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Chapter 7 - Flexible Regulatory Regime and Policy Settings
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RECOMMENDATION Need for responsive regulatory regime
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The current telecommunications regulatory framework has as its primary objective the promotion of the long term interests of end users of communications services. This objective remains highly appropriate as the focus of communications regulation and policy moves towards broadband technologies and services. However even with the same objective, fulfilling the objective requires continual assessment and, where necessary refinement or amendment of the regulatory regime.
In advancing the long term interests of end users, the regulatory regime should continue to create effective pro-competitive market arrangements that encourage investment in infrastructure and applications.
7.1 Role of Government
A year ago United States Federal Communications Commission Chairman Michael Powell made the following pertinent observations in a major speech on broadband policy:
The government sometimes acts like an indignant customer demanding to be served, but who has no intention of paying. We place orders for public policy widgets and expect them to be delivered at provider expense ... We have to recognise that a supplier at the end of the day is going to do very little to fill the order if it does not have an economical way of doing so and getting paid ... in setting out our (broadband) policy goals, we must simultaneously attempt to support an economic environment that will allow the supplier to get adequately compensated, or we will have many years of dissatisfaction because the supplier will rarely fully perform. In short, we must be much better at trying to pursue public policy objectives that align provider incentives, rather than act at cross-purposes with them.[1]
The Government plays a vital role, through its policy settings, leadership and by establishing the regulatory framework, in supporting the ongoing development of the broadband market in Australia.
To date, competition in telecommunications has delivered substantial benefits to consumers in the form of lower prices, improved quality of service, greater choice of products and services, and more flexibility. However, the development of competition has been uneven across different sectors of the communications market, although there is clear evidence of competition emerging in the delivery of broadband services. For example:
- There are now multiple providers of retail ADSL services
- Telstra, Optus, TransACT, Bright Telecommunications and Neighbourhood Cable all own cable networks offering cable modem access services. Cable services are now available in most capital cities and regional Victoria
- There are over 20 providers of high speed data services to corporate users - utilising a variety of services including ATM, frame relay, and managed IP networks.
If the broadband market is going to continue to develop, the regulatory framework must focus on encouraging efficient market outcomes, sustainable competition and removing barriers to entry. This will necessitate a lean regulatory regime that provides incentives for ongoing investment and innovation in broadband infrastructure and services while advancing the long term interests of end users.
For investment to occur on a large scale there is a need for regulatory certainty. This is particularly important in a market where investors have to heavily discount future returns especially as in the current telecommunications environment, the financial markets tend to class investments in next-generation infrastructure as speculative. At the same time regulation needs to be flexible enough to be adapted to address emerging bottlenecks and issues arising from continued technological development. In supporting a dynamic environment for the supply of broadband services, regulatory policy needs to concurrently consider both the short-medium term and longer term objectives. In the short-medium term attention should be on effectively utilising existing infrastructure. Over the longer term the focus needs to recognise the potential for new services and technologies to lead to the provision of qualitatively different services.
7.2 Recommended approach
Regulatory regime
There are several strategies that the Government can adopt in order to support the development of a dynamic environment for the supply of broadband. The combination of strategies and the emphasis on particular strategies will need to change as the market develops.
The principal strategy for the Government is, as far as practicable, to rely on the private sector and market interactions as the primary vehicles for investment decisions and innovation. It is recognised internationally that contestability and competition at both the retail and infrastructure level are likely, as long as they are sustainable, to be a major spur to the take-up of existing services and innovation and the development of new services. In 2001 the OECD concluded that the most fundamental policy available to governments to boost broadband access is infrastructure competition and, where this is not possible, competition would be assisted by policies designed to promote access to networks.[2]
However, the Government should be willing to intervene where there are clear cases of market failure, in a way which as far as possible does not distort the future market development.
Accepting the fundamental policy principle of market driven investment decisions, the regulatory framework established by government needs to encourage efficient market entry as a primary lever for fostering competition and competitive pressure. There are a number of elements that are necessary to encourage efficient market entry:
- appropriate spectrum policies which allow new wireless technologies to emerge
- appropriate licensing policies
- technology neutral regulation
- access arrangements which take account of the network benefits enjoyed by incumbent operators
- technical regulation favouring interoperability between networks and systems
- an access regime which as far as practicable neutralises the network benefits to incumbent carriers of bottleneck infrastructure and services
- reducing information asymmetries facing new entrants
- avoiding taking decisions that could embed inferior technologies.
It is also critical to ensure that there are timely and soundly-based processes in place for identifying and dealing with abuses of market power. To assist in the early identification of anti-competitive cross subsidies, it is important to have mechanisms that allow transparency of cost structures within incumbents.
As well as contributing to a policy environment which encourages market entry and deals with abuses of market power, regulation must also be forward looking and remain appropriate to market conditions as convergence continues to evolve.
Most of the elements listed above already exist but it is important to ensure that the regulatory regime continues to be responsive to changing market conditions. It must maintain the existing regulatory philosophy while improving its ability to deliver timely, efficient and transparent outcomes for the industry. The recent key changes are:
- encouraging further investment in telecommunications infrastructure required for broadband and other key communications services, by enabling potential investors to obtain up-front certainty, through undertakings to the ACCC about access prices and terms and conditions that will apply to their future investments
- providing greater certainty and more timely access for access seekers, by removing merits review of ACCC arbitrations, requiring the ACCC to produce model terms and conditions for 'core' telecommunications services, encouraging voluntary undertakings and ensuring the effective operation of the standard access obligations
- improving the operation of the anti-competitive conduct regime under Part XIB by enabling the ACCC to issue advisory notices before a competition notice is issued and requiring the ACCC to consult with affected parties before issuing a competition notice
- requiring the preparation and publication of regulatory accounts to provide greater transparency of Telstra's wholesale and retail operations, particularly in relation to the 'core' interconnection services provided over Telstra's network.
Internet peering
The current arrangements for international and domestic internet traffic charging between networks, in particular the system generally known as peering whereby charges are levied on the basis of the relative amount of traffic exchanged between networks, is a significant issue for Australian broadband providers.
International connectivity costs form a large component of the costs of providing internet services in Australia. Under the current international peering arrangements, Australian ISPs typically pay for the full international carriage costs for data moving between Australia and the United States. In addition, Australian ISPs have to pay an access charge if they are connecting to one of the large United States internet providers. ISPs in the United States pay neither of these costs when sourcing data for their customers hosted in Australia. Telstra's enhanced peering status in the US creates an opportunity for a reduction in international carriage costs for the company.
With around 80 per cent of Australian internet traffic being sourced from the United States, the cost of international connectivity is one of the reasons why Australian broadband service providers have chosen to impose per megabit charging in their pricing plans.
The Government should use all available means to push for reform of international charging arrangements, continuing to seek reform through multilateral as well as bilateral processes.
Within the Australian market, the apparent discretionary nature of internet traffic exchange arrangements between various internet service providers has also been raised as adversely impacting on the price at which broadband services can be offered by competitors. Commercial arrangements have been struck by a number of providers that allow for the free exchange and carriage of data between networks in recognition, at least in part, of the similarity in the load of data transferred between each network. However, concerns exist that similar arrangements have not been extended to other like networks thereby favouring certain operators to the detriment of the overall competitiveness of Australia's internet market.
[1] National Summit on Broadband Deployment, Washington D.C., October 25, 2001.
[2] OECD, The Development of Broadband Access in OECD Countries, October 2001.