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ENVIRONMENT AND COMMUNICATIONS LEGISLATION COMMITTEE
04/03/2011
National Broadband Network Companies Bill 2011; Telecommunications Legislation Amendment (National Broadband Network Measures—Access Arrangements) Bill 2011

CHAIR —I welcome Mrs Rosemary Sinclair from the Australian Telecommunications Users Group. Thank you for coming today and thank you for being patient. The committee has received your submission as submission 19. Do you wish to make any amendments or alterations to your submission?

Mrs Sinclair —No.

CHAIR —Do you wish to make a brief opening statement before we go to questions?

Mrs Sinclair —Yes. My opening statement will be very brief because I know that we really want to get to discussion. I think that the size of the policy change that is embedded in the national broadband network policy and the subsequent establishment of the company through this legislation is of such significance that it is worth taking a moment to repeat what we are doing here. It is very easy, in these discussions, to get lost in the detail and to get flummoxed by individual positions that nosedive very quickly to very detailed propositions.

As I said in my covering letter, we are doing three things with this national broadband network policy. We are dealing with a long history of misaligned incentives when a company that is dominant in the sector is both a wholesaler and retailer. We are dealing with an important structural issue that has bedevilled this sector since its establishment. ATUG has been watching this issue for 30 years, this year—it is our 30th birthday. From 1981 to 2011 ATUG has been focused on competition on the telco sector. So if I am a bit tired on a Friday you will understand why!

Senator FISHER —Many happy returns!

Mrs Sinclair —Thank you. We are very live to that issue of misaligned incentives. The second issue that we are dealing with here is an extremely significant issue of national importance. I know those words get thrown around but I really mean them. The issue we are dealing with here is the upgrade of Australia’s copper network—a national network which has served us magnificently for many years and which took many years to build. We in ATUG have been watching this issue for the last 10 years, when it became clear that all around the world—we have connections with international colleagues—people were contemplating how to upgrade their national networks from copper to fibre, separately from the discussion about wireless and mobile connections. It is a very important issue as one looks ahead 40 years to the sorts of things we will want to do as our population ages, as our workforces shrink and as we try to deal with climate change.

There are a range of issues that we will only deal with effectively if we can improve productivity, efficiency and outcomes, and the communications network that is available to a country is very important in these deliberations. The question is: how do we upgrade from copper to fibre? We have watched the industry grapple with this issue over the last 10 years. Various plans were put forward and various discussions had between players and the ACCC and between players and governments various. In the end, we came to a point where it seemed very clear that such an upgrade could only be undertaken in the private sector provided monopoly circumstances were created through legislation. That was unacceptable to a number of people, but certainly to us, because of the consequence that that would have for competition and the consequence that that would have for end users. So we find ourselves with the NBN Co. and its mandate to build a monopoly fibre network in the local access part of the market. We have preserved competition where possible in the back haul part of the market, the fibre. We think that is the only way that this upgrade is going to happen.

The third point that I want to focus on is that competition remains core for ATUG in all of this—every piece of legislation, every corporate plan, every statement of expectations, every ministerial determination, every piece of everything. I heard someone earlier talk about documents. We have read, analysed and discussed every piece of documentation that has come out around this set of policies, proposals and legislation with a view to what the impact of a particular proposal or approach will be on competition and how we can preserve competition whilst we fund nationally the upgrade of our local access network from copper to fibre.

This is very important legislation, coming at the end of a series of very important discussions. We have been part of these discussions really since 1994 when the broadband services experts group report was published, and we are pleased to be here to contribute to the committee’s deliberations this afternoon.

CHAIR —Thanks, Mrs Sinclair. Can you expand on your written submission, which makes a strong case for the wholesale only nature of NBN, and advise the committee whether there should be fewer restrictions on who NBN can supply—for instance, not just carriers and carriage service providers?

Mrs Sinclair —Our view on that is that we would like NBN to be wholesale only in the sense of supplying wholesale services. We feel that the exemptions that have been included for utilities and the like are reasonable exemptions. Amongst our members we have a number of people running electricity networks, gas networks and the like, and we understand transport infrastructure, for example. Those activities have very particular communications of their own—and I always say ‘You wouldn’t want to be the minister when the lights go off.’ Those utilities need to be understood as absolutely essential pieces of infrastructure in other sectors. The communications requirements of those organisations have always been regarded as ‘special’ services. We think the exemption for those utilities is fair enough and reflects good practice.

Our own view is that we have wanted NBN to be able to sell wholesale services to anyone who wants to buy them. We have had quite an argument with industry players and others about that. At the end of the day, given the package in the legislation, we are happy that NBN is limited to wholesale services, provided we get the opportunity to see how the layer 3 wholesale market develops.

If we find that the problems in that market—the same old incentive problem of whether someone is going to be a good wholesaler if they have retail interests of their own—are not there and that the market is working effectively then we will be happy. If we find, in 18 months or two years, that there are problems in that market then we want a kind of ‘reserve power’, if you like, so that we can all, in open an open process of consultation, discuss whether NBN should be allowed to enter that layer 3 market. The model I use is Singapore, where the way they have structured their equivalent of the NBN allows the fibre builder to operate as one of the players in the next level of the market. So we watch that model with great interest but we are happy with our own model provided there is an opportunity to be absolutely sure that that layer 3 wholesale market is working effectively.

CHAIR —Also in your submission you had views on cherry-picking provisions. Do you want to expand on them?

Mrs Sinclair —This is difficult. Before I launch into this answer, and probably another, I want to say that when I have been looking at all the policy issues around this I have always used two objects. I put a yellow-face squidgy and some other thing on my desk—I know this sounds ridiculous—because I want to be absolutely sure that I am not just taking old-paradigm thinking into the new-paradigm world of the NBN. All of us need to think very carefully about whether things that ‘were’ need to ‘be’, when we make the sorts of changes we are making. We are embarking on a piece of work which requires us to rethink every single piece of policy in this sector to achieve the outcomes that we want. So when I think about cherry-picking I start with the old model. We all like infrastructure competition; we look at the theory and we see that in economics infrastructure, competition produces the best outcomes for end users—and it does—but the reality in the intervening 20 years or so is that we have not seen much infrastructure competition in the local-access, fixed-services market. So we are not sure that we are going to see much competition in that market, either.

It seems that the economics of that market requires that there be only one fixed line access point into each household or business premise. However, we would want to preserve the option for someone to come into a market if they felt that they could build in that market. That would be a reduced call on the public purse. There are all sorts of good things about that, however, the overarching interest still has to be taken care of: we want a uniform national wholesale price. We need to cross-subsidise the services and we need to make sure that all Australians, whatever premises they happen to be in, receive the benefits of the national policy on the national broadband network, which is that you get NBN-grade services and you get choice of multiple services and multiple service providers. So, if people wish to come into the market and build they need to do so within a policy framework which undertakes that all Australians will achieve these outcomes from the national broadband network policy, whether the physical link is built by NBN Co. or someone else. Is that helpful?

CHAIR —Yes, thank you. I am not sure whether you were here for the evidence from the Regional Telecommunications Independent Review Committee.

Mrs Sinclair —No.

CHAIR —The committee made a submission to say, basically, that there should be uniform pricing in a competitive market at the retail level. How do you think that could be achieved? I was thinking that competition is not about uniformity; competition is about differences to bring the price down. That is the theory that I have understood for some time. Can you tell me what you think is the approach to uniform retail pricing?

Mrs Sinclair —We have had such an approach. It was called the price controls, and they applied to Telstra for fixed-line rentals. It is a very complicated piece of policy in this sector. Our experience of the price controls is that the price of a local access line rental has risen from $11 to $30. It does get complicated because offsetting the local access line rental are decreases, and quite significant decreases, in call charges. You have to put the two packages together. It is on that basis that I would be very worried about retail price control, because that is what it would be in a competitive market, in the retail part of this market.

As long as we get uniform national wholesale pricing then we can rely, I think, until proven wrong, on the retail service providers to take that wholesale price and to add all sorts of things that create different value propositions for different sorts of consumers, which mean that retail prices differ depending on what it is that you value and want to buy. But the wholesale price is uniform and that comes out of the policy.

If we got to a point where we did not see an affordable entry-level package emerging in the retail part of this market then possibly that would be one of the things that, say, the joint house may want to have a look at. If we got ourselves to a point where, for whatever reason, retailers were not effectively servicing the entry-level part of the market then perhaps for a period of time one might want to do something. But I do not think that we should intervene in the retail part of the market without a lot of evidence that that part of the market is not producing the outcome that we want.

CHAIR —You made the comment that discriminatory pricing is okay as long as transparency is maintained and terms and conditions are published. Is there a concern that this will restrict competition within smaller retailers?

Mrs Sinclair —There are some concerns about that. I think it comes from our experience—I am talking about all of us—in the old world. You have got to be very careful that you do not take old-world experience and just dump it into the new world. The old-world experience, where you have misaligned incentives with a wholesaler who is also a retailer, is that all sorts of strange barriers get erected. The problem people are worried about is an old problem, because it was a wholesaler favouring their own retail operations and discriminating against other retailers. That is not the problem we have over here. We have a wholesaler here who has no retail operations and no basis on which to favour one retailer over another.

Having said that, our view on this is that the economies of scale in this massive capital project will be captured by the NBN Company, which is the company that is going to build this thing, so whatever economies of scale there are that might lead to more efficient pricing will be captured by a single entity. We think that the benefits of those economies of scale ought to be shared amongst all the retailers. If there is really truly some efficiency that a retailer brings to the interaction with NBN Company then let’s call it out, let’s have a look at it through an ACCC process of some sort and if it is really there then our economics would tell us that the most efficient thing to do is to allow some price discrimination.

Sometimes I think people are getting a bit confused with efficiencies that occur within retailers’ operations, which of course would then be captured in their own retail pricing, so they take a uniform wholesale price—their overheads are low, there internal processes are efficient, whatever, whatever, and so they only need to add a 15 per cent margin to get a great result for their shareholders—compared to someone else whose processes are not so good and they need to add a 30 per cent margin to get their retail price. Of course, that happens within the retailers. Once again, our position has been that we would prefer to allow the flexibility but to manage all the possibilities using transparency and accountability.

Senator FISHER —You say that your members are keen to have the exemptions that are proposed. Do you have any members who do not support the exemptions?

Mrs Sinclair —No. We talked about this at a board meeting as recently as last Friday, because I knew I was coming here and I wanted to be sure that people had not rethought their position. I should say that the policy position that ATUG always puts is on behalf of the buyers of services. Amongst our membership we have suppliers of services, because we like to have a dialogue with everybody involved, but the policies are put forward on behalf of people buying services, a number of whom do so on behalf of utilities and government agencies and so on. Provided that we are talking about the special needs of those networks, or if those companies and other companies wanted to take the option of becoming a carriage service provider, selling services to the public and whatever other service rules there are, then those people ought to be able to buy from NBN. So we did not have a different view on that.

Senator FISHER —But your submission also says that, if you had your druthers, level 2 services would be open to anyone who wished to buy them, not just to those who want to supply them to the public.

Mrs Sinclair —Yes.

Senator FISHER —If that were the case, then the exemptions would be rendered redundant, wouldn’t they?

Mrs Sinclair —You wouldn’t really need them, I don’t think.

Senator FISHER —I am trying to reconcile the two.

Mrs Sinclair —The legislation says, ‘NBN does this but there are some exemptions,’ and we say, ‘We support those exemptions because we understand there are special needs.’ I guess what I then went on to say is, ‘When we think about competition in this market, this NBN world, then we want more competition than we had.’ Here I am reflecting the needs of our bigger members, who have national operations, whether they be government, banks or retailers. When they think about who can effectively provide services for them nationally, there are not many people on that list. So we come into this NBN world saying, ‘It would be really lovely if we had five or six or seven people to choose from, because then we would really have a competitive market if you are a national organisation.’ So we looked at that. I have had a number of assurances from industry members who say: ‘Don’t worry about that; it’s going to be fine. NBN is national; it’s wholesale. People are going to come in and, at that layer 3, offer national services to your members, and they will do so with a lot of expertise. There is quite a bit of capital investment required to develop those sorts of services. We’re going to do it.’ Reflecting on that, we thought: ‘Let’s see if that happens. If it happens, then we’ll have the range of choice that we want. If it doesn’t happen then I guess we’ll be back to the joint committee saying, “This hasn’t really worked out the way we thought it should.’’’ But at the moment we feel that there will be a significant number of new competitors coming into that space with the way this legislation is framed.

Senator FISHER —Do you have faith in the joint committee process?

Mrs Sinclair —Senator Fisher, as I look at you I have to say I do.

Senator FISHER —I promise I did not prep that question, Chair.

CHAIR —We could wipe it from the record!

Mrs Sinclair —I will say something to this committee that I said at my board meeting: given what we think we are doing here, which is a huge, important and necessary task, the best position for ATUG is to think that every brain that is available in this place is applied to getting the best outcome, which is a different matter from all the political considerations around it. We think the idea of the joint committee is good and when I looked at the structure of where the different members are going to come from and the terms of reference of that committee, I honestly thought,  ‘That is the best risk mitigation strategy that we all have as we embark down this track.’

Senator FISHER —Hopefully it will be starting work pretty soon.

Mrs Sinclair —I do have faith in it. Senator Fisher, you and I have been through many and various committees on the subject of broadband in Australia and I think we are now at a point where we have a good structure where all of that experience can come into processes that will be open, engaging no doubt, and all focused on getting the best outcomes for Australia.

Senator FISHER —To go back to your proposition about level 2 services being able to be sold to any organisation that wants to buy them, given that the current requirement is that they be on sold to the public, is part of your argument that the definition of public, or whatever the precise word is, is too broad, or is your concern more fundamental than that? I suspect it is but can you expand?

Mrs Sinclair —I have not been clear enough about this. I think that we will see over the next five years the emergence of a number of specialist providers, and that is what we want to see. We want to see people looking at the e-health agenda, for example, and saying, ‘We can provide communication services into that sector.’ In fact, I was reading the Financial Review today and there is—

CHAIR —That is always dangerous.

Senator FISHER —You cannot prefer the Australian, Chair?

CHAIR —I suppose it is better than the Australian, given that Senator Fisher has raised the Australian.

Mrs Sinclair —a small company starting up in Melbourne to offer services to the financial services sector to enable them to use the platform that mobile and fixed broadband will provide. This is a new company. They have been working in the United Kingdom and now they are setting up in Australia. This is jobs and all sorts of interesting things because of what we are doing. I suspect there could be service providers who are providing software at the moment who will go backwards in the chain, if you like, and say, ‘We can provide highly secure, very fast communications over the NBN,’ and create a kind of special interest network.

Do I say that the accountants are members of the public and therefore that provider is providing services to members of the public, or when I am thinking about members of the public am I really thinking about residential members of the public? The core issue for me is more competition and more people coming into the space. Maybe they are offering specialist network services or maybe they are offering retail services. My concern is that we are not doing this just to preserve what we have got and take it and all the players over here; what we are doing this for is to create a whole new market with a number of new players. My concern is just to make sure that for those new players, if they knock on the door and say, ‘I want to build a specialist financial services network,’ we have got everything in place that allows them to buy from NBN Co. and to build their services and sell them to their customers.

At the moment I think we have, so I am happy that we go forward with the legislation the way we have got it, provided we have the opportunity to watch the development of this new Layer 3 wholesale market. If we do not like what we see then we might want to direct NBN one way or the other or we might want to do other things. I am not sure we have got the full range of policy responses but I think we have got a proper range of processes that we could use.

Senator FISHER —Are you aware of anyone else running this same argument about level 3 and only accepting the current limitation provided that the minister has the power to direct or the ACCC can review?

Mrs Sinclair —I am not really. I am mostly aware of people arguing the other way: that we want to box NBN up and put labels on them. Our ATUG history in this whole debate makes us very nervous when other people say we need great clarity on this before we have even started. We would prefer, given the protections in the legislation and the various bits of risk management, to give that market a chance to develop without boxing NBN up any more than it currently is.

Senator FISHER —Nonetheless, there are significant investments at stake for the various players, and they would want some degree of clarity.

Mrs Sinclair —Absolutely. I think that we protected the vast majority of those investments with the points of interconnection decision. I say what I say, and we supported the greater number of points of interconnection because, wherever possible, we want the private sector building infrastructure in a competitive market. We feel that significant protection has been afforded to existing players through that decision around the points of interconnection.

Senator FIELDING —Thank you.

CHAIR —Coming back to this issue about what NBN can do and cannot do: we have heard the argument today that NBN should only deliver Layer 2 services. Would that be a way to regulate the kind of services that NBN offers?

Mrs Sinclair —I am sorry: would that be a sufficiently clear statement—

CHAIR —Would that be a good way to regulate NBN and the services it offers?

Mrs Sinclair —Yes, I think so. One of things that all of us on both sides have been careful to do in telco sector regulation is, funnily enough, speak as little as possible about particular technologies. That is because technologies change. Just when you have decided that green and black baubles are the thing that you want somebody to do and you are going to regulate for green and black baubles, then along come red circles. You think: ‘Oh my goodness! I’ve been so busy regulating green and black baubles and now I’ve got red circles to worry about.’ It is best that we leave these definitions as broad as possible but that we make sure that we have got structures and processes in place to review what is happening and, at the end of the day, that we make decisions in the long-term interests of end users. That is embedded in NBN Co.’s legislation. We are very pleased about that and we fought very hard to make sure that was there. It is in the telco act and the Competition and Consumer Act, and it goes way back to 1997. It gives us a basis to be sure that regulatory decisions will be carefully taken with proper processes that we understand and deliver in the interests of end users rather than in the interests of any one player or group of players, as far as it is possible to be technologically neutral—so Layer 2; we know what that means at the moment. We think we should just stay with that definition rather than trying to nail things.

CHAIR —So you are saying that specifying where to in the legislation would not be a good idea?

Mrs Sinclair —Not any further, yes. We say wholesale only, and then I think we have the government statement of expectations where we talk about Layer 2 and Layer 3 and so on.

CHAIR —Can I just clarify; when you talk about the green beads and the red circles—

Mrs Sinclair —Sure—that was me trying to be helpful!

CHAIR —It is a good way to understand this, but I am just not sure that someone listening in would not be confused by this argument that there is this new technology sitting there waiting to happen, and that the NBN fibre network will be redundant because some new wireless approach will come in that is going to blow the NBN out of the water. You are not saying that, are you?

Mrs Sinclair —Absolutely not. In fact, I listen to these discussions about wireless with great interest. One needs to distinguish very early in the discussions between mobile broadband and fixed wireless broadband. Fixed wireless is like fibre, but in the air—it is an individually engineered link. Mobile is where I wander into the base station and if no-one else is there I will probably have a great time. If there are 50 people in that base station then I will have a one-fiftieth great time.

The practical benchmark I use in that debate is that I ask my big members, ‘Are we going to move all our services onto the mobile platform—onto the wireless platform?’ and they say, ‘Absolutely not,’ because the capacity of that platform to support our needs is not good enough. When we are out of our offices, hospitals, schools or whatever premises we are in and we are on the road, mobile connections are marvellous; even though the quality is not always there, the convenience factor is there. There is no lack of clarity in our minds that what we want is fibre to the premises, wireless where fibre is not financially viable and satellite in the remaining three per cent of Australia’s premises. But fibre, absolutely, where we can get that result.

CHAIR —We had a discussion earlier about the same price applying, and you spoke about how that would be a return to retail price regulation. The other argument we have heard here today is that everyone should have access to the same services. That is beyond those 93 per cent who will get the fibre. Is there merit in that idea? And then the more important question is: is that a practical proposition, for everyone in the country to get absolutely the same service?

Mrs Sinclair —We have talked and thought long and hard about that, and at the end of the day we come down on the side of national affordability. When you put that as a priority then you get to numbers which say that we can affordably do 93 per cent with fibre delivering 100 megabits, four per cent with wireless delivering 12 down and one up and three per cent with satellite delivering 12 down and one up.

The history of services in remote and rural parts of Australia is that they have been getting better and better. We run a regional roadshow, and we actually go to communities as far away as Karratha, Mount Isa, in the backblocks of South Australia and every which where.

CHAIR —Careful—you are starting to sound like Barnaby Joyce!

Mrs Sinclair —So we understand the importance of communications. We also understand the realism of folk in those regions and concerns in the regions about the affordability of services. We think that the balance point at the moment between the 93 per cent, the four per cent and the three per cent is a good one because it achieves an affordability outcome. It means that the cross-subsidy that will emerge and that will have to be dealt with is manageable for all of us, and so we can achieve the ubiquitous outcome that we want: everyone is connected to this platform. It may well be that a number of people in the metro area choose the 12 megabits package.

CHAIR —We have just run out of time, so I thank you for your contribution to the committee. It has been very helpful.

Mrs Sinclair —Thank you.

[3.30 pm]