General Manager, NBN Engagement and Group Coordination, Australian Competition and Consumer Commission

NICHOLLS, Dr Robert John, General Manager, Convergence and Mobility Branch, Australian Competition and Consumer Commission

PEARSON, Mr Mark, Deputy Chief Executive Officer, Regulation, Australian Competition and Consumer Commission

Committee met at 08:29

CHAIR ( Mr Oakeshott ): Welcome to day two of the hearings in reference to the six monthly review of the National Broadband Network. At yesterday's hearing the committee took evidence on a number of important regulation issues associated with the rollout of the NBN. It will certainly be interesting to follow those up with the ACCC along with several other issues of relevance. Before calling the first witnesses, I ask a committee member to move that the media be allowed to film the proceedings today in accordance with the rules set down for committees, which include not taking footage or still images of members' papers or laptop screens.

Senator XENOPHON: I will move that.

CHAIR: Thanks. Mike is the seconder. In the interests of full disclosure on issues of the last week, I did stay with a family member last night who is a practising member of the ACCC. He told me absolutely nothing. He gave me no questions in writing.

Senator XENOPHON: It is not a cult.

CHAIR: No, that is right. But he did tell me one thing which has nothing to do with work, which is that Dr Rob Nicholls is doing his last appearance on behalf of the ACCC today. I gather he will be sorely missed internally. I have done my family duties and put that on the record. Well done with your time at the ACCC. Does anyone have an opening statement to make?

Mr Cosgrave : No, thank you.

CHAIR: Did anyone get any insight into what we talked about with various people yesterday? There were a whole lot of conversations with groups such as Optus, Internode and Vodafone around wholesale broadband agreements.

Mr Cosgrave : Unfortunately, your communications failed, so the intent of some of our people to watch your proceedings and perhaps give us a bit of a briefing also failed. Therefore we have had a bit of look at the press this morning and there are a couple of references to various things. You mentioned the evidence from Optus. No, we do not have any insight into it.

CHAIR: Essentially there was a bit of red flagging about time frames, the desire to get rolling on the 10-year project and the role of the ACCC in a number of critical agreements. Do you want to give an update on progress or on the status of some of those?

Mr Cosgrave : I will take in turn the two principal ones which you would have got evidence about: NBN Co.'s special access undertaking and Telstra's structural separation undertaking. In relation to the former of those, you would be aware that some weeks ago NBN Co. were moving towards asking access seekers to sign access agreements. A number of access seekers expressed concerns to the commission around the contents of those access agreements. We did not form a view around the validity or otherwise of those concerns.

What we did have a concern about was the term of the access agreement that NBN Co. was seeking to have access seekers enter into which was a five-year access agreement. That poses a concern largely because of the hierarchy stack, if I can out it that way, that exists in the legislation. This was actually a subject of debate when the legislation went through parliament. The stack effectively places access agreements at the top of the pyramid and then a cascade below that has access to determinations and access undertakings—it might be the other way round, but various determinations by the commission.

That is intended—and the commission have no issue with this—to encourage agreement between access providers and access seekers. The difficulty is that, in the event that people enter access agreements, clearly they have no recourse to the commission. The clear intent always was that there would be a framework set by an access undertaking that would be considered and, if suitable, accepted by the commission. That access undertaking would be the framework under which access agreements were then entered into.

The difficulty is that, because of effluxion of time with various things, including negotiation of agreements and the passage of legislation, we got to a stage where NBN Co. wanted to move forward and enter access agreements. We expressed some concerns to them around that. They have responded to those concerns by extending their trial agreements to the end of November, by putting out a fourth version of their wholesale broadband agreement, which is currently receiving consideration by people like Optus and other access seekers, and intensifying their discussions with us around lodgement of an access undertaking. We are hoping that all of those things will bring to a head both the lodging of an access undertaking and, in the event that this version of the agreement ultimately ends up being more acceptable to access seekers, the entering into of access agreements.

CHAIR: Are you seeking the access undertaking from NBN Co. or are they lodging it for market certainty? Who is pushing who in that arrangement?

Mr Cosgrave : It was always the intention that the framework for the regulation of NBN Co. would be set by an access undertaking. That is the way the legislation works.

CHAIR: Are they bound by law to do it?

Mr Cosgrave : No, it is actually voluntary on their part, but they have always indicated an intention to do so. That is certainly still their intention.

CHAIR: It does not affect your decision making. If it comes, you will deal with it, but you are not requesting it.

Mr Cosgrave : We are concerned that access seekers actually have the ability to get a regulatory determination, whether it be by way of the commission accepting an access undertaking or making access determinations when that right is triggered.

Mrs D'ATH: The one issue that has been raised by a number of witnesses that I would like the ACCC to go through with the committee is the decision on the points of interconnect. There have been some companies who say this is going to be a disadvantage to them. They want to see a reversal of the decision. Can you talk the committee through the reasoning behind why you increased the points of interconnect to 121.

Mr Cosgrave : It think we had a go at this last time. I am certainly happy to have another go. I will give Dr Nicholls the first go at it and I might add to it.

Dr Nicholls : We were asked for advice on where the points of interconnection to the National Broadband Network should occur. We took into account existing infrastructure use, existing competition as well as issues associated with the long-term interest of end users. We looked at the existing transmission or backhaul arrangements, which provide competition that is the support for the way that fixed broadband services are delivered currently. There are access seekers in over 550 Telstra exchanges currently and each of those access seekers relies on backhaul or transmission being provided on a competitive basis. The major providers are Telstra, Optus, Nextgen, AAPT and TPG. Our initial recommendation was that there should be a reasonable number of points of interconnect so that competition between the backhaul providers was not eliminated—that is, there was not an overbuild by NBN Co. of existing infrastructure providers. To balance that, there needed to be competition between transmission providers to each of the points of interconnect. We implemented that by recommending that competition principles be adopted and then worked with NBN Co. to come up with a mechanism, proposed by NBN Co., which would do two things—firstly, select points of interconnect where there was already competition between at least two backhaul providers and, secondly, ensure that there was a reasonable prospect that those providers would still engage in competition once the POI was built and that there was an element of overlay which allowed for an actual network architecture to be constructed.

We used that information to determine, initially, that there should be approximately 120 points of interconnect. We then ran industry inquiries about whether the proposal for 120 met the competition criteria and met the design rules which NBN Co. proposed. As a result of submissions, we shifted slightly to 121, but the actual 121 were slightly different to the initially proposed 120. Subsequent to that, NBN Co. has negotiated with Telstra. There have been a few minor variations in where those points of interconnect are, essentially reflecting whether there is power, water and space in Telstra exchange buildings. The outcome at the moment is that Telstra will provide 111 exchange buildings and that 10 new buildings are being built by NBN Co.

If I am an access seeker, I have to achieve a balance: do I have a physical presence at all of the points of interconnect—it does not matter whether there are 14, 121 or 850; it is a business decision—or should I rely on others to provide me with access to all of those points of interconnect? Internode, in particular, makes the point that, for some access seekers, it is an easy decision: you should be at all 121. Other access seekers, particularly small ISPs, will rely on wholesale services to have a presence at all of the points of interconnect. At a threshold point it is a lineball decision and, as I understand it, Internode suggests that threshold is around 250,000 subscribers, which is pretty much the number of subscribers that Internode has. So there is a threshold between building or acquiring infrastructure to all points of interconnect and acquiring wholesale services to get to all points of interconnect. There is a decision point between the two, which is where Internode is sitting.

Mrs D'ATH: Do you accept the proposition which Internode are putting up, which is that it would actually be more costly for them to establish regional services with the increased number of points of interconnect?

Dr Nicholls : Regardless of who provides backhaul, somebody incurs the cost of the backhaul from regional areas to metropolitan points of presence. In coming up with our advice on points of interconnect, we had to make a choice: should that be monopoly provided by NBN Co. or should that be competitively provided by the five competitors that I mentioned before? Our advice was that competition would yield the best outcomes. There will still be a cost of transmission between metropolitan areas and regional areas. The only difference between whether there are 14 points of interconnection or 121 is whether that cost is incurred by NBN Co. or incurred by competitors who are seeking to provide services on a competitive basis to ISPs such as Internode.

Mr Cosgrave : I think the answer is not necessarily. It is going to depend on a couple of factors: On competitive routes we are relying upon competition; on regulated routes we have been actively reviewing the price of transmission and we are scheduled to bring down access determinations on that service by the end of the year. As Dr Nicholls indicates, it is also dependent upon business decisions made by the individual provider. We also welcome, as a reaction to those concerns, the announcement by NBN Co. in relation to a wholesale charge rebate of the first 150 megs until there are 30 premises passed at the POI. We think that alleviates some of those concerns and we think that was a sensible response to the concerns expressed.

Mrs D'ATH: Would it be accurate to say that, even if there is an increase to an individual provider and it comes down to a commercial decision of that provider to establish that service in that area, in weighing up the greater good, the public interest, you believe that this is the better option to take because it provides more competition?

Mr Cosgrave : There are certainly trade-offs in the advice we gave. We recognise those trade-offs and we have made a recommendation based upon a belief in the competition that existed providing the best outcomes.

Mrs D'ATH: Thank you.

Senator XENOPHON: Mr John Lindsay, the General Manager of Regulatory and Corporate Affairs for Internode, yesterday painted a pretty bleak picture in terms of access to broadband for regional Australians in the context of what is currently being proposed by Telstra. I think a fair summary of his evidence was that Internode is having difficulty getting access to points of interconnect in terms of getting a deal done. He also said, and this was something that struck me as quite disturbing, that the competitive framework could well be worse than what it is now unless the ACCC gets the structural separation and other issues right. I think Internode has made a submission to you. What I would like to know is what weight do you give to operators such as Internode, a very successful South Australian company with about a quarter of a million subscribers, and what resources do you have to forensically analyse what Telstra is proposing?

Mr Cosgrave : I did not have the benefit of hearing all of that evidence, but I think the last part in particular was a reference to the interim equivalency and transparency arrangements in relation to Telstra's structural separation undertaking. The legislation makes very clear that the ACCC cannot accept Telstra's structural separation undertaking unless there are appropriate and effective interim equivalence and transparency measures in place. That recognises that those measures, which fundamentally govern the activities of a vertically integrated provider during the transition to the National Broadband Network at a period where there is expected to be potentially fairly intense retail competition, are vital. We would agree with that.

We expressed a number of reservations, which I am happy to take you to in detail if you wish, around those interim equivalency and transparency arrangements in the discussion paper we released on Telstra's structural separation undertaking, as well as a number of other concerns. It is fair to say that the submissions we received in relation to that discussion paper from the industry sector were almost wholly in relation to those interim equivalence and transparency arrangements rather than the substantive agreement between Telstra and NBN Co.

Senator XENOPHON: Eight years is a long time—is it not? It is the interminable in this industry.

Mr Cosgrave : I think I agreed with you there; that was the proposition I had just put. We have continued to have discussions with Telstra and the industry in relation to those interim equivalence and transparency arrangements. It has certainly been indicated already by Telstra that they have an intent to lodge a revised or a new structural separation undertaking. The conversations we have had to date have been productive, but it is fair to say that there remains significant unresolved issues, including around the existence of an overarching commitment by Telstra towards an equivalence of outcomes. Telstra's approach was to give a number of specific commitments to the commission that overall they indicated to us constituted equivalence. Our view is that over the lengthy transition to the NBN, specific commitments in and of themselves are unlikely to be sufficient and we have pressed Telstra for an overarching commitment to a particular standard—being the equivalence of outcomes.

Senator XENOPHON: Simon Hackett, the managing director of Internode, has said publicly and he has warned that the usage fees have been constructed to create a massive financial windfall for NBN Co., that the usage fees could also result in the abandonment of small-scale retail internet providers in rural and regional Australia and that it is not a charge based on real costs. Is that something that the ACCC is looking at as part of its deliberations?

Mr Cosgrave : It is a different issue—

Senator XENOPHON: It is a different issue but it goes to issues of competition—does it not?

Mr Cosgrave : Absolutely. It is an issue that is clearly going to be before us in relation to NBN Co.'s special access undertaking.

Senator XENOPHON: But when Optus say, and in particular when Internode say that regional Australia could be worse off unless the framework is right—

Mr Cosgrave : We expect that structure of charging to be a major issue for consideration before us with NBN Co.'s special access undertaking.

Senator XENOPHON: Are you going to be able to do this by 20 December given that Telstra has not given you a new SSU?

Mr Cosgrave : Senator, you are mixing up two separate issues.

Senator XENOPHON: No, I am not mixing them up; I am going from one to the other. Don't say I am mixing them up; that is not fair.

Mr Cosgrave : Perhaps you are mixing me up with switching between one and the other.

Senator XENOPHON: That is not my problem. It is all part of the package of measures in terms of getting this right and the ACCC has an integral role to sign off on these things.

Mr Cosgrave : Which one do you want to deal with now?

Senator XENOPHON: I would like to deal with the SSU. What resources and time frame is the ACCC implementing to look at the SSU given that there is a deadline of 20 December?

Mr Cosgrave : The resources are considerable. We have an entire branch dedicated to the consideration of the structural separation undertaking. On the time frames, I am going to give you the same answer that Rod Sims, our chairman, gave you when you asked this question in Senate estimates last week which was that we are moving as quickly as we can. The issues are important, as you have highlighted, but we give no guarantee as to when they might be concluded.

Mr TURNBULL: There are a number of aspects to the deal between NBN and Telstra and also the deal between NBN and Optus that are on the face of it extremely anticompetitive. I invite you to comment on those. The two in particular that many have been concerned about are, firstly, the agreement that Telstra and Optus would not use their HFC networks for broadband and voice. It is acknowledged that HFC is a major player in the broadband sector in Australia and particularly overseas where it is in many countries the dominant provider of broadband services. It is extraordinary and I would think almost unique to have a major piece of infrastructure that is providing a competitive service in a very important industry to be literally by agreement taken out, to be paid by a new competitor to stop operating. I invite you to comment on that. Perhaps you could deal with that first and then move on to the other matter.

Mr Cosgrave : I am not going to comment on these in detail, because these are matters currently before the commission in its consideration of Telstra's structural separation undertaking. I am happy to indicate to you where we have got to in our consideration of those. We released a discussion paper in relation to Telstra's initial structural separation undertaking. I suspect the second one you are going to refer to is the restrictions on wireless marketing. We did express concerns in relation to the restrictions on wireless marketing and we are in ongoing discussions with people in relation to those restrictions. We recognised that the arrangements in relation to HFC were a matter on which we needed to receive comment. We have received some comment in relation to those in response to our undertaking. We are giving consideration to those as part of our overall assessment of the undertaking.

Mr TURNBULL: So you are not able to shed any light on the—

Mr Cosgrave : No, I am not, because it is a matter actively before the commission. The commission has released a discussion paper that indicates where its line of inquiry and its concerns are. The commission is yet to make a decision in relation to those.

Mr TURNBULL: My recollection may be faulty, but my recollection of your discussion paper was that the commission seemed to express more concern about the wireless marketing undertaking than it did about the HFC elimination agreement.

Mr Cosgrave : I think certainly it expressed concerns in relation to the wireless marketing restrictions. It called out for comment in relation to the latter, recognising the nature of the inquiry it has been asked to make in relation to this matter.

Mr TURNBULL: This question follows on from some points that Senator Xenophon made. As you know, there are arguably three states of being for Telstra in a competitive sense. There is the status quo, where we are right now. Then there is the world where the NBN has been completed, where Telstra has been structurally separated not by them splitting off their customer access network, as has been done in other jurisdictions, but by virtue of their customer access network being overbuilt and then consequently decommissioned. So there is the status quo and the final outcome. However, there is the middle ground, which is the subject of the structural separation undertaking which deals with the way that Telstra operates in the interim. That interim will be at least a decade and, depending on whether the NBN continues to be built—it is obviously a very expensive project so one thing the commission would no doubt bear in mind is the possibility that it may not be completed, whether it is by this government or another government. Big government projects do tend to run out of money sometimes and are not completed. We have all seen that—that interim reality may turn out to be a very long-term reality.

That is the point that Internode made yesterday. They said that, even if it is only 10 years—the first DSLAMs were installed only 10 years ago and 10 years is an eon in telecommunications. Their argument is that not only does the interim arrangement subject of the SSU fall far short of what would be the outcome if functional separation as per the statute were to be undertaken—and I would seek your comments on that—but also they contend that it puts them in a worse position in terms of access in the status quo. In other words, the whole exercise in practical terms is going to make the telecom sector, from their point of view, less competitive and give Telstra greater dominance than it has at the moment. That is incredibly serious. If the outcome of all of this is that Telstra's position vis-a-vis other players becomes stronger, that would be a colossal failure of policy. I invite you to address that.

Mr Cosgrave : Perhaps I will address it first by reiterating some of the points I have already made. Firstly, effectively, we accept that the interim equivalency and transparency arrangements have the potential to be in place for a protracted period. That is exactly why we are contributing substantial resources and placing substantial importance on those in our consideration of the undertaking.

Secondly, in relation to the specific proposition put by Internode, and I do talk relatively frequently to both Mr Hackett and Mr Lindsay, they have not put that specific proposition to me at any time during conversations I have had with them. They will have another opportunity to do that in the forthcoming industry forum we have with the industry in relation to the interim equivalency and transparency measures. Without having heard what sits behind that sort of fairly alarming proposition, it is therefore difficult to comment upon it. I am happy to take it up with them but until I see what sits behind that, and we have certainly considered their submission in some detail, I am not really in a position to comment any further.

You mentioned functional separation. The commission has made some comments around functional separation in various contexts, including the policy review that led to the current regime recognising that, broadly, whilst functional separation has attractions as a strong form of operational separation, all operational separation arrangements have difficulties in addressing the incentives of a vertically integrated operator, which is why the commission has always professed a preference for structural separation.

CHAIR: I want to just back that up from a slightly different angle. We talked a bit about policy risk yesterday and how everyone is managing that through the process. It is the same question for, essentially, a public sector agency. For a 10-year project in a short electoral cycle how are you managing policy risk in some of these considerations for both interim agreements and documents that have to stand the test of time? Are you following the law of the land today, or are you factoring in some of those risk questions that are quite obvious in the public debate?

Mr Cosgrave : As a regulator, our primary responsibility is clearly to implement the law as it currently is.

CHAIR: Does that mean you do not factor it in at all?

Mr Cosgrave : I do not think I said that. The current policy settings allow for the interim equivalence in transparency arrangements—which is what we have been principally discussing—to extend, in the event that the National Broadband Network build is ceased for whatever reason. Whether the commission makes any comment in its final decision around what its views might be in the event of various contingencies is ultimately a matter for the commission. We will consider that in the context of our decision.

CHAIR: If you are factoring it in in any way, is it too early to discuss whether you are doing it in consideration of pricing in the commercial sector or in making things compensatable or allowing for renegotiation points in contracts? Are you involved in those discussions at all now, do you expect to be in the future and do you have anything that you are willing to put on the record now about those considerations?

Mr Cosgrave : I think I said our primary responsibilities are to implement the law as we have it.

CHAIR: I am probably trying to explore that secondary responsibility.

Mr Cosgrave : To the extent that we have got a competition advisory role to the government, that advisory role—whatever the flavour of government is—is provided in confidence to the government. It is an advisory role.

Mr Pearson : I wish to put on the record that the commission, the chairman and the commissioners are well aware of issues, problems and concerns surrounding the development of the SSU and the NBN. They are well aware—as are, I think, both Senator Xenophon and Mr Turnbull—of issues to do with the eight to 10 years. They are well and truly focused on that. It is not something that is not at front and centre of both our assessment from a staff level and as a commission. As Michael said, we have the law of the land. If we are asked in a policy sense, we can advise on what we think, but the contractual arrangements of NBN are their business not our business in the sense that our business is to do with the competition aspects, the special access undertaking, pricing that might arise out of that undertaking and a basic, fundamental, regulatory framework. It is very complex but it is a simple, basic, regulatory, building-block framework that we will be looking at.

CHAIR: That is an important point. I am heartened by your words that all the commissioners and everyone is very focused that it is a 10-year build, and there is almost an acceptance that there is policy risk as a consequence of that. So the drill-down question is: how are you factoring that in when you are responsible for regulation and oversight for 10 years? Are you doing it via allowing flexibility on pricing in the commercial sector? Are you allowing for renegotiation points? Or are you allowing for compensation if there is, for example, a change of government and a stop to this project and all the implications that flow from that? What are you doing in a regulatory sense to manage that policy risk as a consequence of all your good words that you are very focused that this is a ten-year build?

Mr Pearson : Some of those aspects are completely out of our control. For example, compensation issues are not a regulatory issue; they go to policy issues and government. We are in the middle or towards the end of pretty intense negotiations and pretty intense discussion and assessment. The commission will be coming to grips with some of these issues and with some of them we may have to step back and say, 'These are really government policy issues; they are not regulatory issues.' Some will be crossing over. We do not have the undertaking finalised and we do not have the SSU or the SAU finalised. If there are any aspects of those that are built in then we would have to look at those as they come forward. The fundamental point that I wanted to make was that we are well aware of those risks. Some of them are not going to be issues that we as a regulator are going to be able to build in; they are going to be government issues for government, both now and in the future.

CHAIR: So as the regulatory body you would say yes if I were to say, 'You follow the law of the land as of today in regard to your responsibilities to any contractual agreements you have oversight or regulation of for the 10-year build of the National Broadband Network'?

Mr Home : To some extent the parties we are dealing with have entered into contractual arrangements that clearly contemplate future possibilities. They are the contractual arrangements that we then have a consideration of in our regulatory decisions. To the extent they bear upon our assessment of Telstra's structural separation undertaking, to the extent they bear upon a special access undertaking that we might receive from NBN Co., we will give consideration to those contractual agreements. It is in the decision making that we are entrusted with that we do that.

CHAIR: As a regulator you are accepting policy risk in the contractual agreements that are entered into in a commercial arrangement, whether they are via renegotiation points, pricing or any other means?

Mr Home : Yes, that is right, and one of the issues we did identify in relation to the structural separation was the renegotiation provision.

CHAIR: Okay.

Mr TURNBULL: Mr Cosgrave, I agree with you that structural separation is the ideal outcome, the best outcome. Certainly we will not get there, even under the current plan, for a decade or more and there is a risk that it could take a great deal longer than that. We should always remember that what is now called Old Parliament House was built as a temporary parliament house and it was operating for 61 years. A question, therefore, is: why would you accept arrangements in the SSU for the interim arrangements that were weaker than functional separation, which you yourself have just said is not entirely adequate?

Mr Cosgrave : Because they are ruled out for us.

Mr TURNBULL: Ruled out where—in the legislation?

Mr Cosgrave : Yes, in the legislation. You are well aware of the legislation, Mr Turnbull. There is a clear choice made by Telstra in the legislation between a number of options, and one of those includes a functional separation option.

Mr TURNBULL: Telstra has chosen to give you the structural separation undertaking, but then it is up to you to determine whether those interim arrangements are adequate. My point is if you say even functional separation is not ideal, why wouldn't you insist that the interim arrangements are as close as possible to functional separation?

Mr Cosgrave : In a way we are. That is precisely why we have called out the need for a continuing supervisory role by the commission towards a specific outcome of equivalence of outcomes. That is precisely the reason we had problems with the initial approach of Telstra of putting forward a range of specific commitments, in the sense that that does not guarantee any particular equivalence outcome. That is why our discussion paper called out the need for an equivalence outcome standard backed by an ability of the commission in the event that that standard was not met to put in place appropriate incentive arrangements, whether they be by way of a fix or a pay, and that there were serious regulatory imposts with Telstra on not complying with its overall commitment. That is of fundamental importance to us in these interim equivalence and transparency arrangements.

Mr TURNBULL: Getting back to the issue relating to HFC, the arrangements with Telstra, and Optus for that matter, are anticompetitive in the sense that they are taking out a very competitive piece of infrastructure. The justification that is given for that by the NBN is that this is in order to protect the economics of the NBN, which, so it is argued, is important to enable it to provide its service. Is that an argument that you believe you can legitimately take into account as justifying what is unquestionably a diminution of competitive capacity, and are you in considering that looking at experiences in other comparable countries? There are many, but I cite New Zealand, where there is a fibre-to-the-home rollout being undertaken. Contrary to Australia, there is no inhibition or prohibition or limitation on HFC—indeed, Telstra's HFC network will continue to provide competitive broadband services—and there is also no requirement for the copper network of Telecom New Zealand, which is now part of Chorus, to be disconnected, although many people anticipate it will be over time.

Mr Cosgrave : I will deal with the last part of the question first, and, yes, we are in fairly regular contact with our New Zealand regulatory colleagues, the Commerce Commission. I did note in one of your more recent interactions a discussion around the relative costs of fibre to the node versus fibre to the premises. There has been some debate about that and I have sought some detail from my New Zealand colleagues because our understanding from prior processes where there were considerably more costs involved in the node—

Mr TURNBULL: In the node? The node was more expensive than fibre to the home?

Mr Cosgrave : No, not in an absolute sense but there was a debate around the percentage of costs of an FTTN build that was subsequently lost in the event that you determined to transition to a fibre-to-the-premises—in other words, that there is a percentage of the fibre-to-the-node build that is actually in the nodes themselves. There is a debate around whether that is 50 per cent, north of 50 per cent or south of 50 per cent. The commission's experience from past processes is that it is actually higher than 50 per cent.

Mr TURNBULL: The chief executive of Chorus is the person to give you firsthand knowledge. He is the person I spoke to.

Mr Cosgrave : The short answer to the last part of the question is that we are very familiar with overseas examples. As to the first part of the question, I am going to repeat that we are presently considering both the Telstra and the Optus transactions. We are considering them under different statutory frameworks. There is a bespoke statutory test in relation to our consideration of Telstra's structural separation undertaking that requires us to have regard to a whole range of factors. Our consideration of the Optus transaction is being conducted under the commission's normal authorisation provisions where, in order for an authorisation to be granted, the commission has to consider that the public benefits outweigh any public detriments or competitive detriments. We are considering both of those transactions under different frameworks. Clearly the issue of network consolidation, as we term it, is of central importance in both considerations. I cannot take it further at this current time.

Senator IAN MACDONALD: I just have one question. Yesterday Internode were concerned that Telstra and Optus will be handsomely paid for their infrastructure that is being taken out. Internode indicated to us that they had 200 DSLAMs at $200,000 a piece, I think they said.

Mr Pearson : One hundred thousand.

Senator IAN MACDONALD: Was it $100,000 a piece? Internode are not getting a cent. Is that something that the commission, under any of its powers, could look at? Does it concern you one way or the other?

Mr Cosgrave : The contractual arrangements that have been entered into between NBN Co. and respectively Telstra and Optus are contractual arrangements and policy matters for the government. It is difficult to see that there is an issue for us in them determining not to enter into contractual arrangements with other parties.

Senator IAN MACDONALD: It is not so much the contractual arrangements between Optus and Telstra, it is the—

Mr Cosgrave : No, between Optus and NBN Co. and Telstra and NBN Co.

Senator IAN MACDONALD: In fairness, is there any trade practice matter—

Mr Cosgrave : It is not a matter where any competition issues easily spring to mind.

Senator IAN MACDONALD: Perhaps in the consumer part of your realm, has Internode raised it with you?

Mr Cosgrave : No.

Mr FLETCHER: Has the special access undertaking been lodged yet?

Mr Cosgrave : No.

Mr FLETCHER: What criteria does the commission apply in considering the SAU? Specifically, were any changes made to the criteria as part of the legislation passed late last year or early this year?

Mr Cosgrave : The answer to the second part of your question is no. They are lodged as special access undertakings under the provisions that have been in the act for some years, as you well know, Mr Fletcher. The overall test is a reasonableness test that has a range of criteria sitting under it, including the long-term interest of end users. As you would also be aware, this is a balancing of competition and investment criteria. It is an assessment according to provisions of the act that have been in place for some time.

Mr FLETCHER: Are you required to have regard to the government's target of a seven per cent return?

Mr Cosgrave : No.

Mr FLETCHER: In other words, it is possible that you might decide that the prices which have been set or which are proposed are too high. If you were to decide that, the fact that NBN Co. argued that those prices were necessary to achieve the seven per cent return would not be relevant to your considerations.

Mr Cosgrave : There are a few hypotheticals in there, but I think I have sketched out the statutory test. It is a well-known one that has been applied in a number of transactions in the past.

Mr FLETCHER: How many special access undertakings has the commission accepted?

Mr Cosgrave : I was afraid you are going to ask me that. Foxtel—

Mr Home : I think one.

Mr FLETCHER: I would not need both hands to come to them, would I?

Mr Cosgrave : You would not need both hands to count them and you have probably been involved in at least one of those yourself in a past life.

Mr Pearson : The fundamental assessment is very similar to our regular undertakings. I think we have something like nine undertakings, ARTC, Wheat Exporters—there are a lot more similarities than there are differences in the basic assessments. As Michael said, many of those point—

Mr FLETCHER: It is a specific set of statutory criteria under part 11C, not under part 3A which is what we are talking about.

Mr Pearson : No, but they are very similar. We did some work internally with one of our internal lawyers who had gone through and assessed across all our regulatory areas—energy, telcos, transport and so forth—where she brought together all these similarities. It is not secret, so I am happy to share that with anybody. It shows the similarities between those regimes and the basic objectives, pricing objectives, the operational assessments, things like demand forecasts and all those sorts of things. There are a lot of similarities, so there is a lot of experience within the commission at the fundamental—

Mr FLETCHER: Can you just remind us of the time frames for the consideration of the SAU once it is lodged.

Mr Home : There is a six-month statutory time frame, which can be extended.

CHAIR: Can I just follow up on that? The last time you gave evidence, Mr Cosgrave, these were your words:

Mr Cosgrave: Our experience with special access undertakings is that we have considered about three of them, one in the context of the digitisation of the Foxtel network some years ago. That took between six and 12 months. The issues around this are likely to be both complex and, based upon what you have said to us, potentially—

Mr Pearson: Controversial.

Just following on from Mr Fletcher, do you stand by that comment that, once lodged, on a voluntary basis, this is likely to take up to 12 months before some decisions are taken?

Mr Cosgrave : It could. We are in the world of hypothesis. We are extrapolating from past experience, and the past experience around access undertakings, particularly in relation to the digitisation of Foxtel, was that there were issues with that undertaking. It required a withdrawal and relodgment and therefore took between six and 12 months. So we are sketching for you a realistic time frame. It could be shorter than that but, again, we are not in a world where we can guarantee particular temporal outcomes. It depends upon the suitability of the undertaking that is ultimately brought forward and the comments that are made around it.

Mr FLETCHER: As part of your consideration of the special access undertaking, do you need to turn your mind to the asset base of NBN Co.?

Mr Home : Yes. We expect to do that.

Mr FLETCHER: Does that require you to think about NBN Co.'s network design and whether that is the most efficient available?

Mr Home : I do not want to get too far ahead of a future consideration of matters, but it is likely that that will be one of the broad considerations. The extent of the consideration or how that consideration occurs is something ahead of us.

Mr FLETCHER: It is the case, isn't it, that, as you have considered, for example, Telstra's regulated price proposals over the years, you have gone into very detailed examination of Telstra's network design and also hypothetical alternative network designs? Is that correct?

Mr Cosgrave : That is correct. We are dealing with a particular issue there, which is around how to value a sunk network that has been, on any account, fully depreciated possibly many times over. Here we are dealing with an issue of a new network build, so the questions are not by any means the same.

Mr FLETCHER: Are you putting to us that really whatever network design NBN chooses, if they say this is how much it costs, the commission will say, 'That's fine.'

Mr Cosgrave : No, we were not putting that to you. I was just highlighting the different nature of the forensic inquiry the commission has got to undertake with a new network build as opposed to a sunk network. As Mr Home correctly said, whilst I am sure Mr Pearson would say we have experience with new network builds in things like rail networks, the questions are different and we are going to have to closely look at them in the context of this undertaking, and we have been thinking about that actively as we prepare for it to be lodged.

Mr FLETCHER: Is it conceivable that you might face the argument that the choice of fibre to the premises as opposed to fibre to the node is an unusually expensive way to build out a network to achieve these objectives?

Mr Cosgrave : I would not want to be predictive in relation to any arguments put to us.

Mr FLETCHER: You are not ruling it in or out?

Mr Home : Perhaps someone else will.

Mr FLETCHER: What are some of the other issues that might arise as you think about network configuration?

Mr Home : Some of the considerations are around not just the network design but when it is actually implemented, the efficiency with which it is built and those types of considerations.

Mr FLETCHER: Isn't it right that, if the ACCC concludes that the pricing or other fundamental aspects of the undertaking are not something you are comfortable with, then as a matter of process the only thing that is open to you to do is reject it?

Mr Cosgrave : If we determine it is not reasonable, it is a binary decision. It is an accept/reject decision.

Mr FLETCHER: Do you expect to be in a position to have informally negotiated with NBN such that once it lodges its SAU you will have a degree of confidence that you can accept it?

Mr Cosgrave : I think that is a matter for NBN Co. We are clearly spelling out in discussions with them some issues we think arise for their consideration. Clearly we can only go so far with that in the sense that an access undertaking is rightly a public regulatory process. As I think I have said a number of times to this committee and perhaps other committees, wherever we have an undertaking with an accept/reject mechanism—I might say that is exactly the same mechanism we have got in relation to Telstra's structural separation undertaking—it does inevitably drive you towards a period of discussion whereby you can at least say, 'This is capable of public consultation.'

Mr FLETCHER: Can you remind us of the hierarchy of price-setting mechanisms, where a special access undertaking sits in that and what options are open to access seekers or the ACCC to initiate a price-setting process?

Mr Cosgrave : The hierarchy broadly sets access agreements at the apex of the arrangements so that a party is able to contract out of any undertaking accepted by the commission or access determination made by the commission. Those two instruments sit underneath in that order. It would make sense that an undertaking accepted by the commission effectively trumps an access determination. But in the absence of an access undertaking, once you have a declared service the commission is able to make an access determination in relation to the terms and conditions of that service.

Mr FLETCHER: Does that mean that, if the commission were to reject an undertaking, it would be open to an access seeker to initiate an access determination process?

Mr Cosgrave : Provided you have a declared service at that stage, yes.

Mr FLETCHER: The fact that on the pricing that NBN Co. has announced to date, they have not offered a voice-only wholesale price. In effect what they have done is put forward a bundled wholesale price—a bundle of voice and data services. Does the commission have any views about that?

Mr Cosgrave : Clearly the provision of services for voice only customers is going to be of importance to that considerable segment of the Australian public. I know this has been the subject of some discussion between you and NBN Co. I have seen them point you to some initial offers from retail service providers that include the provision of voice only services at rates broadly equivalent with what are currently offered in the market by such products as Telstra's HomeLine Budget. It is an issue we will certainly keep under examination, because I would accept that the provision of voice only services is important to a substantial proportion of the Australian public.

Mrs D'ATH: I have a follow-up question on voice only products being offered. Are you aware that iPrimus, as a consequence of the NBN rollout, is now going to be offering a voice only product at a much more affordable rate?

Mr Cosgrave : That is precisely what I was referring to when I responded to Mr Fletcher. I was aware of that offering in the market and I am also aware that other providers are yet to bring their offerings to market.

Senator CAMERON: Mr Cosgrave, I want to go on to an issue that might be just a little bit separate but contextualise where we are. Last week in estimates there was an interesting exchange between me and the Productivity Commission in relation to the inquiries going on into airport facilities, parking and the like. The Productivity Commission defended their position against the ACCC's position—and I think your position was better, I must say—by saying that you have a narrow remit, that you are looking simply at competition, and they have a wider approach. In the context of what we are doing at the moment, are you looking simply at the competitive issue, or do you take into consideration any of the wider social benefits that are quite clearly there with the build of the NBN?

Mr Cosgrave : I think there are a few factors you could mention. I do not think we particularly see ourselves as in competition with the Productivity Commission.

CHAIR: I think 'ideological' was the one yesterday.

Senator CAMERON: Well, they are a bit ideological; I am glad you agree!

Mr Cosgrave : But there are a couple of things. Certainly there are provisions of the act that allow us to take into account issues broader than simply competition provisions—for instance, the public benefit provisions around authorisation, and that is what we are considering the Optus transaction in relation to. In relation to our consideration of Telstra's structural separation undertaken, the legislation and ministerial directions require us to take into account a range of factors beyond purely competition factors, such as, effectively, the delivery of structural reform and distributional benefits to all Australia. So we would say yes, we are both: we are certainly empowered to and we do, in both of the major transactions that we have that are the subject of the examination of this committee, take in a broader range of factors than purely competition factors.

Senator CAMERON: In the context of where we are now with the NBN legislation and where we were for the last 11½ or 12 years, or maybe longer, are we in a better place now for competition than we were under the old regime where Telstra had structural integration?

Mr Cosgrave : I am not going to comment in absolute terms in a qualitative way. I would simply say that there have been a couple of features of legislative reform over the last couple of years that have clearly responded to calls for reform from the commission. The first is the streamlining of an access regime that we laboured under for the best part of a decade. There have clearly been advancements made there and we think that helps us in delivering a more competitive environment. Second, we have already mentioned structural reform. Again, I do not want to go into too much qualitatively in relation to the nature of the structural reform but I simply reflect that we have called over many years for structural reform in this sector.

Senator CAMERON: You indicated that you have had ongoing discussions with your counterpart in New Zealand. What is the name?

Mr Cosgrave : The Commerce Commission.

Senator CAMERON: Before I go there, do you agree with some of the submissions we had yesterday that the way you can respond to building a new telecommunications network in a country to some extent does depend on the history of the growth of telecommunications in an individual country?

Mr Cosgrave : Policy is usually a reflection of history, yes.

Senator CAMERON: So it is not as if you have a blank sheet and you can just say pure competition policy can just be implemented? There are checks and balances and historic issues that have to be dealt with.

Mr Cosgrave : Circumstances are always different from a country-to-country basis. That is clearly why you always take international arrangements into account, but they are rarely determinative.

Senator CAMERON: So we could not just copy New Zealand, Korea or the UK, could we?

Mr Cosgrave : Again, you are straying into areas of policy, but from a regulatory perspective I cannot think of too many occasions where we have looked at regulatory environments in other countries and said, 'These are wholly transportable into our environment.' There are always a range of other factors that you are taking into account from a regulatory perspective.

Senator CAMERON: In the context of the NBN and the build, did the discussions you had with the Commerce Commission in New Zealand go to the nature of the build in New Zealand?

Mr Cosgrave : Clearly we are aware of the arrangements in New Zealand—the demerger of Chorus I think is subject to a shareholder vote tomorrow—and the range of access infrastructures that they have sought to deploy.

Senator CAMERON: Are you aware that in New Zealand there is a move now from fibre to the node to fibre to the home?

Mr Cosgrave : I do not want to comment in detail on that. As I understand it, certainly an ultrafast broadband tender process has been recently concluded in New Zealand. The Chorus demerger arises as part of Telecom New Zealand wanting to participate in that. I think there are clearly a number of access technologies being deployed in New Zealand.

Senator CAMERON: We have had a lot of discussion about fibre to the node and fibre to the home, as you would be aware. You have had to engage in that discussion when you have been giving evidence previously. In relation to the Australian circumstances where fibre to the node would still leave Telstra in control of the copper network from the node to the home, what are the implications of that approach?

Mr Cosgrave : I will make some comments more generally around fibre-to-the-node versus fibre-to-the-premises. We have had cause to reflect upon this, largely in the context of the previous policy regarding a tender for a fibre-to-the-node project. It was subsequently found that there were no suitable proponents. We observed a couple of things in relation to a fibre-to-the-node build that I think are worth repeating. We recognise that it is not necessarily inevitable that you will have a fibre-to-the-node build and that people will seek to upgrade to fibre-to-the-premises. We recognise that fibre-to-the-node is not a stepping stone to fibre-to-the-premises as the nodes deployed are made obsolete in an FTTP rollout. The funds used to deploy the nodes would therefore essentially be wasted once a decision is made to transition to a FTTP network, unless—and it is an important 'unless'—the operator has sufficient time to recover the node's capital cost. The point I was making to Mr Turnbull earlier was that you have something of a binary decision. If you go to fibre-to-the-node, clearly there is much less network build, but, if you subsequently believe there is a policy imperative to upgrade to fibre-to-the-premises, you have the problem that the builders of the network have deployed a substantial capital cost to the node. They are clearly going to want to recover their investment in that build, so you have issues around potential delay.

We also felt that the investment of significant public funds into nodes, if that was the way it was done, could serve to delay fibre-to-the-premises if any successful proponent was not under significant competitive pressure. I think that is a direct response to your question, Senator.

Senator CAMERON: If I understand this correctly, once you commit to fibre-to-the-node, if the technology of fibre-to-the-premises provides greater benefits to the consumer you are really locked into fibre-to-the-node because of the investment that has been made, and that could be for a decade.

Mr Cosgrave : From a competition perspective, we were pointing out something we think is fairly obvious: if a decision is made and you build a fibre-to-the-node network, a significant proportion—and you can debate the proportion—of that capital investment is tied up in the nodes. Understandably, any builder of a fibre-to-the-node network will not be too interested in an upgrade of that network to a fibre-to-the-premises network either until they are fully compensated for their capital costs of the build of that fibre-to-the-node network or, alternatively, they are compensated for the amount of that build that they have not recovered. It is an important policy consideration that you really need to take into account if you are building a fibre-to-the-node network.

Senator CAMERON: We also heard yesterday that, if we went to a fibre-to-the-node proposition and Telstra maintained control of the copper to the home, that could result in some quite significant litigation if you tried to remove the anticompetitive nature of that ownership. Have you given consideration to that?

Mr Cosgrave : No, I cannot give any comment on the prospects of litigation. I simply repeat what I said earlier around the potential for delay if any builder of a fibre-to-the-node network were not under significant competitive pressure.

Senator CAMERON: Companies like Internode were raising the wholesale broadband agreement and that NBN wants them to operate under that before the special access undertaking is in place. Is that your understanding? Is it a problem? If it is a problem, can it be resolved?

Mr Cosgrave : It is our understanding that that was NBN Co.'s position. They were seeking entry into an agreement for five years. For reasons we have already traversed, yes, that is a problem. We raised that with NBN Co. As a consequence, they have determined to extend their trial agreements until the end of November. It is clearly preferable that substantive agreements can be entered into. But, in order for that to happen, we are going to have to have a mechanism whereby in the event that access seekers have difficulties with that agreement they have recourse to a regulatory backstop—to wit, the commission.

Senator CAMERON: I understand that part of the structural separation arrangements for Telstra is that they have a migration plan that details how to migrate customers off the copper network, which is the monopoly network. What is the commission's view on the suitability of that?

Mr Cosgrave : The commission dealt with the migration plan and the test for us to determine now is different again. It is simply to determine whether that migration plan meets migration plan principles. We raised one issue in relation to that migration plan in our discussion paper. Telstra have addressed that issue. Again, our determination in relation to that plan will be conducted and released contemporaneously with our consideration of the structural separation undertaking.

CHAIR: Just to finalise on this special access undertaking, was it your expectation that it would be lodged in March this year?

Mr Cosgrave : It has been a long time in its gestation. There is no doubt about that. If you took us back 18 months or two years ago, yes, we would have expected it to be lodged by now. Clearly there have been intervening circumstances in terms of legislation. There were some important things in the NBN access arrangements legislation that meant that the undertaking really could not be lodged until that was concluded. There was also a delay as a consequence of the negotiation of the agreements between Telstra and NBN Co. and just inevitably a prioritisation from NBN Co.'s perspective. But we would certainly accept that there is a need for NBN Co. to get on with it and get the undertaking lodged.

CHAIR: Thanks. That is probably what I was looking for. Has that affected your internal work schedule for the ACCC? Have you had to juggle resources or rosters accordingly?

Mr Cosgrave : I could be rude to some of my colleagues, but I will not be! We resourced on the basis that we would have received an undertaking already, but we are not short of work. We have managed to find other things for them to do.

CHAIR: I have a final point on this. The whole point of the exercise is a voluntary lodgment to provide market certainty even though arguably there is a corporate plan and it is all out there anyway. I do not know whether you want to comment on this or not but, from a market certainty point of view, when does the issue of the delay of seven months start to create more uncertainty than certainty? Aren't we getting to a point where NBN Co. has to either not lodge and get on and build for market certainty or lodge and make some decisions as quickly as possible?

Mr Cosgrave : The only comment I would make in relation to that is that NBN Co. is a wholesale monopoly, and—and this is consistent with our talk about wholesale broadband agreements—there needs to be a regulatory underpinning for the pricing terms and conditions set by any monopoly, whether it be vertically integrated, like Telstra, or wholesale only, like NBN Co. They need to get on with it. I have just expressed that in relation to the undertaking. We need to get some regulatory certainty around what they have released in a corporate sense to provide the certainty that the retail service providers are clearly looking for.

Mr HARTSUYKER: On the voluntary lodgement of the SAU, given that, as you have indicated, your response to that will be a binary one, where does that leave us should your consideration of the SAU be negative?

Mr Cosgrave : Provided we have a regulated service—which we should have by that stage—if the commission's position differed from what was in the SAU, it would be open to access seekers to ask the commission to make an access determination in ways that, in all likelihood, reflected areas that the commission had concerns with. The commission could take a fairly swift reactive move in the event it found an undertaking unacceptable.

Mr HARTSUYKER: You say you could make a 'swift' move—what sort of timing do you mean by that?

Mr Home : A lot of the considerations through the undertaking process would be relevant to the making of a determination, in all likelihood. So, if the commission were minded to reject an undertaking, it would be likely to have fairly well-developed views about why.

Mr Cosgrave : We are likely to have fairly well-developed views, and our powers would include a power to make an interim access determination, which does not require procedural fairness. With the ability for the commission to act on an interim basis, provided we had a declared service, 'fairly quick' means fairly quick.

Senator XENOPHON: Would the ACCC be concerned if an ISP could not get reasonable access to competitive backhaul?

Mr Cosgrave : Yes.

Senator XENOPHON: What could you do about it?

Mr Cosgrave : Do you mean 'could not get access' on absolute terms or on terms and conditions that it felt were reasonable?

Senator XENOPHON: Reasonable terms.

Mr Cosgrave : You say 'competitive backhaul'—I am sorry, but this is not altogether straightforward. There are segments of the backhaul market where you have a number of providers that are not regulated, where Telstra provides backhaul, Optus, and Leighton's subsidiary Nextgen. Fundamentally, it is up to the market there. Where it is regulated, under the new arrangements you have the ability for the commission to make an access determination. As I have previously said, we have an interim access determination in place. We are due to have an access determination out by the end of the year. That is an important part of the commission's work program for this year that specifically addresses the concern about backhaul in non-competitive areas.

Mr HARTSUYKER: Just harking back to 'swift'—is that several weeks or several months? I am sorry, but it is a very important point.

Mr Home : It also goes to the scope of the determination that parties are seeking. If there was a broad range of issues with which the commission or other parties were uncomfortable, that would likely make the time frames longer.

Mr Cosgrave : You just cannot say in absolute terms. What I am pointing out to you is that the commission clearly has powers, in the event that an access undertaking was unreasonable, to move in ways that are not constrained by legislative requirements to consult et cetera. Clearly the commission would place a high premium on certainty for retail service providers in the event that that was not put in place by an access undertaking.

Mr HARTSUYKER: Just harking back to the deal with Optus and your consideration of the public interest—what is the positive public interest of Optus not providing broadband services over the HFC network which is still functioning?

Mr Cosgrave : Again, I am not going to go into a transaction we are currently considering. That is precisely one of the issues for determination in the Optus authorisation application. We are due to bring down a draft decision on that. I am afraid you will have to wait for it.

Mrs D'ATH: Under the legislation dealing with Telstra's separation, Telstra can structurally separate by migrating its fixed line customers onto a network that it does not control, such as NBN. What would happen if the NBN used fibre to the node rather than fibre to the home? Would that model of separation still be possible?

Mr Cosgrave : I doubt it would satisfy the legislative test if it had a network it did not control. I have not considered it in detail, but it is difficult to see that it would satisfy that statutory test.

Mrs D'ATH: If there were not a fibre-to-the-home network owned independently of Telstra, how else would you achieve structural separation?

Mr Cosgrave : There is a range of methods of structural separation, some of which we have traversed today. Demerger is clearly one. This model is another. They are the two most obvious ones.

Mrs D'ATH: Do you see difficulties with those other approaches?

Mr Cosgrave : There are difficulties with any approach in this area.

CHAIR: Thank you very much for your time. There may be some follow-up questions from the committee. If there are, it would be greatly appreciated if you could turn them around and get them back to the secretariat as quickly as possible.

Committee suspended from 10:02 to 10:15