Application by Optus Mobile Pty Limited & Optus Networks Pty Limited
[2006] ACompT 8
•22 NOVEMBER 2006
AUSTRALIAN COMPETITION TRIBUNAL
Application by Optus Mobile Pty Limited & Optus Networks Pty Limited
[2006] ACompT 8
TRADE PRACTICES – application pursuant to s 152CE(1) of the Trade Practices Act 1974 (Cth) – application for review of decision of Australian Competition and Consumer Commission to reject access undertaking – mobile terminating access service – whether terms of the undertaking are reasonable – efficiency of costs – allocation of costs – application of Ramsey‑Boiteux pricing – network externality surcharge – international benchmarking – whether terms of the undertaking are retrospective.
Trade Practices Act 1974 (Cth): ss 4E, 152AA, 152AB, 152AH, 152AL, 152AQA, 152AR, 152BS, 152BU, 152BV(2), 152BX, 152CE(1), 152CF, 152CGB, 152CN, 152CQ(5), 152DN, 152DNA(1), 152DO, Pt XIC
Telecommunications Act 1997 (Cth): s 7
Telecommunications Legislation Amendment Act 1999 (Cth): Schedule 1, Item 74
Acts Interpretation Act 1991 (Cth): ss 8, 8A
Trade Practices Amendment (Telecommunications) Bill 1996Telstra Corporation Limited [2001] ACompT 4, applied
Telstra Corporation Limited [2006] ACompT 4, applied
Power New Zealand Ltd v Mercury Energy Limited and Commerce Commission [1996] 1 NZLR 686, cited
Re Seven Network Limited (No 4) [2004] 187 FLR 373, consideredW Baumol and J Sidak, Towards Competition in Local Telephony, MIT Press, Cambridge, MA, 1994.
J Sandbach, “Ramsey Pricing –vs.‑ EPMU for Regulation of Firms Operating in Competitive and Non‑Competitive Markets”, paper presented at Conference on The Economics of Electronic Communication Markets, Toulouse, 15‑16 October 2004.File No 3 of 2006
RE:FINAL DECISION BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION DATED 3 FEBRUARY 2006 PURSUANT TO SECTION 152BU(2) OF THE TRADE PRACTICES ACT IN RESPECT OF AN ORDINARY ACCESS UNDERTAKING SUBMITTED BY OPTUS NETWORKS PTY LIMITED AND OPTUS MOBILE PTY LIMITED FOR THE DOMESTIC GSM TERMINATING ACCESS SERVICE
BY:OPTUS MOBILE PTY LIMITED and OPTUS NETWORKS PTY LIMITED
Applicants
GOLDBERG J, MR R DAVEY and MR R SHOGREN
22 NOVEMBER 2006
MELBOURNE
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 3 of 2006
RE:FINAL DECISION BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION DATED 3 FEBRUARY 2006 PURSUANT TO SECTION 152BU(2) OF THE TRADE PRACTICES ACT IN RESPECT OF AN ORDINARY ACCESS UNDERTAKING SUBMITTED BY OPTUS NETWORKS PTY LIMITED AND OPTUS MOBILE PTY LIMITED FOR THE DOMESTIC GSM TERMINATING ACCESS SERVICE
BY:OPTUS MOBILE PTY LIMITED and OPTUS NETWORKS PTY LIMITED
Applicants
THE TRIBUNAL:
GOLDBERG J, MR R DAVEY and MR R SHOGREN
DATE OF DECISION:
22 NOVEMBER 2006
WHERE MADE:
MELBOURNE
THE TRIBUNAL DECIDES THAT:
1.The decision of the Australian Competition and Consumer Commission on the 3rd day of February 2006 rejecting the ordinary access undertaking given to it on the 23rd day of December 2004 by Optus Networks Pty Limited and Optus Mobile Pty Limited is affirmed.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 3 of 2006
RE:FINAL DECISION BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION DATED 3 FEBRUARY 2006 PURSUANT TO SECTION 152BU(2) OF THE TRADE PRACTICES ACT IN RESPECT OF AN ORDINARY ACCESS UNDERTAKING SUBMITTED BY OPTUS NETWORKS PTY LIMITED AND OPTUS MOBILE PTY LIMITED FOR THE DOMESTIC GSM TERMINATING ACCESS SERVICE
BY:OPTUS MOBILE PTY LIMITED and OPTUS NETWORKS PTY LIMITED
Applicants
JUDGE:
GOLDBERG J, MR R DAVEY and MR R SHOGREN
DATE:
22 NOVEMBER 2006
PLACE:
MELBOURNE
CONTENTS
1. INTRODUCTION ………………………………………………………………………. [1]
2. PARTIES TO THE APPLICATION …………………………………………………… [4]
3. THE LEGISLATIVE REGIME …………………………………………………………. [5]
4. THE DOMESTIC GSM TERMINATING ACCESS SERVICE ……………………... [21]
5. THE COMMISSION’S MTAS PRICING PRINCIPLES DETERMINATION ……… [26]
6. OPTUS’ UNDERTAKING …………………………………………………………….. [30]
7. THE COMMISSION’S REASONS FOR REJECTING THE UNDERTAKING …… [37]
8. IS THE OPTUS UNDERTAKING AN ORDINARY ACCESS UNDERTAKING? ….. [42]
9. MARKET DEFINITION ………………………………………………………………. [70]
10. OPTUS’ COSTS ……………………………………………………………………….. [91]
11. THE FL‑LRIC COMPONENT OF OPTUS’ COSTS ……………………………….. [104]
11.1 The CRA/Rohlfs FL‑LRIC model …………………………………………… [104]
11.2 Are Optus’ costs efficient costs? …………………………………………….. [110]11.3Should the FL‑LRIC be determined as if Optus were a standalone
mobile network operator? ……………………………………..…………….. [119]
11.4 Is it reasonable for Optus to rely on anchored costs and volumes? ………. [125]
11.5 Are Optus’ routing factors reasonable? ……………………………………. [127]11.6Is the non‑allocation of network costs to SMS and data services
reasonable? ………………………………………………………………..…. [131]
12. THE R-B COMPONENT OF OPTUS’ PRICE …………………………………….... [137]
12.1 The nature of fixed and common costs (FCCs) and the case for a
mark‑up ………………………………………………………………………. [137]
12.2 Allocating FCCs ………………………………………………………………. [147]
12.3 Efficiency costs of mark‑ups ………………………………………………… [157]
12.4 R-B pricing in a competitive market ………………………………………... [162]
12.5 Is R-B pricing broadly accepted? ……………………………………………. [166]
12.6 CRA/Rohlfs modelling of R-B prices ………………………………………... [180]
12.7 Estimates of elasticities ……………………………………………………… [183]
12.8 Uncertainties regarding the implementation of the modelling ……………. [204]
12.9 Commercially negotiated prices as a benchmark …………………........ ...... [226]
12.10 R-B pricing v EPMU ………………………………………………………..… [236]12.11 Conclusions regarding R-B pricing …………………………………………. [242]
13.THE NETWORK EXTERNALITY SURCHARGE (NES) COMPONENT OF
OPTUS’ PRICE ……………………………………………………………………… [245]
13.1 The nature of externalities …………………………………………………... [255]
13.2 CRA/Rohlfs modelling of the NES …………………………………………... [263]
13.3 Modelling assumptions ………………………………………………………. [266]
13.4 Ignoring other possible externalities ………………………………………... [281]13.5 Conclusions regarding the NES component ………………………………... [291]
14. INTERNATIONAL BENCHMARKING …………………………………………….. [292]
15. NON-PRICE TERMS AND CONDITIONS …………………………………………. [298]
16. CONCLUSION ………………………………………………………………………... [299]
ANNEXURE A GLOSSARY AND ABBREVIATIONS
REASONS FOR DECISION
THE TRIBUNAL: GOLDBERG J, MR R DAVEY and MR R SHOGREN
1. INTRODUCTION
Optus Mobile Pty Limited and Optus Networks Pty Limited (together “Optus”) have applied to the Tribunal pursuant to s 152CE(1) of the Trade Practices Act 1974 (Cth) (“the Act”) for a review of a decision of the Australian Competition and Consumer Commission (“the Commission”) to reject an ordinary access undertaking given by Optus to the Commission under s 152BU(2) of the Act.
The access undertaking sets out the price and non‑price terms and conditions upon which Optus undertakes to provide its domestic GSM (“global system for mobiles”) terminating access service (“DGTAS”). The DGTAS is Optus’ provision of a mobile terminating access service (“MTAS”), a service that was declared by the Commission under Pt XIC of the Act on 30 June 2004. The undertaking was given by Optus on 23 December 2004. The Commission rejected the undertaking in its Final Decision made on 3 February 2006 on the basis that it was not satisfied that the prices and certain non‑price terms and conditions specified in the undertaking were reasonable.
The application for review was filed by Optus on 23 February 2006. The issues before us are whether the prices and certain non‑price terms and conditions in the undertaking are reasonable having regard to certain statutory matters to which we shall refer. Annexure A contains a glossary of terms and abbreviations used in these reasons.
2. PARTIES TO THE APPLICATION
The following parties were granted leave to intervene in the proceeding:
·the Commission;
·Telstra Corporation Limited (“Telstra”);
·Vodafone Network Pty Ltd and Vodafone Australia Limited (together “Vodafone”)
·AAPT Limited (“AAPT”);
·Hutchison 3G Australia Pty Limited and Hutchison Telecommunications (Australia) Limited (together “Hutchison”);
·Macquarie Telecom Pty Limited (“Macquarie”);
·PowerTel Limited (“PowerTel”); and
·Primus Telecommunications Pty Ltd (“Primus”).
Telstra, Vodafone, AAPT, Hutchison, Macquarie, PowerTel and Primus all currently acquire the DGTAS from Optus. Vodafone also has an application for review pending in this Tribunal with respect to the Commission’s rejection of its access undertaking in relation to its supply of an MTAS on its 2G network.
3. THE LEGISLATIVE REGIME
Although the telecommunications access regime under Pt XIC of the Act was explained recently by the Tribunal in Telstra Corporation Limited [2006] ACompT 4, it is helpful to refer to the salient parts of the legislation to provide a context for the submissions of the parties and our reasoning and conclusions.
Part XIC sets out a telecommunications access regime, described in simplified form in s 152AA, in which the Commission may declare carriage services and related services. The object of Pt XIC is expressed in s 152AB(1) of the Act as being “to promote the long‑term interests of end‑users of carriage services or of services provided by means of carriage services”. A carriage service is defined in s 7 of the Telecommunications Act 1997 (Cth) as “a service for carrying communications by means of guided and/or unguided electromagnetic energy”. A service can be declared by the Commission under s 152AL of the Act if, after following a specified procedure, the Commission is satisfied that the making of the declaration will promote the long‑term interests of end‑users of carriage services or of services provided by means of carriage services. Once a service is declared, an access provider (which is a carrier or carriage service provider) must, if requested, supply the service to an access seeker in accordance with the standard access obligations set out in s 152AR of the Act which include, in particular, supplying an active declared service to the access seeker so that it can provide carriage services and/or content services to end‑users.
The carrier or carriage service provider may submit an ordinary access undertaking to the Commission under which the carrier or provider undertakes to comply with the terms and conditions specified in the access undertaking in relation to the applicable standard access obligations: s 152BS(1). If the terms and conditions are specified in writing in the undertaking, the undertaking must specify the expiry time of the undertaking: s 152BS(7).
The acceptance and coming into operation of an access undertaking is significant because it has an impact upon the extent to which the Commission may determine an access dispute between an access seeker and a carrier or provider in accordance with the procedure set out in Div 8 of Pt XIC of the Act. Section 152CGB provides that a determination made by the Commission in respect of an access dispute under Div 8 has no effect to the extent to which it is inconsistent with an access undertaking that is in operation.
The Commission must accept or reject the undertaking: s 152BU(2), but it must not accept the undertaking unless it (and the Tribunal when reviewing a decision of the Commission) is affirmatively satisfied that, inter alia, the undertaking is consistent with the applicable standard access obligations and that the terms and conditions specified in the undertaking are reasonable: s 152BV(2)(b) and (d). When we say that the Commission and the Tribunal must be “affirmatively satisfied” we are not seeking to impose any particular onus of proof upon the party submitting the undertaking. Rather, we are identifying the fact that the Commission and the Tribunal must be satisfied, based on all the material placed before it, that the terms and conditions specified in the undertaking are reasonable. This is no more than a recognition of the opening words of subs (2)(d) of s 152BV that the Commission “must” not accept an undertaking unless it is “satisfied” that the terms and conditions specified in the undertaking are reasonable.
Section 152AH(1) sets out the matters to which regard must be had by the Commission (and by the Tribunal on review) in determining whether particular terms and conditions are reasonable:
“(a)whether the terms and conditions promote the long‑term interests of end‑users of carriage services or of services supplied by means of carriage services;
(b)the legitimate business interests of the carrier or carriage service provider concerned, and the carrier’s or provider’s investment in facilities used to supply the declared service concerned;
(c)the interests of persons who have rights to use the declared service concerned;
(d)the direct costs of providing access to the declared service concerned;
(e)the operational and technical requirements necessary for the safe and reliable operation of a carriage service, a telecommunications network or a facility;
(f)the economically efficient operation of a carriage service, a telecommunications network or a facility.”
Section 152AH(2) provides that subs (1) does not, by implication, limit the matters to which regard may be had.
Section 152AB(2) provides, relevantly, that in determining whether the terms and conditions of an undertaking promote the long‑term interests of end‑users of carriage services or services supplied by means of carriage services (“listed services”), regard must be had by the Commission (and by the Tribunal on review) to the extent to which the terms and conditions are likely to result in the achievement of the following objectives:
“(c)the objective of promoting competition in markets for listed services;
(d)the objective of achieving any‑to‑any connectivity in relation to carriage services that involve communication between end‑users;
(e)the objective of encouraging the economically efficient use of, and the economically efficient investment in:
(i)the infrastructure by which listed services are supplied; and
(ii)any other infrastructure by which listed services are, or are likely to become, capable of being supplied.”
Section 152AB(3) provides that subs (2) is intended to limit the matters to which regard may be had.
In determining whether the terms and conditions of an undertaking are likely to result in the achievement of the objective of promoting competition in markets for listed services, regard must be had by the Commission (and by the Tribunal on review) to the extent to which the terms and conditions will remove obstacles to end‑users of listed services gaining access to listed services: s 152AB(4). Section 152AB(4) does not, by implication, limit the matters to which regard may be had: s 152AB(5).
In determining whether the terms and conditions of an undertaking are likely to result in the achievement of the objective in s 152AB(2)(e), namely encouraging the economically efficient use of and investment in infrastructure, pursuant to s 152AB(6) regard must be had by the Commission (and by the Tribunal on review) to:
“(a)whether it is, or is likely to become, technically feasible for the services to be supplied and charged for, having regard to:
(i)the technology that is in use, available or likely to become available; and
(ii)whether the costs that would be involved in supplying, and charging for, the services are reasonable or likely to become reasonable; and
(iii)the effects, or likely effects, that supplying, and charging for, the services would have on the operation or performance of telecommunications networks;
(b)the legitimate commercial interests of the supplier or suppliers of the services, including the ability of the supplier or suppliers to exploit economies of scale and scope;
(c) the incentives for investment in:
(i) the infrastructure by which the services are supplied; and
(ii)any other infrastructure by which the services are, or are likely to become, capable of being supplied.”
Section 152AB(7) provides that subs (6) does not, by implication, limit the matters to which regard may be had. Section 152AB(7A) provides that for the purposes of determining incentives for investment, regard must be had to the risks involved in making the investment.
Section 152AB(8) provides, in relation to any‑to‑any connectivity, that:
“… the objective of any‑to‑any connectivity is achieved if, and only if, each end‑user who is supplied with a carriage service that involves communication between end‑users is able to communicate, by means of that service, with each other end‑user who is supplied with the same service or a similar service, whether or not the end‑users are connected to the same telecommunications network.”
It is important to note that where we are determining whether terms and conditions of access are reasonable and whether underlying costs are reasonable, there are no absolute answers, nor is there necessarily only one correct approach. In Telstra Corporation Limited [2006] ACompT 4, the Tribunal had to consider whether the price for monthly access in Telstra’s access undertaking was reasonable. The Tribunal said at par [63]:
“In this area of analysis there is no one correct or appropriate figure in determining reasonable costs or a reasonable charge. Matters and issues of judgment and degree are involved at various levels of the analysis. In considering whether Telstra’s estimates of its costs are reasonable we are not driven to considering whether the Commission’s or other parties’ views or assessment of those costs are more reasonable. Nor do we enquire whether Telstra’s method or approach in estimating its costs is the correct or appropriate approach. If Telstra’s method or approach in estimating its costs is reasonable having regard to the statutory matters set out in ss 152AH and 152AB then the matter rests and a comparison with the $9.00 monthly charge is then to be made: Application by GasNet Australia (Operations) Pty Ltd (2004) ATPR 41‑978 at [29].”
Later at par [67] the Tribunal said:
“In a number of respects we are operating in areas where there is no one specific regulatory, economic, accounting or financial answer, and where there may be a number of approaches to the determination of relevant costs or their allocation which may be regarded as reasonable. Our inquiry is directed to whether Telstra’s $9.00 monthly charge in its access undertaking is reasonable having regard to the statutory matters set out in of ss 152AH and 152AB of the Act.”
This application for review is made pursuant to s 152CE(1) which provides that a person whose interests are affected by a decision of the Commission under, inter alia, s 152BU(2) may apply in writing to the Tribunal for a review of the decision. The functions and powers of the Tribunal are set out in s 152CF which provides relevantly:
“(1)On a review of a decision of the Commission under subsection 152BU(2), … the Tribunal may make a decision:
(a) in any case – affirming the Commission’s decision; or
…
(c)in the case of a review of a decision of the Commission under subsection 152BU(2) or 152CBC(2) to reject an undertaking – both:
(i) setting aside the Commission’s decision; and
(ii)in substitution for the decision so set aside, to accept the undertaking; or
…
and, for the purposes of the review, the Tribunal may perform all the functions and exercise all the powers of the Commission.”A decision by the Tribunal is taken, for the purposes of the Act, to be a decision of the Commission: s 152CF(2). Significantly, the Tribunal may only have regard to:
“(a)any information given, documents produced or evidence given to the Commission in connection with the making of the decision to which the review relates; and
(b)any other information that was referred to in the Commission’s reasons for making the decision to which the review relates.”
(section 152CF(4)). The parties are not limited to the submissions made and contentions advanced before the Commission: Telstra Corporation Limited [2006] ACompT 4 at [21].
Accordingly, the function of the Tribunal is to review the matter on the merits, standing in the shoes of the Commission, but only on the basis of the information, documents and evidence before the Commission. The Tribunal’s role is not to identify any error in the Commission’s decision, but rather to consider the matter afresh.
From time to time in these reasons we refer to the “reasonableness of the price” and the “reasonableness of the costs” and the “reasonableness” of particular costs methods or structures. We use these expressions as shorthand expressions to describe and explain the task that is committed to us by ss 152AH and 152AB of the Act. That is to say, we are considering whether a particular price, cost or method of calculating and determining a cost is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. We are not considering the reasonableness of such price, cost or method in the abstract, unrelated to the matters set out in s 152AH and the objectives in s 152AB.
The principal issue for determination is whether Optus’ price term of 17 cents per minute (“cpm”) for 2007 is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act. Optus has contended that that price is reasonable because it does no more than recover the forward‑looking long‑run incremental costs of its supply of the DGTAS, a mark‑up to reflect the recovery of its fixed and common costs and a mark‑up to include a network externality surcharge. That has therefore led to an inquiry whether Optus’ costs and its method or approach in estimating those costs are reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
4. THE DOMESTIC GSM TERMINATING ACCESS SERVICE
It is of assistance to explain, in simplified form, the basic workings of the MTAS and DGTAS.
A telephone call made between users of telephone networks involves two general elements, origination and termination. Origination is the carriage of a call from the end‑user who makes, or originates, the call over the network to which that end‑user is connected. Termination refers to the carriage of the call to the person receiving the call over the network to which the person receiving the call is connected. Where the originator of the call and the receiver of the call are connected to different networks, the point at which origination ends and termination begins is called the point of interconnection (“POI”). The MTAS is the service provided by the receiving mobile network for the carriage of the call from the POI to the person receiving the call.
The MTAS was declared under s 152AL of the Act with effect from 1 July 2004. It was described by the Commission in its Final Decision to declare the MTAS as:
“… a wholesale input, used by providers of calls from fixed‑line and mobile networks, in order to complete calls to mobile subscribers connected to other networks.”
The MTAS covers voice termination on all digital mobile networks in Australia.
In Australia the fixed and mobile networks have adopted a ‘calling party pays’ model. The network operator (whether fixed or mobile) that originates a call to a mobile network pays the mobile network to which the person receiving the call is connected for the use of its MTAS, that is, it pays for the termination of the call. For example, Telstra may purchase access to Optus’ DGTAS in order to enable a call from a Telstra fixed‑line end‑user to be connected to an Optus mobile end‑user. Telstra would then bill its directly‑connected customer, the calling party, for the call and recover its costs of originating the call together with the amount it pays Optus for terminating the call. A similar arrangement occurs when, for example, a customer of Vodafone makes a call from his or her mobile handset to an Optus mobile network customer. In that case Vodafone purchases the DGTAS from Optus and bills its own customer, the calling party. In each case the calling party’s network operator does not disaggregate its call charges to show the cost of the MTAS, and the calling party is generally unaware of the amount of that charge.
The actual way in which network operators charge customers is complex and is discussed later in the context of market definition (pars [74]‑[75]).
5. THE COMMISSION’S MTAS PRICING PRINCIPLES DETERMINATION
Where, as here, the Commission declares a service, it must (s 152AQA of the Act) determine principles relating to the price of access to the declared service and on 30 June 2004 the Commission made a pricing principles determination for the MTAS (“Pricing Principles Determination”). In its Pricing Principles Determination the Commission indicated that the price of the MTAS should “follow an adjustment path such that there is a closer association of the price and underlying cost of the service”. The Commission’s preferred pricing principle was the total service long‑run incremental cost (“TSLRIC”) of supplying the service, with a mark‑up to enable the recovery of organisation‑level common costs, based on an equi‑proportionate mark‑up (“EPMU”) approach. This was described as a TSLRIC+ approach.
The Commission determined that the TSLRIC+ of supplying the MTAS in Australia was likely to fall within the range of 5 to 12 cpm and it selected the upper bound of this range, 12 cpm for its MTAS Pricing Principles Determination.
The Commission determined a three‑year adjustment path to this price of 12 cpm over the period 1 July 2004 to 30 June 2007, as follows:
Time period
Price related terms and conditions (cpm)
1 July 2004 – 31 December 2004
21
1 January 2005 – 31 December 2005
18
1 January 2006 – 31 December 2006
15
1 January 2007 – 30 June 2007
12
While the Commission must have regard to the Pricing Principles Determination if it is required to arbitrate an access dispute, the Determination is not binding on the Commission if it is asked to accept an access undertaking or to arbitrate an access dispute: s 152AQA(6) and (7A).
6. OPTUS’ UNDERTAKING
Optus’ undertaking was, relevantly, in the following terms:
“2. COMMENCEMENT AND DURATION
2.1This Undertaking takes legal effect, subject to clauses 2.3 and 2.4, immediately after this Undertaking is accepted by the ACCC under Division 5 of Part XIC of the TPA and continues until the earlier to occur of:
(a) 31 December 2007; or
(b)termination, withdrawal or replacement of this Undertaking in accordance with the TPA.
2.2For the avoidance of doubt, this Undertaking (including, without limitation, any prices in this Undertaking) has no effect in respect of the supply of the Optus DGTA Service by Optus to an Access Seeker under an existing agreement on the date on which the Undertaking is accepted by the ACCC, for as long as that agreement remains on foot.
2.3If an agreement under which the Optus DGTA Service is being supplied by Optus expires on or before 31 December 2004 and Optus continues to supply the Optus DGTA Service, the prices set out in Schedule 2 will apply in respect of the continued supply of the Optus DGTA Service supplied on and from 1 January 2005.
2.4If an agreement under which the Optus DGTA Service is being supplied by Optus expires after 31 December 2004, the prices set out in Schedule 2 will apply in respect of the supply of the Optus DGTA Service from the date of expiry of that agreement.
3. UNDERTAKING TERMS AND CONDITIONS
3.1Optus undertakes to the ACCC that during the period this Undertaking is in effect pursuant to clause 2.1, it will, in relation to the Applicable Standard Access obligations, supply the Optus DGTA Service:
(a) specified in Schedule 1;
(b) at the prices specified in Schedule 2; and(c) on the terms set out in Schedule 3.”
The DGTAS specified in Schedule 1 was described as:
“… an access service for the carriage of voice calls from a Point of Interconnection, or potential Point of Interconnection, to a B‑Party [the end‑user to whom a telephone call is made] directly connected to the Optus GSM [Global System for Mobiles as defined by ETSI and the GSM Memorandum of Understanding (or any successors) and as applied in Australia] Network.”
A “Point of Interconnection” was described in Schedule 1 as a location which:
“(a)is a physical point of demarcation between the Access Seeker’s Network and the Optus GSM Network; and
(b)is associated with (but not necessarily co‑located with) one or more gateway exchanges of the Access Seeker’s Network and Optus GSM Network.”
The prices specified in Schedule 2 were, relevantly:
Year
Option 1
Option 2
2005
19.25 cpm
$x per number of audited services in operation as at the relevant date + 14.25 cpm
2006
18 cpm
$x per number of audited services in operation as at the relevant date + 13 cpm
2007
17 cpm
$x per number of audited services in operation as at the relevant date + 12 cpm
The calculation of $x required consideration of a number of provisions in Schedule 2. There were a number of terms and conditions in Schedule 2 and Schedule 3 which are not relevant for present purposes.
Optus’ price options were calculated by reference to a forward‑looking long‑run incremental costs (“FL‑LRIC”) model plus a mark‑up for fixed and common costs (“FCCs”) allocated according to Ramsey‑Boiteux (“R‑B”) principles and a mark‑up for a contribution to a mobile subscription network externality called a Network Externality Surcharge (“NES”). This costs model is referred to as FL‑LRIC++.
The prices in Optus’ undertaking were based, primarily, on a costs model prepared on its behalf by Charles River Associates (Asia Pacific) Pty Ltd (the “CRA model”). Optus engaged CRA to estimate the economically efficient level of costs that should be recovered from mobile termination services in Australia. The CRA model estimated the FL‑LRIC++ in 2004‑2005 as 17.03 cpm. This was made up of three distinct elements:
(a) the FL‑LRIC of Optus supplying its DGTAS – [X cpm];
(b)a mark‑up over FL‑LRIC to reflect the recovery of Optus’ FCCs – [Y cpm] allocated according to R‑B principles; and
(c) a mark‑up over FL‑LRIC to include an NES – 2.12 cpm.
The CRA model was a top‑down model, that is it was based on Optus’ actual network design but asset values were adjusted to reflect modern equipment prices.
Optus also relied upon an international benchmarking analysis prepared on its behalf by CRA. CRA considered cost estimates for the MTAS by regulators in Sweden, Malaysia and the United Kingdom and determined that once appropriate adjustments were made, a reasonable range for the cost of supplying the MTAS in Australia was 9.99 cpm to 20.07 cpm. This was said to support Optus’ welfare‑maximising estimate for its price for access to the DGTAS.
The R‑B principles approach was described by the Commission in its Final Decision in the following terms:
“The Ramsey‑Boiteux approach determines an efficient pricing structure across a carrier’s services where prices are marked up above attributable cost in order to raise funds to cover a given amount of unattributable or common costs. For efficiency, these mark‑ups should be set in inverse proportion to the price elasticities of demand for the various services, with more price‑insensitive services bearing greater proportionate mark‑ups.”
We accept this description as an appropriate description of the aim of R‑B principles contended for by Optus.
The concept of an NES was described by the Commission in its Final Decision in the following terms:
“A ‘NES’ is an addition to the access price to raise funds to allow the mobile network operator to subsidise subscription to its network (handset subsidies and/or below‑cost subscription charges). This is based on the argument that additional subscribers to a mobile network generate benefits to existing subscribers to fixed and mobile networks, as they now have an additional mobile subscriber whom they can make calls to (and receive calls from). It is argued that given individuals do not take account of the benefits they generate for others when they subscribe to a mobile network, they may chose [sic] not to subscribe when the combination of the benefits they would enjoy themselves and the benefits they would generate for others would make such subscription desirable from a social welfare perspective. In this context, it is argued a subsidy to mobile subscription – funded out of above‑cost prices for other services (including the MTAS) – can be used to push mobile subscription to socially optimal levels. Because it is a surcharge on an access price to subsidise the price of subscription services below cost, the NES is closely analogous to the access deficit contribution (ADC) that has been added to the price of PSTN Origination and Termination services to contribute to losses from providing fixed‑line subscription below cost as a consequence of retail price controls.”
We accept this description as an appropriate description of an NES contended for by Optus.
7. THE COMMISSION’S REASONS FOR REJECTING THE UNDERTAKING
The Commission said in its Final Decision that the key differences between the TSLRIC+ concept it proposed and the FL‑LRIC++ concept Optus proposed were the mark‑ups. The Commission considered that TSLRIC and FL‑LRIC were ‘broadly comparable “attributable” cost concepts’ but said that Optus had proposed different forms of mark‑up above incremental costs.
In relation to the FL‑LRIC concept, the Commission was of the view that the conceptual approach would, at the very best, tend towards generating an upper bound on the forward‑looking efficient costs of supplying the MTAS in Australia. The Commission said further that even if CRA’s conceptual modelling approach was accepted, the assumptions and inputs used by CRA would tend to suggest that it overstated the efficient costs. The Commission also had concerns about the magnitude of the FCCs.
When considering the mark‑up to reflect recovery of FCCs, the Commission noted that:
“… in principle the efficiency properties of R‑B pricing for the recovery of common costs have been well recognised in the economics literature and regulators of the MTAS in overseas jurisdictions.
Despite this, the Commission is not aware of any other regulator using R‑B principles to allocate relevant common costs when determining an appropriate price for the MTAS. Largely, this is because the significant information demands (especially in relation to estimating relevant elasticities of demand for services) and strict conditions needed to properly apply this principle, and the potentially significant detrimental effects of misapplying R‑B principles.
In the Commission’s view, Optus’s proposed R‑B framework does not satisfy any of the necessary conditions which are required in order for R‑B pricing to necessarily generate a socially-optimal configuration of prices…Overall, therefore, the Commission believes that the R‑B framework proposed by Optus will tend to overstate what would be an appropriate mark‑up above FL‑LRIC to recover Optus’s FCCs.”
The Commission believed that allocating Optus’ FCCs on an EPMU basis was a more reliable estimate of the welfare maximising price for the DGTAS.
The Commission considered that the relative importance of “network externalities” was likely to be low in a highly mature mobile market such as Australia. The Commission said:
“At an empirical level, the Commission considers that, even if the framework developed by CRA to determine a price for a ‘NES’ on Optus’s DGTAS was deemed appropriate, the Commission has concerns with the actual inputs and assumption used by CRA to calculate the magnitude of the NES. In the first instance, the Commission notes that the NES calculated by CRA is not based on any empirical Australian data. Moreover, in calculating the NES, CRA assumes that ‘calling externalities’ are fully internalised, that the subsidy cannot to any extent be targeted to marginal subscribers (which necessitates a greater subsidy). These concerns lead the Commission to the view that there is no certainty that the NES calculated by CRA is socially‑optimal, and in fact, is likely to be overstated and contrary to the efficient use of infrastructure by which telecommunications services are provided.”
The Commission’s conclusion was that the price terms and conditions in the undertaking were not reasonable and that it had significant doubt about the reasonableness of some of the non‑price terms and conditions in the undertaking. It was therefore not satisfied that the terms and conditions specified in the undertaking were reasonable.
8. IS THE OPTUS UNDERTAKING AN ORDINARY ACCESS UNDERTAKING?
Telstra submitted that an undertaking which contained a provision which had retrospective effect was not a valid ordinary access undertaking capable in law of being accepted. Telstra contended that the Optus undertaking did not conform with the requirements of s 152BS(10) of the Act and was therefore not an “ordinary access undertaking” capable of acceptance by either the Commission or the Tribunal. Section 152BS(10) provides:
“The terms and conditions specified in an undertaking may be expressed to come into effect:
(a) immediately after the undertaking is accepted by the Commission; or
(b) at a later time ascertained in accordance with the undertaking.”
Telstra contended that s 152BS(10) did not permit an ordinary access undertaking to be expressed to take effect prior to the date of its acceptance by the Commission or the Tribunal. It contended that the operation of clause 2.1 in conjunction with clauses 2.3 and 2.4 of the undertaking (par [30] above) had the effect that the undertaking came into effect prior to the date of its acceptance by the Commission or the Tribunal. Telstra argued that in order for the Tribunal to accept an undertaking pursuant to s 152CF(1)(c)(ii) of the Act in the review of the decision under s 152BU(2) of the Act it was a precondition that the undertaking be given to the Commission in accordance with s 152BS and s 152BU(1) of the Act.
It followed from Telstra’s submission that the undertaking given to the Commission was not an “ordinary access undertaking” within the meaning of that expression in s 152BU(1) and that it was not then open to the Commission or the Tribunal to accept it.
Telstra submitted that s 152BS(10) admitted of only two alternatives in respect of the point of time at which the terms and conditions specified in an undertaking could be expressed to come into effect and that there was no recognition of the possibility of any other option including retrospectivity being adopted. Telstra found support for its construction in s 152DNA(1) which relates to the final determination by the Commission of an access dispute. Section 152DNA(1) provides:
“Any or all of the provisions of a final determination may be expressed to have taken effect on a specified date that is earlier than the date on which the determination took effect.”
Telstra relied upon this section to demonstrate that where the Parliament intended there to be a backdating or retrospectivity in relation to the effect of a provision then it expressly provided for it. Telstra noted that there was no equivalent provision dealing with ordinary access undertakings.
We do not regard the existence of s 152DNA(1) as being of much assistance in respect of the matter under consideration. Section 152BS was introduced into the Act in 1997 and s 152DNA was introduced into the Act in 1999. As we note later in these reasons, we consider a distinction needs to be drawn between the expression in an undertaking as to when terms and conditions come into effect and the operation of any particular term or condition prior to the expression of such a point of time.
Section 152BS(10) provides two alternatives for the commencement of the operation of the undertaking which are mirrored in s 152BX(2)(a) of the Act in relation to the time at which an undertaking can come into operation. Section 152BX(2)(a) provides:
“If the Commission accepts the undertaking:
(a) the undertaking comes into operation:(i)if the terms and conditions specified in the undertaking are expressed to come into effect immediately after the undertaking is accepted by the Commission – at the time of acceptance; or
(ii)if the terms and conditions specified in the undertaking are expressed to come into effect at a later time ascertained in accordance with the undertaking – at that later time;”
The relevant provisions of the Act do not contemplate that an undertaking may commence to operate retrospectively.
Telstra therefore argued that any undertaking which involved retrospective operation could not be an “ordinary access undertaking” within the meaning of the Act and was incapable in law of acceptance irrespective of whether the balance of its terms and conditions were otherwise reasonable.
Telstra’s submission depends upon acceptance of the proposition that the terms of s 152BS(10) are definitional of an “ordinary access undertaking”. We do not consider that the provisions in s 152BS(10) are definitional of an “ordinary access undertaking” in the sense that if that subsection is not complied with in the terms of an undertaking then the undertaking does not answer the description of an “ordinary access undertaking”.
We consider that the definition of an “ordinary access undertaking” is found in subs (1) of s 152BS which provides:
“For the purposes of this Part, an ‘ordinary access undertaking’ is a written undertaking given by a carrier or a carriage service provider to the Commission under which the carrier or provider undertakes to comply with the terms and conditions specified in the undertaking in relation to the applicable standard access obligations.”
Subsequent subsections of s 152BS contain provisions which deal with the content and form of the ordinary access undertaking, but failure to comply with any of those provisions does not negate the proposition that the undertaking is an “ordinary access undertaking” for the purposes of Pt XIC of the Act.
The jurisdiction of the Commission and the Tribunal to consider an undertaking for the purposes of ss 152BS and 152BV is dependent upon an undertaking being given which conforms with the description in subs (1) of s 152BS. If the undertaking does not comply with other provisions in s 152BS, or other provisions in the Act, that does not negate the jurisdiction of the Commission or the Tribunal to deal with the undertaking; rather such failure will result in the Commission and the Tribunal dealing with the undertaking in accordance with the relevant provisions of the Act.
An undertaking by a carrier or carriage service provider will be entitled to be described as an “ordinary access undertaking” for the purposes of ss 152BS(1), 152BV, 152BU and 152CF and fall within the definition of that expression in subs (1) of s 152BS if it is a document in which the carrier or provider undertakes to comply with the terms and conditions specified in the document in relation to the standard access obligations, which are applicable to it and which are found in s 152AR of the Act. It remains an ordinary access undertaking notwithstanding that it also contains terms and conditions which do not relate to the applicable standard access obligations.
As we have jurisdiction to consider the undertaking, we must decide whether the undertaking should be rejected on the grounds that it fails to accord with the requirements of s 152BS(10). We do not consider that the undertaking offends s 152BS(10). A distinction is to be drawn between the point of time at which an undertaking comes into effect, that is to say the point of time at which it becomes operative and legally binding, and the operation of particular terms and conditions after that point of time is reached. The fact that a term or condition may operate in respect of a period of time prior to the undertaking becoming operative does not mean that the term or condition has been expressed to come into effect prior to the undertaking being accepted by the Commission. Put shortly, once an undertaking has been given legal effect and has become operative, it can contain provisions which apply to a point of time earlier than the point of time at which it comes into effect without offending s 152BS(10). Of course, the Commission (and on review the Tribunal) still has to be satisfied that such terms and conditions are reasonable for the purposes of s 152BV(2)(d).
Clause 2.1 of the undertaking (par [30] above) conforms with s 152BS(10)(a) notwithstanding that it takes effect “subject to clauses 2.3 and 2.4”. Those clauses do not provide that the undertaking “takes legal effect” at a point of time prior to the acceptance of the undertaking by the Commission. Rather, they provide that upon the undertaking coming into legal effect, the prices set out in Schedule 2, in the circumstances specified, will apply in respect of an earlier point of time. That does not alter the point of time at which the terms and conditions of the undertaking come into effect.
Optus relied on the Tribunal’s reasoning in Telstra Corporation Limited [2001] ACompT 4 in support of its interpretation of s 152BS(10). That decision must be approached with care as the Tribunal was concerned with the interpretation of provisions in Div 8 of Pt XIC relating to the resolution of access disputes rather than Div 5 which relates to access undertakings. Further, notwithstanding that by the time the Tribunal came to consider the matter the Telecommunications Legislation Amendment Act 1999 (Cth) (“the 1999 Legislation”) had come into force on 5 July 1999, the Tribunal determined that as a result of the operation of ss 8 and 8A of the Acts Interpretation Act 1901 (Cth) provisions of Pt XIC which had been repealed by the 1999 Legislation were still operative for the purpose of the Tribunal’s determination. The 1999 Legislation introduced s 152DNA(1) into the Act which provides:
“Any or all of the provisions of a final determination may be expressed to have taken effect on a specified date that is earlier than the date on which the determination took effect.”
However the 1999 Legislation included Item 74 in Schedule 1 in the following terms:
“Transitional – backdating of final determinations
A final determination made by the Commission under Division 8 of Part XIC of the Trade Practices Act 1974 has no effect to the extent (if any) to which any provision of the determination is expressed to have taken effect on a date earlier than the date of commencement of this item.”
Item 74 therefore denied the Commission the power to make a determination containing any provision expressed to have effect on a date earlier than the commencement date of Item 74.
The Tribunal decided that the operation of the former, now repealed, provisions of Pt XIC of the Act were preserved by ss 8 and 8A of the Acts Interpretation Act 1901 (Cth). The Tribunal decided that the earlier provisions of Pt XIC enabled the Commission and the Tribunal to determine a dispute which had arisen before the 1999 Legislation by making a determination that had retrospective effect so as to cover the whole period of the dispute. In its form which existed before the 1999 Legislation repealed it, s 152DN provided:
“(1)If none of the parties to the arbitration applies to the Tribunal under section 152DO for a review of the Commission’s determination, the determination has effect 21 days after the determination was made.
(2)If a party to an arbitration applies to the Tribunal under section 152DO for a review of the Commission’s determination, the determination is of no effect until the Tribunal makes its determination on the review.”
The Tribunal rejected Telstra’s submission that this section should be construed to mean that a determination operated only prospectively. The Tribunal said at par [27]:
“Generally speaking, an arbitration to determine a pre-existing dispute will be an exercise intended to fix terms and conditions to operate over the period in dispute. In the absence of any express provision in the former Part XIC to indicate that the power of the Commission or Tribunal to backdate the operation of a determination to the commencement of an access dispute notified under s 152CM, we consider that the former s 152DN should be understood as referring to the time when a determination comes into force and becomes legally binding on the parties, and not as a restriction on power to determine terms and conditions to operate retrospectively over the period of the dispute once the determination is in force.”
We consider that the distinction drawn by the Tribunal, in its interpretation of the former s 152DN, between the point of time when a determination comes into effect and becomes legally binding on the parties and the operation of particular terms and conditions retrospectively once the determination has come into force and effect, is a distinction which applies in the interpretation of s 152BS(10) in the manner to which we have referred.
In Telstra Corporation Limited [2001] ACompT 4 the Tribunal explained the manner in which it took the 1999 Legislative amendments into account in the following terms:
“The 1999 amendments introduced new and different powers exercisable in the course of the arbitration process initiated by the notification of an access dispute under s 152CM. When the amended provisions are understood as introducing new powers and procedures, in our opinion, they do not indicate anything about the scope of the old powers and procedures, other than that they were different. They do not compel the construction of the former provisions for which Telstra contends. Even if the new provisions provide an indication in support of such a view, the countervailing consideration that such a construction would leave a gaping hole in the telecommunications access regime described in s 152AA dispels the suggestion.”
It is then necessary to consider whether clauses 2.3 and 2.4 of the undertaking are reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act. Telstra made a number of submissions in relation to the validity of the undertaking, which we have not accepted, which also bear on the issue whether clauses 2.3 and 2.4 of the undertaking are reasonable. Telstra submitted that clauses 2.3 and 2.4 are expressed in terms which seek to force the applicable prices on an access seeker automatically by virtue of the undertaking being accepted. It was contended that this goes beyond the scope of an undertaking which, in its nature, is a formal promise by one party to do, or not to do, something. It was said that the act of one party giving an undertaking cannot, on its own, create and impose obligations on a third party.
That is correct, in the sense that the terms of an undertaking by one party cannot impose an obligation on another party unless the other party accepts the undertaking on the basis that it is incorporated into a contract into which they enter inter partes.
The relevant question, in the context whether clauses 2.3 and 2.4 are reasonable, is not whether clauses which may have a retrospective operation or which may apply to a period anterior to the date upon which the undertaking comes into effect are reasonable, but rather whether it is reasonable for Optus to specify that the prices set out in schedule 2 of the undertaking will apply in respect of the continued supply of its DGTAS after an agreement entered into by Optus and an access seeker prior to 31 December 2004 expires.
Clauses 2.3 and 2.4 must be read in the light of clause 2.2. Clause 2.2 provides that the prices in the undertaking have no effect in respect of the supply by Optus of its DGTAS “under an existing agreement on the date on which the undertaking is accepted by the ACCC for as long as that agreement remains on foot”. By virtue of clause 2.3, if an agreement under which Optus supplies its DGTAS expires on or before 31 December 2004 and Optus continues to supply this service thereafter, the prices set out in Schedule 2 of the undertaking will apply in respect of the continued supply of the service on and from 1 January 2005. But, if Optus continues to supply the service on and after 1 January 2005 it must be doing so pursuant to some agreement with the access seeker. An agreement may have expired on or before 31 December 2004, but if there is supply by Optus thereafter it must be on the basis of either some over‑holding or continuous supply provision in the expired agreement or on the basis of some agreement actually reached between, or to be constructed from the conduct of, Optus and the access seeker after 31 December 2004. In such circumstances, for the purposes of clause 2.2 of the undertaking, there will be supply under “an existing agreement” on the date the undertaking is accepted by the Commission or the Tribunal. The result is that clause 2.2 applies so as to deny the application of any prices in the undertaking in respect of any supply of Optus’ DGTAS under an agreement which is operative on the date the undertaking is accepted by the Commission or the Tribunal. No issue of retrospective operation of those prices therefore arises.
The same analysis applies to the relationship between clause 2.2 and clause 2.4 which applies to an agreement which expires after 31 December 2004. Consequently taking clauses 2.2, 2.3 and 2.4 together, we consider they are reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act.
Our conclusion on the proper construction of clauses 2.2, 2.3 and 2.4 results in the rejection of Telstra’s submission that the operation of clause 2.1 in conjunction with clauses 2.3 and 2.4 has the effect that the undertaking came into effect prior to the date of its acceptance by the Commission or the Tribunal and therefore had retrospective operation or effect. Accordingly, the issue of the reasonableness of clauses 2.3 and 2.4 because of their retrospective operation having regard to the matters set out in s 152AH and the objectives in s 152AB, does not arise for determination.
It is also apparent that our conclusion does not result in the construction of clauses 2.3 and 2.4 for which Optus contended. Optus submitted that were the Tribunal to accept the undertaking as reasonable, Optus would be substantially prejudiced if the prices in its accepted undertaking could not apply to the period prior to its acceptance by the Tribunal. Optus intended its undertaking to have retrospective effect in the terms of clauses 2.3 and 2.4, but that intention is not implemented in the terms of clauses 2.2, 2.3 and 2.4 for the reasons to which we have referred.
If that intention had been implemented so that clauses 2.3 and 2.4 gave retrospective operation to the prices set out in schedule 2 of the undertaking, we would have considered those clauses to be unreasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. The fact that the undertaking was lodged on 23 December 2004, prior to the dates specified in clauses 2.3 and 2.4 does not alter our conclusion in this respect.
If clauses 2.3 and 2.4 are given effect on the construction for which Optus contended, then an access seeker who has entered into an agreement falling within those clauses is denied the opportunity to negotiate the price of access to Optus’ DGTAS in respect of its supply during the period from the expiry of the agreement up to the time it enters into an agreement for the prospective supply of the service. Notwithstanding the acceptance of the access undertaking by either the Commission or the Tribunal, it is open to the access seeker to attempt to negotiate terms of access which include terms covered by the access undertaking. However, if it seeks to negotiate terms which are inconsistent with the terms of the access undertaking, such as, for example, the price of access, it runs the risk of Optus notifying the Commission that an access dispute exists, in which case the outcome of any arbitration by the Commission cannot be inconsistent with the price of access contained in the undertaking.
We do not consider that this outcome would be reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. It is integral to the telecommunications access regime laid out by Pt XIC of the Act that the terms of access be the subject of agreement or arbitration. Section 152AA of the Act, which sets out a simplified outline of Pt XIC provides, in part:
“•The terms and conditions on which carriers and carriage service providers are required to comply with the standard access obligations are subject to agreement.
•If agreement cannot be reached, but the carrier or carriage service provider has given an access undertaking, the terms and conditions are as set out in the access undertaking.
•If agreement cannot be reached, but no access undertaking is in operation, the terms and conditions are to be determined by the Commission acting as an arbitrator.”
It is not in the long‑term interests of end‑users that their access provider not have the opportunity to negotiate the terms of access for any period during which end‑users are given access to the Optus DGTAS. Nor is it in the interests of the access seekers. Further, we do not consider that it is in the legitimate business interests of Optus that it be in a position to impose charges on an access seeker in respect of a period of supply of the DGTAS prior to the approval of an access undertaking in circumstances where the access seeker is precluded from negotiating the price of such access. That consequence appears to flow from the operation of clauses 2.3 and 2.4 if construed in accordance with Optus’ submissions.
9. MARKET DEFINITION
Optus and the Commission accepted that it was not necessary for the Tribunal to take a definitive stance on market definition in relation to the markets for listed services. However, a number of submissions were made in relation to the definition of the market in which Optus supplied its DGTAS and it is necessary to give some consideration to those submissions.
Optus submitted that there were two key markets which were relevant to an assessment whether its DGTAS promoted competition in markets for listed services. These were:
·the mobile services market; and
·the market in which fixed‑to‑mobile services were provided.
Optus also submitted that there was a national mobile services market in which competing mobile service providers offered a bundle of services comprising origination services, termination services and subscription services.
The Commission submitted that there were three relevant markets:
·the wholesale market for the supply of Optus’ MTAS (that is, its DGTAS). It was said that only Optus could supply MTAS in relation to calls terminating on its mobile network and that no other service was “substitutable for, or otherwise competitive with” (s 4E of the Act) the MTAS supplied by Optus;
·a national market for retail mobile services including mobile call origination and mobile subscription services. It was said that this market was not effectively competitive and was highly concentrated with high barriers to entry in the form of large sunk costs and the pre‑requisite of national coverage;
·a national retail market for the pre‑selected bundle of fixed‑to‑mobile national long‑distance and national calling services.
The key difference between Optus and the Commission is whether there is, as submitted by the Commission, a separate market for termination services or whether, as submitted by Optus, termination services are supplied and consumed as part of an overall retail market for mobile services.
There are presently in Australia four mobile network operators or carriers, namely, Telstra, Optus, Vodafone and Hutchison. There are also thirteen mobile service providers including AAPT, Macquarie, PowerTel and Primus. These carriers and providers compete for end‑user customers by offering networks or platforms that provide subscribers with both the facility to place calls and the facility to receive calls. They thus provide a bundle of services including access to a network, the making of calls and the receipt of calls. None of the services is supplied separately to a customer, nor are they separately produced by a carrier or provider. They charge for this bundle of services through a wide variety of often complex plans that combine, in various ways, charges for connecting to the network, charges for access to the network and charges for making calls. Setting aside any one‑off connection charge, the charges for access and for making calls may be described as subscription charges and origination charges, respectively. But that runs the risk of being misleading. The charge for making a call is not related to the service of origination as described above, which is merely the carriage of a call from the calling party to a point of interconnection. Rather, as noted in par [24] above, the origination and termination components of a call are billed as a single charge for the whole end‑to‑end call.
Moreover, charges that are not levied in terms of individual calls, for example, monthly charges that may be described as “subscription” charges, often include a number of “free” calls (and possibly other services such as the sending of text messages). There is no end to the number of combinations of access and call charges into multi‑part tariffs involving fixed (for example, monthly) and variable (for example, per call) components. In these circumstances it is often difficult or meaningless to say what is “the price of a call”. At best one may be able to specify the price of an additional call over and beyond some number of calls that is chosen in advance by the customer in accepting a particular plan. In addition, there are different approaches for pre‑paid, as opposed to subscription, customers. A further complication is that subscription (monthly) charges typically include the recovery over a period (for example, a contract period of two years) of the cost of a handset. Thus the charges may combine not only charges for services but a charge for a physical device.
As will be seen later, Optus bases the prices in its undertaking on modelling involving the costs of four services: subscription and three calling services (mobile outbound, mobile off‑net and fixed‑to‑mobile, see [105] below). This requires the unbundling of charges so as to ascribe charges to subscription and to calls (also described as usage).
Where does termination, Optus’ DGTAS, fit into this picture? When an Optus mobile network customer makes a call to a customer of another network operator, Optus is not supplying any sort of termination service to its customer. Rather, termination is a service provided in conjunction with the subscription service Optus provides to its customers that enables its customers to receive calls. Accordingly, Optus does not charge its customer for receiving calls. It charges the calling party’s carrier or provider for providing the DGTAS to the carrier or provider. The calling party’s carrier or provider recovers the DGTAS charge from the calling party without disclosing its amount (see par [24] above).
Thus mobile termination (MTAS and in Optus’ case DGTAS) is a service provided to other (fixed and mobile) network operators. Optus similarly pays other network operators when one of Optus’ customers makes a call to a customer of another operator.
It is in the nature of telephone calls (and for that matter text messages) that both the calling party and the receiving party receive and consume services provided by two different network operators (except where both are customers of the same operator). When Optus enables its customers to receive calls, that is, when it terminates calls on its mobile network, it receives revenue from other network operators. When it enables its customers to make calls, it receives revenue from the customers. Clearly, it takes account of all sources of revenue in setting both its retail charges to end‑user customers and its wholesale charges to other network operators. That this is so says little, if anything, about whether the various services are all supplied in a single market. Similarly, the fact that calling parties ultimately pay for the termination charges associated with calls they make (the termination charges being passed on to them by their network operator) says nothing about the termination service being provided in the market for the provision of calls. After all, the calling party’s network operator presumably also passes on its cost of equipment and power, but that does not make the markets for the purchase of equipment and power part of the market for the provision of calls.
Accordingly, we lean towards the Commission’s view of the appropriate market definitions. It is correct to identify a wholesale market for the supply of Optus’ MTAS. There are no substitutable products and the relevant market transaction is a wholesale transaction provided by one network operator to another. To the extent to which there is substitutability of products or services it is the bundle of services which is substitutable; one of the services is not substitutable for another of the services. However, it would be somewhat artificial to use this wholesale market for the purpose of identifying and analysing Optus’ conduct and that of its competitors, and the effect of Optus’ pricing of its DGTAS on its customers and its competitors, both mobile network and fixed‑line operators, independently of the national market for retail mobile services. Nor, indeed, did the Commission suggest such an approach. Such conduct and effect is only meaningfully analysed and understood in the context of the wider markets identified by Optus and the Commission: see Power New Zealand Ltd v Mercury Energy Limited and Commerce Commission [1996] 1 NZLR 686 at 705.
The important thing is to note and seek to understand the interactions between the relevant markets, however they are defined.
When competing with each other, mobile service providers take into account all their sources of revenue. It is a feature of the Australian market that providers offer retail customers a bundle of services in which usage charges subsidise charges for handsets and for access to the network (where access means connection and thus the ability to make and receive calls, while usage is the actual making and receipt of calls). Thus some components of the mobile service provided to the customer may be supplied below cost and some components above cost. If Optus’ DGTAS is supplied at a price which exceeds the efficient costs of supply of that service, it does not necessarily follow that such price is unreasonable. The interactions between the provision of the DGTAS and of the retail services need to be examined. Such a price may not be unreasonable where the overall charge for all the relevant services does not exceed the efficient costs of supply of those services.
Market definition is potentially relevant to several matters:
·the so‑called “waterbed effect”. The waterbed effect is the extent to which subscription and origination prices to mobile customers might rise in response to a reduction in termination charges;
·possible windfall gains to Telstra as a fixed‑to‑mobile provider from lower mobile termination charges; and
·the derivation of termination charges from estimated charges for fixed‑to‑mobile calls.
However, it is more correct to say that understanding what happens in the various related markets is relevant to those matters. In no case does market definition, as such, play a decisive role. The existence of markets for retail mobile services and a market for fixed‑to‑mobile services is not in contention. We consider each of the three matters and refer to them again later where needed.
Optus’ argument that its DGTAS was supplied in the retail mobile services market was made in support of its claim that any profits flowing to Optus from its DGTAS being priced above TSLRIC or FL‑LRIC would be competed away in the retail mobile services market because that market is effectively competitive. This was described as the waterbed effect. The Commission challenged this line of reasoning. First, the Commission submitted that Optus’ analysis did not address the fixed‑to‑mobile services market which was not effectively competitive. Secondly, the Commission contended that the DGTAS was not supplied in the retail mobile services market. Thirdly, the Commission argued that there was no effective competition in the retail mobile services market. The Commission’s concern about DGTAS being priced above TSLRIC was more its effect on the fixed‑to‑mobile market than on the retail mobile services market.
We do not consider that the DGTAS is provided in the retail mobile services market. Nevertheless, in determining the price it will charge its customers for making calls, Optus must factor into its calculations the price it will have to pay other network operators for having its customers connected into their networks so that its customers’ calls can be so connected and the calls terminated and the revenue it will receive from supplying its DGTAS to other network operators. Even if the retail mobile services market were effectively competitive we do not consider that Optus would be strongly constrained in setting its DGTAS price by competition in the retail market. The mobile operators could set their termination charges on a reciprocal basis at above cost while still competing vigorously in the retail market. Indeed, it was accepted that that is what they do.
Among other things, this would bring into question why the MTAS service has been declared. It is no part of our task to consider the merits of the declaration. However, we can observe that if, as the material before us indicated, Optus is able to use its market power in the provision of the DGTAS to charge sufficiently far above cost to allow it to cross subsidise its retail mobile services, that market power could simultaneously allow it to make above normal profits from the termination of fixed‑to‑mobile calls.
Accordingly, so far as this part of Optus’ argument is concerned, we need not come to a definitive conclusion about market definition nor about whether the retail mobile services market is effectively competitive. On the latter issue, we note that the mobile services operators do appear to compete vigorously through the provision of differentiated packages. This characteristic of the bundled services provided, and the methods of charging for them, suggests that each bundle is different from those provided by other operators. Of course the various bundles are highly substitutable.
We have already adverted to the impact of termination charges on the fixed‑to‑mobile market. We do not consider that market to be effectively competitive. According to Professor Hausman, whose evidence was provided by Optus, Telstra accounts for approximately 89% of fixed telephone services in Australia and also accounts for 65% of all fixed minutes terminated. In order to compete in the fixed‑line market, in particular in the fixed‑to‑mobile market, any competitor has to face Telstra’s dominance resulting from its ownership of the only ubiquitous local loop. Further, there are significant barriers to entry to the fixed‑line market which include high sunk costs and the existence of Telstra’s legacy position as the incumbent.
The consequence of this is that operators in the fixed‑to‑mobile market – and in particular Telstra – may obtain some degree of windfall gains from lower mobile termination charges. (It might be expected that Optus’ DGTAS charges would ultimately be lower as a result of Optus’ undertaking not being accepted.) This is not sufficient in itself to justify DGTAS charges higher than those based on efficient costs. Even if Telstra were in a pure monopoly position in the fixed‑to‑mobile market, it would pass on to its customers some (it was argued at least half) of any lowering in its costs, for example, from lower payments to Optus for purchases of its DGTAS. This would result merely from profit-maximising behaviour: it can easily be shown that failure to pass on part of a cost reduction would result in lower sales and hence revenues more than offsetting the reduction in costs.
The parties also made a number of submissions on the issue that Optus supplied its DGTAS in a two sided market. Telstra described the operation of a two sided market in the following terms:
“In these [two‑sided] markets, users on each side derive some benefit from being able to interact with, or be on the same platform as, users from the other side of the market – the more users of the opposite type, the greater the benefit to being on the same platform. For example, buyers value a Yellow Pages directory that will be used by lots of advertisers and businesses value a Yellow Pages directory that will be used by lots of buyers. Similarly, mobile telecommunications platforms are used by two kinds of users (calling parties and called parties), each of whom obtains value from interacting with users of the opposite type over a common platform.”
We do not consider it necessary to address the submissions on two‑sided markets in any detail having regard to the conclusion we have reached in relation to Optus’ costs model. It is sufficient for present purposes to note that any consideration of the reasonableness of the pricing of a mobile network operator’s terminating access service must take into account the pricing of the bundled retail services and the market within which the bundled service is supplied.
10. OPTUS’ COSTS
As noted earlier (par [32]), Optus’ proposed prices have been calculated on the basis of allowing Optus to recover:
·FL‑LRIC of Optus supplying the DGTAS;
·a mark‑up for FCCs allocated according to R‑B principles; and
·a mark‑up for a mobile subscription network externality called an NES.
FL‑LRIC are the long‑run costs incurred by an operator or a producer in supplying an increment of output of a service adopting a forward‑looking approach to estimate the costs that would be incurred by a new entrant in supplying the service. Optus submitted that the recovery of the FL‑LRIC of supplying the DGTAS was reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act.
The prices in the undertaking in Option 1 were set out on a price path reducing from 19.25 cpm in 2005 to 18 cpm in 2006 and finally to 17 cpm in 2007. We have focused our consideration, as the parties did in the course of argument, on the final and lowest price on the basis that our conclusions in relation to the 2007 price of 17 cpm will apply, mutatis mutandis, to the higher prices in 2005 and 2006 and to the Option 2 pricing.
Optus submitted that a consideration of the prices which it would obtain in the absence of acceptance of the undertaking was fundamental to determining whether its proposed pricing was reasonable. We do not accept that this is the correct approach for us to take. It is no part of our task to determine whether there is an alternative price other than that propounded by Optus which, in all the circumstances, is more reasonable or less reasonable than Optus’ price. Rather the inquiry is focused upon Optus’ price alone and whether it is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
We are not, as Optus submitted, considering the relative merits of R‑B pricing and EPMU pricing. What we are considering is whether the application and use of R‑B principles to determine an appropriate mark‑up on Optus’ incremental costs to account for, and cover, its FCCs is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. We are not considering, as Optus contended, whether EPMU is correct or preferable to R‑B pricing.
The undertaking itself does not refer to the three components of Optus’ price. They have no separate identity in the terms and conditions of the undertaking. We must decide whether the price in total, that is, as provided for in the undertaking, is reasonable. Nevertheless, much of the argument before us was in terms whether the individual components of Optus’ price, or methodologies and underlying assumptions for estimating those components, were reasonable. Indeed, it is convenient to examine the components of the price in terms of how they match up to the requirements under the Act for prices to be reasonable. Care must be taken when applying this approach. Often arguments were put in a way that implied that, if we were not satisfied that some element of Optus’ costs was “reasonable”, then the prices in the undertaking must not be reasonable and the undertaking must not be accepted. These arguments must, however, be viewed with caution. It may be that having regard to the matters set out in s 152AH and the objectives in s 152AB, we might view:
·one component in Optus’ costs building exercise as resulting in a cost that is not reasonable;
·another component as resulting in a cost that would offset the unreasonableness in the first component; and
·the ultimate price arrived at as reasonable.
Ultimately it is the reasonableness of the price terms in the undertaking, having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act, which has to be determined although in reaching that conclusion, it is necessary to examine some cost methodologies adopted by Optus by reference to the same criteria.
Optus urged on us that what it claimed to be the conservative nature of some of the assumptions and elements of its methodology in estimating the three components of its total costs, should result in a finding that its DGTAS price is reasonable. However, as will become clear, we have reached the conclusion that we are not satisfied that the method and manner by which Optus determined the mark‑up for the recovery of its FCCs and the NES mark‑up are reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. Thus to the extent to which Optus’ price has been calculated so as to recover those FCCs and NES mark‑ups, we are not satisfied that its price is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
Optus submitted that the recovery of each of the three components of the DGTAS prices set out in the undertaking is reasonable. As the prices are cost‑based we are therefore put on an inquiry whether the method used by Optus in determining the three components of the costs of the supply of the DGTAS is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
Consistently with previous authority, we consider generally that the undertaking prices should reflect and not exceed forward‑looking efficient economic costs: Telstra Corporation Limited [2006] ACompT 4.
As to the costs that should be embraced by our inquiry in the circumstances of this matter where only one of three inextricably intertwined services has been declared, it may be, having regard to the matters set out in s 152AH and the objectives in s 152AB, permissible to look beyond the costs of the declared service, the DGTAS. This may justify a DGTAS price that reflects some degree of “cost‑shifting” between the declared DGTAS and the two services with which it is inextricably intertwined.
This is analogous to a multi‑product firm, in an unregulated, effectively competitive market, pricing its individual products however it chooses (subject to prohibitions on anti‑competitive conduct), even to the point of selling a product at below cost if it believes this is conducive to maximising its overall profit. Similarly, it may be appropriate for the regulated price of an individual declared service that is inextricably intertwined with other non‑regulated services to depart from being based strictly on the costs unambiguously attributable to the declared service. Where Pt XIC applies, this will only be the case when it is demonstrated to the satisfaction of the Commission (or on review, the Tribunal) that the “cost‑shifting” results in a price to end‑users that is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
Thus, to anticipate a later discussion, we would not rule out, purely on the grounds that it is not part of the costs of providing the DGTAS, the possibility that, in an appropriate case, an NES might be recovered.
It needs to be repeated that considering any of the components of the prices in terms of their consistency with being reasonable is only a step towards the ultimate task of deciding whether the price itself, as a term of the undertaking, is reasonable.
11. THE FL‑LRIC COMPONENT OF OPTUS’ COSTS
11.1 The CRA FL‑LRIC model
Optus justified the FL‑LRIC component of its DGTAS on the basis that the costs conformed with, and were verified by, the CRA model. CRA’s approach was to model costs using an economic model of the mobile market that calculated prices given appropriate cost inputs and demand parameters. The model was developed by Dr J H Rohlfs on behalf of the United Kingdom telecommunications regulator, Oftel now Ofcom.
We accept, and adopt, the description of a network externality given in Appendix D to the Commission’s Outline of Submissions as one which:
·arises when existing subscribers (fixed and mobile) attribute some value to a new subscriber joining a telecommunications network; but
·the private value placed on subscribing by a new subscriber (that is, the new subscriber’s willingness to pay the price of subscription) does not take into account this external benefit to existing subscribers.
Existing subscribers are generally thought to place a value on the ability to call and receive calls from a new subscriber, whether or not that ability is exercised.
Expressed in terms of economic efficiency, the raison d’être of the NES mark‑up on the termination charge is that the addition of that new subscriber to the mobile network would bring a benefit to society (or the community of telephone users) greater than the cost, because the benefit to existing subscribers is not factored into the decision of the new subscriber. Thus, there would be a welfare gain (benefit exceeding cost) to society if the potential new subscriber did in fact join the network. There would be a welfare benefit if the potential subscriber’s unwillingness to pay more for what he or she would personally obtain could somehow be overcome.
Optus proposed in its undertaking that the price of the DGTAS be higher than it would otherwise be so as to provide additional revenue which it would use to lower the price of mobile subscription below what it would otherwise be. This is the NES measured per minute of the use of the termination service for a call.
To the extent such a mobile subscription network externality exists, we accept the logic of the argument.
There is also a potential fixed subscription network externality, analogous to the mobile subscription network externality, arising from the benefits to existing fixed and mobile subscribers of an additional fixed subscriber.
CRA also mentioned a potential calling externality, which arises when a called party experiences a benefit (or cost) from receiving a call, whereas only the calling party pays for the call. An externality exists to the extent that the calling party’s willingness to pay for the call does not take account of the called party’s benefit (or cost). Calling externalities could arise in respect of any type of call.
This is separate from the mobile subscription network externality. In fact it is not a network externality (it does not depend on the notion of marginal subscribers) and arises from the fact that any call is jointly consumed by two parties. It is necessary to consider these additional potential externalities in assessing the modelling of the NES.
We use the term “potential externality” to acknowledge the fact that it is an empirical question whether in each case there is in fact an external benefit (or cost). If the potentially arising external benefit is in fact taken into account in the willingness to pay of the relevant party, the externality is said to be internalised. An internalised externality is extinguished, that is, it does not exist; it no longer arises, or did not arise in the first place, except as a theoretical possibility.
13.2 CRA/Rohlfs modelling of the NES
As explained earlier, the CRA/Rohlfs model seeks the welfare‑optimising prices of four services, (mobile subscription, mobile outbound calls, off‑net calls and fixed‑to‑mobile calls) taking account of both R‑B pricing and the existence of a mobile subscription network externality.
It does not take account of a potential fixed subscription network externality and assumes that any potential calling externalities are zero. The effect of assuming no fixed subscription externality and no calling externalities is to make the estimated welfare‑maximising price of:
·fixed‑to‑mobile calls higher; and
·mobile subscription lower,
than they would otherwise be.
It is worth emphasising the different impacts of the R‑B mark‑up and the NES. The R‑B mark‑up increases the prices of the four services by varying amounts over and above the incremental costs of each. The NES, by contrast, shifts costs between services and prices being based on costs, the price of the declared service, the DGTAS, is further increased above its R‑B marked‑up level. The price of subscription, by contrast, is reduced to below its incremental cost (that is, the effect of the NES on the DGTAS, applied as a cross subsidy to subscription, more than offsets the R‑B mark‑up on the incremental cost of subscription).
13.3 Modelling assumptions
In the modelling by CRA, the existence of a mobile subscription network externality is mainly accounted for in the cross elasticity effects described earlier.
However, the modelling applies a raft of additional assumptions about:
·the ratio of the total value of mobile subscription to the private value placed on it by a mobile subscriber;
·the degree to which the externality is able to be internalised by mobile network operators; and
·the calling patterns of marginal subscribers compared to average subscribers.
We consider each of these in turn.
CRA stated that:
“… it is likely that on average both parties to a call receive the same benefit from the call so that the total social benefit generated by a call is twice that of the private benefit. Hence, when an additional subscriber joins a network and results in additional calls being made by, and to, existing subscribers the benefit to the existing subscribers in aggregate could be expected to be the same as the benefit to the new subscriber from joining.”
This reasoning would lead to the ratio of the total value of mobile subscription to the private value placed on it by a mobile subscriber being 2.
CRA adopted a ratio of 1.5 for the net externality factor, which Optus argued was conservative. It essentially assumed some internalisation of the externality by users, for example, parents paying for their children’s subscriptions. While no empirical support is given, we do not see this estimate as being unrealistically high.
Internalisation of the externality by mobile network operators, the second additional assumption above, refers to their ability profitably to reduce the price of subscription because enough profitable additional customers are attracted to make up for the unprofitable customers that are attracted and/or because the unprofitable customers become profitable due to the network externality. Dr Rohlfs recognised this internalisation in his paper, A Model of Prices and Costs of Mobile Network Operators (May 22, 2002) in which he developed for Oftel a model of prices and costs of MNOs. Dr Rohlfs said:
“I believe that MNOs largely internalize externalities that accrue to mobile subscribers. They have great ability to use their multi‑part pricing structures to do so. The mobile industry as a whole has an incentive to do so. And competitive pressures lead to substantial internalization of externalities.”
The model assumes greater internalisation of the benefits accruing to mobile subscribers (80%) than to fixed subscribers (40%). It also assumes that the internalisation is not targeted. Targeting is considered below.
While some parties, for example, the Commission, contended that in many cases network external effects associated with mobile subscription are likely to be internalised by both existing subscribers and MNOs, we consider that the degree of internalisation assumed in the CRA/Rohlfs model is not inappropriate.
The modelling was indirectly attacked, particularly by the Commission, through the argument that in a highly mature mobile market such as in Australia, the network externality was intuitively likely to be small. Although this may be true, the logic behind the externality would appear to hold regardless, since it applies to both:
·marginal subscribers who are just at the point of not valuing their subscription sufficiently to maintain it; and
·potential subscribers who value subscription not quite enough to pay for one.
Furthermore, the argument needs to be translated into a specific objection to some aspect of the modelling, for example, that some parameter is unrealistic in the light of market maturity. That was not done. It could simply be that in a less mature market the estimate of the network externality mark‑up would be higher.
Similarly, the Commission argued that the marginal social benefits from the addition of each new subscriber are likely to be declining, because marginal subscribers will make and receive fewer calls on average than existing subscribers.
However, the modelling assumed that marginal subscribers make one‑third of the calls of average subscribers – the third category of additional assumptions noted above. Optus regarded this as highly conservative. Again, we do not regard these objections as providing any additional basis for rejecting the modelling.
We do note, however, that our concerns regarding the reliability of the elasticity estimates, set out in the discussion of R‑B pricing above, are repeated as concerns about the modelling of the NES.
The assumptions discussed so far relate to the cross‑price elasticity of demand effects. An additional amount is factored into the estimate to account for a so‑called option externality component of the mobile subscription network externality. This relates to the assumed value placed by existing mobile subscribers on the ability to call a new subscriber even if no call is actually made, for example, the ability to call in an emergency. The theoretical existence of this option externality did not appear to be disputed by any of the parties, but the modelling of it was disputed.
This dispute involves problems of achieving consistency between exceedingly arcane elements of the modelling. They appear to arise from differences between the elasticities used by Dr Rohlfs and those used by CRA in applying the Rohlfs model. The problems are sufficient to raise significant in‑principle concerns about the reliability of the estimates. However, the amount said by the Commission to be involved – that is the amount by which it claims the mark‑up is overestimated – is not of itself sufficient to cause us to put significant weight on claimed deficiencies in this aspect of the modelling.
As mentioned above, Dr Rohlfs assumed no targeting of subsidies to marginal mobile subscribers. It would appear that targeting could substantially reduce the amount required to be raised through a mark‑up on termination. Optus submitted that it could not target marginal subscribers to a significant extent. We have difficulty in accepting that claim having regard to the range of products, mobile services and pricing plans offered by Optus and its competitors.
13.4 Ignoring other possible externalities
The CRA/Rohlfs model makes no allowance for a fixed subscription network externality, analogous to the mobile subscription network externality, due to existing fixed line subscribers getting a benefit when an additional subscriber joins the fixed network that is not included in the additional subscriber’s private valuation of subscription.
Dr Rohlfs believes that:
“… the primary goal in taking account of network externalities should be to ensure that potential external benefits to fixed subscribers are not lost through the absence of appropriate corrective pricing”.
While the CRA/Rohlfs model does provide for the existence of calling externalities, it assumes they are fully internalised, that is, extinguished. Because a call generally involves only two parties, any benefit accruing to the called party could be internalised by, for example, the parties each agreeing to call the other half the time, the use of toll‑free numbers, and businesses recovering call costs from customers in prices charged for goods and services.
Nevertheless, the Commission argued that, to the extent that call externalities are not internalised, there is a case for subsidising termination rather than marking it up above cost. It cited WIK‑Consult as claiming that call externalities are not efficiently internalised. Dr Rohlfs did examine the impact of a small calling externality (that is, allow for a small proportion of the externality not to be internalised) as a variant in his UK modelling and found that this significantly reduced the welfare optimising termination charge. He considered, however, that call externalities are largely internalised. CRA, applying the Rohlfs model with its choice of elasticities, found that the impact of allowing for a small calling externality was very small. However, this result depends on acceptance of the other modelling parameters, including the elasticities.
The Commission also argued that the NES would be likely to reduce the number of fixed‑to‑mobile calls due to their price being increased. This would reduce the demand for fixed lines. If there is a fixed subscription network externality, this would reduce welfare.
CRA addressed this concern by saying that:
“… the empirical evidence is that fixed subscription is extremely inelastic even with respect to fixed subscription charges and would be expected to be even more inelastic with respect to the price of one particular type of call”,
and also that:
“… the case for a subscription subsidy is stronger in light of empirical findings that mobile subscription is substantially more price elastic than fixed subscription …”
CRA stated that externalities between the fixed and mobile networks do not balance out.
Other parties argued that this ignores an increasing trend to substitute mobile services for fixed line services including customers becoming more willing to give up fixed line subscriptions in favour of having only a mobile subscription.
Much of the argument was somewhat speculative and to the extent that hard evidence was presented, it was far from conclusive in either direction. It is hard to see how the degree of internalisation of externalities could be estimated with great empirical accuracy, so it is not surprising that reliance is placed on reasoning about likely behaviour.
We have come to the view that if externalities are to be considered in pricing services, they need to be surveyed with some degree of thoroughness. It is not sufficient to include some externalities in the analysis and ignore others purely on an a priori basis that they matter less. This is especially the case where the possibility of countervailing effects is being ignored, and where major changes in the telephony market are likely to be altering demand patterns and levels of substitution between services.
That said, in any consideration of the effects of price changes on markets beyond the most immediate one where the price is charged, a line must be drawn. Not everything can be taken into account. We regard the Rohlfs model as helpful in making explicit what were seen as relevant market interactions in the UK in 2002. It does so in a fair and balanced manner. However, weighty doubts have been raised as to whether the CRA implementation of the model capably deals with the Australian market in 2005. To some extent this is inevitable in changing market conditions.
13.5 Conclusions regarding the NES component
We are not satisfied that the NES component of Optus’ costs which it is seeking to recover from the price for access to its DGTAS is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. The consequence is that we are not satisfied that Optus’ overall price is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. We do not rule out the possibility that taking account of externalities may be a valid part of coming to a reasonable price. However, we do not have confidence that the particular approach adopted in the CRA/Rohlfs modelling leads to a well‑based outcome, and in particular an outcome which is reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB.
14. INTERNATIONAL BENCHMARKING
Optus requested CRA to undertake an international benchmarking analysis for the purpose of supporting the reasonableness of its DGTAS price. CRA took into account and made adjustments for differences for cost factors between Australia and the benchmark countries, namely the United Kingdom, Sweden and Malaysia. The result was that CRA came up with a range of benchmarks for MTAS based on LRIC with an EPMU for FCCs of a range from 9.99 cpm to 20.07 cpm. These figures did not make any allowance for, or take into account, any externalities. The CRA range of prices may be contrasted with the research undertaken by the Commission which led it to conclude in its mobile services review in June 2004 that:
“… no country has produced a reliable cost estimate above the equivalent of 12 cpm, and that cost estimates as low as 5 cpm have been made.”
This conclusion was based, in part, upon a report received from Analysys in June 2004.
There were a number of criticisms made of the CRA report and its relevance for present purposes. In its report CRA had made a number of adjustments for those factors that were significantly different between Australia and the selected countries such as the exchange rate, cost of capital, geographic terrain and network coverage. However, a number of other additional factors relevant to cost differences between the countries were not taken into account by CRA. These included spectrum allocations, network purchasing power, vertical/horizontal integration, network usage and scale, population density, land and labour costs, the use of different technology, retail prices, scope of services offered and the quality of services offered. The Commission submitted that the effect of CRA making only selective adjustments to its international cost benchmarks resulted in a distorted and unreliable analysis.
It was also submitted, in particular by Telstra, that CRA’s analysis was only partial in its scope as it did not consider cost estimates from a number of jurisdictions where bottom up cost models had been developed. It was submitted that a consideration of those jurisdictions yielded a range of cost estimates significantly below those adopted in CRA’s report.
CRA’s international benchmarking report was considered by Marsden Jacob Associates. They concluded that there were other countries which should have been included in the analysis, such as Israel, South Korea and the United States. They undertook a simple benchmarking approach by calculating standard per minute charges in a common currency and came up with a comparison whereby only a few estimates exceeded 12 cpm. Their benchmarking approach did not take into account any of the adjustments made by CRA or the other adjustments which Telstra and the Commission said should be taken into account. Nevertheless, this demonstrates that a benchmarking analysis of other countries tells us little about the reasonableness of prices charged in the Australian regulatory environment.
We do not consider that the international benchmarking analysis proffered by Optus is of any assistance to us in determining the issue as to the reasonableness of Optus’ price. The range of prices derived by CRA is so broad as to be of little assistance. Further, the nature of the adjustments made by CRA and the adjustments to which it gave no consideration, render the figures derived an inadequate comparator for Australian conditions.
In any event, the nature of the international benchmarking exercise was such that it teaches very little, or nothing at all, as to whether Optus’ price terms are reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. In order to place any reliance upon the international benchmarking analysis it would be necessary to know much more about the regulatory environment within which they were determined, the state of the relevant markets and the socio‑economic environment in which the mobile services were operative.
15. NON-PRICE TERMS AND CONDITIONS
A number of the parties, principally Telstra and the Commission, submitted that a number of the non‑price terms and conditions contained in Optus’ undertaking were not reasonable having regard to the matters set out in s 152AH and the objectives in s 152AB. Particular reference was made to the provisions contained in schedule 2, clauses 3.2.2(d), 4.3(g), 4.3(h) and schedule 3 clauses 5.1, 6.2(a), 6.2(b), 6.5 and 6.10(g). Little attention was paid to these provisions in the course of submissions. Having regard to the conclusions we have reached in relation to the price terms and conditions of the undertaking, it is not necessary to form a concluded view about the reasonableness of the non‑price terms and conditions to which we have referred.
16. CONCLUSION
As noted earlier, we have reached the conclusion that we are not satisfied, having regard to the matters set out in s 152AH and the objectives in s 152AB that it is reasonable for Optus:
·to adopt and use in the manner it has R‑B pricing principles to determine the FCC component, or
·to determine in the manner it has the NES component,
to be added to its FL‑LRIC to determine its DGTAS price.
It follows that we are not satisfied, having regard to the matters set out in s 152AH and the objectives in s 152AB of the Act that:
·the FCCs mark‑up of [Y cpm];
·the NES mark‑up of 2.12 cpm,
on Optus’ FL‑LRIC is reasonable.
The FCCs mark‑up is a substantial component of the costs that Optus seeks to recover from the price for its DGTAS. The consequence is that we are not satisfied having regard to the matters set out in s 152AH and the objectives in s 152AB that Optus’ DGTAS price of 17 cpm for 2007 is reasonable. We are similarly not satisfied that its DGTAS prices for 2005 and 2006 are reasonable.
As we are not satisfied that it is appropriate for a mark‑up over FL‑LRIC to recover Optus’ FCCs by reference to R‑B principles, we do not consider that it is in the legitimate business interests of Optus or in the interests of access seekers that Optus set a price term for access without knowing the extent to which such price recovers no more than Optus’ costs however incurred or whether it recovers amounts in excess of those costs. We reach a similar conclusion having regard to the economically efficient operation of the DGTAS.
It follows that, overall, we are not satisfied that Optus is entitled to recover a mark‑up for its FCCs by reference to R‑B pricing principles in the manner it has propounded or that it is appropriate for it to recover an NES by reference to the methodology which it has used.
This result has led us to the conclusion that we are not satisfied that Optus’ price term of 17 cpm for 2007 does no more than cover its long‑run incremental costs of supplying its DGTAS and an appropriate mark‑up for its FCCs and an NES. That leads us to the conclusion that we are not satisfied that Optus’ price term of 17 cpm for 2007 for the supply of its DGTAS is in the long‑term interests of end‑users having regard to the matters set out in s 152AH and the objectives specified in s 152AB of the Act.
In these circumstances it is unnecessary to reach a conclusion whether the FL‑LRIC of the DGTAS are reasonable.
The result is that the decision of the Commission rejecting Optus’ access undertaking will be affirmed.
I certify that the preceding three hundred and six (306) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Goldberg, Mr R Davey and Mr R Shogren. Associate:
Dated: 22 November 2006
Counsel for the Optus Mobile Pty Limited and Optus Networks Pty Limited: T Bannon S.C. with S Balafoutis Solicitor for the Optus Mobile Pty Limited and Optus Networks Pty Limited: Gilbert + Tobin Counsel for the Australian Competition and Consumer Commission: J Beach QC with M Borsky Solicitor for the Australian Competition and Consumer Commission: Corrs Chambers Westgarth Counsel for Telstra Corporation Limited: Dr J Griffith S.C. Solicitor for Telstra Corporation Limited: Mallesons Stephen Jaques Counsel for Vodafone Network Pty Limited & Vodafone Australia Limited: N Hutley QC with R Beech‑Jones Solicitor for Vodafone Network Pty Limited & Vodafone Australia Limited: Gilbert + Tobin Counsel for Hutchison 3G Australia Pty Limited and Hutchison Telecommunications (Australia) Ltd:
N Murray Solicitor for Hutchison 3G Australia Pty Limited and Hutchison Telecommunications (Australia) Ltd: Allens Arthur Robinson Counsel for AAPT Limited: J Arnott Solicitors for AAPT Limited: Allens Arthur Robinson Date of Hearing: 21-25, 28-31 August 2006 Date of Judgment: 22 November 2006 GLOSSARY AND ABBREVIATIONS
ARFF Aviation Rescue and Firefighting Services
cpm cents per minute
CRA Charles River Associates (Asia Pacific) Pty Ltd
DGTAS
Domestic GSM (global system for mobiles) terminating access service
EPMU Equi‑proportionate mark‑up
FCCs
Fixed and common costs FL‑LRIC
Forward‑looking long‑run incremental costs FL‑LRIC++
Forward‑looking long‑run incremental costs plus a mark‑up for FCCs allocated according to Ramsey‑Boiteux principles and a mark‑up for a contribution to a Network Externality Surcharge
GSM
Global system for mobiles IT Information Technology
MNO Mobile Network Operator
MTAS
Mobile terminating access service NES Network Externality Surcharge
Ofcom Office of Communications, the United Kingdom telecommunications regulator
Oftel The United Kingdom telecommunications regulator, later known as Ofcom
POI
Point of interconnection. Ramsey‑Boiteux
See R‑B R-B Principles described in par [35] applied by CRA to determine the FCCs and NES mark‑ups on Optus’ FL‑LRIC
the Act the Trade Practices Act 1974 (Cth)
the Commission the Australian Competition and Consumer Commission
TSLRIC
Total service long‑run incremental cost. TSLRIC +
Total service long‑run incremental cost plus a mark‑up to enable a recovery of organisation‑level common costs, estimated according to the EPMU rule.
WACC Weighted Average Cost of Capital
5
2
0