11 February 2013

Independent Pricing and Regulatory Tribunal

PO BOX Q290

QVB Post Office NSW 1230

Dear Members of the Tribunal,

Crown Castle Level 1, 754 Pacific Highway PO Box202 Chatswood NSW 2067 Australia

Review of Rental Arrangements for Communication Towers on Crown Land

Tel +61 2 9495 9000 Fax +61 2 9495 9100

www.crowncastle.com

Thank you for the opportunity to make a submission in relation to I PART's review of rental arrangements

for communication towers on Crown land- Issues Paper December 2012.

As you may be aware, we fully participated in the I PART review on this topic in 2005 and accordingly would

reiterate the points made in our submissions as part of that process (enclosed is a copy of our 2004

submission and 2005 supplementary submission).

In addition to our previous submissions, we would also like to make the following general comments:

1. Existing Contracts Must Be Honoured

The terms of any existing contracts entered into by governmental agencies should be honoured (in

the same way as concluded under the 2005 I PART review) and any changes should only take effect

on expiry of those contracts. It is important for the private sector to be able to enter into

agreements with the government without fear that the government will try to retrospectively

change the terms of those agreements.

2. The Market Is Land Access (Not Towers Or Radio Networks)

There are 3 separate access markets associated with the communications industry:

i) The market for access to land (the subject of this I PART review);

ii) The market for access to communications infrastructure; and

iii) The market associated with access to radio networks in Australia.

It is important that I PART understands that the risk and return associated with each of these

markets are radically different. The rental associated with access to land should be based on an

opportunity cost analysis not an attempt to extract a profit share from different market segments

that the government has made no investment in.

3. Co-User Fees should remain payable by Co-Users

The current regime where co-users are directly liable for eo-user fees (if any) should remain in place. It is not for an infrastructure owner such as Crown Castle to collect rental payments from third parties on behalf of the NSW Government.

Crown Castle Australia Pty Limited ABN 34 090 873 019

~ flVI CRAOWN W ~ . J TLE 4. Data Networks Create New Challenges for the Industry

Lastly, as you may be aware, telecommunications carriers have been experiencing significant

challenges in maintaining appropriate returns on investment due to the huge costs associated with

deploying data networks in Australia. This has led to some carriers declining to invest further

capital in different market segments. This decline in capital investment can and has led to a loss of

jobs and declining economic activity in the Australian economy. IPART should be careful not to

impose an exploitative rental regime at such a confronting time for the telecommunications

industry.

Director, Corporate Development

IPART Review of Rentals for Crown Land Communications Tower Sites

Crown Castle Submission

4 November 2004

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Table of Contents

1 Introduction .................................................................................................. 2

2 Executive Summary ..................................................................................... 2

3 Commentary.................................................................................................. 6

3.1 The Nature of the Property Rights and Services Involved............................... 6

3.2 The Criteria for Decision Making and Objectives of the Review .................... 7 3.3 Legislative Requirements and Context ............................................................... 8

3.4 Property Rights and Market context ................................................................... 9 3.5 Methodology for price setting............................................................................ 11

3.6 Consequences of pricing errors .......................................................................... 14

Appendix A – Response to Specific Review Questions

Appendix B – Overview of Carrier Statutory Powers as they apply to Review Questions

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1 Introduction

The attached report is the response of Crown Castle Australia Pty Ltd (Crown Castle) to

the IPART issues paper “Review of Rentals for Crown Land Communication Tower Sites”

(IPART Paper).

Crown Castle is well placed to make a submission to IPART in relation to the matters

identified in the IPART Paper as Crown Castle owns and operates 1400 communications

towers, including towers sited on Crown land, that are used by telecommunications

carriers and other communication service providers on a shared basis. Crown Castle is

independent of individual service providers. As an independent shared infrastructure

supplier (ISIS), Crown Castle facilitates maximum use of towers on a competitively

neutral basis as between individual service providers.

2 Executive Summary

1. Crown Castle supports the move to a broadly consistent government policy

covering tenure and access fees. This is how Crown Castle manages its portfolio.

Crown Castle provides co-users with portfolio wide standard tenure arrangements

and pricing, and the standard and transparent nature of these arrangements

encourages the optimal use of Crown Castle’s towers. This leads to an

environmentally and economically efficient outcome for all stakeholders. Crown

Castle does not seek to extract excessive rents from co-users of sites by attempting

to measure the “strategic nature” of a site to a particular co-user. It is neither fair

nor efficient to charge excessive access fees and the market and regulatory

framework constrains this behaviour in any event.

2. A competitive market outcome should lead to rentals for access to Crown land

being based on the Crown’s alternative use value (or opportunity cost). This can

be judged with reference to the precinct statutory land value, a methodology

adopted in IPART’s Review into Rentals for Waterfront Tenancies. This could be

supplemented by an administration fee payable by co-users based on the direct

incremental or variable cost to the government agency of providing access to the

co-user (if any). This fee structure would maximise the use of existing sites and

minimise the proliferation of towers, and thereby meet the stated objectives

identified in the IPART Paper. There is no basis to levy site control fees or other

arbitrary fees for co-users, and the outcome would necessarily contradict the

objectives set out in the IPART Paper.

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3. The demand and price payable for access to public land is generally elastic. If the

landowner charges too high a price, co-users will simply:

(a) by-pass those sites and seek alternatives (and therefore construct more

sites competing with public land);

(b) access those sites using the statutory power to install low impact

facilities under the Telecommunications Act; or

(c) not provide network coverage in that area, thereby denying end users

access to communications services.

If a co-user exercises its statutory powers to access a site, a landowner would

only be entitled to financial loss or damage as a result of that exercise of statutory

power. As the government agency already receives rental for the lease of the

public land from the primary user, the amount recoverable is likely to be

nominal. In any event, litigating to recover access fees is economically and

administratively inefficient.

4. The above outcome is supported by a market analysis. There are three different

markets that operate in relation to the utilisation of a tower site:

(a) First market - access to public land (by primary users).

(b) Second market – access to tower infrastructure located on public land (by

secondary or co-users).

(c) Third market – access to a telecommunications network and services (by

the public).

Each of the above is a very different market with different risks and rates of

return. Crown Castle (as an access provider in the second market) charges access

fees to co-users based on its required rate of return for the investment made by its

shareholders. Crown Castle’s shareholders invested hundreds of millions of

dollars in acquiring tower infrastructure with a view to making that

infrastructure available to co-users for the environmentally and economically

efficient deployment of communications services throughout Australia. It

accepts a myriad of risks - including operating and maintaining the tower

structures themselves, demand risks, network sharing, customer consolidation,

occupational health and safety issues, customer default etc. A government

agency landowner does not take on any of these risks and a government

landowner’s returns accordingly should reflect its much lower risk profile and it

should not tax an investment it has not made.

It follows that neither government agencies (as landowners) nor the primary

users (such as Crown Castle) should appropriate the returns available to co-user

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service providers that provide telecommunications network services to end

consumers. Co-users collectively invest billions of dollars in those networks and

accept the consequent market risks associated with those investments.

5. Crown Castle occupies 38 of the sites owned by the three government agencies

identified in the IPART paper. We have reviewed the rentals paid to those

agencies as against the average ground rental we pay to landowners across the

approximately 1400 sites we lease or licence throughout Australia. The average

rental we pay to the three agencies is greater than the average ground rent Crown

Castle pays across its portfolio and similar to rents paid for analogous sites on

private land. Our analysis confirms that those government agencies are receiving

a fair market based rent for the use of those sites.

6. As a legal and contractual matter, existing rents provided for in long term ground

leases or licence arrangements cannot be changed for the term of those leases.

7. As to tenure:

• Crown Castle believes that all parties would be better served by the use of

a lease rather than a licence (subject to any contrary legislation). A lease

provides greater certainty for all market participants, particularly in the

context of the significant capital investment required to construct tower

infrastructure and deploy communications networks.

• The term of tenure should at least match the structural life of the facilities

constructed on site. Crown Castle currently depreciates its towers over a

20 year period and we believe that this should be a minimum term for a

tenure document, particularly given the low uncertainty associated with

the future use and occupancy of the site.

• There are administrative difficulties and land use/tower use disconnects

associated with the use of a network wide tenure instrument as opposed

to a site specific tenure document.

• To encourage investment and the optimal use of sites, leases should be

assignable.

8. Crown Castle does not support a competitive bid process upon lease expiry. It

does not meet the stated objectives set out in the IPART Paper. In particular:

• A bid process will discourage investment as new communications

infrastructure requires certainty of long term tenure.

• As noted in the IPART Paper, network owners access both public and

private land to build networks and they may be left with stranded towers

on private land if they are unsuccessful in the tendering process.

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• A carrier may be able to outbid an ISIS on lease expiry (for its own

market/competitive reasons) and construct a smaller tower not capable of

sharing. Towers suitable for sharing are more expensive, and Crown

Castle is not interested in building towers that cannot be shared. If

unsuccessful, Crown Castle would be required to pull down its tower

under its make good obligations and remove all co-users from a site. This

would be an expensive and inefficient outcome for all concerned.

• For important sites, carriers would simply utilise their maintenance

power under the Telecommunications Act to remain on site, thereby

bypassing the auction process altogether. A NSW government agency

does not have the power to grant sole access to a successful bidder.

• An auction process would need to commence at least 12 months out from

a lease expiry – this would involve excessive legal and administrative

costs for all participants.

9. Higher public land access costs impact new entrants on a disproportionate basis as

it creates a barrier to market entry. This discourages investment in new

technologies and may ultimately prevent a new entrant providing a ubiquitous

offering of communication services, particularly to rural and remote areas that are

currently under-serviced by such services.

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3 Commentary

The terms of reference for the review requires IPART to report on existing tenure and

rental arrangements, and on an efficient and effective framework that allows the NSW

Government to obtain fair market-based commercial returns.

In order to determine efficient, effective and fair market-based tenure and rental

arrangements for access to Crown land it is important to clarify:

• First, the nature of the Use Rights (as defined below) and services involved

(section 3.1);

• Second, the criteria for decision making and objectives for the IPART review

exercise (section 3.2);

• Third, relevant legislative requirements and context (section 3.3);

• Fourth, the market context which determines the feasible value of the Use Rights

and services (section 3.4); and

• Finally the appropriate methodology to apply to price setting in this case (section

3.5).

In this section we separately address each of these points. We do not apply the

methodology to any particular site locations.

We conclude with a discussion of the consequences of pricing errors for access.

3.1 The Nature of the Property Rights and Services Involved

The general subject matter of the review is the terms for access to Crown land. Although

the focus of the review is the specific use of Crown land for communications towers, the

approach taken to this review should be grounded in a coherent general approach to the

question of access to Crown land, to avoid inconsistency between uses and industries.

Crown land comprises approximately half of all land in New South Wales being 39

million hectares. It is therefore nearly impossible to build a utility network (e.g. energy or

communications network) without requiring access to Crown land.

There are two types of uses of Crown land that need to be considered in this review, and

as our later discussion will show, it is important to distinguish between these two uses in

order to determine fair and efficient prices for such use. The different types of use (Use

Rights) are as follows:

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• Right of Occupancy – this right covers any area or site on Crown land that may be

occupied for the purpose of erecting a commercial or residential facility (in this

case communications towers). This right may be granted by means of a lease or a

licence.

• Right of Way – this right covers the access way over adjoining Crown land that

may be required to secure access to the area or site of occupancy. Access may be

for vehicles or for power or other services. Rights of way are often largely

facilitated over existing roads. In the case of communications towers, access is

usually only infrequently and irregularly required.

These two rights in reality constitute two separable services provided by the Crown,

although they may in fact be bundled into a single legal instrument.

The specific land subject to the review is managed by three agencies:

• Department of Lands;

• Department of Primary Industries; and

• Department of Environment and Conservation

Crown land is subject to a restricted set of uses (which to a degree depend on its current

use). Such restrictions are likely to have the effect of dampening the economic or

commercial value of the land.

3.2 The Criteria for Decision Making and Objectives of the

Review

The terms of reference for the review requires IPART to report on:

“…an efficient and effective framework that allows the NSW Government to

obtain fair market based commercial returns.”

Decisions on the various options in relation to tenure and rental arrangements therefore

need to conform to three decision criteria - namely they need to be efficient, effective and

fair. This is consistent with general legal and economic approaches to public policy and

legal obligations on the Crown.

IPART is also directed to have regard to social benefit objectives. It is noteworthy that the

terms of reference specifically require IPART to have “regard to related objectives of:

o Maximising the use of such sites;

o Minimising their proliferation; and

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o Not impacting adversely on the potential investment in

telecommunications…”

These objectives clearly add greater weight to the criteria of efficiency for making

decisions on tenure and rentals, and further clarify the factors to be borne in mind.

3.3 Legislative Requirements and Context

The terms of reference for the review include a requirement that IPART examine tenure

and rental matters in light of “the relevant legislative requirements.”

Our review of State legislation suggests that each of the relevant agencies is empowered

to implement a lease approach with a specified lease period. This approach would afford

users sufficient opportunity to recoup the cost of development of assets with long pay-

back period, such as telecommunications towers. This approach also enables users to plan

investments and this greater certainty can be reflected in rentals. Government can derive

an assured revenue stream from users.

Commonwealth legislation imposes a significant constraint upon each agency’s ability to

derive market-based rents for ongoing rights of occupancy of sites currently used for

communications towers and for placement of additional antennas and associated

communications equipment on communications towers.

The operation of the Commonwealth legislation is described in some detail in the

Appendix to this submission. In summary, the Telecommunications Act 1997 contains

certain powers of telecommunications carriers to “maintain” communications facilities,

including powers to enter upon and occupy land on which communications facilities are

established. The Act also contains certain powers of telecommunications carriers to install

so called “low impact facilities” upon communications towers. These powers also

empower persons acting for a carrier under a contract to do these things. In each case

compensation is payable if a person suffers financial loss or damage because of anything

done by or on behalf of a carrier in the exercise of these powers. This compensation is

determined by agreement, or failing agreement by a court of competent jurisdiction.

The prospective operation of these powers relevantly constrains the agencies (and all

other landowners) as follows:

(1) Regardless of the terms of any existing or future lease or licence, on expiry of that

lease or licence a carrier (or a person that may be acting for a carrier) may exercise

the “maintain” power to continue to maintain a communications facility, including

entering upon and occupying land on which that communications facility is sited,

subject to payment of compensation for any financial loss or damage occasioned to

the land owner (and any other person).

(2) Regardless of the terms of any existing or future lease or licence, a carrier or a

person that may be acting for a carrier may exercise the “install” power to install a

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“low impact facility” on a communications tower, subject to payment of

compensation for any financial loss or damage occasioned to the land owner (and

any other person). This facilitates “co-sharing” of communications towers, but

constrains the ability of the tower owner or operator and the ability of the land

owner to charge for co-sharing of towers. Co-sharing of a tower through the siting

of additional antennas and associated facilities on a tower will generally result in a

significant opportunity cost for the tower owner, as the part of the tower on which

that additional equipment is sited cannot be used by another customer. This is of

course directly relevant to assessment of reasonable compensation. By contrast, a

landowner usually does not suffer financial loss or damage through such co-siting.

Generally, there will be no loss of use or enjoyment of land by the land owner that

arises out of the co-siting by a secondary user. The co-siting by a secondary user

may cause some increase in coming and going to a site and accordingly use of

rights of way to access the site for the purpose of installation and maintenance of

the secondary user’s facility. However, the impact on a landowner of additional

coming and going along an already established access way will be minimal.

(3) Statutory rights are not available in relation to the installation of new

communications towers. Accordingly the pricing for installation – that is, initial

grant of rights of occupancy – is not relevantly constrained by the

Telecommunications Act 1997. However, the pricing for continuing rights of

occupancy is relevantly constrained by the prospective exercise of the “maintain”

power, as described above, and the installation of low impact facilities on existing

towers.

3.4 Property Rights and Market context

In order to determine efficient, effective and fair market-based tenure and rental

arrangements for Crown land, it is important to not only clarify the legal framework

within which the market must work (as above), but also clarify the nature of the property

rights involved, and the market context which determines their feasible value.

Nature of the property rights

As noted the subject matter of the review is the terms for access to Crown land (managed

by the three agencies covered by this review) for the purpose of communications towers.

It is important that the two rights and services relating to Crown land (Right of

Occupancy and Right of Way) are not confused with rights and services offered by the

occupancy rights holder to co-locating third parties (co-users). An occupancy right holder

who acquires occupancy rights over Crown land may of course grant rights to others,

covering for example access to the facilities they may construct on any site. The focus of

the review is the terms for access to the two property rights outlined above and not the

rights that may be granted to third parties by any occupant.

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An important feature of Crown land which is the subject of the review is that it is

generally limited in the uses to which it may be put. This limits the opportunity cost

associated with making the land available for occupancy in permitted uses. If Crown land

is subject to limited permitted uses, (e.g. excluding development for residential and

commercial uses) then its use to support public utility infrastructure may involve a low

opportunity cost.

Demand for Use Rights is derived demand

Rights of occupancy and access rights are inputs, or intermediate services, not final

outputs or services. They are factors or means of production, not the final output or

service consumed by consumers - who are the ultimate source of value. The demand for

Crown land services is therefore “derived demand” which is derived from demand for

the final product or service which it contributes to produce.

Thus in the same way as labour is employed in the manufacture of cars, Crown land is

used as an input in the production of many services to end users. Crown land is thus used

for example in the production of recreational services (e.g. parks and reserves), and in

public utility services (such as energy, water and communications services). Crown land

is moreover typically employed at a very early stage of the production chain, and

performs an essential infrastructure service.

On this basis, the market for access to Crown land can involve various players on the

demand side including energy, and telecommunications carriers whose demand for

Crown land is derived from their demand for a network infrastructure.

It is likely that these players will approach any decision on how to use Crown land

managed by the three agencies covered by the review, by comparing the net benefit of

using alternative sites, offered for example by private landowners and state owned

corporations.

Public utilities (including telecommunications carriers) will approach access to Crown

land for building their network with three options in mind. They can either

• purchase the Crown inputs themselves and thereby own their own tower sites and

control co-locations (subject to regulatory constraints); or

• enter into co-location arrangements on competitor’s towers; or

• sub-lease locations from an ISIS. This is the value-add provided by Crown Castle

to the telecommunications sector. The carriers, not Crown Castle own the antennas

and associated ground equipment. Other inputs provided by Crown Castle itself

include Crown land access management, co-location management, and the tower

asset portfolio (infrastructure) itself.

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The decision on which of these options to pursue will depend on the costs and benefits of

the alternative options including the price of access. It is important that the access regime

for Crown land does not distort this decision by for example favouring one or the other

option. Finally of course carriers may readily choose not to locate in certain locations (e.g.

rural) if the cost of access is set too high. The access regime clearly needs to recognise this

elasticity of demand for sites and in particular the risk that raising prices may tend to

reduce total revenues from Crown land and not increase them.

Given this context, we set out our methodology for price setting below.

3.5 Methodology for price setting

IPART has asked for comment on what rental fee structure should be adopted by

government agencies in making public land available for communication towers. This

section is a market economic analysis outlining the pricing methodology that should

apply to that market.

Cost based

Prices should be set at levels which enable the Crown to recover the full economic costs of

producing the outputs being purchased by tower site lessees. Accordingly, the price of

access to and occupancy of Crown land should be set relative to the direct incremental

and opportunity costs of providing access to Crown Castle and its customers, and to no

other matters.

It is not appropriate for the Crown to seek to set land rental prices in relation to the

“strategic value” of tower sites, including type of equipment, population and other factors

referred to in the terms of reference. In competitive markets, prices are set in relation to

the marginal economic cost of production or substitute costs for an “input”. Similarly in

regulated industries such as electricity network services the price of network services

supplied to a car factory is set in relation to the cost of supplying the network services to

the factory and does not refer to the type, number or value of the cars produced, or the

profitability of the car factory.

Efficient

Nor is it appropriate for the Crown agency to impose unnecessary costs on Crown Castle

or its customers (for example by duplicating Crown Castle site management services to

customers) and then seek to recoup these in higher charges. Again, in competitive

markets, with alternative suppliers, any supply chain that is characterised by inefficiency

due to duplication or other excessive costs, would not be competitive.

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Service definition

The first step in establishing a pricing methodology is a clear service definition. As noted

earlier, the service being supplied is access to Crown land. This access has two

components:

(i) exclusive occupancy of tower sites; and

(ii) shared access to routes over Crown land necessary to reach tower sites.

The government agency does not provide tower co-location services to carriers. However,

as discussed below, co-location may have implications for the cost to agencies of

providing access services. There should then be a single rental fee component – for the

rental of the tower site and access, as these are the only services being supplied by the

Crown agency.

The other fee components mentioned in page 8 of the IPART Paper, including possible

charges to carriers (co-users) sub-leasing tower sites, are not legitimate or appropriate as

they refer to services that are supplied not by the Crown agencies but by Crown Castle (or

other tower owner’s) itself.

Identification of cost elements

The second step is the identification of the direct incremental costs and opportunity costs.

Direct incremental costs to Crown agencies are relatively easy to quantify, as this refers to

the actual additional costs incurred by Crown agencies associated with provision of tower

site access. Direct incremental costs are likely to include:

• Administrative and management costs, including establishment of pricing and

tenure framework, lease negotiation (including legal fees) and ongoing

management. These costs relate both to access to routes and occupancy and are

typically spread across the portfolio of site rentals rather than being specific to any

one site – e.g. legal costs. Such costs may also include any costs incurred by the

agency during the process by which any planning approvals are required,

including possible public consultation.

• Operational costs, including any one off expenditure necessary to improve site

access or provide additional security. It may also include ongoing costs such as

route maintenance and route and site inspection, and other costs not already

addressed above. Further costs would include a portion of land tax, rates, any

other State levies, electricity (including a portion of fixed charges), and insurance.

• The presence of a built structure may give rise to higher insurance costs, to the

extent any indemnities obtained from the lessees are deemed to leave the agency

in question with residual insurance exposures. These costs typically relate to and

may vary between individual sites.

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Opportunity costs may be more difficult to identify and measure, especially in relation to

sites where alternative uses are heavily constrained by specific regulation. For example,

in national parks, there are typically prohibitions or very strong restrictions on any built

structures and thus the site in question may have no alternative uses. Indeed, in such

cases the only alternative uses are likely to relate to infrastructure for other essential

services, for example easements for electricity transmission towers in the Snowy

Mountains.

Within regulatory constraints on alternative usage, the main opportunity costs in relation

to sensitive sites in, for example, a national park would appear to be the loss of visual

amenity for park visitors.

Quantification of costs

Once direct incremental and opportunity costs have been fully identified, the next step is

to quantify them, taking into account relevant difference depending on the nature of the

sites in question. Relevant factors include the nature of any regulatory restrictions, and

the direct incremental costs associated with route and site access for each site.

It is not obvious that administrative costs would increase as a result of lessees offering co-

location services as there would continue to be a single lease arrangement in operation

and the on-sale of co-location services, in itself, would not impose additional

administrative costs to the agency. However, there may be some additional operational

costs associated with higher rates of route access. To the extent this is so, there is an issue

about the most efficient means of recovering these additional costs. The two options

would appear to be either charging each user separately, or a mechanism in the main

lease instrument allowing the agency to recoup additional costs associated with higher

utilisation of the route access right. Given the likely administrative cost, relative to the

utilisation driven cost, the latter option is likely to be the most cost-effective overall.

Reference to prices for comparable services

Once direct incremental and opportunity costs have been estimated, comfort that the

estimate is both valid and accurate may be sought via benchmarking cost-derived prices

with prices for site occupancy and route access in relation to tower sites on land that is not

owned by the Crown.

The first issue is the extent to which there is competition for the supply of locations. In

heavily built up areas, there are typically numerous locations on existing structures for

the placement of telecommunications infrastructure. In addition, a higher density of

locations may be necessary to manage high communications volumes. In this case, the

service being supplied by private property owners is different – it is more akin to the

supply of locations for antennas (such as rooftops on buildings) than to the supply of sites

for towers.

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However, the direct incremental and opportunity costs of granting access to locations may

be higher due to the greater number of alternative uses, and the larger number of people

who could be affected by the infrastructure. For example, it may be necessary for an

apartment building manager to obtain approval from all the strata owners before entering

into a lease. The overall outcome may be higher prices than in other competitive sites.

In outer suburban areas, there may be fewer existing structures available for locations,

while the value of the land for rental as tower sites may be lower. The opportunity costs

may be lower as in residential zoned areas there may be fewer alternative uses and there

may be fewer people affected (lower population density). These considerations suggest

prices may be lower than in highly built up areas.

In rural areas, there may be no existing structures available for locations and the value of

the land for rental as tower sites may be lower still. The result would be a lower

opportunity cost for suppliers.

In remote areas where all or almost all the land is owned by the Crown, there may be no

existing structures available for locations and the value of the land for rental may be very

low because of usage restrictions. The result could be a low opportunity cost for the

supplier (the Crown).

Differential pricing to Crown entities

There is no case for differential pricing to Crown entities and this is not required if pricing

is appropriate. Any need for differential pricing to Crown entities suggests prices are

excessive for other entities.

3.6 Consequences of pricing errors

Where tower location prices are excessive, then depending on the materiality of this input

relative to other inputs, some combination of the following outcomes may occur.

• An increase in the level of tower proliferation.

Higher prices for tower locations necessarily weakens the incentives for carriers to

co-locate, and encourages the acquisition and build of new sites. It should be

noted that carriers have incentives not to co-locate due to the opportunity costs of

co-locating. These costs include the ability of competitors to offer the same

wireless coverage at the same time, possible capacity constraints in the event of

any future decision to increase capacity (requiring more locations), and the

transactional costs of dealing with an outside supplier for tower location services.

Accordingly, while co-locating on a tower may still cost less relative to a new

tower, if co-locating prices increase, carriers are more likely to opt for a new tower

site. The result is likely to be more towers than would otherwise be the case. This

would be an adverse outcome relative to the terms of reference for the review.

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• Discourage new investments by ISIS on public land

Excessive prices reduce the incentives for carriers to co-locate. Accordingly, they

are more likely to seek to own access tenure and towers directly, rather than

outsource this to an ISIS. This will further fuel the proliferation of towers and

lessen the role of an ISIS to make tower infrastructure available for sharing on

public land.

• A reduction in rural coverage.

Where equivalent alternative site suppliers are not readily available, excessive site

prices will result in higher tower site prices overall (the market price will rise).

Higher overall prices mean that, other things being equal, the revenue threshold

for the acquisition of tower locations will be increased. In areas where this

threshold cannot be met, acquisition will not occur. While site costs for towers are

likely to be low relative to some other inputs, at the margin, the overall result

would be the acquisition of less tower sites than otherwise. This outcome is most

likely to occur in marginal parts of the network where there are relatively few

customers – i.e. in rural areas. The extent and quality of service to consumers will

be lower than otherwise. A reduction in investment in tower locations would be

an adverse outcome relative to the terms of reference for the review.

• A decrease in quality.

If the best tower sites are rendered too costly, substitute sites will be used.

However, the signal quality from substitute sites may be lower than otherwise,

leading to dead spots (no network coverage) and higher call drop out rates. The

quality of service to consumers will be lower than otherwise.

• A slower rate of technical innovation.

Higher tower location prices and lower overall earnings by carriers may reduce

incentives for technical innovation and the introduction of new services. For

example, higher prices for sites on towers may reduce the willingness of new

entrants to enter the wireless communications market, for instance to offer

wireless broadband services. Even when new entrants reach the market, we are

now seeing those entrants plan their deployments away from sites on land owned

by, in particular, state owned corporations, thereby reducing revenues for

government and compromising the ubiquitous offering of new communications

services.

• Higher prices to consumers.

Conceivably, as a partial alternative to the above outcomes, carriers could pass on

higher tower location costs in higher charges to all end users. However, any

16

material increase in price is likely to suppress demand (communications carriers

have a high price elasticity).

INTERNATIONAL

17

APPENDIX A

RESPONSE TO SPECIFIC REVIEW QUESTIONS

1. Overview

o Occupancy rights need to take into account

� long term specialised nature of the tower assets;

� the social and economic benefits of tradeability; and

� the need to optimise investment including infrastructure sharing.

o Pricing should be based on direct incremental and opportunity costs of

production benchmarked to comparable competitive land made available to

primary users.

2. Tenure Issues

Occupancy rights should be strengthened, reflecting the specialised and stranded nature

of the assets, and their exposure to opportunism. If there are not sufficient safeguards to

renegotiation and appropriation of returns to investors in towers ex-post – there will be

sub optimal investment ex-ante.

(a) Lease or licence?

The OICT Management Guidelines do not provide any rationale for why a licence should

be preferred to a lease. Primary and co-users will be required to accept more tenure risk

with a licence and therefore, if adopted, the return available to government agencies

should be discounted accordingly. Further, there are occupational and site management

risks that a government agency may inadvertently take on if they do not grant long term

exclusive occupancy rights to primary users. Crown Castle believes that a registered lease

can deliver a better outcome to the government agency, the primary user and the co-users.

A standard form lease document would further remove some of the administrative

burden on government agencies in providing this form of tenure.

Whatever the case, the existing instruments cannot be replaced prior to tenure expiry

without the agreement of existing users (unlike the tenure arrangements for most of the

Waterfront tenancies where the Minister can terminate arrangements at will).

Of course, legislation may preclude leases being granted and any review of tenure needs

to reflect that regulatory overlay, or encompass consideration of amendment to that

legislation.

18

More specifically Crown Castle believes that a lease is the more appropriate occupancy

instrument for communications sites (where the infrastructure is owned and maintained

by the primary user), for the following reasons:

• Security of tenure - In NSW registration of a lease provides the ultimate

protection for the lessee through indefeasibility of title. This guarantees that the

primary user has protection from third party interests. That protection is not

afforded by an unregistered lease or a licence. Given the significant capital

investment in infrastructure of this nature, and the fact that Crown land sites are

often transferred between agencies, providing this level of certainty and protection

for the primary user is appropriate and necessary;

• Exclusive Possession & Risk - The basic tenet of a lease is that it grants exclusive

possession of the premises to the lessee. This is not inconsistent with the way in

which communications sites on agency land are currently occupied and managed.

Except in emergency situations, only persons authorised by the primary user (to

the exclusion of all others, including agency representatives) are permitted to enter

the fenced and locked compound. Indeed agency representatives should not need

to access the tower compound sites at all, and further there are many good

occupational health and safety reasons why they should not. Accordingly from a

safety and liability point of view it would be in the agencies’ interests to grant

primary users exclusive occupation. This reduces the risks taken on board by the

agency and ensures that primary users are solely responsible for the liability and

safety issues associated with the installation, maintenance and operation of the

communications infrastructure (i.e. the tower and associated equipment);

• Co-User Management - A lease can adequately provide for the primary user / co-

user relationship by permitting subletting and/or licensing of the site. By

permitting the primary user to solely manage the relationship with co-users, the

relevant agency would be relieved of further managerial, administrative, cost and

risk burdens. Except where the co-user requires land additional to that already

occupied by the primary user, there should be no need for the relevant agency to

enter into a direct contract with the co-user.

• Crown Land Management – The grant of an exclusive use lease would not

necessarily conflict with government policy and the principles outlined in the

Crown Lands Act 1989. Communications site leases are traditionally granted for

small areas of land to accommodate the footprint of the communications tower

and equipment shelters which provide on-site housing for ancillary equipment.

Further the sites are often located in remote areas which are infrequently accessed

by the public. Accordingly there would be very little detriment to public use and

enjoyment of the land while the communication tower site enables mobile and

emergency services for example, to be made available in the local area in event of

an emergency.

19

Licences cannot be registered against land title. Accordingly, a licensee has no way of

protecting its ongoing interest in the land, except in contract.

Needless to say contractual damages would not provide a sufficient remedy to a primary

user that found itself stranded from its communications site.

Crown Castle does however acknowledge that legislative and statutory limitations may

preclude some agencies from granting a lease. In the event an agency were so precluded

from granting a lease, or a lease was not agreed to by a particular agency due to

overriding regulatory guidelines, Crown Castle would accept a licence provided it

contained sufficient protection for Crown Castle’s long term investment in the site.

Some protection could be afforded by:

• a contractual right to caveat the title; and

• a condition within the licence that obligated the relevant agency to novate the

licence (on the same terms and conditions) to the transferee or purchaser upon sale

or transfer of the Crown land subject to the licence.

However, as stated by IPART in its recent Review Into Rentals for Waterfront Tenancies

on Crown Land in NSW (April 2004), “the Crown Lands Act 1989 clearly provides that

licences over Crown land are not transferable” (page 25), and “if rentals are set to reflect

and maintain the market value of the occupancy, the term and other conditions should

maximise this value” (page 23). These matters are more fully dealt with in Part 2(d)

(Transferability) of this Appendix (in response to section 5.1.4 of the IPART Paper).

Practical Implementation, Administration & Costs

Primary users such as Crown Castle are well equipped with in-house property and legal

departments to manage the production and processing of primary user and co-user tenure

documents.

To the extent tenure documents are standardised, an agency’s administrative

responsibilities could be reduced to a review and execution function, by passing the

administrative burden of production of the documents on to the primary user (such as

Crown Castle). This would make more effective use of the relevant agency’s time and

resources.

Example 1: One Queensland city council charges Crown Castle’s co-user’s

a $2,000 administration fee to cover its costs of assessing and processing

the carrier’s application to co-use the site. The co-user is not required to

enter into a direct contractual arrangement with the council but rather

obtains a sub-lease direct from Crown Castle as the primary user. No

further rent or fees are charged to either the primary user or co-user for

20

any other purposes.

Example 2: The Queensland Department of Natural Resources and Mines

does not charge Crown Castle a consent fee to review Crown Castle’s

proposed sub-lease (co-user) tenure documents and issues a general

consent attaching any conditions imposed by the statutory regime it

operates under e.g. Ministerial consent required for any further

subletting/assignment of the sublease

In terms of the practical implementation of a change in occupancy instrument, as with the

IPART review on waterfront tenancies, this may not be strictly enforced as existing

licences and leases must be allowed to run their course. However if an improved

occupancy instrument were offered to existing tenants, Crown Castle itself would not be

opposed to rearranging is tenure ahead of time.

Standard form leases

Crown Castle would be highly supportive of a move to agree departmental or agency

specific standard form tenure documents and protocols for transactional management

across all government agencies. Agency specific documents agreed in a commercial

manner would better provide for the agency’s specific land management practices or

policies and/or unique statutory framework. This would also provide an opportunity for

the negotiating party to have its own concerns addressed. A useful precedent for this

concept is the tenure document agreed by several of the major communications carriers

with the NSW Department of Lands (previously DLWC).

In Crown Castle’s experience, the existence of a standard form agreement greatly reduces

the drain on administrative and legal time and resources and is how Crown Castle

manages its own property portfolio. Crown Castle experienced significant administrative

difficulties prior to the introduction of agreed form tenure documents with our customers.

Example: The Department of Natural Resources and Mines in

Queensland suggests that standard co-user sub-leases be submitted for

approval by the Department. Once negotiated and approved by a senior

officer the documents are registered as a ‘memorandum’ at the

Queensland Land Registry. This practice substantially reduces time-

frames for processing of subletting consents by that government

department. This practice is encouraged and supported by Crown Castle.

(b) Sites or networks

Crown Castle does not own or operate a communications network, as defined by the

terms of reference. However, in Crown Castle’s own experience in dealing with

communications carriers and from a property law perspective a network specific

21

instrument may not provide the security of tenure a communications carrier generally

requires, nor would it easily be applied (in practical terms) to a carrier’s network which

consists of a diverse number and nature of communications sites.

Further a network instrument may lead to a disconnect between the ground level site

tenure and the ISIS’s licensing of space on the tower (which the government agencies do

not own and cannot licence).

The IPART Paper notes that administratively there would be less work involved because

there would be less documentation. However we believe this does not necessarily follow.

A document covering a network would not be registerable (as is a site specific lease)

against the title to the site specific parcel of land. Without site specific plans and schedules

(incorporating land title details and addresses etc) attached to this network specific

document, it would presumably not be sufficiently certain (as to the land licensed) as to

constitute an enforceable contract.

Accordingly and presuming that site specific details would need to be recorded

somewhere, so as to provide the requisite element of certainty, there is no reason why that

information could not as easily be recorded in a stand alone document.

There are also some other practical impediments. Firstly carriers build their networks over

a period of time (with different commencement dates for each site) and secondly stamp

duty must be assessed and paid on each use of land (pursuant to New South Wales stamp

duty legislation).

(c) Term

As stated by IPART in its Review into Rentals for Waterfront Tenancies (April 2004),

occupancy terms “should be linked with the engineering life of structures built on the

occupancy” (page 24).

Crown Castle concurs with that statement, and the reasons given in support of that

statement. In particular the general lack of uncertainty about the future use and value of

the Crown land which is the subject of the review suggests the requirement for flexibility

on the part of the Crown is low, and the optimal term of the agreement can be

commensurately longer. The engineering life of structures built on the occupancy

therefore forms a base reference point for setting term.

Crown Castle depreciates its tower portfolio over 20 years and tenure occupancy should

reflect that. A shorter term would lead to less investment, lower rentals and a reduced

return for government. This outcome reflects IPART’s finding in relation to NSW

Waterfront tenancies

22

Traditionally speaking the larger communications carriers have taken leases of 20 years or

more being made up of one five year term with three x five year options (Vodafone), or

four x sequential five year terms (Optus). Crown Castle is currently renewing leases for

20+ year terms (linked to Crown Castle’s towers being depreciated over a 20 year period).

As the Tribunal correctly notes on page 7 (Footnote 11) of the IPART Paper, the grant of a

registerable lease of five years or more would require the preparation and registration of a

lease plan for identification purposes and local government approvals. Carriers have in

the past negotiated exemptions to this rule with the Registrar General of Lands. However

Crown Castle, being a non-carrier, is not privy to the exemption. In any event Crown

Castle may instead register several sequential leases (i.e. terms follow on directly from

one another) and to assist in identifying the leased land Crown Castle, at its own cost,

usually prepares a registerable lease plan, regardless of whether or not this is actually

required.

In Crown Castle’s view term length does not affect the choice of tenure document per se.

However the longer the term the more important it is to Crown Castle (and presumably

other primary users) that the document is a registerable lease. This will protect primary

users and co-users from the uncertainties of restructuring and subsequent transfer of land

to another agency or private entity.

A short term tenure arrangement for government will neither encourage investment in,

nor the sharing of, a communications site as the costs of rebuilding or relocating a

communications site (whether it incorporates a tower or not) will become too expensive

for primary and co-users.

(d) Transferability

Tenure documents, in either format should be transferable (subject only to prohibiting

legislation). Crown Castle currently negotiates such terms as an absolute requirement of

its tenure. Without the ability to assign or transfer its rights the market value of the

occupancy is greatly reduced. Transferability will also encourage investment in the

industry and reduce the enormous cost, administrative difficulties and resources

associated with transferring sites.

In terms of standard property law practice, the right for a landowner to object to an

assignment is available (at law) if the lease provides for the consent of the lessor to be

required, with the proviso that such consent is not to be unreasonably withheld. That

consent may then be withheld if a proposed transferee or assignee does not meet the test

of a ‘respectable and responsible tenant’. In real terms this means that if there is doubt

that a proposed tenant is sufficiently financially robust as to be in a position to maintain

rental payments, or alternatively proposes a change in use of the land, the landlord’s

consent to assignment or transfer may rightly be withheld.

23

Crown Castle believes that this commonly adopted transfer restriction provides adequate

protection for any landlord in a market environment, and should be adopted by

government agencies in any standard lease or licence adopted by it as a result of this

review.

As noted above, the Crown Lands Act 1989 does not currently permit the transfer of

licences over Crown land. However the IPART review into Rentals for Waterfront

Tenancies suggests that a recommendation to implement transferability of licences has

been made to the Government. Given the restrictions on some government agencies

which prohibit the grant of leasehold interests (i.e. State Forests), Crown Castle would

encourage and support such a move.

(e) Renewal

The specific methods for renewing occupancy instruments mentioned by IPART are

“competitive tender” or “right of renewal”.

An auction process on lease expiry is flawed due to the statutory access powers available

to the carriers. The carriers can bypass an auction process by preventing the agency from

displacing unsuccessful bidder(s) by exercising the maintenance power in relation to an

existing “facility” under the Telecommunications Act. A NSW government agency will

not have the power to grant an exclusive access right to a successful bidder alone. Even if

it could be adopted, it would create:

• excessive procedural and administrative costs for government which would not

necessarily be recoverable from site users (i.e. process will need to commence 12

months out from expiry); and

• uncertainty, which will discourage primary users from taking new government

agency sites and, accordingly, reduce demand or occupancy for such sites.

An auction process may encourage the proliferation of towers if individual carriers outbid

an ISIS at auction and build smaller towers. An ISIS such as Crown Castle is not

interested in building towers which cannot be shared.

An auction process may also leave a carrier (as an unsuccessful bidder) with a stranded

asset.

(f) Components of fees and rentals

This is addressed in the Executive Summary and section 3 of this submission.

(g) Implementation of rents and fees

Using the criteria of efficiency and fairness:

24

• There should be no change to or inconsistency with existing contracts to avoid

appropriation of property for fairness and efficiency reasons. This would also be

unlawful.

• New sites and leases need to reflect regulatory and market conditions.

Crown Castle cannot be forced to surrender its existing leasehold/licence tenure in order

to implement regime change within the relevant government departments.

Implementation could therefore take quite some time and would need to be phased in.

(h) Review of rents and fees?

Rents should be reviewed with a low frequency (5 - 10 years) given high stability of

Crown land cost factors and level of rental review costs (to all parties) relative to

justifiable charges.

(i) Differential pricing for Government users?

There is no case for differential pricing and none is required. Differential pricing suggests

excessive charges to other ground leases, or cross subsidization which will be inefficient

compared to using the general tax system to fund the public agencies for their costs

(including ground rentals.)

This report has been prepared with the assistance of Dr George Barker, Director of LECG. The views expressed in this report are those of

Crown Castle, Dr Barker and Gilbert + Tobin. In keeping with its general policies the views expressed in this report are not necessarily

those of LECG or of its other employees.

25

APPENDIX B

STATUTORY POWERS OF TELECOMMUNICATIONS CARRIERS TO

INSTALL AND MAINTAIN TELECOMMUNICATIONS FACILITIES

Before 1 July 1997, licensed telecommunications carriers were entitled to exercise a

statutory power to “install” telecommunications facilities, including towers, on public and

private land. These powers were conferred under a series of Commonwealth Acts,

including the Telecommunications Act 1989 and the Telecommunications Act 1991.

The power to install a telecommunications facility was exercisable subject to certain

requirements, including the giving of notice to the owner and occupier of the land and the

payment of reasonable compensation for any financial loss or damage that any person

suffered as a result of a carrier exercising this power.

Exercise of the power to enter upon and occupy land for the purpose of installing the

telecommunications facility was not conditional upon prior agreement with the owner or

occupier of the land as to the terms of access, including any reasonable compensation.

Telecommunications carriers on occasion exercised the install power by giving the

required notices and then undertaking of relevant activities before the amount of

reasonable compensation was determined by agreement or, failing agreement, by

determination in a court of competent jurisdiction.

Carriers also enjoyed qualified exemptions from State planning and environment law in

relation to the installation of telecommunications facilities. This qualified exemption

created considerable controversy, particularly in relation to suburban deployment of

overhead pay TV cables.

Carriers were also given a statutory power to “maintain” a telecommunications facility,

including a tower, as installed on land. This power was subject to the same obligation to

pay reasonable compensation for any financial loss or damage suffered by a person as a

result of the carrier maintaining the telecommunications facility. The definition of

“maintain” was expansively defined to include entry upon and occupation of land for the

ongoing operation of a facility and the replacement of a facility with a like facility.

In practice, compensation for use of land for telecommunications facilities was generally

agreed between the carrier and the owner of the land. The terms of access to and use of

land were typically agreed and documented in either a lease agreement or licence

agreement. The different carriers installing facilities under the Telecommunications Act

1991 – Telstra, Optus and Vodafone – had different commercial policies and practices in

relation to exercise of statutory powers, negotiation of fees and documentation of lease or

licence terms. Owners of land also had differing requirements, sometimes reflecting

security or other factors or concerns unique to particular sites. Accordingly, when Crown

Castle Australia acquired portfolios of towers from Optus and Vodafone, the ground

leases or licences for the sites on which those towers were constructed took a wide variety

of forms.

The Telecommunications Act 1997 changed the telecommunications landscape.

26

The 1997 Act liberalised conditions for the grant of telecommunications carrier licences,

and in consequence the number of licensed telecommunications carriers rapidly grew to

in excess of 130 licensed carriers. Each of these carriers have been empowered to exercise

the statutory power (described below) to install “low-impact facilities”, including on

communications towers operated by Crown Castle Australia.

The power to install “low-impact facilities” is very relevant in relation to communications

towers and other structures, as flat panel antennas up to certain prescribed dimensions

and small dishes (as may be used for a variety of telecommunications services) may be

installed as low-impact facilities by a carrier exercising the statutory power.

A communications tower is not a low impact facility. In practical effect, from 1 July 1997

telecommunications carriers are only entitled to use the statutory power to install a

telecommunications facility where that facility is a low-impact facility and the procedures

prescribed in relation to installation of a low-impact facility are followed by the carrier:

see Part 1 of Schedule 3 – Carrier Powers and Immunities to the Telecommunications Act

1997, the Telecommunications (Low-Impact) Facilities Determination 1997 made by the

Minister for Communications and the Arts pursuant to that Act, and the

Telecommunications Code of Practice 1997.

Provisions as to the payment of reasonable compensation were effectively carried over

into the 1997 Act, in substantially similar form to the 1991 Act. Telecommunications

carriers may therefore install a low-impact facility on the giving of a relevant notice and

subject to compliance with the procedures prescribed in the legal instruments referred to

above and may do so subject to the requirement to pay reasonable compensation for any

financial loss or damage arising out of the exercise of such right.

The continuing statutory right to install low-impact facilities has a number of important

consequences. Significant incentive is created for telecommunications carriers to use

existing towers, where available, as those carriers may install low-impact facilities on such

towers by exercise of statutory powers and without any requirement to comply with State

planning and environment law. The potential exercise of the right thereby constrains the

ability of owners of communications towers and buildings to derive substantial revenue

from use of their buildings, towers or other structures for installation of flat panel

antennas up to certain prescribed dimensions and small dishes.

New build of communications towers is now significantly constrained. In addition to the

substantial cost and time to market of establishing a new communications tower, a

telecommunications carrier must comply with State planning and environment law in

relation to establishment of the communications tower.

In summary, the current legislative and regulatory framework discourages proliferation

of communications towers by creating significant incentives for co-siting of

telecommunications facilities and use of existing towers, buildings and other structures,

where available and suitable for the requirements of a particular telecommunications

network.

27

The 1997 Act also continued the statutory power for a licensed telecommunications carrier

to maintain telecommunications facilities. The power to “maintain” facilities was dealt

with in greater detail in the 1997 Act. The definition of “facility” in section 7 of the 1997

Act is “any part of the infrastructure of a telecommunications network; or any line,

equipment, apparatus, tower, mast, antenna, tunnel, duct, whole, pit, pole or other

structure or thing used, or for use, in or in connection with a telecommunications

network”. The power to “maintain” a facility expressly includes entering on and

occupying land for the purpose of maintaining a facility: clause 7(2) of Schedule 3 to the

Telecommunications Act 1997. “Maintenance” of a facility relevantly includes the

alteration, removal or repair of the original facility, or replacement of the whole or any

part of the original facility in its original location, provided that the relevant dimensions

of the replacement facility do not exceed the dimensions of the facility: subclauses 7(3)

and 7(5) of Schedule 3 of the 1997 Act.

The power to maintain a facility therefore clearly includes a power exercisable by a carrier

to maintain and replace a communications tower or any communications equipment

placed on that tower. This is the case whether the tower is owned and operated by the

telecommunications carrier undertaking the maintenance activity, or the tower is owned

and operated a third party such as Crown Castle Australia. This is also the case whether

the facility was established pursuant to the exercise of a statutory power or not, and

whether the facility could not be installed pursuant to a statutory power or not. The

power to maintain a facility is exercisable subject to the obligation to pay reasonable

compensation for any financial loss or damage suffered by any person as a result of the

exercise of the power to maintain a facility, but (as with the installation power) the

legislation does not require that compensation be determined before the statutory right is

exercised.

In practice, the desire for certainty, negotiation as to portfolios of sites, and dealing with

occupational health and safety, security and other operational concerns create significant

incentives for telecommunications carriers, Crown Castle Australia and land owners to

agree reasonable commercial terms as to ongoing rights of use of communications towers,

rather than carriers exercising of statutory powers.

Legislative references:

Definition of a “facility” (section 7 of the Telecommunications Act 1997):

http://scaletext.law.gov.au/html/pasteact/2/3021/0/PA000110.htm

Schedule 3 – Carrier Powers and Immunities to the Telecommunications Act 1997:

http://scaletext.law.gov.au/html/pasteact/2/3021/1/PA006290.htm

The Telecommunications (Low-Impact) Facilities Determination 1997 made by the

Minister for Communications and the Arts:

http://scaleplus.law.gov.au/html/instruments/0/30/0/2003111101.htm

The Telecommunications Code of Practice 1997:

http://scaleplus.law.gov.au/html/instruments/0/30/0/2003102801.htm

Page 1

IPART Review of Rentals for

Crown Land Communication Tower Sites

Crown Castle International

Response to Draft IPART Report

Page 2

Introduction

This paper comprises three parts:

Part A - Summary and general comments

Part B - Schedule containing Crown Castle’s response to the specific questions outlined in

IPART’s draft report.

Part C - Economic critique prepared by the Centre for Law and Economics at the Australian

National University.

Part 1 – Summary and general comments

There are some positive features to the draft IPART report to deal with some of the existing

inefficiencies that exist for both land management agencies and users of land utilised for

communication tower sites. However, after a thorough and considered analysis, we believe there

are some fundamental problems and misconceptions embedded in the report requiring further

review by the Tribunal.

Crown Castle has invested $500 million into the Australian economy (including at least $150

million in NSW). We are entitled to expect a stable regulatory and business environment in NSW

to enable Crown Castle to make a return on its investment. The business model for any

infrastructure investor in this market requires high incremental returns for successful site sharing

and co-user fees are contrary to that requirement. You will see from section 3 of Part 1 that

IPART has misread the suggested precedents for co-user fees. There is no relevant precedent for

co-user fees in the global market for shared communications infrastructure. It is a radical

disincentive to site sharing and infrastructure investment. Removing the economic incentive to

share tower sites in NSW will lead (self-evidently) to less sharing as carriers necessarily have a

competitive interest not to share.

If there is a concern the land management agencies are receiving something less than market

pricing – that is incorrect. Crown Castle has 1388 sites throughout Australia. Our data shows

that the three agencies are currently receiving 40% above the rent payable to private landlords for

comparable land accessed by Crown Castle (even without co-user fees) .

1. Draft findings are inconsistent with the Terms of R eference (ToR)

The imposition of co-user fees will have far reaching adverse implications inconsistent

with the ToR.

Page 3

IPART is required under the ToR to have regard to:

• maximising use of sites by the land management agencies;

• minimising proliferation of sites; and

• ensuring no adverse impact on the potential investment in telecommunications

services using the sites.

The Draft Report fails to satisfy each of these criteria in its recommendations relating to

occupancy and rental determination. IPART’s draft pricing methodology will:

(a) reduce usage of land management agency sites;

(b) substantially increase proliferation of towers by eliminating benefits of sharing;

(c) reduce investment by existing shared infrastructure providers; and

(d) create regulatory uncertainty (suggesting the NSW Government has the appetite to change the rules after an infrastructure investment has been made).

2. IPART’s methodology is inconsistent with Commonweal th policy and regulatory regime

IPART’s draft recommendations are not sound government policy and (if implemented)

would produce uncertainty with respect to the Federal regime for facilities installed

and/or maintained under the Telecommunications Act

There has been a shift in IPART’s deliberations between the Issues Paper, the public

round table, and the Draft Report. Crown Castle submits that this shift has been away

from a focus on developing a consistent policy-based approach to tenure and access fees

by agencies applying NSW Government policy, in favour of developing justifications for

extracting high rents on co-located sites, without a sound economic and legal basis. The

basis for IPART’s rejection of a marginal cost pricing principle is not clear.

IPART is also seeking to unfairly differentiate the Crown from other landowners and

attempting to derive for the Crown a share of revenues in a downstream market over

which it has no interest or control (ie the market for public broadcast, mobile and

broadband telecommunications services).

Secondly, IPART’s draft recommendations place the Crown in direct conflict with the

overriding legislative and policy basis of the telecommunications regime, which includes

stimulating infrastructure investment (encouraging development of competing

Page 4

telecommunications networks while minimising costs of network provision, and any

deleterious environmental effects of telecommunications networks, through co-location of

facilities). The approach now reflected in IPART’s draft recommendations invites

Federal scrutiny of such inconsistencies, to the overall detriment of IPART’s otherwise

sound mandate under the Terms of Reference.

IPART’s approach also ignores the adverse social consequences that will result from any

implementation of its proposals, such as reduced network coverage and associated health

and safety implications for those unable to access a network. This is likely to occur in

rural areas, as excessive prices will act as a disincentive to co-locate, construct, or

maintain facilities in many locations.

3. Imposing a tax on infrastructure sharing will put N SW out of step with global practise and

lessen investment in this State.

IPART references models used in British Columbia and New Zealand to justify the

imposition of co-user fees. Looking at those models in more detail:

(a) The British Columbia model reveals incremental fees for additional

“communications uses” (eg: a broadcaster in addition to a telecommunication

carrier) and not for co-users (eg: more telecommunications carriers). There are

no “co-user” fees in British Columbia.

(b) New Zealand has no portfolio based independent site sharing infrastructure

provider (and accordingly new entrants find it extremely difficult to enter the

market).

We believe there is no relevant global precedent for IPART’s suggested imposition

of co-user fees. It is not the practise adopted throughout Europe, the United States, the

UK or the other Australian states. Crown Castle can say this as its parent company owns

more than 11,000 towers in the US and previously owned a significant broadcast and site

sharing business in the UK.

While a network service provider may be interested in providing services to a particular

area to ensure broader service coverage, IPART should recognise that independent

infrastructure providers are not subject to any obligation to build out infrastructure for

reuse by multiple service providers. Crown Castle will not participate if there is no

economic reason to do so (based on return to investors on the capital investment).

Page 5

BEM and IPART acknowledge that currently carriers and infrastructure providers avoid

investing in Crown Land. This is because they are already too expensive. Crown Castle

reiterates that it has not built a facility on Crown Land in NSW in the last 5 years.

In Part B, we recommend some threshold changes which would provide a more realistic

basis for competitively neutral infrastructure providers to participate in the market.

IPART should however accept that the concept of co-user fees will necessarily dissuade

infrastructure providers from investing in NSW.

4. Downstream revenue sharing was rejected by all part icipants at IPART round table

BEM Property Consultants Pty Ltd (at page 51 of their report) acknowledge that “we

believe many primary users would have difficulty in passing on the full co-user rental to

the co-user. Further there will be greater likelihood that the rentals the primary users

receive will be diminished over time”.

As infrastructure providers will not be able to pass on the full co-user rentals to service

providers utilising Crown Castle’s infrastructure, the implementation of the report will

have the same effect as revenue sharing. This concept was rejected by all participants at

the public round table (including each relevant land management agency). It was

universally rejected given the recognition of the substantial capital investment and risk

associated with the facilities. Only IPART has failed to properly recognise this to date.

In Part B we have made recommendations to minimise the ability of land management

agencies to introduce de-facto revenue sharing arrangements.

BEM also noted the declining rentals that primary users will receive from the imposition

of co-user fees. It logically follows that there will be less investment in shared

communication infrastructure on Crown land in NSW.

5. Any tax (through co-user fees) on infrastructure sh aring will lead to less sharing

The proposed co-user fees is the most fundamental issue in the Draft Report.

Any tax on sharing will lead to less sharing. IPART has not accepted this. If IPART

proceeds with this report it must disclose this logical outcome to the NSW Government.

The NSW Government will then be in a better position to assess the ramifications of

IPART’s report.

IPART has proposed an arbitrary co-user fee of 67% of the primary user fee. We note

that BEM recommend a co-user fee of 50% of the primary user fee. There is no basis for

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the conclusion that co-user fees are appropriate at all. IPART’s reasoning is that it is “fair

for the land management agencies to obtain a share of the potential commercial benefits

attributable to site use, regardless of whether these benefits are likely to be derived by

primary users or co-users” (Draft Report, para 4.2.2). The only question to which IPART

appears to give credence is the mechanism by which co-user fees are collected.

The draft recommendations on co-user fees have been devised without consideration of

the social benefits derived from infrastructure investment. In addition to reducing rural

coverage, carriers will use their existing statutory powers to install on less suitable but

substitutable sites.

6. IPART’s analysis of the Telecommunications Act is i ncorrect

IPART incorrectly states that the rights and exemptions available under the

Telecommunications Act have limited application to this review. The low impact and

maintenance powers apply to existing (i.e. built) telecommunications facilities. The

carriers use these powers to install equipment on the towers and to maintain facilities.

Interference with an existing facility is also a criminal offence under section 852J of the

Commonwealth Crimes Act 1914. These powers inform the landscape for commercial

negotiation between landowners, infrastructure providers and carriers.

We recommend IPART obtains legal advice in relation to the above.

In practise, we believe IPART’s pricing recommendation (given its radicalism) may lead

to less revenue to the Crown (as carriers or their agents will utilise their powers under the

Telecommunications Act rather than enter into licences) and more cost (in terms of

litigation).

7. Co-user fees will lead to the build out of smaller towers not capable of being used for

sharing.

Understandably, carriers look at the net present value cost of building a new site as

against colocation on an existing facility. When considering co-locating on a Crown

Castle facility, a carrier develops a business case based on

(a) the fees payable for accessing the communications infrastructure (rental to Crown

Castle); and

(b) the costs associated with constructing and maintaining a new tower.

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Even with no co-user fees, there are situations where the carriers bypass Crown Castle

sites.

In arriving at a discount figure for co-users reusing existing facilities, IPART does not

appear to have taken into account the fees that are payable to the primary user (or any of

the investment and operational costs and risk associated with the tower). This makes the

suggested discount rate and underlying methodology flawed.

8. Crown Land is already more expensive than private l and.

While BEM states that Crown Castle couldn’t disclose our pricing to telecommunications

service providers due to confidentiality restrictions, they miss the point.

Telecommunications service providers pay Crown Castle to access its infrastructure,

while landowners provide land on which a carrier or infrastructure provider may invest.

The land management agencies do not construct, maintain or operate infrastructure.

IPART and BEM have priced the wrong market.

Crown Castle has a substantial share of the market for ground leases for

telecommunications in Australia. We have indicated to both IPART and BEM that the

rentals we currently pay on NSW Crown land are already over and above our average

rental and that we do not pay co-user fees to private landowners. Please refer to Figure 1

in Part C which shows that Crown Castle’s rentals on the Crown land sites considered

under the IPART review are already 40% higher than comparable private land in NSW

(without taking into account co-user fees).

9. Draft report discriminates in favour of large broad cast facilities over much smaller

telecommunications facilities. This is wrong.

Most telecommunications facilities require very small parcels of land, therefore

increasing land use efficiency.

In comparison to telecommunication facilities, broadcast facilities:

(a) require much larger land areas;

(b) have a much more significant visual impact;

(c) emit substantially more power; and

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(d) given the size and power output, service a much larger population (ie: sometimes

millions rather than the thousands or even only hundreds serviced by

telecommunication facilities).

Given the above, we do not understand why government broadcasters would receive such

a significant discount to telecommunications carriers and, further, why the commercial

broadcasters pay at the same rate. There does not appear to be any sound social,

environmental or economic basis for IPART’s draft conclusion on this point.

To illustrate this point graphically, please see figure 5 in Part 3 of this report. That Figure

involves a large commercial broadcast tower. A similar tower with ABC and SBS as the

sole tenants in a high density area will involve a rental of $10,790 versus the rental of

$62,000 for a telecommunications tower with four users a fraction of this size. IPART

obviously needs to have another look at this impact.

10. Minimising site proliferation is more important tha n pricing arrangements

The background materials for the round table stated that: “The key issue in the

consideration of the alternatives will be to ensure that the options do not adversely impact

on the existing incentives for co-location” (at para 2.5). The proposals in the Draft

Report are contrary to IPART’s stated objectives on this point. The pricing proposals will

result in an increased proliferation.

11. Pricing for Co-Users is Flawed

The Draft Report suggests that fees in respect of co-users should be 67% of those levied

for primary users.

The introduction of these fees capturing revenue from co-users will give the infrastructure

builders the option of:

(a) foregoing the captured revenue, a disincentive for further infrastructure

deployment, thereby impacting adversely on potential investment in

telecommunications; or

(b) increasing current placement fees assessed, in response to which co-users may

refuse the increase and build duplicate facilities.

The Draft Report presumes that the shortcomings in these options can be cured by pricing

below the point at which a prospective co-user would decline to proceed with a

commercial arrangement with an owner of infrastructure. IPART has not taken into

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account the fees payable to the primary user (which provides access to infrastructure) in

determining that price point. The price is therefore arbitrary and unrealistically high.

The result is that the proposed fee structure will distort both the immediate market for

property leasing and also the down-stream market for telecommunications and other

services delivered through the relevant infrastructure.

12. Pricing proposals contradict the ToR

The ToRs call for a pricing framework that allows for the capture of “market-based

commercial returns that reflect the benefits realised by all users of Crown Land

communications sites”.

The recommendations in the Draft Report are not “market-based” because;

• the fee structure is arbitrary and has no reference to marginal cost;

• of the under-pricing of risk, specifically the risk undertaken by the builders of

infrastructure;

• pricing is in accordance with the buyer’s revenue, rather than the supplier’s cost

(i.e. it is not cost-based);

• Crown Castle’s data establishes that rentals on Crown land is already above

market.

This represents a failure to deliver cost reflectivity, one of the desired characteristics in

relation to rental matters under the ToR. The notion that rentals should be determined

according to the “strategic value” of individual sites is not cost-based.

13. New technologies will not be deployed in several pa rts of NSW

We have already put IPART on notice that local area wireless broadband providers may

not have the financial capability to pay the co-user fees. These providers make services

available to small communities (sometimes numbering 80 people). We charge these

providers essentially our opportunity cost of making capacity available. We would turn

these providers away if we had to absorb a co-user fee which would never be paid. These

co-users have not made a submission to IPART as they do not have the resources to make

a submission.

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In Part B we address the specific questions put forward by the Tribunal. We do not agree with

many of the preconceptions (eg: imposition of co-user fees/land valuation principles) but have

answered the questions without prejudice to Crown Castle’s core submissions.

If you have any questions in relation to this submission, please direct them to David McKean

(02) 9495 9009.

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Part B

Crown Castle’s Response to

IPART’s Specific Questions

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IPART Draft Recommendations

Crown Castle Response

1. A licence is the most appropriate form of occupancy instrument for the granting

of the right to place communications structures on Crown land in NSW.

Lease is preferred but Crown Castle can accept licence.

2. Land management agencies should enter into a licence with the primary user as

the licence holder only.

Acceptable subject to below comments.

3. Licences should be applied to individual sites, and not to site networks.

Agreed

4. All the land management agencies should use a similar, standard head licence

agreement containing all general conditions (subject to any conditions specific

to land management agencies, governing legislation and common law

principles), with individual site specific conditions set out in schedules to each

head licence agreement.

Agreed. If co-user fees are levied (against our recommendation) then to ensure

no “double dipping” and to encourage site sharing, no fees additional to a co-user

fee in accordance with pricing schedule should be imposed for expansion of

licensed area required to co-locate new co-user equipment. This needs to be

explicit.

We presume all land the subject of current direct leases/licences with co-user will

be rolled into single licence for primary user. Otherwise, land management

agencies may be able to “double dip” and will also retain the management

overhead associated with those leases/licences. This needs to be explicit.

5. The term of a licence should be transferable with the consent of the land

management agency/granting authority, and such consent should not to be

Agreed

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unreasonably withheld in accordance with relevant governing legislation.

6. Licences should be transferable with the consent of the land management

agency/granting authority, and such consent should not to be unreasonably

withheld in accordance with relevant governing legislation.

Agreed

7. Steps should be taken to amend legislation, including section 48 of the Crown

Lands Act 1989 to allow for the transfer of licences granted for the purpose of

communication towers sites on Crown land.

Agreed

8. Land management agencies should give an incumbent licence holder a first

right of refusal to replace an existing licence for a site with a new licence, prior

to considering other potential primary users of that site.

Agreed

9. Licences should provide for an annual fixed adjustment of rentals by the change

in the CPI.

Agreed

10. Licences should provide for rentals to be reviewed against market rates every

six years and that rentals should be reviewed every three years to incorporate

the number of co-users on the site.

Infrastructure providers require cost certainty. Market review provisions create

uncertainty and we oppose them. In any event, we do not understand the need

for a market review when IPART rejects a market based rental arrangement in

preference to an arbitrary fee structure. A traditional market review would see

rents decline dramatically, given the pricing that would be available for alternate

sites and Crown Castle’s data indicating Crown land is already well over market.

If IPART can reconcile non market based pricing with a “market review”, it

should have a 15% cap on increases to allow infrastructure provider to manage

long term cost profile.

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Given the default and technology risk with new co-users, the 3 yearly rent

reviews should exclude new co-users. They could, rather, be taken into account

at the 6 yearly review. This would still comply with the Crown Lands

Legislation Amendment Act 2005 (requiring 3 yearly rental review). We offer

discounted arrangements to new entrants to facilitate the deployment of new

technology. Innovation involves risk – the Crown should recognise this and

without it there is no product based competition in market.

Rentals should immediately drop with effect from a co-user failing to pay the

primary user (given the primary user is essentially a collection agency for the

Land Management Agency, not an insurer). Further for each co-user default, the

Land Management Agency should reimburse Crown Castle’s make good costs.

If land management agencies want to impose co-user fees they must accept

deployment risk.

11. A conservative view of recent market prices should be used as a guide to setting

fair market rentals for the use of Crown land sites.

Agree. However, the IPART draft report is counter to this statement. Rentals in

NSW have provided stable to declining yields to landowners for some time. This

does not appear to have been acknowledged nor that Crown agencies are already

charging significantly above market rates. A conservative approach would see

no co-user fees and a reduction in land rental.

12. Rentals should be directly levied on primary users only, but set with regard to

the number and type of users on a site.

Rentals could be directly levied on primary users provided the safeguards set out

in this paper are incorporated. Failing that, Crown Castle is unlikely to agree to

act as an unpaid agent of the land management agencies. Obviously, we

categorically disagree that rentals should be based in the number or type of users

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on a site.

13. Rentals should continue to be determined through site-by-site negotiations

between the relevant land management agency and the primary site user for

high-value sites.

Yes but there should be no minimum price. If total rent > $50k for

communications tower sites, it will be far cheaper for the infrastructure provider

and co-users to share costs of a new non-Crown site. If IPART’s

recommendations were to be adopted, this provision of site by site negotiations

should be stipulated to reduce the rental from the calculated amount so as to

incent sharing and ensure primary users are not incented to relocate.

14. For all other sites, rentals should be based on a published fee schedule that

takes into account permitted uses, the location of the site and the number and

type of users on the site.

Agree with published fee schedule but recommend pricing formula based on

unimproved land value. Otherwise, the impact will be:

(a) more towers;

(b) less sharing;

(c) greater barriers to entry;

(d) discouragement of investment;

(e) potential use of powers under Telecommunications Act which may reduce revenue to government plus lead to litigation/dispute management

If IPART does not change approach, we strongly recommend IPART adopt the

suggestions Crown Castle makes in this paper to minimise the harm to the

industry and the environment.

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15. The recommended occupancy and rental arrangements should be implemented

as an entire package, at the earliest opportunity practical while honouring

existing written occupancy agreements.

Agreed (subject to acceptability of package).

16. Any existing unwritten agreements should be reviewed immediately, and

replaced with new written agreements consistent with the Tribunal’s

recommendations within two years.

Agreed (subject to acceptability of package).

17. The following criteria should be used to identify the high-value sites for which

rentals are to be determined through negotiation:

� Sites with more than 8 users, and /or � Sites with a total rental of $50,000 or more under the new price

schedule.

No objection to number concept if rental can be negotiated down and 8 users

explicitly excludes the primary user. Minimum price setting also may have

Trade Practices Act implications if land management agencies are treated as

being in the business for licensing land to third parties.

Minimum pricing self-evidently leads to less competition/a barrier to

entry/market failure.

18. In negotiating rentals with the primary user, the land management agency

should have regard to:

� The factors that determine the strategic value of the site, including

permitted uses, the location of the site and proximity to population centre(s), the likely coverage area (eg, determined by site topography), the availability of alternative sites and the amount and nature of co-use (potential for co-use)

� Recent market rentals agreed for similar sites � The fee schedules used to established rentals for the lower value sites,

which establish the floor for the prices negotiated with users.

Disagree. For context, See 14 above.

Should be no artificial “floor” on prices. If the price is too high, it should be

reduced otherwise revenue will drop for the Crown.

Rentals should be based on market pricing. Co-user fees are not “market” and

the ground rental for the agencies is already above market.

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19. Land management agency valuation expertise should be centralised with the

Valuer General, or a private, independent valuer.

Agree

20. The fee schedule should be used by the land management agencies in the

calculation of rental for lower value sites to specify a separate fee for six user

categories in three location categories, as set out below.

Crown Castle doesn’t agree with differential pricing as this is more appropriately

dealt with via consolidated revenue. It will lead to market distortion. If it is

adopted, however, Crown Castle suggests the following amendments are

incorporated to reflect market conditions:

(a) Government funded local service providers (via Connect Australia and other schemes) should be priced at nominal cost. (b) Large broadcast sites should not be priced at a discount to small communication towers (which have substantially less environmental and land use impact and service a fraction of the number of end users). (c) Unwired and PBA (Commander) need to be explicitly treated as local service providers. (d) Network sharing joint ventures need to be treated as a single user. (e) The pricing for commercial telecommunication carriers is excessive (when compared to commercial broadcast facilities).

21. When calculating the component of the rental that relates to co-use of the site, a

discount of 33 per cent should be applied to the appropriate usage fee each co-

user.

Disagree with co-users fees. If implemented, discount should start at 50% (as a

minimum) as infrastructure providers have long term contracts with customers.

To encourage sharing, the discount should increase by 10% for each new co-user

(with a maximum discount of 90%). The higher the discount, the better the

primary user is delivering to the objectives set out in the ToR.

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In other words:

First co-user - 50% discount

Second co-user - 60% discount

Third co-user - 70% discount

Fourth co-user - 80% discount

Each following - 90% discount

Co-user

Further, land management agencies will be able to outsource site management to

the primary user (thereby reducing costs and increasing revenue). Primary users

will need to retain more staff and make modifications to their IT systems to cater

for such a change. Clearly, this needs to be compensated with a management fee.

The simplest mechanism is to increase the discount for each co-user (as above).

The co-user fee should be zero if the primary user receives no rental from the co-

user.

In determining what would be an appropriate discount, the Tribunal has

considered the cost to the co-user of building a new site. The Tribunal doesn’t

appear to have considered that the primary user charges its own fee for use of its

infrastructure. The recurring cost to the co-user is primary user fee + co-user fee.

Further, except in exceptional circumstances, it will be far cheaper for Crown

Castle to relocate its tower and its customers than to pay an aggregate of $50,000

in site rental for access to public land. If the net present value cost of relocating is

less than the anticipated rental fee for the Crown sites, we will move or our

customers will exercise their rights under the Telecommunications Act to pay

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statutory compensation.

22. Where the primary user is an infrastructure provider the rental should be based

only on the appropriate fee for each co-user. However, a minimum site fee

equivalent to the undiscounted fee for the highest value user on the site will be

charged.

IPART should encourage facilities based competition through the minimum site

fee for infrastructure provider being equivalent to the discounted fee.

To drive sharing, infrastructure providers must be able to build sites and enter the

market at less cost than carriers. This incentive is crucial to avoiding duplication

of infrastructure. Carriers have a greater ability to source capital and necessarily

have less incentive to share. Indeed, why would carriers share under IPART

pricing unless regulated to do so? The independent infrastructure provider is the

only self regulated promoter of site sharing.

23. The land management agencies should require primary users to notify them as

new co-users located on the site, as a condition of their occupancy instrument.

Agreed

24. The land management agencies should keep comprehensive records of all rental

agreements, any changes in the number and type of co-users on a site after the

rental has been determined, and the costs associated with establishing

occupancy instrument, as detailed in section 5.4 of this draft report.

Noted

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An Economic Critique of IPART’s Draft Report on “Review of Rental Arrangements

for Crown Land Communication Tower Sites”

Dr. George Barker Richard Tooth

Centre for Law and Economics (CLE)

Thursday, 1 September 2005

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An Economic Critique of the IPART Draft Report

Executive Summary .................................................................................................................. 3

Introduction / Overview ............................................................................................................ 4

Context of the Rental Review.................................................................................................... 5 The Assessment Criteria and Objectives ............................................................................... 5 Relevant Law on Access Pricing for Crown Land................................................................. 6 The Optimal `Marginal Cost Pricing’ Approach to Rental Pricing ....................................... 7

The Draft IPART Recommendations ........................................................................................ 8 Strategic Pricing..................................................................................................................... 9 Co-user Based Pricing ......................................................................................................... 10 Discriminatory Pricing......................................................................................................... 10

The Likely Consequences of the IPART Recommendations ..................................................10 The Effects of Strategic pricing ........................................................................................... 10 The Effects of Co-user Based Rentals ................................................................................. 14 The Effects of Discriminatory Pricing................................................................................. 15 Conclusion ........................................................................................................................... 16

A Pricing Schedule Based on Marginal Cost Pricing.............................................................. 17 Comparative Pricing Approach ........................................................................................... 18 Cost Based Approach........................................................................................................... 18 Summary Pricing Schedule.................................................................................................. 21

Conclusion............................................................................................................................... 21

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Executive Summary This report reviews the draft IPART report titled "Review of Rental Arrangements for Crown Land Communication Tower Sites". The main conclusion of our review is that the draft IPART report in effect recommends that managers of Crown land:

i) price as monopolists for new sites, and appropriate returns to stranded assets in existing sites through a policy of strategic pricing; and

ii) distort competition through a policy of discriminatory pricing. Such pricing policies will simulate a tax on telecommunications services, create a deadweight loss to Australia and NSW, harm consumers and will deter investment in NSW infrastructure. Furthermore the policies are discriminatory and unfair to consumers and service providers. The IPART recommendations are contrary to standard economic theory, good public policy and the terms of reference for the review. The policy may also be considered unlawful. Our preliminary analysis of market data suggests the underlying problem that needed to be addressed by the review was that Crown land managers are already using their monopoly position in locations to set rentals at least 40% above a competitive market rate. The proposed IPART recommendations however will only make matters worse, rather than remedy this situation, and further raise prices to over 100% of the competitive market rate. Contrary to IPART’s recommendation, we recommend that access to crown land be granted using a socially optimal rental pricing arrangement, namely the marginal cost pricing principle, which one observes in freely competitive markets. Consistent with the terms of reference, good public policy and relevant economic theory, an approach based on the marginal cost pricing principle would be efficient, effective, and fair. It is also supported by relevant legal requirements. Such an approach would imply a uniform approach to pricing policy for all users and all sites based on recovering only the cost of access to Crown land (no discriminatory or strategic pricing). Prices would thus be set to recover only the direct incremental cost plus opportunity cost to the Crown of providing access to Crown land. It is important that the problems and issues raised by our review are addressed quickly as they risk damaging the reputation of NSW. Even in draft form the recommendations will have a negative impact on investment decisions in telecommunications infrastructure and, by extension of precedent, other industries. .

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Introduction / Overview We have been asked to provide review of the draft IPART report titled "Review of Rental Arrangements for Crown Land Communication Tower Sites". We have been asked to focus only on the economic rental pricing aspects of the draft report. This report:

• reviews the setting for the rental review o the criteria and objectives set for IPART’s review; o the law relevant to setting access prices for Crown land; and o the optimal ‘marginal cost pricing’ approach to rental pricing1;

• describes the IPART recommendations; • analyses the consequences of the IPART recommendations against the marginal cost

pricing alternative; and • provides a guide for pricing based on marginal cost pricing.

1 The economic arguments for the socially optimal rental pricing were set out in Crown Castle’s previous submission to this review. See also the submission by Professor J. Gans for Broadcast Australia

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Context of the Rental Review The Assessment Criteria and Objectives IPART was asked to consider and advise on:

"an efficient and effective framework that allows the NSW Government to obtain fair market-based commercial returns that reflect the benefits realised by all users of Crown land communication sites having regard to related objectives of:

• maximising the use of such sites, • minimising their proliferation, and • not impacting adversely on the potential investment in telecommunications and

related communicated services using the above ground infrastructure located on such sites."

Although the objectives listed are quite clear there is often misunderstanding in regard to a number of important criteria referenced in this guiding statement regarding, efficiency; effectiveness and fair market-based commercial returns. It is important to be clear as to what is meant by these terms. Below we outline what we understand is their generally accepted meaning.

• Efficient

Efficiency is generally thought to refer to the use of scare resources in order to produce the maximum value to society. An efficient outcome is achieved when resources are fully employed, are allocated to the services most wanted by society and employed using the least costly techniques.

• Effective

To be effective a framework needs to be feasible, practical and able to deliver the results sought. Although there may be many options that meet these criteria, the option chosen also needs to be cost effective by keeping costs to a minimum compared with feasible alternatives. Thus by illustration cars, buses and planes all offer effective means of travel, but they each differ significantly in their associated costs. The cost effective pricing option is the one that delivers the result sought at with the least cost, including the administration costs associated with implementing the framework

• Fair market-based commercial returns

While the criterion of efficiency and effectiveness may narrow options for consideration, the criterion of fairness also helps guide the final decision. While what one person perceives as fair may be contrary to the view of another, it is generally seen to be unfair for one party to abuse a position of power or trust. In this context any abuse of market power by the Crown, or abuse of trust would generate unfair commercial returns to the Crown. In commercial matters the term 'fair' price is generally associated with competitive market returns, and the term 'unfair' with uncompetitive market returns, and abuse of market power.

We also note the terms of reference requires rentals to reflect the benefits realised by all users of Crown land communication sites. It is worth noting in this regard that the key beneficiaries of the use of Crown land sites are consumers. Any increase in rental prices will only directly and indirectly harm them. Competitive markets and/or price regulation of monopoly

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providers ensure that producers can only expect over the long run to earn normal profits, the profits required to compensate the firm for the investment and risks faced.2 Competition and downstream regulation ensures that the costs associated with overcharging for access to crown land will flow through to consumers. Given no excess profits, any increase in rental prices will only be directly and indirectly be borne by consumers. We also note that IPART was "requested to examine" among other factors

"the pricing principles recently proposed by AAS Consulting Pty Ltd in its Management Guidelines “Access to NSW Government Owned or Managed Property by Mobile Telecommunications Carriers” commissioned by the NSW Office of Information Technology;"

Some of the pricing principles outlined in these management guidelines may be contrary to the principles of efficiency, effectiveness and fairness. Fortunately since IPART was requested to "examine", it does not need to, and should not "follow" the guidelines where they contradict with the more important principles discussed above. Finally we recognize that there may be significant interest in raising revenue for Crown agencies and/or providing support of selected groups. We note however that such objectives are not part of the terms of reference and are likely to conflict with the criteria and objectives stated. Although such policy goals are outside the objectives of this report we would be happy to recommend efficient means to achieve these goals should they be required. Relevant Law on Access Pricing for Crown Land There are two areas of Commonwealth law that may be relevant to the review First, the Telecommunications Act 1997 contains certain powers of telecommunications carriers to “maintain” communications facilities, including powers to enter upon and occupy land on which communications facilities are established. The act also contains certain powers of telecommunications carriers to install so called “low impact facilities” upon communications towers. These powers also empower persons acting for a carrier under a contract to do these things (e.g. Crown Castle). The pricing for continuing rights of occupancy by IPART is thus relevantly constrained by carriers and their contractual agents prospective exercise of the “maintain” power, and the “low impact” installation power on existing towers. These powers are described more fully below. The pricing for installation – that is, initial grant of rights of occupancy – however is not relevantly constrained by the Telecommunications Act 1997. It may however be constrained by Trade Practices Act provisions also described below. Under the Telecommunications Act 1997, for both the prospective exercise of the “maintain” power and the installation of low impact facilities on existing towers, compensation is payable if a person suffers financial loss or damage because of anything done by, or on behalf of, a carrier in the exercise of these powers. This compensation is determined by agreement, or failing agreement by a court of competent jurisdiction. This rule effectively constrains the scope for pricing access to Crown land for existing towers in any way other than to recover costs incurred. It rules out the use of strategic and discriminatory pricing as proposed by IPART for existing towers.

2 Normal profits are often described as a fair return for a firm's investment.

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The second area of law that may be relevant is the Trade Practices Act which binds State agencies conducting a business. Three particular provisions of the Trade Practices Act may be relevant to the review. These are:

i) the rules preventing contracts, arrangements or understanding that restrict dealings or affect competition (section 45) and relate to price fixing (section 45A);

ii) the rules preventing an abuse of market power that may deter or prevent a person from engaging in competitive conduct in that or any other market (section 46); and

iii) the rules providing for access to essential services, or services essential to competition (Part III).

The recommendations of IPART may thus need to be consistent with these requirements of the Trade Practices act. In particular:

i) In recommending prices for access to Crown land to be charged uniformly across a number of Crown agencies, IPART may be recommending an arrangement that involves price fixing. Given section 45 and 46 of the Trade Practices Act, it may be important that IPART and the Crown agencies avoid price fixing that involves an abuse of market power, or collusion, with the purpose and effect of preventing or deterring competition, or substantially lessening competition.

ii) The access to crown land covered by the review is essential to the competitive provision of services (including communication tower networks in New South Wales). The NSW State in effect holds a monopoly of vast areas of land in the state. Part IIIA of the Trade Practices may therefore oblige the New South Wales Government to develop an access regime for Crown land services that promotes and does not inhibit competition in upstream or downstream markets.

The best way to ensure IPART’s proposed pricing approach is consistent with the Telecommunications Act for existing sites, and the Trade Practices Act for new and old sites, is for IPART to adopt the socially optimal approach to rental pricing outlined in the next section. The Optimal `Marginal Cost Pricing’ Approach to Rental Pricing The optimal approach to pricing in this case involves the application of the marginal cost pricing principle. This leads to the following recommendations on the key issues raised in the IPART report:

• First, rentals for primary use should be set at a rate which reflects direct incremental costs plus opportunity costs;

• Second, any additional fees for co-use should reflect only higher direct incremental costs or opportunity costs associated with co-use; and

• Third, rates should not discriminate between end users i.e. all groups should be charged using the same marginal cost principle.

Such a pricing regime performs well against the criteria and objectives.

• Efficiency

The first criteria of efficiency is clearly met. The Crown will be compensated not only for the direct costs of providing access but also its opportunity cost, or what the land could have earned in its next best alternative. It will thus be at least as well off as it

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would have been were the land not used for communications tower services. On this basis it would also of course be compensated for any and all losses associated with the location of a tower on any site - as required by the Telecommunications legislation. On the basis of the marginal cost pricing principle, if tower service providers decide to locate on Crown land it will be because they judge the decision will create more value than the Crown obviously stands to lose, and an efficient or value maximising outcome is guaranteed. If the Crown charges more than its direct incremental cost plus opportunity cost, it risks not selling access to the land in circumstances when that would be efficient and socially optimal.

• Effectiveness

The marginal cost pricing principle also leads to an effective solution in the current case. It is a clearly understood and widely used principle that is not difficult to implement. It is a relatively simple process to estimate the direct incremental costs and opportunity costs of access to crown land as we demonstrate later. It is also consistent with the pricing policies used by IPART in other areas, and other regulators including the ACCC under the Trade Practices Act. It is a practical, well-developed and easily applied methodology.

• Fairness

It is clearly fair for the Crown to be compensated for its direct incremental costs plus opportunity costs. To pay less than that would be unfair and impose a tax on the NSW Government. To charge more than that however risks an abuse of market power, and expropriation of legitimate returns to stranded assets, and therefore offers 'unfair' returns to the Crown. Moreover with marginal cost pricing, one will observe horizontal equity or fairness whereby users of similar sites will be charged similar amounts. One will also observe vertical equity or fairness whereby the charges for users of dissimilar sites will vary. Thus any price discrimination would be both fair and efficient

The additional stated objectives are also well met. Thus in accordance with the terms of reference the marginal cost pricing principle will:

• maximise the use of such sites - to the extent additional use is efficient, or the marginal benefits of use exceed or equal the marginal costs (as revealed by the charges);

• minimise the proliferation of sites - in that additional sites will only be built where the marginal benefits exceed the marginal costs, and where it is more economically efficient there would be co-use of existing sites; and

• not impact adversely on the potential investment in telecommunications and related communicated services - instead it will encourage investment in telecommunications where the marginal benefits of investment exceed the marginal cost.

The Draft IPART Recommendations There are three distinct important recommendations in the draft IPART report in regard to rental pricing. These are:

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• strategic pricing, in which: − rental prices are set in the range between opportunity cost and willingness to pay; − price increases are to apply to all sites including existing sites;

• co-user charging, in which rental pricing is based on the number of co-users in a manner unrelated to costs incurred; and

• discriminatory pricing, in which rental prices vary by type of user in a manner unrelated to costs incurred.

The recommendations are linked in that they are all dependent on the landowner having market power and so being able to price in a way different to what would evolve under a competitive market, where prices are set equal to marginal cost. Before examining the implications of the policy it is useful to understand what these recommendations mean in relation to standard economic theory. Strategic Pricing IPART argues that pricing should fall within the range set at the lower bound by the opportunity cost of the land manager and at the upper bound by the willingness to pay of the tower manager. This method of setting prices implies the high transactions cost of negotiating agreements, and the opportunity costs of error by the Crown. This is true as willingness to pay will be difficult and costly for the Crown to estimate, and will inevitably at times be over estimated, meaning efficient deals will not be done. Turning to the lower bound recommended by IPART, this should be more correctly described as covering opportunity costs plus direct incremental costs.3 This lower bound is what is recommended by the marginal cost pricing principle described above. It is also less costly for the crown to estimate its own direct incremental and opportunity costs of supply. Opportunity costs plus direct incremental costs is also the rental price that would result in a purely competitive market. To see this, consider a geographic market segment with a large number of small land holdings. In this case the price (i.e. the rental charged) would be bid downwards to the level of marginal cost, which is equal to the direct incremental costs plus opportunity costs. To price above marginal costs would risk losing out on site locations to marginal site owners. By comparison the upper bound of the range proposed by IPART is the price a monopolist would charge. It is only because of the market power held by the land manager that the upper bound of the range is higher than the lower bound. In a competitive market for land, a tower operator would not be willing to pay more than the land manager’s marginal cost. In the case of an existing site, the land manager always has market power due to the prohibitively high cost of moving the tower. The tower assets in existing sites are in effect stranded assets. If there were a competitive market and the tower owner had no costs of moving to another site, the rental price charged would be bid down to marginal cost or that matching a competitive market.

3 For example, consider that a land manager incurs direct incremental additional costs of $200 / year for administration related to the tower and has received an alternative opportunity to use the land valued at $500 / year. In a competitive market the land manager should not accept less than $700 / year rental for the tower. The types of direct incremental costs are described later in this report

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Although IPART recommends pricing within the range, they also recommend that land managers negotiate prices for high value sites. Due to competition between tower providers for sites, this price will in effect become the monopoly price. Co-user Based Pricing IPART advises that rental prices should be charged only to the primary user but should incorporate increases with each additional co-user. To the extent such a fee structure is unrelated to the marginal cost of leasing ground to tower sites it will not be efficient, effective or fair and will not reflect the rental arrangements that would evolve under a free competitive market. Discriminatory Pricing The draft IPART report also recommends discriminatory pricing. This involves charging different rates for the same service, depending on who is using it. In this case, two forms of discriminatory pricing are proposed. First IPART implicitly proposes that the prices for access to crown land be set separately for communication tower service providers, and independently from the prices set for access by other users – e.g. energy. Second within the group of communication tower service providers, it is proposed that different rates be set for community, non profit and selected government agencies, compared to those charged private and commercial parties including telecommunications carriers and their agents (eg Crown Castle). This discriminatory pricing approach will distort competition in the provision of infrastructure services particularly between Government and private commercial infrastructure service providers in radio, communications and TV. The approach may confuse communication, radio and TV content produced by Government and community groups, and the infrastructure services required to support the transmission of that content, and thereby serve to distort infrastructure competition. Where pricing of crown rentals to any groups is in fact below the marginal cost, the price is inefficient, and will encourage their overuse and over investment in towers. It will also in effect be equivalent to a subsidy to the group with a restriction that the subsidy must be spent on telecommunication services. Where pricing to a group is above marginal cost it will deter their use of sites and reduce their investment in sites and in effect be a tax on the group affected. Thus discriminatory pricing, by inevitably implying a departure from marginal cost pricing, will distort use and investment decisions and lead to inefficient and unfair outcomes. The Likely Consequences of the IPART Recommendations Compared to the alternative of marginal cost pricing observed in a free competitive market, the consequences of the IPART recommendations are likely to be significant and adverse. The Effects of Strategic pricing Strategic pricing as proposed is likely to be viewed as little more than a blatant attempt to raise crown revenues. As previously noted however raising Crown revenues is not a stated objective. If the Crown wishes to raise revenues then there are more efficient ways to do so.

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Depending on the circumstance in which it is applied strategic pricing will either fail or succeed in its objective of raising crown revenues, but in either case it will have adverse consequences. In some circumstances strategic pricing will fail in raising Crown revenues. Strategic pricing will fail if the services supplied by crown land are offered in a competitive market. In such cases demand for the affected crown land will be elastic, and any price rise will simply lead investors to switch to other less efficient options, or reduce investment levels in communication services to the detriment of the community. In this case any attempt to raise prices above direct incremental plus opportunity cost will lead to a reduction in crown revenues. Crown land managers in NSW are already pricing substantially higher than what is offered in the competitive market. Crown Castle maintain a database of sites categorised by population density,4 a key driver for rental. As shown in Figure 1, the mark-up of the rental paid for the sites under the review over the rental paid for a comparable set (based on population density) of private sites is 40%. Under the proposed IPART proposal this mark-up will more than double to 109% of the rental on comparable private sites. It is thus unlikely that these further price increases will be competitive.

Source: Crown Castle site database and CLE analysis.5 Figure 1: Comparison of Rents in NSW

The hypothesis that Crown land managers are currently overcharging is supported by analysis of how the ratio of site rentals changes by population density. We would expect greater competition for sites in higher population density areas and thus the Crown to be forced to price more competitively in these areas. This is consistent with the results shown in Figure 2. The ratio of rental of sites considered in the IPART review to those of private sites is higher in areas with lower population density.

4 The population density measure used in this instance is an internal measure - it is not an identical match to that used in the IPART draft recommendations 5 Based on of Crown Castle’s 44 sites under IPART review and 220 private sites in NSW.

Total Rental Comparison on NSW Sites under the IPART Review

Comparable Private Sites Current Rental Draft IPART Proposal

Current 40% Markup

Proposed 109% Markup

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Source: Crown Castle site database and CLE analysis. 6 Figure 2 : IPART Sites to Private Rental Ratio by Population Density

Source: Crown Castle site database and CLE analysis. 7 Figure 3 : Reviewed Sites to Private Rental Ratio, NSW vs. Rest of Australia Equivalent

We might question whether there are factors associated with the sites considered in the IPART review that result in higher costs. If this were the case we should observe a similar pattern in other states in Australia. This hypothesis is not supported by the data. Figure 3

6 Based on of Crown Castle’s 44 sites under IPART review and 220 private sites in NSW. 7 Rest of Australia sites include 710 privates sites and 67 sites managed by similar agencies to those covered by the IPART review. These include those managed by the following lessors: Qld Dept. of Natural Resources, Qld Dept. of Lands, Qld Dept of Primary Industries, SA Dept. of Environment and Heritage, Tas. Dept. of Primary Industries, Foresty Tasmania, Vic. Dept. of Sustainability and Environment, WA Dept of Planning and Infrastructure, WA Minister for Lands, WA Planning Commission and WA Dept Conservation and Land. They exclude sites managed by councils, government corporations and the Commonwealth Government

Ratio of Rental of NSW Sites Under IPART Review to Private Sites. Variation by Population Density

107%

136%

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shows how the ratio used in figure 2 compares with the same ratio involving comparable lessors in the rest of Australia. In the rest of Australia, comparable lessors charge a rental substantially less than what is on the private market. The IPART draft recommendations will result in substantial price increases (as much as 4-fold in some cases). Compared with the private site alternative, this would risk making most Crown land sites uncompetitive. If strategic pricing is successful in raising Crown revenues then it is best seen as involving either:

• Monopoly pricing and an abuse of market power by the Crown relying on its legal monopoly of crown land in certain geographic areas; or

• A breach of an implied undertaking, and short run opportunistic appropriation of the value of stranded assets. Whereas investors may have relied on, or trusted the Crown to price efficiently at competitive levels when they invested in towers, they are now exposed to price hikes as they are locked into current locations.

The implications of monopoly pricing are reduced volume or quality of service, higher prices and a deadweight loss to society. The result simulates what would occur if the NSW Government taxed the use of telecommunications services. Reduced competition will ensure that over time the loss is largely borne by consumers through lower quality services and higher prices. The visible consequences of higher prices for tower locations are many. As articulated in Castle's prior submission, some combination of the following outcomes may occur.

• A reduction in service: o A decrease in quality of services; o A reduction in rural coverage; o A slower rate of technical innovation.

• An inefficient use of towers: o Reduction in new investments by independent shared infrastructure service;

providers on public land; o An increase in the level of tower proliferation.

• Higher prices for telecommunication services. In response to higher rents, telecommunications service providers will cut back on investment in infrastructure. This reduction in infrastructure will result in poorer telecommunications services for NSW consumers and businesses. For the users of telecommunications services there will be reduced coverage i.e. dead spots and more drop-outs.

Example. In a number of cases Forests NSW currently charge more than twice the site rental of equivalent rural sites. A potentially unfortunate outcome of such pricing is that there will be fewer sites and poorer coverage to the detriment of users of state forests.

As an alternative to the reduced service provision, carriers may pass on the cost of higher rents to users resulting in consumers and businesses paying more for telecommunications services than they otherwise would have.8

8 This may be a case of not receiving reductions in prices that would otherwise have occurred.

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The appropriation of stranded assets is equivalent to imposing a lump sum tax on business. It is a transfer of wealth from the business to the Crown and is not value creating. Such an action has a significant negative consequence in terms of discouraging further investment in NSW not just in telecommunications but also in any industry where government agencies may be able to appropriate wealth.

Example The communications tower in Kincumber, NSW is in a high density area and supports a number of telecommunications carriers. Under the IPART recommendations the site rental will be over $50,000, and represent a several fold increase. There are no existing towers with-in 2.5kms of this site. In such a case a number of scenarios may occur.

• Crown Castle passes on the increased rental fee it charges to the telecommunications carriers. Because telecommunication carriers 'costs per quality of service' have increased, the telecommunications carriers reduce planned extension coverage in other areas.

• One or more of the telecommunication carriers will exit the area lowering the competition for telecommunication services in the area.

• An alternative site is developed on private land with much lower rental albeit with worse coverage.

In any scenario, in the long run, due to competition within the industry, additional charges are borne by the consumer in terms of reduced service or higher pricing.

The Effects of Co-user Based Rentals Charging higher rental for additional co-users unrelated to costs will also have a number of negative affects.9 A co-user based rental pricing will cause unnecessary distortions in decision making. An otherwise economical decision to add a co-user to a tower may become uneconomic. Likely results of co-user based pricing are:10

• less co-location; and • a greater proliferation of towers; and • reduced competition between telecommunications network providers.

Higher rents for additional co-users will not be distortionary if the higher rents reflect higher marginal costs. Increase in costs associated with additional co-users should be reflected in the market price for site rentals. Figure 4 shows how private rental prices change with the number of users. It shows that the average market rental is largely unrelated for 2 or 3 users over the single user rental for high and medium density locations and decreases with more users for low-density locations. Interestingly the market price rises more significantly for 4 or more users for high density locations. This may be because there are no close substitutes to these

9 The issues are well articulated in the earlier report of Professor J. Gans for Broadcast Australia. We highly recommend that the tribunal review these. 10 The co-user based charging could create some perverse incentives. By being the primary user of a site a council could become a lower cost provider than a company established to manage infrastructure. For example, if Crown Castle were to operate a telecommunications tower with a single co-user (say Optus) it's rental would be $20,000. If the council became the primary user and allowed Optus to become a co-user the total rental would $19,900. If a local community group became the primary user the total rental would be $13,750.

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sites and the land managers are using their market power and/or because there are additional costs (e.g. greater land space) required to support a significantly large number of users. This analysis suggests that the competitive rate for site rentals only increases marginally, if at all, with additional users. The 67% increase in fee for the second and subsequent users that is being proposed is clearly not reflective of market rates.

Source: Crown Castle site database and CLE analysis.11 Figure 4 : Market Rental by Number of Co-users

The Effects of Discriminatory Pricing Discriminatory pricing as proposed is neither fair not efficient. If the outputs of certain providers (e.g. broadcasters or the police) are socially valued then they should be subsidised according to community preferences transparently through fiscal subsidies in the state's budget. On this basis they would compete with other proposals for community fiscal support, and the extent and cost of any support would be easy to measure. By comparison, regulating the input prices they pay and offering price discounts for access to certain users provides hidden and uncosted subsidies in a non-transparent manner. Not only is it non-transparent and therefore poor public policy to support activities in this way, it is also distortionary, inefficient, and unfair. Regulated low cost pricing for telecommunication services is akin to regulating that these groups pay less for office rental, electricity, gasoline or even staff wages. As noted earlier this discriminatory pricing approach will distort competition in the provision of infrastructure services in radio, communications and TV - particularly as between Government on the one hand, and private commercial infrastructure service providers. Thus while communication, radio and TV content produced by Government and community groups may be valued, discounting the crown land rental they face only serves to distort their decisions as to choice of infrastructure used to support transmission of their content. Cross subsidies their use of crown land will bias their decisions away from outsourcing supply of

11 The analysis is based on all Crown Castle’s 930 private sites in Australia. Note: The population density measured used is an internal measure which applies across Australia

Private Rental by Number of Users

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infrastructure to private commercial players, and therefore unfairly distort infrastructure competition against the private commercial sector. Conclusion Against the criteria, the draft IPART recommendations perform poorly.

• Efficiency

The IPART recommendations support non-competitive market pricing and so will result in inefficient outcomes. The monopoly market pricing may or may not raise revenue but will certainly come at a substantial cost. The net outcome is a deadweight loss to society that is a result of reduced service and higher prices. That prices increase with the number of co-users unrelated to the additional costs will cause a distortion in the efficient use of a communication sites. The appropriation of value of stranded assets is simply a transfer of value and has no societal benefit. It comes at a very large cost in deterring future investment Finally discriminatory pricing is an inefficient method of subsidising particular groups and intentionally serves to distort infrastructure competition. At a lower cost the crown could raise revenue directly to fund the groups who would then have greater flexibility in their use of funds, and choice of infrastructure service provider.

• Effectiveness

The pricing regime suggested will be ineffective because in competitive market locations the prices suggested will be too high and induce switching away from crown sites ultimately reducing crown revenue. The negotiated pricing is more administratively difficult and costly than using a cost based approach, particularly when moves to overcharging will meet resistance and thus raise not lower contract negotiation and enforcement costs. The revenue raised for the Crown will be largely insignificant compared to the crown agencies budget - let alone the state budget. The policies suggested also lead to some other unintended effects. Such policies would create a precedent in support of non-competitive market pricing. The approach is different to the principles used by IPART in regulating the prices of electricity, gas, water and transport and may encourage additional rent seeking by organizations. There are also risks and costs to implementation. Such policies will be viewed by influential organizations as ineffective economic management and may damage the reputation of the government implementing the policies and the departments that advocate them. There will be continued resistance to implementing such policies and as with any policy not well grounded on solid economic principles, the policy has a higher risk of being overturned at a later date.

• Fairness

The IPART recommendations include:

o appropriating the value of stranded assets;

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o price discrimination unrelated to the costs of service provision; and o abusing market power by charging monopoly prices.

As mentioned above there are no clear rules as to what is fair. It is, however, difficult to describe these recommendations as fair.

• Reflect benefits realised by all users of Crown land communication sites

As discussed above it is the consumers who are the beneficiaries of the use of Crown land communication sites. In competitive markets there are no benefits to producers over and above that required to compensate them for their investment and risks faced. The pricing policies will appropriate value from producers in the short term. In the longer term, consumers will suffer more from the proposed pricing policy.

• maximising the use of such sites

Due to the high marginal cost on each additional co-user the price policy proposed will have the effect of reducing the incentive for co-use.

• minimising their proliferation

The recommendations would lead to a sub-optimal number of sites. Some sites that would have been developed under a competitive market will be not developed due to higher prices. In other cases due to the higher marginal cost for co-use, additional sites will be developed and potentially existing sites will be abandoned.

• not impacting adversely on the potential investment in telecommunications and

related communicated services using the above ground infrastructure located on such sites.

Compared with a marginal based pricing approach there will be less investment due to higher ground rentals. Moreover by setting monopoly prices for access to government assets, and appropriating returns to stranded assets, the policy will create a precedent that will create uncertainty for businesses wishing to invest in NSW infrastructure more generally. It is important to note that even in draft form, the IPART report may create uncertainty and have a detrimental effect on telecommunications infrastructure and other investment in NSW. Businesses that are aware of the draft report, facing the choice of investing in NSW or other states, will be biased towards other states. It is thus important that this inefficient economic policy be corrected quickly.

A Pricing Schedule Based on Marginal Cost Pricing As discussed the appropriate pricing schedule is one based on marginal cost. There are two approaches that can be used to quantify an appropriate rental arrangement based on marginal cost pricing.

• A comparative pricing approach that benchmarks prices against a competitive market • A cost based approach that estimates marginal costs from individual cost elements

Both of these approaches are described in Crown Castle's previous submission.

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Comparative Pricing Approach A comparative pricing approach needs to address two issues:

• Finding a comparison competitive market; and • Adjusting for different costs factors between the comparison market and the location to

be priced. As noted in the previous submission, high density areas are likely to have competitive markets but are also likely to have higher opportunity costs due to loss of visual amenity, or loss of space for use for alternative uses. In remote areas where the Crown owns all or almost all the land, there may be no existing structures available for locations and the value of the land for rental may be very low because of usage restrictions. The result could be a low opportunity cost for the supplier (the Crown). The analysis on private site rentals discussed in previous sections of this report suggests that:

• Crown land managers are currently using their market power to charge rental rates above comparable private market rentals and above marginal cost

• The level of overcharging is greater in less populous areas • No materially higher rental fees is justified for co-users

A more sophisticated econometric analysis could be undertaken to give a more accurate estimate of a competitive market price for Crown land site rent.12 Cost Based Approach The cost based approach requires estimating the marginal costs. These costs include:

• Direct incremental costs which incorporate: − Administrative and management costs, including establishment of pricing and

tenure framework, lease negotiation (including legal fees) and ongoing management. These costs relate both to access to routes and occupancy and are typically spread across the portfolio of site rentals rather than being specific to any one site – e.g. legal costs. Such costs may also include any costs incurred by the agency during the process by which any planning approvals are required, including possible public consultation.

− Operational costs, including any one off expenditure necessary to improve site

access or provide additional security. It may also include ongoing costs such as route maintenance and route and site inspection, and other costs not already addressed above. Further costs would include a portion of land tax, rates, any other State levies, electricity (including a portion of fixed charges), and insurance.13

• Opportunity costs may be more difficult to identify and measure, especially in relation

to sites where alternative uses are heavily constrained by specific regulation. For example, in national parks, there are typically prohibitions or very strong restrictions on

12 Using a rental database (for all Australian sites) a rental price function could be estimated using a model of the form Price (or Log of Price) = B0 + X BX + u, where B0 and BX are vectors of parameters to be estimated, X is a vector of control factors and u is an error term. 13 It is our understanding that it is common for the tower operator to bear many of the operational costs, including site development and maintenance. In which case these should not be reflected in the rental pricing.

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any built structures and thus the site in question may have no alternative uses. Indeed, in such cases the only alternative uses are likely to relate to infrastructure for other essential services, for example easements for electricity transmission towers in the Snowy Mountains. Within regulatory constraints on alternative usage, the main opportunity costs in relation to sensitive sites in, for example, a national park would appear to be the loss of visual amenity for park visitors.

Direct incremental costs appear relatively easy to estimate. The main issue focuses around estimating the opportunity cost associated with a site. We reviewed the locations of a number of government sites to consider how the opportunity costs might vary. Three categories appeared appropriate.

• sites with alternative development uses (typically urban sites); • sites with no alternative development uses and negligible amenity impact; and • sites which have no alternative development uses but may have an amenity impact

Sites with alternative development uses are sites such as those located in urban parkland (an example of such a site is in Baulkham Hills in Sydney). If the Crown allowed alternative uses, it is likely that these sites would be used for other developments. Given this forgone opportunity, one might assume the public value of the entire parkland to be at least equal to its market value. The opportunity cost in this case is the marginal loss of use of the site space for parkland enjoyment. The opportunity cost of locating a tower may be estimated by the market rate charged for a similar development in a similar private rental site, less the direct incremental cost. A number of sites may be classified as having no other alternative development use and having zero or negligible amenity impact. Such sites are located typically on ridges or hilltops (for example there are two such sites near Gosford) and although ideal for telecommunication towers, are typically impractical for other developments. They may have zero or negligible amenity impact because they are not in locations visited by recreational users. The appropriate marginal cost rental price in these cases is simply the direct incremental costs, which should be easily estimated. Given nearby private sites may have alternative uses, private rental prices may be substantially higher and an inappropriate comparison. Some sites may have no practical alternative uses but have a material amenity impact when used for communication towers. An example is a site in a state forest in a location visited by recreational users. People may regard that the tower facility detracts from their enjoyment of the park.14 We expect that this loss of amenity will be related to the size, appearance and perceived health effects of the facility. In this case the rental price should reflect factors such as the height of the tower, the site spaced used, the transmission power of the tower and the degree to which the facility blends in with the natural surroundings. Such a pricing structure would encourage tower operators to develop low-impact towers. We note that the proposed pricing structure that has been recommended does not reflect such ‘loss of amenity’ costs. For example, we would expect that a commercial broadcast tower which is over five times higher, occupies substantially more site space and has (as we understand) a substantially higher transmission output should incur a higher rental due to its

14 It commonly accepted that there might be a non-use value (also known as passive value) to maintaining natural resources. This value reflects that people may be affected by changes to a natural resource even if they never visit or use the resource. Nonuse value is estimated to be highest “when the resource in question is unique and/or where adverse impacts are irreversible” (Harpman, Welsh, and Bishop, "Nonuse economic value: Emerging policy analysis tool", US Bureau of Reclamation, 1994). In the case of telecommunication towers, the sites used are unlikely to be considered environmentally unique and we would expect any adverse impacts to be quickly reversible (if desired).

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higher amenity cost than a telecommunications tower. As demonstrated in Figure 5, under the draft IPART proposal, the reverse will be the case if there are fewer co-users on the broadcast tower. We expect these costs to be very low for the telecommunication towers that are typically small, use a small site space and located in non-unique forest space. The amenity affect may be positive in cases where the tower operator maintains an access road that may be used for fire control purposes and/or for recreational use.

Figure 5: Amenity Cost Comparison15

An indicative estimate of marginal costs may be made by examining the experience in other locations. Whereas other agencies may abuse market power and charge above the competitive level, it is unlikely that they will charge below their own marginal cost.16 Thus the lower level of prices seen elsewhere should provide a guide as to the true marginal cost of providing a site. We note that the IPART report borrows heavily from the policies of Land and Water British Columbia Inc. The prices used in British Columbia are substantially lower than that proposed by IPART and do not include co-user fees unless the co-user has a different "communication use". 17 Their pricing is listed below in Table 1, along with the rates used by the Department of Natural Resource, New Brunswick. The New Brunswick rates are much lower again and appear to reflect the approach of charging only marginal costs.

15 The Crown Castle height is based on the average of towers in NSW on sites managed by Department of Lands, Forests NSW or the National Parks and Wildlife Service. The ABA, (“Digital Channel Plan”, 1999), report that the height of the Channel 7/10 commercial broadcast tower in Artarmon is 192m. 16 Land managers may underestimate their opportunity costs but as discussed in the previous submission these are likely to be low for low density areas. 17 Thus multiple mobile phone carriers would constitute one "communication use". See Land and Water British Columbia Inc.'s Communication Site Policy for details.

190+

m

Average height ≈35 m

Commercial Broadcast Tower Crown Castle Tower

Three commercial channels. IPART Draft Rental =

$48,000

Four telecommunications carriers IPART Draft Rental = $62,000

190+

m19

0+ m

Average height ≈35 m

Commercial Broadcast Tower Crown Castle Tower

Three commercial channels. IPART Draft Rental =

$48,000

Four telecommunications carriers IPART Draft Rental = $62,000

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Table 1 Land Manager Annual Communication Site Rental

in local currency Department of Natural Resources, New Brunswick Canada http://www.gnb.ca/0263/packagelease-e.asp#approved

Issuance Fee: $172.50 Annual Rent on a Communication Lease: $350.00 per hectare for the first hectare and $40.00 for each additional hectare plus HST ($350.00 minimum fee).

Land and Water British Columbia, Canada http://lwbc.bc.ca/02land/tenuring/communicationsites/

The zone rates for April 1, 2005 to March 31, 2006 are: Zone 1 (Urban Areas): $4642 Zone 2 (Semi-Urban Areas): $1741 Zone 3 (Remote Areas): $ 581 Payments increase with each additional "communication use" (not co-user) at a discounted rate.

Summary Pricing Schedule Based on the two approaches discussed, an appropriate pricing schedule will be much less than the proposed IPART schedule and less than what is currently being charged. IPART could and should use a cost-based approach to determine an appropriate level of pricing. Conclusion An efficient, effective and fair rental policy is to charge rents based on the principle of marginal cost based pricing which simulates the effect of a free competitive market. This leads to rentals being priced at direct incremental costs plus opportunity costs. The IPART draft recommendations are pricing based on abusing the market power Crown land managers have in some locations. If implemented they will be less efficient, less effective and unfair. There are many negative consequences to these policies for NSW. It is important to act quickly to correct the recommendations of the draft report. Even in draft form, the recommendations in the report may introduce uncertainty, and deter private investment in telecommunications infrastructure, and infrastructure in other industries.