Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
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 —Welcome. The committee has received your submissions and numbered them Nos and 12 and 23. Do you wish to make any amendments or alterations to your submissions?

Mr Clapperton —No.

Mr Dooley —No, thank you.

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

Mr Clapperton —If the chair pleases.

CHAIR —Mr Dooley, will you be making an opening statement?

Mr Dooley —A short one.

CHAIR —Okay. Mr Clapperton, we will start with you.

Mr Clapperton —In opening, I would first of all like to thank the committee for this opportunity to address it today on this issue which is of extreme importance to the development and maintenance of competition in the telecommunications markets in Australia, in our view. I must confess, I have been in this game for some time and never thought the day would come where I would be sitting in front of a government committee addressing it on monopoly in the telecommunications industry and Telstra would be agreeing with me. However, this has in fact come to pass.

The provisions of the NBN access bill, which are the subject of our submission, will in our view establish a de facto monopoly over the supply of wholesale fixed-line telecommunications services in this country. This will occur not only to the detriment of the existing players in the wholesale markets and their customers, many of whom acquire services from companies such as PIPE and others that they simply cannot acquire elsewhere, but to the detriment of competition in the retail markets at the end of the day. If the legislation is enacted in substantially its current form it will have the effect of completely disincentivising investment in fixed-line telecommunications infrastructure in Australia. Retailers—those who supply to the end user—will have no-one from whom they can obtain those services but NBN Co. In our submission, this is not going to be in the long-term interests of end users or of the development of competition in the telecommunications industry in general.

Mr Dooley —I am representing Amcom, which is a telecommunications company based in Perth. It has been in this business for over 10 years and already has a fibre network that is based in the CBD and metro areas of Perth, Adelaide, Alice Springs and Darwin, its largest network being in Perth, where it has about 1,600 kilometres of fibre installed. Its customer base is predominantly corporate and government; that accounts for about 75 per cent of the customers on its fibre network, with the remaining 25 per cent being sold as wholesale access to other carriers.

Amcom’s primary concern and the basis for its submission is that there is quite a high level of uncertainty surrounding the cherry-picking provisions of the proposed legislation. Amcom wants to ensure the meaning of the cherry-picking provisions and how they will affect Amcom and similar companies in the future. We concur with quite a few of the views that PIPE Networks has expressed and that have been briefly outlined by Mr Clapperton. Another point Amcom feels needs to be taken into account in relation to the damage to competition is that if there is a disincentive for existing network operators to roll out or expand their current network in the lead-up to the deployment of the NBN, this will have another consequence in that Telstra will have a very significant advantage in this lead-up period, which could be up to eight years. We would not like to see that occur.

Senator FISHER —My question is to Mr Clapperton in particular. Can you expand a bit more on how you think the proposed level playing field provisions will impact on your current business model given that, as I understand it, your business is already reasonably heavily involved in building and operating what you might call advanced fibre networks? Can you expand a bit more on why you think that will not be good for you?

Mr Clapperton —At the moment, PIPE has a fairly significant fibre network, the exact details of which are in the confidential version of our submission to the committee. Also mentioned in our submission is the fact that we are currently doing a dramatic expansion of that network in order to service a new customer, Vodafone Hutchison Australia, who of course is one of the major players in the Australian wireless and mobile industry.

That expansion of our network—this new, significant amount of fibre—will be installed after November of last year, that is, after the cut-off date for the level playing field amendments. Even though we were contracted to perform this expansion before the bill was introduced, because it will be installed after the magic date in November 2010, it will, on the current bill, be subject to the level-playing-field arrangements which call into question our ability to make a commercial return from that investment. Similarly it will impact on our ability to make future expansions to our network. Under section 141 as it currently exists if our fibre runs past the front door of particular premises and we install another 10 or 20 metres of fibre to connect a new building into our existing network that new building will also be caught by the level-playing-field provision. So, whether we are installing another 10 metres or another 10 kilometres of fibre, it seems to us that any expansion at all past, I think, 26 November 2010 will be caught by the level-playing-field arrangements. Potentially, depending on the exact form in which the amendments—which are foreshadowed in the government’s letter to NBN Co. of December last year—are enacted in the worst case scenario it might require PIPE to structurally separate.

Senator FISHER —Do you think you can live with the regime contemplated, with some measures to rectify that shortcoming, or is it part and parcel of the regime that the government is contemplating?

Mr Clapperton —Our primary submission is that the regime is, essentially, overkill and that the underlying policy objectives could be achieved by less harmful means.

Senator FISHER —For example?

Mr Clapperton —For example, a maintenance or continuation of the universal service obligation levy or something very much like it or, as the opposition have advocated recently in the lower house, a subsidy provided by the government from the budget.

Senator FISHER —How would the latter help you?

Mr Clapperton —It would not help us except to the extent that it would make the anti-cherry-picking provisions that we are complaining about unnecessary.

Senator FISHER —Is the proposition that the ACCC gets involved in determining whether or not a layer 2 bitstream is a declared service an appropriate regulatory requirement or a bit heavy-handed?

Mr Clapperton —Historically it has been the role of the ACCC to make the call as to whether a service should be a declared service or not after balancing up the net effect on competition and what would be in the long-term interests of end users. However, in this case, the bill, essentially, forces the ACCC’s hand. It requires that the ACCC, as soon as possible, declare that the layer 2 bitstream service is a declared service. Although we have not expressed a view on this particular issue in the submission, I think, that, on balance, it is probably more appropriate that the ACCC make that decision. If, in fact, it is going to be pro-competitive and in the long-term interests of end users then the ACCC will make that decision in the way the government intends after, of course, having afforded all the interested parties an opportunity to be heard on the matter and make submissions.

Mr Clapperton —Mr Dooley might have something to add on that point.

Mr Dooley —The ACCC has long-running, standard procedures for public inquiries on whether to declare a service. As Mr Clapperton pointed out, it is based upon the long-term interests of end users and whether or not it will promote competition. That does seem appropriate for the ACCC’s normal procedures to be utilised.

Senator FISHER —To the extent that the proposed legislation is going to be damaging, are you, Mr Clapperton, suggesting that it could effectively make the wholesale arm of your business redundant or worse?

Mr Clapperton —Redundant is a strong word bearing in mind that the bill is still in a fairly early stage. I understand that the government intend to introduce amendments to clarify the scope of section 141, and we have had some private consultations with the Department of Broadband, Communications and the Digital Economy on those types of issues. I think it is safe to say that it could have a potentially quite serious effect on the wholesale arm of our business.

I guess one of the secondary submissions we make is that the anti-cherry-picking regime ought not to apply to companies such as PIPE that have a focus on backhaul and transmission and corporate and government markets as opposed to a more mass market NBN style network. If I can draw your attention to page 14 of the explanatory memorandum, which states:

In summary, these requirements will mean that mass market fixed-line access networks …

will be subject to the relevant restrictions. PIPE’s network and the networks of most other corporate- and government-targeting networks are in no way, shape or form mass market networks. For that reason it is one of our secondary submissions that the regime ought not to apply.

Senator FISHER —Mr Dooley, do you have anything to add to that?

Mr Dooley —The network of Amcom targets corporate and government clients. As Amcom owns its own pipe it differs with PIPE Networks in that extent to some degree. Where PIPE will use Telstra’s pit and pipe, as will NBN Co., Amcom installs its own pipes through the streets. So it runs along streets and will carve off from the street network into particular buildings where they have clients. NBN Co. when that is installed will use Telstra’s ubiquitous pipe network and as such will go into all buildings.

The anti-cherry-picking requirements, therefore, are very problematic for Amcom. If any extensions are made to service new clients or to service the existing client base when they enter into a new building our uncertainty is whether (a) the extension will be caught by the cherry-picking provisions, (b) the entire network will be caught or (c)—and that is what we hope—it will not be caught at all because the network existed prior to 25 November 2010. We are seeking clarification of that. If either (a) or (b) is the intention of the legislation, we would like it reeled in to some extent so that it only applies to significant new rollouts.

Senator FISHER —And how would you define that?

Mr Dooley —We chose not to try to define ‘significant’. We do consider it would apply to any greenfields rollouts for new developments, particularly if they are residential. We basically have left it up to the minister to define ‘significant’ with input from the ACCC and ACMA. So, from our point of view, if an existing network has some kind of creep in its size then that should not be captured by this legislation whereas, if an existing network decides to go into a large-scale competition with NBN prior to the NBN deployment, then that should be caught.

Senator FISHER —But that could nonetheless be an extension.

Mr Dooley —That is right. We have not gone so far as to try to say no extensions to an existing network should ever be caught, because we consider that that would be against the intention of the legislation. We understand that the cherry-picking legislation is to make NBN commercial and to prevent large-scale rollouts taking away the commercial objectives of the NBN. We consider that small-scale rollouts should be permitted and not be caught by the cherry-picking provisions.

Senator FISHER —So it is just a matter of where you draw the line and how you define it?

Mr Dooley —Exactly.

Senator FISHER —To the extent that the legislation effectively discourages competition in the wholesale sector but encourages it in the retail sector, what do you think of that tension?

Mr Clapperton —I think that ultimately it will work against the long-term interests of the end users. It will essentially be the re-establishment of a monopoly in the supply of telecommunications services in Australia but, instead of the competitors resupplying the services of Telstra, the competitors, including Telstra, will be resupplying the services of NBN Co. Of course there will be no other alternative to NBN Co., which essentially means if NBN Co. does not supply it, it is not available. If NBN charges it, you have to pay it. There will be no other viable alternatives if the bill is introduced in substantially its current form.

Particularly given the vibrant and competitive market that has emerged in wholesale telecommunications markets for fixed line services in metropolitan areas, and indeed the corporate and government markets especially with respect to the particular specialised products demanded and indeed required by certain segments of those markets, such as very low latency dark fibre services, which I understand NBN Co. will not be supplying but are essentially a requirement when you are talking about things like the Australian Stock Exchange’s network that they use to connect with their various brokerage houses. It runs on PIPE Networks’ dark fibre because low latency is absolutely critical in applications like that. Millions of dollars can be made or lost based on a couple of milliseconds difference in the speed of the service. We feel that even after the full roll-out of NBN there will still be substantial segments of the market for whom either NBN Co. services will be unsuitable or, for reasons of redundancy, that is not putting all of their eggs in the one basket, they will want to acquire services from multiple networks. The effect of the bill in its current form is to essentially stall the roll-out of existing networks and prevent the deployment of new networks in the future.

Senator FISHER —Did you say that NBN Co. will not provide what you called low latency dark fibre services?

Mr Clapperton —Dark fibre is a layer one service. It is our understanding that NBN Co. will only be supplying layer two services at this point in time. In the interests of time, I would be happy to elaborate on the difference in a supplemental submission.

Senator FISHER —I understand how you get to that point now, thank you.

CHAIR —Mr Clapperton, you are the legal counsel for PIPE Networks. Is that an in-house position?

Mr Clapperton —Yes.

CHAIR —You say in your submission that there is a vibrant and competitive market—is that the market for fibre?

Mr Clapperton —Yes, especially in relation to corporate and government markets and especially in metropolitan areas, and especially in the CBDs and inner suburbs in many cities.

CHAIR —Would you still describe that market as representing a market failure, where other regional areas of Australia do not have access to broadband? Is that a market failure?

Mr Clapperton —It is probably that those markets are a natural monopoly. As we say in our submission, there are many areas in the country where it is not economically viable, perhaps in the absence of massive subsidies such as are being provided to NBN Co., for new entry into those markets. We accept that there have been market failures in some areas; we do not see that as a reason essentially to abolish competition in areas which are not subject to such market failure.

CHAIR —So your company has got no plans to expand into regional areas?

Mr Clapperton —We are, to an extent, expanding into regional areas. The Vodafone-Hutchison rollout, for example, is going to involve a decent amount of deployment of fibre into regional areas. I would be pleased to elaborate, subsequently in writing, on exactly where. For confidentiality reasons, I cannot say where now. But the simple reality is that we will build our network to wherever we have customers. Vodafone-Hutchison Australia have particular requirements, many of which are outside the cities and, because they are willing to pay for it, we are willing to build our network there. But what we will not do and what, with respect, no rational competitor in the telecommunications market will do is build a network into an area where it will not return a profit.

CHAIR —Your customers are the retailers, aren’t they?

Mr Clapperton —Our customers are other carriers and telecommunications providers, so wholesalers. We do have some retail customers in the sense that we sell directly to many government departments and large corporations.

CHAIR —So if those wholesalers and retailers that you supply do not set up in Armidale and they do not set up in Wagga, you will not be there. That is the reality, isn’t it?

Mr Clapperton —If someone in Armidale or Wagga is willing to pay what it will cost us to build to Armidale or Wagga we will build to Armidale or Wagga.

CHAIR —But I think your previous response was that it has to be commercially viable. Would it be commercially viable?

Mr Clapperton —Based on the existing demand in those areas, I suspect not.

CHAIR —Communities in Armidale and Wagga and other regional centres have to wait until the market determines commercial viability. Is that correct?

Mr Clapperton —Yes, or until the government provides sufficient incentives for someone, whether it be the NBN Co. or PIPE or anyone else, to deliver services in those uncommercial areas.

CHAIR —You indicated earlier that you see cherry picking as a problem. Do you agree with the cherry-picking rules in principle, but your problem is in relation to the detail?

Mr Clapperton —I would not say that we agree in principle with the anti cherry-picking rules. Our primary submission is that they are overkill and that the government’s objectives, such as achieving national uniform wholesale pricing for wholesale customers of NBN Co., could be obtained by less harmful means such as, as I mentioned earlier, a continuation or an adaptation of the universal service obligation regime, which currently subsidises the supply of Telstra for basic telecommunications services in uncommercial areas or, as the opposition has recently suggested, by a direct government subsidy.

CHAIR —More direct action. Have you raised these issues with the department?

Mr Clapperton —We have had consultations with the department. They do not set policy and the issue of whether or not this cherry-picking regime is a good idea is a question of policy. So we have not raised that issue with the department.

CHAIR —You have not raised that with the department?

Mr Clapperton —What we have raised is the wording of section 141 and the significant uncertainties that exist within it, most of which are addressed in our secondary submissions in our submission to the committee.

CHAIR —But you should understand how government works. You do understand that departments provide policy advice to government, don’t you?

Mr Clapperton —We understand that.

CHAIR —Why would you not be raising these issues in terms of policy development?

Mr Clapperton —With respect, when the bill containing these provisions was introduced, it did appear that it had gone past the stage of trying to influence government policy via the department. Essentially, we felt that the appropriate forum to make our views on it as a policy issue known is here and now.

CHAIR —With respect, that may have been a mistake. Surely, you have to engage in the interests of your company and those of your shareholders as widely as you possibly can and, given that the department is an advisory body to the government, you would be raising those issues with them as well?

Mr Clapperton —I accept what you say, Chair. If the department is going to be willing to enter into those issues with us we will certainly talk to them or anyone else who is willing to listen.

CHAIR —You say there is a vibrant and competitive market in Australia. Why is the cost of broadband supply so high in Australia compared to in the rest of the world?

Mr Clapperton —There are a number of factors, one of which being that Australia is essentially an island separated by very large oceans from the rest of the internet. One of the key reasons that internet access in Australia is expensive is because it requires the use of very expensive submarine cable systems to get internet access from Australia to anywhere else in the world. That is one of the reasons why a couple of years ago PIPE Networks invested over $200 million in building an undersea fibre-optic telecommunications system from Sydney to Guam via Papua New Guinea, with the opportunity for further expansion, which—as I believe Mr Bevan Slattery from NEXTDC, the former CEO of PIPE Networks, elaborates on in his submission—has had the effect of driving down significantly the cost of international internet access in this country.

CHAIR —One of the issues that has been consistently raised in relation to NBN by you is this issue of overbuild. Given that there is an economy of scale to rule out the NBN, as is indicated, given that the business plan deals with that, isn’t your position just that you do not want a competitor? That is a reasonable position, but I just think we need to get it in context. If that is the case, then that should be on the record.

Mr Clapperton —Certainly. Our position is not that we do not want a new competitor. We welcome competition from NBN Co. We feel that our products and services are sufficiently different from what NBN is going to be offering that we will be happily able to coexist with NBN Co. What we do not want to see happen is that the anti-cherry-picking regime in effect nobbles us and prevents us from expanding or upgrading our network in the future so as to be competing against NBN Co. with one hand tied behind our backs.

CHAIR —Okay. Mr Dooley, would you also agree that there is a market failure in relation to the supply of fibre-optic networks around Australia?

Mr Dooley —Yes. A lot of that has to do with the size of Australia, as Mr Clapperton pointed out, and that it costs vast amounts of money to get to regional areas. As a result of that, the regional areas are definitely coming into second place in comparison to CBD and metro. The cost of backhaul between regional areas and the capital cities is one of the most significant reasons that a lot of other telcos apart from Telstra have not really got any networks in those places. Amcom has quite recently put quite a bit of network into places like Alice Springs and Darwin as a result of getting new customers there, but also with the knowledge that the black spot for broadband backhaul will be covered off by a new rollout that Nextgen Networks is doing on behalf of the government. So, yes, from our point of view it is insufficient backhaul competition that has resulted in regional areas having very poor broadband services.

CHAIR —Have you got concerns about the cherry-picking provisions?

Mr Dooley —We have concerns. We are not absolutely against it; we understand it is necessary for NBN to have some level of protection in that regard. Our concern is what the extent of the anti-cherry-picking provisions is going to be. As I was saying earlier, we would like certainty on that and also a carve-out from the anti-cherry-picking provisions when they apply to existing networks that are doing insignificant extensions to existing networks.

CHAIR —Mr Dooley, has Amcom had discussions with the department on this detail?

Mr Dooley —Not that I am aware of and my expectation is that they probably have not. One of the problems with relatively small companies is that people sometimes unfortunately work on their day-to-day jobs and do not realise the bigger picture.

CHAIR —You are not an in-house lawyer; you are representing Amcom Telecom, aren’t you?

Mr Dooley —That is right.

CHAIR —I may come back a bit later, but we will now go to Senator Troeth.

Senator TROETH —Good morning, Mr Dooley. I wanted to ask you two questions. Can you tell us whether you think the anti-cherry-picking regime is necessary?

Mr Dooley —I think it is necessary if there is a large-scale rollout of a fixed network that will occur in advance of the NBN—if a telecommunications company wanted to install a network where they were aware that they would be able to make a lot of money and they would be able to get in first and prevent NBN from coming in later and obtaining a sufficient customer base to operate commercially. That in our view is fair enough.

Senator TROETH —I gather you have some criticisms of the anti-cherry-picking regimes that are in the bill. How would you make them better?

Mr Dooley —Our criticisms stem not so much from what is currently in there but from what the industry thinks it really means. As it is currently drafted, networks such as Amcom’s will not be caught by the bill because their network did pre-exist. In the current drafting, our reading of it is that even if they do significant extensions they will still not be caught, but we believe that is not the intention. We believe the intention is that extensions will be caught and that the bill will be amended to actually cover extensions to existing networks. What was your question again on that point?

Senator TROETH —If you were the lawmaker and it was pointed out to you that there were deficiencies in the present anti-cherry-picking provisions, how would you make it better?

Mr Dooley —Firstly, by clarifying exactly what the intention is by stating whether extensions will be caught within the ambit of a superfast broadband that is subject to regulation. Secondly, if that is the case, by saying that extensions that are not significant will not be caught within the ambit so that networks such as PIPE Networks or Amcom, which pre-existed 25 November but are naturally extending their networks but not in a significant manner that will impact negatively the NBN, are allowed to continue in that manner.

Senator TROETH —Thank you.

CHAIR —I think we have time for one more question.

Senator FISHER —I have a question, Chair. Mr Clapperton, what opportunity do you think you had to raise with the department the issues that concern you, particularly in respect of cherry picking, prior to the relevant bills being introduced in the House?

Mr Clapperton —I do not say this to in any way criticise the department because I am given to understand that their hands were largely tied by the government on this. We were aware that these bills were coming. We did make representations to the department that we would very much like to see exposure drafts of those bills so that we would have an opportunity to make our views known before the bills were introduced. For whatever reason—and I will decline to speculate on what those reasons might be—we found out what was in those bills only after they were introduced in the lower house.

Senator FISHER —And at that point in time you decided—

CHAIR —Senator Fisher, we have run out of time. I thank Mr Clapperton and Mr Dooley for appearing at such short notice. We appreciate your help this morning and we appreciate your attendance. Thank you.

[9.40 am]