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Report card on the new telecommunications regime. Speech on the occasion of the opening of the new offices of the Australian Communications Industry Forum, Sydney, 23 February 1998



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Report card on the new telecommunications regime

 

Speech by

Senator Richard Alston

Minister for Communications, the Information Economy and the Arts

 

On the occasion of the opening of the new offices of the

Australian Communications Industry Forum

 

SYDN EY, 23 FEBRUARY 1998

 

Thank you, Greg.

 

It's a very great pleasure to be here today to officially open the Sydney office of the Australian Communications Industry Forum (ACIF).

 

I congratulate Greg Crew and Johanne Plante, Chairman and Chief Executive of ACIF, and their staff for the work they have done to date in getting ACIF up and running. But my congratulations should not be limited to them. ACIF is a body which involves the entire telecommunications industry in the self-regulatory processes which are a central feature of the new regime. It has enjoyed considerable success to date in tackling its large program of work, and the whole industry can take credit for that.

 

Now that the new regime has been in place for almost eight months, sufficient time has passed to make some useful comments on progress to date.

 

OVERALL FINDING: SUCCESS

 

July 1 last year - the date of the introduction of full and open competition - was an historic date which marked Australia as a world leader in terms of regulating its telecommunications market.

 

But, in some respects, such a landmark can create unrealistic expectations which do not always take full account of the existing industry structure, particularly the overwhelming dominance of our own six hundred pound gorilla, or the extent to which the price of many services commenced to fall ahead of the open market.

 

But let there be no mistake, we are on the right track.

 

As one of the industry leaders, Allan Horsley of ATUG, recently acknowledged: "There is little doubt that the legislative framework of the Telecommunications Act and the amended Trade Practices Act will allow a very beneficial world to develop."

 

The trick is to ensure that Australian cultural and industry changes get under way with sufficient rapidity to enable today's consumers to taste the benefits.

 

Chief among the challenges is one for the industry - to pursue changes such as interconnect and access rights by meaningful negotiations rather than too early resort to the courts, with all the obvious cost and time delay implications.

 

The long term interests of end users lie in fair and reasonable commercial arrangements being negotiated which will allow carriers and service providers to compete on the merits on both price and quality of service offerings.

 

Both businesses and home consumers are entitled to share in the fruits of the technology tidal wave which is washing over the world and offers Australia an unprecedented opportunity to access leading edge digital services at highly competitive prices.

 

In many respects dramatically more powerful and cost competitive bandwidth is the key to the Information Revolution - network PCs connecting LANs and WANs to provide intranets and extranets with a cornucopia of distributed applications.

 

Having said that: how should we measure the success of the regime so far. On any reasonable account it must be judged a success.

 

More than a dozen new carriers have so far been licensed but the most tangible consumer benefit has been dramatic price reductions. The very day the new regime began, 1 July, AAPT announced that it would offer up to 60 percent off the current cost of national and international long distance calls. Other players were hot on AAPT's heels. A number of service providers - including Global One, Primus and WorldxChange - now offer calls to the United Kingdom, the United States and New Zealand for as little as 37 cents per minute for calls in peak weekday periods to the US.

 

In recent months, we have started to see some particularly innovative offer ings. For example, Northgate Communications offers its Ballarat customers untimed calls to Sydney or Melbourne for 95 cents. Northgate also offers untimed calls to Los Angeles, Hong Kong, London and Auckland for $4.95. And both Telstra and AAPT have offered a capped $3 call around Australia on weeknight evenings.

 

The Christmas period saw vigorous price competition, offering many Australians significant benefits as they spoke to friends and family interstate and overseas. Cheaper rates on public holidays have not been a feature of Australian telecommunications unti l very recently. But this time we saw major reductions, especially outside peak periods, and we saw a range of alternatives from Telstra, Optus, AAPT, Global One and Primus and others.

 

However, whilst significant progress has been made in long distance, there has not been the same price reduction in local calls - the ultimate test of a fully functioning competitive regime. Nonetheless a significant number of new players have entered the market as licensed carriers, including established telephone companies such as AAPT, Primus, Horizon and OMNIConnect as well as utilities such as United Energy.

 

THE CONCERNS SO FAR

 

When the new telecommunications legislative regime came into force on 1 July last year it was gratifying that a number of players, both incumbents and new entrants, expressed their satisfaction that the government had pretty much got the legislative regime right and that it would be largely up to the players - and the regulator - to make competition work.

 

I indicated then, as now, that the Government stands ready to fine-tune the regime should it prove necessary. Against this background it is significant that on the celebrated ATUG pre-Christmas harbour cruise no-one suggested the need for legislative change although a number of new entrants have claimed to experience significant frustration both in relation to the behaviour of Telstra and the approach of the ACCC.

 

Access arrangements

 

To start with, several of the newer and smaller players have complained to me that, in the early months of the new regime, Telstra refused to negotiate on access arrangements in relation to the 11 declared services announced by the ACCC on 1 July. I understand that Telstra essentially told smaller players that it was devoting its resources to negotiating with Optus, before turning to the smaller players.

 

There are now some signs that the regime has begun to find its feet in this regard. The first encouraging sign occurred when Telstra struck an interconnect agreement with Optus on 17 October. Then Telstra reached a deal with AAPT on interconnect fees. Two other significant recent developments which will make life easier for access seekers are that the ACCC has approved the Telecommunications Access Forum's access code, and Telstra has lodged access undertakings with the ACCC. Moreover, the ACCC has already shown in its current inquiry an awareness of the importance of digital data services and particularly ISDN for regional and remote users.

 

In addition, I understand that by the middle of the year, the ACCC's work with the access regime will give considerable further guidance to the industry. For example, the ACCC is currently conducting an inquiry into whether data, transmission and ISDN services should be declared services. It will also be considering whether the terms and conditions (including prices) in Telstra's access undertakings are reasonable.

 

Preselection

 

Another concern put to me in the early days of the new regime was that Telstra was tardy in making preselection (non code access) available. The ACA's pre-selection determination was made on 29 July, but it was only in October that preselection started to become widely available. Telstra tells me that the delay was due to technical difficulties rather than bad faith on its part. In addition, a number of other carriage service providers experienced difficulty in providing non-code access to the customers of other providers.

 

I understand that the issue has now been largely resolved.

 

Internet pricing

 

Another issue which has come to the fore more recently concerns the market for internet data carriage in Australia. As I have just returned from leading a trade mission to Silicon Valley, let me start by making some more general observations about this issue. In the US, the already dramatic growth in online services and electronic commerce is regarded as still being in its infancy, driven by remorseless technological progress, fundamental business reengineering opportunities, and the rapid emergence of a bewildering array of new and attractive consumer products and services.

 

However, as experience in the United Kingdom underlines, such electronic promise can be choked off by high charges levied by the telcos. In this area, prices that are significantly attractive to users to facilitate rapid take up can also be in the best in terests of telcos. Past experience suggests that competitive pricing leads to both higher demand and higher revenue.

 

It is therefore critically important for Australian telcos to recognise these opportunities and not simply generate premium pricing models which may well stifle demand.

 

With that background, let me turn to consider tariffing arrangements for data traffic in Australia. This is potentially a very significant issue as the volume of non-voice traffic, particularly international, is exploding - Telstra already derives more than half its international revenue from data. With Australia already at least second in the world in terms of household PC and Internet penetration and with electronic commerce poised to become the next big killer application, it is critically important that Australia makes the most of its opportunities. Indeed the prospect of becoming a world leader in distant education and telemedicine simply underlines the fundamental social as well as commercial significance of the Internet.

 

Telstra introduced a new tariff structure for internet traffic halfway through last year, under which it charges 19 cents per megabyte for the carriage of data from its network onto other networks. It makes no distinction between data sourced from Australia and data sourced from overseas. It offers no reduction in the rate to higher volume customers. And it does not offer payment on a reciprocal basis, namely payment to operators of networks which have supplied data onto Telstra's network.

 

These bundling arrangements have provoked widespread criticism in the industry, on the grounds that current tariffing arrangements give Internet service providers little incentive to develop Australian based content and do nothing to promote the development of separate wholesale and retail markets. Perhaps the most vociferous complaint, however, is that these arrangements are simply unfair. Why should Telstra be able to use its commercial muscle to charge for the provision of data, but refuse to pay for the receipt of data?

 

Telstra has a number of points to make in response to these objections. For example, Telstra says that a bit of data delivered by its network is more valuable than the same bit delivered by any of the other players in the Australian market, because Telstra's network is more widespread and therefore the bit is likely to be delivered to a point closer to where it is needed than a bit delivered by any other network.

 

It is difficult, however, to see how these arguments can justify the current stark pricing differential: 19 cents in, 0 cents out. I understand that Telstra is in discussions with Optus and other players with a view to reaching a more reasonable tariff structure. I hope these discussions are fruitful: in any event, given the enormous international and domestic competitive opportunities which are up for grabs if Australia gets this right, I expect that the ACCC will regard this issue as a high priority and will be scrutinising the arrangements for any anti-competitive consequences.

 

COND UCT OF THE KEY PLAYERS

 

Despite the fact that Telstra is one of the great Australian success stories, which has gone from strength to strength under the astute leadership of Frank Blount, you don't have to go far to detect anti-Telstra sentiment. It is inevitable that Telstra's name comes up so often: it is the colossus of the industry. Despite deregulation it is still largely true that all roads lead to Telstra. However, those who consider that the industry structure is too one sided should remember that if Paul Keating had had his way, Telstra and OTC would by now have been fierce competitors.

 

The reason we got the present stack of cards is because the then Minister for Communications, Kim Beazley, caved in to party and trade union pressure. The leopard certainly hasn't changed his spots since becoming Leader of the Opposition.

 

It is not merely unsurprising that Telstra should be vigorously defending its own interests - it would be derelict in its duty to its shareholders if it failed to do so. However, it goes without saying that the Government expects Telstra - like every othe r player - to be scrupulous in observing its statutory obligations.

 

Furthermore, Telstra should be fair dinkum in the way it deals with the new players. That doesn't mean Telstra has to give them a good deal because they are battlers who deserve a free kick. The world doesn't work that way. But it does mean, for example, being careful to avoid pleading technical problems as an excuse for delay, and the regulator will undoubtedly remain vigilant in this regard.

 

I would make another observation arising from the report of the consultants who last year examined the billing arrangements between Telstra and a range of service providers in order to enable the Government to be forewarned of any future anti-competitive roadblocks which might emerge. The more Telstra can engage in consultation with other industry players - for example, in developing industry standards for the transfer of billing data - the better the result will be for the industry and, ultimately, end users. This is a difficult cultural change for an organisation like Telstra to make. However, I was pleased to note, at the meeting we held a few weeks ago to work through the findings of the report, the Telstra team showed a preparedness to engage in exactly this kind of consultation. Indeed I want to congratulate all parties involved, but particularly Brian Perkins on behalf of SPAN and Doug Campbell on behalf of Telstra, for the maturity of their approach to this difficult issue.

 

By the way, most of these comments apply to Optus as well, particularly to the extent that it is an access provider.

 

New players

 

But then there is the other side of the coin. What have we seen from the new players, and how does their behaviour compare to what might be expected?

 

Well, the Government's first expectation is that the new players should operate in a professional and business like way. Again, there were some interesting lessons in the consultants' report on service provider billing. They noted that in some cases service providers have not properly documented and standardised their internal practices, so there are still plenty of industry challenges ahead.

 

More generally, one of the lessons from that study was that the more work a service provider put into its relationship with Telstra, the more smoothly its billing functions are likely to operate. In other words, those who try to do it on the cheap, without putting in the effort to work with Telstra's billing teams, are likely to experience more problems in their customer relationships.

 

Our second expectation of new players relates more specifically to the operation of the new regulatory regime: we expect new players to do most of the heavy lifting themselves. Government has set the framework by introducing the new Act - and of course we continue to monitor its operation carefully, and look for opportunities for continuous improvement. But the day-to-day job of exercising rights under the new Act, of obtaining access to declared services, of having new services declared - that job is for the industry and particularly for the newer players. We in Government will do what we can to help, but the main job is up to you.

 

On a related point, as Professor Fels has said, the ACCC is pro-competitive but not pro any one competitor. We cannot solve the particular business problems of individual businesses. This is a competitive regime in a tough industry. Some players will not succeed.

 

The ACCC

 

The new Act has brought the ACCC in as a central player in the telecommunications industry. For many in the industry, dealing with the ACCC is a new experience. For some, it is a frustrating experience.

 

Much of that frustration is based on unfair perceptions. The ACCC must act in a manner consistent with its legislative powers and general requirements such as natural justice: that is, the right for affected parties to put their case.

 

For example, a number of industry players have complained that the ACCC's processes are too slow and legalistic. Certainly, there are requirements of due process built into the Act - but for a very good reason.

 

The ACCC has been given very wide ranging powers under the Act. Perhaps the most dramatic is the ACCC's power, if necessary, to set the price which an access provider must charge to an access seeker. It is potentially a very significant interference with the business freedom of access providers.

 

After they have made their investments, and built facilities, the law is effectively saying to them, "Here is the price that you can charge. Here is the return on your investment that you can have."

 

It is absolutely right and proper that before it exercises these sweeping powers, the ACCC should be required to carefully consider both sides of the story - and inevitably, these processes will be somewhat legalistic. Clearly it is frustrating to many access seekers that these processes have to be worked through. But consider how frustrating it must be for an executive of Telstra or Optus, to be told by the Government how much you can charge for a service!

 

However, as well as complaints about the form of the regime, there have been complaints about the way the ACCC is exercising - or not exercising - the powers which the regime undoubtedly gives it. Let me focus on two issues, and indicate the Government's view as to the way in which the ACCC should conduct itself.

 

The first issue is when, and in what circumstances, the ACCC should issue a competition notice. This is a powerful pro-competitive tool, because it constitutes prima facie evidence in court proceedings that the party against whom the notice has been issued has breached the Trade Practices Act. There is a perception in the industry that the ACCC is being ultra cautious in using this power, and that it is waiting until it has a cast iron case before it issues its first competition notice.

 

It is true that in some cases the ACCC has been able to obtain significant results from investigations without issuing a competition notice. For example, the ACCC recently investigated complaints that, in introducing its new ISDN access product, Telstra was reducing the availability of wholesale ISDN services whilst increasing their price. Following the investigation, Telstra agreed to a significantly reduced increase, and also spent $3.5 million on infrastructure to supply connections prior to the release of its new product.

 

It is also true that a lawyer's cauti on is often prudent. Nevertheless, in a fast moving industry a cautious approach can be overdone.

 

The intention behind including the competition notice powers in the Act was to give the ACCC a device which it could use speedily and effectively to respond to conduct which it considered was anti-competitive. There is a risk that this intention will be undermined if the ACCC is excessively cautious in its use of the power. Conversely the fact that the ACCC might find that a competition notice is subsequently overturned by the courts does not necessarily equate to an error of judgment. The hard task is always to strike the right balance.

 

Of course, the ACCC must act in good faith and must be satisfied that it has good reason to issue a competition notice before it does so. But this does not necessarily mean that the ACCC must be certain that a court will uphold a competition notice before it issues it. Moreover, unless and until the ACCC starts issuing such notices, it will never be able to test and define the limits of its competition notice powers.

 

Secondly, there is the broader issue of the relationship between the ACCC's competition powers under part XIB of the Trade Practices Act and access issues under part XIC. Some sections of the industry have argued that experience to date suggests that the ACCC believes that it should only use its anti-competitive powers if the matter cannot possibly be treated as an access issue. These groups are concerned that unnecessary slowness in resolving access issues affects their ability to compete in the marketplace.

 

It was never the Government's intention that these issues should be completely separated. The two Parts were drafted to provide some overlap, to ensure that legitimate competition issues would not fall through a gap. There is no basis in the Act for belie ving that a matter cannot attract both sets of powers. While the ACCC may in some circumstances decide not to use both sets of powers to avoid inappropriate "double jeopardy" penalties, in other circumstances the combined use of the relatively quick anti-competitive powers followed by more comprehensive action under Part XIC may be appropriate.

 

Role of the Minister

 

Having spoken freely on the roles of a range of other players under the new telecommunications regulatory regime, it is only fair that I should engage in a bit of self examination as well.

 

The main point to make here is that there is still a measure of confusion in the industry as to the day-to-day role of the Minister in the new regulatory regime. I was interested to read Alan Kohler's piece in the Australian Financial Review a couple of weeks ago in which he said that I had received 'passionate, sometimes pitiful entreaties from hollow-eyed phone carriers accompanied by sleek lawyers'. He must have been backgrounded by the likes of Gilbert & Tobin or Mallesons, because the adjective used to describe the lawyers was significantly more flattering than that used to describe their phone company clients.

 

Kohler's piece observed that I am refusing to intervene in the day-to-day handling of particular regulatory issues by the ACCC and ACA. Indeed I am. It should not be the role of the Minister to become some kind of off-the-cuff cowboy regulator. The Government has only engaged in one piece of direct action so far, in taking a decision on local number portability, and it was prepared to do that only because there was AUSTEL analysis of the issue sitting on the shelf for the Government to draw on.

 

In general, we will be guided by the principle that the regime gives particular responsibilities to particular bodies like the ACCC and the ACA. They must be permitted to discharge those responsibilities and will normally be better placed than anyone else to undertake the detailed analysis required by complex regulatory issues.

 

NON-COMPETITION ISSUES

 

Competition issues are the engine room of the new regime. But there are other aspects which should not be overlooked. There are now significant new consumer safeguards in place, including the customer service guarantee (although I wish Telstra, Optus and others would give the scheme a mention on their websites!), strengthened universal service arrangements and an expanded TIO scheme. The move to an industry-based, rather than regulator-imposed, standards regime is an immensely complex task, but one where the industry is at last beginning to put in the necessary resources.

 

ACIF is well placed to make a major contribution in these areas, and it certainly has the support of the Government in its efforts.

 

CONCLUSION

 

I want to close as I began; by reflecting on what I regard as the overall success of the new regime. And in particular, I want to acknowledge the very considerable amount of work which has been done, and continues to be done, by industry participants in making the new regime work. Whilst Telstra is always going to be the lightning rod for industry criticism, I want to express my gratitude for the substantial amount of work Telstra has done to support the new regime. It has made the expertise of its regulatory experts freely available - even when this has brought outcomes which are not always in Telstra's immediate interests.

 

Other large players like Optus, Vodafone and AAPT have also given of their time and resources to make the new regime work. Equally, many of the newer and smaller players have made a considerable contribution of time and effort - even as they struggle with the ongoing pressures of trying to build a business in a fiercely competitive environment. In this regard, I particularly want to acknowledge the considerable contribution of time made available by service providers to the consulting study I mentioned earlier.

 

I continue to believe that we are on a winner with this new regime. It is already delivering substantial benefits to end users, and I think it will deliver many more over time. There are new carriers to enter; new services to be declared; new and better a ccess prices to be delivered over time. This Government is determined to continue to drive this regime to provide benefits for end users. That is in the interests of the industry; and it is in the interest of the nation.

 

Perhaps I could leave you with these words from Winston Churchill:

 

"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."

 

THANK YOU

 

 

 

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