COSGRAVE, Mr Michael, Group General Manager, Communications Group, Australian Competition and Consumer Commission

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

NICHOLLS, Mr Rob, General Manager, Convergence and Mobility Branch, Australian Competition and Consumer Commission

PEARSON, Mr Mark, Deputy Chief Executive Officer, Regulation, Australian Competition and Consumer Commission

CHAIR: I now welcome representatives of the Australian Competition and Consumer Commission. Thank you for attending this afternoon. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal 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. Before we proceed on the rollout, I would like to remind everyone that we will deal with issues surrounding greenfields development and the fibre deployment bill and, at the same time, the ACCC's evidence, I think. So, if everyone is okay with it, we will mix the questions in together. As the ACCC has indicated they do not have an opening statement, we will go straight to questions.

Mr HARTSUYKER: What is the role of NBN engagement and group coordination within the ACCC?

Mr Home : Primarily, we are dealing with establishing the arrangements for access to the NBN and a range of assorted and related activities that arise out of the NBN bill, as recently passed; for example, the development of non-discrimination guidelines and various other tasks. In addition, my group deals with coordinating activities across the communications group.

CHAIR: Were you involved in the statement of expectations?

Mr Cosgrave : No, we were not. We have obviously seen the statement of expectations, but we were not involved in its compilation.

Ms LEY: We are in receipt of a submission from Australia Online urging to the government to ignore the ACCC's recommendation to increase the number of POIs from 14 to 121. Can you give us your side of the argument.

Mr Nicholls : Broadly, the approach we took in the advice to government on points of interconnection was driven by the long-term interest of users and took into account both the retail and wholesale aspects of where the points of interconnection with the National Broadband Network would be. This was in an environment where there is existing transmission competition in a number of areas, and effective competition, such that the regulations occurred in another set of areas. So our approach was to look at how we move the points of interconnection to be appropriate to a natural monopoly—that is, not to see scope creep so that the last few kilometres became the last few hundred kilometres.

Although Australia Online and a number of smaller ISPs, or retail service providers, have expressed concerns about the number of points of interconnection, we are of the view that there is a reasonable prospect, if not current existing competition, for transmission from points of presence, which is typically what an ISP or RSP has in capital cities, out to the 121 points of interconnection that we provided advice to government on. So Australia Online and other providers in the future would expect to be able to acquire services that deliver from their point of presence to the POIs either from current the transmission providers or potentially new services that offer layer 3 connectivity.

CHAIR: Because the member raised a potential submission from Australia Online, I will take this opportunity to ask committee members to resolve to accept Australia Online's submission as evidence and authorise it for publication.

Ms LEY: So moved.

CHAIR: There being no objection, it is so resolved.

Ms LEY: Do you think you adequately analysed the needs of rural and regional Australia in coming to those conclusions?

Mr Nicholls : Yes. Our review of this was to look, as I mentioned, at both the wholesale and the retail aspects of the effects of where an appropriate set of points of interconnection should lie. One of the balances is between where you put the points of interconnection to ensure effective competition to those points of interconnection and where you end up saying, 'We can't go as far out as we might like because there isn't current effective competition.' So the practical outcome is that a significant majority of the points of interconnection are actually located in metropolitan areas. In the regional areas they tend to be located at major regional centres in order to ensure that more remote and rural retail customers have effective access to the NBN.

Mr Cosgrave : Allied to the decision on the points of interconnection, as my colleague said, there are a couple of things militating towards where we got to. One was a concern around correcting an NBN Co. omission that you are dealing with potentially contestable backhaul markets. Where we felt there was no potential either now or in the future for backhaul competition, we have not extended beyond the semidistributed approach. We have taken a more active role since the passing of the Competition and Consumer Act late last year in setting indicative prices around backhaul transmission to bring them down in rural and regional Australia, and we think that is the correct approach.

CHAIR: We had a fair bit of conversation about communities that are on the fibre backhaul who can see it but cannot access it with regard to the fibre option. What looks to be emerging as evidence is that there will be a process to negotiate an option for local councils and potentially others directly with, by the looks of it, NBN Co. Has the ACCC been involved in establishing that process at all? If not, are there concerns about competitive neutrality in the development of a process?

Mr Cosgrave : Firstly, no, we have not been involved in that. Secondly, probably the first we heard of it was around the time you heard of it, so we have not really analysed whether there are any competitive neutrality issues—although it is difficult on first blush to see that there would be. It having been raised by the committee, we will go away and think about it a bit more.

CHAIR: Do you think there are any issues that might engage it?

Mr Cosgrave : It is difficult to see that there would be, but we are happy to take it that people are thinking about it and we need to think about it as a consequence.

Mr HARTSUYKER: In the Sydney Morning Herald the minister is reported as saying:

The decision cost NBN Co. three to four months because it had to redesign the network architecture and scout for suitable exchanges at each connection point.

Do you share the minister's view that the ACCC is to blame for the three- to four-month delay?

Mr Cosgrave : I do not think I have any comment about that. We gave advice to the government and the government accepted the advice. NBN Co. is implementing the government's decision.

CHAIR: Do you want to take the opportunity to comment on negotiations between Telstra and NBN Co. and the ACCC's role or lack of role or is it better not to comment at this stage?

Mr Cosgrave : It is difficult to comment in any great detail. We are aware, to a greater extent perhaps than are members of the public, of some matters under negotiation, but we have had the benefit of some documents on the way through. As I understand it, negotiations are still ongoing. We are certainly in discussion with Telstra in the event that those arrangements are consummated around the relationship between those agreements in any structural separation undertaking—that Telstra would have the option of lodging under the Telecommunications Act.

Mr TURNBULL: Gentlemen, the scheme of the NBN, as you know, is to allow service level competition on a structural facility. The parliament has legislated to make it very difficult to provide facilities based competition, and that has been justified on economic grounds. Would you agree that, from a competition point of view, it would be preferable if there were no barriers to facilities based competition?

Mr Cosgrave : It is a difficult time to proffer a view around that in the event that arrangements that are contemplated in the financial heads of agreement are ultimately consummated—and I am thinking about, for instance, the restricted use of the HFC in the structure. That has the considerable potential of being precisely the matter that the ACCC will have to consider in its contemplation of a structural separation undertaking.

Mr TURNBULL: But the legislation basically deems that not be a breach of the act, doesn't it—any part of the Telstra-NBN deal?

Mr Cosgrave : In the event of ACCC approval of a structural separation undertaking. In the event that it is approved, any conduct under the agreements becomes authorised—that is right—but only after ACCC approval.

Mr TURNBULL: The reason I ask this is that we had a discussion—you may not have been here—with the department earlier about Korea. I looked at my notes of my meetings with the Korean communications commission, which has a similar role to you in respect of the telecom sector. One of the points they made most emphatically was that they did not believe that service level competition was enough or was ever genuinely effective. Part of their policy is to promote facilities based competition wherever possible. Are you able to discuss the merits of service level versus—

Mr Cosgrave : I will make a few general comments around that without wanting to, in any way, prejudge matters that may ultimately come to the commission. The commission, as with most economic regulators, has, particularly in its early regulation of the sector from 1997 onwards, certainly talked a lot around facilities based competition. Indeed, in 2003 we gave a report to the then government recommending the divestment of Telstra's HFC network and, basically, the divestment of Telstra's interest in Foxtel. Both of those pieces of advice were given in an attempt to promote what is generally called intermodal competition, or competition between copper and cable. That advice was given in 2003. It was not then accepted and, I have to say, was not wholly embraced by industry at that time. We have had a number of things since then. We had Telstra apply to exempt itself from its access obligations where Optus had its HFC network. Optus was fundamentally able to convince both the commission and, on appeal, the Australian Competition Tribunal that it was not a particularly efficient use of infrastructure for it to take first mover advantage and up the speeds on its HFC at the time.

So I guess a few things like that along the way have caused the commission to reconsider the extent to which the customer access network—the CAN—is a piece of natural monopoly infrastructure. I think that, if you looked at commission publications over the last two years, in particular we have changed our pricing approach over the last two years to move away from a pricing methodology that really talked about promoting an efficient build-buy decision—a decision on whether you build or buy or, in other words, whether you engage in full infrastructure-based competition or not—to a recognition that the CAN is much more a natural monopoly, which is why we have started to price it much as we would price an electricity utility or any other natural monopoly. So, without forming a view on it, I do not think we would think the issue is quite as clear-cut as our Korean colleagues might have put to you.

Mr TURNBULL: But it is unusual, though. I know you keep up to date with what is going on in comparable jurisdictions, as you should. Can you think of anywhere else in the world where the potential for facilities-based competition is actually being eliminated? There are always arguments for not creating it because of cost, but to actually eliminate it, which is what the government is doing here, is surely unique, isn't it?

Mr Cosgrave : I am certainly not aware of any fibre-to-the-premises proposal that is similar to this government's anywhere else in the world, but I think that is well known.

Mr TURNBULL: Yes, it is. Peter Harris said it is out there; that is his description. In Singapore, for example, they are building a new fibre-to-the-premises network, but there is no restriction on the ability, for example, of the StarHub owned HFC network to compete with it.

Mr Cosgrave : Yes, but—again without reflecting on comparable policies—you have to recognise that the dynamics of a Singapore build and an Australia build—

Mr TURNBULL: Yes, I know, but that is just one example.

Mr Cosgrave : are vastly different. Again, being very careful not to judge positions put by any other parties, the rationale, as I understand it, for these various provisions is at least twofold: (1) the possibility of cherry-picking in high-value areas as opposed to low-value areas—that is the principal one. That is not to say that they are inherently provisions that a competition authority feels innately comfortable about or anything like that. Perhaps I will leave it there.

Mr TURNBULL: Thank you.

Senator XENOPHON: I have a couple of questions in relation to the issue of the CVC—the connectivity virtual circuit. There have been concerns expressed by the founding CEO of Internode, Simon Hackett, that whatever prohibitions or deterrents there are against volume discounts, larger operators will still be favoured by virtue of the CVC. What role will the ACCC have to ensure that will not occur?

Mr Cosgrave : Ultimately, one way or the other, it is clear that the issue of NBN Co.'s pricing will come to the ACCC. The preferred way in which it would come, and I think this has been indicated by all parties and is still the way we expect it to come, would be via a special access undertaking lodged by NBN Co. We have been in very substantial discussions with NBN Co. in relation to that undertaking, as we would with any party proposal—

Senator XENOPHON: In approving any such undertaking will you be guided by the legislative requirement that there not be volume discounts? Will you take that into account when considering how the CVC would operate?

Mr Cosgrave : The test we apply is a different one under the act—it is a reasonableness test. Whether it would encapsulate—

Senator XENOPHON: In considering the reasonableness test, would you consider the fact that there are some legislative prohibitions against volume discounts?

Mr Cosgrave : There are no exceptions to the non-discrimination test, which is another way of putting the same thing. So we will certainly have that—

Senator XENOPHON: So in other words, will your consideration of the reasonableness test be tempered by the non-discrimination test in the legislation?

Mr Home : Yes, it will be. We must have regard to what is in the legislation around that. To add to what Mr Cosgrave said, our reasonableness test encompasses effects on competition very directly and we will need to consider the effects on a range of players in the market.

Senator XENOPHON: In relation to the CVC, will there be a public consultation process?

Mr Cosgrave : Absolutely.

Senator XENOPHON: Again, with the CVC you have seen the concerns of Simon Hackett and others—

Mr Cosgrave : And spoken with Mr Hackett.

Senator XENOPHON: Okay, so you understand where he is coming from about the potential impact of the CVC on non-discrimination?

Mr Cosgrave : Yes, we understand that he has concerns. We have taken a deliberate approach with NBN Co.

Senator XENOPHON: It does not sound as though you accept his concerns; you cannot say that you will accept them or not.

Mr Cosgrave : We do not have an undertaking in front of us at the moment. We have not formed a view, and could not, until we go through a public consultation process. We have a statutory process which requires public consultation and that is the appropriate time to make that sort of judgment. I guess this has been guided by our experience with Telstra in relation to the use of access undertakings where, in the commission's view, they have been lodged without any industry consultation process, but what we have encouraged NBN Co. to do, before it brings us an access undertaking, is to consult broadly with industry around its pricing and access model. It has done that on one occasion and received comments. I understand that it is about to go out on a second round fairly quickly. But ultimately it has to bring its pricing and terms and conditions for access to us.

Senator XENOPHON: You have Simon Hackett saying that and you have Bevan Slattery saying something different. He controversially said that the NBN will fail because the CVC charges will make it uneconomic for any player to make a profit. How do you deal with that sort of statement in the context of your statutory role?

Mr Cosgrave : You do not until you start your statutory role and ask them to make detailed written submissions as opposed to representations they may make.

Senator XENOPHON: But do you see a tension between what Mr Hackett is concerned about and what Mr Slattery saying?

Mr Cosgrave : I guess we see plenty of tensions in any regulatory process.

Senator XENOPHON: How long do you think this process will take?

Mr Cosgrave : Our experience with special access undertakings is that we have considered about three of them, one in the context of the digitisation of the Foxtel network some years ago. That took between six and 12 months. The issues around this are likely to be both complex and, based upon what you have said to us, potentially—

Mr Pearson : Controversial.

Mr Cosgrave : Thank you, Mr Pearson—potentially controversial. We would expect there to be a full process and it will take around that length of time.

Senator XENOPHON: Thank you.

Senator CAMERON: The ACCC have been involved in telecommunications competition for some years, haven't they?

Mr Cosgrave : Since 1997, yes.

Senator CAMERON: The vertical integration of Telstra has been the fundamental problem in achieving successful competition in the industry. Would that be correct?

Mr Cosgrave : The ACCC has consistently expressed concerns about not only the vertical integration but the horizontal integration. But it would be fair to say that the extent of its vertical integration has been one of the primary concerns of the ACCC, yes.

Senator CAMERON: Would it be fair to say that for a number of years there has been a market failure in terms of competition?

Mr Cosgrave : I think we have consistently said in our competition assessments that whilst there has been progress it has been patchy progress, yes.

Senator CAMERON: How do you reconcile the term 'patchy' with the national interest? We have to look at the national interest on an issue such as telecommunications, don't we?

Mr Cosgrave : I am not sure how to answer that question. I guess by patchy I mean that we think—and I think I have had discussions with you about this before—there have been some successes in the regime via access to the copper CAN and as a consequence of DSL services and their provision by competitors in particular where that competition has been able to flourish. We would also say that the mobile area, which is not one we regulate in a particularly intrusive way, has been an example of infrastructure based competition succeeding. So we would say there have been some successes in competition, but when I used the word 'patchy' that is what I meant: it has been patchy.

Senator CAMERON: The role of the ACCC relates to both consumers and competition. Theoretical competition does not always benefit the consumer, does it?

Mr Cosgrave : Competition is not an end in itself is the way I have often heard it put, and I think that is consistent with not only the ACCC's views but the fact that in various processes we do take into account matters other than competition, particularly around the authorisation process under our act.

Senator CAMERON: Mr Turnbull, I think, asked you about looking worldwide at different approaches to the NBN. Do you also monitor the response of the retail providers to the NBN?

Mr Cosgrave : I might ask you to clarify that, Senator. I am not quite clear what you are driving at.

Senator CAMERON: A number of retail providers have made public comment about the NBN and the capacity for the NBN to increase competition at the retail level. Have you seen any of that?

Mr Cosgrave : Certainly. Of course, as you would expect, my group monitors all comments around the NBN. So, yes, we have certainly seen those comments. Our remit is to encourage competition at all levels. That is the best way I can put it.

Senator CAMERON: There have been comments made not only by the retail providers but some of the biggest technology companies in the world like Google and Microsoft. Have you monitored that?

Mr Cosgrave : Yes.

Senator CAMERON: What are they saying?

Mr Cosgrave : At a broad level there are various expressions of support, some support for the policy and some people are expressing a broad debate around this policy as you would expect.

Senator CAMERON: Is the ACCC satisfied that there will be sufficient retail competition with the introduction of the broadband network?

Mr Cosgrave : I think it would be premature to make any judgment as to that at this stage.

Senator CAMERON: Is there any fundamental, either theoretical or practical, issue that you would say is a problem?

Mr Home : I will point out that, as Senator Xenophon noted, certain parties are flagging some concerns around the structure of NBN Co.'s pricing. That is a matter that we will be considering through the SAU process in terms of its impact on competition.

Senator CAMERON: There has been some questioning today in relation to the access of other companies to the wholesale network in being able to build their own wholesale and retail networks—small vertically integrated networks. Have you had a look at what that might do to the pricing policy that NBN has if there were cherry picking into the big metropolitan areas?

Mr Home : It is fairly early days in terms of NBN Co.'s proposed pricing. The SAU I would expect would cover the conditions, circumstances and limitations under which they can change their pricing. Those are matters I think we would need to consider through that process.

Senator CAMERON: Thank you.

Senator FISHER: With respect to the connectivity virtual circuit charge, if NBN users actually start to use the full capacity of the NBN, for example, three video streams per home then a retail service provider responsible for providing that service would be requisitioning a significant amount of CVC capacity from NBN Co.

Mr Cosgrave : That would be a matter for their judgment. The contention ratios they run will ultimately be a matter for each RSP.

Senator FISHER: Yes, but for example one retail service provider has said that an example like that might require 1,000 gigs. So one retail service provider is saying if that were to mean the requisitioning of CVC capacity to service say 1,000 gigs then that would mean a cost to the retail service provider of, I think, about $84 a month that being the $24 charge plus an additional $60 before you even think about GST and a retail service provider's profit margin. If that sort of scenario were to eventuate, and I appreciate your point, Mr Cosgrave, that it is for the RSPs at the end of the day, surely the ACCC would have a competition based perspective on that and if so, how would you handle it.

Mr Cosgrave : I am going to give Mr Nicholls his head, I think!

Mr Nicholls : Firstly, there is a technology issue associated with the approach. If a retail service provider were using the technology called multicast, proposed by NBN, ultimately that can deliver broadcast-type video very efficiently and would not lead necessarily to those big CVC charges, so it is for certain types of video distribution, particularly broadcast style—that is, it is a linear stream of programming rather than on-demand programming. The CVC would not be as adversely affected, in addition to considering the contention issues that you might not want to. So it may be that it depends on the type of service being offered as to whether big, fat CVC pipes are really required.

Senator FISHER: I like that term; I can understand 'big, fat'. Although, we are left in the dark as to how NBN Co. is factoring in, in terms of its revenue streams, where the 'big, fat' is an alternative to requisitioning significant amounts of CVC capacity. Are you able to rule out the scenario painted by that retail service provider in the example I have given?

Mr Nicholls : I do not think we could rule it out, because it depends on the retail service provider and the types of service they want to provide—things like the quality of service that they expect to provide and what the demands are of their customers. One of the things implemented in the design of the network is a way to reduce the requirements of CVC if what is being provided is linear video.

Mr Home : I think the example you have described is effectively the usage by one household of the CVC charge.

Senator FISHER: Yes.

Mr Home : The CVC charge would cover a wide range of households, and so it would be difficult to isolate cost per household.

Senator FISHER: The retail service provider in that scenario also suggested that a thousand gigs is currently being provided by it to an individual household. But, yes, you are correct: it is to an individual household. How would NBN have factored in CVC revenue or otherwise into its forecasts?

Mr Home : I think that is primarily a question for NBN Co.

Senator FISHER: Fair enough. Thank you for fronting up here today, once again. Has the Prime Minister or anyone else from government written to the ACCC saying that the government expects that you will appear before this committee if and when required? She promised in her letter of November last year to Senator Xenophon that the government would so write. I want to know whether you have got the memo.

Mr Cosgrave : Not that I am aware of. We are of course happy to appear before this committee at any time with or without the letter.

Senator FISHER: Indeed, but it would appear without any help from the Prime Minister.

Mr Pearson : We are clarifying that issue.

Mr Cosgrave : I think I said, 'not that I am aware of.'

Mr Pearson : Senator, we will take that on notice and check because it would go through our executive area, not necessarily to Mr Cosgrave.

Senator FISHER: Mr Cosgrave, in response to the chair you talked about the Telstra deal and outlined, if I understood you correctly, that the ACCC is involved in considerations in the event that the deal is 'consummated', which I think were your words. So you are involved in a way in respect of Telstra, as I understand it. You might want to clarify this. I am not asking you about the terms of the conditions of the deal but about the capacity in which the ACCC is involved in the process of reaching the deal itself, as opposed to the consummation of which you spoke.

Mr Cosgrave : It goes back to the authorisation provisions and the fact that for any arrangements under any agreement to be authorised the ACCC has to be given a copy of them prior to them being authorised. Understandably, both parties to the negotiation are interested in the ACCC broadly being aware of how their negotiations are going. From time to time we have had some briefings from both parties to the negotiations. We are not involved in those negotiations, and that is the extent of it at this stage.

CHAIR: If there are no other questions, I will just finish with a general question in regard to the Telecommunications Legislation Amendment (Fibre Deployment) Bill 2011. Has the ACCC been involved in any issues to date and, if so, what? If not, having a look at the bill, is there any consideration of any issues that the ACCC thinks are of concern and, if so, what?

Mr Cosgrave : Mr Nicholls will take the issue of consultation to date because he has been involved in some, I believe.

Mr Nicholls : We provided advice when asked in respect of the advice which is mentioned in the regulatory impact statements. Stakeholders were asked to consider issues. Broadly, the regime that is set up from an ACCC perspective looks very similar to the facilities access regime under schedule 1. It is an analogy of the Telecommunications Act 1997, which is a carrier-carrier relationship. In this case, it would be carrier access seekers and non-carrier access providers to facilities access.

Mr Cosgrave : It appears broadly similar to responsibilities we already have under the Telecommunications Act, but I have to say we have not considered it in any detail. That is the current state of affairs.

Mr TURNBULL: I have a question about the bill. Are you familiar with or aware that, apart from our general inquiry of oversight of the NBN, we are also looking at the Telecommunications Legislation Amendment (Fibre Deployment) Bill?

Mr Cosgrave : We are aware of that, yes.

Mr TURNBULL: I may not be doing them justice, and it is a pity they could not have given here evidence first, but the greenfield operators, and I am sure you know who they are, have said that essentially the NBN is putting them out of business because instead of a circumstance where they will be able to—you are not familiar with this?

Mr Cosgrave : I am aware in general that there have been concerns expressed by some people. I think in the context of legislation that is being prepared those concerns have primarily been addressed to the policy department rather than the commission. Other than seeing some public reports of those concerns, I am not aware of any representations being made.

Mr TURNBULL: As we understand it at the moment, a developer has to provide the pit and pipe infrastructure. The developer will have the option of either waiting for the NBN to connect fibre to the premises in his development, at no cost to the developer, or, alternatively, paying a greenfield operator out of his own pocket to do exactly the same thing. That is obviously not a level playing field. The argument being put is that as long as these greenfield operators, private cable companies, install technically compliant infrastructure they should be able to get paid to do that and get the same benefit of the subsidy that the NBN is getting. I think that is a serious competition issue. It does seem odd that we would be putting companies out of business when they are perfectly capable of building the infrastructure that is required. Can I get a reaction from you on that, and also any other issues you see with this bill from a competition point of view?

Mr Cosgrave : I am not going to give you an extensive one, because it is not legislation we have closely considered. There has been, as I understand it, a working group chaired by the policy department in relation to the development of this bill, and we did attend as an observer at that. We have only just been provided the bill, as have you. We will examine the bill, but I make clear that we have not had any representations to my knowledge put to the commission in relation to competition concerns.

Mr TURNBULL: Could you come back to the committee with your comments on the bill?

Mr Cosgrave : We will do that.

Mr TURNBULL: That would be very helpful.

CHAIR: That is a nice way to wrap it up.

Senator CAMERON: I might have some questions on notice on this issue.

CHAIR: I hope the ACCC is happy to have questions on notice through the secretariat.

Mr Cosgrave : More than happy.

CHAIR: Thank you for attending today to assist the committee. Due to the time sensitive nature of the legislation, any feedback would be welcomed by 23 May, if possible.

Mr Cosgrave : That would be next Monday.

CHAIR: Yes, that would be next Monday. As well, if the committee has any further questions, they will send them through in writing via the secretariat. Thank you all very much for attending today. It was appreciated.

Mr Cosgrave : Thank you.