Presentation to ACCC: HFC Exemption Application
2 May 2008
Public version
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Overview
1. Optus position on key issues
2. The overlapping exemptions problem
3. Additional data
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Overview
1. Optus position on key issues
2. The overlapping exemptions problem
3. Additional data
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The hurdle is high, investment is crucial
• To grant the exemption, the ACCC must be affirmatively satisfied that the exemption will promote the LTIE.
– Requires an improvement on the existing situation
• This will require affirmative satisfaction that:– the exemption would cause Optus to invest more in the development of its HFC
network than it is otherwise likely to; and that– such investment will:
• encourage efficient use of infrastructure and • promote competition
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Investment to connect MDUs is not economic
CiC• Access costs are high (lead-ins, masonry, internal wiring to units, network upgrade)• Penetration rates are uncertain and impacted by Telstra’s HFC network• Cable succeeded in other jurisdictions because operators had advantages Optus never had:
– Geographical monopoly– Incumbent prohibition– Profitable pay TV– Favourable market profile of MDUs
Optus has never been able to establish a viable business case for HFC service to MDUs• This is despite repeated analysis of the issue• It was not economically feasible to connect MDUs even prior to the emergence of ULLS as a
commercially viable supply option• April 2000 commercial analysis noted “long payback period”• July 2003 commercial analysis found:
– “Low NPV… CiC”– “Unattractive payback period of CiC”
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HFC services to business customers not feasible
Telstra argument: • exemption upgrade HFC serves business customers
This argument ignores geography and economic feasibility:• Large corporate customers are located in CBDs and business parks
– no HFC coverage– If Optus builds network in these areas it will be fibre
• SME commercial buildings are subject to same problems as MDUs– Access costs are high (lead-ins, masonry, internal wiring, network upgrade)– Penetration rates are uncertain and impacted by Telstra’s HFC network
• Optus has never been able to establish a viable business case– We plan to submit commercial analysis
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CiC
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CiC
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Investment would not be efficient
• Even if the exemption did motivate additional investments by Optus, any impact of the proposed exemption in promoting such investment would not be efficient
• Supply of HFC to MDUs and unserviceable SDUs is:– Inefficient duplication of infrastructure– Not least-cost service provision
• Decisions about the level, timing and pattern of investment in the HFC network are best made by the party bearing the risk
• The ACCC promotes efficient investment by setting the ULLS access price: – Price = efficient cost of supply – Sends the correct economic signal to encourage efficient investment by access seekers– Access seekers will make efficient investment decisions on that basis– An exemption cannot improve efficient investment relative to the current situation
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Exemption would deter infrastructure investment
• This exemption would set a precedent: – Infrastructure investment results in loss of access to Telstra's CAN
• Exemption would deter investment in infrastructure-related projects in future, eg:– Carriers with existing networks from expanding (eg TransACT); and– Other carriers developing network infrastructure
• Risk recognised by Martin Cave:[exemption] "… will create disincentives for investment in the future: an operator will fear that if it invests, it (and it alone) will be forced to negotiate for access on commercial terms, or be denied access, … which continues to be available to other competitors which haveundertaken less infrastructure investment.“ – Cave, p.14
• Cave’s proposed solution based on the ACCC 'signalling' its future intentions:– would not address incentives of carriers with existing networks (eg TransACT)– cannot legally be implemented by the Commission
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Purported benefits are highly uncertain…
It has not been shown that:• Optus would have the incentive to invest, or • that investment would lead to an improvement in competition
– Telstra has not demonstrated that end users (eg MDU residents) would benefit from the availability of Optus HFC as opposed to Optus DSLAM-based services
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…but the damage to competition is certain
If granted we can say with certainty that the exemption would harm competition:• Consumer market: reduced choice of provider for residents of MDUs and
unserviceable SDUs • Wholesale market: reduced choice of provider for wholesale purchasers
– There is no HFC wholesale product available today– Any HFC wholesale product would be unattractive to wholesale customers due to:
• costly and time-consuming work required at customer premises, and • reduced coverage / scale
• Small business: would face reduced choice of provider – commercial premises usually unserviceable by HFC
• Corporate market: Optus’ ability to submit compliant tenders reduced– some premises unserviceable by HFC– HFC unable to meet business SLAs
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Overview
1. Optus position on key issues
2. The overlapping exemptions problem
3. Additional data
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Summary
• Optus’ position has been set out in letters of 21 February 2008 and 3 April 2008.
• Telstra’s overlapping applications in respect of WLR, LCS and PSTN OA and the necessarily contingent nature of the HFC exemption application make it impossible for the ACCC to properly apply the legal test in s152AT(3).
• The ‘contingency’ of Telstra’s HFC exemption application may well invalidate the application so that the ACCC has no jurisdiction to make a decision under s152AT(3)
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The overlap
• Telstra itself has acknowledged the significance of the overlap between the HFC exemption application and other extant exemption applications.
• Optus estimates there are at least 200 ESAs in which Telstra seeks exemptions from SAOs owed to Optus as an access seeker for WLR, LCS and PSTN OA under both earlier exemption applications and the HFC exemption application.
• There is no statutory basis upon which the Commission can take a “net outcome” approach across different exemption applications as urged by Telstra. That would be a misapplication of the test.
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Telstra’s contingent HFC exemption
Description of the declared services to which the application relates:This Exemption Application relates to:(a) the ULLS and the LSS; and(b) to the extent not covered by another exemption under s152AT(1) of the TPA:
(i) LCS;(ii) WLR; and(iii) PSTN OA,each of which are “declared services” pursuant to section 152AL(3) of the TPA (together the Exempt Services).
Description of exemption applied forTelstra applies for an exemption from all of the standard access obligations set out in
section 152AR of the TPA in respect of access to the Exempt Services in the Exemption Area:
(a) directly to SingTel Optus; or(b) indirectly to SingTel Optus…
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The Commission’s power to decide
• Section 152AT(3) invests jurisdiction in the ACCC to make a substantive decision.• Section 152AT(3) gives the ACCC two options “after considering the application”:
– An exemption order can be made; or– The application can be refused
• The discretion to decide between them is described in s152AT(4).• Section 152AT(4) requires the ACCC to select the refusal option unless satisfied that
an exemption order is in the LTIE.
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The test is impossible to apply
• The application of the correct legal test under s152AT(4) to the HFC exemption application requires the ACCC to look forward and compare the likely state of competition in relevant markets with and without the HFC exemption.
• This analysis must be different depending on whether the HFC exemption application includes within its scope the WLR, LCS and PSTN OA services (3 of the 5 services) in the 200+ ESAs where there is overlap.
• Situation now crystallised with draft WLR / LCS decision exempting 229 of 387 ESAs. If this is made final then Telstra’s HFC application is limited to seeking exemption for WLR / LCS within part or all of at least some of the remaining 158 ESAs.
• In other words, the scope of the HFC exemption sought will be narrower if the other exemption applications upon which Telstra has made it contingent are successful and broader if not.
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Think through the consequences
• Think through the consequences of the contingent HFC application in the event of a party seeking review in the Tribunal of exemption decisions – a not unlikely event given ACCC’s history and current experience!
• Section 152AW(4) and interpretation of analogous provisions in Seven Networks Limited (No 4) (2005) mean that the Tribunal will not consider any information or facts not before the Commission at the time it made its decision. In other words, the Tribunal puts itself in the Commission’s shoes as at the date of its decision.
• This creates a far from fanciful prospect of outcomes which are so absurd and embarrassing as to suggest that they cannot have been intended by the legislation to be possible.
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A scenario
• Consider the following:– The Commission makes its determination in relation to the LCS and WLR exemption
applications along the lines of the draft decision;– Telstra or Optus (or any other party) seeks a review by the Tribunal;– the Commission makes its determination in relation to the HFC exemption application,
and defines the scope of the exemption sought based on the decision it made in relation to the LCS and WLR exemption applications;
– the Tribunal overturns the determination of the Commission in relation to the LCS and WLR exemption applications;
– Telstra or Optus seeks for the Commission's decision in relation to the HFC exemption application to be reviewed by the Tribunal.
• In making the last decision, the Tribunal would be required by s152AW(4) not to take into consideration the circumstance that it had previously overturned the determination of the Commission in relation to the LCS and WLR exemption application; thereby changing the scope of the HFC exemption application.
• The Tribunal therefore faces a logical impasse, being required base its decision on an incorrect view of the scope of HFC exemption application.
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A scenario
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What enlivens the ACCC’s power to decide?
• Optus believes the kind of absurdity demonstrated supports strongly the view that the ‘contingency’ of Telstra’s HFC exemption application invalidates it so that the ACCC has no jurisdiction to make an order under s152AT(3)(a).
• Not surprisingly, the jurisdiction for decision-making under s152AT(3)(a) is not ‘at large’. It is only enlivened in certain circumstances.
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Three requirements
• These circumstances are expressed in section 152AT. • There are at least 3 requirements:
– First, the ACCC must consider the application before making an order (s152AT(3))
– Second, the application • must be in writing; and• in a form approved in writing by the Commission
(s152AT(2))– Third, there must be an application by a carrier or carriage service provider
seeking exemption from all or any of the obligations referred to in section 152AR (s152AT(1))
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Section 152AR – standard access obligations
• Look more closely at the third requirement: the requirement in s152AT(1) is that the application identify the obligations in s152AR which are sought to be exempted.
• Section 152AR(3) describes the fundamental standard access obligations by reference to:
– an active declared service; or– the active declared service.
• It follows that an application must identify the SAOs to be exempted delimited by reference to the active declared service/s to which it would otherwise apply.
• Telstra can’t do that given the overlapping applications – the best it can do in respect of three active declared services is seek exemption ‘to the extent’ the SAOs exist. It’s application therefore does not meet the requirements of s152AT(1) and one of the three express requirements which must exist before the ACCC makes a decision is not satisfied.
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Overview
1. Optus position on key issues
2. The overlapping exemptions problem
3. Additional data
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HFC vs ULLS footprint
Optus DSLAMs were deployed to reach customers not serviceable by HFC• We plan to submit coverage maps of HFC network and Optus DSLAM footprint
DSLAMs were deployed based on the number of existing off-net Optus customers, so:• TESAs with high HFC coverage often excluded
– Eg Lindfield• However some TESAs with apparently high HFC coverage still had many off-net
customers since there are many unserviceable homes within the HFC footprint
In reading coverage maps, note that:• HFC coverage often covers only part of a given TESA• ULLS coverage is not uniformly available throughout these TESAs as it is affected by:
– Distance limitation– Pair gain systems
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Unserviceable premises
We plan to submit further on MDU numbers due to new construction in recent years
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Investment to serve unserviceable premises
We plan to submit further data on the costs of serving SME commercial premises (prior to the emergence of ULLS)
– CiC
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Other data requirements
Remaining priority data requirements?
