EXPLANATORY STATEMENT
MONITORING AND REPORTING ON COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY DETERMINATION 2003 (NO. 1)
Issued by the Authority of the Minister for Communications, Information Technology and the Arts (the ‘Minister’).
The Monitoring and Reporting on Competition in the Telecommunications Industry Determination 2003 (No. 1) (the Determination) is made under subsections 151CMA(1) and (3) of the Trade Practices Act 1974 (the Act). The Determination requires the Australian Competition and Consumer Commission (ACCC) to monitor and report to the Minister on matters relating to competition in broadband services, as specified in the Determination.
Policy background
In its response to the Productivity Commission report on Telecommunications Competition Regulation the Government foreshadowed the use of existing powers under the Act. Division 12A of Part XIB of the Act requires the ACCC to monitor and report to the Minister on matters relating to competition in the telecommunications industry, as specified in a written determination by the Minister.
The current monitoring and reporting arrangements provide some information on broadband, however, the utility of the information is limited due to timing, scope and confidentiality issues. The proposed enhancement to the current arrangements will bring Australia into line with telecommunication markets around the world including the United States, the United Kingdom and the European Union.
The objective of the enhanced monitoring and reporting arrangements is to provide more information to improve transparency in the market. A more efficient market is also expected to have flow on benefits such as promoting competition and assisting rational investment in the industry. Additionally, the information will be used to evaluate the effectiveness of the Government’s telecommunications reforms and assist further policy development.
The Determination is consistent with previous policy decisions aimed at opening up competition in broadband services. In particular, declaration of the unconditioned local loop service and line sharing has made provision of these services mandatory to competitors and has benefited consumers through access to innovative, flexible broadband services at more competitive prices.
Legislative background
Division 12A of Part XIB of the Act requires the ACCC to monitor and report to the Minister on matters relating to competition in the telecommunications industry as specified in a written determination by the Minister. Section 151CMA and 151CMB, respectively, provide for the Minister to issue a determination for the reports to be publicly released or remain confidential. These provisions also require the Minister to specify the regularity of reporting intervals.
Examples of matters that may be specified in the determination are outlined in section 151CMC as:
- telecommunication charges;
- market participants’ share of the total supply of services;
- market participants’ revenue share of the total supply of services; and
- other quantitative or qualitative indicators of the supply of services.
Notes on Clauses
Clause 1 – Name of Determination
Clause 1 provides for the citation of the Determination as the Monitoring and Reporting on Competition in the Telecommunications Industry Determination 2003 (No. 1).
Clause 2 – Commencement
Clause 2 provides that the Determination commences on gazettal.
Clause 3 – Definitions
Clause 3 contains definitions of terms used in the Determination. Most terms derive from the Telecommunications Act 1997. The term ‘geographic area’ is intended to disaggregate data at an appropriate level to build a picture of competition in broadband services including ‘hotspots’ for demand, identify possible factors driving demand and address social equity issues associated with the digital divide. The ACCC is provided with flexibility to collect data by postcode or at a similar disaggregated level. This approach is intended to enable the ACCC to collect appropriately disaggregated data whilst having regard to compliance costs. The term ‘relevant carriage service provider’ is intended to capture significant market participants without imposing onerous requirements on smaller market participants.
Clause 4 – Matters that the Commission must monitor and report on
Subclause 4(1)
Subclause 4(1) provides that the ACCC is required to monitor and provide quarterly reports to the Minister on competition in the supply of broadband services by relevant carriage service providers as defined in clause 3. The requirement for quarterly reporting is intended to strike an appropriate balance between timeliness and imposing burdensome requirements. In terms of international practice, in the United States the Federal Communications Commission (FCC) reports on a six-monthly basis whilst in the United Kingdom the Office of Telecommunications (OFTEL) issues bi-monthly reports.
Subclause 4(2)
Paragraph 4(2)(a) provides that the ACCC is required to monitor and report on the take-up of retail broadband services supplied by relevant carriage service providers based on a geographic area and further classified by sector, technology type and transmission speed. The collection and publication of this information is intended to improve transparency in the market. The provision of adequate information is a prerequisite to market efficiency. A more efficient market is also expected to have flow on benefits such as promoting competition and assisting rational investment in the industry.
Paragraph 4(2)(b) provides that the ACCC is required to monitor and report on the take-up of retail broadband services supplied by relevant carriage service providers on a sector basis and further classified by technology type, transmission speed and usage. The collection and publication of this information is intended to provide existing and potential market participants with readily available data at an adequate level of granularity to identify ‘hot spots’ for demand in retail broadband services.
Paragraph 4(2)(c) provides that the ACCC monitor and report on the take-up of wholesale broadband services supplied by relevant carriage service providers based on a geographic area and further classified by technology type and the characteristics of the services. The collection and publication of this information is intended to improve transparency in the market. The provision of adequate information is a prerequisite to market efficiency. A more efficient market is also expected to have flow on benefits such as promoting competition and assisting rational investment in the industry.
Paragraph 4(2)(d) provides that the ACCC must monitor and report on the availability of wholesale and retail broadband services supplied by relevant carriage service providers based on a geographic area. This information is further classified by technology type, the characteristics of the services and the number of providers supplying the services. The collection and publication of this information is intended to provide adequate information to assess the effectiveness of the Government’s telecommunications reforms and assist further policy development.
Subclause 4(3)
Subclause 4(3) provides that the ACCC’s first report must be given to the Minister within six months after the commencement of the Determination.
Subclause 4(4)
Subclause 4(4) provides that the ACCC’s reports to the Minister cannot contain any confidential information. ‘Confidential information’ is defined in subsection 151CMA(3) of the Act. Information is considered confidential if, and only if, the publication of the information could reasonably be expected to prejudice substantially the commercial interests of a person. This will ensure that no substantial prejudice to the commercial interests of a person will result from the tabling of the reports under subsection 151CMA(5) of the Act.
REGULATION IMPACT STATEMENT
MONITORING AND REPORTING ON COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY DETERMINATION 2003 (NO. 1)
The Monitoring and Reporting on Competition in the Telecommunications Industry Determination 2003 (No. 1) (the ‘Determination’) is made by the Minister for Communications, Information Technology and the Arts (the ‘Minister’), under Division 12A of Part XIB of the Trade Practices Act 1974 (the ‘TPA’). This Regulation Impact Statement (RIS) identifies the key issues the Determination addresses, the options for addressing them, and explains why the approach has been adopted.
Background
The term ‘broadband services’ is generally used to describe a range of services and technologies that provide consumers with high-speed data connections. Broadband offers customers an 'always on' dedicated digital service, that is principally used for fast Internet access at this stage. Broadband services and technologies are often defined in terms of a capability to transfer information including text, sound and video/graphics, at a higher rate than traditional 'dial-up' services. Broadband services are provided over broadband networks that consist of telecommunications infrastructure owned and operated by carriers.
Broadband services are in their infancy but have the potential to deliver substantial economic and social benefits. The importance of broadband has been recognised by developed nations as a key policy issue. The Government has established the Broadband Advisory Group to provide high-level advice on the development of the broadband market in Australia.
In the market for broadband services there is competition at both the carrier level and the carriage service provider level. This competition exists amongst infrastructure carriers, wholesale broadband carriage service providers and retail broadband carriage service providers. Carriers are the owners or controllers of the infrastructure and carriage service providers deliver services to the public over a carrier’s infrastructure.
Broadband services are now being offered through a variety of technologies including cable modem, asymmetric digital subscriber line (ADSL), satellite and wireless services. This demonstrates that competition exists across a range of markets such as product, service, wholesale, retail and infrastructure.
However, the incumbent through its ownership of the core network dominates the industry. There are a small number of second tier service providers that compete with the incumbent. The industry is also comprised of numerous small providers servicing a particular market niche or geographic region.
Telstra is the largest broadband provider in the market owning both the telephone network used to deliver ADSL and the largest Pay TV cable network used to deliver cable modem services. Optus is the second largest player owning the most substantial local access network other than Telstra’s in its Pay TV cable network.
The telecommunications competition regulatory regime consists of the Telecommunications Act 1997 and the telecommunications specific competition provisions in the TPA. The broad objectives of the regime are to promote the long-term interests of telecommunications users and to encourage further efficiency and competition in the Australian telecommunications industry.
In terms of broadband services, this has been facilitated by the Australian Competition and Consumer Commission (ACCC) declaring the unconditioned local loop service and line sharing. Declaration has made provision of the services mandatory to competitors and has benefited consumers through access to innovative, flexible broadband services at more competitive prices. The Government is of the view that these decisions will assist opening up competition in broadband services.
A number of players have taken advantage of the ACCC declaration of the unconditioned local loop service to install their own DSL equipment in Telstra exchanges. This has led to the development of some competition in the wholesale DSL market. At the retail level there are a large number of small operators and Internet service providers re-selling Telstra’s ADSL services.
The existing monitoring and reporting arrangements undertaken by regulatory authorities provide some information on broadband services, however, the usefulness of the information is limited. The current arrangements are also lagging behind telecommunication markets around the world, including the United States, the United Kingdom and the European Union.
In the United States, the Federal Communications Commission (FCC) collects and publishes extensive information on the rollout and deployment of broadband services and infrastructure on a semi-annual basis. The FCC requires respondents to break down the total number of broadband lines and wireless channels into mutually exclusive categories defined by the distribution technology to the subscriber environment. To assist the FCC in monitoring the evolving structure of the broadband market, information on the percentage of reported lines that are used in certain ways is collected. The FCC also requires information on zip codes in which customers are provided broadband services to assess the state of local competition and broadband deployment in particular geographic markets. Additionally, the FCC has a statutory obligation to conduct a regular inquiry into whether ‘advanced telecommunications capability’ is being deployed to Americans in a reasonable and timely fashion.
In the United Kingdom, the Office of Telecommunications (OFTEL) has wide-ranging information collection powers with the capacity to require the production of any documents related to a telecommunications purpose. OFTEL publishes a bi-monthly briefing providing statistics on take-up and updates its work to create a competitive broadband market.
The European Union collects information from key stakeholders in order to monitor the development of competition in member states and the implementation of competition directives.
The Government foreshadowed its intention to improve the level of information on competition in broadband services in Australia, in a media release dated 24 April 2002, outlining its response to the Productivity Commission Inquiry Report on Telecommunications Competition Regulation (Report No.16 of 2001).
Division 12A of Part XIB of the TPA provides the Minister with the power to issue a written determination requiring the ACCC to monitor and report to the Minister on specified matters relating to competition in the telecommunications industry. Section 151CMA and 151CMB, respectively, provide for the Minister to issue a determination for the reports to be publicly released or remain confidential. These provisions also require the Minister to specify the regularity of reporting intervals. Examples of matters that may be specified in the determination are outlined in section 151CMC as:
- telecommunication charges;
- market participants’ share of the total supply of services;
- market participants’ revenue share of the total supply of services; and
- other quantitative or qualitative indicators of the supply of services.
Problem Identification
The lack of information regarding broadband services has been identified as a significant problem. The current monitoring and reporting arrangements provide limited information on broadband services, however, the usefulness of the information is limited due to timing, scope and confidentiality issues. This clearly needs to be addressed, as provision of adequate information is a prerequisite to market efficiency.
The collection and release of information is necessary to improve transparency by identifying ‘hot spots’ for demand in broadband services. The current monitoring and reporting arrangements in place with the ACCC and the Australian Communications Authority (ACA) do not meet this requirement. In particular, the data is collected at too high a level to ascertain the level of demand and competition in broadband services.
The lack of transparent information has the potential to inhibit the growth of competition and rational investment in broadband services. In addition, the information that is available is not adequate to assess the effectiveness of the Government’s policy and program initiatives and may impede ongoing policy development.
Objectives
The objective of the enhanced monitoring and reporting arrangements is to provide more information to improve transparency in the market. A more efficient market is also expected to have flow on benefits such as promoting competition and assisting rational investment in the industry. Provision of such information would assist potential investors in identifying opportunities but would not replace the need to conduct a due diligence process.
Additionally, the information will be used to evaluate the effectiveness of the Government’s telecommunications reforms and assist further policy development. The greater level of detail is necessary to assess and promote the development of competition in broadband services. These enhanced arrangements will also bring Australia into line with telecommunications markets around the world, including the United States, the United Kingdom and the European Union.
Stakeholders
The key stakeholders with an interest in these matters are:
- carriers;
- carriage service providers;
- potential investors in telecommunication services;
- consumers and business;
- regulatory bodies; and
- Government.
Description of Options
(a) Maintain the current position
Option (a) is to leave unchanged the current arrangements for monitoring and reporting on broadband services. The ACCC prepares an annual report on telecommunications charges but information on broadband or the wholesale market is not reported. Additionally, the ACCC’s report on service quality and take-up is based on voluntary collection which raises issues regarding whether the data is of uniform quality and reliability. The Australian Communication Authority’s report on telecommunications performance does not sufficiently disaggregate information as it is collected subject to varying confidentiality arrangements with service providers.
(b) Enhancing the current monitoring and reporting requirements to improve the level of information on broadband services
This option is to introduce a Determination under the provisions of Division 12A of Part XIB of the TPA to improve the level of information on broadband services. The ACCC will be required to monitor and provide quarterly reports to the Minister, for public release, with the first report proposed six months after commencement of the Determination.
The key components of the Determination are outlined below.
- Carriers and carriage service providers will be covered by the proposed monitoring and reporting regime.
- The ACCC will specifically be required to monitor and report on:
- take-up of retail broadband services on a geographic area by postcode (or a similar level of disaggregated information), by sector, technology and transmission speed;
- take-up of retail broadband services on a sector basis by technology, speed and usage;
- take-up of wholesale broadband services on a geographic area by postcode (or a similar level of disaggregated information), technology and characteristics of the services; and
- availability of wholesale and retail broadband services geographically by technology type, characteristics of the services and the number of providers.
(c) Introduce detailed monitoring and reporting requirements
Under option (c) carriers and carriage service providers would be required to disclose more comprehensive information regarding broadband services. The information requirements would include those outlined in option (b) and detailed disclosure of financial information on both an aggregate and segment basis, including operating revenues and expenses; earnings before interest, tax and depreciation; capital expenditure; and profitability, liquidity and cashflow ratios.
Impact Analysis
Under Option (a) the current arrangements will not provide additional information on broadband services. The lack of transparency has the potential to inhibit the development of a more efficient market. Furthermore, expected flow on benefits associated with improvements in market efficiency such as promotion of competition, rational investment in the industry and related consumer benefits in terms of lower prices and improved product availability may not be realised.
The current arrangements also benefit the incumbent by means of its ownership of the core network and its engagement in bilateral commercial negotiations whereby it acquires extensive information on all its competitors. The existence of this high degree of information asymmetry creates concerns as it provides the incumbent with an unfair advantage in protecting and enhancing its market share. The potential benefits accruing to the incumbent are likely to be to the detriment of existing and potential market participants.
Continuing to rely on the existing arrangements will provide some information on broadband and will not introduce additional compliance costs, however the usefulness of such information is limited due to scope, timing and confidentiality issues.
Whilst it is possible to collect additional information on a voluntary basis, there are a number of pitfalls. A voluntary collection mechanism presents issues regarding the level of participation and has significant implications as to whether the information provides a complete and accurate view of the industry. There are also issues associated with consistency in reporting parameters, adoption of incongruent time periods and delays in lodgement of information.
Therefore, the objective to provide more information to improve transparency in the market can not be met under the current arrangements.
Under Option (b) the enhancements to the current arrangements to provide more information to improve transparency in the market will be met. The collection and release of information is necessary to build a picture of competition in broadband services including ‘hotspots’ for demand, identify possible factors driving demand and address social equity issues associated with the digital divide. This approach will enable the ACCC to collect appropriately disaggregated data whilst having regard to compliance costs. The proposed enhancements are also expected to provide significant benefits in terms of more informed regulatory decisions. These benefits can also be categorised by user group, as follows:
- Industry – Existing and potential players will benefit from increased transparency through ready access to adequate information and associated improvements in market efficiency. The parties are also expected to receive flow on benefits associated with greater market efficiency such as promotion of competition and rational investment.
- Consumers – The realisation of flow on benefits, such as promotion of competition is in turn expected to generate further flow on benefits for consumers. Consumers generally benefit from more competitive and informed markets through better prices, better service and a wider range of products.
- Regulatory bodies – The effectiveness of current and proposed regulatory decisions can be evaluated by considering industry performance and the development of competition. Under the current arrangements, information is not sufficiently disaggregated to meet this objective. The proposed monitoring and reporting requirements will provide objective evidence on take-up and availability of broadband services cross-classified by a number of indicators, including geography, sector, technology, speed and usage to measure the specific impact of regulatory decisions.
- Government – Additional information will guide the development of more effective and appropriate policy and program initiatives. It is difficult to develop appropriate competition policy without information on market development. Government cannot determine how, over time, take up for broadband is increasing nor how many and where new technologies are being deployed. This is especially important in the context of Government trying to ensure adequate services are made available to high demand sectors such as rural and regional, health, education and small to medium enterprise.
This option will impose compliance costs on industry and the ACCC, however, the benefits outlined above are expected to outweigh such costs. This option has also been designed to collect information that, as far as possible, service providers can reasonably be expected to know as part of their normal commercial activity. Therefore, compliance costs are expected to be minimised once initial systems are established.
The submissions from large players stated that there would be compliance costs in terms of systems upgrades and administration associated with the proposed enhancements to current arrangements but did not provide any estimates of the size of these costs. In contrast, industry associations representing smaller players acknowledged the expected benefits of the proposed arrangements but did not raise the issue of compliance costs.
It can be reasonably assumed that there will be an initial outlay to develop compliance reporting systems that will over a period of time be outweighed by the benefits realised by the industry as a whole through more transparency. The retro fitting of new compliance reporting systems to large business legacy systems is likely to result in a larger cost to existing businesses. However, new entrants will be likely able to build the systems in from the start of operations ensuring this information will be collected as a matter of course.
Under Option (c), the collection of more comprehensive information will provide more information to improve transparency in the market, however, such benefits need to be considered against the compliance costs and the possible impact on competition of revealing highly, commercially sensitive information. The collection of this level of information is likely to impose a significant administrative and cost burden on industry. Additionally, the collection of this level of information is likely to be considered contrary to the protection of confidentiality. Concerns about confidentiality were raised in many submissions with parties strongly recommending the withdrawal of any requirements regarding disclosure of financial information.
This option will provide additional information to the market, however, the marginal costs are expected to outweigh the marginal benefits.
Consultation
The Minister issued an exposure draft of the Determination to industry, including carriers, carriage service providers and industry associations, for their comment. The Broadband Advisory Group, at its meeting on 12 September 2002, discussed a background paper attaching the exposure draft. In addition, a copy of the exposure draft was made available on the Internet for public comment.
A number of written submissions were received that demonstrated in principle support for improving the level of information available on competition in broadband services. The submissions from large players stated that there would be compliance costs in terms of systems upgrades and administration associated with the proposed enhancements to current arrangements but did not provide any estimates of the size of these costs. In contrast, industry associations representing smaller players did not raise the issue of compliance costs. Many submissions also indicated that the proposed arrangements should be harmonised as closely as possible with related monitoring and reporting processes. Additionally, the submissions suggested the withdrawal of any requirements regarding disclosure of financial information due to confidentiality concerns.
The Minister also consulted with the regulatory bodies which supported the introduction of the Determination as it supplements their existing and proposed activities. The ACCC has indicated that is proposing to collect additional information on the pricing of retail and wholesale broadband services, on a confidential basis, to determine whether market participants are engaging in anti-competitive conduct. The ACA is also canvassing views from interested parties on a proposed quality of service framework for broadband and high data rate services.
Conclusions and Recommended Actions
Option (a) provides some information on broadband services, however, there are issues associated with timing, scope and confidentiality that limit the usefulness of the information. Option (b) enhances the current monitoring and reporting arrangements by providing more information to improve transparency in the market. The proposed enhancements are also expected to provide significant benefits in terms of greater transparency in competition and more informed regulatory decisions. Option (c) will provide additional information on broadband services, however, there are significant compliance costs and confidentiality concerns associated with the disclosure of more comprehensive information. It is recommended that option (b) be adopted as it strikes a balance between providing accurate and reliable information and imposing burdensome requirements on industry.
Implementation and Review
The Determination is made by the Minister under subsections 151CMA(1) and (3) of the TPA and will commence upon gazettal. The ACCC is required to present the first report to the Minister six months after the commencement of the Determination. The ACCC will use its record-keeping rule powers under Division 6 of Part XIB of the TPA to undertake the proposed monitoring and reporting activities.
The Government will closely monitor the operation of the Determination and undertake a review in three years time. Under subsection 33(3) of the Acts Interpretation Act 1901, the Determination can be revoked or varied at any time by another disallowable instrument made by the Minister.