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ACCC Discussion Paper into whether wholesale ADSL services should be declared under Part XIC of the

Competition and Consumer Act 2010

Discussion Paper

December 2011

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© Commonwealth of Australia 2011 This work is copyright. Apart from any use permitted by the Copyright Act 1968, no part may be reproduced without prior written permission from the Commonwealth available through the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, Australian Competition and Consumer Commission, GPO Box 3131, Canberra ACT 2601.

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Contents

List of abbreviations and acronyms ............................................................................. 4

1 Introduction.............................................................................................................. 6

1.1 Purpose................................................................................................................. 6 1.2 Overview of ADSL services ................................................................................ 6 1.3 Structure of this paper.......................................................................................... 6

2 Timetable and process for the inquiry ................................................................... 7

3 The legislative framework....................................................................................... 7

4 Background .............................................................................................................. 8

4.1 Methods of providing broadband internet............................................................ 8 4.2 Past competition concerns in relation to wholesale ADSL................................ 10 4.3 Previous consideration of wholesale ADSL declaration ................................... 10 4.4 The context for this declaration inquiry............................................................. 11

5 State of competition in the relevant markets....................................................... 12

5.1 Relevant markets................................................................................................ 12 5.2 State of competition in the relevant markets......................................................14

6 Consideration of the LTIE .................................................................................... 16

6.1 Promotion of competition .................................................................................. 17 6.2 Any-to-any connectivity .................................................................................... 21 6.3 Economic efficiency .......................................................................................... 22

7 Considerations if the ACCC were to declare a wholesale ADSL service.......... 25

7.1 Coverage ............................................................................................................ 25 7.2 Service description............................................................................................. 26 7.3 Duration of declaration ...................................................................................... 28 7.4 Pricing................................................................................................................ 28 7.5 Implications for other regulatory processes.......................................................29

Appendix A: Overview of DSL ................................................................................... 30

Appendix B: The ACCC’s approach to the LTIE test ............................................. 31

Appendix C: Questions on which submissions are sought....................................... 35

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List of abbreviations and acronyms

2008 Merger Guidelines ACCC, Merger Guidelines, November 2008

ACCC Australian Competition and Consumer Commission

ADSL Asymmetric digital subscriber line services, such as ADSL1 ADSL2, ADSL2+)

AGVC aggregating virtual circuit

CBD central business district

CAN customer access network

CCA Competition and Consumer Act 2010 (Cth)

CSP carriage service provider

DSL digital subscriber line

DSLAM digital subscriber line access multiplexer

DTCS domestic transmission capacity service

ESA exchange service area

FTTP fibre to the premises

HFC hybrid fibre-coaxial

ISP internet service provider

LCS local carriage service

LTIE long-term interests of end-users

LSS line sharing service

MSAN multi-service access node

NBN National Broadband Network

NBN Co NBN Co Limited

POI point of interconnect

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PSTN OA public switched telephone network originating access

PSTN OTA public switched telephone network originating and terminating access

RMRC Retail minus retail cost

SAOs standard access obligations

SDSL symmetric digital subscriber line

SIOs services in operation

ULLS unconditioned local loop service

Unbundled lines ULLS and the LSS lines

WLR wholesale line rental

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1 Introduction

1.1 Purpose This Discussion Paper seeks comment on whether the wholesale ADSL service should be declared. The ACCC can declare a service if it is satisfied that doing so would promote the long-term interests of end-users of carriage services, or of services supplied by means of carriage services.

1.2 Overview of ADSL services Digital subscriber line technology is used to provide fixed-line broadband services over copper networks. It is the major technology for internet connections in Australia.1

In Australia, Telstra operates a near-ubiquitous copper access network from the exchange building to the premises. Despite the introduction of competition in telecommunications services in Australia from 19912, the CAN has remained a bottleneck facility. Telstra and other service providers use the CAN to supply DSL services, as well as other fixed line services, to end-user premises.

ADSL (asymmetric) services have a high downstream data rate coupled with a lower rate upstream and are typically used by residential or small business consumers. Appendix A outlines the main features and functionalities which distinguish a DSL service, and also outlines different types of ADSL services.

Since being introduced in 2000, DSL services have grown to over 4.7 million services in operation, and generate revenues in excess of 3 billion dollars per annum. Demand for DSL services initially experienced rapid growth, but over the last three years demand for DSL services has grown only moderately at around one per cent per quarter.

DSL services are used to provide a range of services to end-users, such as internet connectivity, and the delivery of various applications such as email, web browsing and more recently, content delivery.

1.3 Structure of this paper Section 2 outlines the timetable and process for making submissions on this Discussion Paper.

Section 3 outlines the relevant legislative framework.

Section 4 is background to the ACCC’s current consideration of declaration of a wholesale ADSL service, and the context for issuing this Discussion Paper.

Section 5 outlines the ACCC’s approach to assessing the state of competition in the relevant markets.

Section 6 outlines some relevant considerations in relation to the long-term interests of end-users.

1 By June 2011, DSL technology accounted for 75 per cent of fixed internet connections in Australia: Australian Bureau of Statistics (ABS), Internet Activity, Australia, June 2011. 2 By the Telecommunications Act 1991 (Cth).

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Section 7 outlines considerations that would arise if the ACCC were to declare a Wholesale ADSL service, including regarding the service description and terms of any access determination.

2 Timetable and process for the inquiry The ACCC encourages industry participants, other stakeholders and the public more generally to consider the questions posed in this Discussion Paper and to make submissions to the Commission to assist it in determining whether to declare a wholesale ADSL service. A full list of the questions posed in this Discussion Paper is in Appendix C.

Under the Telecommunications Act 1997 (Cth), the ACCC must provide a reasonable opportunity for any member of the public to make a written submission to a public inquiry. Accordingly, the ACCC seeks written submissions on the issues raised in this discussion paper by no later than 5.00 pm on 19 January 2012.

After consideration of the submissions, the ACCC will publish a final decision. The ACCC does not intend to issue a draft decision prior to finalising its decisions.

The ACCC may be limited in its ability to fully consider late submissions, therefore it is important that interested parties make their submissions by the above deadline.

The ACCC prefers to receive electronic copies of submissions. Electronic submissions should be in either PDF or Microsoft Word format and allow for searchable text.

Please forward submissions and enquiries by email to the Contact Officer:

To allow for an informed and consultative process, all submissions will be considered as public submissions and will be posted on the ACCC’s website. If interested parties wish to submit commercial-in-confidence material to the ACCC they should submit both a public and a commercial-in-confidence version of their submission. The public version of the submission should clearly identify the commercial-in-confidence material by replacing the confidential material with an appropriate symbol or ‘[c-i-c]’.

The ACCC-AER information policy: the collection, use and disclosure of information sets out the general policy of the ACCC and the Australian Energy Regulator on the collection, use and disclosure of information. A copy of the guideline can be downloaded from the ACCC website: http://www.accc.gov.au.

3 The legislative framework Part XIC of the Competition and Consumer Act 2010 (Cth) establishes a regime for regulated access to carriage services and services that facilitate the supply of carriage services.

Contact Officer: Melanie Brandis Communications Group Australian Competition and Consumer Commission Email: melanie.brandis@accc.gov.au

Please copy correspondence to: Sara Afaghi Communications Group Australian Competition and Consumer Commission Email: sara.afaghi@accc.gov.au

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Once a service is declared:

• An access provider supplying the declared service to itself or another person must also supply the service, upon request, to service providers in accordance with the standard access obligations set out in section 152AR.

• The ACCC must commence a public inquiry within 30 days regarding making an access determination for that service.3 Access determinations can cover a broad range of terms and conditions but must specify price or a method of ascertaining price.4

Declaration ensures service providers have access to the inputs they need to supply competitive communications services to end-users on terms and conditions that promote the LTIE.

Section 152AL(1) allows the ACCC to declare a specified eligible service5 if it:

• holds a public inquiry about its proposal to make a declaration

• prepares a report about the inquiry

• publishes that report within a 180 day period before any declaration is made, and

• is satisfied that the making of the declaration will promote the LTIE of carriage services or of services provided by means of carriage services.

In particular, the ACCC must decide whether declaring wholesale ADSL would promote the LTIE of carriage services, or of services supplied using carriage services. When determining whether something promotes the LTIE, regard must only be had to the extent to which it achieves the following objectives:

• promoting competition in markets for listed services

• achieving any-to-any connectivity in relation to carriage services that involve communication between end-users

• encouraging the economically efficient use of, and the economically efficient investment in, infrastructure.6

The ACCC’s approach to the LTIE criteria is outlined in more detail in Appendix B.

4 Background

4.1 Methods of providing broadband internet Broadband services can potentially be supplied by competing internet service providers by:

3 Section 152BCI(1) CCA. 4 Sections 152BC(3) and 152BC(8) CCA. 5 An “eligible service” is (a) a listed carriage service (as defined by the Telecommunications Act 1997 (Cth) (Telco Act)); or (b) a service that facilitates the supply of a listed carriage services (as defined by the Telco Act), where the service is supplied, or is capable of being supplied, by a carrier or a carriage service provider (whether to itself or to other persons): section 152AL(1) CCA. 6 See subsection 152AB(2) CCA. In determining the extent to which a particular thing is likely to result the achievement of promoting competition and encouraging the economically efficient use of, and the economically efficient investment in, the infrastructure, regard must be had to other matters listed in subsections 152AB(4), (6) and (7) CCA.

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1. building their own access network infrastructure; or

2. acquiring ULLS or LSS services from Telstra; or

3. acquiring wholesale ADSL services from Telstra; or

4. acquiring wholesale ADSL services from access seekers that have their own infrastructure and use the ULLS to sell wholesale services.

In relation to the first method of providing broadband services, other access network infrastructure in Australia includes:

• HFC cable which can be used to provide high speed fixed-line broadband services, as well as TV and phone services. There are two major HFC networks in Australia owned by Telstra and Optus, predominantly covering east coast metropolitan areas.

• Optical fibre which can be used to provide high speed fixed-line broadband services. Optical fibre is capable of carrying greater data at much higher rates than conventional copper wire. This technology is presently not in wide use but is the technology that is used in the National Broadband Network.

• Wireless broadband services offered over a mobile broadband network, a fixed wireless broadband network, or satellite. The quality of wireless broadband service is generally dependent on the degree to which the spectrum (used for delivery within a cell-based service area) is shared by others users in that service area.

In relation to the other methods of providing broadband services, these are different means of providing DSL services over Telstra’s CAN.

Access seekers can provide DSL services by purchasing ULLS or LSS and investing in their own DSL (e.g. DSLAMs) and backhaul networks. The ULLS and LSS are declared services 7- the ULLS provides access to the entire unconditioned local loop whereas the LSS allows access to the high frequency spectrum of the CAN.

Alternatively, a wholesale ADSL service can be acquired by access seekers to provide an ADSL service without the need to deploy their own DSLAM. Telstra currently supplies wholesale ADSL to access seekers in approximately 2800 “ADSL-enabled” ESAs.8

In both these potential supply models, the service provider must combine the relevant access service (ULLS, LSS, or wholesale DSL) with additional transmission services, internet connectivity and downstream applications support in order to supply an end-user service. That is, access seekers who own their own Core IP network and application servers manage data transmission to the internet from their point of presence via their IP Core network and further back in the network for both wholesale ADSL and ULLS inputs.

In relation to the fourth means of supplying broadband services, both Optus and AAPT currently offer wholesale ADSL services within their DSL network footprints. Market share data is not available. However, the reach and functionality of these

7 ACCC, Fixed Services Review Declaration Inquiry for the ULLS, LSS, PSTN OA, PSTN TA, LCS and WLR, July 2009 8 Telstra ADSL-enabled exchange list: http://www.telstrawholesale.com.au/products/data-broadband/adsl/adsl-reports-plans/index.htm .

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networks differ greatly between operators. While Telstra supplies wholesale ADSL at approximately 2800 exchanges nationally, other providers have much smaller DSL footprints. Accordingly, the wholesale ADSL market is highly concentrated with Telstra as the dominant provider.

4.2 Past competition concerns in relation to wholes ale ADSL The position of Telstra as a vertically integrated provider of ADSL has resulted in several allegations of vertical price squeeze conduct over the past decade. A vertical price squeeze is a form of anti-competitive pricing. A price squeeze can occur where a vertically integrated firm uses its market power over the supply of a key input to reduce the profit margin available to competitors (to whom it supplies the key input and also competes with in the downstream market). This results in competitors that match the access provider’s retail prices obtaining no profit margin, or a limited profit margin, in the downstream market and potentially exiting the market.

Over the last decade, ISPs have alleged to the ACCC that Telstra has increased wholesale ADSL prices without a commensurate increase in its retail ADSL prices, or has decreased its retail ADSL prices without a commensurate decrease in its wholesale ADSL prices, resulting in a retail price squeeze.

In early 2001, the ACCC issued a competition notice to Telstra in relation to its wholesale ADSL price increases.9 The competition notice was revoked by the ACCC in May 2002 after Telstra made appropriate reductions to its wholesale ADSL pricing.

In March 2004 the ACCC issued a competition notice to Telstra in relation to its retail ADSL price reductions. The matter was resolved in February 2005 after Telstra agreed to reduce its wholesale prices, pay wholesale customers $6.5 million in compensation, and establish a formal broadband retail pricing notification protocol for the ACCC (which has now expired).10

In July and August 2010, the ACCC received further complaints regarding Telstra’s pricing of its wholesale and retail ADSL products. ISPs alleged that Telstra was engaging in vertical price squeeze conduct by reducing its retail ADSL pricing without a corresponding reduction in its wholesale ADSL pricing. In addition, ISPs alleged that unreasonable non-price conditions or restrictions are attached to Telstra’s supply of wholesale ADSL services.

4.3 Previous consideration of wholesale ADSL declar ation In December 2005, the ACCC issued a discussion paper seeking comments on whether any wholesale broadband services should be declared.11 In June 2006 the ACCC decided not to declare any wholesale ADSL service, on the basis that to do so could adversely affect competition by delaying the uptake of ULLS.12 Chairman

9 Competition notice: The ACCC may issue a notice stating that (1) a specified carrier or carriage service provider has engaged, or is engaging, in anti-competitive conduct (s 151AKA), or (2) a specified carrier or carriage service provider has contravened, or is contravening, the competition rule (s 151AL). The competition rule states that a carrier or carriage service provider must not engage in anti-competitive conduct. 10ACCC, Media release: Resolution of Broadband Competition Notice, 21 February 2005 11 ACCC, A strategic review of the regulation of fixed network services – An ACCC Discussion Paper,

December 2005. 12 ACCC, A strategic review of the regulation of fixed network services – ACCC position paper, June 2006, pp. 88, 90

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Graeme Samuel reiterated the ACCC’s position that a compelling case for declaration of wholesale ADSL service had not been made in 2006 and 2007.

On 20 October 2010, following receipt of the competition complaints referred to above, the ACCC sought comment on whether it should commence a declaration inquiry in respect of wholesale ADSL services.13 The ACCC received a number of submissions from interested parties. With the exception of Telstra and two other parties, all responses were supportive of commencing an inquiry at that time. Telstra was of the view that an inquiry was not warranted, that commercial negotiations were continuing in respect of the matters that were the subject of the competition complaints, and that its pricing was commercially rational and economically efficient.14

On 18 April 2011, the ACCC publicly stated that it would not conduct a wholesale ADSL declaration inquiry at that time and would instead adopt a “wait and see” approach.15

The ACCC then considered that industry and regulatory developments could have resulted in improved competitive conditions. In particular, there was evidence of some further infrastructure investment as a result of the Regional Backbone Blackspots program and the potential for further investment as a result of the Interim Access Determinations for the ULLS and DTCS services. The ACCC also noted that there had been some improvement in the level of Telstra’s wholesale ADSL pricing, and there appeared to be potential for commercial negotiations to result in further improvement.

4.4 The context for this declaration inquiry Since the ACCC’s open letter on 18 April 2011, the ACCC has monitored the state of competition in relevant markets. As outlined in section 5.2, it appears clear that Telstra has retained a dominant position in the supply of retail and wholesale DSL services.

An important consideration in this inquiry is whether the declaration of wholesale ADSL services will promote competition. This is because the wholesale ADSL service has been – and continues to be – the subject of competition concerns and requests for declaration.

In addressing this question, the ACCC will consider the likely state of competition in relevant markets. This will in turn raise questions around:

• the nature and extent of competition concerns that could likely develop in relevant markets both now and in the future;

• the extent to which effective competition is likely to emerge over competing networks, including competing DSL networks supplied over Telstra’s CAN; and

13 ACCC, Open letter re proposed declaration inquiry regarding wholesale ADSL , 20 October 2010. Available at http://www.accc.gov.au/content/index.phtml/itemId/952604. 14 Telstra response to the ACCC’s open letter, 27 October 2010. Available at http://www.accc.gov.au/content/index.phtml/itemId/952604 15 ACCC, Open letter re proposed inquiry regarding wholesale ADSL, 18 April 2011, Available at: http://www.accc.gov.au/content/index.phtml/itemId/952604

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• whether other regulation – and in particular Telstra’s proposed structural separation undertaking which the ACCC is currently considering – is likely to redress potential competition concerns.

5 State of competition in the relevant markets This section identifies the relevant markets and assesses the current state of competition in those markets.

5.1 Relevant markets The ACCC notes that market definition is a purposive exercise and must be considered in light of the issues raised in this Discussion Paper.

A market includes any goods or services that are substitutable for, or otherwise competitive with, the goods and services under analysis.16 Typically, the ACCC considers the product, geographic, functional and temporal dimensions of a market. The ACCC’s approach to market definition in relation to service declaration does not require the adoption of a definitive market definition.17 It is a purposive exercise to assist competition analysis and the application of the LTIE test.

5.1.1 Functional dimension

The LTIE test directs the ACCC’s attention to the markets in which competition is likely to be promoted. This will generally be the markets for downstream services (retail markets) rather than the market in which the eligible service is supplied (wholesale markets).

5.1.2 Product dimension

The relevant retail and wholesale markets will include both ADSL and substitutable services. When considering whether a product is substitutable, the ACCC may consider customer attitudes, the function or end use of the technology, past behaviours of buyers, relative price levels, and physical and technical characteristics of a product.18

The ACCC considers that the relevant retail and wholesale product markets include bundled fixed telephone (PSTN) and high speed broadband services, including copper as well as HFC and optic fibre based services.

Despite different technical specifications ADSL2+ is likely substitutable to ADSL services as all ADSL services are used for the similar function or end use of web browsing. In addition, while there are limited providers of HFC and optical fibre, these two technologies could be substitutable for DSL in the retail market. In the wholesale market, to the extent that these services could be supplied on a wholesale basis, they can also be considered substitutes.

16 Section 4E CCA. 17 See ACCC, Telecommunications services – Declaration provisions – a guide to the declaration provisions of Part XIC of the Trade Practices Act, July 1999, pp. 41-42; Foxtel Management Pty Ltd v Australian Competition and Consumer Commission [2000] FCA 589 at [172] per Wilcox J. 18 A useful list of information the ACCC may consider when identifying close substitutes to the relevant product is contained in the 2008 Merger Guidelines, p. 19.

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Furthermore, wireless broadband may provide an alternative for some users, for at least for some types of uses.19

The ACCC has reached these views based on market evidence which indicates that the above services are substitutable for ADSL services. However, the degree of substitutability between different services will depend on the particular downstream application. For example, ADSL1 and wireless may not support data intensive applications such as video streaming as well as ADSL2+ or cable.

Bundling of services

There is evidence that bundling of services is common in the telecommunications industry, as evidenced by current market offers by ISPs. Data shows that Telstra’s customers commonly purchase both fixed voice and fixed internet products from Telstra.20 The ACCC does not consider it necessary to determine if there is a bundled or stand alone market for the purpose of this declaration inquiry.

5.1.3 Geographic dimension

Delineation of the relevant geographic markets involves the identification of the area or areas over which a carrier or CSP and its rivals currently supply, or could supply, the relevant product.

In assessing the relevant geographic markets, the ACCC may examine the relative price levels and price movements of different geographic sources of supply, competitive conditions within different geographic areas, and the cost to customers of obtaining supply from alternative regions.21

In the context of its general review of the regulation of fixed services and the recent inquiry into varying the exemption provisions in the final access determination for WLR, LCS, and PSTN OA services the ACCC has considered the most appropriate geographic unit upon to assess competition is at the exchange level.22 However, the Australian Competition Tribunal has made clear that while an exchange based approach may be appropriate in some contexts there may be circumstances where an alternative approach is preferable.23 The ACCC notes that market definition is a purposive exercise and must be considered in light of the issues in this Discussion Paper.

The availability (or likely availability) of effective alternatives to Telstra wholesale ADSL varies between exchange service areas. A number of competing DSL networks have been built in metropolitan ESAs, although the reach and functionality of these networks differ between operators.

In rural and regional ESAs, which appear to be characterised by higher barriers to entry, competing DSL networks have not developed to any material extent.

19 ACMA, Communications Report 2009-10 series – Report 2: Take-up and use of voice services by Australian consumers, 18 November 2010, p.2. 20 Telstra Bundling RKR data, June 2010. 21 A useful list of the types of information the ACCC may consider to identify close substitutes in relation to defining the relevant geographic regions are listed in the 2008 Merger Guidelines, p. 19. 22 ACCC, Fixed Services Review: a Second Position Paper, April 2007, p. 31; ACCC, Inquiry into varying the exemption provisions in the final access determination for WLR, LCS and PSTN OA, December 2011, p.39-40. 23 Application by Chime Communications Pty Ltd (No 2) [2009] ACompT 2, 27 May 2009, paragraph 109-110.

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However, for the purpose of conducting an LTIE analysis as part of this declaration inquiry, the ACCC will consider the relevant markets on a national basis. In support of adopting a national market definition in the present context, Telstra has previously submitted that it prices retail and some wholesale ADSL services on a national basis and therefore ‘the most appropriate market is national in scope’.24

Further, Telstra appears to clearly be the dominant supplier of wholesale ADSL services regardless of whether that assessment is undertaken on a national basis or on a less aggregated basis, with service in operation market shares that significantly exceed those of any other providers that have a presence in the relevant zones.25

The ACCC considers while the CBD and metropolitan ESAs are potentially more competitive than the rural and regional ESAs, there are competition concerns in all ESAs that arise from the commercial terms on which Telstra provides access to the wholesale ADSL service generally.

Should declaration of wholesale ADSL be in the LTIE, the ACCC will consider the most appropriate terms and conditions for regulated access to the service in the access determinations. The ACCC notes that it is able to incorporate provisions in access determinations which provide that any or all of the standard access obligations are not applicable to a carrier or carriage service provider. 26 This may be either unconditional or subject to such conditions or limitations as are specified in the determination.

The ACCC’s preliminary views on the coverage of any declaration of wholesale ADSL is discussed further in section 7.1.

Question

1. What is the relevant market for the purpose of this Discussion Paper and the application of the LTIE test?

5.2 State of competition in the relevant markets Having broadly identified the relevant market, it is useful to assess the state of competition in that market so the ACCC can consider the likely state of competition with and without the declaration.

As discussed in section 1, Telstra operates the CAN that is used to provide wholesale and retail ADSL services. Telstra also operates the only near ubiquitous DSL network – with Telstra’s ADSL network covering over 90% of Australian homes and businesses.27

Telstra’s vertical integration across the CAN and downstream service provision, and the near ubiquitous coverage of its DSL network, provide inherent advantages in fixed line markets and can dampen incentives for others to invest. Telstra has also invested in a HFC network that can be used to supply cable broadband services.

24 Telstra response to the ACCC’s open letter, 27 October 2010, p.4. Available at http://intranet.accc.gov.au/content/item.phtml?itemId=1227673&nodeId=00e1a3a2b51f5b2f7efb1ba5757c5940&fn=Telstra.pdf . 25 Telstra CAN RKR, September 2011. 26 Section 152BC CCA. See also Explanatory Memorandum, Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2010, p. 170 27 Telstra, Fact Sheet: Data Solutions DSL Internet Grade, available online at: http://telstrawholesale.com/download/document/telstra-wholesale--internet--factsheet-1.pdf .

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It appears clear that Telstra has retained a dominant position in the supply of retail and wholesale DSL services. In this regard, in the majority of exchange service areas, Telstra remains the only provider of fixed-line broadband access and backhaul services.

Further, where competing network infrastructure (such as Optus’ HFC network) has been installed, or access seekers have used the declared ULLS and LSS services to invest in competing DSL networks, Telstra’s networks have retained a significant market share of services in operation.

Telstra’s DSL network currently supplies around 63 percent of all of retail and wholesale ADSL SIOs. In metropolitan areas (ULLS Bands 1 and 2), Telstra’s DSL network supplies around 50 percent of these SIOs, and it supplies around 96 percent of such SIOs in regional areas (ULLS Bands 3 and 4).28

In contrast, the three largest competing DSL networks each supply between 8 to 13 percent of retail and wholesale SIOs, and the remaining DSL networks supply around 7 percent of these services between them.

If market shares are calculated for those areas served by competing infrastructure, Telstra’s DSL network retains a dominant position of around 48 percent of SIOs, with the nearest competing DSL network supplying around 20 percent of SIOs within this footprint.29

This much greater share of SIOs could be partially attributed to Telstra’s use of RIM or LPGS technologies in the CAN. Currently, approximately 11 percent of CAN lines are supplied using RIM/LPGS technologies.30 Lines with RIM/LPGS technologies are widely distributed throughout the CAN, as practically all ESAs are subject to some RIM technologies.31

While in many cases Telstra can provide subscribers on these lines with ADSL services, the use of RIM/LPGS creates significant difficulties for competing DSL network operators. This is because Telstra’s cabinets are not designed to accommodate third-party DSLAM equipment, and hence network operators would need to install their own cabinet and obtain ULLS or LSS services via a cross-connect cable.

The relatively high costs associated with installing this infrastructure, and the limited number of serviceable customers available, creates high barriers to competitive network entry and typically result in wholesale ADSL being the only input service available to service providers wishing to supply end-users in RIM affected areas.

In terms of geographic reach, Telstra’s DSL network reaches around 2800 ESAs, with each competing DSL network reaching no more than 15 percent (420) of these ESAs.

The combined footprint of all competing DSL networks represents around 20 percent of the footprint of the Telstra DSL network.32

Looking ahead, it appears that Telstra may have an irreversible first-mover advantage in a large number of exchange service areas, as a business case might not exist now for competing DSL networks to be built in those areas.

28 Telstra CAN RKR, September 2011. 29 Ibid. 30 Telstra Infrastructure RKR, September 2011. 31 Ibid. 32 Telstra CAN RKR, September 2011.

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The footprint of competing DSL networks has grown slowly over the last two years, reflecting a growth of only one or two ESAs per month.33 In the last six months, even with the commissioning of competing transmission links on Regional Backhaul Blackspot Program routes, competing DSL networks entered only ten ESAs, in addition to a background growth rate only of seven ESAs.

In October 2011, Telstra announced that it will begin installing ADSL2+ equipment on top of the existing street side cabinets as part of its ‘Project Top Hat’.34 Telstra expects 2000 street side cabinets will be equipped within 18 months and this will allow Telstra to provide ADSL2+ fixed broadband to all premises supplied by the cabinet.35 Currently, some cabinets can only support 120 ADSL services and some cabinets cannot support ADSL at all.36

Consequently, it appears clear that Telstra will over time increase its use of RIM technologies in order to supply ADSL services to end-users, with a likely increase in the number of ADSL services that could only be supplied by the Telstra DSL network.

Further, the roll-out of the NBN is likely to have implications for the state of competition in relevant markets. As discussed in section 6.3.3, the NBN may tend to lessen incentives for investment in DSLAM infrastructure due to uncertainty over the NBN roll-out schedule and a potentially truncated investment period.

In assessing the state of competition in a wholesale market, it is also relevant to take account of retail market outcomes. This is because the downstream retail market often reflects the strength of the upstream wholesale market. The state of the retail market is one aspect the ACCC will consider when assessing whether a market is competitive, in addition to factors such as market share and barriers to entry.

In this regard, Telstra has a large market share of fixed retail broadband services which it has maintained over time (45% of services in operation).37

6 Consideration of the LTIE In deciding whether to declare wholesale ADSL, the ACCC must consider whether declaration would promote the LTIE of carriage services, or of services supplied using carriage services. When determining whether something promotes the LTIE, regard must only be had to the extent to which it achieves the following objectives:

• promoting competition in markets for listed services

• achieving any-to-any connectivity in relation to carriage services that involve communication between end-users38

33 Ibid. 34 Telstra, Telstra will start rolling out Top Hats in November, 25 October 2011 http://exchange.telstra.com.au/?p=15830 . 35 Ibid. 36 Ibid. 37 Telstra Full Year Results Announcement 2011, 11 August 2011 http://www.telstra.com.au/abouttelstra/investor/calendar/annual-results-announcement-4.xml . 38 This is the ability of end-users of different networks to communicate — the value of the network to an end-user depends on the number of other users that network allows the end-user to reach. Without any-to-any connectivity, smaller networks could only offer services to their own end-users, and would therefore find it difficult to attract new users, regardless of their long-term efficiency.

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• encouraging the economically efficient use of, and the economically efficient investment in, infrastructure.39

6.1 Promotion of competition Subsection 152AB(2) requires the ACCC to consider whether declaration of an eligible service is likely to promote competition in markets for particular carriage services and services supplied by means of carriage services.

As discussed in section 5.2, the current state of competition in relation to the provision of wholesale DSL is not effective as evidenced by Telstra’s 63 percent market share nationally. As the vertically integrated incumbent, Telstra has strong incentives to engage in entry-deterring or expansion-deterring conduct to maintain and grow its retail market share. The ACCC considers that it is likely that legitimate competition concerns will continue into the future given Telstra’s strong incentives to discourage competition in the short to medium future.

Competition in wholesale markets has not developed substantially despite the availability of alternatives to wholesale ADSL. Further, Telstra has the ability to constrain competition through the commercial terms in which it supplies wholesale ADSL. Without declaration of wholesale ADSL Telstra will continue to hold substantial market power in the relevant wholesale markets.

6.1.1 Competition concerns

Declaration of a wholesale ADSL service may potentially promote competition by providing certainty around the pricing of wholesale ADSL services and by reducing Telstra’s ability to favour its own retail services.

Telstra’s vertical integration provides an incentive for Telstra to engage in conduct that allows it to maintain a dominant position and create additional barriers to entry into the relevant markets. As a vertically integrated company Telstra has an incentive to discriminate against wholesale customers and favour its own retail service through price and non-price terms. The lack of similar treatment between Telstra’s retail and wholesale customers prevents wholesale customers competing with Telstra as they would against other competitors that are not vertically integrated. This has the potential to lessen competition in downstream markets as those service providers facing a higher access price will be at a competitive disadvantage and over time will be excluded from the market. Furthermore, Telstra is not required to innovate or seek out efficiencies in transforming network access into retail services in order to maintain its dominant position, and access seekers are effectively discouraged from doing so as benefits are lost through higher access charges elsewhere.

A number of specific competition concerns arise from Telstra’s vertical integration.

Level and structure of prices

The first concern arises from the level and structure of prices for the wholesale ADSL service.

39 See subsection 152AB(2). In determining the extent to which a particular thing is likely to result the achievement of promoting competition and encouraging the economically efficient use of, and the economically efficient investment in, the infrastructure, regard must be had to other matters listed in subsections 152AB(4), (6) and (7).

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There is some evidence that the level of prices charged for wholesale ADSL are above what would be expected in a competitive market. For example, it would appear that Telstra’s wholesale ADSL prices are based on the availability of effective alternative infrastructure as opposed to being based on the underlying costs of supply.

Further, the ACCC has regularly received complaints from access seekers about the level of Telstra’s wholesale ADSL prices relative to Telstra’s retail ADSL charges. The variation in the charges between access seekers and Telstra retail can inhibit the ability of access seekers to profitably compete with Telstra in retail markets. As discussed in section 4.2 the ACCC has conducted investigations and taken appropriate regulatory action in response to access seeker’s allegations of vertical price squeeze conduct.

A related pricing concern stems from the apparent cycle whereby material delays occur between the release of new Telstra retail broadband pricing and the finalisation of negotiations around Telstra wholesale ADSL pricing. The delay causes access seekers to have to choose between losing customers or reducing retail prices and making negative margins while they await new wholesale pricing. This conduct also gives Telstra extra leverage in negotiations as the longer the delay the more urgently access seekers need to finalise wholesale prices.

As well as concerns about the level of prices, the price structure of the wholesale ADSL service also raises competition concerns. Telstra requires wholesale customers who purchase wholesale ADSL to also purchase AGVC to transport aggregated traffic to their point of presence. Access seekers have raised concerns that Telstra’s AGVC charges are high for wholesale customers and Telstra retail does not face a similar marginal cost. In addition, as access seekers order AGVC capacity in accordance with their bandwidth (data rate) requirements, access seekers are put at a disadvantage, particularly in terms of their ability to offer large data quotas or data-intensive services to customers on off-net plans due to the need for greater backhaul capacity. This may, for instance, prevent access seekers from competing in emerging content delivery markets.

Telstra also charges for early cancellation of a wholesale ADSL service. The imposition of wholesale ADSL early termination charges may discourage or delay access seekers from providing services over other networks. For example, access seekers may face early termination costs where they migrate their customers onto the NBN and decide to serve their customers directly from NBN Co or through a wholesale provider other than Telstra.

Declaration of wholesale ADSL services is likely to remove the concerns that arise from Telstra’s level and structure of pricing as the ACCC could make an access determination which sets appropriate price terms.

Questions

2. Do you consider that Telstra’s wholesale terms and conditions inhibit competition? If so, what have been the effects on the ability of access seekers to compete?

3. Do access seekers have data to indicate the effect of Telstra’s access terms on their ability to compete? Please indicate the relevant market shares of customers on-net and off-net.

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4. Are there any instances whereby delays in the negotiation of revised wholesale DSL charges following Telstra’s retail price changes have affected the ability of access seekers to compete? If so, please specify the duration and impact of the delays.

5. Do you consider that Telstra’s wholesale terms and conditions restrict the nature of service offerings? For example, the provision of large data quotas and retail products such as IPTV and multimedia content.

6. Are there any business cases that have been or could be frustrated as a result of the pricing of AGVC?

7. Are there instances where access seekers provide DSL services on more competitive terms if they use their own DSL network or where supply of wholesale ADSL is available from another provider? If so, please detail the differences.

8. Could early termination charges discourage access seekers from providing services over alternative networks?

Price discrimination:

A second concern arises from the price discrimination between access seekers and against access seekers who choose to use their own infrastructure or obtain wholesale services from alternative providers.

Price discrimination between access seekers has the potential to diminish competition where it is not based on measurable cost efficiencies in supplying potential access seekers. In order to secure its market share and competitive advantage, Telstra has incentives and the ability to charge higher prices to access seekers that it considers pose a greater competitive threat to its retail supply of ADSL.

The potential damage to competition that stems from discrimination between access seekers in the supply of wholesale services has led to legislation requiring the NBN Co to provide access to services in an open and non-discriminatory manner.

The equivalent access and non-discrimination provisions of the NBN access regime were developed in order to:

[R]respond to longstanding concerns about barriers to competition in the Australian telecommunications market flowing from Telstra’s control of the access network and its vertical integration.40

In addition, the ACCC considers that price discrimination against access seekers on the basis that they choose to use their own infrastructure or gain supply from an alternative wholesale provider reduces competition and inhibits the development of effective and efficient markets that might otherwise emerge.

This pricing conduct has the potential to prevent effective competitors from using their scale to sharpen their retail pricing and put the incumbent under pressure. Declaration of wholesale ADSL is likely to promote competition by removing

40 Explanatory Memorandum to the National Broadband Network Companies Bill 2010 and Telecommunications Legislation Amendment (National Broadband Network Measures – Access Arrangements) Bill 2011, p.9.

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Telstra’s ability to discriminate between access seekers on price terms in order to protect its own market share.

Questions

9. Are there any instances of price discrimination between access seekers? If so, what is the basis for the price discrimination and what are the effects on the ability of access seekers to compete?

10. Are there any instances of price discrimination on access seekers that choose to use their own infrastructure or an alternative wholesale supplier to the incumbent?

Leveraging conduct

The third concern relates to Telstra’s ability and incentive to leverage its dominant position in the supply of wholesale ADSL services to discourage competitive conduct and the use of competitive infrastructure where it is efficient to do so. This conduct can include imposing restrictions on the ability of access seekers to deploy DSLAMs and imposing minimum spend or volume commitments. Leveraging conduct could result in competitive harm by discouraging access seekers from engaging in competitive conduct.

Question

11. Are there any instances of access terms such as volume commitments and minimum spend restrictions? If so, do the set targets reflect ordinary growth rates or do they rely on migration onto the Telstra network?

6.1.2 Wholesale ADSL and the NBN

In addition to existing concerns, the transition to the NBN could give rise to additional competition concerns.

The Government’s NBN project will progressively make available an effective alternative to wholesale ADSL. However, the availability of wholesale ADSL services on reasonable terms while the NBN is being deployed could be important to the development of effective retail-based competition in the medium to long term. This is primarily because regulated wholesale ADSL could potentially enable access seekers to effectively compete with Telstra for retail customers. They would do so with the knowledge that when the NBN becomes available those customers may be retained and migrated onto the NBN access infrastructure.

In the lead-up to the proposed NBN, access seekers may consider it necessary to access Telstra’s wholesale ADSL in order to acquire additional customers. Access seekers will be looking to achieve economies of scale in the NBN environment in order to promote product innovation and differentiation, and to engage in effective competition with Telstra.

The transition period will likely be a key customer acquisition point as during this time end-users will seek replacement or new broadband services. Consequentially, during the transition period Telstra will have strong incentives to restrict competition so as to maintain/increase its market share at a retail, and wholesale level in order to migrate as many of these services as possible to Telstra fibre services over the NBN and at the same time deny competitor’s critical scale.

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A declared wholesale ADSL service may allow access seekers to build the customer scale necessary to compete in emerging markets such as multimedia content, cloud-computing, IPTV and other new technologies. In the medium to long term, such value-added services are expected to become a greater focus for competition. In the longer term, retail service providers will all compete via the NBN wholesale platform.

There is a risk that Telstra could also engage in variations of past conduct during the interim period. Telstra could engage in leveraging conduct tying wholesale ADSL and NBN Layer 3 markets. For example, Telstra has signalled its intention to bundle NBN services with backhaul to provide a Layer 3 service over the NBN.41 Telstra has an incentive to provide discounts on wholesale ADSL pricing on condition that ISPs purchase NBN services from Telstra instead of NBN Co or other wholesalers. Such conduct could distort the development of competition at the network layer over the NBN as other DSL network operators could not replicate Telstra’s bundled offers.

Overall, the impending deployment of the NBN appears to suggest that declaration of a wholesale ADSL service could promote competition.

Questions

12. Do you consider that it is imperative to have a pre-existing subscriber base prior to the rollout of the NBN? If so, will an existing market share provide a material comparative advantage? If so, how?

13. Are access seekers concerned about Telstra migrating its customers onto the NBN and contractually “locking in” customers by specifying a minimum term or imposing prohibitive switching fees?

14. Are there are any other potential risks to competition that may arise in the transition to the NBN if wholesale ADSL is not regulated? If so, what are they?

15. Has the NBN changed the strategic importance/value of expanding during the transitional period leading up to the NBN? Why or why not?

16. On the NBN, do you anticipate increased competition to take place on value-added retail services such as IPTV? Are access seekers considering deploying value-added services during the transition to NBN?

17. Does investment in value-added retail services such as IPTV require greater customer scale, and if so, to what extent would a declaration of wholesale ADSL offer opportunities to obtain this scale?

18. Do you consider that declaration of wholesale ADSL will promote competition in the transition to the NBN? Why or why not?

6.2 Any-to-any connectivity The second objective under section 152AB is achieving any-to-any connectivity in relation to carriage services that involve communication between end-users.

Subsection 152AB(8) states that the objective of any-to-any connectivity is achieved if, and only if, each end-user who is supplied with a carriage service that involves communication between end-users is able to communicate, by means of that service,

41 Telstra newsletter, December 2011, http://telstrawholesale.com.au/news/newsletter/dec2011/nbn/index.htm .

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with each other end-user who is supplied with the same service or a similar service, whether or not they are connected to the same network.

The any-to-any connectivity requirement is particularly relevant when considering services that involve communications between end-users. When considering services which do not require user-to-user connections, (such as carriage services that are inputs to an end-to-end service or distribution services, such as wholesale ADSL services), this criterion is generally less important.

Question

19. What impact would declaration have on the objective of achieving any-to-any connectivity in relation to carriage services that involve communication between end-users?

6.3 Economic efficiency The third objective under section 152AB is to encourage the economically efficient use of, and economically efficient investment in, the infrastructure used for the supply of listed services or any other infrastructure by which listed services are, or are likely to become, capable of being supplied. Economic efficiency has three components.

• Productive efficiency refers to the efficient use of resources within each firm such that all goods and services are produced using the least cost combination of inputs.

• Allocative efficiency refers to the efficient allocation of resources across the economy such that the goods and services that are produced in the economy are the ones most valued by consumers. It also refers to the distribution of production costs amongst firms within an industry to minimise industry-wide costs.

• Dynamic efficiency refers to the efficient deployment of resources between present and future uses such that the welfare of society is maximised over time. Dynamic efficiency incorporates efficiencies flowing from innovation leading to the development of new services, or improvements in production techniques.

An access regime may play an important role in ensuring that existing infrastructure is used efficiently where it is inefficient to duplicate the existing networks or network elements. An access regime should not discourage investment in networks or network elements where such investment is efficient.

The ACCC’s current concerns relate to the price and non-price terms and conditions on which Telstra is likely to supply wholesale ADSL services. As declaration would enable the ACCC to make an access determination covering a broad range of price and non-price terms and conditions of access to wholesale ADSL, it may promote economic efficiency by ensuring that access is provided on more efficient terms.

In considering whether declaration of a wholesale ADSL service would encourage the economically efficient use of and investment in relevant infrastructure, the ACCC is required to consider:

• the technical feasibility of supplying and charging for the service

• the legitimate commercial interests of the supplier(s) of the service, including the ability for the supplier(s) to exploit economies of scale and scope

• the incentives for investment in the infrastructure by which listed carriage services are supplied or may be capable of being supplied.

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These factors are discussed below.

6.3.1 Technical feasibility Telstra currently offers wholesale ADSL services in all ESAs which are ADSL-enabled. As such, the ACCC considers that provision of such services is technically feasible.

6.3.2 Legitimate commercial interests of the access provider

Telstra’s legitimate commercial interests will be met where it can expect to earn a normal market return on its investments, commensurate with the risks involved.

In this regard, the ACCC notes that wholesale ADSL services are provided using Telstra’s CAN, which is also used to provide many of its other services. It is not clear, therefore, that the risk characteristics associated with the use of the CAN for wholesale ADSL services would differ materially from those associated with any other CAN-dependant service.

Telstra’s legitimate commercial interests regarding return on investment would be addressed when the ACCC engages in the process of setting prices or a method of determining prices for any declared service.

In some circumstances the potential declaration of a service may raise concerns about the access provider’s ability to exploit economies of scale and scope. However, this appears unlikely to be an issue in relation to the current consideration of a declaration of a wholesale ADSL service (which Telstra already provides).

6.3.3 Incentives for investment in infrastructure

Under certain circumstances it may be efficient for access seekers to deploy, or extend the capacity or footprint of, DSL networks rather than seek regulated access to the Telstra wholesale ADSL service. The ACCC notes that declaration of a wholesale ADSL service could cause access seekers to reconsider planned deployment of DSLAM infrastructure.

That said, whether this is the case would depend upon a number of factors, including the services to be supplied and the relative costs of each supply model. In that regard, there is some evidence that where it is efficient to invest in DSLAM infrastructure, access seekers may continue to do so regardless of the availability of a regulated wholesale ADSL service. DSLAM investments may provide access seekers with an enhanced ability to differentiate their products, as access seekers may be able to offer increased functionality or service quality over their own DSLAM networks. In the UK, there has been strong take-up of LLU services not withstanding the availability of regulated wholesale broadband access (wholesale DSL).42

Questions

20. If the ACCC were to declare a wholesale ADSL services, is it likely that access seekers continue to invest in DSLAMs where it is efficient to do so?

42 OfCom, Review of wholesale broadband access markets – final explanatory statement and notification, 21 May 2008, p.14-15; OfCom, The Communications Market 2010: UK, http://www.ofcom.org.uk/static/cmr-10/UKCM-5.33.html .

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21. Does investment in DSLAM infrastructure enhance the ability of access seekers to differentiate products, through increased functionality and service quality?

Further, it could be that the opportunities for efficient investment in competition DSL networks have now declined significantly.

This is because areas that have not attracted DSLAM-based investment to date may exhibit natural monopoly characteristics. As noted in section 5.2, market evidence indicates that expansion of the collective “footprint” of competitive DSLAM roll-outs is slowing – with a growth of only a few ESAs per quarter. The comparatively low population density in many ESAs may make it difficult to obtain a commercial rate of return on a DSLAM investment because there are fewer potentially addressable customers per DSLAM.

Furthermore, the lack of competitively priced backhaul services in many regional and rural ESAs ,may be a significant barrier to DSLAM-based entry. In areas beyond the existing competitive footprint, DSLAM investment may not be efficient as Telstra may be able to service the entire demand for wholesale ADSL in such areas at much lower cost than if access seekers deployed their own DSLAM equipment.

There also appears to be substantial capacity on competing DSL networks in those ESAs where such networks are present. 43 This data indicates that in these mature ESAs access seekers are unlikely need to invest further in significant infrastructure to service any additional customers.

Further, the impending deployment of the NBN also has implications for investment in DSLAM infrastructure going forward. The NBN will render copper-based DSLAM infrastructure redundant. Uncertainty about the NBN deployment schedule, and the terms and conditions on which industry participants will gain access to the NBN further, increases investment risk. Over the medium to longer term, the deployment of the NBN could create an incentive for ISPs to reduce investment in DSLAMs as the DSLAM payback period becomes more difficult to attain.

In this regard, the ACCC has previously considered that an efficient access seeker could make a return on its DSLAM investment within two years.44 However, there is some recent evidence to suggest that this payback period may have underestimated the time necessary to recover DSLAM investments due to long lead times involved.45 Submissions by access seekers in the ACCC’s inquiry into varying the exemption provisions in the final access determinations for the WLR, LCS, and PSTN OA services suggest that in forecasting the payback period, factors such as planning, funding and construction, require consideration and result in longer lead times.46 Therefore, some access seekers consider that it is unlikely that they can recover investment cost of a DSLAM before the NBN is rolled out.47

43 ACCC, Inquiry into varying the exemption provisions in the final access determinations for the WLR, LCS and PSTN OA services: Final Report, December 2011, Appendix F. 44 ACCC, Telstra’s local carriage service and wholesale line rental exemption applications – Final decision and class exemptions, August 2008, p. 74. 45 Optus, Submission by Optus in response to the ACCC’s issues paper on inquiry into varying the exemption provisions in the final access determinations for the WLR, LCS and PSTN OA services, October 2011, confidential p.6 (public p. 6). 46 Ibid, confidential p.7, (public, p.6). 47 Macquarie Telecom, Submission by Macquarie Telecom in response to the ACCC’s issues paper on inquiry into varying the exemption provisions in the final access determinations for the WLR, LCS and PSTN OA services, October 2011, p. 14; Optus, Submission by Optus in response to the ACCC’s

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Incentives for investment in DSLAM infrastructure could be further dampened as the NBN approaches as ISPs can direct their capital funds away from DSLAM investments and towards investments in other infrastructure. During the transition to the NBN, access seekers will continue to have incentives to invest in infrastructure – such as transmission infrastructure and core networks– which will be used to interconnect with the NBN. Declaration of wholesale ADSL may promote efficient investment in the infrastructure used to provide value-added retail services which will become an increasingly important competitive dynamic once the NBN becomes the platform from which broadband is wholesaled to all ISPs.

Questions

22. Are significant opportunities for efficient investment in competing DSL networks – in terms of either expansion of the existing DSLAM footprint or increased investment in areas that have already attracted ULLS/LSS based competition? Is this likely to change over time?

23. What impact does the NBN have on incentives to invest in DSLAM infrastructure?

24. Could declaration of wholesale ADSL promote efficient investment in infrastructure that will be used to interconnect on the NBN or provide value-added retail services?

7 Considerations if the ACCC were to declare a wholesale ADSL service

If the ACCC were to declare a wholesale ADSL service it would be necessary to consider:

• the appropriate coverage of that declaration and any FAD, given that competition has emerged unevenly in different geographic markets; and

• the appropriate service description; and

• the expiry of the declaration.

Further, the ACCC must commence an inquiry into the setting of access determinations within 30 days after the declaration is made.48 An access determination can cover a broad range of terms and conditions but must specify the price or a method of ascertaining the price for access to the declared service.49 It may also contain non-price terms and conditions and/or impose other requirements on a carrier or CSP in relation to access to the declared service.

7.1 Coverage The ACCC has commenced this declaration inquiry in response to specific concerns about the commercial terms on which Telstra permits access to the wholesale ADSL service. The ACCC considers that, if declaration of a wholesale ADSL service is ultimately considered to be in the LTIE, it would appear appropriate for the service description to cover the supply of wholesale ADSL services on a national basis. issues paper on inquiry into varying the exemption provisions in the final access determinations for the WLR, LCS and PSTN OA services, October 2011, confidential p.6 (public p. 6). 48 Sections152BCH(1) and 152BCI(1) CCA. 49 Sections 152BC(3) and 152BC(8) CCA.

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The ACCC notes that while the level of competition varies between ESAs, market conditions indicate that concerns about the commercial terms on which Telstra provides access to the wholesale ADSL service continue to arise on a national basis.

The competition concerns discussed in section 6.1.1 are not specific to certain ESAs and are in regard to Telstra’s overall conduct. Moreover, as indicated in section 4.2, over the past decade the ACCC has conducted many investigations and taken regulatory action in response to allegations of Telstra’s anti-competitive conduct.

Should the wholesale ADSL service be declared, declaration could promote competition in the retail supply of high speed broadband services throughout Australia. Declaration in both metropolitan and rural and regional areas could promote and improve competition by encouraging market entry and thereby allowing access seekers to be price competitive. In light of the above, if the ACCC decides to declare a Wholesale ADSL service, a national service description for the wholesale ADSL service may be appropriate.

However, the ACCC also notes that it has the discretion to exclude, restrict or limit the application of the SAOs when determining the terms and conditions and scope of access determinations relating to a declared service (including, potentially, by excluding certain ESAs from the standard access obligations),50 and also to determine different terms and conditions for different classes of declared services.51 Therefore, if wholesale ADSL services were to be declared on a national basis, the ACCC has a further opportunity to consider whether different terms and conditions of access should be determined for various ESAs, or whether certain ESAs should be excluded altogether.

7.2 Service description Approach to service description

The ACCC has set out principles for developing a service description.52 These principles can be summarised as follows:

• While some degree of technical specification will be required, the ACCC’s preference is to make the service description in terms which are as functional as possible.

• The eligible service should be described in a manner which provides sufficient clarity for application of the SAOs.

• The service should be technically feasible to supply and charge for. Additionally, the service should be one which potential access providers are supplying to themselves and others.

• Terms and conditions of access should not be included in the service description.

For the purpose of this inquiry, the ACCC proposes to adopt a service description that makes clear each of the following matters:

• The service ends at the network boundary point at the end-user premises, and hence does not include the modem or in-premise wiring.

50 Section 152BC(3)(h) and (i) CCA. 51 Section 152BC(6); section 33(3A) Act Interpretation Act 1901. 52 ACCC, Telecommunications services – Declaration provisions: A guide to the declaration

provisions of the Trade Practices Act, July 1999, p. 27-28.

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• The point of interconnection is at a network-to-network interface that is in the same state/territory from which the access provider would serve the area in which the end-user is located – this would be expected to be the state/territory in which the end-user is located, but could potentially be another state/territory, e.g., exchange service areas that are adjacent to state borders. This point of interconnection could be expected to be in the relevant capital city, but the service description would not rule out other locations within the relevant state/territory.

• The service is supplied by means of digital subscriber line technology and uses asymmetric upstream and downstream data rates – this excludes other types of data services, including symmetric DSL services and cable broadband services. Digital subscriber line technology would include equipment such as DSLAMs, MSANS or similar.

• The access service is provided over a metallic line/path – this excludes services that are not supplied over a customer access network that uses a metallic path, such as wireless or fibre to the premise access networks, but would still include services that are provided over metallic paths from fibre fed RIMs.

• The service would, from the perspective of the access seeker, be a point-to-point layer two service – this does not exclude services where the access provider uses higher layer services in the transport (backhaul) network, provided that the access provider uses a static layer 2 tunnelling protocol giving the access seeker direct access to end-user sessions. This would however exclude multipoint services.

• Minimum or maximum data transfer rates are not mandated – hence both unshaped or shaped ADSL services, or particular variants of ADSL services such as ADSL2+ services, would fall within the scope of the service

Further, the ACCC considers that the service description should clearly include the Telstra “DSL Internet Grade” service (including ADSL and ADSL2+). Telstra’s service encompasses ADSL-based end-user access and transport of traffic to the wholesale customer’s point of presence.

The ACCC recognises that there could be issues around whether to include or exclude specific features or elements from the service description. The ACCC’s principal concern however would be to ensure that Telstra’s existing wholesale ADSL service offerings are covered in the service description. Proposed service description

The asymmetric digital subscriber line access service is a point to point service for the carriage of communications in digital form between a network-network interface that is a point of interconnection and a user-network interface that is supplied:

(a) by means of digital subscriber line technology; (b) over a customer access network that includes a metallic path;

and uses:

(i) asymmetric upstream and downstream data rates

(ii) a static layer 2 tunnelling protocol.

Definitions

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Where words or phrases used in this declaration are defined in the Competition and Consumer Act 2010 or the Telecommunications Act 1997, they have the meaning given in the relevant Act. Layer 2 has the same meaning as in the Open System Interconnection (OSI) Reference Model for data exchange.

a network-network interface that is a point of interconnection means an interface that is:

(a) a physical point of interconnection which allows the interconnection of facilities in accordance with subsection 152AR(5) of the Competition and Consumer Act 2010; and

(b) located in the same state/territory that the access provider associates with the exchange service area in which the user-network interface is located.

a user-network interface means the boundary point of the network that is

(i) associated with the end-user premise; and

(ii) ascertained in accordance with section 22 of the Telecommunications Act 1997.

7.3 Duration of declaration In specifying an expiry date the ACCC must have regard to the principle that an expiry date for a declaration should occur in the period:

• beginning 3 years after the declaration was made; and

• ending 5 years after the declaration was made. 53

The ACCC has discretion to specify an expiry date for a declared service that is longer than five years if it considers that circumstances warrant it.54

The ACCC’s discretion is part of the changes that were introduced by the CCA in order to enable the ACCC to provide longer-term regulatory certainty to promote competition and investment.55

The ACCC considers that should it decide to declare a wholesale ADSL service there may be benefit in providing certainty that the declaration will remain in place during the transition to the NBN.

7.4 Pricing The ACCC anticipates that if it were to declare a wholesale ADSL service, it would initially set price terms in an interim access determination using a methodology that could be quickly implemented. In this regard, the ACCC would use an RMRC methodology that applies Telstra’s average retail price (net of discounts) as the retail price. This reflects that RMRC can be implemented quickly and, if properly applied, the RMRC methodology can be appropriate.

53 Section 152ALA(2)(a) CCA. 54 Section 152ALA (2) CCA. 55 Explanatory Memorandum to the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Act 2010 (Cth), p.167.

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However, the appropriate pricing methodology and pricing levels to apply over the longer term would be matters for further consideration through a final access determination inquiry. As well as the appropriate level of prices, the ACCC would also consider as part of that process the appropriate structure of wholesale ADSL prices (including e.g. bundled prices).

7.5 Implications for other regulatory processes Should the ACCC decide that declaring a wholesale ADSL service is in the LTIE and would promote competition by safeguarding against anticipated competition concerns, there will be implications for the ACCC’s assessment of Telstra’s SSU. This is because Telstra’s SSU provides that should the ACCC declare the wholesale ADSL service and make a pricing decision for it under Part XIC of the CCA, Telstra will adopt the price terms specified in that decision as the basis for meeting its price equivalence obligations, in the same way as it has proposed for the existing declared services. The ACCC is conducting a consultation process in relation to Telstra’s SSU, and the consultation paper is available on the ACCC’s website at www.accc.gov.au.

Questions

25. If the ACCC declares a wholesale ADSL service:

(a) What is an appropriate service description?

(b) Should the service description cover wholesale ADSL services nationally, or be limited in geographic scope?

(c)What is the appropriate duration of the declaration?

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Appendix A: Overview of DSL

Appendix A briefly outlines the main features and functionalities which distinguish DSL services.

DSL technologies enable access seekers to provide end-users with broadband carriage services. There are a number of features or functionalities which distinguish the DSL services:

� The service is provided over the existing copper wire infrastructure. The use of legacy copper networks limits the data rates that DSL can support and the maximum data rates that can be provided fall as the distance between the customer and the exchange building increases.

� The service is always on, that is, no dial-up is required (allowing the user to maintain a permanent connection to the network enabling real time delivery of services such as email).

� Users of the service can utilise both voice and data services simultaneously.

� The service enables faster upstream and downstream data rates than dial-up internet.

DSL technologies can be asymmetric or symmetric. ADSL (asymmetric) services have a high downstream data rate service coupled with a lower rate upstream service. This service is typically used by households/consumers. Symmetric DSL services have symmetric Bandwidth capacity and are typically used by businesses.

ADSL2+ is an advanced ADSL technology that can achieve higher data rates than standard ADSL technologies. Whereas “standard” ADSL can only achieve data rates of up to 8 Mbps downstream and 384 Kbps upstream, ADSL2+ can achieve data rates in excess of 20 Mbps downstream and 1 Mbps upstream.

ADSL services are marketed to both residential and business users. Telstra separately markets a residential ADSL product and a wholesale business DSL product.56

Wholesale ADSL services comprise both a local access component, and a transmission component between DSL enabled exchanges and CBD points of interconnect (POI). In this respect, wholesale ADSL services are generally a more bundled service than the services which are currently declared (e.g. ULLS and domestic transmission capacity service (DTCS)).

56 Telstra Wholesale website: www.telstrawholesale.com/products/data/dsl-internet-grade.htm.

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Appendix B: The ACCC’s approach to the LTIE test The ACCC must decide whether declaring wholesale ADSL would promote the LTIE of carriage services, or of services supplied using carriage services. When determining whether something promotes the LTIE, regard must only be had to the extent to which it achieves the following objectives:

• promoting competition in markets for listed services

• achieving any-to-any connectivity in relation to carriage services that involve communication between end-users57

• encouraging the economically efficient use of, and the economically efficient investment in, infrastructure.58

The following discussion outlines in more detail the LTIE criteria.

2 Promoting competition

Competition is the process of rivalry between firms, where each market participant is constrained in its price and output decisions by the activity of other market participants. The benefits of competition to end-users are lower prices, better quality and a better range of services over time.

Subsection 152AB(4) and (5) of the TPA provides that, in determining the extent to which declaration is likely to result in the objective of “promoting competition”, regard must be had (but is not limited) to the extent to which declaration will remove obstacles to end-users gaining access to listed services.

The ACCC considers that denying service providers access to necessary wholesale services on reasonable terms is a significant obstacle to end-users gaining access to services. Declaration can remove such obstacles by facilitating the entry of service providers, thereby providing end-users with additional services to choose from.

Below are some concepts relevant to the consideration of promoting competition in markets for listed services.

Market Power

Competition may be inhibited where the structure of the market gives rise to market power. Market power is the ability of a firm or firms to constrain or manipulate the supply of products from the levels and quality that would be observed in a competitive market for a significant period of time.

An access regime such as Part XIC addresses the structure of a market, limiting or reducing the sources of market power, by allowing third parties to negotiate access to certain services on reasonable terms and conditions. Competition is promoted when market structures are altered such that the exercise of market power becomes more

57 This is the ability of end-users of different networks to communicate — the value of the network to an end-user depends on the number of other users that network allows the end-user to reach. Without any-to-any connectivity, smaller networks could only offer services to their own end-users, and would therefore find it difficult to attract new users, regardless of their long-term efficiency. 58 See subsection 152AB(2). In determining the extent to which a particular thing is likely to result the achievement of promoting competition and encouraging the economically efficient use of, and the economically efficient investment in, the infrastructure, regard must be had to other matters listed in subsections 152AB(4), (6) and (7).

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difficult. For example, barriers to entry may have been lowered (permitting more efficient competitors to enter a market and thereby constraining the pricing behaviour of the incumbents) or because the ability of firms to raise rivals’ costs is restricted.

Identifying the relevant markets

To assist in determining the impact of the declaration on markets, the ACCC will first need to identify the relevant markets and then assess the likely effect on competition in each market.

Section 4E of the TPA provides that the term “market” includes a market for the goods or services under consideration as well as any other goods or services that are substitutable for, or otherwise competitive with, those goods or services. The ACCC’s approach to market definition is discussed in its 2008 Merger Guidelines, is canvassed in its information paper, Anti-competitive conduct in telecommunications markets, August 1999 and is also explored in the ACCC’s second Fixed Services Review position paper, April 2007.

Assessing the impact of the declaration on relevant markets

The next step is to assess the likely effect of the proposed declaration on competition in each relevant market. As noted above, subsection 152AB(4) requires regard to be had to the extent to which a particular thing will remove obstacles to end-users gaining access to listed services.

3 Any-to-any connectivity

Subsection 152AB(8) states that the objective of any-to-any connectivity is achieved if, and only if, each end-user who is supplied with a carriage service that involves communication between end-users is able to communicate, by means of that service, with other end-users whether or not they are connected to the same network.

The any-to-any connectivity requirement is particularly relevant when considering services that involve communications between end-users. When considering services which do not require user-to-user connections (such as carriage services that are inputs to an end-to-end service or distribution services, such as the carriage of pay television), this criterion is generally less of an issue.

4 Efficient use of, and investment in, infrastructu re

In determining the extent to which declaration is likely to encourage the economically efficient use of, and investment in, infrastructure, subsections 152AB(6) and (7A) of the TPA provide that regard is to be had (but is not limited) to the technical feasibility of providing the service, the legitimate commercial interests of the supplier, and the incentives for investment in infrastructure.

Economic efficiency has three components:

• Productive efficiency refers to the efficient use of resources within each firm to produce goods and services using the least cost combination of inputs.

• Allocative efficiency is the efficient allocation of resources across the economy to produce goods and services that are most valued by consumers. It also refers to the distribution of production costs amongst firms within an industry to minimise industry-wide costs.

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• Dynamic efficiency refers to efficiencies flowing from innovation leading to the development of new services, or improvements in production techniques. It also refers to the efficient deployment of resources between present and future uses, such that the welfare of society is maximised over time.

An access regime may play an important role in ensuring that existing infrastructure is used efficiently where it is inefficient to duplicate the existing networks or network elements. An access regime must also not discourage investment in networks or network elements where such investment is efficient.

Paragraph 152AB(6)(a) requires the ACCC to have regard to a number of specific matters in examining whether declaration is likely to lead to achievement of the objective in paragraph 152AB(2)(e). Some of these are outlined below.

Technical feasibility

In assessing the technical feasibility of supplying and charging for a service, the ACCC will consider the:

• technology that is in use, available or likely to become available

• costs involved, and whether it is reasonable or likely to become reasonable

• effects or likely effects on the operation or performance of telecommunications networks.

The ACCC will look to an access provider to assess whether it is technically feasible to supply the relevant service, and will also consider experiences in other jurisdictions.

The legitimate commercial interests of the supplier

A supplier’s legitimate commercial interests are its obligations to the owners of the firm, including the need to recover the cost of providing services and to earn a normal commercial return on the investment in infrastructure. The ACCC considers that allowing for a normal commercial return on investment will provide an appropriate incentive for the access provider to maintain, improve and invest in the efficient provision of the service.

Paragraph 152AB(6)(b) also requires the ACCC to have regard to whether the access arrangement may affect the owner’s ability to realise economies of scale or scope. Economies of scale arise from a production process in which the average (or per unit) cost of production decreases as the firm’s output increases. Economies of scope arise from a production process where it is less costly for one firm to produce two (or more) products than it is for two (or more) firms to each separately produce the relevant products.

Declaration is more likely to impact on a supplier’s ability to exploit economies of scope than economies of scale. A limit in the capacity available to the owner may constrain the number of services that the owner is able to provide using the infrastructure and thus prevent the realisation of economies of scope associated with the production of multiple services. In contrast, economies of scale may simply result from the use of the capacity of the network and be able to be realised regardless of whether that capacity is being used by the owner or by other carriers or CSPs. The ACCC will assess the effects on the supplier’s ability to exploit both economies of scale and scope on a case-by-case basis.

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Incentives for investment

Firms should have the incentive to invest efficiently in the infrastructure by which the services are supplied (or are capable, or are likely to become capable, of being supplied).

Access regulation may promote efficient investment in infrastructure. It reduces the barriers to entry for other (competing) businesses as well as reducing the barriers to expansion by competing businesses. The ACCC must also consider the effects of any expected disincentives to invest arising from anticipated increases in competition.

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Appendix C: Questions on which submissions are sought

1. What is the relevant market for the purpose of this Discussion Paper and the application of the LTIE test?

2. Do you consider that Telstra’s wholesale terms and conditions inhibit competition? If so, what have been the effects on the ability of access seekers to compete?

3. Do access seekers have data to indicate the effect of Telstra’s access terms on their ability to compete? Please indicate the relevant market shares of customers on-net and off-net.

4. Are there any instances whereby delays in the negotiation of revised wholesale DSL charges following Telstra’s retail price changes have affected the ability of access seekers to compete? If so, please specify the duration and impact of the delays.

5. Do you consider that Telstra’s wholesale terms and conditions restrict the nature of service offerings? For example, the provision of large data quotas and retail products such as IPTV and multimedia content.

6. Are there any business cases that have been or could be frustrated as a result of the pricing of AGVC?

7. Are there instances where access seekers provide DSL services on more competitive terms if they use their own DSL network or where supply of wholesale ADSL is available from another provider? If so, please detail the differences.

8. Could early termination charges discourage access seekers from providing services over alternative networks?

9. Are there any instances of price discrimination between access seekers? If so, what is the basis for the price discrimination?

10. Are there any instances of price discrimination on access seekers that choose to use their own infrastructure or an alternative wholesale supplier to the incumbent?

11. Do you consider that it is imperative to have a pre-existing subscriber base prior to the rollout of the NBN? If so, will an existing market share provide a material comparative advantage? If so, how?

12. Are access seekers concerned about Telstra migrating its customers onto the NBN and contractually “locking in” customers by specifying a minimum term or imposing prohibitive switching fees?

13. Are there are any other potential risks to competition that may arise in the transition to the NBN if wholesale ADSL is not regulated? If so, what are they?

14. Has the NBN changed the strategic importance/value of expanding during the transitional period leading up to the NBN? Why or why not?

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15. On the NBN, do you anticipate increased competition to take place on value-added retail services such as IPTV? Are access seekers considering deploying value-added services during the transition to NBN?

16. Does investment in value-added retail services such as IPTV require greater customer scale, and if so, to what extent would a declaration of wholesale ADSL offer opportunities to obtain this scale?

17. Do you consider that declaration of wholesale ADSL will promote competition in the transition to the NBN? Why or why not?

18. If the ACCC were to declare a wholesale ADSL services, is it likely that access seekers continue to invest in DSLAMs where it is efficient to do so?

19. Does investment in DSLAM infrastructure enhance the ability of access seekers to differentiate products, through increased functionality and service quality?

20. Are significant opportunities for efficient investment in competing DSL networks – in terms of either expansion of the existing DSLAM footprint or increased investment in areas that have already attracted ULLS/LSS based competition? Is this likely to change over time?

21. What impact does the NBN have on incentives to invest in DSLAM infrastructure?

22. Could declaration of wholesale ADSL promote efficient investment in infrastructure that will be used to interconnect on the NBN or provide value-added retail services?

24. If the ACCC declares a wholesale ADSL service:

(a) What is an appropriate service description?

(b) Should the service description cover wholesale ADSL services nationally, or be limited in geographic scope?

(c)What is the appropriate duration of the declaration?