EXPLANATORY STATEMENT

Trade Practices Act 1974

Australian Competition and Consumer Commission (Accounting Separation – Telstra Corporation Limited) Direction (No. 1) 2003

Issued by the authority of the Minister for Communications, Information Technology and the Arts (Minister).

The Australian Competition and Consumer Commission (Accounting Separation – Telstra Corporation Limited) Direction (No. 1) 2003 (the Direction) requires the Australian Competition and Consumer Commission (ACCC) to exercise its record-keeping rule powers under Part XIB of the Trade Practices Act 1974 (the Act) to ensure that:

• Telstra prepares records and reports in relation to each of the services of Telstra to which the Regulatory Accounting Framework applies on a historic cost and current cost basis and provides those reports to the ACCC within specified timeframes;
• Telstra prepares records and reports that record the value of Telstra’s internal supply each of the “core services” as if Telstra had purchased the service concerned at a wholesale price based on the prices that Telstra charges access seekers for that service and provides those reports to the ACCC within specified timeframes.  Based on the information in the reports given to the ACCC, the ACCC is required to prepare an imputation or margin analysis of the reports;
• Telstra prepares records and reports that compare the outcomes of Telstra’s performance for supply of specified wholesale services and specified retail services in accordance with key performance indicators for non-price terms and conditions and provides those reports to the ACCC within specified timeframes; and
• the ACCC makes copies of the reports provided to it as a result of these record-keeping rules available to the public.

The Direction also requires the ACCC to monitor and prepare, on a 6 monthly basis, reports for the Minister on competition in the telecommunications industry in relation to the corporate segment of the business customer group.

BACKGROUND

Section 151BU of the Act provides that the ACCC may make record-keeping rules under which specified carriers and carriage service providers, or classes of carriers and carriage service providers, are required to keep and retain records.  Carriers and carriage service providers can also be required to provide reports to the ACCC consisting of information contained in such records. Subsection 151BU(4) limits the information that can be collected under the record-keeping rules.

Sections 151BUA, 151BUB, 151BUC give the ACCC the power to disclose, or to require carriers or carriage service providers to disclose, reports prepared in accordance with the record-keeping rules.  These provisions contain a number of procedural steps to ensure that information is disclosed where the benefits to the industry outweigh the commercial interests of the carriers and carriage service providers required to disclose the information, including the requirement that the carrier or carriage service provider whose information is to be disclosed is given an opportunity to comment on the proposed disclosure.   Decisions by the ACCC on disclosure are subject to review by the Australian Competition Tribunal.

The ACCC has worked with the industry, over a number of years, to develop the Telecommunications Industry Regulatory Accounting Framework (‘RAF’) which are record-keeping rules made under section 151BU.  The RAF requires certain carriers and carriage service providers to keep and retain certain records and provide certain reports to the ACCC. The RAF consists of financial statements in respect of assets, capital employed and profit and loss relating to lines of business in the retail, internal wholesale and external wholesale categories of the provider.  The accounting data are based on historical costs and reports are provided half-yearly and annually.  No RAF accounts have been published to date.

There has been criticism from industry that there is no accounting transparency in Telstra’s wholesale and retail costs and claims that it may be discriminating between the prices it charges itself for core interconnect services and those it charges its competitors who access its network.  There have also been ongoing concerns that Telstra may be setting retail prices derived from these core services at levels which do not allow a sufficient margin for competitors to compete in the market.

To address these concerns, the Government has decided to encourage a more transparent market by requiring enhanced accounting separation of Telstra’s wholesale and retail operations.

Part 16 of the Telecommunications Competition Act 2002 amended Division 6 of Part XIB of the Act to implement the Government’s intention of enhancing the accounting separation regime for Telstra.  New subsection 151BUAA(1) enables the Minister to give a written direction to the ACCC in relation to the exercise of its powers under section 151BU and new sections 151BUDA, 151BUDB or 151BUDC.  A report under a record-keeping rule made in accordance with such a direction is known as a Ministerially-directed report.  New sections 151BUDA, 151BUDB and 151BUDC enable the ACCC to give public access or limited access to certain persons, to a Ministerially-directed report or extracts thereof.   New subsection 151BUAA(1B) allows the Minister to give the ACCC a written direction requiring the ACCC to prepare a specified kind of analysis of a series of Ministerially-directed periodic reports that it receives under the record-keeping rules.

A key area of competition is the provision of telecommunications services to large organisations with significant annual expenditure on such services.  Competition in this segment is significant and has raised some concerns.

The ACCC will continue to undertake individual investigations on matters that come to its attention in this segment.  However, to supplement this, and to provide transparency to the market, the ACCC will also be required to prepare and publish a 6 monthly report, qualitative in nature, on competition in the corporate segment of the business customer group, with a particular focus on competition between Telstra and access seekers who are supplied wholesale services by Telstra.

OBJECTIVES

The Government’s proposed accounting separation framework will require the preparation and publication of regulatory accounts to reveal the wholesale and retail costs of a number of Telstra services.  It will  allowwill allow a comparison of the price and non-price treatment by Telstra of its internal wholesale arm with that of competitors that interconnect with Telstra’s network and provide a report on competition in the corporate segment of the business customer market.

The proposed accounting separation framework is intended to promote the following objectives, particularly in relation to ‘core’ services:

1. to ameliorate information asymmetries so as to improve the basis for access negotiations;

2.      to provide a high level of systemic confidence that there is no predatory pricing occurring;

3.      through transparency, to provide incentives for equitable treatment in the supply of core services;

4.      to ensure there is a consistent and appropriate basis to which the regulator can refer when examining any competition issue involving costs; and

5.      over time, to improve the regulator’s systemic capacity to identify, and investigate allegations of, anti-competitive behaviour in the supply of ‘bundled’ services in an increasingly convergent environment.

In designing the package, care has also been taken, as far as practicable and consistent with the preceding objectives, to:

• build on work already done by the ACCC and the industry with the Regulatory Accounting Framework (RAF) rather than ‘reinvent the wheel’;

• not destroy genuine economies of scale and scope in the supply of retail services; and

• avoid undue regulatory burdens on industry.

In summary, the proposed framework will require the ACCC to ensure that:

(a)   Telstra prepares current (ie replacement) cost accounts under the RAF as well as the existing historic cost RAF accounts;

(b)   Telstra publishes key financial statements under the RAF for the core interconnect services (ie the Publicly Switched Telephone Network (PSTN), Unconditioned Local Loop Service (ULLS) and Local Carriage Service (LCS)), but is not required to publish underlying financial and traffic data that is commercially sensitive;

(c)   Telstra provides information to the ACCC which reveals the margins that would be available to it if it were to purchase the core interconnect services at the prices that it charges external access seekers;

(d)   the ACCC publishes the results of the margin analysis outlined at (c) above;

(e)   Telstra publishes quarterly information to compare its performance levels in supplying wholesale and retail services in relation to key non-price terms and conditions; and

(f)    the ACCC prepares and publishes a qualitative report, on a 6 monthly basis, on competition in the corporate segment of the business customer group.

The key benefits of the above proposals are that:

• the ACCC would have better costing information to identify possible discrimination and anti-competitive behaviour;
• Telstra’s competitors would have access to transparent price and non-price information in relation to the core services that are subject to Telstra’s monopoly control, thereby assisting them in identifying possible cases of discrimination and in negotiating commercial agreements for access; and
• release of cost information is likely to deter anti-competitive conduct.

Legislative basis

Subsection 151BUAAA(1) of the Trade Practices Act 1974 (the Act) (Cth) provides that the Minister must take all reasonable steps to ensure that a “special Telstra direction” is given within 6 months of the commencement of the section 151BUAAA.  Section 151BUAAA commenced on 19 December 2002.   The accompanying Direction is the special Telstra direction that the Minister is required to make under section 151BUAAA. 

The Direction satisfies the definition of “special Telstra direction” provided in subsection 151BUAAA(2) by:

• relating to Telstra’s wholesale and retail operations (see subclauses 5(1) and 6(1)) which will result in records and reports that enable comparison of Telstra’s supply of wholesale services and retail services by reference to price and performance in relation to non-price terms and conditions and to a customer grouping (if any) determined by the ACCC) – paragraph 151BUAAA(2)(a);
• requiring the ACCC to exercise its record-keeping rule powers under section 151BU to require Telstra to keep and retain certain records, prepare certain reports and provide them to the ACCC (see subclauses 4(1), 5(1) and 6(1)) – paragraph 151BUAAA(2)(b); and
• requires the ACCC to exercise its powers under at least one of sections 1512BUDA, 151BUDB and 151BUDC in relation to those reports (see subclauses 4(8) to (9), 5(5) and 6(4) – paragraph 151BUAAA(2)(c).

The Direction is made under subsections 151BUAA(1), 151BUAA(1B) and 151CMA(1) of Part XIB of the Act.  Subsection 151BUAA(1) enables the Minister to give written directions to the ACCC in relation to the exercise of its powers under section 151BU, 151BUDA, 151BUDB or 151BUDC of the Act.  Section 151BU allows the ACCC to make, by written instrument, record-keeping rules requiring one or more specified carriers or carriage service providers to keep and retain records.  The rules may also require those carriers or carriage service providers to give any or all of the reports to the ACCC.  Sections 151BUDA, 151BUDB and 151BUDC apply to “Ministerially-directed reports” (i.e. reports that are prepared in accordance with a rule made as a result of a direction made by the Minister under section 151BUAA) and relate to the disclosure of Ministerially-directed reports or extracts of reports to the public by the ACCC or a carrier or carriage service provider.  Subsection 151BUAA(1B) enables the Minister to give written directions to the ACCC to prepare a specified kind of analysis of a series of Ministerially-directed periodic reports that it receives under the record-keeping rules.

Subsection 151BUAA(4) provides that a direction under section 151BUAA is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

Clause 9 of the Direction is made under subsection 151CMA(1) of the Act which allows the Minister to require the ACCC to monitor, and report on, such matters relating to competition in the telecommunications industry as are specified by the Minister in a written determination.   The Minister is required to table in Parliament a copy of a report prepared in compliance with a direction under subsection 151CMA(1) within 15 sitting days of receiving the report (subsection 151CMA(5)).  Subsection 151CMA(6) provides that a direction under section 151CMA is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.

ATTACHMENT

Clause 1 – Name of Direction

Clause 1 provides for the citation of the Australian Competition and Consumer Commission (Accounting Separation - Telstra Corporation Limited) Direction (No. 1) 2003.

Clause 2 – Commencement

Clause 2 provides that the Direction commences on gazettal.

Clause 3 – Definitions

Clause 3 defines key terms used in the Direction.

Clause 4 – Records and reports in relation to current costs of core declared services

Clause 4 requires the ACCC to make record-keeping rules on current costs and specifies:

• the nature of the records and reports to be kept and prepared under these record-keeping rules;
• the periods to be covered by initial and subsequent reports prepared under these record-keeping rules;
• when the initial and subsequent reports are to be provided to the ACCC;
• when the ACCC must publish the reports provided to it; and
• that published reports must be accompanied by a statement by the ACCC about compliance and accuracy.

The ACCC is required to make the record-keeping rules on current costs as soon as practicable.

Records and financial statements

The record-keeping rules on current costs will require Telstra to keep and retain certain records and prepare reports that contain financial statements.  Specifically, paragraph 4(1)(a) requires that the records to be kept under the record-keeping rules must enable separate financial statements to be prepared in relation to each of the services of Telstra to which the RAF applies and must be prepared on a current cost and historic costs basis in accordance a methodology (if any) determined by the ACCC in writing.  In determining an appropriate methodology, the ACCC would be expected to have regard to the degree to which the methodology enhances transparency, the level of compliance costs, Australian and overseas accounting standards and practices and any other matter considered relevant.  “Financial statements” is defined in clause 3 of the Direction to mean the Capital Adjusted Profit and Loss Statements, the Capital Employed Statements and the Fixed Asset Statements that are prepared by Telstra in accordance with rules 8, 9 and 10 respectively of the Telecommunications Industry Regulatory Accounting Framework (the “RAF”) made by the ACCC under section 151BU of the Act. 

Reports

Paragraph 4(1)(b) provides that the record-keeping rules on current costs must require Telstra to prepare separate reports that meet the following requirements:

• they must include the relevant financial statements mentioned in paragraph 4(1)(a);
• they must relate to each of the services of Telstra to which the RAF applies;
• they must be consistent with the reports that Telstra is required to prepare and provide to the ACCC under the RAF; and
• they must be prepared on both an historic cost and current costs basis in accordance with a methodology (if any) determined by the ACCC in writing, and further, in a manner (also to be determined by the ACCC) that reconciles the current cost and historic cost reports.

Initial reports

Subclause 4(2) sets out the periods that the record-keeping rules on current costs must cover in “initial reports” of a type referred to in paragraph 4(1)(b).  The initial reports must cover the six-month period beginning on 1 July 2002 and ending on 31 December 2002 and the six-month period beginning on 1 January 2003 and ending on 30 June 2003.  The initial reports must also cover the twelve-month period beginning on 1 July 2002 and ending on 30 June 2003. 

The record-keeping rules must require the initial reports to be provided to the ACCC by 30 November 2003 (subclause 4(5)).

The ACCC must make copies of the initial reports or copies of the financial statements (which are included in the reports) in respect of the core services available to the public as soon as practicable but by 31 December 2003 (subclause 4(8)).  “Core services” has the meaning given in paragraphs 152AQB(1)(a) to (d) of the Act (see clause 3).

Subsequent reports

Subclause 4(3) sets out the periods that the record-keeping rules on current costs must cover in “subsequent reports” (ie reports that are made subsequently to those in subclause 4(2)) of a type referred to in paragraph 4(1)(b).  In effect, the subsequent reports must cover each six-month period beginning on 1 July and ending on 31 December and each six-month period beginning on 1 January and ending on 30 June.  The subsequent reports must also cover each twelve-month period beginning on 1 July and ending on 30 June.  The record-keeping rules on current costs must require the subsequent reports to be provided to the ACCC at the following times:

• where the subsequent report relates to the period beginning on 1 July and ending on 31 December, by 2 weeks after the date on which Telstra is required to lodge its half-yearly reports with ASIC under section 320 of the Corporations Act 2001 (subclause 4(6)); and
• where the subsequent report relates to the period beginning 1 January and ending on 30 June, or beginning 1 July and ending on 30 June, by 4 weeks after the date on which Telstra is required to lodge its annual report with ASIC under section 319 of the Corporations Act 2001 (subclause 4(7)).

The ACCC must make copies of the subsequent reports or copies of the financial statements (which are included in the reports) in respect of the core services available to the public as soon as practicable but by 1 month from the date that the ACCC receives the reports (subclause 4(9)). 

A statement by the ACCC must accompany the copies of the initial reports, subsequent reports or copies of the financial statements that the ACCC must make available to the public (subclause 4(10)).  This statement must deal with the accuracy of the reports and the extent to which the reports comply with the RAF, any other relevant record-keeping rules made by the ACCC (whether made for the purpose of the Direction or otherwise) and any direction by the ACCC under clause 8 of the Direction.  The statement may include such qualifications that the ACCC considers necessary.

Different record-keeping rules for initial and subsequent reports

Subclause 4(4) makes it clear, to avoid doubt, that the ACCC may make different record-keeping rules on current costs for the initial reports and the subsequent reports.  For example, the record-keeping rules on current costs in relation to the initial reports could consist of transitional rules that address the difficulties that may arise in the preparation of the initial reports.  These difficulties might also be addressed by the ACCC including any qualifications that it thinks necessary about the information contained in the initial reports in the statement that the ACCC will issue at the time that copies of the initial reports or copies of the financial statements included in those initial reports are made available to the public (subclause 4(10)).  The ACCC would also be able to make record-keeping rules for one subsequent year that are different to the record-keeping rules that are made in relation to another subsequent year.

Clause 5 – Records and reports in relation to imputation

Clause 5 requires the ACCC to make record-keeping rules in relation to imputation and requires the ACCC to prepare an imputation or margin analysis of the reports it receives under the record-keeping rules.  Clause 5 specifies:

• the nature of the records and reports to be kept and prepared under these record-keeping rules;
• when reports are to be prepared under these record-keeping rules;
• when reports are to be provided to the ACCC;
• that the ACCC is to prepare an analysis of the reports it receives under these record-keeping rules;
• when the ACCC must publish the reports provided to it and its analysis of the reports; and
• that published reports must be accompanied by a statement by the ACCC about compliance and accuracy.

The ACCC is required to make the record-keeping rules in relation to imputation as soon as practicable.

Records and reports

The record-keeping rules in relation to imputation will require Telstra to keep and retain certain records and to prepare separate reports consisting of information contained in the records.  Specifically, paragraph 5(1)(a) requires the records and reports to be kept and prepared under the record-keeping rules to do two things.  First, they must record the values of Telstra’s internal supply of each of the core services as if Telstra had purchased the core service concerned at arm’s length at wholesale prices.  The wholesale prices are the volume-weighted average of the prices that Telstra charges access seekers for that service. “Core services” has the meaning in paragraphs 152AQB(1)(a) to (d) of the Act (see clause 3).  Secondly, they must identify the individual cost and revenue elements by customer group and the retail margins for each retail service.  “Retail service” is defined in clause 3 and “customer group” is defined in subclause 5(8) to mean a group comprising all customers that are business customers or residential customers.  It is intended that the ACCC will determine the composition of customer groups that are business customers or residential customers. 

The record-keeping rules in relation to imputation must also require Telstra to prepare the reports required by those rules every quarter (subclause 5(2)), commencing with the quarter ending on 30 September 2003. “Quarter” is defined in clause 3 to mean a period of 3 months ending on 30 September, 31 December, 31 March or 30 June.

The record-keeping rules in relation to imputation must require Telstra to provide the quarterly reports to the ACCC as soon as practicable but by 2 months after the end of each quarter, commencing with the quarter ending on 30 September 2003 (subclause 5(3)).

ACCC analysis

The Direction requires the ACCC to prepare an imputation or margin analysis of the reports received under the record-keeping rules in relation to imputation (subclause 5(4)).  The ACCC is required to prepare this analysis as soon as practicable after it receives the reports.

Publication of reports and analysis

The ACCC is required to make copies of the reports prepared under the record-keeping rules on imputation available to the public as soon as practicable but by 1 month after the date on which the ACCC receives the reports (subclause 5(5)). The ACCC is also required to publish its analysis of the reports when it publishes the reports.

A statement by the ACCC must accompany copies of the reports that the ACCC must make available to the public (subclause 5(6)).  This statement must deal with the accuracy of the reports and the extent to which the reports comply with the RAF, any other relevant record-keeping rules made by the ACCC (whether made for the purpose of the Direction or otherwise) and any direction by the ACCC under clause 8 of the Direction.  The statement may include such qualifications that the ACCC considers necessary. 

If the ACCC considers that adjustments for Telstra’s economies of scale and scope are appropriate (in accordance with a methodology (if any) determined by the ACCC in writing) the ACCC must take these adjustments into account when making the record-keeping rules in relation to imputation, preparing its imputation or margin analysis or preparing its statement as to accuracy and compliance (subclause 5(7)).

Clause 6 – Records and reports in relation to non-price terms and conditions

Clause 6 requires the ACCC to make record-keeping rules in relation to non-price terms and conditions.  Clause 6 specifies:

• the nature of the records and reports to be kept and prepared under these record-keeping rules;
• when reports are to be prepared under these record-keeping rules;
• when reports are to be provided to the ACCC;
• when the ACCC must publish the reports provided to it; and
• that published reports must be accompanied by a statement by the ACCC about compliance and accuracy.

The ACCC is required to make the record-keeping rules in relation to non-price terms and conditions as soon as practicable.

Records and reports

The record-keeping rules on non-price terms and conditions must require Telstra to keep and retain records, and to prepare reports consisting of information contained in those records, that compare the outcomes of Telstra's performance for supply of specified wholesale services and specified retail services in accordance with a customer grouping (if any) determined by the ACCC and in respect of key performance indicators determined by the ACCC for non-price terms and conditions.  “Non-price terms and conditions” is defined in clause 3 of the Direction to mean terms and conditions relating to one or more of: faults, maintenance, ordering, provisioning, availability, performance, billing, notifications or such other matters as the ACCC considers to have a material effect on Telstra’s performance in relation to the supply of services to its retail arm vis-à-vis external access seekers.

The record-keeping rules in relation to non-price terms and conditions must also require Telstra to prepare the reports required by those rules every quarter (subclause 6(2)), commencing with the quarter ending on 30 September 2003. “Quarter” is defined in clause 3 to mean a period of 3 months ending on 30 September, 31 December, 31 March or 30 June.

The record-keeping rules must require Telstra to provide the quarterly reports to the ACCC as soon as practicable but by 2 months after the end of each quarter, commencing with the quarter ending on 30 September 2003 (subclause 6(3)).

Publication of reports

The ACCC is required to make copies of the reports prepared under the record-keeping rules in relation to non-price terms and conditions available to the public as soon as practicable but by no later than 1 month after the date of which the ACCC receives the reports (subclause 6(4)).

A statement by the ACCC must accompany copies of the reports that the ACCC must make available to the public (subclause 6(5)).  This statement must deal with the accuracy of the reports and the extent to which the reports comply with any other relevant record-keeping rules made by the ACCC (whether made for the purpose of the Direction or otherwise) and any direction by the ACCC under clause 8 of the Direction.  The statement may include such qualifications that the ACCC considers necessary. 

Clause 7 – Manner and form of reports

Clause 7 requires the ACCC to specify in the record-keeping rules mentioned in clauses 4, 5 and 6 such auditing and certification requirements as the ACCC considers necessary to enable the ACCC to prepare the statement required by subclauses 4(10), 5(6) and 6(5) (ie, such auditing and certification requirements that are necessary to ensure that the reports are accurate and comply with the RAF (in the case of reports prepared under clauses 4 and 5), any other relevant record-keeping rules (whether made for the purpose of the Direction or otherwise) and any direction given by the ACCC under clause 8).

Clause 8 – Information in relation to Telstra reports

Clause 8 requires the ACCC to give a direction to Telstra that requires Telstra to take such action as is specified in the direction to inform the public (including access seekers), in a manner that the ACCC considers appropriate, that copies of the reports that Telstra is required to provide to the ACCC (under clauses 4, 5 and 6) or copies of extracts of those reports that the ACCC has decided are to be made available to the public, are so available.

Clause 9 – ACCC to prepare report on competition in the corporate segment of the business customer group

Subclause 9(1) requires the ACCC to monitor, and prepare reports for the Minister, on competition in the telecommunications industry in relation to the corporate segment of the business customer group and, in particular, competition in that segment between Telstra and access seekers who are supplied wholesale services by Telstra (i.e. telecommunications service providers who rely on the supply of wholesale services by Telstra to provide telecommunications services to corporate customers in competition with Telstra).

It is intended that the ‘corporate segment of the business customer group’ would include all large business customers of providers of telecommunications services whose contracts have a significant value.  For example, a contract of a significant value between a provider of telecommunications services and a government agency would fall within the corporate segment.

Subclause 9(2) sets out a non-exhaustive list of matters, including indicators of emerging systemic discrimination, that the ACCC may analyse, or comment upon, in a report to the Minister.

The reports to be prepared by the ACCC under subclause 9(1) are to be prepared and given to the Minister as soon as practicable after the end of each 6 month period, commencing with the 6 month period beginning on 1 July 2003 and ending on 31 December 2003 (called the initial period) (subclause 9(3)).  The first (or initial) report to be prepared by the ACCC and given to the Minister in accordance with subclause 9(1) must cover the initial period (subclause 9(4)).

Subsequent reports to be prepared by the ACCC and given to the Minister must cover the preceding 6 month period (subclause 9(5)).  For example, the report to be prepared and given to the Minister after the initial report must be prepared and given the Minister as soon as practicable after the end of the period beginning on 1 January 2004 and ending on 30 June 2004.  Subclause 9(5) makes it clear that this report must relate to the preceding 6 month period, being 1 January – 30 June 2004.

Each report given to the Minister under clause 9 must be tabled in each House of Parliament within 15 sitting days of the Minister receiving the report (ss151CMA(5) of the Act).

Clause 10 –  Generality of Division 6 of Part XIB of the Act not limited

Clause 10 makes it clear that nothing in the direction limits the ACCC’s powers under Division 6 of Part XIB of the Act, including its powers to make record-keeping rules that supplement those that the ACCC is required to make under this direction.  This clause reflects subsection 151BUAA(1A) which has the effect that the Minister may only give the ACCC a direction that requires the ACCC to exercise its powers under section 151BU, 151BUDA, 151BUDB or 151BUDC or to exercise its powers under those sections in a particular way.  This means that the ACCC’s power to make record-keeping rules is not limited by the Minister’s ability to make directions under section 151BUAA.

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION (ACCOUNTING SEPARATION – TELSTRA CORPORATION LIMITED) DIRECTION (NO. 1) 2003

TRADE PRACTICES ACT 1974

REGULATION IMPACT STATEMENT

Background

The Minister may, under section 151CMA in Division 12A of the Trade Practices Act 1974 (the Act), make a written determination to require the ACCC to monitor and to report to the Minister on competition in the telecommunications industry. 

The Telecommunications Competition Act 2002, which commenced operation on 19 December 2002, introduced a new section, 151BUAA, into the Act which empowers the Minister to give written directions to the Australian Competition and Consumer Commission (ACCC) in relation to the exercise of its powers under the Record Keeping Rules (RKR) provisions of the Act.  Section 151BUAAA requires the Minister to take all reasonable steps to issue a ‘special Telstra direction’ within six months of the commencement of the section on 19 December 2002, following a public consultation process.

A Direction under new section 151BUAAA must relate to Telstra’s wholesale and retail operations and require the ACCC to exercise its powers to make rules requiring Telstra to keep and retain records; prepare reports therefrom; and provide such reports to the ACCC.  The effect of the definition of “wholesale operations” in subsection 151BUAAA(5), is to include those relating to services that Telstra supplies itself or to other persons for resale.

This Direction implements the legislative requirement of section 151BUAAA.  The Direction is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901 (meaning that it can be disallowed in either House of Parliament).

Problem Identification

The Productivity Commission (PC) concluded in its Inquiry Report on Telecommunications Competition Regulation (Report No. 16 of 2001) in September 2001 that vertically integrated access providers should not be able to set terms and conditions that discriminate in favour of their own downstream operations, except to the extent justified by cost savings. 

The current accounting separation and reporting arrangements are established under Division 6 of Part XIB of the Act.  The ACCC has exercised its Record Keeping Rule (RKR) powers under section 151BU of Division 6 to establish a Regulatory Accounting Framework (RAF)) which provides information to ACCC on the costs and revenues of telecommunications services provided by carriers or carriage service providers.  However, the utility of the regulatory accounting information is limited because it is provided on a historical cost basis, rather than a current (replacement) cost basis.  Further, although the ACCC has discretion to publish some of that information, this discretion is subject to certain criteria and procedural requirements contained in section 151BUA.  The ACCC has not, to date, published any of the information it has received under its RKR powers. 

Telstra has substantial power in a number of telecommunications markets.  There has been concern in the industry about the lack of transparency of Telstra’s costs and revenues in relation to ‘bottleneck’ services in the market.  In particular, Telstra’s competitors, who rely on Telstra for the supply of essential services, have expressed concern about the lack of transparent cost information to satisfy themselves whether Telstra is engaging in anti-competitive pricing practices.

The current arrangements are deficient in that the information provided is not based on current costs and does not require publication of any information by the ACCC.  Consistent with the recommendation of the PC, the Minister, in his media releases of 24 April and 24 September 2002, indicated that the Government would be encouraging greater transparency through accounting separation of Telstra’s wholesale and retail operations.

Objective

The objective of the enhanced accounting separation and reporting arrangements is to promote competition by better informing the regulator and the market about relevant costs and revenues of Telstra, on a current cost basis, and its comparative treatment of its retail arm vis-à-vis its competitors.

The enhanced arrangements will also bring Australia more into line with regulatory arrangements applying in telecommunications markets around the world, including the United Kingdom, United States, and some European Union countries.

Options

In March 2003, the Minister released a draft direction for public consultation.  The key components of the Draft Direction are:

• Enhancement of the existing accounting separation regime to require Telstra to provide, every 6 months, the ACCC with current cost information, with reconciliations to the historical cost information it also supplies;
• Requirement for Telstra to provide, on a quarterly basis, the ACCC with detailed imputation information in relation to each of its retail services which makes extensive use of the essential services which it also supplies to its competitors.

• Requirement for the ACCC to publish:

-            Telstra’s current cost financial statements relating to core declared services;

-            the ACCC’s imputation or margin analysis of the information relating to retail services making extensive use of the core declared services; and

-            comparative information on Telstra’s non-price performance in relation to the supply of services by its own retail arm vis-à-vis the supply of the comparable services by its wholesale arm to its competitors.

• Requirement for the ACCC to report to the Minister every 6 months on the level of competition in the corporate customer group, an area susceptible to the exercise of market power.  The Minister must table a copy of every report in each House of Parliament within 15 sitting days after receiving each report (ss.151CMA(4) of the Act).

The following three options were considered to implement the statutory obligation on the Minister to issue a Direction to the ACCC in relation to Telstra’s wholesale and retail operations:

1.      Issue a Direction consistent with the draft accounting separation released for public comment - ie, require preparation of current cost accounts, publication of historic / current cost accounts in respect of core services, preparation and publication of imputation analysis reports and reports on non-price performance, as well as 6 monthly reports on competition in the corporate sector.

2.      Issue a Direction which imposes minimum reporting and disclosure obligations and largely relies on existing regulatory mechanisms – ie, require the publication of existing historic cost financial information for core services and address concerns about anti-competitive behaviour through existing case by case ACCC investigations and general reports on competition in the telecommunications industry.

3.      Issue a Direction which imposes increased reporting and disclosure requirements from those provided in the published draft Ministerial direction – ie: require publication of current cost accounts for all wholesale / retail services, which disclose underlying detailed financial and traffic information; require publication of more disaggregated information for imputation analysis and performance of non-price terms and conditions, as well as 6 monthly reports on competition in the corporate sector.

Impact Analysis

Option 1

Option 1 will substantially increase the level of information about Telstra’s wholesale and retail activities that is provided to the ACCC, Telstra competitors and the market, without requiring Telstra to establish new information systems or to publish detailed commercially sensitive information.  In particular, preparation of current cost accounts, disclosure of those accounts for core services, and publication of the imputation analysis and performance against non-price terms and conditions will provide transparency as to whether there are systemic concerns about anti-competitive behaviour in the supply of wholesale services to competitors who access Telstra’s fixed line network.  However, there will be some one-off costs associated with the need to identify and revalue assets and classes of assets.

As outlined above, the proposed enhancement of the current RAF reporting arrangements in respect of Telstra will provide significant benefits in terms of a more transparent market and better informed regulatory decisions.  These benefits, which are expected to significantly outweigh any costs, are categorised below in terms of industry, consumers, regulatory bodies and investors.

Industry

The enhanced transparency will deter anti-competitive behaviour, facilitate its detection, increase market confidence, encourage investment as a result, increase overall industry efficiency and benefit consumers.  The costs to industry relating to regulatory compliance, including arbitration and enforcement, are also expected to decline as a more transparent framework reduces the need to resort to regulatory measures.  Overall regulatory compliance costs are likely to be reduced in the long-run.

A more competitive industry is promoted by ensuring current and potential competitors of Telstra have access to adequate information.  The consequent reduction of uncertainty of outcomes would increase confidence and expedite strategic decision-making.

The level of information that would be available to industry and the market strikes a balance between providing sufficient information to enable meaningful analysis and revealing commercially sensitive information.

Telstra

The proposed Direction is outcomes based and specifies the reports that are required to be produced.  The level of costs will depend on the specific RKRs developed by the ACCC.  For example, the precise costs of revaluing assets will depend to a large extent on the asset valuation methodology specified.  It is expected that the level of costs will be examined in further detail in an implementation Regulatory Impact Statement (RIS) relating to the detailed RKRs.

Telstra currently collects financial and other information to prepare reports for internal purposes, Corporations Act purposes and the telecommunications-specific regulatory accounts (the Regulatory Accounting Framework (RAF)).

The RAF requires Telstra to provide revenue and cost information for wholesale and retail services to the ACCC on a historic cost basis using General Ledger information that has been prepared for Corporations Act purposes.  Under this option, Telstra would use the existing RAF information system and data to produce the key transparency components.

The proposals in the proposed Direction would require Telstra to enhance the financial information currently prepared for the existing historic cost RAF regulatory accounts by preparing current cost accounts that are derived from the existing historic cost accounts.  For this purpose, Telstra would need to revalue its assets on a current cost basis.  Both the existing historic cost and proposed current cost reports would be required to be provided at the same time on a 6 monthly basis. There is expected to be additional one-off costs to Telstra of providing information on the current costs of some of its long-held assets, although this has not been quantified and will depend on the asset valuation methodology adopted.

The information used for the proposed imputation analysis would be derived from the current cost accounts and actual pricing inputs for the supply of wholesale inputs to access seekers.  Telstra will not be required to collect information on a more regular basis than currently occurs.

The information used to prepare non-price performance reports would be derived from existing internal reports and information systems.  Telstra will not be required to collect information on a more regular basis than currently occurs.

Telstra will not be required to alter its internal or Corporations Act accounting and other information systems to generate the required information systems, although some enhancements will be required to the existing RAF.

Consumers

Increased competition is likely to result in lower prices, greater innovation and better quality of services for consumers. 

Regulatory bodies

The ACCC is currently required to analyse and publish accounting information provided by Telstra under the RAF on a 6 monthly basis and is in the process of developing a disclosure regime.  Current cost information would be provided with existing RAF reports and it is not expected that there will be substantial additional costs to the ACCC in retrieving, analysing and publishing current cost information.

The quarterly imputation analysis will draw on existing and current cost information.  The 6 monthly report on the corporate market sector will be developed from existing information, but will be required to be analysed and published.   It is not expected that the increased obligations imposed by the enhanced regime will constitute a substantial increase in ongoing costs to the ACCC.  Additional costs should also be offset by the reduced need to seek additional information (such as any investigation or imputation analysis required under the anti-competitive conduct provisions of Part XIB of the Act).

The need for regulatory decisions is likely to be reduced and their effectiveness improved with holistic accounting information based on current costs.

Investors in telecommunications services

A better informed market, and expectations of more effective regulation will engender greater confidence in existing and potential investors in telecommunications services.

Option 2

Option 2 would have the benefits of minimal compliance costs while providing some increased transparency.  However, it would not provide information on the current (replacement) cost of Telstra’s services.  A high proportion of Telstra’s assets are carried at historic cost and have been ‘written off’ the accounts (ie carried a nil value).  This does not reflect the costs of having to allow for their replacement in the future and so does not accurately reflect the costs of the company on an ongoing basis.  In the absence of imputation analysis and non-price comparisons, industry and the market will not have confidence that Telstra is not engaging in price squeezing or treating itself more favourably than it treats its external wholesale clients.  Confidential case by case analysis by the regulator and general reports on competition may not provide confidence to the market that there is no systemic emerging patterns of anti-competitive behaviour in the market place.

Industry would welcome increased transparency, but would be likely to argue that the level of transparency is insufficient and does not address concerns raised about pricing practices and performance in relation to non-price terms and conditions.  Although there would be no increase in compliance costs under this option, Telstra has argued that historic cost information, which does not reflect the current replacement values of its long lived assets, can be misleading.  This option does not increase the level of information available to the regulator. Investment in telecommunications services is likely to remain largely unchanged.  To the extent that release of historic cost information results in increased competition, consumers are likely to be better off, with benefits to the broader economy.

Option 3

Option 3 would greatly increase the amount of detailed information available to Telstra’s competitors and the market generally.  However, it would impose significant additional costs to Telstra as it would need to develop and implement new disaggregated accounts (and associated information systems) to address the increase in detailed information requirements.  Disclosure of detailed, commercially sensitive information would also unfairly impact on Telstra’s legitimate commercial interests and, in the longer term, may also dampen competition in the market and reduce industry investment.

Telstra’s competitors would welcome increased transparency.  There is however a risk that exposure of commercially sensitive information would result in a focus on price based competition, rather than quality of service (including price) competition. Telstra could be worse off, as competitors focus on the more profitable sectors of the market.  This option does not increase the amount of information available to the regulator (which can obtain this information under existing provisions, although with different disclosure arrangements).  To the extent that innovation and service quality is diminished, investment in telecommunications services may decrease and could result in consumers and other parts of the telecommunications industry (eg retailers and suppliers) being worse off.

Consultation

Stakeholders

The key stakeholders with an interest in these matters are:

•      carriers;
•      carriage service providers;
•      consumers;
•      current and potential investors in telecommunication services; and
•      the ACCC.

Process

The Government consulted with a range of interested parties, including carriers, carriage service providers and the ACCC, and asked for their comment.  In addition, public hearings were held by the Senate Legislation Committee for Environment, Communications, Information Technology and the Arts, at which representatives of key players in the telecommunications and broadcasting industries made written submissions and gave evidence on the Telecommunications Competition Bill 2002.  The Australian Consumers’ Association and the Australian Telecommunications Users’ Group also made written submissions. 

A draft of the proposed Direction was released on 20 March 2003 inviting submissions by 2 May 2003.  Submissions were received from telecommunications carriers, including Telstra; the Australian Telecommunications Users’ Group; and the Australian Consumers’ Association.

Telstra broadly supports the proposed enhancements to the accounting separation and reporting requirements and submitted that the proposals canvassed in the draft Direction were sufficient to address industry concerns, but did seek a higher level of aggregation of information to be provided to the ACCC; a reduction in the amount of information to be published; and more gradual implementation. 

Other market participants were broadly supportive of the initiative.  Some market participants and consumer organisations, however, considered they did not go far enough, particularly in relation to bundling possibilities. They sought a higher level of disclosure, further disaggregation of data, and faster implementation.

The ACCC supports the preferred option.

Conclusions and Recommended Actions

Option 1 enhances the information provided to the regulator by providing information relating to the current replacement cost of the assets that underpin Telstra’s services.  Publication of this information in relation to the core network services (ie those relating to Telstra’s fixed line network) will provide information to the market.  Imputation analysis and non-price performance reports will indicate that Telstra is not engaging in anti-competitive price squeeze behaviour and that it is treating access seekers on a similar basis in relation to services as it treats itself.  A report on activity in the corporate market sector will provide early identification of any emerging trends or systemic discrimination.  This option is broadly supported by industry, including Telstra.  Compliance costs are minimised by building on the existing framework provided by the RAF.

Although Option 2 has relatively minimal compliance costs, it does not achieve the necessary level of transparency and reporting arrangements required to promote competition by better informing the market and the regulator.  Increased competition will benefit the consumer, industry and the broader economy.  This option is unlikely to be supported by industry, including Telstra (albeit for different reasons), the potential benefits to consumers are unlikely to be as significant and it provides no additional information to the regulator (than it currently receives).

Option 3 would impose significant compliance requirements on Telstra by requiring it to develop new and more detailed set of accounts and associated information systems for review.  The release of commercially sensitive information may impact on Telstra’s ability to compete in the market and potentially reduce innovation and quality of service to consumers and decrease investment signals.  This option is likely to be supported by Telstra’s competitors.  However it is possible that consumers and other parts of the telecommunications industry may be worse off if it results in dampening of competition.  The regulator is already able to obtain this information under existing provisions (although with different disclosure arrangements).

Option 1 strikes the appropriate balance between providing sufficient meaningful information to the market, and avoiding the disclosure of commercially sensitive information and compliance costs.  It is recommended that Option 1 be adopted.

Implementation and Review

The Direction is made by the Minister under subsections 151BUAA(1), 151BUAA (1B), 151BUAAA and 151CMA (1) of the TPA and will commence upon gazettal. The ACCC will use its RKR powers under Divisions 6 and 12A of Part XIB of the TPA to implement the proposed accounting separation and reporting requirements.  It is expected that a RIS will be prepared to assess the impact of the implementation of the RKRs.

The Government will monitor the operation of the Direction.  Under subsection 33(3) of the Acts Interpretation Act 1901, the Direction can be revoked or varied at any time by another disallowable instrument made by the Minister in the same manner in which the Direction was made.

Measuring effectiveness

The effectiveness of the direction will be measured by assessing, among other things, the following:

• the level of credible transparency in the market;
• the level of compliance by Telstra, as assessed by the ACCC and the market;
• Whether the ACCC and the market consider Telstra’s current cost accounting information is accurate and cost allocation satisfies generally accepted accounting principles;
• Whether the ACCC considers adequate margins are available to access seekers for retail services they provide in competition with Telstra (utilising the core services supplied by it);
• Whether competition in the corporate market is effective; and
• Whether Telstra is discriminating in favour of its retail arm in the non-price dimension of competition in the supply of services to access seekers.