Re Seven Network Limited (No 4)
[2004] ACompT 11
•30 SEPTEMBER 2004
AUSTRALIAN COMPETITION TRIBUNAL
Seven Network Limited (No 4) [2004] ACompT 11
TRADE PRACTICES – telecommunications access regime – digital subscription television services – review of anticipatory exemption orders – exemptions from standard access provisions granted to carrier and carriage service provider by ACCC pursuant to s 152ATA of the Trade Practices Act 1974 (Cth) – undertakings pursuant to s 87B of the Act – terms of access capable of falling within the ambit of s 152CBA – whether exemption orders should be made under power conferred by s 152ATA – digitisation of network – whether digitisation would have occurred in same or similar timeframe regardless of exemption orders – whether it is the exemption orders or the terms of undertakings that must promote the long term interests of end‑users – whether an exemption order is in the long term interests of end‑users.
EVIDENCE – admissibility – documents – Tribunal limited to review of documents before the Commission.
Trade Practices Act 1974 (Cth): ss 87B, 152AB, 152AH, 152AR, 152AT, 152ATA, 152AW, 152CBA and 152CBD
R v Toohey; Ex parte Northern Land Council (1981) 151 CLR 170, not followed
Downey v Transwaste Pty Ltd (1991) 172 CLR 167, referred to
Re Sydney Airports Corporation Ltd (2000) 156 FLR 10, followed
Re Queensland Co‑operative Milling Association Ltd and Defiance Holding Ltd (1976) 25 FLR 169, followed
Re QIW Ltd (1995) 132 ALR 225, followed
FOXTEL Management Pty Ltd v Seven Cable Television Pty Ltd and Others [2000] 102 FCR 555, referred toFile No 10 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATIONS LODGED BY TELSTRA CORPORATION AND TELSTRA MULTIMEDIA
BY:SEVEN NETWORK LIMITED (ACN 052 816 789) and C7 PTY LIMITED (ACN 082 901 442)
File No 11 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATION LODGED BY FOXTEL MANAGEMENT PTY LIMITED (FOR AND ON BEHALF OF THE FOXTEL PARTNERSHIP AND FOXTEL CABLE TELEVISION)
BY:SEVEN NETWORK LIMITED (ACN 052 816 789) and C7 PTY LIMITED (ACN 082 901 442)
JUSTICE GOLDBERG (President), MR G F LATTA and MR R F SHOGREN
23 DECEMBER 2004
MELBOURNE
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 10 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATIONS LODGED BY TELSTRA CORPORATION AND TELSTRA MULTIMEDIA
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
THE TRIBUNAL: JUSTICE GOLDBERG (President)
MR G F LATTA
MR R F SHOGRENDATE OF ORDER:
30 SEPTEMBER 2004
WHERE MADE:
MELBOURNE
THE TRIBUNAL DECIDES THAT:
1.The decision of the Australian Competition and Consumer Commission and its written exemption order pursuant to s 152ATA(3)(a) of the Trade Practices Act 1974 (Cth) (“the Act”) made on 12 December 2003 is set aside.
2.The Tribunal refuses the application dated 24 December 2002 made under s 152ATA(1) of the Act by Telstra Corporation Limited and Telstra Multimedia Pty Limited for an anticipatory individual exemption from standard access obligations set out in s 152AR of the Act in respect of the Digital Subscription Television Carriage Service (as described in par 2(a) of the application).
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 11 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATION LODGED BY FOXTEL MANAGEMENT PTY LIMITED (FOR AND ON BEHALF OF THE FOXTEL PARTNERSHIP AND FOXTEL CABLE TELEVISION)
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
THE TRIBUNAL: JUSTICE GOLDBERG (President)
MR G F LATTA
MR R F SHOGRENDATE OF ORDER:
30 SEPTEMBER 2004
WHERE MADE:
MELBOURNE
THE TRIBUNAL DECIDES THAT:
1.The decision of the Australian Competition and Consumer Commission and its written exemption order pursuant to s 152ATA(3)(a) of the Trade Practices Act 1974 (Cth) (“the Act”) made on 12 December 2003 is set aside.
2.The Tribunal refuses the application dated 23 December 2002 made under s 152ATA of the Act by Foxtel Management Pty Limited (for and on behalf of the Foxtel Partnership and Foxtel Cable Television Pty Ltd) (“Foxtel”) for a written order that Foxtel is exempt from the obligations referred to in s 152AR of the Act that would apply in respect of a digital subscription television service (as described in par 2(a) of the application) in the event that the service becomes an active declared service pursuant to Part XIC of the Act.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 10 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATIONS LODGED BY TELSTRA CORPORATION AND TELSTRA MULTIMEDIA
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
File No 11 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATION LODGED BY FOXTEL MANAGEMENT PTY LIMITED (FOR AND ON BEHALF OF THE FOXTEL PARTNERSHIP AND FOXTEL CABLE TELEVISION)
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
THE TRIBUNAL:
JUSTICE GOLDBERG (President)
MR G F LATTAMR R F SHOGREN
DATE:
23 DECEMBER 2004
PLACE:
MELBOURNE
INDEX
Introduction 1 The applications for exemption orders 5 Background to the applications 6 Relevant legislation 8 The 2002 amendments 11 Foxtel’s s 87B undertaking and commitment to digitise 21 Foxtel’s access agreement 26 Telstra’s s 87B undertaking and commitment to digitise 29 Telstra’s access agreement 30 The Commission’s decisions 33 Foxtel 33 Telstra 35 The significant issues before the Tribunal 36 Submissions by Seven Network 37 Threshold issue 39 Lont‑term interests of end‑users 46 Promoting competition and encouraging economically efficient use and investment 47 Assessing the future without an exemption order: articulating the counterfactual 52 The likelihood of digitisation as at 12 December 2003, the date of the Commission’s decisions 56 Would digitisation have proceeded regardless of a “Final Order”? 58 Evidence suggesting digitisation would have been delayed or would not have taken place 69 Finding: commencement of digitisation 75 The consequences of the finding in relation to digitisation 81 The future with and without exemption orders 82 The future with exemption orders 82 The conditions imposed by the Commission on Foxtel 84 The conditions imposed by the Commission on Telstra 85 The future without exemption orders 86 Finding: exemption orders and the LTIE 87 Concerns with the terms and conditions of access 90 Exclusion of interactivity 92 Access without interactive services 97 Foxtel: tying access to the Basic Package 100 The term and duration of access 106 The pricing methodologies 110 Foxtel 110 Telstra 113 The duration of the undertakings and the exemptions 116 Concerns with the duration and potential extension of the undertakings and exemptions 119
IN THE AUSTRALIAN COMPETITION TRIBUNAL
File No 10 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATIONS LODGED BY TELSTRA CORPORATION AND TELSTRA MULTIMEDIA
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
File No 11 of 2003
RE:APPLICATION FOR REVIEW OF THE DECISION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 12 DECEMBER 2003 ON THE SECTION 152ATA DIGITAL PAY TV ANTICIPATORY INDIVIDUAL EXEMPTION APPLICATION LODGED BY FOXTEL MANAGEMENT PTY LIMITED (FOR AND ON BEHALF OF THE FOXTEL PARTNERSHIP AND FOXTEL CABLE TELEVISION)
BY: SEVEN NETWORK LIMITED (ACN 052 816 789)
First Applicant
C7 PTY LIMITED (ACN 082 901 442)
Second Applicant
THE TRIBUNAL:
JUSTICE GOLDBERG (President)
MR G F LATTAMR R F SHOGREN
DATE:
23 DECEMBER 2004
PLACE:
MELBOURNE
REASONS FOR DECISIONS
INTRODUCTION
The decisions in these two applications were announced and published on 30 September 2004. The Tribunal now publishes its reasons for those decisions.
The applicants, Seven Network Limited and C7 Pty Limited (collectively “Seven Network”) filed an application with the Tribunal on 30 December 2003 pursuant to s 152AV(1) of the Trade Practices Act 1974 (Cth) (the “Act”) for a review of the decision of the Australian Competition and Consumer Commission (the “Commission”) made on 12 December 2003 whereby the Commission made a written order pursuant to s 152ATA(3)(a) of the Act that:
“[I]n the event that the proposed Exempt Service becomes an active declared service, Foxtel is exempt from all of the obligations referred to in section 152AR of the Act, to the extent to which the obligations would otherwise relate to the Exempt Service.”
In the Commission’s written order the expression “Exempt Service” was defined as meaning:
“(a)a service for the carriage of digital signals used for the purposes of transmitting a Subscription Television Service or Related Service by means of any part of a hybrid fibre co‑axial network owned, controlled or operated by Telstra Multimedia Pty Ltd (Telstra Multimedia) or satellite (other than a satellite owned or controlled by Foxtel); and
(b)services that facilitate the carriage of digital signals used for the purposes of transmitting a Subscription Television Service or a Related Service by means of a hybrid fibre co‑axial cable or satellite, including, without limitation:
§services that allow a service provider to determine the entitlement of end‑users to receive particular services through conditional‑access customer equipment (CA services);
§services for the processing of information necessary to be received by conditional‑access customer equipment which permits the reception of a digital Subscription Television Service or Related Service (SI Services);
§subscriber management services; and
§services for the reception and decryption of digital signals in customer premises by conditional‑access customer equipment.”
Put shortly, the Commission granted an anticipatory exemption order to Foxtel Management Pty Limited (“Foxtel Management”), for and on behalf of the Foxtel partnership (between Telstra Multimedia Pty Ltd and Sky Cable Pty Ltd) and Foxtel Cable Television Pty Ltd (collectively “Foxtel”), exempting them from the standard access obligations set out in s 152AR of the Act in relation to the Exempt Service, which may be described very generally as Foxtel’s subscription cable television service. The effect of an exemption granted under s 152ATA is to exempt the applicant from one or more of the “standard access obligations” (as contained in s 152AR) which would otherwise apply if the service(s) the subject of the application were ever to be declared.
There is also before the Tribunal an application filed by Seven Network on 30 December 2003 pursuant to s 152AV(1) of the Act for a review of the decision of the Commission on 12 December 2003 whereby the Commission made a written order pursuant to s 152ATA(3)(a) of the Act that:
“[I]n the event that the proposed Exempt Service becomes an active declared service, Telstra Corporation and Telstra Multimedia are exempt from all of the obligations referred to in section 152AR of the Act, to the extent to which the obligations would otherwise relate to the Exempt Service.”
In that written order, the expression “Exempt Service” was defined as meaning:
“(a)a service for the carriage of digital video signals associated with subscription television services by means of any part of a hybrid fibre co‑axial network owned, controlled or operated by Telstra Multimedia (Carriage Service) or a service that facilitates the supply of any part of the Carriage Service (Facilitating Service); or
(b)any other service which is capable of being used to provide the carriage provided by the Carriage Service or the functionality of a Facilitating Service (Broader Service)”.
By this decision, the Commission granted an anticipatory exemption order to Telstra Corporation Limited and Telstra Multimedia Pty Ltd exempting them from the standard access obligations set out in s 152AR of the Act in relation to the above Exempt Service, which may be described very generally as Telstra’s cable network.
Seven Network through wholly‑owned subsidiaries operates a free‑to‑air commercial television network in Australia. C7 Network Pty Ltd, a wholly‑owned subsidiary of Seven Network, operated a pay television business that provided pay television channels to Optus Vision Pty Ltd, Austar United Communications Limited and Austar Entertainment Pty Ltd from March 1999 until March 2002.
Telstra Corporation Limited and Telstra Multimedia Pty Limited (collectively “Telstra”) own and manage a hybrid fibre coaxial cable (“HFC”) which delivers analogue and digital pay television carriage services to consumers’ homes and are carriers of digital signals associated with subscription television services by means of its HFC network.
Foxtel is a pay television provider currently providing analogue and digital pay television services to consumers’ homes and users’ homes via Telstra’s HFC network. Foxtel also provides services by means of satellite.
Each of the orders was made subject to a number of conditions. Relevantly, each of the orders was effective, and only had effect, while certain undertakings given by Telstra and Foxtel pursuant to s 87B of the Act and accepted by the Commission on 21 November 2002, remain in place. Each order was also subject to a limitation that Foxtel and Telstra were not exempted from the standard access obligations in s 152AR insofar as they related to, inter alia, “Interactive Services”.
Further:
·The order in relation to Telstra ceased to have effect if Telstra ceased to supply a digital subscription television carriage service.
·The order in relation to Foxtel ceased to have effect if the digital access undertaking provided by Telstra in relation to the digital subscription television carriage service terminated or otherwise ceased to have effect.
In substance, the Commission made the exemption orders because it considered that the undertakings given by Telstra and Foxtel in accordance with s 87B of the Act and the access agreements scheduled to those undertakings, which specified the price and non‑price terms and conditions on which Telstra and Foxtel were to supply digital services to third parties, provided for effective access to such digital services and that, as a consequence, exemption from the standard access obligations was in the long‑term interests of end‑users of carriage services or of services provided by means of carriage services. In these reasons, wherever the expression “LTIE” appears it is to be taken as a shorthand reference to the long‑term interests of end‑users of carriage services or of services provided by means of carriage services.
THE APPLICATIONS FOR EXEMPTION ORDERS
In December 2002, Telstra and Foxtel Management, for and on behalf of the Foxtel Partnership and Foxtel Cable Television Pty Ltd (collectively “Foxtel”), lodged anticipatory individual exemption order applications under s 152ATA of the Act with the Commission. The applications concerned the proposed provision of digital pay television services via Telstra’s HFC network or satellite.
Section 152ATA provides for “anticipatory individual exemptions” from the access regime established under Pt XIC of the Act. Such exemptions are specific to individual applicants (as distinct from the class exemptions available under ss 152AS and 152AT), and precede any declaration of the services in question (as distinct from the exemptions available under ss 152AS and 152AT). An order for exemption can only be made, in the words of s 152ATA(6), if the Commission (or, on review, the Tribunal) “is satisfied that the making of the order will promote the long‑term interests of end‑users of carriage services or of services provided by means of carriage services”. The statutory framework of Pt XIC of the Act will be discussed in more detail below.
In October 2003, the Commission released draft decisions indicating its preliminary view that granting the anticipatory exemptions orders, subject to conditions and limitations, would promote the long‑term interests of end‑users. On 12 December 2003, the Commission announced its final decisions to accept Telstra’s and Foxtel’s applications, again subject to certain conditions and limitations (the conditions largely concerned the form of the s 87B undertakings provided by each of Telstra and Foxtel to the Commission in November 2002). These decisions were taken on review to the Tribunal by Seven Network as a person affected by a decision of the Commission, pursuant to s 152AV. In accordance with the decision and determination of the presidential member presiding, Goldberg J, at an earlier stage of these proceedings, the reviews of the decisions undertaken by the Tribunal have been full merits review, not limited to review for error, but nevertheless limited, in accordance with the provisions of s 152AW(4), to information given, documents produced and evidence given, to the Commission in connection with the making of the decisions and information referred to in the Commission’s reasons for making the decisions.
Insofar as, and to the extent that, these reasons, set out or refer to questions of law that have arisen in the course of the reviews, those questions have been determined in accordance with the opinion of the presidential member presiding, Goldberg J.
BACKGROUND TO THE APPLICATIONS
In March 2002, Foxtel and Optus announced their intention to enter into a content supply arrangement, whereby each would carry pay television channels of the other in its network and through its set top units.
The Commission considered the arrangement would contravene certain provisions in Pt IV of the Act. Various parties addressed the issues raised by the Commission and parties including Telstra and Foxtel provided the Commission with undertakings pursuant to s 87B of the Act which the Commission accepted. These included an undertaking by Telstra and Foxtel to provide third parties with access to digital pay television carriage services. In general terms, the digital access undertakings were expressed to be conditional upon the Commission making an order that Foxtel’s and Telstra’s digital pay television carriage services would be exempt from the access regime provisions of Pt XIC of the Act. Accordingly, the terms of these digital access undertakings formed the basis of the parties’ exemption applications.
Telstra explained the nature of its digital service and network in the following terms:
“A digital subscription television service (‘DSTS’) is, from a technical perspective, a better quality service than an analogue subscription television service. Digital television offers several advantages, including a clearer, sharper picture and increased audio quality. This is because digital signals do not degrade or vary as much as analogue waves during transmission. Digital technology also allows for error correction at the STU and ensures that the quality of the received signal is identical to that of the signal transmitted by the supplier of the DSTS.”
An important characteristic of digital services is that they take up far less capacity on the HFC cable and therefore many more channels are able to be provided.
An STU is a set top unit, sometimes also known as a set top box, and is a piece of “conditional‑access customer equipment” (as defined by s 152AC of the Act) that receives the transmission of subscription television services and enables them to be viewed on television screens and monitors.
Content, whether digital or analogue, can be transmitted over Telstra’s HFC network. This network, which passes more than 2.5 million homes in Australia, is capable of delivering services other than digital subscription television services, such as cable modem internet access services and telephony. Telstra submitted, however, that its HFC network was primarily used for the transmission of subscription television content.
There are three main components to the HFC network:
·“headends”, to which suppliers of DSTS deliver their signals for transmission;
·the HFC transmission network;
·customer connections.
The headends are the points from which signals carried on the HFC network originate. A headend contains the transmission equipment necessary to broadcast digital signals over the HFC network. The Telstra HFC network has five digital headends, one in each of Brisbane, Sydney, Melbourne, Adelaide and Perth. At each headend, the digital subscription television signals to be carried on the HFC network are received from the subscription television broadcasters over terrestrial lines (which do not form part of the HFC network).
In essence, therefore, the services proffered by Telstra under its proposed terms of access are the receipt of access seeker signals at the headends, the processing of those signals into digital streams and the carriage of the signals via the HFC network to the ‘wall plates’ in customer homes. It is at the wall plate that the Telstra HFC network terminates.
By way of a ‘fly cable’, the wall plate of a given house is connected to a subscriber’s STU, which in turn is connected to a television set or video recorder. Accordingly, the provision of “Set top unit services” involves delivery of subscription television signals from the wall plate to the television. Access to subscription television services, however, is typically managed by the scrambling of signals prior to broadcasting (by way of a conditional access or “CA” system), with only those subscribers who have paid to receive the services having the codes required to unscramble the signals. The encryption data required for the scrambling of signals is generated by Foxtel at its ‘play‑out centre’ and sent to Telstra for encryption at the headends. The conditional access system regulates each subscriber’s access to signals by use of a ‘smartcard’ installed in each subscriber’s STU.
There is also a service information (“SI”) system, which produces network, service and event based data that is used to ‘inform’ STUs as to the services that are available, upcoming events and where on the network (ie the frequency) those services are located. Foxtel creates a combined ‘CA/SI data’ stream in relation to all digital subscription television and related services delivered to Foxtel STUs connected to the HFC network (whether its own or, potentially, those of other network users). This data stream carries the data required by the STUs to determine the location of the various services within the bandwidth of the HFC network, as well as to determine which subscribers are entitled to receive which services.
RELEVANT LEGISLATION
A number of definitions of expressions in the Act need to be identified at the outset. Telstra is “a carriage service provider”. Foxtel is also “a carriage service provider”. A “carriage service” is “a service for carrying communications by means of guided and/or unguided electromagnetic energy”. A “carriage service provider” is a person who supplies, or proposes to supply a “listed carriage service” to the public using:
“(a) a network unit owned by one or more carriers;
(b)a network unit in relation to which a nominated carrier declaration is in force …”.
A “listed carriage service” is, inter alia, “a carriage service between a point in Australia and one or more other points in Australia”. A “declared service” is a “listed carriage service” or a service that facilitates the supply of a listed carriage service, which is supplied, or is capable of being supplied by a carrier or carriage service provider, which has been declared by the Commission after undertaking the procedure set out in s 152AL(3). A “declared service” is also, in accordance with s 152AL(7), a service supplied by a person who has given the Commission a special access undertaking in relation to that service and the undertaking is in operation and the service is being supplied.
“Conditional–access customer equipment” is customer equipment that:
“(a)consists of or incorporates a conditional access system that allows a service provider to determine whether an end‑user is able to receive a particular service; and
(b) either:
(i) is for use in connection with the supply of a content service; or
(ii) is of a kind specified in the regulations.”
At the time the s 87B undertakings by Foxtel and Telstra were being negotiated, proffered and accepted, Pt XIC of the Act had not been amended so as to include s 152ATA and the opportunity for a carrier or a carriage service provider to obtain exemption from the standard access obligations referred to in s 152AR of the Act before, and in anticipation of, its service becoming an active declared service. Prior to the amendment of Pt XIC of the Act which introduced s 152ATA into Div 3 of Pt XIC, only a carrier or carriage service provider whose service had become an active declared service was entitled to apply for an exemption from the obligations to comply with the standard access obligations pursuant to s 152AT of the Act.
A number of the obligations of Telstra and Foxtel under their respective s 87B undertakings and in particular the obligation to supply digital services were conditional upon what was called “Revised Legislation” being passed which enabled service providers such as Foxtel and Telstra to apply for, and obtain from the Commission, an exemption from the access obligations that would be applicable if the service were subject to a statutory access regime. At the time the s 87B undertakings were accepted the Telecommunications Competition Bill 2002 was still before the Parliament and it was not assented to until 19 December 2002. We note that in its s 87B undertaking, Foxtel undertook to supply Digital Set Top Unit Services in any event if it commenced supplying Commercial retail digital cable Subscription Television Services, whether or not an exemption order had been granted by the Commission in relation to standard access obligations.
On 24 December 2002 Telstra lodged an application with the Commission for an exemption order pursuant to s 152ATA(1) of the Act. On 31 December 2002 Foxtel lodged with the Commission a similar application seeking anticipatory exempt status. On 12 December 2003 the Commission made written orders pursuant to s 152ATA(3) of the Act exempting Foxtel and Telstra from obligations under s 152AR of the Act.
Parts XIB and XIC were introduced into the Act in 1997 by the Trade Practices Amendment (Telecommunications) Act 1997 (Cth), as an industry‑specific regulatory regime for telecommunications. Part XIB was established as a special regime regulating anti‑competitive conduct in the telecommunications industry. Under Pt XIB the Commission is able to seek remedies in respect of anti‑competitive conduct by a carrier or carriage service provider and to issue a competition notice stating that a carrier or carriage service provider has engaged in such conduct.
Part XIC sets out a telecommunications access regime for the industry, providing for the declaration of carriage services (as defined in the Telecommunications Act 1997 (Cth)) and related services. Once declared, the regime provides for certain “standard access obligations” to apply to carriers and carriage service providers supplying those services, unless an access provider is exempted. Under Pt XIC, conditions of access could be determined by agreement, incorporated in an access undertaking (if accepted by the Commission), or in the absence of agreement or an undertaking, be determined by the Commission in an arbitration. Under the initial terms of Pt XIC, access undertakings and exemptions from the standard access obligations were only available in respect of services which had already been declared pursuant to s 152AL of the Act.
Section 152AT enables individual carriers or carriage service providers to apply to the Commission for an exemption from all or any of the standard access obligations. The Commission must either make an order exempting the carrier or provider from one or more of the standard access obligations or refuse the application. The Commission may only make an order exempting the carrier or carriage service provider from one or more standard access obligations where it is satisfied that the making of the order will promote the long‑term interests of end‑users of carriage services or of services provided by means of carriage services.
Section 152CH provides that the Minister may make a written determination setting out principles dealing with price or a method of ascertaining price relating to the standard access obligations set out in proposed s 152AR. A Ministerial pricing determination is a disallowable instrument for the purposes of s 46A of the Acts Interpretation Act 1901 (Cth).
Amendments to the access regime were made by the Trade Practices Amendment (Telecommunications) Act 2001 (Cth), which were generally designed to streamline the access regime established under Pt XIC. Specifically, the amendments “aim[ed] to encourage commercial negotiation and expedite the resolution of access disputes notified” to the Commission. Of particular relevance for present purposes, however, were the amendments made by the Telecommunications Competition Act 2002 (Cth), including the introduction of ss 152ATA and 152CBA.
THE 2002 AMENDMENTS
The 2002 amendments, which, inter alia, made undertakings and exemptions available in cases where declaration had not occurred (and even when the service was not yet in existence), were implemented in response to the Productivity Commission’s inquiry report on Telecommunications Competition Regulation (December 2001). The Explanatory Memorandum to the Telecommunications Competition Bill 2002, which introduced the amendments, noted that they were aimed “to increase the level of competition and investment in the telecommunications market to the benefit of consumers and business”. This was to be achieved by, inter alia, facilitating timely access to basic telecommunications services, facilitating investment in new telecommunications infrastructure, encouraging a more transparent regulatory market, enhancing accountability and transparency of decision‑making under Pt XIB of the Act.
The purpose of each of the new provisions relating to access undertakings and the ability to seek anticipatory exemption orders was stated in identical terms “to provide certainty for potential investors in telecommunications infrastructure and services in relation to access to that infrastructure or service in the future…”.
Prior to the exemption created by s 152ATA, a potential investor was unable to receive an order exempting it from the obligation to provide access to a declared service or to lodge an access undertaking until it supplied an active declared service. The Explanatory Memorandum to the Bill stated:
“This can provide a disincentive for investment because it means potential access providers cannot obtain regulatory certainty as to whether or not their service will be declared, and if so, on what terms they will be required to provide access. In particular, where ‘risky investments’ are subject to potential declaration, the investment may be rendered uneconomic as a result of this uncertainty.”
While it was noted that the costs were difficult to quantify, the potential for lost or delayed investment was highlighted in the Explanatory Memorandum.
In considering how s 152ATA was likely to be used, the Explanatory Memorandum stated:
“Longstanding exemptions may be appropriate in circumstances where a service is ‘ex‑post’ contestable, and therefore would not normally be declared, but an investor may wish to obtain a ruling that this is the case beforehand.”
Alternatively, exemptions for a limited period could be granted as “an incentive to invest and innovate in otherwise uncertain circumstances”.
In considering the conditions which may attach to an anticipatory exemption order, the Explanatory Memorandum noted:
“[A]n order may contain a limitation that the exemption applies to a service that is supplied using a particular facility, or particular infrastructure and/or in a certain geographical area. This also provides flexibility for the ACCC to grant an exemption in relation to any combination of standard access obligations.”
Item 62 in the Bill inserted s 152ATA after s 152AT. Section 152ATA allowed a person who is, or expects to be, a carrier or carriage service provider to apply to the Commission to make an order exempting the person from any or all of the standard access obligations in the event that a specified service or a proposed service become an active declared service.
The terms “specified service” and “proposed service” allow for exemptions to apply to services not yet in existence or not yet being supplied. An order made by the Commission under s 152ATA may be unconditional or subject to conditions or limitations specified in the order. For example, as noted in the Explanatory Memorandum, an order may contain a limitation that the exemption applies to a service that is supplied using a particular facility, or particular infrastructure and/or in a certain geographical area. This also provides flexibility for the Commission to grant an exemption in relation to any combination of standard access obligations.
Section 152ATA is relevantly in the following terms:
“Application for exemption order
(1)A person who is, or expects to be, a carrier or a carriage service provider may apply to the Commission for a written order that, in the event that a specified service or proposed service becomes an active declared service, the person is exempt from any or all of the obligations referred to in section 152AR, to the extent to which the obligations relate to the active declared service.
(2) An application under subsection (1) must be:
(a) in writing; and
(b)in a form approved in writing by the Commission for the purposes of this paragraph.
Commission must make exemption order or refuse application
(3) After considering the application, the Commission must:
(a)make a written order that, in the event that the service or proposed service becomes an active declared service, the applicant is exempt from one or more of the obligations referred to in section 152AR, to the extent to which the obligations relate to the active declared service; or
(b) refuse the application.
(4)An order under paragraph (3)(a) may be unconditional or subject to such conditions or limitations as are specified in the order.
(5)An order under paragraph (3)(a) has effect accordingly.
Criteria for making exemption order
(6)The Commission must not make an order under paragraph (3)(a) unless the Commission is satisfied that the making of the order will promote the long-term interests of end-users of carriage services or of services provided by means of carriage services.
[There is no (7)‑(9)]
Expiry time for exemption order
(10)An order under paragraph (3)(a) must specify the expiry time for the order. If an order expires, this Part does not prevent the Commission from making:
(a)a fresh order under paragraph (3)(a) in the same terms as the expired order; or
(b)if the service or proposed service has become an active declared service—an order under section 152AT in relation to the service.
(10A)The expiry time for the order may be described by reference to the end of a period beginning when the service or proposed service becomes an active declared service.
(10B) Subsection (10A) does not, by implication, limit subsection (10).
Consultation
(11)If, in the Commission’s opinion, the making of an order under paragraph (3)(a) is likely to have a material effect on the interests of a person, then, before making the order, the Commission must first:
(a)publish the application for the order and invite people to make submissions to the Commission on the question of whether the order should be made; and
(b)consider any submissions that were received within the time limit specified by the Commission when it published the application.
…”
The obligations referred to in s 152AR of the Act are defined as the standard access obligations. Section 152AR is relevantly in the following terms:
“(1) This section sets out the standard access obligations.
Access provider and active declared services
(2)For the purposes of this section, if a carrier or a carriage service provider supplies declared services, whether to itself or to other persons:
(a) the carrier or provider is an access provider; and
(b) the declared services are active declared services.
Supply of active declared service to service provider
(3) An access provider must, if requested to do so by a service provider:
(a)supply an active declared service to the service provider in order that the service provider can provide carriage services and/or content services; and
(b)take all reasonable steps to ensure that the technical and operational quality of the active declared service supplied to the service provider is equivalent to that which the access provider provides to itself; and
(c)take all reasonable steps to ensure that the service provider receives, in relation to the active declared service supplied to the service provider, fault detection, handling and rectification of a technical and operational quality and timing that is equivalent to that which the access provider provides to itself.
…
Conditional‑access customer equipment
(8)If an access provider supplies an active declared service by means of conditional‑access customer equipment, the access provider must, if requested to do so by a service provider who has made a request referred to in subsection (3), supply to the service provider any service that is necessary to enable the service provider to supply carriage services and/or content services by means of the active declared service and using the equipment.”
The criteria for the Commission’s satisfaction (in s 152ATA(6)) that the making of the exemption order will promote the long‑term interests of end‑users of carriage services or of services provided by means of carriage services are found in s 152AB of the Act.
Indeed, s 152AB(1) provides that the LTIE are the object of Pt XIC. Section 152AB(2) sets out the matters to which we must have regard in determining the LTIE and, by virtue of s 152AB(3), this is intended to limit the matters to which regard may be had. Section 152AB provides:
“Object
(1)The object of this Part is to promote the long-term interests of end‑users of carriage services or of services provided by means of carriage services.
Promotion of the long‑term interests of end‑users
(2)For the purposes of this Part [Part XIC], in determining whether a particular thing promotes the long‑term interests of end‑users of either of the following services (the listed services):
(a)carriage services;
(b)services supplied by means of carriage services;
regard must be had to the extent to which the thing is likely to result in the achievement of the following objectives:
(c)the objective of promoting competition in markets for listed services;
(d)the objectives 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, the infrastructure by which listed services are supplied.
Subsection (2) limits matters to which regard may be had
(3)Subsection (2) is intended to limit the matters to which regard may be had.
Promoting competition
(4)In determining the extent to which a particular thing is likely to result in the achievement of the objective referred to in paragraph (2)(c), regard must be had to the extent to which the thing will remove obstacles to end‑users of listed services gaining access to listed services.
Subsection (4) does not limit matters to which regard may be had
(5)Subsection (4) does not, by implication, limit the matters to which regard may be had.
Encouraging efficient use of infrastructure etc.
(6)In determining the extent to which a particular thing is likely to result in the achievement of the objective referred to in paragraph (2)(e), regard must be had to the following matters:
(a)whether it is technically feasible for the services to be supplied and charged for, having regard to:
(i)the technology that is in use or available; and
(ii)whether the costs that would be involved in supplying, and charging for, the services are 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 the infrastructure by which the services are supplied.
Subsection (6) does not limit matters to which regard may be had
(7)Subsection (6) does not, by implication, limit the matters to which regard may be had.
Achieving any‑to‑any connectivity
(8)For the purposes of this section, 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.”
The LTIE test was introduced into the Act as part of the new telecommunications regime in 1997. The Explanatory Memorandum for the Trade Practices Amendment (Telecommunications) Bill 1996 provides guidance as to the interpretation and application of the LTIE test. In particular, guidance is provided in relation to the term “end‑user”. In this respect, the Explanatory Memorandum (under the heading ‘Proposed section 152AB – Object of this Part’) states:
“The term ‘end‑users’ recognises that telecommunications networks and services are used both by customers with a direct contractual relationship with a carrier or service provider and other end‑users of carriage or content services (such as the members of a customer’s household).”
The Explanatory Memorandum is also helpful in explaining the role of s 152AB(4) in relation to which the Memorandum states that it was “intended that particular regard be had to the extent to which the particular thing would enable end‑users to gain access to an increased range or choice of services”.
As the basis for the application of both Foxtel and Telstra was the undertaking to give access in the terms of the annexed agreement, which terms Foxtel and Telstra contended were reasonable, it is necessary to turn to subdiv B of Div 5 of Pt XIC which contains provisions for the giving of special access undertakings which may be approved by the Commission.
Section 152CBA provides for actual or prospective carriage service providers to give a special access undertaking. This provision is similar to s 152ATA, in that it is “anticipatory” of declaration. Section 152CBA provides:
“Scope
(1)This section applies to a person who is, or expects to be, a carrier or a carriage service provider supplying:
(a)a listed carriage service (within the meaning of the Telecommunications Act 1997); or
(b)a service that facilitates the supply of a listed carriage service (within the meaning of that Act);
whether to itself or to other persons, so long as the service is not an active declared service.
Undertaking
(2)The person may give a written undertaking (a special access undertaking) to the Commission in connection with the provision of access of the services.
(3)The undertaking must state that, in the event that the person supplies the service (whether to itself or to other persons), the person:
(a)agrees to be bound by the obligations referred to in section 152AR, to the extent that those obligations would apply to the person in relation to the service if the service were treated as an active declared service; and
(b)undertakes to comply with the terms and conditions specified in the undertaking in relation to the obligations referred to in paragraph (a).
(4)The undertaking must be in a form approved in writing by the Commission.
(5)The undertaking may be without limitations or may be subject to such limitations as are specified in the undertaking.
Expiry time
(6)The undertaking must specify the expiry time for the undertaking.
(7)The expiry time of the undertaking may be described by reference to the end of a period beginning:
(a)when the undertaking comes into operation; or
(b)when the person begins to supply the service (whether to itself or to other persons).
(8)Subsection (7) does not, by implication, limit subsection (6).
(9)The undertaking may provide for the person to extend, or further extend, the expiry time of the undertaking, so long as:
(a)the extension or further extension is approved by the Commission; and
(b)the undertaking sets out criteria that are to be applied by the Commission in deciding whether to approve the extension or further extension.
(10)If the undertaking expires, this Part does not prevent the person from giving:
(a)a fresh special access undertaking in the same terms as the expired undertaking; or
(b)an ordinary access undertaking that deals with the same service as the expired undertaking.
Related services
(11)A reference in paragraph (1)(b) to a service that facilitates the supply of a carriage service does not include a reference to the use of intellectual property except to the extent that it is an integral but subsidiary part of the first-mentioned service.
Definition
(12)In this section:
active declared service has the same meaning as in section 152AR (disregarding subsection 152AL(7)).”
The framework of Pt XIC establishes certain criteria that must be met before the Commission can accept a special access undertaking (pursuant to s 152CBC) and a number of obligations which apply thereafter. Notably, s 152CBD provides:
“(1)This section applies if a person gives the Commission a special access undertaking relating to a service.
(2) The Commission must not accept the undertaking unless:
(a)the Commission is satisfied that the terms and conditions referred to in paragraph 152CBA(3)(B) would be consistent with the obligations referred to in paragraph 152CBA(3)(a); and
(b)the Commission is satisfied that those terms and conditions are reasonable; and
(c)the Commission is satisfied that the undertaking is consistent with any Ministerial pricing determination; and
(d)the Commission has:
(i)published the undertaking and invited people to make submissions to the Commission on the undertaking; and
(ii)considered any submissions that were received within the time limit specified by the Commission when it published the undertaking.”
The reference to “reasonable” in s 152CBD(2)(b) in turn directs attention towards s 152AH, which establishes criteria that must be considered in the course of determining whether particular terms and conditions are reasonable. Section 152AH provides:
“(1)For the purposes of this Part [Part XIC], in determining whether particular terms and conditions are reasonable, regard must be had to the following matters:
(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.
(2)Subsection (1) does not, by implication, limit the matters to which regard may be had.”
These criteria, which include, but are not limited to, the LTIE, are not required to be established in any application under s 152ATA. In relation to applications under that section, attention is rather directed to s 152AB, which relates only to the LTIE.
A critical consequence of the acceptance of a special access undertaking under s 152CBA is that, pursuant to s 152AL(7), the service the subject of the undertaking is deemed a declared service. This in turn means that both the standard access obligations set out in s 152AR apply, and so does the general machinery of Pt XIC which attaches to the standard access obligations. This machinery includes:
·confidentiality obligations owed by the carrier or carriage service provider to an access seeker (s 152AYA);
·various enforcement rights, exercisable both by the Commission and by actual or prospective access seekers before the Federal Court (see ss 152BB, 152CD and 152EG);
·the ability of the Commission to give directions in any negotiations between an access provider and access seekers (s 152BBA), which are in turn enforceable in the Federal Court (s 152BBB);
·an ability for the Commission to act as an observer, mediator or arbitrator in relation to negotiations between access providers and prospective access seekers (whether pursuant to s 152BBC or, more generally, Div 8);
·that any provision of the special access undertaking that is inconsistent with any Ministerial pricing determination made pursuant to s 152CH (see further s 152CI) has no effect to the extent of the inconsistency; and
·section 152EF, which provides that a person subject to the standard access obligation must not engage in conduct “for the purpose of preventing or hindering” the fulfilment of the obligations or any other obligations imposed by the Commission pursuant to an arbitration process under Div 8.
FOXTEL’S S 87B UNDERTAKING AND COMMITMENT TO DIGITISE
Foxtel’s s 87B undertaking contains a conditional commitment to digitise, that is, to supply Digital Set Top Unit Services and a promise of access upon certain terms and conditions once digitisation had occurred. The undertaking includes the following defined terms of significance:
“Commercial retail digital cable Subscription Television Service means a retail digital Subscription Television Service supplied using the Telstra HFC network in Australia but does not include a trial or test service
Commercial retail digital satellite Subscription Television Service means a retail digital satellite Subscription Television Service provided in Australia which uses 12 or more transponders but does not include a trial or test service
Digital Set Top Unit Services means:
(a)use of digital Set Top Units and customer cabling… controlled and used by FOXTEL, for the purpose of provision of a Subscription Television Service or Related Service; and
(b)the provision of Conditional Access Services; and
(c)the provision of Service Information Services; and
(d)the provision of smartcard authorisation verification information reasonably necessary for the access seeker to invoice its customers but limited to that information that can reasonably be produced by the Conditional Access system
For the avoidance of doubt, (a), (b), (c) and (d) must be taken together.
Final Order means:
(a)a written order made by the relevant statutory body pursuant to the Revised Legislation exempting a service provider from the access obligations that would be applicable to the service provider in relation to a service if the service were subject to an access regime and in respect of which no appeal is lodged and any applicable appeal period has expired; or
(b)if an appeal is lodged, there is a final resolution of that appeal and any subsequent appeals in a way which permits the written order of the relevant statutory body referred to in paragraph (a) to take effect according to its terms.
Revised Legislation means legislation enabling a service provider that provides a service, or expects to provide a service, to:
(a)apply for an exemption from the access obligations that would be applicable to that service provider in connection with that service if that service were subject to a statutory access regime and for the relevant statutory body to make an order exempting the service provider; and
(b)give a written access undertaking in connection with the provision of access to that service which sets out the circumstances in which the service provider agrees to provide that service and for the relevant statutory body to approve in writing of the undertaking.
Subscription Television Service means a content service that provides television programs to consumers in Australia where the service is:
(a)a subscription broadcasting service; or
(b)a subscription narrowcasting service.”
Foxtel provides a commitment to digitise in cl 4 in the following relevant terms:
“4.1Subject to this Clause 4, FOXTEL undertakes to supply Digital Set Top Unit Services in accordance with the terms in Schedule 2 to these undertakings from the date it commences supplying Commercial retail digital cable Subscription Television Services and to make available at least the following amount of capacity for such supply:
(a)15% of the total capacity of FOXTEL to supply Digital Set Top Unit Services during the Simulcast Period; or
(b)35% of the total capacity of FOXTEL to supply Digital Set Top Unit Services after the Simulcast Period,
based on the quantity of digital cable or digital satellite capacity that addresses the relevant STU. It is the responsibility of the access seeker to obtain an equivalent volume of digital cable or satellite carriage capacity as the case may be.
4.2FOXTEL has no obligation to negotiate the supply of Digital Set Top Unit Services with an access seeker unless:
(a)the access seeker has arranged for the carriage of its digital Subscription Television Services and Related Service; or
(b) the access seeker has provided:
(i)where the access seeker’s digital Subscription Television Service and Related Services are to be transmitted using Telstra’s network:
(A)an application to Telstra for carriage of its digital Subscription Television Services and Related Services (which application has been accepted by Telstra); and
(B)a bank guarantee to Telstra as required pursuant to the application to Telstra for carriage of its digital Subscription Television Services and Related Services (which bank guarantee is acceptable to Telstra);
(ii)a confidentiality agreement to FOXTEL in the form of Annexure C;
(iii)a bank guarantee to FOXTEL as required pursuant to Schedule 2; and
(iv)a deposit of $50,000, in cleared funds, to FOXTEL which will be applied towards the access seeker’s fees once it commences acquiring the Digital Set Top Unit Services or, if the access seeker does not commence acquiring the Digital Set Top Unit Services and asks FOXTEL to terminate negotiations, will be refundable to the access seeker with interest after FOXTEL deducts any reasonable costs incurred by FOXTEL,
and the access seeker has provided to FOXTEL, if requested, such proof of the access seeker’s compliance with Clauses 4.2(a) or 4.2(b)(i) (as the case may be), as FOXTEL may require.
4.3FOXTEL undertakes to notify the Commission three months before it commences supplying a Commercial retail digital cable Subscription Television Service. However, in the event that FOXTEL and Telstra have received Final Orders in accordance with Clause 5.1 nothing in this Clause 4.3 will prevent FOXTEL from commencing a Commercial retail digital cable Subscription Television Service prior to the expiry of the notice period, if it so wishes.”
Under cl 5 of the undertaking, Foxtel committed to commence supplying a Commercial retail digital cable Subscription Television Service and a Commercial retail digital satellite Subscription Television Service no later than 12 months (but not before 23 October 2003) after each of Foxtel and Telstra obtained a “Final Order” on acceptable terms (ie if subject to conditions, those conditions did not have a “material adverse effect” on the financial or operational assumptions underlying either Foxtel’s or Telstra’s decision to digitise). A “Final Order” was, in substance an order granting exemption under s 152ATA(3) that was not subject to review.
Clause 5 is relevantly in the following terms:
“5.1So long as the Revised Legislation commences prior to 31 December 2003 and there has been no Regulatory Change, FOXTEL will commence supplying a Commercial retail digital cable Subscription Television Service and a Commercial retail digital satellite Subscription Television Service no later than 12 months after the latter of the date on which:
(a)FOXTEL obtains a Final Order relating to its proposed digital cable and digital satellite Subscription Television Service for the duration of FOXTEL’s Digital Access Undertaking (including any period of continuation of the Digital Access Undertaking pursuant to Clause 15.4) and, if the Final Order is subject to a condition or conditions, such condition or conditions, in FOXTEL’s reasonable opinion, not having a material adverse effect on the financial or operational assumptions on which the decision of either FOXTEL or Telstra to give the commitment to commence supplying the relevant service was made or on the extent of the exemption obtained under the Revised Legislation; and
(b)Telstra Multimedia obtains a Final Order relating to its proposed digital cable subscription television carriage service for the duration of Telstra Multimedia’s undertaking in relation to that service (including any period of continuation of Telstra Multimedia’s undertaking) and, if the Final Order is subject to a condition or conditions, such condition or conditions, in FOXTEL’s reasonable opinion, not having a material adverse effect on the financial or operational assumptions on which the decision of either FOXTEL or Telstra Multimedia to give the commitment to commence supplying the relevant service was made or on the extent of the exemption obtained under the Revised Legislation,
but in any event not before 23 October 2003.
5.2FOXTEL undertakes to apply to the relevant statutory body for a Final Order for exemption relating to the digital cable and digital satellite Subscription Television Services under the Revised Legislation for the purposes of Clause 5.1 within 28 days of the Revised Legislation commencing.
5.3If FOXTEL’s application for a Final Order is rejected, FOXTEL will, as soon as reasonably practicable but no later than 2 months of the Commission advising FOXTEL of the reasons for the rejection, make a further application for a Final Order and a variation of the s 87B undertaking pursuant to s87B(2) based on a revised Schedule 2, if the variations required to Schedule 2 are acceptable to FOXTEL, acting reasonably.”
Access was to be phased in over the course of the “Simulcast Period” (the period when both analogue and digital subscription television services were being provided), with 15% of available capacity to be made available during the Simulcast Period, and 35% thereafter. Schedule 2 contains a pro forma access agreement, setting out the terms and conditions of the access that Foxtel was undertaking to provide.
Clause 13 provides:
“For a period of 3 years from the date these undertakings take effect, the price of the FOXTEL Basic Package on FOXTEL’s cable and satellite service will not exceed the price calculated in accordance with the following formula
Year 1 $47.95 plus CPI ($X)
Year 2 $X plus CPI ($Y)Year 3 $Y plus CPI
Clause 15 provides that the digital access undertaking contained in cl 4 was in force until 31 December 2007, unless extended by Foxtel until 31 December 2015. While it was terminable upon 12 months’ notice during this extension period, the undertaking was otherwise only able to be withdrawn if the Final Order granted to either Foxtel or Telstra was varied, revoked or abrogated. Nonetheless, where Foxtel “is unable to comply with its obligations in these undertakings, or believes it is necessary to seek some modification due to changed circumstances”, there was provision for negotiation in good faith with the Commission for a variation or revocation.
As can be seen by the emphasis on the obtaining of a Final Order and the definition of Revised Legislation, the undertaking was structured in anticipation of amendments to the Act, permitting both an exemption from the standard access obligations contained in Pt XIC and the provision of written access undertakings in relation to the provision of access. Further, cl 1.9 of the undertaking made it clear that Foxtel would be relying on the undertaking as to access contained in it and the terms of access as a reasonable alternative to the standard access obligations and as a justification for the making of an exemption order. Accordingly, upon the introduction of s 152ATA, Foxtel applied for an exemption.
FOXTEL’S ACCESS AGREEMENT
The Digital Access Agreement scheduled to Foxtel’s s 87B undertaking sets out the terms and conditions for access. Upon satisfaction of a number of conditions precedent, Foxtel agrees to supply to an access seeker the Digital Set Top Unit Services. This term is broken down in sch 1 to the Digital Access Agreement to various subsets of services, as follows:
Set Top Unit Services: “The delivery of a digital Subscription Television Service which complies with the Interface Specifications from the Network Termination Point to the Subscriber’s television or VCR using the Digital Subscriber Equipment for the purpose of provision by the Access Seeker of digital Subscription Television Services and Related Services to its Subscribers”;
CA Services: “The services and Operational Procedures that allow a service provider to determine whether a Subscriber is entitled to receive a particular service through a Digital Set Top Unit using a smartcard”;
Service Information Service: “The processing of information necessary to be received by a Digital Set Top Unit which, in addition to CA Information, permits the reception of a digital Subscription Television Service but does not include the content which forms the digital Subscription Television Service”; and
Smartcard Authorisation Verification Information Services:
“(a)The provision of information to allow the Access Seeker to verify the Access Seeker’s digital Subscription Television Service enabled on the Smartcard but only that information which can reasonably be produced by the FOXTEL Equipment to provide CA Services.
(b)FOXTEL to provide this information on a monthly basis.
(c)For the avoidance of doubt, the Access Seeker is not entitled to use or access the subscriber management system.”
Clause 4.1(c) of the Digital Access Agreement provides that Foxtel is only obliged to supply, and continue to supply, Digital Set Top Unit Services:
“(i)where the Digital Set Top Unit to which the Digital Set Top Unit Services are to be supplied is actually in use by a Subscriber for reception of FOXTEL’s digital Subscription Television Services;
(ii) as a total package and not as one or more component parts;
(iii)where the Access Seeker’s digital Subscription Television Service and Related Services are broadcast via satellite, provided that these are broadcast using the Satellite Network or otherwise using the same transmission configuration and same satellite orbital location as FOXTEL’s digital Subscription Television Services;
(iv)where the Access Seeker’s digital Subscription Television Services and Related Services:
(A)are transmitted using the Telstra Network, provided that only Digital Set Top Units for cable are used; and
(B)are transmitted using the Satellite Network, provided that only Digital Set Top Units for satellite are used; and
(v)for so long as the Access Seeker’s broadcast signal comprising the Access Seeker’s digital Subscription Television Services and Related Services complies with the relevant Interface Specifications at each of the Interface Points (including the Network Termination Point).
For the avoidance of doubt, in circumstances where the Access Seeker both enters into this Agreement in respect of part of the delivery of Subscription Television Services and installs or arranges for the installation of its own digital set top units in respect of other parts of the delivery of Subscription Television Services, then Clause 4.1(c)(iv) will not apply in respect of the Access Seeker’s digital set top units.”
Clause 4.2(a), however, excludes from the services to be supplied a number of services, including (in subcl (vi)) what is known colloquially as interactivity (discussed in further detail later in these reasons). Clause 4.2(a) is in the following terms:
“The Access Seeker acknowledges and agrees that the Digital Set Top Unit Services do not include the provision by FOXTEL of
(i)Carriage Services up to the Network Termination Point (including LANs, WANs or any Carriage Services from, to and between all Interface Points);
(ii)interconnection or interfacing with any points other than Interface Points,;
(iii)call centre services;
(iv)Subscriber management and related services (including billing);
(v)Electronic Program Guide services;
(vi)any Digital Set Top Unit functionality (other than decryption of the Access Seeker’s digital Subscription Television Services and Related Services), including return path or interactive functionality;
(vii)dedicated access to any second or subsequent tuner and/ or hard drive in the Digital Set Top Unit;
(viii)access to or use of Flash Memory;
(ix)marketing;
(x)magazine and program guide listings; or
(xi)content creation playout or management.
…”
The access fee payable for acquisition of the Digital Set Top Unit Services is in accordance with a pricing methodology set out in Sch 3. This methodology was the subject of extensive submissions before the Commission and the Tribunal.
The methodology determines two cost pools – attributable costs and shared costs. Attributable costs, which are relatively small, are those arising directly from the provision of access to third parties and are charged directly to access seekers. Shared costs – being a combination of annualised future digital capital and operating costs and a mark-up for corporate overheads – are allocated between all users (including Foxtel itself) according to the benefit derived from the supply of the service, as assessed by revenue or ratings (whichever is the greater). The methodology provides for a deemed minimum rating of 0.25% of the total subscription television ratings.
Certain key principles underscored the price methodology put forward by Foxtel. The first is that pricing is to be based on a total service long‑run incremental cost (“TSLRIC”) methodology. In addition, the shared costs discussed included past expenditure on analogue STUs (referred to as installed base acquisition costs, or ‘IBAC’). Further, Foxtel proposed the use of the weighted average cost of capital/capital asset pricing model (‘WACC’ and ‘CAPM’ respectively) to establish the cost of capital for its digital STU cost base. The parameters put forward by Foxtel resulted in an initial ‘vanilla’ WACC of 17.08%. Finally, as with Telstra, the price determined by the Foxtel methodology is subject to upward movements in the CPI, as assessed on each anniversary of the date of execution.
Aside from these specific issues, the content of the Foxtel access agreement is not controversial with clauses concerning liability and indemnities, intellectual property rights, dispute resolution, force majeure and confidential information. With some minor exceptions, these provisions did not give rise to specific concerns before the Tribunal.
TELSTRA’S S 87B UNDERTAKING AND COMMITMENT TO DIGITISE
Like Foxtel’s undertaking, Telstra’s s 87B undertaking contains a conditional commitment to digitise and a promise of access upon certain terms and conditions once digitisation had occurred. In addition to the same definition for terms such as “Final Order” and “Revised Legislation”, the undertaking included a definition of “Digital Subscription Television Carriage Service”:
“a point‑to‑multipoint service for the carriage over Telstra Multimedia’s HFC network of digital video broadcast signals associated with subscription television services.”
Following a similar structure to the Foxtel s 87B undertaking, by cl 6.1, Telstra undertook to commence supplying a Digital Subscription Television Carriage Service no later than 12 months following the obtaining of an acceptable Final Order by both Foxtel and Telstra (but not before 23 October 2003). Pursuant to cl 6.4, Telstra also undertook to “supply a Digital Subscription Television Carriage Service in accordance with the terms in Schedule 2 to this undertaking if it commences supplying a Digital Subscription Television Carriage Service, other than a test or trial service”. The Telstra undertaking was of the same duration as Foxtel’s undertaking, with identical provisions concerning its extension, revocation and variation.
The following clauses in Telstra’s s 87B undertaking are also relevant for present purposes:
“1.8Telstra Multimedia is providing an undertaking in relation to a digital subscription television carriage service in reasonable anticipation that the Government will enact the Revised Legislation.
…
1.9Telstra Multimedia will rely on the terms of Schedule 2 to this undertaking in any application to the relevant statutory body under the Revised Legislation for an order exempting Telstra Multimedia from the obligations that would apply to it if the Digital Subscription Television Carriage Service, or services of a substantially similar nature, were subject to a statutory access regime.
…
6.1So long as the Revised Legislation commences prior to 31 December 2003 and there is no Regulatory Change, Telstra Multimedia undertakes to commence supplying a Digital Subscription Television Carriage Service no later than 12 months after the later of the date on which:
(a)FOXTEL obtains a Final Order in relation to a digital cable and a digital satellite subscription television service for the duration of FOXTEL’s undertaking to supply a commercial retail digital cable subscription television service and a commercial retail digital satellite subscription television service (including any period of continuation of the FOXTEL undertaking) and, if the Final Order is subject to a condition or conditions, such condition or conditions, in Telstra Multimedia’s reasonable opinion, would not have a material adverse effect on the financial or operational assumptions on which any decision of Telstra Multimedia or FOXTEL to give the commitment to commence supplying the relevant service was made or on the extent of the exemption obtained under the Revised Legislation; and
(b)Telstra Multimedia obtains a Final Order in relation to a Digital Subscription Television Carriage Service for the duration of Telstra Multimedia’s undertaking referred to in paragraph 6.1 (including any period of continuation of the undertaking pursuant to paragraph 7.3) and, if the Final Order is subject to a condition or conditions, such condition or conditions, in Telstra Multimedia’s reasonable opinion, would not have a material adverse effect on the financial or operational assumptions on which any decision of Telstra Multimedia or FOXTEL to give the commitment to commence supplying the relevant service was made or on the extent of the exemption obtained under the Revised Legislation,
but in any event not before 23 October 2003.
6.4Telstra Multimedia undertakes to supply a Digital Subscription Television Carriage Service in accordance with the terms in Schedule 2 to this undertaking if it commences supplying a Digital Subscription Television Carriage Service, other than a test or trial service.”
TELSTRA’S ACCESS AGREEMENT
The pro forma access agreement scheduled to the Telstra undertaking, the Telstra Multimedia Access Agreement – Digital Services, is complicated in its structure. For present purposes, its key components are the General Terms and Conditions, Annex Five (being the digital channel allocation process) and the Digital Services Module.
The preface to the General Terms and Conditions sets out a “Simplified outline” which states:
“1.Telstra conducts the Digital Channel Allocation Process in accordance with Annex Five for the Available Digital Channels. If the Customer is allocated a Digital Channel it will be supplied Digital Services using that Digital Channel pursuant to the Digital Services Module. If the Customer is not allocated a Digital Channel, this Agreement will terminate.
2.Telstra has no obligation to supply the Digital Services until the conditions precedent set out in the Digital Services Module have been fulfilled, including the completion of any Enhancements and Extensions. The Customer must pay the annual charges for the Digital Services from the date that Telstra notifies the Customer that the Digital Services are available for acquisition.
3.Telstra supplies each Digital Channel in accordance with the Digital Services Module for the Digital Module Term. The Customer can elect to encode its own Customer Input Signal in certain circumstances via the Customer Encoding Election, otherwise Telstra will encode the Customer Input Signal. This Agreement expires at the end of the Digital Module Term unless renewed or terminated earlier.”
The General Terms and Conditions set out provisions governing the relationship of the parties, billing and payment obligations, branding and intellectual property obligations, provisions concerning allocation of risk and limitations on liability, dispute resolution procedures and so forth. More detailed provisions relating to billing and payment are set out in Annex Two. Annex Three describes the operations, maintenance and fault procedures, while Annex Four contains the IT Systems interface procedures.
There are two digital channel allocation processes as set out in Annex Five. The first applies during the “Simulcast Period” – being the period during which both analogue and digital services are to be provided, and 15% of the total number of Digital Channels are to be made available for access seekers. For the purposes of this period, an auction process has been established. The Reserve Price for the auction is $750,000 per channel per year (increased to reflect inflation, on each anniversary of 1 October 2002). For the post‑Simulcast Period, during which 35% of the total number of Digital Channels would be made available to access seekers, the auction process is no longer applicable. Instead, channels may be purchased upon application for the Channel Price, which is $750,000 per channel per year, subject to inflation. The “Simulcast End Date” is defined in Annex One (the dictionary of definitions) to be the date at which Telstra ceases carriage of Foxtel’s subscription television signals in analogue mode on the Telstra HFC network on a commercial basis.
The Digital Services Module, which contains the substantive access provisions, contains a number of conditions precedent that must be satisfied before Telstra has an obligation to supply the Digital Services the subject of the agreement. The Digital Services Module also provides that Telstra “intends to activate Digital Channels on a per 8 MHz Stream basis [and] will usually delay activation of Digital Channels until at least 6 Digital Channels in each 8 MHz Stream have been allocated” (cl 1.27).
“Digital Services” are defined in Pt 1 of the Digital Services Module as “the digital subscription television broadcast carriage service described, and subject to the limitations set out in Part 2 of this Digital Services Module and any other service to be provided by Telstra under this Digital Services Module as part of that service”. Clause 2.2 of Pt 2 sets out that description and limitations, providing:
“The Digital Services comprise a digital subscription television broadcast carriage service, specified and subject to the limitations contained in the Digital Specifications, comprising:
(a)if the Customer has not made, or has revoked, the Customer Encoding Election for a Supplied Digital Channel:
(i)the receipt of the Customer Input Signal to be carried by that Supplied Digital Channel from the Customer at the relevant Interconnection Point;
(ii)the creation of the Carried Signal from the Customer Input Signal;
(iii)the point to multi-point carriage of the Carried Signal using that Supplied Digital Channel from the Headends over, and subject to the performance characteristics of, the Telstra HFC Network to each Network Termination Point.
(b)if the Customer has made the Customer Encoding Election for a Supplied Digital Channel:
(i)the receipt of the Pre‑Encoded Input Signal from the Customer at the relevant Interconnection Point;
(ii)the creation of the Carried Signal from the Pre‑Encoded Input Signal;
(iii)the point to multi-point carriage of the Carried Signal using that Supplied Digital Channel from the Headends over, and subject to the performance characteristics of, the Telstra HFC Network to each Network Termination Point; and
(c)the point to multi‑point carriage of the Service Information Signal from the Headends over, and subject to the performance characteristics of, the Telstra HFC Network to each Network Termination Point”.
THE COMMISSION’S DECISIONS
FOXTEL
Each application was granted subject to conditions. In the case of Foxtel, the Commission was concerned to ensure that the exemption granted was not broader than the access granted under its s 87B undertaking. This would have given rise to a lacuna, whereby Foxtel was exempt from the standard access obligations in relation to certain services in relation to which it would not be obliged to provide access. Particular concern had been expressed regarding interactivity, in relation to which the Commission said (at 70):
“The issue before the Commission is whether to provide an exemption for subscription television services. It is ensuring that interactive services are not exempted, due to the lack of clear terms and conditions of access to such services. If it occurs that access to interactive services is important in its own right, or as a supporting service to subscription television, then this is a matter the Commission will need to consider in the future.”
Accordingly, the Commission, in drafting its exemption order, included express limitations ensuring that it did not extend to interactive services.
The Commission had concerns regarding the pricing methodology put forward by Foxtel. While the Commission accepted the basic framework underlying Foxtel’s methodology, it did not accept certain of the WACC parameters included in that methodology. A condition of the exemption order was that certain parameters, such as the asset beta, debt margin and risk free rate, be changed, resulting in a lower WACC than that proposed by Foxtel.
The Commission also required the term of access provided under the Foxtel access agreement to run for five years (as distinct from five years less any time required to satisfy conditions precedent).
Other than these reservations, which the Commission considered could be addressed by appropriate conditions, the Commission concluded that “the price and non‑price terms and conditions of access in Foxtel’s Digital Access Agreement are likely to provide for effective access on reasonable terms and conditions”. Accordingly, subject to the conditions and limitations set out in its exemption order, the Commission accepted that providing Foxtel with an exemption order pursuant to s 152ATA(3)(a) of the Act would promote the LTIE.
In considering whether the grant of the exemption order to Foxtel would promote the LTIE, the Commission addressed the objectives referred to in s 152AB(2)(c) and (e) (par [46]). The Commission considered whether the grant of the exemption order would promote competition in the markets for carriage services and for services supplied by means of carriage services. The Commission considered that the likelihood of future regulation was an important issue for it to consider because the possibility of regulation under Pt XIC was removed by the granting of an exemption. The Commission stated (at 67):
“[G]ranting an exemption should provide for greater certainty for access than leaving the issue to potential declaration. Granting an exemption at this time, with the modifications that are required to the section 87B undertakings, means that the terms and conditions of access are clearer for all parties at a significantly earlier time than leaving the issue to potential declaration after a further public inquiry …”.
Overall the Commission took the view that the non‑price terms and conditions in Foxtel’s access agreement provided an effective form of access having regard to the interests of access seekers and Foxtel. The Commission also took the view that the price terms and conditions were reasonable subject to certain conditions.
During the course of the hearing, there were extensive submissions put before the Tribunal concerning the pricing contained in the access agreements of each of Foxtel and Telstra. In respect of Foxtel, the Seven Network’s primary concerns related to the inclusion of the IBAC, as well as the means by which shared costs were to be allocated across users. In respect of Telstra, the main issue concerned the existence, relevance and quantification, of the “telephony defence”, being the benefit to Telstra’s telephony business derived from its HFC network.
Foxtel
Basic methodology
Seven Network submitted that the tie of the Basic Package required a departure from TSLRIC pricing. For the reasons already given, we consider that this tie is not in the long‑term interests of end‑users and accordingly, we do not consider it necessary to investigate whether a departure from TSLRIC pricing could be justified on this ground.
IBAC
Seven Network put forward a number of concerns with the IBAC which formed the base of the Foxtel pricing methodology. These concerns included:
·the lack of evidence of such costs and the fact that they were unrecovered;
·as a matter of economic analysis, it was inappropriate to include the IBAC cost in the cost base for providing digital STU services; and
·it was inappropriate to include marketing costs, or at least branded marketing costs, in the IBAC and that there was no evidence that the marketing costs sought to be included by Foxtel were confined to non-branded generic marketing costs.
In response, Foxtel submitted that the IBAC was consistent with efficient pricing principles and should be accepted. It noted the observation in the report of NECG submitted to the Commission by Foxtel (and Telstra) that the most valuable asset base (for both Foxtel and access seekers) that the digital business will inherit from the analogue business is the installed base of Foxtel subscribers. Expenditure on the assets represents a shared cost between the analogue and digital business, as the costs incurred to derive the benefits from the asset will be recovered from the digital businesses in so far as they have not been (and, indeed, cannot be) recovered from the analogue business. With the shutting down of the analogue business, an appropriate analogy was the sale of the analogue customer base to a new entrant digital service provider. On the basis of such an analogy, the IBAC was appropriately included in the Foxtel cost base, effectively being the cost of establishing the market which future access seekers would be seeking to exploit.
Cost allocation
Seven Network also criticised the cost allocation mechanism – using imputed revenue and a minimum ratings figure. Under this mechanism, an access seekers’ revenue share for a particular channel is the higher of its actual revenue and its imputed revenue. The imputed revenue is based on the ratio of the rating achieved by its channel to Foxtel’s total ratings. The access seeker’s minimum rating figure is deemed to be 0.25%.
The use of imputed revenue, according to the Seven Network, meant that Foxtel would receive a high revenue from its Basic Package (which access seekers would not), which would inflate access seekers’ imputed revenue. Seven Network further submitted that the use of imputed revenue was one‑sided as only access seekers’ revenue shares would be the subject of a formula for the greater of the imputed revenue and actual revenue. In particular, it was noted that Foxtel’s share of costs would not be allocated on the basis of the higher of its actual revenue and imputed revenue for channels not in the Basic Package. This, alleged Seven Network, would permit Foxtel to add additional tier channels to compete with an access seeker’s channels but at a significantly lower cost base.
The use of the minimum ratings figure also came in for criticism. Seven Network noted that the minimum ratings figure, as used for cost allocation, applies only to calculating the access seeker’s ratings and revenue, and not to Foxtel’s ratings or revenue. Consequently, Foxtel’s channels on a tier would be treated on a different basis from access seekers’ channels. Accordingly, Seven Network submitted that Foxtel would have a lower cost base if it wished to provide a competing niche channel on a tier.
Foxtel submitted that the revenue/ratings approach reflected the fact that not all access seekers would necessarily be seeking to garner revenue from each individual channel offering. Some access seekers, such as religious, education or shopping channels, are likely to have low direct revenues, and may not even seek to charge a subscription fee. A corresponding problem does not arise in dealing with Foxtel’s revenue under the mechanism, as Foxtel’s total revenue across all of its channels enters into the formula. Accordingly, Foxtel considered it was appropriate to have a method whereby revenue could be imputed. Foxtel also rejected the contention that it receives higher revenue from the Basic Package compared with access seekers (thereby inflating an access seeker’s imputed revenue). Foxtel submitted that there was no evidence to suggest that Foxtel’s revenue per rating point for its Basic Package is higher than for premium channels.
In response to the alleged asymmetry in the application of the revenue/ratings approach, Foxtel submitted that as Foxtel bears all of the costs of the STU business that are not allocated to access seekers, Foxtel’s average revenue per rating point is an appropriate base against which to allocate costs. Such an approach, submitted counsel for Foxtel, allowed for the efficient use of the resources in question.
Cost of capital
Seven Network submitted that the cost of capital submitted by Foxtel was excessive and that the Tribunal should accept the evidence of its expert economist, Professor Robert Officer, concerning the appropriate asset beta. It was also submitted that we should adopt a ten‑year life for STUs for depreciation purposes. In response, Foxtel submitted that there was no good or compelling reason why we should reject the Commission’s assessment of these issues.
Conclusions on Foxtel’s pricing methodology
For the reasons already given, it is not necessary for us to decide the various issues underlying the Foxtel pricing methodology. We are generally satisfied with the pricing methodology (including cost allocation) adopted by Foxtel, as modified by the Commission. In relation to IBAC, in particular, we accept as a matter of principle that such costs should be included in the cost base, although we consider it important to ensure that the IBAC does not include Foxtel‑specific marketing costs. While accepting the methodology, we consider that more rigorous verification of the inputs (including the IBAC costs, and any recovery thereof) would be appropriate. While Foxtel submitted that it would be amenable to an independent review of the calculation of the IBAC, we note that there is a considerable distinction between reviewing a particular calculation and verifying that the inputs to that calculation are accurate. To this end, we would have been more comfortable if the IBAC costs had been supported by audited accounts. We also accept in principle the method of imputing revenue, but consider that the deemed minimum rating of 0.25% should be reviewed if more finely granulated ratings data become available.
Telstra
Telephony defence
While there were various submissions concerning the methodology that underlies the access price to be charged by Telstra, the most significant of these concerned the existence, relevance and quantification, of the “telephony defence”. Seven Network submitted that the HFC network was not built, and never would have been built, on the expectation of recovering the cost of investment (or even a substantial part of this cost) from pay television revenues or services that could be delivered over the network. Specifically, it was contended that Telstra built the network to defend the telephony revenues that it earned on its copper‑wire network. By building the HFC network, Telstra was trying to ensure that fewer people connected to Optus’ local loop. If people subscribed to Optus’ subscription television services, they would also be able to receive telephony products over Optus’ cable and bypass Telstra’s network. Telstra stood to lose the local loop and long distance revenue from those telephony customers who churned to Optus.
Seven Network submitted that the appropriate asset valuation should not exceed the economically recoverable value of the HFC network, which, according to Telstra’s 1997 Annual Report, appeared to have a carrying value of $210 million.
According to Seven Network, the telephony defence meant that there was an economic benefit to Telstra in building the HFC network other than the revenue which could be generated by way of direct use of the network (eg pay TV). Consequently, full cost recovery was an inappropriate premise upon which to derive an access price, as such recovery was not contemplated at the time the network was constructed. Accordingly, the value of the economic benefit due to the telephony defence expected to be derived by Telstra at the time of the network’s construction should be deducted from the cost base. A related way of approaching the issue was to proceed on the basis that the costs incurred in building the HFC network were “economically efficient” within the meaning of s 152AB(2)(e) of the Act.
That the telephony defence existed was not disputed by Telstra. For example, in its Statement of Facts, Issues and Contentions, Telstra “admits that one of the reasons why Telstra constructed a HFC Network included the perceived need to offer a full range of services (including subscription television) in order to prevent the loss of telephony revenues to competitors who did offer such a range”. In relation to submissions by Seven Network that attempted to quantify the value of the telephony defence, arguing that the cost base should be adjusted accordingly, Telstra stated that such submissions were “merely postulations of the applicants which were only put before the Commission as assumptions provided to the applicants’ experts”. In so saying, Telstra appears to have disregarded the requirements of s 152ATA(6), which make it clear that it is for Telstra to satisfy the Commission, and subsequently the Tribunal, as to the merit of its application.
In addressing the issue, the Commission stated (at 48) that:
“C7’s concerns regarding the strategic reasons underlying Telstra’s investment in its HFC network are seen as potentially relevant in terms of the way common costs should be allocated to the different services provided on the HFC cable network. The Commission’s discussion on this is in the section on cost allocation below”.
Turning then to the cost allocation section of its decision, the Commission rejected Telstra’s 90 per cent allocation of the common costs of the HFC network to subscription television, reducing it to 70 per cent with provision for resets (in October 2006 and October 2010) whereby the “proportion of total revenues represented by subscription television revenues will then be determined” (at p 52). The Commission, however, did not articulate whether and to what extent this reduction was attributable to the telephony defence. While it is clear that the reduction is due (at least in part) to assessments of the efficient use of the HFC network, this is not quite the same issue. Further, the effect of the resets may be to erode any discount attributable to inefficient use of the network and the telephony defence. Accordingly, it is by no means clear that the telephony defence was adequately addressed in the Commission’s decision.
Having examined the evidence presented to the Commission, we consider that there was limited information upon which to reach a view. On the one hand, there were suggestions that the quantum of the telephony defence was substantial and the cost base should be reduced accordingly. Most significantly, in its audited financial statements for the year ended 30 June 1997, Telstra assessed that the present value of the estimated future net cash‑flow before income tax of the HFC network was $210 million, compared to an investment cost of $1.891 billion and, as a result, effectively wrote down the value of the HFC network. That assessment, according to the Seven Network’s submissions, has been confirmed in each set of annual accounts since 1997.
Further evidence of the inefficient nature of Telstra’s investment was the extent of the ‘overbuild’ as between the Telstra and Optus HFC network, being 80% as compared with just 1% cable overbuilt in the United States. Further, as noted in a C7 submission to the Commission during the course of the analogue proceedings, Telstra announced its intention to scale back the rollout of the network only after Optus had announced its intention to do the same.
On the other hand, it is not clear to us that the mere fact that the value of the network has been written down implies that the investment was inefficient at the time it was made. In the absence of explanation for that write‑down, we are unable to conclude why it occurred. Further, there appears to us to be a number of reasons that suggest that the value of the telephony defence to Telstra may not have been significant. As submitted by the Seven Network, the objective was to prevent the loss of custom from those “people [who] subscribed to Optus’ pay TV services [who] would also be able to receive telephony products over Optus’ cable and bypass Telstra’s loop”. If this were the case, then the customer base that Telstra appears to have been trying to protect must be potential subscription television subscribers who would be attracted by a bundled telephony/pay television service. The Tribunal was given no means by which this pool of customers could be quantified, but it would not seem extensive.
Indeed, we have been given no means by which to assess the value of the telephony defence. Accordingly, Telstra has not satisfied us that the access price is reasonable. It seems likely that Telstra has within its possession documents that would help in assessing the value of the telephony defence – including board minutes and papers, as well as documents prepared in support of the business case to spend $1.8 billion on the network. As with Foxtel, we consider that it was open to the Commission to impose a greater degree of rigour upon Telstra in making out its claims as to the original cost, and actual value (in an economic sense), of the HFC network, by calling for the production of such documentation. We are, however, constrained by the terms of s 152AW(4), and can only note that supporting documentation not available to the Commission was neither proffered by Telstra, nor requested by the Commission.
THE DURATION OF THE UNDERTAKINGS AND THE EXEMPTIONS
Clause 15 of the Foxtel undertaking sets out the duration of its Digital Access Undertaking. Clause 15.2 provides that the Digital Access Undertaking continues until 31 December 2007, subject to cl 15.4, which permits the withdrawal of the undertaking if the Foxtel Final Order is varied (“and such variation has a material adverse effect on the FOXTEL business”), revoked or abrogated. The undertaking may also be withdrawn under cl 15.4 if (as a consequence of Telstra’s Final Order being varied, revoked or abrogated), Telstra withdraws its Digital Access Undertaking.
Under cl 15.3, however, Foxtel’s Digital Access Undertaking may be extended. Clause 15.3 of the undertaking provides:
“Notwithstanding Clause 15.2 and subject to Clause 15.4, at any time between October 2006 and 31 December 2006 FOXTEL may give a notice that it intends to continue its Digital Access Undertaking as it relates to a satellite service and/or as it relates to a cable service past 31 December 2007 until 31 December 2015. If FOXTEL gives that notice the relevant Digital Access Undertaking continues on its then terms after 31 December 2007 until 31 December 2015 unless it is terminated before 31 December 2015 by FOXTEL giving 12 months’ notice to the Commission of its intention to terminate the Digital Access Undertaking either as it relates to a satellite service and/or as it relates to a cable service.”
Clause 7 of Telstra’s original undertaking sets out the duration of the undertaking and an extension option in substantially identical terms. The Commission, however, required cl 7.3 (the equivalent to cl 15.3 of the Foxtel undertaking) to be varied to ensure that the life of certain ancillary undertakings was tied to the digital access undertakings in cl 6.4. These ancillary undertakings were contained in par 6.7, 6.8 and 6.9 of the Telstra undertaking (addressing matters such as the provision of information or assistance by Telstra to access seekers, Telstra designing and using equipment in its network that will facilitate access by access seekers, and Telstra not entering into arrangements that will require Telstra to seek further consents).
The application for exemption by each party ties the length of the exemption to the life of the digital access undertakings. As such, par 2(b) of the Foxtel application states that “The order would have effect until 2015 or the date on which the Digital Access Undertaking … ceases to be in force, whichever is the earlier”. An equivalent provision is contained in par 2(b) of the Telstra exemption application.
Seven Network does not appear to have made specific submissions to the Commission expressing concern over the potential length of the exemption, nor the unilateral nature of its extension. Nonetheless, the Commission sent requests for information, both dated 28 July 2003, to each of Telstra and Foxtel seeking further detail as to the temporal structure of the undertaking. Telstra was requested to provide information addressing “why Telstra believes an exemption is required potentially until 2015”. In respect of Foxtel, the Commission asked for “further information which outlines the benefits to its business plans for digitisation, of having the option to cease supply of the digital carriage service subject to the terms and conditions within its section 87B undertaking prior to 2015”.
Foxtel responded (by letter dated 5 August 2003) as follows:
“The benefit to FOXTEL’s business plans for digitisation of having the option to cease supply of the digital carriage service prior to 2015 (but not before 21 December 2007) is that it gives FOXTEL flexibility to cease supplying the service pursuant to the digital access undertaking if market conditions so change that it becomes uneconomical for it to continue to do so…”.
Telstra’s response was provided by letter dated 11 August 2003:
“As a general point, Telstra notes that the Explanatory Memorandum to the Telecommunications Competition Bill 2002 expressly stated that anticipatory exemptions are not subject to a maximum expiry time.
In relation to its Exemption Application, Telstra notes that the term of the exemption order sought by Telstra matches precisely with the term of the relevant provisions of Telstra’s Section 87B Undertaking… Once Telstra has digitised its HFC network and commences supply of the digital carriage service, that obligation continues until at least 2007. However, Telstra may give notice that it intends to continue its undertaking to supply a digital subscription television carriage service until 2015. In these circumstances, it is reasonable that Telstra have an exemption for the same period.
Telstra believes that a term of between 11 and 12 years (on the assumption that if the exemption is granted soon, the network would be digitised in 2004) is reasonable in circumstances in which:
(a)Telstra must have sufficient regulatory certainty to enable it to recover the costs of its significant investment; and
(b)access seekers have certainty as to the terms and conditions on which they will be able to obtain access such that they are able to plan for the establishment and development of an entirely new business.”
Ultimately, however, the ability of Telstra and Foxtel to extend the undertakings (and thus the exemptions) until 2015 received scant comment in the Commission’s final decisions, being discussed under the heading ‘Flexibility’. A brief comparative exercise between the undertaking as submitted and a declaration under Pt XIC was undertaken, with the Commission concluding, “the difference appears to be that declaration under Part XIC of the Act is of a much shorter duration” than the exemption applied for.
While the Seven Network’s written submissions before the Tribunal did not raise specific concerns with the length of the exemptions, they noted that granting the exemption would effectively take each of Telstra and Foxtel outside the regulatory access regime until (the beginning of) 2016. In its oral submissions, the Seven Network queried the basis for each of Telstra and Foxtel having a unilateral right to extend from 2007 to 2015 without scrutiny by the Commission. Concerns were expressed about locking in terms of access, particularly price, for such a long period without the benefit of regulatory scrutiny. The potential length of the exemption in such a “rapidly changing technological sector” was particularly called into question. Senior Counsel for the Seven Network, Mr Young QC, stated:
“… the essence of it is that this arrangement fixes price and terms of conditions until 2015. So far as Telstra and Foxtel are concerned, they're bound to adhere to them until 2007, but thereafter Foxtel and Telstra have the option of dropping this regime if it suits them – that is to say, if this regime hasn't stifled access, or for some reason has moved so it's unsuitable to them, they can abandon it either in 2007 or thereafter by giving 12 months’ notice each and every year.
But if it’s moved adversely to the public interest by 2007 – assuming there is nothing wrong with it to begin with – the Commission can’t do anything about the extension from 2007 to 2015; that is at the sole discretion of Telstra and Foxtel. So… the regulator is handing over the keys to the treasury to Telstra and Foxtel. They’re given power to determine the length of this arrangement. So if we’ve had no effective access and these prices are far too high… Telstra and Foxtel can then extend it until 2015 and, at the same time, the arrangement is stripped of all the statutory protections.”
No specific justification was provided by either Telstra or Foxtel for the provisions in question in either their written or oral submissions. Accordingly, the relevant clauses stand to be considered by reference to the issue of the degree of the certainty to be provided to Foxtel and Telstra as investors.
Concerns with the duration and potential extension of the undertakings and exemptions
In the light of the submissions put before the Tribunal, the main issues of concern with the duration and extension provision governing the undertakings, and thus any exemption orders, appear to be as follows:
·the unilateral nature of the extension;
·the potential for rapid technological change during the potential life of the exemption; and
·the ‘magnifying’ effect of the potential duration.
Unilateral nature of extension
Seven Network submitted that the access arrangement was all one‑sided, if the proposed access terms do not ultimately suit Telstra or Foxtel, or if a competitive threat emerges by reason of the access allowed, Telstra or Foxtel or both may terminate access for the access seeker at the end of December 2007, or later, on giving 12 months’ notice. However, if Telstra/Foxtel are satisfied with the outcome of their proposed terms, then, at their election, the exemption will continue for 12 month periods running until the end of 2015. Seven Network suggested that a satisfactory outcome that would prompt Telstra and Foxtel to extend the terms of the undertakings may be that there had been no constraining entrant or, even, that no party had sought or obtained access at all.
We note with concern that neither Telstra nor Foxtel sought to place before us substantive justification for the unilateral ability to extend the undertakings. In accordance with the brief submissions offered on this point to the Commission, we have considered how the extension provision in each undertaking contributes to the claimed advantages of the exemption applications, for example, certainty (in this case, certainty of terms and conditions of access). Contrary to Telstra’s submission, the right to extend until 2015 provides no certainty to potential access seekers. While we accept that it offers Telstra (and Foxtel) a degree of regulatory certainty, in our view, any such certainty is inappropriately one‑sided. While we may have been open to accepting that, say, a 12 year term was necessary to provide the investors with the security they needed (if appropriately justified), Telstra and Foxtel have instead sought to have ‘an each way bet’, such that they can exit their self‑constructed access regime if it does not meet their interests or, conversely, they can elect to extend it for a further eight years.
We also note that the initial term and the extension period are somewhat unusually structured. It is not customary for an extension period (here, eight years) to be significantly longer than the initial term (five years), except where the arrangement in question is effectively being ‘trialled’. In the absence of an explanation from Telstra and Foxtel, we consider this unusual feature of the undertakings supports an inference that they have been structured in such a way as to enable Telstra and Foxtel to reassess their terms of access at an early stage and then to elect to continue them only if it is in their commercial interests to do so with possible adverse consequences for competition.
Potential for rapid technological change
We consider that the technology the subject of the applications – digital television (including interactive services) – is in its early stages in Australia, and is likely to develop in unforeseen ways between now and the end of 2015, being the potential life of the undertakings and proposed exemption orders. An exemption of the length contemplated – particularly when control over the precise length of the exemptions lies within the hands of Telstra and Foxtel – strikes us as inappropriate in an industry characterised by rapid technological development. Having regard to the statutory test, we are not satisfied that it is in the LTIE that – potentially until the end of 2015 – access seekers may be precluded from seeking declaration or that access seekers and end‑users alike will be unable to benefit from any ministerial pricing determination under s 152CH, regardless of whether such determination may be appropriate.
Magnifying the effect of other concerns
The potentially long life of the undertakings/exemptions also has the effect of ‘magnifying’ our other concerns with the proposed access arrangements. Taking, for example, the tie of the Basic Package to access to Foxtel’s services, to the extent that the tie does serve to deter prospective entry, it will have such an effect for more than a decade. Similarly, issues with pricing and the separation of interactive services from other digital subscription television services, as well as other miscellaneous concerns with the proposed terms of access, are exacerbated by the potential length of the undertaking/exemption and the fact that such length will be as determined by Telstra and Foxtel.
Conclusions on the length of undertakings and exemptions
In considering these matters, our concerns with the potential life of the exemption include, but also extend beyond, the issues raised by Seven Network. We are not confined, in assessing the LTIE, to considering those concerns raised by a single prospective access seeker. Accordingly, we should not fall into the trap of approaching these reviews as though they were adversarial proceedings with Seven Network’s concerns taken to reflect exhaustively the interests of end‑users.
Having regard to the statutory test posed by s 152ATA(6), we are not satisfied that it is in the LTIE that, for a timeframe largely within their control and potentially until the end of 2015, Telstra and Foxtel will be exempted from the statutory regime in respect of the services the subject of their respective applications. While we do not suggest that it should be for the Commission to determine the term of the undertaking (still less an access seeker), we may have regarded the potential duration of the exemption with considerably more favour if Telstra and Foxtel tied the life of the exemption to an undertaking that could be extended only with the consent of the Commission. We may also have been more favourably disposed if the undertaking simply ran until the end of 2015 (without any discretion to extend), although concerns would have remained as to whether such a lengthy exemption was appropriate in this industry. However, we are not comfortable with the prospect that it is for Telstra and Foxtel to assess the access regime they have created, and then, assuming it meets their commercial objectives, to determine whether (and for how long) it continues. This grants excessive discretion to parties who, by reason of a perceived absence of constraint, were required to give the undertakings in the first place.
We are not satisfied that the potential life of the undertakings and hence any exemption orders (and the means by which such life is determined) would be in the long‑term interests of end‑users.
I certify that the preceding three hundred and fifty‑four (354) numbered paragraphs are a true copy of the Reasons for Decision herein of Justice Goldberg (President), Mr G F Latta and Mr R F Shogren. Associate:
Dated: 23 December 2004
Counsel for the applicants: Mr N J Young QC with Mr J R J Lockhart Solicitors for the applicants: Freehills Counsel for Foxtel Management Pty Ltd: Mr N J O’Bryan S.C. with Mr M H O’Bryan Solicitors for Foxtel Management Pty Ltd: Allens Arthur Robinson Counsel for Telstra Corporation Limited and Telstra Multimedia Pty Limited: Mr T F Bathurst QC with Mr T D Castle Solicitors for Telstra Corporation Limited and Telstra Multimedia Pty Limited: Malleson Stephen Jaques Counsel for the Australian Competition and Consumer Commission: Mr T J Ginnane S.C. with Mr D Star Solicitor for the Australian Competition and Consumer Commission: Australian Competition and Consumer Commission Date of Hearing: 5, 6, 9, 10, 11, 12, 13, 16, 17 and 19 August 2004 Date of Decisions: 30 September 2004 Date of Reasons: 23 December 2004
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