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Joint Committee on the National Broadband Network
16/04/2012
Rollout of the National Broadband Network

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

RIORDAN, Mr Sean, Acting Group General Manager, Communications Group, Australian Competition and Consumer Commission

WILLETT, Mr Ed, Commissioner, Australian Competition and Consumer Commission and Chair, Communications Committee

[16:24]

CHAIR: Welcome. Thank you for coming in today. You will be pleased to note that everyone has said nice things about you today in the evidence has been given.

Mr Willett : That makes a very pleasant change!

CHAIR: Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Would you like to make an opening statement to the committee?

Mr Willett : I do not think there is a need for that, Chairman. We have been here before. I think the activities we have been involved in lately have been a matter of public record and no doubt you have had some explanations and suggestions from others today on what we should be doing, so I think we could move straight into questions.

CHAIR: The first question is, are there any issues we should be aware of that are outstanding from all the various regulatory work that now seems to have largely come to various stages of agreement?

Mr Willett : A lot of it has but of course we are still heavily involved in the negotiation and settling of an undertaking with NBN Co. and relevantly we also involved in an application for authorisation from Optus and NBN Co. in relation to their proposed arrangements for migration of customers. So there are still two very important pieces of work that are outstanding.

CHAIR: Are either of those having an impact on their ability to scale up, as they are wanting to do this year?

Mr Willett : No, not from our point of view. I think we have recently and on other occasions faced very large workloads and we have managed to deal with them, so I do not see any problem.

Mr FLETCHER: The ACCC has before it the special access undertaking lodged by NBN Co. Could you describe what the effect of the special access undertaking is and why a party building a network would typically want to get a special access undertaking approved?

Mr Willett : I guess you would have to address that question in the context of the legislative scheme, and we have a legislative scheme that sets precedents in order of conditions and terms of access first of all being set by commercial agreement, secondly under an SAU, as you described, and thirdly under determinations that we make or binding rules of conduct that we make. So I think it is in NBN Co.'s interest. We certainly see some advantages in them settling with us an undertaking to set at least a framework of terms and conditions for the provision of their services. That would not necessarily rule out determinations on matters that are not covered under that SAU in future but, for the terms and conditions that are actually covered by that SAU, the SAU would determine how those terms and conditions are provided.

Mr FLETCHER: If the commission ultimately determined that it was unable to approve the SAU and the application of the statutory criteria, what would be the consequences commercially for NBN Co. and what would be open to access seekers to do?

Mr Willett : It is hard to say exactly what the commercial implications for NBN Co. would be. That would be a question for them, I think. But there would be some choices for NBN Co. at that point. They could resubmit their undertaking, seeking to address whatever concerns we expressed about their existing draft. Otherwise it would be likely, I think, that the commission would move to implement an access determination inquiry and as part of that process set interim terms and conditions through binding rules of conduct.

Mr FLETCHER: If that were to occur, is it right that access seekers could, by choosing not to renew the current interim one-year commercial agreements, then have the benefit of whatever terms and conditions were specified in the access determination?

Mr Willett : That is right.

Mr FLETCHER: Therefore, from NBN's point of view, to gain some certainty it has an incentive to have the access undertaking approved?

Mr Willett : Yes. I believe that is right.

Mr FLETCHER: How does this access undertaking that the commission is considering compare to previous undertakings that have been put to you—for example, in terms of duration?

Mr Willett : This proposal has a long duration, but can I say at the outset that it is not usual for a greenfields start-up service provider to submit undertakings of this kind. I think this is probably the first one the commission has had to deal with, although we have in the past considered the possibility of greenfields applications being made by gas pipelines under the gas pipeline code. We have actually issued a greenfields gas pipeline code guideline for that eventuality. Rather than compare the approach that is being taken here with our usual course of business with access determinations or access undertakings or the like—and the usual course of business is an incumbent service provider with an established network that seeks or is obliged under the various legislation to submit to us terms and conditions for approval on how they will provide services—here we have a business who is seeking to invest in a new network and to set those terms and conditions before that network is complete. I think the relevant comparison would be with the sorts of approaches envisaged in our greenfields gas pipeline guideline, for example, which does envisage the sorts of approaches that are being adopted here—in other words, a long-term, at least, framework undertaking with perhaps more regular consideration of some aspects of those terms and conditions and seeking to establish upfront ways in which efficient costs for the provision of service will be established and how prices will be set.

Mr FLETCHER: Can I just ask on that whether it is correct that this SAU needs to be approved under part XIC of the Competition and Consumer Act, and what you are talking about in terms of the gas approval would be under part IIIA. Is that right?

Mr Willett : There is a separate gas law. The commission considers access issues not just in terms of telecommunications. But you are right: it is under XIC, and this is an unusual process for—

Mr FLETCHER: Accepting your proposition that considering 10-, 20- or 30-year agreements or undertakings is within the commission's experience, albeit in other sectors, is there anything in part XIC that creates any challenge in doing that in the telecommunications sector?

Mr Willett : There is nothing that prevents it, but the very nature of trying to set in place arrangements that will extend over a 30-year period proposes its own challenges; there is no doubt about that. It is not an easy thing to do. At this stage we are leaving open the possibility that the things that are set in place for 30 years might be broad and sweeping in terms of principles rather than actual specific terms and that, within that framework, terms and conditions can be set or revisited on a more regular basis.

Mr FLETCHER: Is it right that there have been applications made to the commission previously to approve a special access undertaking under part XIC but that you have never been in a position to approve such an undertaking?

Mr Willett : I think the Foxtel matter was under XIC?

Mr Riordon : Yes.

Mr Willett : So that was one that was approved. But, if you are thinking of applications by Telstra, yes, that is true.

Senator GALLACHER: Does the ACCC have any thoughts on what might happen with respect to billing in the uptake of the NBN? For example, what happens when you have a household with two or three mobiles an internet provider—Telstra and the NBN—and how people can officially migrate to one single source of bill?

Mr Willett : We have, because we think that is the way the industry is probably heading. We think the industry is probably heading towards retailers offering a sort of 'everything you need in communications' bundle. And that bundle might include not only fixed line voice services and broadband; it might also include pay television services, IPTV services and perhaps mobile services as well.

The industry is already heading in that direction. From a consumer point of view, you can see some advantages in just dealing with one retailer for all those services. The NBN is likely, in our view, to boost that sort of trend. I think we are likely to see expanding bundles of services being offered by retailers.

Senator GALLACHER: That would include the protection of keeping your existing numbers and all of those sorts of things?

Mr Willett : Yes, it could do. It could also include, for example, data storage services and cloud services. There is a whole range of information technology services that might be included in those sorts of bundles.

CHAIR: Are there any foreseeable regulatory issues that we should be aware of as that bundling of billing starts to occur?

Mr Willett : I think the commission is well and truly on record expressing some concerns about the availability of key content that might form an essential element of those bundles and what the implications of that is for competition in those services.

CHAIR: As in a clear breakdown of what you are getting—

Mr Willett : If you are going to have competition between retailers providing bundles, you want to make sure that all aspects of the bundles are at least competitively available and, if there are opportunities for some service providers to lock up key content, like sporting content, then that might limit competition. We have expressed some concerns about that. We are certainly monitoring that issue very closely. Otherwise, we think retail services are likely to be competitive and regulatory issues are likely to be fairly limited at the retail level.

CHAIR: You are confident that existing powers that are at your disposal will allow you to deal with any of those issues as they emerge?

Mr Willett : We are not sure about the key content issue. We are not sure that existing powers will be enough to ensure that there are not any competition issues there. But we are not in a position at this stage to say that that is definitely the case.

Mr SYMON: I have one question that relates to the wholesale broadband agreement. The time frame was changed from five years to 12 months. Do you have any comment about that?

Mr Willett : That was done at our instigation because there were concerns in the market that retailers might be in a position to, or be obliged to, enter into longer term agreements with NBN Co. prior to regulatory settings being fully established—in particular, through setting of the SAU. So we expressed our concern to NBN Co. They agreed—as an interim measure, until we have time to go through the SAU processes—to offer 12-month services. That provides retailers with the opportunity to renegotiate those contracts after regulatory settings are established.

Mr SYMON: So it is a form of protection for the early movers?

Mr Willett : That is right. It enables retailers to enter into those agreements, knowing that, if there is a change or adoption of regulatory settings that might cause them to rethink whether that deal is the deal they want to be in with NBN Co., they have the opportunity to renegotiate that agreement.

Mr SYMON: Thank you.

Mr HARTSUYKER: I am interested in the ACCC's role in price monitoring in the out years ahead and your rationale.

Mr Willett : This is one area that I think is the subject of quite deep and intensive discussions with NBN Co. The broad framework that we are looking to apply is one where there is sufficient regulatory oversight of key products that NBN Co. is disciplined by that regulation to provide all its services on reasonable terms and conditions. We think there is some work to do on the current undertaking to get to that position, but we will need to pursue those discussions first and then engage in some industry consultation on whether what we are proposing or what NBN Co. is proposing is sufficient to achieve that.

Mr HARTSUYKER: There is a lot of discussion about the continued trend for reductions in prices of telecommunications services over time, and the evidence is clear. There is also discussion of whether NBN Co. can complete the project for the budgeted cost, and there are a range of views on that. How would you view a world scene with falling prices against a project that is increasing in cost as it goes along beyond what was originally anticipated, and how would you find the middle ground there?

Mr Willett : I am not sure that I would sign up to the point in your question that assumes that costs will increase; I just do not know. But I think it is important to distinguish between network costs and other costs in service provision. I think you are right that many costs in ICT—information and communications technology—are falling, but that may not include some important physical costs like trenching, conduits and perhaps even the basic infrastructure itself. We have seen reducing network costs through the development of regulation of copper services. I think that is not so much because those costs necessarily decline as because our regulatory approach became increasingly sophisticated in assessing what those appropriate costs and prices should be. I think that process came to an end a little while ago, and even if we did not have an NBN we would not expect to see the same sorts of reductions over time in network costs. They had pretty much stabilised, I think.

We will continue to see reductions in the costs of some aspects of service provision, but they are more likely to be on the resale side of the business going forward. I think you will see more and more services being offered at lower real prices and consumers getting more for the same or for less. That does not necessarily mean that network costs themselves will come down over time. With the broad approach we are taking to NBN's undertaking, we envisage that there will be a period when they will increase utilisation of the network and constrain themselves on pricing, to the extent that they will be making losses in the early years. Those losses will be rolled forward and recovered. When those losses are recovered, if the network is successful and there is high utilisation, you would expect to see those prices come down and reflect the costs of provision going forward. What period we are talking about there is not clear.

Mr TURNBULL: Mr Willett, the NBN has put a ceiling over its pricing such that it does not seek to achieve greater than a seven per cent return on its investment—is that right?

Mr Willett : I do not think that link is right. They are proposing in the initial years to adopt pricing which broadly reflects the sort of pricing that is in the market for wholesale services at the moment. It is probably somewhat better than that and, as I said in my earlier answer, they expect to recover costs over time by increasing utilisation and by recovering revenues associated with increasing throughput and with data services. Certainly the relatively low rate of return they are seeking will help in that process. It will mean earlier recovery of their costs than would otherwise be the case and it will result in the long term lower prices than would otherwise be the case.

Mr TURNBULL: Mr Willett, you understand that there is obviously a lot of controversy about that point you just made—

Mr Willett : Yes.

Mr TURNBULL: If the NBN were to come to you and say, 'We want to increase our prices because we are not getting anything near a seven per cent return on our investment,' you really could not object to that, could you?

Mr Willett : We would have to consider that. We would be obliged to consider that. But let me say that it would not necessarily be the case that we would allow prices to increase to ensure they earn a return regardless of the utilisation.

Mr TURNBULL: If they have got x billion dollars invested and they are only getting three per cent return and they say that that is just ridiculously small and they need to increase prices across the board to get a six per cent return—which is still ridiculously small for an asset of this kind—what basis would you have for knocking them back?

Mr Willett : I do not want to prejudge what the commission might do in that sort of circumstance, but what they would envisage I think is the network not being as useful as was originally envisaged, which would in turn mean that it is not as valuable as the cost put into it. So it might mean a write-down in the valuation of the network. That would be one way of dealing with that particular issue. I am not saying that that would be the approach we would take, but that is one possibility in a regulatory context.

Mr TURNBULL: Is this a sort of 'goldplating issue' that you see with electricity utilities?

Mr Willett : It is an economic depreciation issue.

Mr TURNBULL: So you might say to them, 'Well, you have chosen to build a $40 billion or $50 billion network. We actually think that it is only worth $20 billion,' and so if it is written down to $20 billion and you are getting a seven per cent return—

Mr Willett : That is a possible regulatory approach. I am not suggesting that that is the approach we would take, but all I am saying is that the scenario you outlined would not necessarily lead you to a particular outcome.

Mr TURNBULL: Just exploring that, this is the very the most expensive way to get very fast broadband to the premises—I do not think that there is any doubt about that; its supporters say that it is also the best way and worth every penny being spent of course. Given that it is the most expensive way to go about it, if there is a risk that the regulator could say, 'You have invested in the most expensive network and we are now, ex post facto, after you have made the investment, concluding that you have invested too much money,' that is a very big risk for the NBN Co., isn't it?

Mr Willett : It is, which is why there is a strong incentive for them to submit an undertaking which will provide the framework for how those prices will be set over the 30-year period.

Mr TURNBULL: Sorry, which undertaking?

Mr Willett : This is the undertaking we have before us.

Mr TURNBULL: This is the SAU.

Mr Willett : That is right. It does not envisage the sort of scenario that you have outlined, which is the important point. If we accept that undertaking, then what you have outlined is not going to happen and that is the importance of this—

Mr TURNBULL: Why would that not happen?

Mr Willett : Because they are committing to certain prices as benchmark services and they are committing to limiting price increases for those services over that period of time.

Mr TURNBULL: Then the risk that they do not reach the seven per cent is entirely their risk.

Mr Willett : Their risk. That is right.

CHAIR: Are there further questions?

Mr HUSIC: Given my other colleagues have finished their questions, I just wanted to quickly ask something about the NBN. So far we have already seen the huge productivity benefits that come about as a result of businesses and governments using the internet, and it is expected that this will increase in time. One of the issues I have been concerned with in particular with people trying to access the NBN, especially into the future, is about pricing around hardware and software. We joked about this and talked about it flippantly in the lead-in to your appearance today. The US Department of Justice has been very focused on companies effectively working together to drive up prices in the case of Apple over e-books. Here in Australia firms are required to pay almost double or triple. In one case a firm told me they were charged $10,000 more simply for downloading software. At what point will the ACCC consider pursuing this matter, given that consumers rightly feel that they have been unfairly slugged for the prices that they are paying, particularly, as I mentioned before, on software?

Mr Willett : Let me start with what is happening in the US—or what we understand to be happening in the US. I might say at the outset that at this stage I am only relying on media reporting, as you probably are as well. The allegations there, as I understand them, are allegations of cartel conduct. That is extremely serious conduct under the act. It now involves the risk of time in jail. If there were any evidence of that sort of conduct in Australia we would be very keen to pursue it. Indeed, we have close relations with US authorities and I expect we will be in close contact with them very soon to test whether there might be similar actions taken in Australia appropriately, and if there is a case for that we will be sure to pursue it.

As to whether Australians are paying too much for particular products compared to consumers overseas, that is a very broad question. We are seeing that playing out in online retailing at the moment. And we all expect to see that sort of scenario playing out in a whole range of industries. Over time, information technology will mean it will be harder and harder for particular service providers to maintain higher prices for products in Australia compared to overseas. I think that model that we have seen in the past in a number of services has been exacerbated by the value of the dollar, and that has made those comparisons even more stark. I think those sort of practices will be harder and harder to sustain. But certainly the commission will be pretty keen to ensure that those sort of differences are not supported by contraventions of the act.

Mr HUSIC: Thank you.

CHAIR: There are no further questions today. We may see you again; we may not. Thank you for the work you have done over the last six months in particular and for keeping the committee informed. I do not think you have taken any questions on notice.

Mr Willett : No, I do not think we have taken anything away, which will please my colleagues no end.

CHAIR: To disappoint you, there are some committee members are not here who may feed in some questions. If they do, please get them back by 27 April.

Mr Willett : Will do.

CHAIR: We can then consider them for our next report. Thank you very much. We appreciate your time.

Mr Willett : Thank you, Chair.

Resolved:

That this committee authorises publication, including publication on the parliamentary database, of the transcript of the evidence given before it at public hearing this day.

Committee adjourned at 16:54