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  • Presentation to ACCC: HFC Exemption Application

    2 May 2008

    Public version

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    1. Optus position on key issues

    2. The overlapping exemptions problem

    3. Additional data

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    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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    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 have undertaken 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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    1. Optus position on key issues

    2. The overlapping exemptions problem

    3. Additional data

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    • 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 for Telstra 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

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