AUSTRALIAN COMPETITION TRIBUNAL

Application by Telstra Corporation Limited [2009] ACompT 1

RE:     APPLICATION FOR REVIEW OF A DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 152AT OF THE TRADE PRACTICES ACT 1974 TO REFUSE TO GRANT AN EXEMPTION ORDER TO TELSTRA CORPORATION IN RESPECT OF THE SINGTEL OPTUS HFC NETWORK

BY:      TELSTRA CORPORATION LIMITED

            ABN 33 051 775 556

Applicants

File No 7 of 2008

jUSTICE mIDDLETON (dEPUTY PRESIDENT), Mr R DAVEY and PROFESSOR D ROUND

22 MAY 2009

MELBOURNE (HEARD IN SYDNEY)

THE TRIBUNAL DECIDES THAT:

1.         The decision of the Australian Competition and Consumer Commission of 11 November 2008 is affirmed.

CONTENTS

INTRODUCTION.. 2

AN OVERVIEW OF THE AUSTRALIAN TELECOMMUNICATIONS MARKET. 11

Telstra’s position in the market12

Optus’ position in the market13

The place of the Part IXC telecommunications access regime in the market13

The purpose of section 152AT in the market14

OPTUS’ HFC NETWORK.. 14

THE RELEVANT SERVICES AND OPTUS’ USE OF THEM... 15

The unconditioned local loop service (ULLS)15

The line sharing service (LSS)16

The local carriage service (LCS)17

The wholesale line rental service (WLR)17

The domestic public switched telephone network originating access service (PSTN OA)17

Trends in Optus’ use of the Relevant Services. 18

THE GRAVAMEN OF TELSTRA’S APPLICATION.. 18

RELEVANT MARKETS. 20

THE LONG-TERM INTEREST OF END-USERS. 20

WHETHER THE EXEMPTION IS LIKELY TO PROMOTE COMPETITION.. 21

Number of premises passed by Optus’ HFC Network. 21

Number of premises served by Optus’ HFC Network. 22

The likely effect on third-tier firms. 25

The likely effect on end-users. 26

Competition v a competitor: the targeted and discriminatory nature of the application for exemption. 29

Regulating technology v regulating services. 30

WHETHER THE EXEMPTION IS LIKELY TO ENCOURAGE ECONOMIC EFFIENCY.. 31

The notion of economic efficiency. 31

Whether Optus is likely to upgrade its network. 32

The ‘chilling’ or disincentive effect34

Limitation or conditions. 37

CONCLUSION.. 37

DECISION.. 38

REASONS FOR DECISION

INTRODUCTION

1                          By application dated 17 December 2007 (‘the Application’), Telstra Corporation Limited (‘Telstra’) applied to the Australian Competition and Consumer Commission (‘the ACCC’) under s 152AT(1) of the Trade Practices Act 1974 (Cth) (‘the Act’) for an exemption from all of the standard access obligations (‘the SAOs’) set out in s 152AR of the Act:

(a)        in respect of the Unconditioned Local Loop Service (‘ULLS’), the Line Sharing Service (‘LSS’) and, to the extent not covered by another exemption under s 152AT, the Wholesale Line Rental service (‘WLR’), the Local Carriage Service (‘LCS’) and the domestic public switched telephone network originating access service (‘PSTN OA’) (together, ‘the Relevant Services’); 

(b)       supplied, directly or indirectly, to SingTel Optus Pty Ltd, Optus Networks Pty Ltd, Optus Vision Pty Ltd, XYZed Pty Ltd and any related body corporate of each (together, ‘Optus’);

(c)        within the area comprising the end user premises located wholly or partly within 75 metres of the Hybrid Fibre Coaxial (‘HFC’) network deployed by Optus in the Sydney, Melbourne and Brisbane metropolitan areas (‘the HFC Footprint’).

2                          The application sought immediate exemption in respect of the LCS, the WLR service and the PSTN OA service and a deferral of the exemption in respect of the ULLS and the LSS (180 days in respect of premises with less than five lines and 365 days in respect of premises with more than five lines).

3                          It is unnecessary to set out the background, legislation and technology in any detail, as a useful summary is contained in the recent decision of the Tribunal in Application by Chime Communications Pty Ltd [2008] ATPR 42-267 and the Full Court in Telstra Corporation Limited v Australian Competition Tribunal [2009] FCAFC 23 (‘Telstra’).

4                          This proceeding before the Tribunal is a review on the merits of the ACCC’s decision of 11 November 2008 to refuse the Application under s 152AT(3)(b) of the Act.  The review is limited to the information, documents and evidence before the ACCC (s 152AW(4)), although the Tribunal is entitled to draw upon its own expertise and experience.  The Tribunal’s role is not to identify any error in the ACCC’s decision, but to consider the matter afresh (cf Re Optus Mobile Pty Limited & Optus Networks Pty Ltd [2006] ACompT 8 at [18]).

5                          Before making an order under s 152AT(3)(a) of the Act, the ACCC (and therefore the Tribunal) must be satisfied that the making of the order will promote the long-term interests of end-users (‘the LTIE’) (s 152AT(4)).  Obviously, an applicant for an exemption will need to put material before the ACCC to enable the ACCC to be satisfied that the statutory requirements are met.  However, there is no statutory presumption against making an exemption order or in favour of the existing regulation, and no legal onus for Telstra to rebut any such presumption: see Telstra at [161]. 

6                          In determining whether a particular thing promotes the LTIE, regard must be had to the extent to which the thing is likely to result in the achievement of a number of listed objectives.  The main objectives that are relevant to Telstra’s exemption application are:

(a)        the objective of promoting competition in markets for listed services (s 152AB(2)(c)); and

(b)        the objective of encouraging the economically efficient use of, and the economically efficient investment in:

(i)         the infrastructure by which listed services are supplied; and

(ii)        any other infrastructure by which listed services are, or are likely to become, capable of being supplied (s 152AB(2)(e)).

7                          The ACCC, Telstra and Optus did not rely upon the objective in s 152AB(2)(d).  The Tribunal is satisfied that the objective of ‘any-to-any connectivity’ is as likely to be achieved in the future without the exemption as it is in the future with it.  No further consideration of objective (d) is thus required: see Telstra [269].

8                          In respect of the objective of ‘promoting competition’ (s 152AB(2)(c)), competition is a process and is generally not concerned with the position or protection of individual competitors: see Telstra at [224].  However, this does not mean the Tribunal should ignore the position of individual competitors.  Whilst the Tribunal and the ACCC are concerned with competition as a process and not with individual competitors, there may be circumstances in which the impact of an action or thing on a particular competitor may have implications for the promotion of competition generally.  In Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 the Full Court held (at [242]):

Competition is a process and the effect upon competition is not to be equated with the effect upon competitors, although the latter may be relevant to the former.  Competition is a means to the end of protecting the interests of consumers rather than competitors in the market. 

(References omitted.)

See also Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (No 2) (2008) 170 FCR 16 at [351] per Dowsett J.  The present application, being directed by Telstra against its main competitor (and only that competitor), gives rise to a potential situation where the effect on Optus may have repercussions for competition generally and could impact upon end-users, which are required to be considered by the Tribunal.

9                          The notion of ‘promoting competition’ involves the idea of creating the conditions or environment for improving competition from what it would otherwise be, and not requiring satisfaction that there would be an actual advance or increase in competition.  In Re Sydney International Airport [2000] ACompT 1, the Tribunal stated (at [106]):

The Tribunal does not consider that the notion of "promoting" competition in s 44H(4)(a) requires it to be satisfied that there would be an advance in competition in the sense that competition would be increased. Rather, the Tribunal considers that the notion of "promoting" competition in s 44H(4)(a) involves the idea of creating the conditions or environment for improving competition from what it would be otherwise. That is to say, the opportunities and environment for competition given declaration, will be better than they would be without declaration.

10                        Similarly, in Telstra, the Full Court in accepting the submission of Telstra stated that (at [224]):

… the notion of “promoting competition” involves the idea of creating appropriate conditions or an environment for improving competition from what it would otherwise be and not as requiring satisfaction that an actual increase in the level of competition has already taken place or will definitely take place in the future (see Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR 41-754 at 40,775).

11                        In the present case, the Tribunal must determine whether it is satisfied that the granting of the exemption is likely to promote competition in relevant markets and encourage the economically efficient use of, and investment in, the infrastructure by which the listed services are supplied or are likely to become capable of being supplied.  The statutory test requires the Tribunal to determine whether it is satisfied that the exemption is ‘likely’ to ‘promote’ and ‘encourage’ the statutory objectives in s152AB(2)(c) and (e) as compared to the extent to which those objectives are likely to be promoted and encouraged in the absence of the exemption (see Telstra at [159]).  That is, the Tribunal compares the future situation with the exemption orders having been made with the future situation without the exemption orders having been made and then asks the question: whether it is satisfied one situation or the other is in the long-term interests of end-users?

12                        In Re Seven Network Limited (No 4) [2004] ACompT 11 the Tribunal said the following about evaluating the LTIE (at [119]):

We accept that the `future with and without' approach provides helpful guidance in applying the LTIE test. In making this assessment we are guided by the fact that, in the words of s 152AB(2), the "particular thing" that is before us is the granting of the exemption applications and not, for example, the terms of access offered by Telstra and Foxtel. However, it should be noted that the `future with and without' test requires the forecasting of future market behaviour, competitive activity and market conduct in a particular area or region and the development of an investment. But the answer to the application of that two-fold enquiry (the future with and without the exemption) is not the ultimate or final answer to the issues posed. That answer must be couched in terms of an appropriate degree of satisfaction that the making of an order exempting each of Foxtel and Telstra from the standard access obligations in s 152AR will promote the long-term interests of end-users of the services they provide. This degree of satisfaction is reached by applying the future with and the future without test, that is to say we compare the future situation with the exemption orders having been made with the future situation without the exemption orders having been made. We then ask the question: which situation is in the LTIE; cf Re QIW Ltd (1995) 132 ALR 225 at 276.

13                        The Tribunal accepts the submission of Telstra that it is in the nature of this test that a predictive assessment of the relevant conditions of the future is required.  The degree of satisfaction required before an exemption order is made is not one that requires or is capable of certainties – what is required is a forecasting of the future under different scenarios and an assessment of what outcomes are “likely”, as opposed to them being certain.  This seems to be the effect of statements made by the Full Court in Telstra at [153], [173]-[174] and [229].  No hard and fast minimum requirements should be set out or dictated by the Tribunal.  The Tribunal should not demand evidentiary requirements and standards which exceed these required by the provisions of Pt XIC of the Act: see Telstra at [171].

14                        Section 152AB(2) of the Act talks in terms of ‘likely to result’ in the achievement of certain objectives.  In a different context, but an approach that can be adopted here, the Tribunal in Re Howard Smith Industries Pty Ltd and Adelaide Steamship Industries Pty Ltd [1977] ATPR 40-023 the Tribunal indicated that forecasting involves a consideration of ‘commercial likelihoods’ (at 17,343):

Section 90(5) of the Act imposes a prohibition on the Tribunal against the granting of an authorisation unless it is satisfied as to enumerated matters.  This involves the Tribunal in a consideration of what is likely to result, in this case of consideration of what is likely to result from the proposed merger if authorised.  This involves a consideration of commercial likelihoods.  As part of that consideration, it is necessary to consider what is likely to result if the proposed merger is not authorised.  This does not mean that the likely effects must be more probable than not, but rather there must be a tendency or real possibility of a particular result following the refusal of an authorisation.  This is an aspect of the main matter for consideration, namely commercial likelihoods resulting from the proposed merger if authorised. 

15                        The Tribunal in Re Queensland Co-operative Milling Association Ltd, Defiance Holdings Ltd (Proposed Mergers with Barnes Milling Ltd) [1976] ATPR 40-012 also observed that (at 17,243):

We are to be concerned with probable effects rather than possible or speculative effects.  Yet we accept the view that the probabilities with which we are concerned are commercial or economic likelihoods which may not susceptible of formal proof.  We are required to look into the future but we can be concerned only with the foreseeable future as it appears on the basis of evidence and argument relating to the particular application.

16                        It is also important to recall that commercial viability is not the same as efficient investment.  As Optus submitted, to say that the Optus HFC Network is technically and commercially capable of delivering better services to more premises, and that Optus may plausibly be able to recover the costs of making the necessary infill investments, says little or nothing about the efficiency of making those investments, or indeed the likelihood of them being made.  Relative to service provision over the existing infrastructure, the investments may not be efficient.  The appropriate calculus is of social cost benefit, not the private cost benefit to Optus. 

17                        The Tribunal (Goldberg J, Dr B Aldrich and Mr M Waller) in Re Sydney International Airport [2000] ACompT 1 made pertinent observations in this regard (albeit in a different context) (at [205]):

The issue whether uneconomical is to be construed in a private or social cost benefit sense is closely connected to the question of whether "anyone" should include the owner of the facility providing the service to which access is sought. If "uneconomical" is interpreted in a private sense then the practical effect would often be to frustrate the underlying intent of the Act. This is because economies of scope may allow an incumbent, seeking to deny access to a potential entrant, to develop another facility while raising an insuperable barrier to entry to new players (a defining feature of a bottleneck). The use of the calculus of social cost benefit, however, ameliorates this problem by ensuring the total costs and benefits of developing another facility are brought to account. This view is given added weight by Professor Williams's evidence of the perverse impact, in terms of efficient resource allocation, of adopting the narrow view.

18                        Of course, in this application, the Tribunal is required to determine these matters over the ‘long-term’.  In Re Seven Network Limited (No 4) [2004] ACompT 11 the importance of the long-term perspective was stressed, including the need to ensure that there is no potential conflict between promoting competition and encouraging economically efficient investment in infrastructure.  The Tribunal stated (at [122]):

The use of the "long-term" may also assist in resolving the apparent tension between the criteria in s 152AB(2)(c) and (e). For example, action that promotes competition in the short-term may deter investment and hence, over the longer-term, competition may lessen (resulting in reduction to efficiency and innovation). Moreover, an action may promote competition at the retail level (resulting in more channels offered by more operators), but may deter facilities-based competition, with fewer service providers being prepared to establish delivery mechanisms of their own than would otherwise be the case. Assessed over the long-term, however, there is less likely to be any conflict between the promotion of competition and efficiency. Nonetheless, to the extent that there are mixed effects, we will have regard to the overall or net effect.

19                        As the Tribunal has indicated, the sole issue for determination in this proceeding is whether the making of the exemption order would promote the LTIE.  Sections 152AB and 152AT do not involve a balancing between the short-term and the long-term, but rather due regard must be had to the LTIE: see Telstra at [243].  However, as the Full Court said in Telstra (at [244]):

In any given case, this may well involve consideration of the existing state of the market and the future impact of the particular thing under consideration, both in the immediate future and over the longer term.  The reference to the short-term, in such a context, would not necessarily be an error or involve a misconstruction of the requirements of s 152AB.

20                        The Tribunal must have regard to the objectives set out in all of sub-paragraphs (c), (d) and (e) of s 152AB(2).  Sub-paragraphs (c) and (e) are subject to further statutory requirements in ss 152AB(4), 152AB(6) and 152AB(7)(A).  The Tribunal must consider and give appropriate weight to the extent to which the making of an exemption order is likely to result in the achievement of each of the stated objectives, and treat each objective as a central and fundamental element: see Telstra at [266]-[267].  No element is to be given primacy, but one element may in any given case be given more weight: see Telstra at [272].  This is not to say that after a consideration of the objectives, the Tribunal may not conclude in any given case that one element is decisive.  What the Tribunal must not do is impermissibly confine itself to one objective to the exclusion of the others, nor treat ex-ante any individual objective as having primacy in terms of its weight or influence over other objective: Telstra at [270]. 

21                        The Tribunal also observes that whether conditions or limitations should be imposed must be considered at the same time as the primary enquiry: see Telstra [290]-[291].  Again, in any given case, conditions or limitations may be discounted once considered as being inappropriate.

22                        It is convenient to now make reference to five issues raised in the course of the hearing before the Tribunal. 

23                        First, there was an initial suggestion by Telstra that the Tribunal should draw adverse inferences of the kind applicable in adversarial judicial proceedings according to the principles in Jones v Dunkel (1959) 101 CLR 298.  In the end, Telstra relied upon the principle expressed by Brennan and McHugh JJ in G v H (1994) 181 CLR 387, where their Honours said (at 390):

The drawing of an inference is an exercise of the ordinary powers of human reason in the light of human experience;  it is not affected directly by any rule of law. … the drawing of an inference is part of the process of fact finding:  it has to do with the minor premiss in the syllogism of judgment, not with the major premiss of legal principle.

24                        This, Telstra said, should apply in these circumstances where Optus had, in effect, failed to provide information and documentation to the ACCC.

25                        As we have already observed, the Tribunal is required to proceed on the information which was before the ACCC: s 152AW(4).  The ACCC, in considering an application from a party for an exemption order, is required to consult with affected persons, invite submissions and consider any submissions before making a decision: s 152AT(9).  The ACCC did not require Optus to provide the information said by Telstra to give rise to the inferences now sought to be drawn.  There is no reason to conclude that Optus failed to provide to the ACCC any information or documentation requested by the ACCC.  There is thus no warrant to draw any inferences against Optus in this proceeding on the basis of any failure to provide information on documents which it is said are within Optus’ ability to provide to the ACCC.  This is not to suggest that, in any other case, appropriate inferences may not be drawn by the Tribunal.  In particular, in many instances ‘assertions’ are made by Telstra and Optus, including as to present intentions relating to future conduct, which assertions are not verified and remain unverified before the Tribunal.  The Tribunal must assess such assertions based upon all the material before it.  Undoubtedly, inferences may then need to be drawn from established primary facts. 

26                        Secondly, an issue arose as to whether Telstra’s ‘contingent’ application (see [1](a) above) was invalid and alternatively that, at the very least, consideration of it should be deferred until the other exemption applications upon which it is expressly contingent were finalised.  In the end this submission did not seem to be pressed.  Optus submitted that the contingent and uncertain nature of the application was a further reason for the Tribunal, in its discretion, to refuse to make the order sought by Telstra.  In view of the Tribunal’s conclusion in this application, this submission of Optus requires no further consideration.  Regardless, any residual discretion, assuming Telstra’s application was valid, does not exist: see Telstra at [283]. 

27                        Thirdly, Telstra relied upon evidence about the experience of overseas cable operators (including cable overbuilders).  At one level, Telstra sought to argue that, having regard to international experience, the Tribunal should be satisfied that Optus could operate as an efficient and effective competitor through its HFC network.  In the Tribunal’s view, comparisons with the experience of overseas cable operators who do not operate in the same regulatory, commercial and physical environment as Optus should be treated with extreme caution.  The information lacks an appropriate contextual relevance: see Re Optus Mobile Pty Limited & Optus Networks Pty Ltd [2006] ACompT 8 at [297], and Re Application by ElectraNet Pty Limited (No 3) [2008] ACompT 3 at [233].  The quality of Australia’s free to air TV compared to the US, Australia’s anti-siphoning laws, the take-up of pay TV in Australia compared with the US, Australia’s dual HFC networks (one being owned by the incumbent, Telstra), and restrictions in the US on a local incumbent exchange carrier (ILEC) offering cable TV in its own region prior to 1996 and only one ILEC in the US having an interest in an HFC network by 2004, may together suggest that Telstra’s reliance on US experience might not be able to be translated relevantly to the Australian setting. 

28                        Before meaningful conclusions can be drawn from the overseas experience, further comprehensive information on the telecommunication, broadband and TV (pay and free to air) structural and regulatory regimes at a national and local level in each of the countries referred to, and on each country’s geography, demography and socio-economic structures, would be required.

29                        Nevertheless, we do accept that information about overseas technology may be relevant in relation to how Optus might upgrade and expand its HFC network, although information provided by Telstra about the cost of installing a cable service to a multiple dwelling unit (MDU) may need to be qualified having regard to exchange rates and Australian labour rates  vis-à-vis US labour rates.

30                        Fourthly, the issue of pay TV was considered by the ACCC.  However, the Tribunal accepts Telstra’s submission that the issue of pay TV is largely irrelevant to the application and the Tribunal’s considerations.  Telstra has not sought to suggest that pay TV is a major advantage that the Optus HFC network has over the Telstra copper network, or that Optus pay TV will be a major driver for the facilities-based competition contemplated by Telstra.  Rather, the drivers for investment and growth are broadband internet and other data services, and telephony.  The Tribunal agrees with the approach proposed by Telstra.

31                        The final preliminary matter concerns the need to define the relevant market or markets.  Whilst it is not necessary for the Tribunal to make specific findings as to the exact boundaries of the relevant markets, in order to assess whether a ‘particular thing’ promotes competition in a market, some general view as to the markets in question must be formed.  However, the Tribunal does not consider it necessary to define the product dimension, geographic dimension or functional dimension of the markets.  Nevertheless, the Tribunal does proceed on the basis that it needs to give particular consideration to the effect of the exemption within the HFC Footprint and, to some extent, within the Exchange Service Areas (ESAs) within the HFC Footprint and not just at the national level.

AN OVERVIEW OF THE AUSTRALIAN TELECOMMUNICATIONS MARKET

32                        The HFC Footprint is a microcosm of the broadly defined market for telecommunications in Australia. 

33                        The defining structural characteristic of that market is the presence of one very large firm, Telstra, one moderately sized firm, Optus, and a number of third-tier firms of modest size compared with Telstra and Optus.

34                        While compared with Telstra, Optus is moderately sized, Optus’ share of the market supplied through its use of the ULLS is many times greater than the next largest third-tier firm.  Generally, the third-tier firms offer a smaller range of services in fewer geographical areas than Telstra or Optus.

35                        The ACCC suggested the following terms to describe the three ways that Telstra, Optus and the third-tier firms compete in the market to supply services to end-users:

(a)        Full facilities-based competition where Telstra and Optus compete (with each other and the third-tier firms), each using their own stand-alone infrastructure that is capable of providing a range of services that are substitutable for each other (eg: the provision of a local call services over Telstra’s ubiquitous copper Customer Access Network (‘CAN’) on the one hand, and over Optus’ HFC network, on the other).

(b)       Access-based competition, a lesser form of facilities-based competition where Optus and the third-tier firms compete (with each other and Telstra) using a combination of access to Telstra’s CAN through the ULLS or LSS and their own facilities (such as a digital subscriber line multiplexer (DSLAM) or a multi-service access node (MSAN), typically installed in a Telstra exchange) to provide services (telephony and/or broadband) to end-users.

(c)        Resale-based competition where typically Optus and the third-tier firms compete (with each other and Telstra) by acquiring Telstra’s wholesale services (such as the PSTN OA, the LCS and the WLR service) and use these services in the provision of fixed voice services.  To use PSTN OA and other resale services to provide an end-to-end service requires the acquisition of switching and other inputs such as transmission and terminating access either by way of modest investment or on a wholesale basis.

36                        It is to be noted that while sub-paragraphs (a) to (c) above describe the typical and current prevalent forms of competition, Optus also provides some wholesale services to third-tier firms.

Telstra’s position in the market

37                        Telstra’s public switched telephone network (PSTN) consists of the CAN and an inter-exchange network. Being that part of the network that connects an end-user to a local exchange, the CAN is the backbone of telecommunications services throughout Australia .

38                        Telstra is the largest provider of retail and wholesale services over its CAN.

39                        Telstra’s CAN is separated into 5,069 ESAs.  Each ESA is a unique geographical area defining an area of the CAN traditionally serviced by an exchange.

40                        Telstra also operates an underground HFC network in the metropolitan areas of Sydney, Melbourne and Brisbane to provide broadband and pay TV services but not telephony.

Optus’ position in the market

41                        The largest individual competitive constraint to Telstra’s use of its CAN and HFC network is provided by Optus.  Optus engages in:

(a)        full facilities-based competition, operating its own HFC network in metropolitan Sydney, Melbourne and Brisbane; and

(b)       access-based and resale-based competition utilising Telstra’s CAN.

The place of the Part XIC telecommunications access regime in the market

42                        The Part XIC telecommunications-specific access regime facilitates Optus’ (and the third-tier firms’) access to Telstra’s CAN.  The regime enables Optus (and the third-tier firms) to obtain regulated access to ‘declared services’ and to compete with Telstra at a wholesale and/or retail level.

43                        The following paragraphs from the Second Reading Speech on the Trade Practices Amendment (Telecommunications) Bill 1996 provide a convenient summary of the telecommunications access regime in Part XIC of the Act:

The telecommunications access regime in Part XIC provides foundation access rights to all industry operators and establishes a framework within which the industry can develop additional arrangements to improve the efficiency with which access is supplied.

The access regime provides for regulated access rights to be established for specific carriage services and related services, and provides a framework within which the terms and conditions of access can be determined. It will reduce the power of those owning or controlling important infrastructure or services which are necessary for competitive services to be supplied to end users. In doing so, judgments by new and existing operators about whether to build their own networks or buy capacity on existing networks will be driven by normal commercial factors. Decisions to build will only be taken where commercial considerations clearly favour this strategy. The regime will therefore promote the efficient use of, and investment in, infrastructure.

44                        In brief, the regime seeks to provide an equality of opportunity for all downstream rivals to compete on the same terms as the vertically integrated infrastructure owner in relation to the costs of supply and access to the infrastructure needed to supply telephony and broadband services.

The purpose of section 152AT in the market

45                        The Explanatory Memorandum which accompanied the Trade Practices Amendment (Telecommunications) Bill 1996 provides the following explanation of s 152AT:

This section will enable individual carriers or carriage service providers to present a case to the ACCC that the long-term interests of end-users will be promoted by the limitation or removal of the standard access obligations on that carrier or carriage service provider or which may in the future be placed on that carrier or carriage service provider.  Given the service declaration itself (which has industry wide application) was made on the basis that it would promote the long-term interests of end-users, it is appropriate that a similar test apply where an individual seeks to have the relevant obligation removed.

This mechanism could be used where infrastructure investments of national or regional significance are proposed which would provide long-term and substantial benefits to end-users of carriage services and services supplied by means of carriage services, but would not proceed or would be severely hampered if the standard access obligations applied in their entirety.  The provision is drafted in broad terms because ACCC judgments about the giving of an exemption and the precise nature of exemptions need to be made on a case-by-case basis.

OPTUS’ HFC NETWORK

46                        Optus has deployed an aerial HFC network in metropolitan Sydney, Melbourne and Brisbane which overlaps 262 of Telstra’s ESAs.

47                        Optus uses its HFC network to provide retail telephony, broadband and pay TV to residential customers.  Optus does not supply services to business customers via its HFC network.  Nor does it supply wholesale services via its HFC network.

48                        In round figures as at February/March 2008 Optus’ customer numbers were telephony, [confidential], data 412,000 and pay TV, [confidential].

49                        In February 2008 the total number of connections to Optus’ HFC network was [confidential] and the total numbers of voice and data customers on the network were [confidential] and [confidential], respectively. 

THE RELEVANT SERVICES AND OPTUS’ USE OF THEM

50                        The following paragraphs provide a brief description each of the Relevant Services the subject of Telstra’s exemption application and the use Optus makes of them.

The unconditioned local loop service (ULLS)

51                        The ULLS provides Optus (and third-tier firms) with access to an unconditioned local loop (sans dial tone or other carriage service) on Telstra’s CAN between an end-user’s premises and an exchange.  Optus uses the ULLS in conjunction with its own facilities in the exchange (such as a DSLAM) to provide:

(a)        a range of retail services to end-users, including traditional voice services and/or high-speed internet access; and

(b)       wholesale services to other service providers.

52                        According to data derived from the ACCC’s CAN Record Keeping Rules (RKR):

(a)        Optus has installed DSLAMs in [confidential] of the 262 ESAs that overlap its HFC network and in [confidential] ESAs overall; and

(b)       Optus and other access-based third-tier firms have installed DSLAMs in only [confidential] of Telstra’s 5,069 exchanges in Australia.

53                        In February 2008 the numbers of voice and data customers receiving a service through Optus’ use of the ULLS were [confidential], respectively.

54                        As at March 2008 the total number of end-users served through ULLS used by Optus throughout Australia was [confidential] and in June 2008 [confidential].

55                        Also as at March 2008 the number of end-users served through ULLS used by Optus in the HFC ESAs was [confidential] and in June 2008 [confidential].

56                        The average number of end-users served through ULLS used by Optus in each ESA as at March 2008 was [confidential] and in June 2008 [confidential].

57                        The s 152AW(4) material discloses that Optus uses the ULLS to supply at least [confidential] wholesale customers but there is no material to show whether any of those customers receive a service from Optus in the 262 ESAs that overlap its HFC network, and on the s 152AW(4) material it is uncertain whether the wholesale customers receive services using a Relevant Service in respect of premises within the HFC Footprint.

58                        Telstra submitted  that the impact of the exemption would be minimal because:

(a)        only a [confidential] portion of Optus’ ULLS would be affected; and

(b)       [confidential].

59                        Telstra also submitted that 50% of the ULLS used by Optus in the HFC ESAs would be within the HFC Footprint. 

60                        The number of services in operation (SIO) (including SIOs supplied to end-users by Optus’ wholesale customers) receiving services supplied by Optus using the ULLS throughout Australia as at March 2008 was [confidential].

The line sharing service (LSS)

61                        The LSS provides an access seeker with access to the non-voiceband frequency (or broadband) of an unconditioned copper wire on Telstra’s copper CAN running between an end-user’s premises and an exchange.  An access seeker who obtains access to the LSS uses its own facilities (such as a DSLAM) to supply high-speed internet access while the access provider (typically Telstra) retails or wholesales an underlying voiceband public switched telephone network (PSTN) service.

62                        Optus acquires negligible LSS from Telstra and its use of the LSS (as distinct from the LSS generally) is not material to the Tribunal’s consideration of the issues before it.

The local carriage service (LCS)

63                        The LCS is used by Optus (and third-tier firms) to supply a local call service to an end-user.  Telstra is responsible for the carriage of the call between the calling party and the called party – the local carriage service.  Optus re-supplies this service to an end-user.  The LCS is not a declared service in the Brisbane, Sydney, Melbourne, Adelaide or Perth central business districts (CBDs).

The wholesale line rental service (WLR)

64                        In the context of this matter, the WLR service involves Telstra supplying Optus with a basic line rental service that allows an end-user to connect to the Telstra’s CAN.  The end-user is provided with:

(a)        a telephone number; and

(b)       an ability to make and receive standard PSTN voice calls including local, fixed-to-mobile and national and international long-distance calls.

65                        The WLR service is also a resale-based service.  As with the LCS, the WLR is not a declared service in Brisbane, Sydney, Melbourne, Adelaide or Perth CBDs.

The domestic public switched telephone network originating access service (PSTN OA)

66                        For the purposes of this matter the PSTN OA service may be described as the carriage of a telephone call from a calling party to a point of interconnection with Optus’ network.

67                        Optus uses the PSTN OA service (along with the LCS and WLR service) to provide end-users with voice services including long-distance, fixed-to-mobile and local call services.

68                        More particularly, Optus uses the PSTN OA to supply long-distance services to wholesale customers.  During 2008, Optus supplied [confidential] wholesale customers in this way.  Those wholesale customers serviced in excess of [confidential] end-users.

69                        Telstra originally contested an Optus statement that Optus relies on access to the PSTN OA to service end-users who cannot satisfactorily be supplied via its HFC Network or ULLS, for example [confidential] retail business customers, but later stated that it did not express a view on the matter as it is not a fact within its knowledge.

Trends in Optus’ use of the Relevant Services

70                        Where possible, Optus is moving from supply to residential customers via the PSTN OA, LCS and WLR service to supply by ULLS in respect of premises unserviceable by its HFC network.  Accordingly, while there are distinct issues regarding access to the PSTN OA, LCS and WLR service (particularly in relation to business customers) the primary issue for Optus arising from Telstra’s application is Optus’ access to the ULLS to service those residential premises unserviceable by its HFC network.

71                        Optus’ use of the ULLS grew from 93,000 and 60,000 telephony and internet end-users (including end-users supplied by Optus’ wholesale customers) in March 2007 to 317,000 and 267,000 in March 2008.  This growth in Optus’ use of the ULLS is matched by a decline in resale-based customers from [confidential] in financial year 2005/06 to [confidential] by February 2008.

THE GRAVAMEN OF TELSTRA’S APPLICATION

72                        The gravamen of Telstra’s application is its submission that, if granted, the exemption is likely to result in:

(a)        Optus upgrading its HFC network;

(b)        Optus connecting additional premises to its HFC network;

(c)        a greater level of full facilities-based competition flowing from (a) and (b) above; and

(d)        long-term benefits to end-users flowing from (c) above.

73                        In making that submission, Telstra notes that the likely results, while mutually reinforcing, are not inter-dependent.  That is, in the future with the exemption Optus would have an incentive to treat more premises as serviceable and competition would intensify, even if Optus decided against upgrading its HFC network.

74                        It is convenient at this point to summarise what has been detailed above concerning the requirements of Act relating to the Tribunal’s task of satisfying itself whether the granting of the application will promote the LTIE as submitted by Telstra.  In undertaking that task, the Tribunal must have regard to the extent to which the exemption is likely to result in the achievement of the objectives of:

(a)        promoting competition;

(b)       achieving any-to-any connectivity; and

(c)        encouraging the economically efficient use of, and the economically efficient investment in:

            (i)         infrastructure by which services are supplied; and

(ii)        other infrastructure by which services are, or are likely to become, capable of being supplied.

75                        Leaving to one side the objective of any-to-any connectivity (for reasons stated in [7] above), the following paragraphs:

(a)        determine the markets relevant to the Tribunal’s consideration of Telstra’s submission outlined in [72] above;

(b)       canvass the concept of the LTIE;

(c)        focus, seriatim, on what may be conveniently described as the competition and economic efficiency objectives (adopting a future with, and a future without, analysis to determine whether the exemption will promote the LTIE as submitted by Telstra); and

(d)       address the issue of conditions or limitations that might be attached to the exemption.

RELEVANT MARKETS

76                        As observed at [31] above, it is not necessary for the Tribunal to make specific findings in respect of the relevant markets.  The application for exemption does, however, require consideration of the likely impact of the exemption, if granted, on Optus, the third-tier firms and end-users within the HFC Footprint and the ESAs that overlap the HFC Footprint and, more generally, of the consequences of the exemption for the promotion of competition and economic efficiency (including dynamic efficiency through innovation) in the use of, and investment in, infrastructure in the HFC Footprint and the ESAs that overlap the HFC Footprint.

77                        There is also a need to look more broadly than the HFC Footprint and the overlapping ESAs.  That is because if the exemption were granted there may be flow-on effects in respect of Optus’ customers within the HFC Footprint who also have dealings with Optus in the broader Australian telecommunications market.  Also, having regard to the nature of the exemption sought in this matter, the consequential chilling or disincentive effect on investment discussed below would manifest itself in that broader market.

THE LONG-TERM INTEREST OF END-USERS

78                        In assessing the long term in considering an application for exemption, it would normally be expected that little tension might exist between the objectives of promoting competition and encouraging the economically efficient use of, and investment in, infrastructure.  Should such tensions arise there is no guidance in Pt XIC how the tension might be resolved.

79                        In terms of commercial reality, the long term is but an iteration or evolution of successive short terms.  While in economic theory the long term is a blueprint of sorts, embodying the current most efficient outcome in a theoretical “what if” sense given current technology, end-user demands and preferences (and what these are today could be quite different in a month or a year’s time), in practical business terms the long term evolves as market conditions change and as firms adapt to changing pressures of market supply and demand. 

80                        Regulation of existing assets seeks to achieve a progression towards theoretically optimum levels of efficiency and competition.  Regulation cannot start with a clean slate and engineer the long-term ideal.  It has to do the best it can at any given time with the assets in place and with a realistic assessment of future commercial and social likelihoods and their impact on economic efficiency, broadly defined.

81                        Accordingly, measurement of the effect of a regulatory change on the LTIE in a practical sense necessitates consideration of the likely series of short-term outcomes as the market evolves over time, responding to changing market forces of supply and demand.  This may well require an examination of the existing nature and level of competition in the market and the impact of the matter in question in both the near future as well as in the longer term.  A balancing or weighting process will then be necessary to evaluate the overall long-term impact on end-users of any proposed change sought in the regulatory environment.

WHETHER THE EXEMPTION IS LIKELY TO PROMOTE COMPETITION

82                        Telstra’s submission that the withdrawal of Optus’ access to the Relevant Services is likely to result in greater, full facilities-based competition by virtue of Optus upgrading its HFC network and connecting additional premises, raised issues between the parties as to:

(a)        the number of premises passed by Optus’ HFC network; and

(b)        the number of premises that might be served by Optus’ HFC network.

            The following paragraphs canvass those issues seriatim.

Number of premises passed by Optus’ HFC Network

83                        It is not clear on the s 152AW(4) material precisely how many premises Optus’ HFC network passes.  Having regard to an analysis of the section 152AW(4) material before it, the Tribunal is satisfied that:

(a)        Optus’ HFC network passes at least 2.2m premises;

(b)       the construction of premises since the network was built may have increased that number; and

(c)        if the construction of such premises was at the same rate as the construction that has occurred in Telstra’s HFC footprint, Optus’ HFC network may now pass some 2.5m premises.

84                        Optus prefers the figure of 2.2m, while Telstra prefers the 2.5m figure.  Which figure is to be preferred is not material to the Tribunal’s determination of the issues before it.

Number of premises served by Optus’ HFC Network

85                        Optus’ additions to the initial Statement of Facts filed in this matter state that:

(a)        more than 1.4m homes (64% of the premises passed by its HFC network according to its records) are considered by it to be serviceable; and

(b)       more than 0.8m homes passed by its HFC network (approximately 36%) are considered by it to be unserviceable and that of these:

(i)         approximately 0.5m are MDUs; and

(ii)        0.3m are single dwelling units (SDUs) or commercial premises.

86                        The Final Statement of Facts contains the following paragraphs (footnotes omitted) submitted by Optus explaining why end-users’ premises within the HFC Footprint may be considered unserviceable:

137B.1in respect of single dwelling units:

(i)        location in a heritage area where overhead cabling is not permitted;

(ii)       distance from the main HFC cable because the voice signal deteriorates;

(iii)      the nature of terrain (for example, the minimum cross road height for a cable drop to the premises);

137B.2in respect of MDUs and commercial premises:

(i)        the radio-frequency design of the HFC Network does not accommodate MDUs;

(ii)       the MDUs may be located in areas without power poles (for example because the power supply has been placed underground);

(iii)      difficulty of securing access from bodies corporate;

(iv)      masonry construction of MDUs with resulting lack of access for cabling to individual units; and

(v)       unavailability of multi-line customer access units suitable for MDUs.

87                        Telstra submitted that Optus’ serviceability rate of 64% compares poorly with Telstra’s rate of 93%.

88                        The Tribunal notes, however, that compared with Telstra’s underground HFC network, the aerial nature of Optus’ HFC network limits its deployment for reasons particularised in pars 137B1 and 137B2 of the Final Statement of Facts.

89                        While Telstra did not directly contest pars 137B1 and 137B2 of the Final Statement of Facts, it did take issue with Optus whether:

(a)        premises presently classified by Optus as unserviceable are properly classified; and

(b)        the cost of the investment required to increase the number of serviceable premises.

90                        The parties provided the following answers to the Tribunal’s question about the number of serviceable and unserviceable premises within the HFC Footprint in the future with the exemption.

91                        The thrust of Telstra’s’ answer was to the effect that in the future with the exemption, Optus would have an increased incentive to connect additional premises to its HFC network.  This would include MDUs and SDUs which are currently classified by Optus as unserviceable on economic grounds.  Therefore, the number of premises that are genuinely serviceable by the SingTel Optus HFC network will increase even in the absence of any expansion of that network (that is, in the absence of infill investment).

92                        The ACCC’s assessment was that it does not consider that in the ‘future with’ scenario there will be sufficient further incentive (in addition to that which would exist in the ‘future without’ the exemption) for Optus to connect additional premises to its HFC network.

93                        Optus’ answer was to the effect that the number of serviceable and unserviceable homes within the HFC Footprint would be no different in the future with or without the exemption.  This, Optus submitted, is because the classification by Optus of a premises’ serviceability will not change and because it would not be rational or efficient for Optus to make the kind of infill investments needed to turn unserviceable premises into serviceable premises.

94                        Optus also submitted that in the future with the exemption that there is “... no realistic possibility ...” it would make investments (additional to those that it would otherwise make) to increase the capacity, quality and/or serviceability of its HFC network.

95                        In support of its submission Optus referred to numerous reviews it conducted between 1995 and 2003 whether a viable business case might exist for it to access MDUs via its HFC network as providing “... good evidence for the proposition that such investments are not economic ...”. 

96                        The parties focused on Optus’ most recent analysis of the economics of accessing MDUs carried out in July 2003.

97                        Telstra attacked this analysis as outdated, first in its conservative penetration assumptions and second in relation to the cost of customer premises equipment.  Telstra submitted in support of its position two aides-mèmoire entitled Impact of Assumption Adjustments on Optus MDU Model and Optus Penetration Rates.  Optus responded to the first of these with its own aide-mèmoire entitled: Assessment of MDU Connection Costs – Optus Response, which prompted yet another document from Telstra entitled MDUs – Telstra’s Response to Optus’ Written Submission (which was filed after the hearing).

98                        Having regard to the Telstra aides-mèmoire the Tribunal is not satisfied that it may accept Optus’ July 2003 analysis as demonstrating that in a future with the exemption it would not be viable for Optus to access MDUs via its HFC network.  That is not to say, however, that Telstra’s aides-mèmoire satisfy the Tribunal of the converse.  On the contrary, Telstra recognised that Optus’ analysis upon which its aides-mèmoire were based “lacks sufficient detail to allow precise adjustment”.  Further, as Telstra is not privy to the all the detail of Optus’ business case, its aides-mèmoire necessarily make certain assumptions.  The Tribunal is similarly disadvantaged in its consideration of:

(a)        not only Optus’ July 2003 analysis but also the several aides-mèmoire submitted by Telstra and Optus; and

(b)       the relevance of both the analysis and the aides-mèmoire to a determination whether the exemption is likely to result in the achievement of the s 152AB(2)(e) objective of encouraging the economically efficient use of, and investment in, infrastructure.

99                        Accordingly, to the extent that the achievement of the s 152AB(2)(c) objective of promoting competition turns on the likelihood of Optus, in a future with the exemption, accessing MDUs it does not currently access, the Tribunal cannot be satisfied on the s 152AW(4) material available to it that the exemption is likely to result in the achievement of the objective.

100                      Furthermore, the s 152AW(4) material available to the Tribunal shows that Optus maintains an investment program in its HFC network  and supports Optus’ submission to the effect that to date (with the Relevant Services available to it) it has found, and in the future without the exemption will find, no cause to justify any further major infill investment in its HFC network.  The Tribunal accepts Optus’ submission as a matter of commercial common sense.

101                      Just as the exemption is not a necessary prerequisite to Optus upgrading its HFC network (see [143] below), nor is the exemption a necessary prerequisite to Optus investing in infilling its HFC network.

The likely effect on third-tier firms

102                      In a future with the exemption, the third-tier firms do not exhibit the potential for:

(a)        filling the competitive constraint vacuum which would occur in the HFC Footprint; or

(b)       countering any diminution of competitive restraint in the broader Australian telecommunications market consequential upon Optus being denied regulated access to the Relevant Services in the HFC Footprint.

103                      Nor, having regard to the chilling or disincentive effect of the proposed exemption as discussed below (at [145]-[158]), is it likely that a third-tier firm would develop its own infrastructure to a point where it might provide such a competitive constraint else it too be the subject of a targeted exemption application by Telstra and risk being denied access to Telstra’s copper CAN.

104                      While some of the third-tier firms have deployed, and are deploying, their own infrastructure such as DSLAMs and MSANs, their ability to compete is dependent on access to Telstra’s CAN and, to a lesser extent, on Optus’ use of the Relevant Services.

105                      In the smaller geographic market, the HFC Footprint, in the future with the exemption scenario, the third-tier service providers would likely be unable to secure supply from Optus, leaving them with only one supplier, Telstra.  Thus, in the future with the exemption the third-tier firms would, in the foreseeable future, have no choice other than to obtain the Relevant Services from Telstra and the overall prospects for dynamic efficiency in the future with scenario accordingly appear unlikely.

106                      This diminution of dynamic efficiency attributable to a lack of choice within the HFC Footprint may also tell against the achievement of the s 152AB(2)(c) objective of promoting competition in the broader market for telecommunications in Australia.  That is because a third-tier firm forced by the exemption to deal with Telstra in its HFC Footprint activities may find it more convenient to have but one supplier (Telstra) throughout Australia and switch from Optus in areas not embraced by the application.

The likely effect on end-users

107                      A like diminution of choice and the ability to shop around for the best deal may also face end-users within the HFC Footprint in the future with the exemption.  As it is, and as it would be in the future without the exemption, an end-user has the choice of Telstra, Optus and a number of third-tier firms.

108                      If the end-user chooses Optus, the s 152AW(4) material demonstrates that:

(a)        Optus applies a ‘Business Rule’ that commits Optus to supplying the end-user by way of its HFC network where possible rather than by way of a Relevant Service; and

(b)       if pay TV is excluded, supplying the end-user by way of its HFC network is the least cost option for Optus (a fact advanced by Telstra ) – taking into account the monthly ULLS access charge of $16 imposed by Telstra, for a period over nine months it costs Optus more to supply an end-user by way of the ULLS than it does to supply by way of its own HFC network.

109                      Commercial self-interest and profit-maximising behaviour dictate that Optus would not choose to use a Relevant Service if it could supply an end-user more cost-efficiently by way of its HFC network.  As submitted by the ACCC :

(a)        it is not plausible that Optus would use (and therefore, in the future without the exemption, continue to use) to any significant extent the Relevant Services in preference to its HFC network for premises that are serviceable by that network; and

(b)       the Tribunal cannot be satisfied that Optus is (as submitted by Telstra) currently using the Relevant Services in preference to its HFC network.

110                      Thus, it may be concluded that within the HFC Footprint there are a number of end-users whose premises are classified by Optus as unserviceable by way of its HFC network.

111                      And, to the extent that those premises would remain classified as unserviceable in the future with the exemption, and if Optus were forced to supply its customers via its more expensive HFC network rather than the more cost-efficient Relevant Service, it may also be concluded that the exemption would not be in the LTIE.  True it may be that those customers might be serviced by Telstra or a third-tier firm via the Relevant Services, but they would then be denied the benefit of the competitive constraint Optus exercises on Telstra.

112                      As Optus submitted, even if in the future with the exemption Optus were to expand the reach of its HFC network and offer services via that network to end-users who it currently services through a Relevant Service, this might not represent socially efficient investment if alternative measures of provision were available at a cheaper cost.  This, Optus said, would plainly not be in the LTIE.

113                      The s 152AW(4) material shows that there currently exists an incentive for Optus to use its HFC network and to expand its reach through modest levels of efficient investment.  It is no more likely in the future with the exemption that Optus would upgrade the capacity of its HFC network, nor, if it did, would such an upgrade involve efficient investment in telecommunications infrastructure.

114                      What is commercially inconvenient and privately non-optimal for Telstra may in fact represent a social benefit.  The s 152AW(4) material shows that Optus connects its customers to its HFC network where it is feasible for it to do so.  Thus, if Optus is unable to service customers via its HFC network and instead provides them services via a Relevant Service that they find preferable to services offered by Telstra (or the third-tier firms), then such provision may be thought of as being socially optimal in terms of competition, end-user choice and in terms of the social cost of supply.  Also, by using what might otherwise be excess capacity in the CAN, use of the Relevant Services may be likely to lead to more efficient use of the CAN as well.

115                      There is no suggestion in Telstra’s submissions or the s 152AW(4) material to which the Tribunal was directed that Telstra’s CAN or its HFC network lack capacity.  The infill investment Telstra submits would flow from the exemption would, in effect, be but a duplication of Telstra’s CAN and its HFC network.  Such duplication of this ‘last half-mile’ infrastructure, if it were to occur, would, on the face of it, be a socially wasteful investment.

116                      Nothing put to the Tribunal convinced it otherwise.  The competition that Telstra submitted would flow from Optus connecting additional premises exists now and would continue to exist in the future without the exemption.  Indeed, for reasons canvassed above, the competition that exists now and would continue to exist in the future without the exemption would appear more socially desirable because:

(a)        it offers end-users within the HFC footprint a greater choice of suppliers competing with the same technology; and

(b)       there is no risk of third-tier firms being restricted in their choice of supplier within the HFC footprint.

Competition v a competitor: the targeted and discriminatory nature of the application for exemption

117                      As observed at [8] above, while the s 152AB(2)(c) objective of ‘promoting competition’ is not concerned with the position or protection of individual competitors (Telstra at [224]), there are circumstances in which the impact on a particular competitor may have implications for the promotion of competition generally (Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 at [242]).

118                      This is clearly a matter in which the impact of an exemption on a particular competitor (Optus), which is the dominant competitive constraint on the major player (Telstra), may have implications for the promotion of competition generally.

119                      The application before the Tribunal is one of a number of current applications by Telstra for exemption from the SAOs set out in s 152AR of the Act.  The other applications (in respect of the WLR service and the LCS, and in respect of the PSTN OA service) have sought to deny all access seekers regulated access to those services.  The present application is different - it is targeted specifically at Optus.

120                      If granted, this application would have the effect of:

(a)        denying Optus (and Optus alone) regulated access to the Relevant Services for the purposes of supplying services in the HFC Footprint;

(b)       denying it (and it alone) regulated access to Telstra’s copper CAN-dependent technology that would remain available to Telstra and third-tier firms; and

(c)        restricting Optus to a singular technology, namely, its HFC network when supplying services in the HFC Footprint.

121                      None of the other exemption applications by Telstra have been so specifically targeted – this application is unique in the history of access regulation in Australia.  As submitted by the ACCC (and not challenged by Telstra), in view of the likely chilling effects on investment of such an application for exemption it is perhaps unsurprising that there are no examples of a discriminatory exemption or forbearance having been granted anywhere in the world.

122                      In the future with the exemption scenario, Optus would be competitively disadvantaged due to a regulatory decision which would:

(a)        fly in the face of the words of the Second Reading Speech quoted at [43] above; and

(b)       be beyond the role envisaged by the Parliament for s 152AT in relation to major infrastructure investments as set out in the Explanatory Memorandum quoted at [45] above.

123                      If granted, the application would force Optus to compete within the HFC Footprint restricted to one technology (its HFC network) and forego the alternative technology (the Relevant Services) it currently uses and regards as more cost-effective for servicing certain end-users in the HFC Footprint.  This restriction would:

(a)        put Optus at a significant competitive disadvantage vis-à-vis Telstra and the third-tier firms who may continue to supply end-users via the Relevant Services in the HFC Footprint; and

(b)       place a significant damping effect on Optus’ role as the main competitive restraint on Telstra within the HFC Footprint, which effect is likely to extend to the broader market.

124                      Indirectly, the exemption would also have the effect of denying wholesale supply of the Relevant Services by Optus to third-tier firms, who may accordingly find they have fewer choices of suppliers of these services.

Regulating technology v regulating services

125                      The focus of the of the Part XIC telecommunications access regime is on services.  This focus reflects a fundamental tenet of good telecommunications regulation that it should, to the greatest possible extent, be technology-neutral, else the specification of one technology restrict the development of alternative technologies.

126                      As observed at [120] above, the targeted and discriminatory nature of the application would restrict Optus to a singular technology in the HFC Footprint and would, in effect, be regulating by reference to a technology.  Thus, the exemption if granted would fly in the face of the fundamental tenet.

127                      Regulating by reference to a technology is, in effect, a regulatory choice of the most economically efficient method of delivering a service, a choice best left to market forces to determine the most commercially/socially efficient technology.

128                      A fortiori, in this matter where the specification of the technology would be limited to but one player in the market (Optus), its competitors (Telstra and the third-tier firms) would be free to use all the available alternative technologies.

WHETHER THE EXEMPTION IS LIKELY TO ENCOURAGE ECONOMIC EFFIENCY

The notion of economic efficiency

129                      Consistent with Howard Smith and Sydney International Airport (see [13] and [16] above) the Tribunal considers that “efficiency” (or, more specifically in terms of s 152AB(2)(e), the economically efficient use of, and investment in, infrastructure by which services are supplied or in any other infrastructure by which services are, or are likely to become, supplied) should be assessed in terms of commercial/social efficiency.

130                      This approach avoids the ‘perverse impact’ (noted in the extract from Sydney International Airport quoted above) upon socially efficient resource allocation that would follow were a narrower approach to efficiency (in which only private benefits and costs were considered) to form the basis of the Tribunal’s determination of whether the exemption is likely to result in the achievement of the s 152AB(2)(e)objective.

131                      No matter how socially efficient an investment might be, it will likely not be undertaken (without external subsidy) unless it is commercially viable for the investor.  Accordingly, an assessment of commercial viability or efficiency must be made first, before the question of social efficiency in a practical sense can be properly evaluated.  On the other hand, an investment which is commercially viable or privately efficient may not be a socially efficient investment.

132                      Accordingly, while the Tribunal agrees with Telstra’s submission that commercial likelihoods (faced by all access seekers and infrastructure owners) are an important part of the Tribunal’s evaluation of the future with exemption in this matter, to consider the private benefits and costs alone would fall short of the requirements of the Act.

133                      The Tribunal must compare the likely impact of the future with the exemption with the future without it, not only on current infrastructure investors (cf: s152 AB(2)(e)(i)), but also on other likely infrastructure investors (cf: s152 AB(2)(e)(ii)) as they all may seek to compete for the custom of end-users, the promotion of whose long-term interests is the object of Part XIC.

Whether Optus is likely to upgrade its network

134                      In the course of the parties addressing Telstra’s submission that denying Optus access to the Relevant Services is likely to result in greater, full facilities-based competition by virtue of Optus upgrading its HFC network, it emerged that neither Telstra nor Optus believe that there is a first mover advantage in upgrading their respective HFC networks, either now or in the long term.

135                      The s 152AW(4) material shows that both Telstra and Optus are considering upgrades.  However, neither have moved to implement an upgrade.

136                      Telstra submitted  that:

(a)        there is a significant disincentive to an upgrade of its own HFC network to DOCSIS 3.0 standard, namely, that it might become a declared service and the subject of regulation under Part IXC; and

(b)       accordingly, Telstra would not be the ‘first mover’ in an HFC network upgrade.

137                      The Tribunal is of opinion that regulated access to an upgraded Telstra HFC network is as unlikely as regulated access to its network as it stands, particularly as market forces would dictate a competitive upgrade response from Optus.

138                      Thus, Telstra’s submission that it would not be the first mover in a technological upgrade of its HFC network suggests that:

(a)        Telstra is a large firm so secure in its market position that it is likely to upgrade its network only when it sees a competitive threat (this suggestion is given credence by Telstra’s decision in the past to provide ADSL2 + services only in ESAs where its competitors had done so);

(b)       any diminution of the competitive constraint provided by Optus’ access to the Relevant Services would not be in the LTIE, especially from the perspective of dynamic efficiencies; and

(c)        for reasons canvassed at [157]-[158] below, there is substance to the disincentive or ‘chilling effect’ submission advanced by the ACCC.

139                      The Final Statement of Facts filed in this matter notes that Optus has been reported as stating publicly that it is considering a DOCSIS 3.0 upgrade to its HFC network.  Optus relied on this report to submit, in effect, that:

(a)        the incentive to invest in an HFC network upgrade which exists now demonstrates an incentive to so invest would exist in the future without the exemption; and

(b)       the exemption is not a necessary prerequisite for Optus to decide whether to invest in an upgrade of its HFC network.

140                      The ACCC supported Optus’ submission but Telstra took issue with it.  It seized on the word “considering” and suggested that it was not clear whether Optus was saying it will not happen or that it will happen.

141                      The July 2007 report  referred to in the Final Statement of Facts quotes Optus’ Group Marketing Director, Consumer, as stating that it is investigating the deployment of DOCSIS 3.0 and its Managing Director, Consumer, as stating that “Upload is becoming increasingly important in the mind of the customer and we’ve got to facilitate that”.

142                      The Tribunal accepts Optus’ submission in [139] above.

143                      The Tribunal is satisfied that while Optus has not yet chosen to upgrade its HFC network, a future without the exemption scenario is likely to require not only Optus but also Telstra to keep the economically efficient use of, and investment in, their respective HFC networks under constant review as a matter of commercial common sense.  Certainly, the exemption sought by Telstra is not a prerequisite for this investment.

144                      In a competitive market it could be expected that such investment would result from the interactive rivalry forecast in the s 152AW(4) material referred to at [135] above, which reports that both Optus and Telstra are considering an upgrade to their respective HFC networks.  Because the incentive for such investment exists in the future without scenario, the Tribunal is not satisfied that making an exemption order to force Optus to pursue this path would promote the LTIE.

The ‘chilling’ or disincentive effect

145                      The ACCC submitted that the targeted and discriminatory nature of the exemption sought is fundamentally counter to the LTIE because it may provide a disincentive to the making of economically efficient investments in competitive infrastructure.  This chilling or disincentive effect, it submitted, would apply to all carriers, not just Optus, and apply both within and beyond the HFC Footprint.

146                      As the Tribunal understands the ACCC’s submission, if the exemption sought were granted, a carrier would be reluctant to undertake investment in infrastructure else the investment render it liable to lose its access rights, much as Optus which having invested in HFC infrastructure now risks losing its access rights.

147                      As Optus put it, the asymmetric nature of the exemption would have a detrimental effect on the LTIE by creating a general disincentive for any access seeker to undertake infrastructure investment, given the risk that such investment may be likely to lead to the loss of rights of access to declared services.

148                      Optus’ expert economic advice provided by CEG noted:

The consequence of the exemption would be that operators which are contemplating undertaking risky investments in an alternative infrastructure would be faced with an additional new risk that they may lose rights to regulated access that would be retained by service providers without their own networks.

149                      Telstra’s own expert, Professor Cave, acknowledged that:

It can be argued … that a discriminating access policy will create disincentives for investment in the future: an operator will fear that if it invests, it (and it alone) will be forced to negotiate for access on commercial terms, or be denied access ... which continues to be available to other competitors which have undertaken less infrastructure investment.

150                      This ‘serious issue’, Professor Cave concluded, is one which could be resolved by a statement from the regulator (the ACCC or on review, the Tribunal) clearly limiting the circumstances of what he described as “… an exceptional policy …” being adopted – for example, a statement confining the policy to circumstances “… such as the present … in which an operator [Optus] had constructed for itself nearly all the assets permitting it to self-supply …”.  He went on to say “… such a statement of intent would, if it were believed, prevent the routine application of different access arrangements for different operators.” 

151                      However, inherent in Professor Cave’s conclusion is an assumption that Optus is in a position to “self-supply”.  This is not an assumption shared by the Tribunal - the issue of the number of premises that may be serviced by Optus’ HFC network being one upon which the Tribunal cannot be satisfied having regard to the s 152AW(4) material available to it – see [99] above.

152                      Nor is the Tribunal satisfied that Professor Cave’s suggestions would address the chilling effect of the exemption proposed in this matter.

153                      First, the ACCC (or on review, the Tribunal) must cast a statement that is to be “believed”.  This, as noted by CEG, may give rise to some difficulties:

For instance, what constitutes ‘nearly’ all of the assets required to self-supply?  When does an investor cross the line?  This uncertainty could discourage other operators from extensive investments (ie investing in most of the assets for self-supply of a customer) while the announcement of a future review is hardly likely to provide the level of certainty needed by an operator to undertake a substantial investment in a new network build in which the pay-back period may extend well into the future.

154                      Second, as noted by Optus and the ACCC, if the ACCC (or on review, the Tribunal) were to make a policy statement without uncertainty it would operate as such a fetter on its consideration of future exemption applications as to render its decisions on them open to challenge.  As Optus put it, the ACCC (and on review, the Tribunal) is simply “… not at liberty to merely apply policy in its decision making process in relation to exemption orders.”

155                      The ACCC’s and Optus’ submissions on the chilling effect of the exemption sought is given credence by Telstra’s submission (at [136] above) that the risk of regulation deters it from first mover initiatives in investing in new technology.  Telstra’s submission in that regard is but the other side of the coin.

156                      The chilling effect is real and is likely to lead to less-than-optimal levels of independent infrastructure investment by a firm currently enjoying regulated access to the Relevant Services.

157                      Such a disincentive would, in the Tribunal’s assessment, be likely to seriously hamper the achievement of long-term dynamic efficiency and sustainable full facilities-based competition, the very opposite effect to Telstra’s claim as to the likely outcome of the exemption.

158                      Telstra submitted that the ACCC’s concern about the chilling effect was misconceived because Optus’ HFC network was in place prior to the existence of Part XIC and at all relevant times there have been two networks, not just one monopoly network owned by Telstra.  Telstra also submitted that it was not relying on Optus’ infrastructure investment since the Relevant Services were declared - rather, it relied upon the absence of such investment and that in those circumstances the exemption would provide no chilling effect to a firm making investments after the commencement of regulated access.  Telstra’s submissions do not, however, address the fundamental concern giving rise to the chilling effect, namely, that in the future with the exemption scenario a firm contemplating investment in its own infrastructure is likely to decide against it because of the uncertainty about losing access to the declared services, much as Optus risks losing its access rights. 

Limitations or conditions

159                      Having regard to the Full Court’s decision in Telstra (at [290]), the Tribunal is bound to consider the question of conditions or limitations at the same time it is considering whether it is satisfied that an exemption will promote the LTIE – the purpose of s 152AT(5) being to allow the ACCC (and on review, the Tribunal) to fashion appropriate conditions and limitations which would go towards promoting the LTIE.

160                      As observed in [2] above, Telstra’s application sought transitional conditions.  Those conditions would not, of themselves, address the Tribunal’s findings that the exemption will not promote the LTIE.

161                      Nor would a limitation Telstra submitted on the defined area in which the exemption might apply address issues in relation to some of Telstra’s exchanges being ‘capped’ and not allowing, or restricting, the installation of third party infrastructure.

162                      The Tribunal was also unable to perceive of a condition or limitation that would:

(a)        address the chilling or disincentive effect so as to allow a finding that the exemption sought will likely promote the LTIE; and/or

(b)       allow third-tier firms the choice of supplier in the HFC Footprint area in the future with the exemption; and/or

(c)        ameliorate the likely detrimental effects on end-users.

CONCLUSION

163                      In light of the above reasons, the Tribunal is not satisfied that the making of the exemption order sought by Telstra will promote the LTIE of carriage services or of services provided by means of carriage services.

DECISION

164                      The decision of the ACCC of 11 November 2008 is affirmed.

Associate:

Dated:         22 May 2009