Carrier Licence Conditions (Network supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No. 1 of 2016)

Explanatory Statement

Telecommunications Act 1997

Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No.1 of 2016)

Issued by the Authority of the Minister for Communications

Purpose

The Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No.1 of 2016) (the Amending Declaration) is made by the Minister for Communications under subsection 63(5) of the Telecommunications Act 1997 (the Act).

The purpose of the Amending Declaration is to extend the expiry date of the Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (the Original Declaration) by 18 months. The Amending Declaration also removes some provisions which are now spent because of the passage of time and introduces additional reporting requirements to bolster compliance and enforcement.

The Amending Declaration is a legislative instrument for the purposes of the Legislation Act 2003 (paragraph 13(1)(b)).

Background 

On 31 December 2014, the then Minister for Communications (the Minister) made the Original Declaration to impose functional separation and wholesale supply obligations on carriers that extended existing fixed-line networks to supply superfast carriage services to residential customers, but were not subject to similar obligations in Parts 7 and 8 of the Telecommunications Act 1997 (the Act). The Original Declaration addressed concerns that vertically integrated networks could create local access bottlenecks that impede effective retail competition and that such operations therefore have an unfair competitive advantage over other networks that are subject to the rules in the Act.

The Original Declaration was  intended to be a transitional measure pending the passage of new legislation announced in the Government’s December 2014 Telecommunications Structural and Regulatory Reform policy statement. Consequently, the Original Declaration expires on 31 December 2016. As the legislation is still being finalised, the Minister has decided to extend the Original Declaration to avoid a period in which there is no regulatory coverage. The Amending Declaration also makes a number of changes to the Original Declaration, including removing spent provisions and adding new reporting requirements to improve transparency and compliance with, and enforcement of, the requirements under the Original Declaration.

Regulation Impact Statement

Context

Introduction  

On 31 December 2014, the Minister for Communications (‘the Minister’) made the Carrier Licence Conditions (Networks Supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (CLCs). The CLCs impose functional separation[1] and wholesale supply obligations on carriers who extend existing networks to supply superfast carriage services[2] to residential customers, but who were not otherwise subject to similar obligations in the Telecommunications Act 1997 (the Act). The CLCs addressed concerns that vertically integrated networks could create local access bottlenecks that impede effective retail competition and that such operations would be at a competitive advantage relative to other networks already subject to similar rules.

The Minister is now considering whether to extend the CLCs, which expire on 31 December 2016. The CLCs were originally intended to be transitional measures pending the passage of new legislation announced in the Government’s December 2014 Telecommunications Structural and Regulatory Reform policy statement.[3] That statement set out a number of proposed changes to the separation arrangements in Part 8 of the Act, which include retaining the default requirement for structural separation but allowing for functional separation subject to authorisation by the ACCC to facilitate commercial flexibility. However, the passage of legislation has been delayed.

This regulatory impact statement (RIS) examines extending the licence conditions by a short period to ensure there are appropriate separation rules to address the competition issues above and there is no regulatory gap before the Act can be amended. It also considers whether additional measures should be put in place to improve transparency that regulatory objectives are being achieved.

An early assessment RIS was first prepared by the Department in July 2016, following which the Office of Best Practice Regulation (OBPR) decided that a standard form RIS should be completed. The version of the RIS released for public consultation was provided to the Minister to consider in September 2016. The Minister approved that RIS and a draft instrument for consultation, which occurred in October and November 2016. This version of the RIS has been prepared for the Minister to consider, along with submissions on the instrument, in reaching a final decision on whether or not to extend the CLCs.

The original RIS for the CLCs (‘the 2014 RIS’) identified a number of competition concerns arising from vertically integrated networks. The key concern is that in situations where there is an infrastructure access bottleneck, the firm controlling the network has the incentive and ability to deny access to would-be competitors and potentially favour its downstream operations over those of its competitors. These concerns can be addressed by separation rules in relation to network and retail operations. However, such rules can have efficiency impacts for the regulated firms, for example, in terms of reduced co-ordination between retail and network operations, increased transaction costs, regulatory compliance costs and reduced economies of scope. A key issue, therefore, is the trade-off between the benefits of separation rules for competition and the potential impacts on efficiency.

The superfast network rules 

In March 2011, the Parliament enacted legislation (Parts 7 and 8 of the Act) to require new networks that were able to provide download speeds of more than 25 Mbps (‘superfast networks’) to residential and small business customers to operate on an open access, wholesale-only and non-discriminatory basis. The networks were also required to offer a Layer 2 [bitstream] wholesale service.[4]

These requirements were very similar to those applying to NBN Co and were intended to ensure that new networks that are built provide consumers with a choice of competing retail service providers and the benefits of competition, in terms of service innovations and lower retail prices.  As such they sought to provide consumers with the same types of outcomes that they should enjoy on the NBN.  The rules were also intended to create a more level regulatory playing field for NBN Co, enabling it to compete more effectively in the provision of infrastructure.  As a result of this, NBN Co would also be better able to cross-subsidise loss-making services, as required by the previous Government’s operational model for the NBN. The current Government now intends that these loss-making services be funded by a transparent, competitively neutral industry subsidy scheme, pending new legislation announced by the Government’s December 2014 policy statement.

The superfast network rules involve a number of exemptions. One exemption applies to network operators who extend superfast networks that existed before 1 January 2011 by less than 1km (the statutory 1km exemption). This was intended to permit existing networks to be extended on a limited basis. The intention was that new networks, and any substantial extensions of existing networks, targeting residential or small business customers should be subject to the new rules.

Following the implementation of the superfast network rules, TPG announced it would use its existing business networks to supply superfast services to residential customers on a vertically integrated basis using the 1km statutory exemption. The Government noted that a number of carriers could similarly use the exemption to roll out large scale networks that were not subject to Parts 7 and 8 of the Act. This raised competition concerns that the carriers would have the incentive and ability to deny access to would-be competitors and potentially favour their own downstream operations over those of their competitors. This was contrary to the intent of Parts 7 and 8. Consequently, the CLCs were made in December 2014 to address these concerns, pending the enactment of new legislation.

The Government is developing legislative reforms to Parts 7 and 8 of the Act that will retain the default requirement for structural separation of new superfast networks, but allow network operators to operate on a functionally separated basis if authorised by the ACCC. This will provide commercial and competitive flexibility while continuing to address the competition concerns arising from vertical integration.

The Carrier Licence Conditions 

The CLCs subject carriers operating a ‘designated telecommunications network’ to a number of new wholesale supply and separation obligations if they do not operate those networks on a wholesale-only basis. A designated telecommunications network is defined as that part of a fixed-line telecommunications network made up of local access lines, or parts of local access lines, that are used, or are technically capable of being used, to supply superfast carriage services to residential customers.

Key to the CLCs’ new obligations is subsection 6(6), which sets out the conditions relating to functional separation. The overarching principle of subsection 6(6) is that a specified carrier’s retail company cannot supply eligible services it receives from the wholesale company unless those services are also offered by the specified carrier’s wholesale company to other carriers and carriage service providers on the same terms and conditions. This requires carriers not operating designated telecommunications network on a wholesale-only basis to separate their business into a retail company and a wholesale company. The CLCs allow for functional separation instead of structural separation (as with Part 8) to afford carriers greater flexibility while still addressing the fundamental competition concerns.

Subsections 6(7) and 6(8) of the CLCs set out conditions relating to access obligations. Subsection 6(7) provides that where a Layer 2 Wholesale Service is not a declared service, a specified carrier must offer to supply, upon reasonable request by another carrier or carriage service provider, a Layer 2 Wholesale Service using the designated telecommunications network. This is based on the basic service that must be offered under Part 7 of the Act. Subsection 6(8) sets the maximum price of $27 per month (exclusive of GST) for the supply of the Layer 2 Wholesale Service. The price is based on the price that the ACCC set under its declaration of the Local Bitstream Access Service in respect of networks subject to Parts 7 and 8 of the Act.

Carriers subject to the CLCs were required to register with the ACCC. To date, no carrier has registered, meaning that all designated networks must now be operating on a wholesale-only (structurally separated) basis or are operating in breach of the CLCs. TPG advised, early in 2015, that it had disposed of its retail business, meaning it was operating the network concerned on a wholesale-only basis and did not need to comply with the functional separation obligations under the CLCs. It has since created a functionally separate wholesale company to supply wholesale Layer 2 services.[5]

This suggests that the CLCs have been successful in supporting competition by regulating vertical integration. However, there have been calls for improved transparency to support commercial decision-making, compliance and enforcement. For example, a number of carriers, have raised concerns with the Department about compliance with the CLCs. Industry uncertainty around whether businesses that are subject to the CLCs are complying with them can affect commercial decision-making and in turn have a negative effect on competition. New transparency obligations would address this by improving confidence about compliance with the CLCs and better enable the ACCC to investigate potential claims of non-compliance. Additional information about networks operating under the CLCs will also help commercial decisions about using such networks.

Superfast Broadband Access Service Declaration 

Part XIC of the Competition and Consumer Act 2010 (CCA) sets out the telecommunications access regime. Under Part XIC, the ACCC can ‘declare’ access to telecommunications carriage services if it is in the long term interest of end-users. Declaring a carriage service has the effect of obliging carriers to supply wholesale services if they operate a network that is capable of supplying that service. Declaring superfast carriage services would address the supply concerns covered by the CLCs in the long term.

On 11 September 2014, the ACCC commenced a declaration inquiry into whether a superfast broadband access service (SBAS) should be regulated under the CCA. Superfast broadband access services are fixed-line services with a downstream data rate of at least 25Mbps that are provided using certain technologies. On 29 July 2016, the ACCC declared SBAS and made an interim access determination (IAD). This requires carriers operating certain superfast networks to supply SBAS over their networks, including networks that would be subject to the CLCs. As a result, subsections 6(7) and 6(8) now operate subject to the SBAS declaration, although networks with fewer than 20,000 services in operation are exempted from the declaration.

As noted in the 2014 RIS, ACCC declarations can establish wholesale supply obligations, but cannot impose separation or non-discrimination requirements, which means that they cannot address the competition issues posed by vertical integration. ACCC access determinations can set out price and non-price terms and conditions for supply of declared services, which ensures that baseline price and non-price terms and conditions are available to access seekers. However, where the access provider is also vertically integrated, the access provider will still have significant ability and incentive to favour its own retail operations. For example, vertically integrated access providers can delay access to facilities or declared services by access seekers, delay providing access seekers with information about new products, network upgrades or other changes, or impose higher costs (noting that SBAS does impose a price cap). As a result they can continue to gain a competitive advantage from integration. This can particularly effect consumers that have subscribed to the access seekers that are being discriminated against, because they can experience service delays, inferior service offerings and higher costs compared with consumers that subscribe to the access seeker being favoured. Vertical integration also affect consumers as a whole because favouring some access seekers over others compromises the competitive process. As a result, the declaration of SBAS does not fully address the competition concerns identified in 2014.

Defining the problem

The CLCs were intended as a short term measure, having been originally planned to remain in place for two years and expire by 31 December 2016, while legislation was developed and passed by the Parliament. However the Government’s proposed long-term reforms to introduce functional separation obligations, which were planned to take effect on
1 January 2017, have been delayed and are yet to be introduced into the Parliament. They cannot now be considered by the Parliament before 1 January 2017. This means that the CLCs could expire before the new legislation can take effect. If the licence conditions are allowed to lapse, there is a risk that carriers could extend superfast networks on a vertically integrated basis and re-open the competition issues relating to vertical integration that the CLCs were put in place to address.

This regulatory impact statement addresses the question of whether to extend the CLCs by a short period to ensure there are appropriate separation rules to promote competition and there is no regulatory gap before the Act can be amended. It also considers whether additional measures should be put in place to improve transparency that regulatory objectives are being achieved. Such measures would aim to clarify how carriers who are subject to the CLCs, but have adopted wholesale-only models, are operating, promoting certainty for the sector.

Overview of options

Four options are examined in relation to the problems identified.

Option 1. Do nothing. The existing CLCs would expire and carriers would no longer be required to implement functional separation of networks subject to the CLCs. Any long term solutions would depend on the passage of legislation, which is discussed under Option 4.

Option 2. The Minister could extend the CLCs for 18 months (i.e. to expire on 30 June 2018) until legislative changes are passed. Some minor changes could be made to remove spent provisions. The CLCs would continue to require those carriers not subject to Parts 7 and 8 of the Act that supply superfast carriage services to residential customers to establish functionally-separated retail and wholesale units, with the wholesale unit required to offer the services to the retail unit, other carriers and service providers on the same terms and conditions.

Option 3. The Minister could extend the CLCs for 18 months as proposed in option 2, and amend the CLCs to:

• remove spent provisions; and
• include additional transparency obligations covering carriers who own or control designated telecommunications networks.

The additional provisions would ensure that carriers that are subject to the CLCs but are operating on a wholesale-only basis confirm to the Minister and the ACCC that they are not supplying wholesale services to associated service providers. They would also require them to provide information on their network coverage, wholesale services on offer and service terms and conditions.

Option 4. Implement legislative changes in line with the Government’s December 2014 policy statement before the CLCs expire. This would involve repealing Part 7 and amending the wholesale-only rules in Part 8 to reset the basic requirement of structural separation and allow the ACCC to authorise functional separation.

In all instances, access to specific services on high-speed broadband networks would be dealt with by Part XIC of the CCA through the ACCC’s SBAS declaration.

Regulatory impacts of options

The four options have been assessed against the following criteria:

• Does the option promote investment in, and consumer access to, superfast broadband?
• Does the option allow operators to achieve efficiency gains through integrated operation?
• Does the option address competition concerns in relation to vertically integrated networks?
• Does the option promote a level regulatory playing field between market players?
• Does the option impose ongoing or one-off compliance costs on a carrier?

The assessment considers the impacts on different stakeholders, including consumers and industry (including NBN Co).

Option 1 – Do nothing – allow the CLCs to expire

Option 1 has the following advantages: 

• A limited number of carriers might extend networks by less than 1km on a vertically integrated basis. This could promote some additional investment in new superfast broadband infrastructure and provide some end-users with earlier access to superfast carriage services than may otherwise have been the case.
• Option 1 would enable any efficiency gains achievable through more integrated operations to be captured by those with networks that were otherwise caught by the CLCs.
• As the CLCs would automatically lapse, the option could be implemented quickly and with no administrative costs and would provide industry with some legal certainty.

The option has the following disadvantages:  

• Vertically integrated operators could favour their downstream operations over those of competitors seeking access to the network. This could limit the degree to which competition provides benefits to consumers.
• Incumbent carriers with pre-2011 infrastructure could extend their networks by less than 1km on a vertically integrated basis, giving them an advantage over new market participants that would not have this option and who have to invest on a structurally separated basis.
• NBN Co may face greater competition in some areas, and if this reduces its revenues, this could place pressure on its ability to cross-subsidise service provision for regional end-users.
• Given that the Government has indicated that it will seek to introduce legislation along the lines set out in the CLCs, industry would face the uncertainty of another potential regulatory change in the short term.

The extent to which Option 1 would promote investment is unclear. Only a limited number of carriers with pre-2011 infrastructure would be able to take advantage of the change. Moreover, under the CLCs, TPG has continued to expand its fibre-to-the-basement network in major capital cities on a separated basis. In December 2014, the network was present in a small number of buildings. In early 2015 it was present in over 600 buildings. By August 2016, the network had reached over 1,500 buildings with further expansion planned.[6]

Data from other countries – the United Kingdom, New Zealand and Singapore - that have introduced functional separation of major telecommunications networks also show that network investment has continued after separation.[7]

Similarly, it is unclear that greater vertical integration would lead to significant efficiency gains. For Singapore, data provided to the Department of Communications and the Arts by the Infocomm Development Authority show that retail prices on the separated next generation national broadband network have fallen on an annual basis since it was completed in 2010. In the United Kingdom, the average price of a broadband package decreased by
48 per cent between 2004 (when functional separation was introduced) and 2012, facilitated by greater non-discriminatory access to unbundled local loops.[8] In Australia, retail broadband prices on TPG’s fibre-to-the-basement network have been stable since the CLCs were introduced.[9]

Given these data, it is unlikely that there would be a delay in the roll-out of superfast carriage services to some end-users whether the CLCs are extended or not. However, if designated networks are not subject to non-discrimination and separation obligations, they would be able to favour their own retail operations over those of wholesale customers. This would be likely to lead in the longer term to a lack of choice and differentiation for end-users at the retail level, as retail competition on the quality and price of services would be impeded. 

Given the information on pricing overseas following the introduction of separation and non-discrimination obligations, option 1 could also lead to an increase in retail prices for end-users. This is because, as argued in the original RIS, carriers operating networks that are currently subject to the CLCs could discriminate in favour of their downstream retail operations, raising costs for their wholesale customers and, over the medium to long term, delivering prices that do not reflect effective competition. While this could be mitigated to some extent by the ACCC’s declaration of SBAS, declaration only deals with the one service (SBAS) and not all eligible services supplied on a network. Furthermore, declaration, as noted above, does not prevent discrimination by the network operator in favour of its own retail operations, for example, delaying access requests, withholding information from certain access seekers and raising costs.

The regulatory burden measurement for this option is at Annex A.

Option 2 – Extend the Carrier Licence Condition

Option 2 has the following advantages: 

• The option addresses the concerns about the competitive impact of vertical integration by ensuring that access seekers will have access, on a non-discriminatory basis, to services.
• Incumbent carriers with pre-2011 infrastructure would not be advantaged over new market participants that can only enter the market on a structurally separated basis.
• There would be scope for affected operators to capture some efficiency gains, for example, through greater co-ordination of retail and network operations, which might result from more integrated operation as a result of functional separation. These efficiencies would be shared with other retail access seekers who need to be treated on a non-discriminatory basis.
• NBN Co would operate on a more level regulatory playing field, reducing pressure on its revenues and its ability to cross-subsidise service delivery for regional end-users.
• Network operators and retail service providers who have planned on the basis of the CLCs and replacement legislation could continue to operate as planned.
• No carriers would have to take action if the CLCs were extended because they would effectively be carrying on under their current business models.

Option 2 has the following disadvantages: 

• To the extent the rules discourage investment, there may be a limited impact on investment and earlier access to superfast broadband for some consumers. However, as discussed under Option 1, the impact on investment is expected to be limited.
• To the extent that functional separation has an impact on business efficiency, there may be additional transaction costs for the separate entities and these would continue to be passed on to end-users. Again, however, as discussed under Option 1, the extent of such potential efficiency losses appears to be limited.

The regulatory burden measurement for this option is at Annex A. 

Option 3 – Extend the Carrier Licence Condition with added transparency measures

Option 3 has similar advantages to option 2, given it is a variation of that option:

• The option addresses the concerns about the competitive impact of vertical integration by ensuring that access seekers will have access, on a non-discriminatory basis, to services.
• Incumbent carriers with pre-2011 infrastructure would not be advantaged over new market participants that can only enter the market on a structurally separated basis.
• There would be scope for affected operators to capture some efficiency gains, for example, through greater co-ordination of retail and network operations, which might result from more integrated operation as a result of functional separation. These efficiencies would be shared with other retail access seekers who need to be treated on a non-discriminatory basis.
• NBN Co would operate on a more level regulatory playing field, reducing pressure on its revenues and its ability to cross-subsidise service delivery for regional end-users.
• Network operators and retail service providers who have planned on the basis of the CLCs and replacement legislation could continue to operate as planned.
• No carriers would have to take substantive action if the CLCs were extended because they would effectively be carrying on under their current business models.
• The proposed transparency obligations would provide new visibility and confidence that the rules were working to support fairer competition. Industry would have greater confidence that a competitor was complying with the law. End-users would be able to know whether they could have a choice of retail provider if they are served by networks subject to the obligations.
• The proposed transparency obligations would also make more information available for industry and regulators. This would afford would-be access seekers greater information for commercial decision-making and improve enforcement by better enabling the ACCC to investigate potential claims of non-compliance.

Option 3 has similar disadvantages to option 2, with the additional implications of the proposed new transparency rules.

• To the extent the rules discourage investment, there may be a limited impact on investment and earlier access to superfast broadband for some consumers. However, as discussed under Option 1, the impact on investment may be minor.
• To the extent that functional separation has an impact on business efficiency, there may be additional transaction costs for the separate entities and these would continue to be passed on to end-users. Again, however, as discussed under Option 1, the extent of such potential efficiency losses appears to be limited.
• The new transparency obligations involve a new regulatory burden, however the associated costs are likely to be negligible because carriers would only have to sign a declaration and provide information which should already be collected in the ordinary course of business. The Department estimates that this work will take about 15 hours a year to complete for each carrier that is affected. This equates to a regulatory burden of about $980 per year per affected carrier. We estimate that there are at most four carriers that are likely to need to provide additional information.

The regulatory burden measurement for this option is at Annex A.

Option 4 – Legislation to address the issue

Option 4 has similar advantages and disadvantages to options 2 and 3. The key difference is that under option 4, legislation would need to be passed by the Parliament before the CLCs expire. This is not achieved realistic proposition, given the short time remaining before the CLCs expire and competing legislative priorities. Consequently, in the short term, this option presents the same outcomes as option 1. In the longer term it presents the same outcomes as option 2. The new regulatory approach would also address the transparency issues targeted under option 3.

The regulatory burden measurement for this option is at Annex A.

Selecting the best option

The preferred approach is option 3. Extending the CLCs in the short term will address the fundamental policy issue that carriers rolling out substantial extensions of pre-2011 networks can operate on a vertically integrated basis, leading to poor competitive outcomes. It will minimise any impact on NBN Co’s ability to compete on a level playing field and to cross-subsidise it rural and remote networks, pending the enactment of broader legislation to address these issues. It will provide policy and regulatory continuity for market participants, while requiring minimal regulatory adjustments. While there could be potential impacts on network investment and efficiency, these are seen as limited given the number of providers affected, evidence that separation has had limited effects in these areas, and the scope to capture some efficiency gains through functional separation.

The CLCs would apply for an additional 18 month period, subject to the timing of legislative change. Once legislation is in place the Government would adopt, in effect, option 4. As stated in the December 2014 policy statement, the Government will put forward new legislation. This will require new high-speed broadband networks targeting residential customers to be structurally separated as a default. However, carriers would be able to submit undertakings to the ACCC containing functional separation and non-discrimination commitments. The ACCC could then authorise functional separation. This would enable some of the efficiency benefits from vertical integration to be captured while also providing benefits for consumers from more effective retail competition.

Amending the CLCs to include additional transparency obligations covering carriers who own or control designated telecommunications networks would improve transparency and public confidence that competition objectives are being achieved. It would also assist industry with commercial decision making. As stated earlier, compliance with the new provisions is estimated to involve a minor regulatory burden of about $980 per year per affected carrier. This reflects the amount of time estimated to fill in forms and gather information (about 15 hours), multiplied by the wage for work-related labour costs, which is $65.45 per hour.

Consultation

Under section 64 of the Tel Act, before the Minister makes or amends CLCs the Minister must provide a draft of the CLCs to an affected carrier and invite that carrier to make a submission on the draft. As CLCs on superfast carriage services could affect a number of carriers, the Department, on behalf of the Minister, wrote to all licensed carriers in Australia, inviting submissions on the draft CLCs and the early assessment RIS. The Department also placed a copy of the draft CLCs and the early assessment draft of the RIS on the Department’s website for public information and comment.

The Department received submissions from five carriers. Three supported extending the CLCs for 18 months with the inclusion of transparency obligations. Two proposed further reporting measures be included. One argued that the CLCs should provide an exemption for small carriers. The fifth carrier argued that the CLCs should be allowed to lapse on the grounds that they are now redundant following the ACCC’s SBAS declaration.

In finalising the CLC, one change was made to adopt an additional requirement for carriers to report on the total estimated addressable premises technically capable of being served by a designated network. This change will help identify the extent of designated networks and better support commercial decision-making. The Department considered that the additional obligation would not impose any further regulatory burden, as the information to be provided would already be collected by carriers in the ordinary course of business. The information would however be of benefit to would-be access seekers.

The Department decided against including an exemption for small carriers because a small carrier that has installed new local access lines since 2011, and not extended a pre-2011 network by less than 1km, would not be subject to the CLCs but rather the Act, under which they are already able to seek an exemption.

With regard to the submission from the fifth carrier, as outlined earlier in this RIS, the Department does not consider that the SBAS declaration has made the CLCs redundant. The main aim of the CLCs was, and is, to ensure that designated networks are subject to functional separation and non-discrimination obligations. Given that an ACCC declaration cannot impose either of these obligations, the CLCs will be required until the long-term legislative changes are passed in the Parliament.

Implementation and evaluation

Option 3 would be implemented by the Minister extending the CLCs with the proposed amendments. The CLCs would take effect from the day after they are registered on the Federal Register of Legislative Instruments. The CLCs would be a disallowable instrument.

The Government would continue to evaluate the effectiveness of the CLCs, including the nature of any impacts on carriers and on end-users, through its regular monitoring of industry circumstances and liaison with carriers and regulators.

In the long term, the CLCs will eventually be superseded by the legislative amendments detailed in option 4.

Annex A – Regulatory Burden Measurement

The regulatory burden measurement of the different options is set out in the table below.

Assumptions (Option 1)

This option would mean carriers subject to the CLCs would no longer need to comply with the separation rules under the CLCs. These carriers could extend networks on a vertically integrated basis. To the extent that they choose to do so, this could involve some costs, however these would be taken on voluntarily and not imposed by option 1.

Other industry players that have planned on the basis of the CLCs and legislation being enacted may choose to re-assess their future plans. However, any change in plans would be a voluntary decision by the firms involved, noting the Government has indicated it intends to legislate similar rules.

Given these considerations, there is no regulatory burden imposed by this option.

Assumptions (Option 2)

Extending the CLCs would not require carriers to change their current business models. They would be able to carry on ‘as usual’. Consequently, this option would not produce any new compliance costs for industry. As such there is no regulatory burden imposed by this option.

Assumptions (Option 3)

         Extending the CLCs would not require carriers to change their current business models.

         The inclusion of new transparency obligations in the CLCs will impose a minor regulatory burden on 1-4 businesses, that is, those with pre-2011 infrastructure that may be able to take advantage of any relaxation of the rules. Given the approximate cost of compliance is estimated at 15 hours a year per business, this equates to a regulatory burden of about $980 a year per affected carrier. This figure is based on an estimate of the amount of time required to fill in the necessary forms and gather information (estimated at 15 hours), multiplied by the wage figure for work-related labour costs, which is $65.45 per hour.

Assumptions (Option 4)

• The cost to industry of amending legislation to repeal Part 7 and amend the wholesale-only rules in Part 8 will be negligible in this context. The rules have been in effect since 2011, so carriers are already subject to existing structural separation requirements.
• Introducing greater flexibility through allowing functional separation is expected to promote investment by carriers on the basis they have greater commercial and competitive flexibility.

Workings

Regulatory Burden and Cost Offset Estimate Table

The regulatory cost offsets noted in the above table have been identified within the Communications portfolio. These cost offsets relate to the amendments to the International Mobile Roaming Standard (OBPR ID 19650).

Consultation

Section 64 of the Act provides that before making an instrument under subsection 63(5) of the Act, the Minister must arrange for a draft version of the instrument to be provided to the licence holder and invite the holder to make a submission to the Minister on the draft.

Consistent with this requirement, the Department of Communications and the Arts, on the Minister’s behalf, formally wrote to all licensed carriers on 30 September 2016 providing them with a copy of the draft Amending Declaration, and the early assessment Regulatory Impact Statement (RIS), and inviting them to give submissions to the Minister on the draft Amending Declaration and RIS. Copies of the draft Amending  Declaration and RIS were also published on the Department’s website for public comment. Five submissions were received and the Minister has considered each of these. The reporting requirements were amended in light of the submissions. Further information about the submissions is included in the Regulation Impact Statement.

Details of the accompanying Amending Declaration are set out in Attachment 1.

The Statement of Compatibility with Human Rights for the Amending Declaration is set out in Attachment 2.

Attachment 1

Notes on Sections

Section 1

Section 1 provides that the name of the instrument is the Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No.1 of 2016).

Section 2

Section 2 provides that the instrument will commence on the day after it is registered on the Federal Register of Legislation.

Section 3

Section 3 provides the legislative authority for the instrument. The Amending Declaration is made under subsection 63(5) of the Telecommunications Act 1997.

Section 4

Section 4 of the Amending Declaration provides that the Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Original Declaration) is varied in the terms set out in the Schedule to the Amending Declaration.

Schedule to the Amending Declaration

Item 1

Item 1 amends the expiry date set out in section 3 of the Original Declaration. The date is changed from 31 December 2016 to 30 June 2018.

Items 2 and 3

Item 2 inserts a new definition into section 4 of the Original Declaration for the Amending Instrument. This represents a consequential change stemming from the insertion of new subsection 6(5A) which inserts new reporting requirements (refer item 13 below).

Item 3 inserts a new definition into section 4, ‘geographic extent’, a term used in the new reporting requirements.

Items 4 and 5

Item 4 updates the statute name and provision reference contained in the note accompanying section 4 of the Original Declaration. The updated statute title is the Legislation Act 2003 and the new updated provision is paragraph 13(1)(b).

Item 5 makes a consequential change to subsection 4(2) of the Original Declaration by inserting a reference to new subsection 6(5A) which is inserted by item 13.

Item 6

Item 6 removes paragraphs 6(1)(a) and (b) of the Original Declaration as these paragraphs are now spent and no longer required. Paragraph 6(1)(a) required specified carriers to comply with the conditions set out in subsections 6(2) and (3) during the period 1 January 2015 until 30 June 2015. Similarly, paragraph 6(1)(b) required specified carriers to comply with the ‘Layer 2 Wholesale Service’ price conditions set out in section 7 of the Original Declaration between the period 1 January 2015 until 30 June 2015.

Item 7

Item 7 substitutes paragraph 6(1)(c) of the Original Declaration with a new one. The two substantive changes that appear in the replacement paragraph (c) relate to the end date for the condition, which is changing from 1 December 2016 to 30 June 2018, and the inclusion of the reference to new subsection 6(5A) which sets out new reporting requirements.

Items 8, 9 and 10

Item 8 removes the heading of subsection 6(2). Items 9 and 10 respectively remove subsections 6(2) and (3) of the Original Declaration in their entirety. Those subsections both expired on 30 June 2015 and are spent and no longer required. Subsection 6(2) imposed interim wholesale service offering obligations on specified carriers in respect of eligible services supplied using their designated telecommunications networks, and related information supply, facilities access and interconnection. Subsection 6(3) imposed conditions relating to non-discrimination requirements that applied to the supply of services under subsection 6(2).

Items 11 and 12

Item 11 removes the heading of subsection 6(4). Item 12 removes subsection 6(4) of the Original Declaration in its entirety. Subsection 6(4) set out an exception to the non-discrimination obligations under the interim wholesale service supply conditions in subsection 6(2). As noted above, subsection 6(2) is spent, and as a consequence, so is subsection 6(4).

Item 13

Item 13 inserts two new subsections into section 6 of the Original Declaration.

The purpose of these additional reporting obligations in new subsection 6(5A) is to provide greater transparency and improve compliance and enforcement. The Government has also had little information available about the coverage of designated telecommunications networks or the number of carriage services that are being supplied on them. This lack of transparency affects industry members, who are unsure whether designated networks are complying with separation and non-discrimination obligations.

The additional reporting obligations target businesses that are wholesale-only, given that these networks are the ones about which concerns have been raised. In relation to carriers that are operating under a functionally separated basis subject to the CLCs, the ACCC has the ability to require them to provide similar information, if appropriate.

The declaration in new paragraph 6(5A)(b) provides a mechanism to ensure that carriers owning or controlling designated networks are being transparent about whether or not they are supplying retail carriage services through associates.

The new condition in subsection 6(5A) requires any specified carriers whose operations of a designated telecommunications network are conducted on a wholesale-only basis, to provide the ACCC with a statement setting out the following details:

•         the specified carrier’s name and Australian Company Number (ACN);

•         the technology type of the network;                                   

•         the geographic location of the network;

•         total number of carriage services in operation on the network;

•         the estimated total number of addressable premises technically capable of being served by each network; and

•         the names and ACNs of each carriage service provider supplied with eligible services (i.e. wholesale customers) using each network during the particular reporting period.

The statement and declaration must be given by two or more of the carrier’s directors. The statement must be given within 30 days of the Amending Declaration coming into effect, and every six months thereafter, and must be accompanied by a declaration that each designated telecommunications network has not been used by the specified carrier to supply eligible services to any of its associates (i.e. is being operated on a wholesale-only basis). If the ACCC specifies a particular format for the statement, then the carrier will need to ensure that the statement it provides is in the proper form.

The ACCC can use the reports to monitor compliance. The ACCC can publish information to the extent that it is not commercial in confidence, where it considers that it could be of use to the wider industry.

Proposed subsection 6(5AA) provides that the ACCC can specify the format of such reports to ensure they meet its needs and to maintain consistency across carriers.

In sub-paragraph 6(5A)(a)(ii), ‘technology type’ is intended to refer to the particular type of fixed-line network technology that is being employed. For example, the network may be fibre-to-the-premises, fibre-to-the-basement or fibre-to-the-node or some other kind of fixed-line technology type.

In sub-paragraph 6(5A)(iv), premises that are ‘technically capable’ of being served by a designated telecommunications network are intended to be premises that are within the coverage footprint of the network and which have ready access to that network. For example, a specified carrier may have deployed its network to the basement of a multi-dwelling unit. It may then be supplying services to a small number of the total premises in that building, but all the premises may have ready access as they could be readily supplied with a service if the internal cabling in the building is connected by the specified carrier to its equipment in the basement. Similarly, a specified carrier may have deployed a network that runs past buildings which are not connected to its network, but can readily be connected to the network.

Item 14

Item 14 makes a minor textual change to subsection 6(6) by removing text which is considered duplicative of section 5 of the Original Declaration.

Item 15

Item 15 removes the 2016 date references included in subparagraph 6(6)(d) of the Original Declaration. That subparagraph imposes an obligation to report on a specified carrier’s use of shared business and communications systems. In the Original Declaration the reports were required by 31 January 2016 and then on 30 June 2016 and 31 December 2016. Given the 18 month extension to the Original Declaration, these date references are substituted with a more generic requirement to report by each 30 June and 30 December.

Attachment 2

Statement of Compatibility with Human Rights

Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No.1 of 2016)

 This statement of compatibility is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HR Scrutiny Act).

The Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (Amendment No.1 of 2016) (the Amending Declaration) is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the HR Scrutiny Act.

Overview of the Amending Declaration

Licensed carriers are currently subject to two classes of carrier licence conditions: standard licence conditions under the Telecommunications Act 1997 (the Act); and specific licence conditions made by the Minister under section 63 of the Act.

The purpose of the Amending Declaration is to extend the expiry date of the Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration 2014 (the Original Declaration) by 18 months, and to introduce new reporting requirements that improve transparency, compliance and enforcement. 

The Original Declaration was made in December 2014 and imposed functional separation, non-discrimination and wholesale supply obligations on carriers that extended existing fixed-line networks to supply superfast carriage services to residential customers, but were not subject to similar obligations in the Act. The Original Declaration addressed concerns that vertically integrated networks could create local access bottlenecks that impede effective retail competition and that such operations therefore have an unfair competitive advantage over other networks that are subject to the rules in the Telecommunications Act.

The Original Declaration was intended to be a transitional measure pending the passage of new legislation announced in the Government’s December 2014 Telecommunications Structural and Regulatory Reform policy statement. Consequently, the Original Declaration expires on 31 December 2016. As the legislation is still being finalised, the Minister has decided to extend the Original Declaration to avoid a period in which there is no regulatory coverage. The Amending Declaration also makes a number of changes to the Original Declaration, including removing spent provisions and adding new reporting requirements to improve transparency and compliance with, and enforcement of, the requirements under the Original Declaration.

Human rights implications

The Amending Declaration does not engage any of the applicable rights or freedoms.

Conclusion

This Amending Declaration is compatible with human rights as it does not raise any human rights issues.

[1] ‘Structural separation’, which requires market entrants to operate as either wholesale or retail businesses, but not as both, is required under Part 8 of the Act for ‘superfast’ networks. The CLCs put in place ‘functional separation’ for some networks that were exempt from Part 8. Functional separation requires a single corporate entity to separate its wholesale and retail operations into separate companies or business units, while allowing it to retain ultimate control of both.

[2] ‘Superfast carriage services’ are defined in the Act and are essentially carriage services supplied over fixed-line networks that allow end-users to download communications with a download transmission speed of 25 Mbps or more.

[3]https://www.communications.gov.au/sites/g/files/net301/f/Telecommunications%20Regulatory%20and%20Structural%20Reform%20Paper.pdf

[4] ‘Layer 2’ is a commonly-used term in the industry and refers to a particular layer in the network. A Layer 2 service will not have the characteristics of a retail service but forms a ‘raw’ foundation on which a wholesale customer can build retail services such as telephony or Internet access.

[5] Communications Day, ‘TPG’s new functionally separated wholesale arm releases FTTB services: with $4 CVC charge,’ Issue 5195, pp.1-2.

[6] See Communications Day, ‘TPG’s new functionally separated wholesale arm releases FTTB services: with $4 CVC charge,’ Issue 5195, 17 August 2016, p.1

[7] For New Zealand, see Ministry of Business, Innovation and Employment (2016), Telecommunications Act Review: Options Paper, p.5. For the United Kingdom, see Department for Culture, Media and Sport (2016), A New Broadband Universal Service Obligation: Consultation, pp.5-7 (increases in the deployment of superfast broadband infrastructure by the functionally separated network provider, Openreach). For Singapore, see http://www.netlinktrust.com/press/netlink-trust-completes-integration-of-singapores-fibre-assets/.

[8] Ofcom (2015), Cost and value of communications services in the UK, pp.4-5.

[9] In December 2014 TPG charged $69.99 per month for an unlimited broadband service (bundled with a telephone) on its network. Currently, the retail provider to whom TPG disposed of its retail business on the network, Wondercom, charges $69.99 per month for the same bundle (https://www.wondercom.com.au/fttb). Other retail providers on TPG’s network offer similar prices for an unlimited broadband and home phone bundle; for example, ello charges $69.99 per month (http://ello.com.au/), AusBBS charges $64.95 per month (https://ausbbs.com.au/residential/fttb/), nbnSP charges $55 per month (https://nbnsp.com.au/fttb/) and Boom Broadband charges $65 per month (http://boombroadband.com.au/nbn-products/fibre-to-the-building/).