"Telecommunications Reform - Will it Work?"

Rod Shogren
Commissioner
Australian Competition and Consumer Commission
Australian Interactive Multimedia Industry Association Conference
Conrad Jupiters Hotel, Gold Coast
1 August 1997

Introduction

As most of you well know, the Commission assumed the primary role for competition and economic regulation of telecommunications services (including on-line services) from 1 July 1997, although some access provisions , such as the transitional provisions were already in place. The Commission’s new responsibilities are primarily centred on:

  • new enhanced competition powers under Part XIB of the TPA, and
  • new access provisions specific to telecommunications under Part XIC of the TPA.

I propose to outline our responsibilities under both Part XIC and Part XIB separately, while making some general comments on the application of these provisions and other provisions of the Trade Practices Act 1974 to On-Line services.

New Regulatory Responsibilities

In introducing full and open competition to the telecommunications industry, the Parliament’s main objectives were to:

  • promote the long term interests of end users of carriage services or services provided by means of carriage services (such as content services); and
  • promote the efficiency and international competitiveness of the Australian telecommunications industry.

In this way the regulatory framework is intended to facilitate the development of:

  • world class infrastructure using the latest market driven technology;
  • a large number of service providers (including carriers) offering diverse and innovative services; and
  • contestable market strategies which reduce prices and increase the quality of services.

The Government’s package of legislation involves a new Telecommunications Act and amendments to other legislation, particularly the Trade Practices Act ("TPA"). The package establishes new economic regulation and competition rules for the industry which will achieve the above objectives.

The new regime is based on the current competition principles embedded in the Trade Practices Act, albeit extended to include special provisions for telecommunications. This means that there are some differences in the nature and culture of a telecommunications regulatory regime based on competition law when compared with the preceding regime. It is, for example, less prescriptive and rather more market friendly and flexible and adaptive to changing circumstances. This is not to say that it is less certain. Trade practices law has been operating in Australia for several decades - and is based on overseas antitrust laws of even longer standing - with the result that the core concepts, methods of analysis, and applications are well settled.

Part XIC - Access Provisions

Part XIC of the Trade Practices Act establishes the access regime for telecommunications. It provides "foundation access rights" [1] to new and existing carriers and service providers and facilitates commercially negotiated access arrangements. The new Part XIC provisions are derived largely from Part IIIA of the TPA and like Part IIIA, the telecommunications access regime is designed to utilise infrastructure efficiently and encourage efficient investment.

The primary object of Part XIC is to establish an access regime that promotes the long-term interests of end-users. The legislation is quite specific regarding what can be taken into account in considering the long-term interests of end-users. The factors are:

  • promoting competition in telecommunications markets;
  • any-to-any connectivity (users of different networks can communicate);
  • economic efficient use of, and investment in, infrastructure.

The Commission considers that the most fundamental competition issue at stake is ensuring that there is effective regulation of access by new entrants to the incumbent’s network. In the telecommunications industry the incumbent has substantial advantage over new entrants through:

  • control of access to key network elements; and
  • the historical development of an asymmetrical network and market information.

Denying or impeding access to key network elements, such as the Customer Access Network, can constitute a barrier to entry and efficient competition in dependent markets (such as long-distance telephony services). While infrastructure duplication is essentially an industry decision; the role of regulation is to ensure that industry’s decision about whether to roll out a new network is not distorted by access conditions being too harsh (leading to either a lessening in competition or wasteful duplication) or too lax (leading to inefficient use of existing facilities). The aim therefore is to ensure that decisions are consistent with maximising benefits to end users.

It is important to bear in mind that the regulated access regime will not apply to all telecommunications services. It will only apply to declared services. Declared services will usually be those services which are considered important for competition to develop in related markets or for any-to-any connectivity.

There are three methods by which a service can be declared:

  • the Commission has already deemed services under existing carrier access arrangements to be declared;
  • the Commission may declare those services recommended by the industry body, the TAF (which is registered under the business name of Australian Communications Access Forum- ACAF); or
  • alternatively, the Commission may declare services after holding a public inquiry.

Once a service is declared the access provider must make the service available to requesting access seekers on reasonable terms and conditions. The Act does not spell out the terms or conditions of access.

Under the new legislation, the terms and conditions of access can be established in three ways:

  • an access provider may enter into a private, commercially negotiated agreement with a service provider regarding the price and quality of access to the declared service;
  • alternatively, an access provider may register an access undertaking with the ACCC. (This undertaking must be consistent with either the ACAF Access Code or the ACCC code, whichever is applicable and must set out the terms and conditions of access); or
  • where a access provider and a service provider cannot come to an agreement regarding the terms and conditions of access and where there is no undertaking in place, or the dispute involves an area which is not covered by the undertaking - the parties may notify the Commission of an access dispute.

In the Commission’s administration of its access responsibilities regard will be had to the principles and legislative provisions contained in Part XIC. The Act clearly sets out the criteria under which we will declare services, approve access codes, determine exemptions from standard access obligations, approve undertakings and arbitrate on access disputes. As part of the Commission’s responsibilities to inform and educate the public regarding trade practices law, a number of tasks have been undertaken by the Commission to inform industry of the approach the Commission will most likely take in performing its function under Part XIC.

The Commission has determined its approach to access pricing following the issue of access pricing guidelines and inputs from industry. The Commission will follow these principles when assessing undertakings and conducting arbitrations.

The pricing principles are intended to guide the parties in their access negotiations. The Commission considers that, in the usual case, access prices should be consistent with the broad pricing principles and pricing rules specified in the draft guidelines. These principles and rules set limits on the pricing behaviour of access providers who could otherwise use their market power to set anti-competitive prices.

The access provisions in Part XIC and the conduct provisions in Part XIB are regarded by the Commission as complementary tools that can act to reinforce the Commission’s powers, rather than separate regulatory mechanisms for addressing market concerns. For example where an incumbent attempts to bypass the safeguards inherent in the access provisions, which provide a form of control at the "wholesale" level, and engage in anti-competitive pricing behaviour at the "retail" level, the Commission is able to draw upon extensive powers in XIB which can and will be used to deal with such behaviour, in an expeditious way. I will now turn to the Part XIB provisions.

Part XIB - New Competition/Conduct Provisions

Anti-competitive conduct

Under the new legislation carriers and carriage service providers are prohibited from engaging in anti-competitive conduct. This prohibition is known as the competition rule. There will be two circumstances in which a carrier or carriage service provider will be said to engage in anti-competitive conduct:

  1. where a carrier or service provider with a substantial degree of power in a telecommunications market takes advantage of the power with the effect or likely effect of substantially lessening competition in that or any other telecommunications market; or
  2. where it engages in conduct in contravention of section 45, 45B, 46, 47 or 48 of the TPA and the conduct relates to a telecommunications market.

The legislation equips the Commission with several new tools which are relevant to the enforcement of the competition rule. Namely:

  • the issue of a competition notice;
  • the issue of an exemption order;
  • the making of tariff filing directions; and
  • the making of a record keeping rules

I propose to briefly comment on each of these regulatory mechanisms, before discussing the general approach of the Commission to Part XIB issues.

Issue of a Competition Notice

Where the Commission considers that there has been a breach of the competition rule, it may issue a competition notice. In deciding whether to issue a competition notice, the Commission must have regard to competition notice guidelines,which under the legislation it is required to formulate and circulate prior to 30 June. In addition to the Guideline, the Commission has also released an information paper entitled "Anti-competitive Conduct in Telecommunications Markets". This Commission initiative is designed to inform interested parties of their obligations under the Act and the approach that the Commission will usually take in analysing allegations of anti-competitive conduct in telecommunications markets.

Significant consequences flow from the issue of a competition notice. The legislation provides that a competition notice will be taken as prima facie evidence of a breach of Part XIB. If the Federal Court is satisfied that a person has contravened the competition rule, it may make orders including pecuniary penalties of up to $10 million in fines plus $1 million per day for continuing breaches following issue of the competition notice. In addition, once a notice has been issued, private parties may seek injunctions, damages or other orders for breaches of the competition rule.

Exemption Orders

In certain limited cases the Commission may exempt a carrier or carriage service provider from the application of the anti-competitive conduct rule and the ancillary provisions of the Act. In issuing an exemption order, the Commission must be satisfied either that the conduct is not anti-competitive or that the conduct will result, or will be likely to result, in a net benefit to the public.

Tariff Filing Requirements

Where the Commission has concerns about potential anti-competitive conduct engaged in by a carrier or service provider, and where there are insufficient grounds to support the issue of a competition notice, the Commission may rely upon its tariff filing directions power . Under the legislation the Commission may issue a tariff filing direction requiring a carrier or service provider to provide information to the Commission regarding present and future tariffs for any service, whether a basic or more enhanced service. Telstra will be required to file with the Commission all its charges for basic carriage services, however, the Commission will be able to exempt Telstra from this obligation in relation to specified charges or services.

Record-Keeping Rules

The Commission can also make record keeping rules specifying the manner in which specified carriers or service providers are to keep and retain records relevant to, amongst other things, the exercise of Commission powers in regard to the competition rule and ensuring access to competing carriers’ services. The Commission is currently developing new rules to assist with its competition, access and pricing responsibilities. We expect that new and much improved record-keeping rules will be able to be implemented from next year.

Initiating investigations

The Commission will commence an investigation into potentially anti-competitive conduct (or monitor conduct which is, for example, inherently capable of being anti-competitive) whenever the Commission considers such action to be in keeping with the Act’s objective of enhancing the welfare of Australians through the promotion of competition and fair trading and provision of consumer protection. For example, the Commission may commence an investigation under a number of circumstances including:

  • following a complaint by any person;
  • where indicated by matters arising from an investigation of any person (including a carrier or carriage service provider) as part of the Commission’s performance of its duties; or
  • where the Commission obtains information by other means and that information suggests a contravention of the competition rule may have occurred, or is occurring.

An example of the second circumstance would be the Commission commencing an investigation in response to information obtained in the process of administering information gathering provisions such as tariff filing directions or record keeping rules, or the access provisions in Part XIC. An example of the third circumstance would be the Commission commencing an investigation in response to media reports suggesting a carrier or carriage service provider was engaging in anti-competitive conduct.

Obtaining information

In obtaining information and assessing the probative value of that information, the Commission will draw on the full range of its statutory powers both under Part XIB and under the Act more generally.

Carriers and carriage service providers should be aware that the Commission may obtain information by exercising:

  • the general information gathering power (s.155), permitting the Commission to obtain information where it has reason to believe that a person is capable of furnishing information, producing documents or giving evidence relating to a matter that constitutes or may constitute a contravention of the Act or is relevant to a designated telecommunications matter. [2] The section also provides that where the Commission has reason to believe that a person has engaged or is engaging in a contravention of the Act an officer authorised by the Commission may enter premises and inspect and make copies of documents; [3]
  • the power to issue tariff filing directions (Division 4); and
  • the power to make record keeping rules (Division 5). Although carriers and carriage service providers are not directly required to provide kept records to the Commission, such records may be the subject of a s.155 notice.

Information provided pursuant to a tariff filing direction may, in some circumstances, be made publicly available by the Commission. [4]

Notwithstanding these powers, the Commission considers that complainants who allege anti-competitive conduct have an important role to play in providing information and assistance which may help the Commission to reach a decision. In particular, the Commission is often able to make a decision more quickly where a complainant is able to assist the Commission in its examination of industry-specific practices and provide information which allows the identification of potential market boundaries for the assessment of market power and the effects on competition of the alleged anti-competitive conduct.

These issues will often require detailed analysis of relevant market information and assessment of statements by actual or potential market participants as to the effect of the conduct under investigation. Therefore, while acknowledging that the Commission is obliged to (and will) investigate potentially anti-competitive conduct without assistance if necessary, the Commission will expect parties bringing a complaint to the Commission to provide all possible assistance to ensure a rapid response.

Role of the Courts

Although the ACCC is now the official body responsible for regulating competition in the telecommunications industry, the ultimate decision- making body in relation to the new telecommunications rules will be the courts. Private rights of action exist under the telecommunications provisions, in addition to the rights under the general Parts of the Act. In making decisions on whether and how to use the new competition/conduct provisions, the Commission will be paying attention to the manner in which the courts have approached general competition law concepts such as market definition, market power and substantial lessening of competition - the all- important concepts contained in Part XIB.

ACCC Intervention

The Commission will also seek to monitor developments in the industry to assess the need for intervention, not only under Parts XIB and XIC but other provisions of the Trade Practices Act, for example, in terms of structural changes to market players (eg joint ventures and mergers). However, that should not be at the expense of an active industry role in the development of a progressive telecommunications market in which competitive forces drive innovation, investment and the provision of quality services.

Part IV - Anti-Competitive Conduct Provisions

Part IV of the Trade Practices Act prohibits certain anti-competitive conduct. However, where a business engages in conduct in contravention of section 45, 45B, 46, 47 or 48 of Part IV the TPA and the conduct relates to a telecommunications market, Part XIB of the TPA will also apply.

Although Part IV is complex and detailed, it is based on two basic principles:

  • that any behaviour which has the purpose or effect of substantially lessening competition in a market should be prohibited; and
  • put broadly, that such behaviour should be able to be authorised when its anti-competitive effects are offset by associated public benefits.

The main types of anti-competitive conduct which are prohibited include:

  • anti-competitive agreements and exclusionary provisions, including primary and secondary boycotts (s 45), with price fixing (s 45A) prohibited per se;
  • misuse of substantial market power, for the purpose of eliminating or damaging a competitor, preventing entry or deterring or preventing competitive conduct
    (s 46);
  • exclusive dealing which substantially lessens competition (s 47), with third line forcing prohibited per se;
  • resale price maintenance for goods (ss 48, 96-100); and
  • mergers and acquisitions which substantially lessen competition in a substantial market (s.50).

The remedies available to the Commission under Part IV include: