TELECOMMUNICATIONS

DIALING UP THE DUOPOLY - THE NEW LEGISLATIVE REGIME FOR AUSTRALIAN TELECOMMUNICATIONS

CARRIER RESERVATION A major difference between the current Telecommunications Act and the new Bill is the domain which is exclusively reserved to the carriers. Under the current Act, the Government carriers have a monopoly of networks and of basic services provided over those networks. Only value added services and a private network services can be provided competitively by non-carriers, such as AAP Communications. The current structure of the industry is as depicted in Diagram 1. When formulating its proposals for reform, the Government recognized that the current boundary between reserved and value added/private network services was inherently unstable. The Government, reinforced by AUSTEL's resale inquiry, concluded that any alternative distinction based on the types of services (e.g. carrier reservation of basic voice telephone

services only) or any limitations based on customer or user groups (e.g. wider common interest group boundaries for private networks) were also destined to fail. The carriers' reservation, therefore, is framed only in terms of the provision of network infrastructure d g7~ the telephone lines ('line links') which connect one 'distinct place' with another. No services are reserved to the carriers, and the full range of end-to-end services are open to competition from non-carriers. Private networks, which under the former regime had 'common interest' group limitations, can now be double- ended interconnected with the PSTN. Switching is also not reserved to the carriers, although as a practical matter, the big switches which drive the public telephone service will still be provided by the carriers. As a result, service providers will be able to lease large capacity lines between Sydney and Melbourne install their switches and offer to the public at large a full STD service which 'bypasses' TelecomlOTC and the second carrier. This completely inverts the current industry structure, as depicted in Diagram 2. However, with the ability of carriers to price advantage themselves as discussed below, the more likely scenario is that service providers will construct larger and more flexible private networks; for example, 'vertical networks' which include a manufacturer and its suppliers, which would have failed under the current Private Network Services Class Licence.

NON-CARRIER NETWORKS The right of subscribers to install their own 'private telephone system' on their own properties is also expanded. Under the current Act the carriers have the exclusive right to install lines between 'cadastrally separated' places, which is almost as awkward to apply as it sounds. The new Bill instead provides that non-carriers can install their own facilities within 'distinct places'.

CURRENT AUSTRALIAN REGULATORY REGIME

|

E

NEW REGULATORY MODEL

Higher Level Price Services Advantage

-~- asic Carriage rrier

Advantage

duopoly

J~ ' ] open competition

Diagram 1. Diagram 2.

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A distinct place is a property over which there is a single legal title, but excluding parts of that property which are leased, sub- leased or used by another party. Different floors of an office building leased to different parties are each distinct places. However, unlike under the current Act, adjoining properties which are owned, leased or 'Primarily used' by one party can be aggregated into a common area, and a privately owned and operated network can be installed throughout the common area.For example, this will allow a Government department which leases several adjoining warehouses to establish a single PABX network which crosses the property lines and joins up the warehouses. The Minister can also issue guidelines allowing different parties with a 'common interest' to install a private telephone system between their adjoining properties. This will allow tenants in the one building, for example, to have a common internal telephone system. The specific exceptions to the carriers' network reservation under the current Act are also largely retained intact in the Bill, e.g. networks installed and operated by government transport and electricity authorities. Under the current Act, AUSTEL has a general power to permit the installation of privately-owned network facilities, but Telecom has a right of veto. This section was intended to allow small-scale exceptions at the margin of the carriers' reservations: for example, running a line across a street to link up to buildings owned by the same company, or installing a line between two remote mining sites not serviced by Telecom. Apparently only one authorization has been arranged by Telecom, and there was a feeling within the Department of Communications that Telecom over-played. The Bill waters down the carrier to a requirement on the part of the Minister only to consult the carriers in setting guidelines for network exemptions. The Minister is to consider whether the proposed exemptions will 'erode unduly the practical value' of the carriers' licences.

MOBILE C O M M U N I C A T I O N S The Government proposes to issue three mobile ('PMTS') licences; one to the merged Government carrier, another to the second carrier, and a third to an independent operator, or possibly toregionat operators. The Government had initially proposed to issue the second and third PMTS licences simultaneously, but concerned about the possible impact on the attractiveness of AUSSAT, the Government proposes to delay the third licence until 1993. Public Access Cordless Telephones will be open to full competition, with providers operating under a class licence.

INTERNATIONAL TELECOMMUNICATIONS Establishing a facilities based duopoly at the international level is a trickier exercise because carriers do not provide their own facilities at the international level, but obtain capacity from the international satellite bodies (INTELSAT) and cable consortia. While the Bill provides that only cable consortia involving a duopoly carrier may land cables in Australia, the statutory reservation does not include the 'operation' of cable links, which may allow non-carriers to lease capacity or acquire indefeasible rights of use. The Bill allows, enacts and expands the Government's Private Earth Station Policy, which will allow

non-carriers to lease space segment, establish their own gateway and interconnect with the PSTN. However, concerned about the impact of non-carriers bypass- ing the international accounting rates system operated by carriers, the Government has announced that open re-sale at the international level will not be allowed except on a reciprocal basis. This is likely to be done through the class licence. Following the UK approach, there will also be an international code of practice as a safeguard against a dominant foreign carrier playing off the two Australia carriers to obtain an unfair advantage.

PRICING REGULATION AUSTEL recognized that paring down the carrier reservation to the installation of line links and opening up services to full competition could deprive the carriers of sufficient economic incentive for the huge capital expense involved in establishing comprehensive networks. It was this concern which ted AUSTEL to recommend the basic carriage/higher level services distinction, and the thicket of pricing, dissemination and supply rules surrounding those distinctions. The basic carriage services (BCS)lhigher level (HLS) distinction bears more than a passing resemblance to the current reserved servicesNAS distinction, which the Government said it was to abolish. However the BCS/HLS distinction serves a very different purpose. Rather than marking out the exclusive domain for carriers as the current ACt does, the BCS/HLS distinction serves as the line below which carriers may exploit the 'economics of scale and scope' arising from their facilities reservation, but above which the carriers must compete on an equal basis with service providers. Thus, while service providers are free to offer a plain old telephone service in the way described above, they are unlikely to offer that service as cheaply as the carriers. As a result, the carriers will have a 'de facto reservation' of POTS as depicted in Diagram 2. The categorization as a BCS is only a threshold determination, and it is then important to trace through the consequence in terms of pricing and supply which follow on, which are as follews: - a carrier may internally transfer price a BCS at cost to itself

in providing another BCS (for example, factor megalinks at cost into its basic telephone charges to customers);

- a carrier is not required to supply a BCS to a service providerwhere that BCS is used only in providing another BCS.

- a carrier must internally transfer price a BCS used in providing a HLS at the same price and on the same terms as it prices the BCS to service providers;

- a carriers must file a tariff for all BCS used in HLS or supplied to service providers.

A more fundamental difficulty with the BCS provisions as framed in the Exposure Draft was their symmetrical application to both duopoly carriers, regardless of their relative power or ability to distort or manipulate competition in the downstream markets where service providers operate. ATUG, which represents users and service providers, took the view that service providers, and users' interests would be best served by vigorous competition between the carriers. As the

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second carrier will have no power to enforce its will in the market, anti-competitive conduct on its part will result only in it forfeiting market share. The symmetrical application of the same pricing and tariffing rules to the second carrier may only serve to stifle competition rather than help service providers. Reflecting this position, the final version of the Bill applies most BCS pricing rules (e.g. the internal transfer pricing rules) only to the 'dominant carrier', which will usually be Telecom/OTC in most markets. The second carrier will still be required to file tariffs, which will be a ceiling on its charges, but it will still be able to strike individual lower priced deals 'off tarriff'. As the second carrier progressively erodes TelecomtOTC's dominant market share, the need for stricter pricing control of Telecom/ OTC will diminish.

INTERCONNECT As under the UK regime, interconnect is to be negotiated between the two carriers, and if they cannot reach an agreement, the regulator, AUSTEL, is to arbitrate. However, it is fair to say that the Australian Government attributes Mercury's low market share to an unfair and unequal interconnection regime and to a high interconnect price. The Bill spells out that the benchmark against which the two carriers are to negotiate is equal technical and operational access and interconnection between the two networks. The Bill states that the interconnection arrangements must be directed towards allowing the carriers to compete on an equal basis; providing for interconnection on a fair and equitable basis; and removing obstacles to customers accessing the service of each carrier. The Government has also explicitly stated that the price to be paid by the second carrier for interconnections is 'directly attributable incremental cost' in providing that access. The Government has directed AUSTEL to recommend the method for calculating that cost, and to suggest the initial interconnect price. The Bill gives the Minister power to proclaim pricing principles, which will then bind the parties in their negotiations. AUSTEL has not delivered its report yet, but is leaning towards long run incremental cost, although it is still not settled whether the 'sunk' or non-traffic sensitive costs of the local loop might find their way into this formula. When introducing the Bill, the Minister said of these interconnect arrangements that they were the "most rational and pro-competitiven of any in the world.

DUOPOLY PERIOD The Government originally announced that the duopoly automatically ends in 1997. However, concerned about the impacton the attractiveness of AUSSAT, the Government has begun to move away from a categorical commitment to that date, although the transition to open competition remains firm policy. The Minister announced that AUSTEL will conduct an inquiry towards the end of the duopoly and review the best manner in which to proceed with further de-regulation, somewhat like the recent UK process.

MINISTERIAL DISCRETION The Exposure Draft of the Bill has been criticized on the basis that it vested very wide powers in the Minister. In the hands of a government of a different political hue (which is a real

possibility in the next two years), these powers could allow a new Minister to completely re-shape the duopoly, if not abandon it. The Exposure Draft endeavoured to reduce this risk by allowing the Minister to agree with the second carrier to limit his or her discretion to vary the carrier's licence. However, promising not to change the ground under a player's feet may be of little value if the whole surrounding landscape can be changed. Heeding this criticism, the Bill now allows the Minister to agree not to issue new licences to other parties (thus locking in place the duopoly), or to vary any of the licence conditions which apply to all licences, or to cellular licences or to carrier licences. This agreement can also specify the amount of compensation which is payable by the Government in the event of breach of the agreement. However, the one 'gap' in this process of fettering Ministerial discretion is that the Minister may still change the individual licence conditions which apply to another carrier, but not generally to all. carriers. The Government could thus relatively disadvantage the second carrier by lifting conditions which applyonly to TelecomlOTC.

CARRIER POWERS The second carrier is to be given the same rights to enter private and public land to install towers, lines and other facilities as Telecom has under the current Act. As with Tetecom, the second carrier will be under an obligation to repair or compensate for damage caused. Telecom is currently exempt from state environmental and planning laws in the full range of its activities, including the construction not only of telecommunications facilities, but also office buildings and retail space it lets out to others. The Federal Government is considering abolishing this exemption, but retaining power for the Federal Minister to override local councils and state governments where the facility was essential. Potential bidders for the second carrier licence argued that this approach would substantially slow down the roll-out of an alternative national network. Because Telecom has traditionally been exempt, state and local environmental plans do not list telecommunications facilities as permitted activities, 'and a wholesale revision of these plans would be required. With the override power, the Federal Minister would inevitably become involved in controversial local planning disputes, and local councils' decisions would be subject to constant appeal and pre-empting. Heeding these arguments, the Government decided to retain the exemption from state environmental laws, but more narrowly limited to telecommunications facilities. There will also be a federal environmental code, and the Government is to consult with state and local governments in drawing up this code.

CONCLUSION One of the Government's objectives is to reduce the level of regulation in the telecommunications industry, and to rely on market forces to deliver lower prices, higher quality and greater innovation. However, the market conditions which would allow reliance on competition will not exist initially. In the short term, a fairly sophisticated regulation, and a close supervisory

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role by AUSTEL, will be required to successfully manage the transition from monopoly to duopoly and on to open competition.

Peter Leonard and Peter Waters are partners in the Sydney law firm, Gilbert and Tobin and both specialize in telecommu- nications and information technology.

THE REPORT OF THE DIRECTOR GENERAL OF TELECOMMUNICATIONS FOR 1990

:,~i!iii This Report was published by HMSO (priced at 14.90) at the :::i! end of May this year and makes interesting reading for ;i:: those interested in telecommunications. :~!:;~i The main sector of general interest is the Director General's !ili; Statement at the beginning of the report, which covers the ~:~:~ii period to the end of last year. Unfortunately, therefore, it ::iii!!: does not analyse the white paper - "Competition and ~;~i: Choice: Telecommunications Policy for the 1990s'. How- : ever, some of the thinking behind the contents of the :i: November 1990 Consultative Paper of the same name is ii~ I explained, being the first step in the Duopoly Review. ~ii~i!il International Calls :::iiiii A particular area of concern which the Director General iili i discusses is the pricing of international services. This is :::: addressed in the Duopoly Review but the Director General

goes to some length to explain that the whole question of iiii;~ the review of international pricing was already well in hand, i!ii prior to (and will continue independent of) the Duopoly i ;iill Review ::!~ When a price control agreement was entered into with BT ~:i: in 1988, it did not address international pricing because the ::iil Director General made the assumption, at that time, that ::i!!!~ competition would keep international prices under control. i:i~:ii He felt that the position of the new entrant in the UK iiii! market, Mercury Communications Limited, in the market

for international calls was sufficiently strong that this ~iii: strength would have the desired effect of causing BT to ~i~i share its margins. However, his subsequent investigations ::iiii!iil have confirmed his initial concern that the level of margin i:i~i BT makes on international calls is too high and his

assumption in relation to the effect of competition was insufficient on its own.

PUBLIC TELECOMMUNICATIONS OPERATORS AND COMPETITION The second part of the report is called 'PTO Licences and Competition'. It is extremely useful, in that it explains the history and background of the various categories of public

::: telecommunications opera tors -ce l lu la r mobile radio i~ networks providers; personal communications networks;

cable systems and so on. The section describes the various systems and contains some useful statistics.

APPARATUS AND CONTRACTOR APPROVAL AND NON-PTO UCENCES The third part of the report looks at such areas as apparatus and contractor approval and the establishment of telecommunications standards. In addition, it looks at non-PTO licences, i.e. Iicences pursuant to which those who run telecommunications systems of their own are licensed- i.e. those other than the public telecommunications providers. He looks at the liberalization of the branch systems general licence ('BSGL')

i and how it has been expanded in recent years and sets out further proposals for changes. He notes that, in some cases, where a specific individual licence was required by virtue of the nature of a private system, the same system now does not necessarily need a separate licence, because it falls within the more extensive provisions of the wider BSGL.

GENERAL There are other chapters in the report but those listed above are probably of widest general interest. There are also appendices to the report which are themselves useful (including the reports of the six advisory committees on telecommunications which the Director General was required to establish under the Telecommunications Act 1984). The committees cover England; Scotland; Wales; Northern Ireland; telecommunications matters affecting people who are disabled or of pensionable age; and telecommunications matters affecting small businesses. The last three attachments to the report are a complete list of all non-PTO licences issued during 1990 under the Telecommunications Act 1984; all broad band cable operators licensed as PTOs under Section 7 of the Telecommunications Act 1984 during 1990; and a complete list of Oftel publications for 1990. The report is a good reference tool as to where the telecommunications market was at the end of 1990 and is a helpful explanatory prelude to the Duopoly Review. Heather Rowe Report Correspondent

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