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ACCC discusses 'ring fencing' of Telstra.

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Thursday, 10 March 2005



STEPHEN CRITTENDEN:  To split or not to split? As Telstra approaches the altar of privatisation, this is the issue which is itself splitting the coalition. According to Finance Minister, Nick Minchin, breaking up Telstra is not on. ‘It’s now too late to try and unscramble the egg’, he said yesterday. But recipes have been provided to the government.


The Australian Competition and Consumer Commission (ACCC) has cooked up at least four versions of a restructured Telstra which, it says, boosts competition and satisfies National Party demand for services in the bush. For its part, the government says a broken up Telstra is worth less in bits than as a whole, and as the majority shareholder it wants and needs the highest sale price, for Telstra, possible. But the government also has an obligation to consumers to provide a competitive outcome and, of course, not just to consumers but to others amongst Telstra’s competitors.


Well, if the ACCC says that this comes from restructuring or splitting Telstra, then why had these models been rejected? In recent weeks the Competition Chairman hasn’t commented on Telstra but today he will give a major speech to the Telecommunications Users Group—ATUG. Graeme Samuels is with us in our Sydney studio this morning. Welcome to the program.


GRAEME SAMUEL: Thanks, Stephen.


STEPHEN CRITTENDEN: Is a truly competitive telco environment possible with Telstra as dominant as it is?


GRAEME SAMUEL: Yes, it is but it requires two possible sources of dealing with that matter. The first is regulation, which is what we have at the moment, and the second is for Telstra’s competitors to install new infrastructure that bypasses the monopoly infrastructure network that Telstra owns.


Telstra owns that copper wire network that connects every home and every place of business in this country, and the only way that competitors can compete with Telstra is either to gain access to that network at a wholesale basis and then resell it or alternatively build their own infrastructure.


STEPHEN CRITTENDEN: You’ve had talks with the government for some time. In fact I think originally we were expecting an ACCC report but that turned into a series of proposals that you put to the government for what to do with Telstra in terms of restructuring. What did the ACCC propose?


GRAEME SAMUEL: The ACCC is proposing—and I’ll be saying so at today’s ATUG conference—an operational separation of Telstra. Now what this means is having Telstra’s wholesale division completely transparently operationally separate from its retail division. An operational separation can be done internally within Telstra but it needs to be publicly transparent with separate accounting, separate staff; lack of communication between the two divisions, other than on a normal commercial basis. Then it is possible for us as a regulator to look at Telstra wholesale and say you are dealing with your retail operations on exactly the same form of conditions, commercial terms and conditions, as you are dealing with other wholesale customers of Telstra which are after all the competitors of Telstra’s retail division.


STEPHEN CRITTENDEN: Now, am I right in saying that that’s perhaps a less radical operational restructure proposal? It doesn’t amount to an actual restructure. I mean, there’s a term called ‘ring fencing’ isn’t there—a proposal to in a way structurally separate the company, not just operationally?


GRAEME SAMUEL: No, this is ring fencing. This is the model….


STEPHEN CRITTENDEN: This is ring fencing. This is in fact what’s on the table. This is, I guess, the most radical of the proposals that you put to the government, isn’t it?


GRAEME SAMUEL: That’s right. I should say this ring fencing model has been used in other utilities, such as gas and such as electricity over the past 10 or more years and has worked very well indeed.


Some of the more radical proposals that I think Senator Minchin and Senator Coonan have been referring to in the past couple of days have been the selling off or the breaking up of Telstra into two or more separate….


STEPHEN CRITTENDEN: And that wasn’t amongst the proposals that you put?


GRAEME SAMUEL: That’s a matter that we discussed with government one to three years ago but, look, frankly it’s not a matter that we pursue today. It’s not on the radar screen. Senator Coonan, in her speech yesterday, said that it was not a matter that the government was going to entertain; that’s a policy issue for parliament.


I have to say to you that as an independent regulator this is a matter that we really have to leave to government to determine. What we are now addressing is: what are the options that are available and how can we best structure the telecommunications industry into the future; how can we best guide its structure to provide for effective competition?


STEPHEN CRITTENDEN: What do you say to those people, and they include I think the former communications spokesman for the Labor Party, Lindsay Tanner, who was originally quite interested in the idea of a restructure and then said it was too hard; Nick Minchin who just the other day said the time had passed? Is it in fact too difficult for the government to restructure Telstra in the way you are proposing given that it has a majority shareholding?


GRAEME SAMUEL: Let’s make it clear—what we are proposing—the operational separation—is a matter that in fact Senator Coonan was discussing quite openly yesterday as being a real option for the government to examine. What some others have been discussing is a separation of Telstra, in other words, to create two listed companies if you like—a Telstra wholesale and a Telstra retail; breaking up the existing company into two entirely separate companies with different shareholders, different boards of directors and the like.


STEPHEN CRITTENDEN: Listening to Helen Coonan in Question Time in the Senate yesterday, it sounded to me like she was fence-sitting. Is she in fact fence-sitting?


GRAEME SAMUEL: No. Well, if you read the speech that she gave to the ATUG conference yesterday, she made it very clear that she is examining, I think with some favourable inclinations, the prospect of an operational separation along the lines of that that I will be discussing in some detail at this morning’s conference of ATUG.


STEPHEN CRITTENDEN: Do we also need a tougher regulatory environment? Your communications commissioner, Ed Willett, in a very interesting speech he gave in November, was suggesting that we need one or the other; we either restructure or we increase the regulatory regime. Do we actually need to do both?


GRAEME SAMUEL: Yes, and I think Ed Willett was actually indicating we do need both. I don’t think it’s one or the other because I think if we can put in place an effective operational separation that’s a move towards a competitive environment, and the ultimate discipline is real competition.


STEPHEN CRITTENDEN: It’s not one or the other; it’s both?


GRAEME SAMUEL: Yes, and until we get there we are going to need regulation to be able to control some of the excesses of Telstra.


STEPHEN CRITTENDEN: Is the existing regulatory regime that you operate under based on a competitive environment, in relation to Telstra and in relation to the telecommunications industry in Australia, that actually doesn’t exist in reality yet?


GRAEME SAMUEL: I think the question is this: the existing regulatory regime is satisfactory. I’d have to say to you that always the regulator, in a regulatory regime, is working off the back foot. And our experience recently with our competition notice and Telstra on its broadband pricing showed that we are working off the back foot. But I have to say to you that with some tweaking, with some modifications to the regime, we think that it can ultimately work. But I have to say to you, ultimately the real process for the real way forward is to have new competitive infrastructure that says to Telstra: we don’t have to buy off you we can actually work on our own.


STEPHEN CRITTENDEN: How will, what the ACCC is proposing—the kind of separation you are proposing—benefit the consumer and particularly people in the bush?


GRAEME SAMUEL: I think what it will do is it will help us to ensure that ultimately we get a very competitive marketplace for telecommunications. And competition has been demonstrated in virtually every other market in Australia, today, to produce benefits to consumers in terms of lower prices and far higher quality of services. There are competitors out there that are trying to find niches, trying to help consumers, trying to satisfy consumers because that’s after all where they get their revenue and their profit.


STEPHEN CRITTENDEN: Thank you very much for being on the program.


GRAEME SAMUEL: Thanks Stephen.


STEPHEN CRITTENDEN: The Chairman of the ACCC, Graeme Samuel.