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National Broadband Network Companies Bill 2010; Telecommunications Legislation Amendment (National Broadband Network Measures—Access Arrangements) Bill 2011

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

Mr Cosgrave —No, thank you. We are here to assist the committee in whatever way we can.

CHAIR —Okay.

Senator BIRMINGHAM —Thank you very much for your time, gentlemen. We hope for and trust in your assistance, as always. I will ask at the outset whether you have had an opportunity to review some of the submissions and the proposed amendments to this legislation.

Mr Cosgrave —In general terms that is correct. We are certainly familiar with the legislation and the proposed amendments and have had a quick look at some of the more major submissions.

Senator BIRMINGHAM —We have had discussions with Optus, for example, about how potential amendments could impact on the means by which agreements between NBN Co. and retail service providers are struck, how they are struck and what information is publicly released during that process. Have you had an opportunity to review those amendments in particular?

Mr Cosgrave —No. Optus has not shared those with us. I have seen some reference to them in a summary of the evidence Optus gave this morning, but I have not actually seen the Optus amendments.

Senator BIRMINGHAM —That being the case, does the ACCC believe that the current legislative requirements in the legislation are adequate to ensure that there is adequate transparency of different arrangements that are struck between NBN Co. and retail service providers?

Mr Cosgrave —Speaking in the broadest of terms, we do think that the provisions strike a balance between the general obligation that NBN Co. has to supply services on a non-discriminatory basis and the flexibility to discriminate in circumstances in which discrimination may aid efficiency. That is in the broadest of terms, but I suspect you might want to drill down on that a little bit.

Senator BIRMINGHAM —Are there any particular ways you think those broad objectives could be better met than are proposed in the legislation?

Mr Cosgrave —None immediately come to mind, but as we work through them there may be matters of detail that we can reflect upon.

Senator BIRMINGHAM —Perhaps I can go to a particular issue that has been raised, and that is the question of whether volume should be a consideration of discounted rates or the like that may be struck between NBN Co. and RSPs. Does the ACCC have an opinion, have you been asked for any views or have you undertaken any research on whether volume of sales is a reasonable basis on which discrimination can occur?

Mr Cosgrave —Perhaps I can start at a conceptual level around the issue of price discrimination. At its broadest level, it has been the subject of much debate over a number of decades in relation to the Competition and Consumer Act. Obviously volume discounting is a subset of price discrimination more generally. You would be aware that at one time some price discrimination actually fell foul of the Trade Practices Act, the predecessor of the Competition and Consumer Act. That provision was ultimately withdrawn as a consequence of the Hilmer review in the 1990s, when it was recognised from an economic perspective that at the broadest level price discrimination can, to pick up a term used in the act, aid efficiency. So I think a competition regulator would generally take the position that at a conceptual level price discrimination can aid efficiency.

When you go back in this field to some of the access pricing principles the ACCC put out in the early days of the previous regulatory regime, which commenced in 1997, there is a fairly general reflection of that orthodox principle and a fairly general reflection that volume discounts might be something to look at. That said, during the course of the ACCC’s role in setting prices during that regime, no party sought to convince us that in setting regulated prices we should seek to differentiate on the basis of volume, and nor have we done so over the 13 or 14 years in which we have had those powers.

Broadly I think we would say, conceptually, we might be able to see where volume discounts could be something you would consider. I do not think we would underestimate the significant information requirements in convincing us that such discounts aided efficiency or did not have an impact on downstream retail markets. I am differentiating between the conceptual and thinking about the regime that is proposed here, where proposed arrangements would be registered with us and you would presume we would look at them fairly closely, particularly in the early days of the regime. We would want to see some fairly convincing information that suggested to us that such volume discounts did aid efficiency. I should also add that there are other hoops in terms of volume discounts that we are aware of that are contemplated by the legislation. I think they were referred to by the previous witness to the extent that any volume discount has to be consistent with what is put to us by NBN Co. in a special access undertaking which would need to be approved by us.

Senator BIRMINGHAM —Is there an example you can give us from that conceptual space of how a volume discount may actually be justified, how it may provide the efficiency that would warrant approval and justification of it?

Mr Cosgrave —At the conceptual level we would probably think in terms of an overall competition analysis or efficiency where the volume discount was allied to other factors. We have undertaken, for purposes of preparing ourselves for whatever regime comes, a comparative analysis of some external regimes, domestically and internationally, and have also examined our past practices not only in this sector but across sectors. We are struggling to find an example where we have effectively ticked off on a volume discount by itself. I guess we are saying we would expect in the event that such arrangements were put to us that there would be a fairly high hurdle for people to convince us that they would aid efficiency.

Senator BIRMINGHAM —Can I shift to greenfield sites and how they are treated by the legislation. Is there a competition benefit in allowing only NBN Co. to be the wholesale provider in greenfield sites?

Mr Cosgrave —I think that is a policy decision that was taken; I do not know that it is an issue we have specifically focussed on from a competition perspective.

Senator BIRMINGHAM —Are you able to focus on it at this point in time, Mr Cosgrave?

Mr Cosgrave —It comes back to issues around—and this comes up in the so-called overbuild protection provisions—the extent to which you perceive the fixed access network as a natural monopoly. As I say, a policy decision has been taken in relation to greenfield estates. I am not sure the commission has much to add to what I have already said, that we have not focussed on it in depth from a competition perspective. We certainly have made comments around the extent to which we think of the fixed access network as a natural monopoly. That, in turn, influences the extent to which you think various network investments will be efficient investments. That is a broader question.

Senator BIRMINGHAM —Has the ACCC looked at all at the situation in Canberra and the relationship between TransACT and NBN Co. where there may be an overlap of services or how this legislation may impede on TransACT continuing even with its existing business model?

Mr Cosgrave —TransACT has not made any representations to us in relation to NBN Co.

Senator BIRMINGHAM —And you have not been asked for any advice by the government in relation to those issues?

Mr Cosgrave —No.

Senator BIRMINGHAM —I will turn to one other issue that has been canvassed today and is reflected in the submissions, particularly in Telstra’s submission. Telstra highlighted issues around the definition of carriers or carriage service providers and the potential for allegedly open definitions there. It seems many different types of entities have already met or could meet to see a proliferation of potential customers of NBN Co. who are not onsellers of a product to anyone else. Would the ACCC have a concern if NBN Co. started effectively providing a retail type service as a result of this to large banks, large supermarkets, library services, councils or the like?

Mr Cosgrave —There a couple of things about that. I think the first half of your question was a commentary in relation to carriers and carriage service providers. I am not aware of those definitions having been changed from what they are and have been for some time under current legislation. In relation to the second part of your question, where I think you are talking about what broadly I hear described occasionally as mission creep or scope creep, the ACCC has already put a couple of things on the record in relation to that, most specifically on the advice we gave to the government when requested on NBN Co.’s points of interconnection. We reflected some fairly fundamental regulatory orthodoxy there where we said that, firstly, regulation should generally only extend where there is an access problem, an economic bottleneck. It is the fixed access network that we consider as being the enduring bottleneck in this space. That underpins our approach to where regulation should occur. Secondly, we did reflect, broadly, a concern that the model that was proposed by NBN Co. in relation to points of interconnection had the potential to engage in mission creep. Following that through, our view is that NBN Co.’s mission is and should be around where an economic bottleneck exists. That is a longwinded way of saying that there clearly would be concerns in an expansion beyond being a wholesale-only provider.

Senator BIRMINGHAM —Clarifying the first half of the question that I asked, working off Telstra’s submission, they highlighted the current types of companies and entities that I mentioned in that question as companies that already meet the definition of a carriage service provider.

Mr Cosgrave —But, arguably, that can be an increase in competition. If people are entering the market to become carriers, that is an increase in competition and you would expect, in an NBN environment, there to be a number of new entrants into that space.

Senator BIRMINGHAM —If Woolworths meet this definition because they are a mobile reseller who find it profitable and viable to get their own stores, outlets and offices connected by NBN Co. but not to onsell the fixed line service then that would effectively make them a retail customer by clever means of the legislation. Would it not be preferable to have a clear legislative requirement that NBN Co. sell its products to customers who have an intention of onselling them?

Mr Cosgrave —I would accept that there are always issues at the margin about whether the provision of services reflects the underlying policy intent of wholesale only. I do not know that it is appropriate for us to comment on the best mechanism for that. What we are saying is: ‘Yes, we have a concern if NBN Co. moves beyond what we perceive as its mandate and what we perceive as its mandate is based on fairly traditional competition regulator grounds.’ The best way to ensure it does not do that is really a matter for policymakers, not for us.

Senator LUDLAM —This might go some way down the track that Senator Birmingham was asking about. He was specifically asking about volume discounts, but I am more interested in whether you have done any formal or informal investigation into a mechanism for NBN Co. to offer price discounts reflecting whatever efficiencies there are. Have you been tasked with coming up with some kind of mechanism via which NBN Co. might make those judgments or against which it might be judged?

Mr Cosgrave —The legislation contemplates the provision of guidance by the ACCC. Clearly this is a matter NBN Co. and its prospective customers are all going to be intensely interested in. It is highly likely that we would provide such guidance. We have already started a process of interaction with NBN Co. to, in the first instance, understand their perspectives on it. I have already indicated that we have started a bit of a comparative analysis—not simply around price discrimination but how non-discrimination provisions generally are handled internationally. We would expect, consistent with our ordinary practice, that before we finalised any guidelines, we would put them out for public comment. Given the interest in the issue before this committee, we would expect to get quite some comment.

Senator LUDLAM —Is it the intention that such decisions made by NBN Co. would be disputable by third parties—if someone thinks they have made the wrong call on an efficiency or somebody is getting an unfair discount?

Mr Cosgrave —Yes.

Senator LUDLAM —Those disputes are going to land on your doorstep?

Mr Cosgrave —Yes, as I understand the current state of the legislation, there is a requirement that agreements that involve provisions which depart from either the NBN Co. standard form of access agreement or their special access undertaking would need to be registered with the commission. The commission is required to keep a register of them—no more than that—but clearly the commission would also undertake some scrutiny based on its own notion of those provisions. We would think that actually places some incentives, on NBN Co. in particular, in the early days of any legislative regime, to be quite clear about the commission’s views on such matters before it enters any such contractual arrangements.

Senator LUDLAM —You have already started giving this some fairly serious thought. Did the government ask you to do that or did NBN Co. ask you to do that?

Mr Cosgrave —I do not think either of them specifically asked us to do it. I mean, it was clearly a central tenet of the overall policy. It has been clear from a very early stage that the commission was highly likely to be tasked with a role in relation to non-discrimination provisions, and clearly we have, whatever the final shape of that role, started the preparatory work to arm ourselves to perform that function.

Senator LUDLAM —Haven’t we just opened up a very slippery slope here? We have said that it must be non-discriminatory, but you can discriminate on the basis of this unformed, undefined concept called efficiency. We may have bought ourselves an enormous amount of work and, potentially, alarm and despondency. Why don’t we just have NBN Co. offer the same service to all comers, which is what most people thought would happen?

Mr Cosgrave —I guess because it is not an unfamiliar concept in legislation. We already have the concept of price discrimination that aids efficiencies already in the Competition and Consumer Act, in the general access regime in part IIIA.

Senator LUDLAM —Are we going to wind up with a Coles and Woolworths retailer situation in the telecommunications space? It does not seem to working out so well elsewhere.

Mr Cosgrave —Is that a comment or a question, Senator?

Senator LUDLAM —You could take it as either.

Mr Cosgrave —I will take it as a comment, because I am not sure that I see a question there.

Senator LUDLAM —Fair enough. Have you taken any advice, or what kind of view have you formed, around how you measure efficiency—efficiency for who? Where are we going to find that? The question that I put right at the beginning of the day, it might have been to Telstra or to Optus, was: in theory, it is more efficient for NBN Co. to have to deal with one large RSP than 50 little ones—is that an efficiency that would give you a discount?

Mr Cosgrave —There are a couple of things to say about that. The first I have said already, which is that concepts around ‘aids efficiency’ are not unfamiliar to the ACCC in terms of access. Secondly, we have already considered those concepts in a number of other sectors such as aviation and railways—albeit I suspect not with the degree of scrutiny that we may get in this sector, so I would not suggest that our analysis in those sectors is as highly developed. What I would expect is that the ACCC will approach the concept of efficiency in the existing legislation in the same way that it does in all its regulatory roles, which is that it will consider efficiency as an economic concept and not a more loosely defined concept. The impact of that is that it is unlikely that we will be looking at what individual parties might see as the efficiencies for their individual business cases as a determinant of whether a particular arrangement aids efficiency. In other words, we are likely to do a substantial competition analysis and we are likely to be highly cognisant and cautious about the impact of any arrangement upon competition in any downstream market.

Senator LUDLAM —Are you not balancing something very difficult there, and I presume that this is what you do for living, but don’t efficiencies accrue to economies of scale and favour large players over small ones?

Mr Cosgrave —You are right, that is what we do for a living. But, again, it is not dissimilar to the sort of weighing exercise you have to do under the statutory test for our current access regime, which requires us to balance up to the promotion of competition with the efficient use of and investment in infrastructure. There is absolutely a weighing-up exercise and it is precisely the sort of exercise that you would expect us to need to follow in this instance. It is exactly why you would expect us to consult broadly around the guidance we give industry on this.

Senator LUDLAM —The more we pursue this line of questioning, the more Soviet style command economies start to sound attractive. I will leave it there.

Senator FISHER —Why should NBN Co. be exempt from scrutiny by the Standing Committee on Public Works?

Mr Cosgrave —We don’t have a view on that.

Senator FISHER —Are you familiar with the basis upon which the minister wrote to the Governor-General seeking that exemption?

Mr Cosgrave —No.

Senator FISHER —Would it be a surprise for you to learn that one of the bases, if not the only basis—I am trying to recollect because I do not have a copy of the letter with me—was that NBN Co. would be in competition with other providers?

Mr Cosgrave —I have not seen the correspondence and I do not have a view on it.

Senator FISHER —If that were the basis of the exemption from scrutiny by the Public Works Committee, on what basis, if any, could it be claimed that NBN Co. would be in competition with anybody?

Mr Cosgrave —NBN’s principal infrastructure asset will be a fibre-to-the-home asset that, as I understand it, will reach to 93 per cent of the population. I am well aware of the debate around whether these are complements or substitutes, but clearly that network will be in competition with a range of wireless networks, being the most obvious form of competition.

Senator FISHER —Isn’t the intent of clause 9 of the companies bill to restrict NBN Co. to the provision of wholesale only?

Mr Cosgrave —Certainly.

Senator FISHER —If that is the effect, how is there any competition at all?

Mr Cosgrave —I am sorry; I must be missing the point of your question. Can you repeat it?

Senator FISHER —If the intent of clause 9 of the companies bill is to restrict NBN Co. to the provision of wholesale only and if clause 9 of the companies bill achieves that intent, then how can NBN Co. be said to be in competition with anybody anywhere? And how can that be a basis for claiming exemption from scrutiny by the Public Works Committee?

Mr Cosgrave —I will not answer the second part of your question, but, as to the first part of your question, competition self-evidently works at a range of different levels—wholesale and retail—and, depending upon the provisions that ultimately emerge from this legislation, there may or may not be wholesale competition for NBN Co. in the fixed-access market. That is still clearly a live question. But there are a variety of other infrastructure providers, particularly mobile infrastructure providers, who I think NBN Co. would see as certainly competing with it for some part of its services and/or market.

Senator FISHER —Can you expand on the basis upon which you say there may be wholesale competition?

Mr Cosgrave —Again, it depends what arrangements ultimately emerge in this sector, but all I am reflecting is the current state of the sector—that you currently have a copper network and two HFC networks. It is a matter of public comment that there are various kinds of negotiations in play between people as to what might be the future of those networks, but that is what I was referring to. I do not have any more of a crystal ball than anyone else as to the competitive environment that will emerge over the next little while.

Senator FISHER —The government obviously thought it did have, or the minister obviously thought he did have, in seeking the Public Works Committee exemption from the Governor-General on this basis. Senator Macdonald, did you want to ask a related question?

CHAIR —Senator, I am chairing. Are you finished?

Senator FISHER —No, but I thought Senator Macdonald wanted to ask a related question, in which case I was more than happy for him to do so.

CHAIR —You finish, and then I will go to Senator Macdonald.

Senator FISHER —Okay. What about competition in the provision of retail, Mr Cosgrave? You also referred to that as a possibility.

Mr Cosgrave —That is fundamentally, as I understand it, one of the policy constructs upon which the NBN is set to be based, which is that with a ubiquitous fibre to the premises network new retail competition will emerge.

Senator FISHER —But did I misunderstand you to be saying that it is at least possible that NBN Co. could be in competition in the retail market with others?

Mr Cosgrave —I think you have misunderstood.

Senator FISHER —Okay, good. I am reassured by that. Therefore, the only basis upon which, if I understand you correctly, you are suggesting that it could be claimed that NBN Co. would be in competition with anybody anywhere in the new regime is in respect of the provision of wholesale.

Mr Cosgrave —What I am putting to you is that the shape of the sector is clearly fluid at the moment. There are a variety of both commercial negotiations and legislative provisions in play that will have an impact upon the shape of the sector. I do not have a crystal ball to see what the outcome of all of those will be. In the absence of that, I cannot speculate as to the competitive environment that will emerge.

Senator FISHER —Therefore, implicit in your answer, is it not, is that NBN Co. could end up being a competitor with others?

Mr Cosgrave —That is one of a myriad of possibilities, yes.

Senator IAN MACDONALD —Following up on Senator Fisher’s question, would it concern you if following these publicly reported negotiations which you refer to the NBN did end up as a monopoly fixed line provider in Australia? What would that do to competition principles?

Mr Cosgrave —That is an issue that at least in one particular scenario might come to the commission’s consideration in the event that Telstra submits a structural separation undertaking to the commission. Given that that is at least a very real possibility and that it is something that we will have to determine in those proceedings, I prefer not to answer that at this stage.

Senator IAN MACDONALD —Nothing in this legislation moves our communications system to a situation where there is one monopoly provider.

Mr Cosgrave —Is that a statement?

Senator IAN MACDONALD —No. I am asking, ‘Would nothing in the legislation before us that we are in inquiring in to, in your view, move of us towards a situation where we would end up with a monopoly provider?’

Mr Cosgrave —No. My understanding of the legislation is that it is to set up the corporate basis on which the NBN Co. will operate and the access arrangements under which it will operate. So the answer to your question is no.

Senator IAN MACDONALD —As you see it, subject to the qualification you just made about perhaps having a need to determine this at some time, nothing in this legislation in any way prevents competition at the wholesale level, either for fixed line or wireless.

Mr Cosgrave —There are clearly potential competitive impacts from the provisions I have seen described as level playing field provisions.

Senator IAN MACDONALD —Sorry, how does that answer that? Could this legislation lead to a situation where there is a monopoly provider?

Mr Cosgrave —No, I am saying that those provisions may well have an impact upon investment in the sector.

Senator IAN MACDONALD —Is that another way of saying, ‘Yes, we may end up with a monopoly provider’?

Mr Cosgrave —No, it is not. It is in response to your question that asked whether there was anything arising from this provision—I may be paraphrasing your question—that impacted upon the way in which competition emerged via infrastructure.

Senator IAN MACDONALD —My understanding of general announcements that have been made in the general political ether is that it is the government’s intention to end up with one monopoly fixed line provider of services in Australia. If that is the intention, does that cause you concern as the competition regulator, and what does it do to competition, for instance?

Mr Cosgrave —I am going to repeat my earlier response, which was that that is an issue that may well come before us in a structural separation undertaking. I will also repeat that we have made some statements over the last couple of years that indicate that we do think the fixed access network has significant bottleneck characteristics that tend towards a natural monopoly.

Senator IAN MACDONALD —Could the government legislate to exclude your concern about that? I am not saying that you have got a concern, because I hear what you say, but—

Mr Cosgrave —I do not know.

Senator IAN MACDONALD —It is not in this bill anyway.

Mr Cosgrave —Not that I am aware of.

CHAIR —Mr Cosgrave, it seems to me that some of these debates are a bit theoretical. The practical situation we have had is that competition policy has not operated well in the telecommunications industry for many years, has it?

Mr Cosgrave —The commission’s position in successive annual reports made to the Commonwealth on the operation of the access regime is that competition has developed unevenly in this sector. We have seen some successes in the competitive environment largely either where there has been infrastructure investment by mobile operators or where the commission has intervened, say, to promote investment by ultimate providers in DSLAMs using the unconditioned local loop. In our view that has led in some markets, mainly metropolitan markets, to some advances for consumers in the service provision of broadband, but we have consistently expressed concerns about other factors that have impeded competition in this sector.

CHAIR —’Developed unevenly’ is an ACCC technical term for basically saying that competition has not worked out well in a whole range of areas.

Mr Cosgrave —In some areas it clearly has not worked well. We are on record expressing concerns around the operation of the access regime that we had for 12 or 13 years and that is currently being amended. We have been on record incessantly about that. We have been on record consistently expressing concerns around structural issues within the sector. I am trying to simply balance that by saying that we do not think it is entirely a one-way street, that we have seen some competitive benefits accrue, partially at least, we believe, through regulation of the unconditioned local loop service in particular. We have seen some successes in DSL markets that we do not think would have been there without that intervention. I am simply trying to balance it up a bit there. Certainly, we are not saying—and we have not said—that this sector is a competitive panacea by any manner of means.

CHAIR —Isn’t there a long history in both Australia and many—if not most—other countries that where there is a market failure and government moves in to do something about that market failure that obviously means a monopoly in terms of service provision? That is the history of building utilities and government services for as long as I have been able to read about it.

Mr Cosgrave —I am not going to particularly debate with you appropriate policy mechanisms for market failures but clearly there has long been, I think, a bipartisan view that this is a sector where there has been market failures and I do not think—here it is tripartite, and my apologies to Senator Ludlam—I do not think there is any dispute that this is a sector where there has been a continuing requirement for intervention at either a structural or an access level.

CHAIR —I refer to this uneven development that you spoke about earlier. That uneven development included the vertically integrated Telstra, didn’t it?

Mr Cosgrave —Indeed. We are on record for many years expressing concerns around both Telstra’s vertical integration and level of market power within the sector.

CHAIR —If that vertical integration is dealt with in the coming period and we are left with a dominant wholesale supplier providing a very competitive retail sector, surely that is a better proposition than having a vertically integrated dominant player who cannot or will not supply the requirements of the nation?

Mr Cosgrave —I do not want to get into a qualitative assessment of the policy. I do not think that is appropriate for a regulator. I would simply say that the ACCC does perceive circumstances under the current policy where you have not only different and potentially more vibrant retail markets but also emerging downstream wholesale markets; in other words, markets downstream from the layer 2 service that is the service NBN Co. are principally going to provide. We are interested in promoting competition at both of those layers.

CHAIR —You did say earlier, in response to a question from Senator Birmingham, that you could balance competition with the efficient use of infrastructure.

Mr Cosgrave —That is the current statutory test. It is still the statutory test.

CHAIR —If that statutory test were applied to NBN Co., wouldn’t that be a balance of competition with the efficient use of the infrastructure that NBN Co. is rolling out?

Mr Cosgrave —Again, I do not want to go too far with this at the present time because one of the factors, depending on Telstra ultimately bringing forward a structural separation undertaking and depending on what guidance we give in relation to that undertaking, that we may have to judge concerns issues around efficient use and investment in infrastructure. So I would prefer to leave that for the present time.

CHAIR —I want to try to clarify this. I think there still is some confusion by the questioning that you have had today in relation to NBN Co. and its activities in the retail area. Obviously, you have looked at the legislation.

Mr Cosgrave —Yes.

CHAIR —And, obviously, you are well aware of the powers of the ACCC. Given the ministerial direction, given this issue of exemptions and given the ACCC position, is there not a fairly robust set of checks and balances against NBN creeping into the retail area?

Mr Cosgrave —There is certainly a significant policy intent, as I understand it, that NBN Co. act as a wholesale-only operator. The ACCC perspective, as I have indicated in advice we have given to the government, is that that is appropriate; that it should be a wholesale-only operator.

CHAIR —Yes. And you spoke earlier about fundamental regulatory orthodoxy. Is that what still applies to NBN Co.? It is not anything different from a fundamental—

Mr Cosgrave —As I said, if your view is that the fixed-access network is an enduring bottleneck—and the commission has expressed some views that would support that—then a policy response that seeks to address that access bottleneck would be consistent with what the commission has put.

CHAIR —Yes. Thank you very much Mr Cosgrave—I note it is ‘Cosgrave’ not ‘Cosgrove’.

Mr Cosgrave —Thank you—I appreciate that! That makes you one of about 10 per cent who get that right.

CHAIR —And thank you Mr Home for you contribution.

[3.41 pm]