EXPLANATORY STATEMENT

Telecommunications (Consumer Protection and Service Standards) Act 1999

Telstra Carrier Charges – Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2005

(Amendment No. 1 of 2010)

Issued by the authority of the Minister for Broadband, Communications and the Digital Economy

OVERVIEW

The Determination is made under the Telecommunications (Consumer Protection and Service Standards) Act 1999 (the Act).

The Determination commences on the day after it is registered on the Federal Register of Legislative Instruments.

The Determination amends certain provisions of the Telstra Carrier Charges – Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2005 (the Original Determination).

The purpose of this Amending Determination is to extend the expiry date of the price control arrangements under the Original Determination from 30 June 2010 to 30 June 2012. The roll-over provisions under clause 30 are similarly extended by 24 months.

The extension follows the conclusion of a review of retail price controls by the Australian Competition and Consumer Commission (ACCC). This review was undertaken in accordance with Australian Competition and Consumer Commission (Inquiry into Price Control Arrangements) Direction (No. 1) 2009 (the Direction). The Direction was made on 23 December 2009. The Minister for Broadband, Communications and the Digital Economy (the Minister) directed the ACCC under subsection 496(1) of the Telecommunications Act 1997 (the Tel Act) to hold a public enquiry into the retail price control arrangements that should apply under Part 9 of the Act to Telstra after expiry of the Original Determination on 30 June 2010.

The Direction provided that the ACCC was to have regard to the intention that price controls would remain in place for a further two years to 30 June 2012 while the Australian Government considered the impact of the transition to the National Broadband Network (NBN) on pricing policy. Other legislative proposals that will have implications for the retail price control arrangements include the introduction into Parliament of the following Bills:

·     Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 (the TLA Bill) on 15 September 2009; and

·     Telecommunications Legislation Amendment (Fibre Deployment) Bill 2010 (the FD Bill) on 18 March 2010.

The TLA Bill seeks to amend the telecommunications regulatory regimes under the Trade Practices Act 1974 and the Tel Act, as well as seeking to address Telstra’s level of integration in the communications market. The transition to a NBN environment, including the establishment of NBN Co combined with the possible separation of Telstra, is likely to see significant structural and competitive changes to the telecommunications industry, with consequential effects on the way services are provided. The FD Bill proposes a new legislative framework for fibre-to-the-premises coverage in new residential estates.

On 15 January 2010 the ACCC commenced the inquiry by releasing the Review of Telstra Price Control Arrangements – Discussion Paper. Eleven public submissions were received in response, including a submission by Telstra.

On 16 June 2010 the ACCC publicly released the Review of Telstra’s price control arrangements (the Review), which was provided to the Minister by the ACCC in March 2010. The ACCC considered that many retail fixed-line telecommunications markets are not yet effectively competitive, due to a lack of competition in the wholesale markets where Telstra has significant market power due to ownership of the fixed-line local access network that connects most Australian households.[1]

The Review noted that the interested parties had divergent opinions on the need to retain price controls.[2] The ACCC considered that the continued existence of Telstra’s high market share in fixed voice services, combined with the expected impact of the NBN, necessitated retention of price controls in the interim to protect consumers.[3] The ACCC considered that the existing price control arrangements had not prevented Telstra from recovering the costs of its fixed-line services, including the extension and maintenance of fixed-line infrastructure.[4]

In the Review, the ACCC recommended the retention of the existing structure of the first, second, third and fourth basket of services in Schedule 1 of the Determination.[5] The extension of current arrangements by two years will preserve this structure. The Review also recommended retaining the price caps on the second, third and fourth basket with a price ceiling of the consumer price index (CPI), to protect consumers from unjustified price increases for the most basic line rental products, and to ensure price parity obligations in the transition to a NBN environment.[6] The ACCC also recommended that the 22 cent price cap on local calls and calls to a data network access service number with the prefix 0198; and the 50 cent price cap on local calls from payphones be retained to assure consumers they will not be subject to unjustified price increases.[7] The extension of current arrangements by two years will preserve these provisions.

The Review proposed various measures to streamline or update the price control arrangements. While these measures may be considered further in the future, the present Determination seeks only to extend the current arrangements in their existing form, as this will offer certainty and appropriate safeguards for consumers during a time of significant uncertainty in the sector.

As a result of this extension, Telstra will continue to accumulate carry-in credits or debits in successive years as usual during the extended period.

A Regulation Impact Statement (RIS) was completed, and approved by the Office of Best Practice Regulation as part of the Government’s consideration of this issue.

REGULATION IMPACT STATEMENT: PRICE CONTROLS

1.    Problem

Telstra retail price controls seek to address two significant problems in the current market for fixed-line telecommunications services: a lack of competitive tension in pricing and social equity in ensuring affordability of access.

The provision of fixed-line services is dominated by the incumbent carrier, Telstra, which has by far the most extensive network and the largest market share. While there is some evidence that competition from other providers has acted to contain retail prices, results have been patchy and less effective than was hoped for when barriers to entry were first lowered. The ACCC in its latest review of price controls concludes:

While price movements in fixed-line services may indicate an increase in competition, the continued existence of Telstra’s high market share in fixed voice services, combined with the limited constraints from mobile and VoIP services indicates that the market for fixed-line services … is not yet effectively competitive.[8]

One way in which market power can be asserted is when efficiency improvements are not passed on to the consumer in the form of lower prices. This problem can be particularly acute in an area such as telecommunications where technology evolves quickly, in many cases reducing the cost of providing services. In the absence of effective competition, it is useful to have a cap on prices which encourages the incumbent to find greater efficiencies in the provision of services when it might otherwise increase its margins.

With regard to social equity, the Government has long pursued a policy objective of extending access to communications services to all Australians, wherever they are located and at prices that are affordable. Greater connection leads to greater inclusion: a network which covers all citizens equally confers benefits which partial networks do not. Safety and emergency service access, economic participation and improved social cohesion are all indirect ‘network externalities’ arising from this policy.

Providing price parity between metropolitan and non-metropolitan users supports this objective, as does requiring Telstra to design and implement measures to assist low-income customers. Retail price control arrangements (and the associated Extended Zones agreement) are part of the range of regulatory mechanisms which ensure that these outcomes are achieved, though they are the only ones which directly affect Telstra’s pricing.

Expiry of current fixed-line price controls

The Telstra Carrier Charges - Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2005 (the price controls) applies price caps to specified baskets of fixed-line telephone services supplied by Telstra, and sets out other pricing obligations. Price caps are calculated using the Consumer Price Index (CPI) as a baseline factor.

Retail price controls were first introduced in 1989. The current Determination expires on 30 June 2010.

The Determination:

1.      Places caps on price increases for Telstra residential and business customers for baskets of services, including line rental, local calls, national long-distance calls, international calls and connection services (clause 12);

2.      Places a cap of 22 cents on untimed local calls and on calls to certain dial-up Internet services (clauses 16 and 17);

3.      Places a cap of 50 cents on untimed local calls from a Telstra payphone (clause 16);

4.      Requires Telstra to offer local calls in non-metropolitan areas at the same or lower prices and on the same price-related terms as are offered in metropolitan areas (clause 16);

5.      Requires Telstra to offer basic line rental services in non-metropolitan areas at the same or lower prices and on the same price-related terms as are offered in metropolitan areas (clause 19A);

6.      Requires calls within an extended zone and between adjacent extended zones to be charged at the same rate as untimed local calls elsewhere in Australia (clause 15);

7.      Requires Telstra to seek the consent of the ACCC to increase the rates of residential line rental services, with the consent conditional on Telstra fulfilling its obligations in respect of low-income customers (involving the Low-income Measures Assessment Committee, LIMAC) (clause 24); and

8.      Requires Telstra to notify the Minister of proposed increases to the rates of directory assistance services, and allows the Minister the option of disallowing the increases if they are not considered to be in the public interest (clause 29).

Upon expiry of the Determination, items 1 to 4 will continue to apply for a period of 12 months. However, the obligations contained in items 5 to 8 will cease.

The current price controls date from 1 January 2006, when they were renewed following an inquiry conducted by the Australian Competition and Consumer Commission (ACCC) in 2004-05. On 23 December 2009, the Minister directed the ACCC to conduct a further public review. On 12 March 2010, the ACCC provided its report to the Minister, which contained a number of recommendations, including that price controls be extended for a further two years to 2012.

2.    The desired objectives

The desired objectives are to address a lack of competitive tension in Telstra’s fixed-line service pricing; to promote greater social equity in ensuring affordability of access to services.; to ensure that efficiency benefits are passed on to customers; and to safeguard low-income consumers.

Substantial rollout of the wholesale-only, open access National Broadband Network (NBN) will commence during the next price control period. This will have significant implications for the structure of the telecommunications industry and in the longer term Telstra will no longer be expected to use its own fixed-line services to provide retail services to consumers. It is also anticipated that there will be increased competition at the retail service provider level. Managing the impact of this change is an important objective of the Government.

3.    The options for achieving the desired objectives

Option 1: Remove price controls completely.

Option 2: Renew price controls for two years, incorporating the ACCC’s suggested changes.

Option 3: Extend the current price control Determination by two years, with no changes.

Option 1 – Allow price controls to lapse, with no further extension or renewal.

Many of the key price controls would continue to operate for 12 months beyond the expiry date of 30 June 2010, but others would fall away. Eventually all controls would cease, and Telstra would be free to set fixed-line retail prices on commercial terms, as it does in the mobile sphere.

Option 2 – Accept the ACCC’s recommendations as part of a new price control Determination.

Broadly, the ACCC’s report recommended the continuation of the current arrangements for price controls until 2012, with a relaxation of one price cap and the streamlining of certain provisions. A new Determination would allow the Basket 1 cap to increase in line with the CPI, remove school-line rental and LIMAC compliance requirements, and provide for directory assistance calls to be charged up to 50 cents (except for customers with a disability).

Option 3 – No change apart from all dates being moved forward by two years.

All arrangements would continue as usual, including the roll over of Telstra’s accrued credits/debts. A comprehensive review of the price control framework would be conducted in 2011-12 to take account of the changes to industry structure which will inevitably arise from the wholesale-only, open access NBN and to ensure that price controls work in accordance with wholesale price settings and other consumer arrangements, including new universal service arrangements.

4.    Impact Analysis

Option 1 – Allow price controls to lapse, with no further extension or renewal.

This option represents a significant departure from the existing regulatory framework. Some constraints on Telstra would remain, such as the legislated requirement for all carriers to offer customers the option of untimed local calls, but overall Telstra pricing would be limited only by competitive pressure.

This would provide additional flexibility for efficient pricing in the market, particularly where services (such as directory assistance) are currently offered below cost. Pricing data over the last few years shows that Telstra has consistently priced Basket 1 services below the cap, suggesting that it is more of a ‘safety net’ than a true substitute for competitive tension. However, as concluded by the ACCC:

…the ACCC considers that many retail fixed-line telecommunications markets in Australia are not yet effectively competitive. This generally stems from a lack of competition in the wholesale markets where Telstra has ownership of the ubiquitous fixed-line local access network, which connects virtually every household in Australia, and from which it derives market power…[9]

The ACCC concludes that this lack of competition “strengthens the case for the retention of retail price control arrangements”[10]. Even viewed as a safety net, price controls have a positive effect in containing retail prices in non-competitive areas of the market.

The Commission further notes:

There can, however, be tension between the dual objectives [of efficiency and equity] of the price controls. In particular, the pursuit of certain social policy objectives may create inefficiencies. For example, policy may require that the prices of supplying telecommunications services to particular consumers do not reflect the underlying costs. The ACCC also recognises that retail price controls are one of a number of alternative or complementary regulatory mechanisms by which to deliver economic or wider social policy objectives.[11]

The Government acknowledges that there may be some tension between the objectives, and that alternative remedies may need to be considered. However, it takes the view that it would not be prudent to introduce significant changes to the regulatory environment for pricing on the eve of much larger structural and technological changes occurring across the industry. The deployment of the NBN over the next few years will require many regulatory policies to be re-examined, pricing among them.

Administratively, this option would free up resources within the Department and the regulator which are currently dedicated to overseeing price control compliance, including occasional reviews of policy and pricing. The savings would however be minimal.

In terms of the stated policy objective of safeguarding consumers, this option is unlikely to achieve a positive outcome. At best, fixed-line prices would stay the same; at worst, they would increase, perhaps significantly.

Option 2 – Accept the ACCC’s recommendations as part of a new price control Determination.

The ACCC report, while broadly supportive of the current arrangements, identified some matters which it thought could be usefully modified in a renewed Determination.

The principal alterations to existing arrangements recommended by the ACCC were:

·        the relaxation of the price cap on the basket of services for local, trunk and international calls and line rental services (local calls are both capped separately and included in a basket of services);

·        the removal of obligations to offer line rental to schools at a price at, or below, residential line rental rates;

·        the introduction of a 50 cent price cap for directory assistance services – Telstra is currently required to provide a free service to its residential customers; and

·        the removal of the obligation on the ACCC to check Telstra’s compliance with the carrier licence condition requiring it to maintain a low income measures package before approving increases to the price of line rental services.

The effect of the ACCC recommendations would be to relax some key price control provisions, allowing Telstra to increase a range of prices in line with the consumer price index should it so choose.

In considering the appropriate price cap for the basket of local, trunk and international calls and line rental services, the ACCC noted that “for the future price control period, the Australian telecommunications industry will likely be in a period of transition in which service providers are likely to face a high degree of uncertainty.” The ACCC concludes from this observation that “a relaxation of the price cap on basket 1 is considered appropriate in such a period to provide as much assurance as is reasonably necessary to efficient service providers that they will not be foreclosed from fixed-line markets.”[12]

The ACCC’s observation regarding the forthcoming period of transition for the industry is accurate, and its recommendations reflect caution in maintaining investment incentives.

However, the Government is concerned that, in focussing on competition aspects the ACCC’s preferred course may not adequately account for the interests of consumers. Relaxing price restrictions may allow for more efficient pricing, but it would also have a financial impact on users who rely on fixed-line services (particularly the elderly and disadvantaged), and lessen equity of access. Telstra faces the least amount of competition in low-density rural areas, which depend more highly on telecommunications for social inclusion. Even in more populous areas, if Telstra’s prices rise, there is a danger of other carriers following suit, leading to general price rises across the fixed-line market.

In terms of safeguarding consumer interests and passing through cost efficiencies, it is not clear whether this option would have a positive result. Loosening price caps and streamlining regulations may promote flexibility and investment. The ACCC states that the market is not fully contestable, yet still argues in favour of minor changes to price controls which would give the incumbent greater freedom of movement.

The ACCC’s position would undermine the consumer safeguards established in the price control arrangements.  There would be significant community concerns if this were to occur.

Option 3 – No change apart from all dates being moved forward by two years.

The benefit of this option is that it maintains regulatory certainty during a period of significant change and adjustment in the marketplace, as the future structure of Telstra and the deployment of the NBN are decided. There would be more time for the industry as a whole to adjust to the significant changes which lie ahead.

Consumer interests would be maintained, with cost efficiencies continuing to be passed through and equity of access would be safeguarded.

The cost would be continued price restraint on Telstra at a time when fixed-line subscriptions are falling and margins are tightening. Prices for Basket 1 services would effectively remain at 2005 levels. However, as noted above, Telstra has consistently priced below the cap, and may well continue to do so.

This option would most clearly support the objective of safeguarding consumers.

5.    Consultation statement

ACCC public consultation

On 23 December 2009, the Communications Minister directed the ACCC to hold a public inquiry about the nature of the retail price control arrangements that should apply to Telstra after the expiry of the current arrangements on 30 June 2010.

On 15 January 2010, the ACCC commenced the inquiry by releasing a discussion paper. Submissions were requested by 12 February 2010, but late submissions were accepted and considered.  The ACCC received 11 public submissions in response to the discussion paper. Submissions were received from industry participants, the Australian Telecommunications User Group (ATUG) and members of the public.

Broadly, Telstra’ position was that price controls should be abolished, but if they were retained it favoured some loosening of the price caps and streamlining of requirements such as school-line rental and directory assistance. Some industry participants also argued for price controls to be dropped, but most considered them to be useful and suggested minor changes to increase their flexibility. Consumer groups supported the retention of price controls, and suggested ways in which certain measures could be strengthened to improve outcomes for consumers; for example, the imposition of a sub-cap on fixed-to-mobile call rates.

The ACCC provided its report to the Minister on 12 March. In considering its options, the Government had careful regard to the report and the submissions.

6.    Recommended option

Extend current retail price controls for two years

On balance, Option 3 offers the most effective means of safeguarding consumers in the current uncertain environment, whereas Option 1 could result in significantly higher fixed-line prices for consumers and Option 2 may also produce price rises in sensitive areas, and in the process lessen social equity.

A comprehensive review will be conducted into future arrangements for price controls in light of changes to the industry and Telstra.

7.    Strategy to implement & review the preferred option

An amending instrument will be drafted and signed by the Communications Minister.

The Government will undertake a comprehensive review of the retail price control framework over the next 18 months, taking into account developments in industry structure, the roll-out of the NBN and new consumer protections such as revised Universal Service Obligation arrangements. The ACCC will also be consulted, along with Telstra and other stakeholders.

CONSULTATION

The Amending Instrument was published in draft form on 16 June 2010 on the website of the Department of Broadband, Communications and the Digital Economy. Submissions were invited from industry stakeholders, including Telstra and the ACCC, by 22 June 2010. One submission was received, from Telstra.  

NOTES ON CLAUSES

Clause 1 - Name of Determination

Clause 1 provides that the name of the Determination is the Telstra Carrier Charges – Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2005 (Amendment No.1 of 2010).

Clause 2 - Commencement

Clause 2 provides that the Determination commences on the day after it is registered on the Federal Register of Legislative Instruments.

Clause 3 – Variation

Clause 3 provides that the Telstra Carrier Charges – Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2005 (the Original Determination) is amended as set out in the Schedule to the Amending Determination.  

Schedule – Amendments

Item 1 – Clause 3

Clause 3 of the Original Determination provides that, subject to clauses 23 and 30, the Determination expires at the end of 30 June 2010. In order to give effect to a two year extension to the Determination, Item 1 of the Amending Determination replaces the date reference of “30 June 2010” with the new date of “30 June 2012”. This extension is broadly consistent with the recommendations made by the ACCC in its Report following the detailed review of the price control arrangements (as outlined in the “Overview” above). This extension recognises that the level of competition in the telecommunications market has not yet achieved a level to allow the removal of the price control arrangements.

This extension is also to enable the Australian Government to assess the impact of the NBN on the telecommunications market. The Australian Government will then be able to consider whether to further extend the Determination and whether any further changes to the Determination are required.

Item 2 – Paragraph 20(2)(c)

Clause 20 of the Original Determination provides Telstra with the option to defer exercising the price-cap for: (a) the first basket of services; or (b) the second basket of services; or (c) the third basket of services; or (d) the fourth basket of services.

Subclause (2) deals with when the election may be made. Item 2 of the Amending Determination will replace the reference of “2009/2010 financial year” with “2011/2012 financial year”, in line with the extension.

Item 3 – Subclause 22(2)

Subclause 22(1) of the Original Determination provides that if Telstra reduces prices by more than required by a price-cap, the price-cap for the subsequent financial year will consequently be adjusted by that amount (representing a credit). No credit will apply, however, for price reductions under the price-cap in the financial year specified under subclause 22(2) (i.e. the final year of the period).

Item 3 of the Amending Determination will replace the reference of “2009/2010 financial year” in subclause 22(2) with “2011/2012 financial year” to reflect the two year extension to the operation of price controls.

Item 4 – Subclause 23(2)

Clause 23 of the Original Determination relates to the reconciliation of price movements above the set price cap. Subclause 23(2) provides that where the price movement for the first basket of services for the last price-cap year is greater than the price-cap for that year, and clauses 11, 12 and 13 of the Determination still apply, the price cap for the relevant basket in the financial year 2010/2011 is to be varied by the difference.

As subclause 23(2) of the Original Determination contains multiple references to relevant dates, the entire subclause is, for clarity and ease of description, omitted and a new subclause (with updated date references), is inserted at Item 4 of the Amending Determination. This has the effect of updating date references in subclause 23(2).  Specifically, all occurrences of “2010/2011 financial year” are replaced with “2012/2013 financial year”. Similarly, all references to “2009/2010 financial year” are updated to “2011/2012 financial year”, consistent with the 24-month extension to the price control arrangements. Apart from the date changes, the substantive provisions of this subclause remain unchanged.

Item 5 – Subclause 23(3)

As noted above, Clause 23 of the Original Determination relates to the reconciliation of price movements above the set price cap. Subclause 23(3) provides that where the price movement for the second, third or fourth basket of services for the last price-cap year (2009/2010 financial year) is greater than the price-cap for that year, and clauses 11, 12 and 13 of the Determination still apply, the price cap for the relevant basket in the financial year 2010/2011 is to be varied by the difference.

As Subclauses 23(3) of the Original Determination contains multiple references to relevant dates, the entire subclause is, for clarity and ease of description, omitted and a new subclause (incorporating updated date references), is inserted at Item 5 of the Amending Determination. This has the effect of updating all date references in subclause 23(3). Specifically, all occurrences of “2010/2011 financial year” are replaced with “2012/2013 financial year”. Similarly, all references to “2009/2010 financial year” are updated to “2011/2012 financial year”. Apart from the date changes, the substantive provisions of this subclause remain unchanged.

Item 6 – Part 6 (Title)

Item 6 of the Amending Determination represents a minor change to the title of Part 6 of the Original Determination. As the rollover provisions are being extended by a further 24 months, it is necessary to change the date reference in the title to “2012/2013”, which represents the financial year after expiry of the determination (as amended).

Item 7 – Clause 30 (Title)

In order to give effect to a 24-month extension to the rollover provisions in the Original Determination, Item 7 of the Amending Determination updates the date reference in the title of clause 30. The revised date reference is “2012/2013 financial year” which represents the financial year after expiry of the determination (as amended) on 30 June 2012.