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Focus: Telecommunications law reform moving forward

19 November 2010

In brief: New telecommunications legislation will have a profound impact on the Australian telecommunications industry's structure and regulation, and will also provide more legislative certainty for Telstra in undertaking its structural separation. Our experts from the Communications, Media & Technology and the Competition groups outline the Bill in further detail.

• Background
• Reforms to the telecommunications market structure
• Reforms to the competition regime
• Strengthening consumer safeguards
• Next steps

Background

In April 2009, the Federal Government announced the establishment of NBN Co Limited, to roll out and operate a new super-fast national broadband network across Australia (the NBN). The Government also released a regulatory reform discussion paper (the Regulatory Reform Paper) that explored ways in which the current regime could be made to work more effectively while the NBN is being built.

On 15 September 2009, the Government introduced into the Parliament a package of legislative reforms in the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 (the 2009 Bill),¹ which addressed the issues raised in the Regulatory Reform Paper, namely:

• Telstra's high level of horizontal and vertical integration;
• perceived deficiencies in the competition regime;
• consumer safeguards; and
• opportunities to remove redundant and inefficient red tape.

The 2009 Bill subsequently lapsed at the time Parliament was prorogued for the election.

On 20 October 2010, the Government reintroduced the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010 (the Bill) and Explanatory Memorandum. Since the Bill was introduced in 2009, it has been the subject of a Senate Committee inquiry that received submissions from key stakeholders. Most importantly, the Bill provides a legislative framework that underpins the potential 'definitive agreements' between NBN Co and Telstra (giving legal effect to the non-binding 'financial heads of agreement' reached between Telstra and NBN Co in June 2010), including provision as to how Telstra's structural separation might progress.

The Bill contains amendments to, among other Acts, the Telecommunications Act 1997 (Cth), Parts XIB and XIC of the Competition and Consumer Act 2010 (Cth) (the CCA) (currently the Trade Practices Act 1974 (Cth)) and the Telecommunications (Consumer Protection and Service Standards) Act 1999 (Cth) (the Consumer Protection Act).

Reforms to the telecommunications market structure

The Bill's reforms to Telstra's structural operation seek to alter significantly the competitive dynamics within the Australian telecommunications industry. It is the Government's view that Telstra's high level of integration in both the wholesale and retail telecommunications market has hindered the development of effective competition in the sector.² Consequently, the Bill provides two options for Telstra to restructure: voluntary structural separation or enforced functional separation.

Structural separation of Telstra

The Bill provides a framework for Telstra to voluntarily structurally separate. This requires Telstra to lodge a structural separation undertaking (SSU) with the ACCC that Telstra will not supply fixed-line carriage services to retail customers (and not be in control over a company that supplies fixed-line carriage services to retail customers) using a telecommunications network over which Telstra is in a position to exercise control.

The Bill makes several key changes to the provisions of the 2009 Bill:

• provision is made for Telstra to select one or more specified events to which any SSU it gives will be subject. Specified events may include approval of a draft migration plan by the ACCC and the passing of a shareholder resolution. The specified events must occur within six months after the undertaking is accepted by the ACCC, or another period specified by the Minister;
• the Bill also allows Telstra to provide a draft migration plan to the ACCC with its SSU. The draft migration plan will set out the timing and processes for the migration of Telstra's customers from the copper network to the national broadband network, and will be subject to industry consultation. A draft migration plan comes into force when it is accepted by the ACCC or, if it is given before an SSU comes into force, at the time the SSU comes into force. Once this occurs, it may not be withdrawn, but may be varied;
• the Bill sets out provisions to authorise conduct by Telstra and NBN Co that would otherwise breach the CCA in giving effect to the 'definitive agreements' with Telstra;
• similarly to the 2009 Bill, the Bill prevents Telstra from acquiring or operating a designated part of the radiofrequency spectrum (in effect, the digital dividend spectrum), unless an SSU is in force, in addition to Telstra divesting its interest in hybrid fibre-coaxial networks and subscription television broadcasting licences. The Minister may exempt Telstra from the requirement to divest its interest in hybrid fibre-coaxial networks and subscription television broadcasting licences if Telstra submits an acceptable SSU to the ACCC; and
• the Government's clear preference for structural separation, as set out in the 2009 Bill, is further strengthened in this Bill by offering the following incentives to Telstra:
  • allowing it to acquire the digital dividend spectrum, unless the Minister determines otherwise in a legislative instrument, which will provide regulatory certainty for Telstra to take a firm structural separation proposal to its shareholders; and
  • allowing it to concentrate on preparing its SSU without having to simultaneously prepare a functional separation undertaking (FSU).

Functional separation of Telstra

If Telstra does not provide a voluntary SSU and draft migration plan (if required), the Bill requires Telstra to functionally separate. Telstra must provide an FSU that complies with the functional separation principles, including that Telstra:

• maintain arm's length functional separation between its wholesale/network business unit and its retail business unit;
• provide the same information and access to regulated services on equivalent price and non-price terms to its retail business and wholesale customers; and
• implement internal systems, procedures and practices to ensure compliance with the functional separation undertaking, including the establishment of a committee to be known as the Oversight and Equivalence Board to report to the ACCC and Telstra's board of directors about compliance with its functional separation obligations.

Telstra must give the draft FSU to the Minister within 90 days after a Ministerial determination of certain functional separation requirements is made. The Minister will consider the draft undertaking and, after a public review and consultation with the ACCC, may approve, vary or replace the undertaking. Once the draft FSU is approved by the Minister, it becomes final and may not be withdrawn (although it may be varied).

Reforms to the competition regime

The Government's objective to establish an open, competitive telecommunications market is manifested in the amendments to Parts XIC and XIB of the CCA, which seek to clarify the telecommunications access regime and anti-competitive conduct regime and increase regulatory certainty in these areas.

Reform of Part XIC

The Bill responds to industry and consumer criticism that the 'negotiate-arbitrate' model currently used in Part XIC to resolve access disputes is overly protracted and vulnerable to 'gaming' by parties with an incentive to delay proceedings.

The proposed reforms seek to streamline the Part XIC regime to enable the ACCC to:

• make access determinations for declared services for a three- to five-year period, following consultation with industry;
• determine fixed principles to remain in force for longer periods; and
• make temporary binding rules of conduct for the supply of a declared service where the ACCC considers there is an urgent need to address problems with the supply of the service.

The option to lodge an undertaking in relation to a service that is declared and to apply for merits review of decisions under Part XIC will no longer be available.

The Bill makes several key changes to the provisions of the 2009 Bill, including:

• requiring the ACCC to have regard to specified criteria when making binding rules of conduct, where it is reasonably practicable to do so. Such criteria include, for example, whether the rules will promote the long-term interests of end-users of carriage services;
• requiring the ACCC to commence a public inquiry into the making or varying of an access determination within 30 days of making binding rules of conduct;
• clarifying that binding rules of conduct cannot override a fixed principle in an access determination;
• providing that access agreements and special access undertakings may deal with the same range of subjects as access determinations; and
• enabling special access undertakings to include fixed principles.

Reform of Part XIB

The reforms to Part XIB similarly attempt to remove opportunities for delay by streamlining enforcement processes that the ACCC is required to follow and clarifying the application of the competition notice regime.

The proposed reforms reintroduced in the Bill include:

• removing the requirement for the ACCC to consult with a party before issuing a Part A competition notice;
• removing the requirement that the ACCC observe procedural fairness in issuing Part A competition notices; and
• clarifying that Part XIB applies to content services delivered by carriers and carriage service providers.

Strengthening consumer safeguards

Finally, the Bill seeks to strengthen existing consumer protection regulation, such as universal service obligations (USO), customer service guarantees (CSGs) and priority assistance, to ensure consumers are protected and standard levels are maintained at an adequate level during the transition to the NBN.

Universal service obligations

The USO requires Telstra, as the universal service provider, to ensure that all people in Australia have equitable access to telephony services, including payphones. The Bill seeks to improve the precision and enforceability of these requirements, through the reintroduction of the following measures:

• amending the Consumer Protection Act to require the universal service provider to supply, on request, standard telephone services with characteristics and performance standards determined by the Minister. The performance standards will include maximum periods of time for new connection and fault rectification and reliability standards;
• requiring the universal service provider to meet minimum performance benchmarks in fulfilling its responsibilities;
• granting the Minister the power to specify rules and performance standards to which a primary universal service provider must adhere in relation to the supply, installation, maintenance and location of payphones;
• granting the Australian Communications and Media Authority (the ACMA) new powers to direct the universal service provider not to remove payphones; and
• new public consultation and notification requirements in relation to proposals to remove payphones.

Customer service guarantees

The CSGs establish minimum performance standards for telephone companies and require telephone companies to compensate customers where standard are not met. However, compliance reporting undertaken by the ACMA suggest variations in industry performance and a lack of incentives for the industry to improve service quality.

In response, the Bill reintroduces the following amendments to the Customer Protection Act:

• enabling the Minister to establish minimum CSG performance benchmarks and deeming a failure to meet these benchmarks subject to a civil penalty or infringement notice;
• enabling the Minister to establish new CSG timeframes for connections and repair that will apply to wholesale providers, to assist retailers to meet CSG service quality standards;
• clarifying CSG waiver provisions so that a customer's express agreement for a waiver will be required and a customer waiver of a CSG must include a statement that summarises the consequences of the customer opting to waive the CSG; and
• making explicit that the CSG cannot be waived for a telephone service that is supplied in fulfilment of a USO, in order to ensure consumer protection.

The key change from the 2009 Bill is amending the new CSG performance benchmark provisions to exclude contraventions of standards from being counted against benchmark compliance when the contravention results from another service provider's actions.

Priority assistance

Priority assistance provides enhanced telephone connections and fault repairs to customers who require such services as a result of a life-threatening medical condition. As in the 2009 Bill, the Bill reintroduces a service provider rule requiring that service providers either offer a priority assistance service in accordance with the relevant Communications Alliance code or inform customers from whom they can purchase such a service if required.

Next steps

The response of the Senate to the Bill will determine the competitive dynamics and structure of the Australian telecommunications industry.

Telstra's decision as to whether it will offer an SSU to the ACCC to structurally separate or be required to functionally separate will have a profound impact on the industry and stakeholders. The announcement by Telstra and NBN Co that they had entered into the non-binding Financial Heads of Agreement that will deliver structural separation by providing for the progressive migration of customer services from Telstra's copper and pay-TV cable networks to the NBN is a step towards full structural separation. At this stage, only one thing is clear: the passage of the Bill provides the necessary framework for the provision by Telstra of an SSU, and the necessary condition to permit Telstra to take such a proposal to its shareholders, supported by definitive agreements with NBN Co and a migration plan approved by the ACCC.

Footnotes

1. For more information, see Allens Focus: Significant reform of telecommunications laws.
2. Explanatory Memorandum, p3.

For further information, please contact:

• Ian McGillPartner, Sydney
  Ph: +61 2 9230 4893
  Ian.McGill@allens.com.au
• Kon StelliosPartner, Sydney
  Ph: +61 2 9230 4897
  Kon.Stellios@allens.com.au
• Michael PattisonPartner, Melbourne
  Ph: +61 3 9613 8839
  Michael.Pattison@allens.com.au
• Peter JamesPartner, Brisbane
  Ph: +61 7 3334 3360
  Peter.James@allens.com.au