Do we need the legislative blackmail?

The Senate Standing Committee Inquiry into the Telecommunications Legislation Amendment has already come out and said that it thinks the proposed changes to the structure of the industry are a good thing.

Despite Senator Nick Minchin's claim that it's all legislative blackmail, the report concluded that "while further examination of issues raised above is warranted, the committee believes that the passage of the Bill should not be delayed".

So hang on, why the rush? As you'll hear in today's Twisted Wire, which eavesdrops on the committee's public hearing in Melbourne last month, Telstra says it is close to having an IT system capable of providing an equivalent service to its wholesale customers as it does to its own retail division.

There's also the question as to why, if we separate Telstra, do we need public investment into the NBN? Wouldn't a structurally (or functionally) separated Telstra invest more in infrastructure and manage the build themselves? I ask if it isn't all a bit "arse about"?

You'll hear from the witnesses at the public inquiry held in Melbourne on 13 October:

• Geoff Booth, group managing director, NBN Engagement, Telstra
• Tony Warren, executive director, Regulatory Affairs, Telstra
• Andrew Sheridan, general manager, Interconnect and Economic Regulation, Optus
• David Havyatt, manager, Regulatory and Corporate Affairs, Unwired
• Matt Healy, national executive, Regulatory & Government, Macquarie Telecom
• John Horan, general manager, Legal and Regulatory, Primus Telecom
• Dale Clapperton, legal counsel, Pipe Networks

Be sure to let us have your thoughts too, in the Talkback section at the end of this post.

You can also read the transcript of the full day's hearing (PDF) or read the Senate inquiry report on the Bill.

See transcript here.

Phil Dobbie (ZDNET): This week on Twisted Wire, we hear how Telstra is talking to the government about a way forward without the proposed legislative change.

Geoff Booth (Telstra): ... these negotiations commenced before this Bill was introduced.

Dobbie: They say issues with wholesaler customers are often exaggerated:

Dr Tony Warren (Telstra): We do not believe it is anywhere near as bad as people make out.

Dobbie: But Optus, naturally, like it — and they like repeated quotes from Senator Conroy — they like him, too.

Andrew Sheridan (Optus): ... so that the wrongs of the past 12 years can be addressed.

Dobbie: We'll also hear from Pipe Networks, Unwired, Macquarie Telecom and Primus Telecom, as we hear the arguments for and against the proposed telecommunications reform. That's all today on Twisted Wire.

While the senate inquiry into the NBN has been going on for some time, and is yet to produce its report, the Senate Standing Committee on the Telecommunications Legislation Amendment Bill 2009 — that contentious one that will threaten Telstra with a functional separation, divesting itself of its share of Foxtel and denying access to 4G spectrum — yes, that one — this inquiry has been relatively quick.

It was called for by the senate on 17 September, submissions were in by the 7th of last month, they held a couple of public inquiries and the report was produced on 26 October. This week and next, we'll hear the views from those public inquiries, today from Melbourne on 13 October and from Canberra on the 14th.

By now you'll know that the report recommended that the Bill be passed. The committee said it will be to the benefit of providers and consumers and, while further examination of some of the issues raised is warranted, they say that shouldn't hold back the passing of the legislation.

First up in Melbourne, the case for the negative from (who else?) Telstra. Well, actually probably no one else, or very few, in the Telco sector — but a lot of shareholders probably support their views. Although, to be fair, Telstra do say that, although they oppose the passage of the Bill in its current form, they're looking for a win-win outcome in all this, but the win for Telstra has to be an acceptable outcome for their shareholders, of course. And Telstra is talking to the government, but:

Booth: Given the commercial sensitivity of these discussions it would not be useful for us to comment on the details of those discussions at this point. What we can say, however, is that these negotiations commenced before this Bill was introduced. We strongly believe that the way to realise a mutually acceptable outcome on the National Broadband Network is via commercial negotiations and not via legislation.

Dobbie: They're going to have to get a bend on then if they want to stop the new legislation being passed, which is why Telstra want to see the passing of the Bill deferred. That was Geoff Booth, by the way, who used to run Telstra Countrywide at one stage, but today he is Telstra's Group MD for NBN Engagement. There's another job the NBN has created already! And as for that legislation, it will ...

Booth: ... impede the achievement of the National Broadband Network vision; it will reduce competition, especially in the mobile and media markets; it will harm consumers, particularly those in rural and regional Australia; it will not necessarily result in industry reform; it will provide the ACCC with expanded powers unparalleled in any other industry; and it could destroy value for the 1.4 million shareholders who have purchased Telstra shares from the government over the past 12 years.

Dobbie: But then there are these secret discussions, positive ones we're told, that are looking at how Telstra can be involved in the NBN, and achieve the government's vision without resorting to all this legislative change. One of the issues Telstra raises is if they are forced to functionally separate and then buy access from the NBN, that's a massive two-stage migration process.

Booth: The time taken to implement functional separation would create at least a double migration for customers from the current Telstra legacy systems to the functionally separated legacy systems; indeed, if Telstra were then to buy from a National Broadband Network it would require a third set of IT changes. So this multiple migration does significantly add to the risk of customer service and billing programs with millions of customers involved. It really magnifies the potential for some chaos.

Dobbie: Can't fault the logic of that one, can you? And he says having people working on the separation would take the focus away from developing new systems to access the NBN. Plus, of course, separation doesn't come cheap. In Britain, BT put the cost at around $300 million or so. Telstra reckon it will be closer to around $1 billion. Why the difference? Well Telstra say, over and above the system changes at the wholesale level, there's all the retail products that need to change as well to meet the new wholesale structure — something that other retailers have had to live with — moulding their products according to Telstra's wholesale offerings.

Warren: The billion dollars that we have put in there we think is a serious estimate having spoken at length with both BT, Telecom New Zealand and, to some extent, Telecom Italia as well.

Dobbie: Telstra's Dr Tony Warren, executive director of Regulatory Affairs — who has something to say on the hotly debated topic of equivalence — asks does a wholesale customer get the same prices and services and access as Telstra retail? Well, of course they do — there may have been issues, but ...

Warren: We do not believe it is anywhere near as bad as people make out and so it therefore in no way justifies the massive cost of the solution.

Dobbie: He says they have just been through a massive IT transformation and their new systems are ...

Warren: ... absolutely customer agnostic and are completely blind.

Dobbie: These new systems, costing hundreds of millions of dollars, will be available very soon and should fix up the issues they say. And as for fixing up disputes, that's simple — don't leave it with the lawyers, get an engineer.

Booth: We basically suggested in our previous submission that you could sit such a person within the ACCC as a specialist adviser, but essentially what we are saying is that you need an engineer to deal with some of these problems rather than trying to have economists and lawyers (much as I am sure we would all agree that they are fantastic at these things). You really do sometimes need specialists to sit down and say: "That's rubbish; this is rubbish. Why don't you try this?"

Dobbie: Now that makes sense — but just going back a moment, if Telstra can provide equivalence with their new IT systems, why will it cost a billion dollars extra if they are separated — hasn't the work already been done?

Booth: Just to be clear, functional separation BT-style would require retro-fitting of the systems. The BT-style model is "chop it up and duplicate it". We are saying that with our new systems much of the manual processes, if not all, have been taken out and equivalence has been hard-wired in there, not because of functional or operational separation or accounting separation. As you know, under the standard access obligations under part 11C we have to have that equivalence. That has been there from the very beginning of the regime.

Dobbie: Although many would say, it's not been totally adhered to — hence the call for this new legislation. And if the new law is passed, how long will Telstra have to split itself apart? Quite some time is the answer.

Booth: The legislation as it currently stands means that, three months from royal assent, the minister must give a direction to ACCC on what any minister would expect from functional separation. We then have three months to put an undertaking in, and then the ACCC has to assess that. As to the timing of how long we would have to implement separation, that really depends upon what we put in our undertaking and what is acceptable to the ACCC. You can see from our submission that the experience from overseas is that how long it will take really depends on the flavour of separation imposed upon us.

Dobbie: So it could be years before the changes are even started, let alone implemented. By which time the NBN might well exist, or at least only be a couple of years away. In the meantime it defocuses a lot of time and effort from Telstra, providing no long-term benefit to its shareholders — or anyone really. And as for those two threats hanging over Telstra's heads with this new legislation: are they in the public interest?

Warren: We believe that taking us out of the upgrade path, the 4G market, would basically reduce competition in that market, particularly for rural and regional consumers, for whom we are the only network. Secondly, in the Foxtel space, clearly if we were forced to divest Foxtel it is most likely that a media player would acquire that, and we have not seen a good argument for how a greater concentration of media can be in the consumer interest.

Dobbie: All interesting points from the Big T. Next came the not-quite-as-big Big O. Andrew Sheridan is the general manager, Interconnect and Economic Regulation at Optus — so there! They love the proposed changes — that's why he toadied up to the panel.

Sheridan: I would, thanks. Firstly, thank you for the opportunity to appear before the committee today.

Dobbie: And they seem to think it will do the trick.

Sheridan: It addresses problems that exist in the market today and impact all users of telecommunications services. It is important therefore that the reforms are enacted in full and quickly, so that the wrongs of the past 12 years can be addressed.

Dobbie: Of course it's only wrongs from the past 12 years of telecommunications — if you had an affair, or said something awful to your mother — this law does nothing for that. But as for fixing up the telco industry, well Optus would say that wouldn't they? Being a Pom he was inevitably asked about the UK experience with the split of BT which he says has been ...

Sheridan: ... an undoubted success. I will just draw your attention to some comments from Ofcom, which very recently undertook one of its annual assessments of the undertakings that were given by BT, saying that the separation arrangements in the UK had led to "greater choice and take-up of services, choice of suppliers, products and packages and increased value for money" for customers.

Dobbie: Not a view that Telstra follows, although they seem to be at odds even with BT over that one. Andrew Sheridan says that the changes need to be enacted quickly because right now, we're paying too much for our telecommunications services. As far as the OECD is concerned ...

Sheridan: We are the fifth-most expensive country for both small and home office and small and medium-sized enterprises for fixed-line voice prices.

Dobbie: But is a break-up necessary when the government is already putting $43 billion into building another, competing network? As Senator Nick Minchin puts it ...

Senator Minchin: Why go through all the hassle of breaking up Telstra?

Dobbie: Well?

Sheridan: Whether the National Broadband Network happens or not, the need for reform of the existing market structure is quite clear. The full implementation and roll-out of the National Broadband Network is some way off. I think there has been talk of an eight-year period. I do not think consumers should have to wait for eight years to benefit from some fairly standard rights that they should have today — that is, to have a choice of provider and access to affordable services.

Dobbie: But isn't there a bit of self interest here — the proposed Bill could deprive Telstra of access to mobile spectrum that could be bought instead by — oh, yes, Optus! Isn't that less competition and how is that good for the customer?

Sheridan: In terms of the broad package, the government has very clearly articulated what its primary objective is, which is to achieve improved equivalence of access through the separation of Telstra's fixed-line network and retail business. That is clearly the primary objective, and it has done that to deliver outcomes — as I keep talking about — for the 22 million Australians.

Dobbie: Actually 23 million — that's a million Optus don't know about.

Sheridan: Putting forward that vision has given Telstra some options. If Telstra buys into that vision, then it will be able to access spectrum, it will be able to keep hold of its HFC cable network and it will be able to keep its investment in Foxtel. But, if it decides that it does not want to embrace that vision, then it effectively has a choice: does it want to retain its dominant position in the fixed-line market? If that is the case, then the government is basically saying: "Because of your dominance in this market, we think we need to take something away from you in some of the other markets", the key one there being the wireless market. We do not want a carrier taking a dominant position in every single platform. From my perspective, that is the underlying rationale.

Dobbie: Although as Nick Minchin is quick to point out:

Minchin: It does not have a dominant position in mobile, does it? It is less than 50 per cent.

Dobbie: And this?

Minchin: So you think it is reasonable for the parliament to sign up to legislative blackmail?

Sheridan: They are not the words that I would use to describe this, but Optus is certainly supportive of the whole package of reforms.

Dobbie: Although Andrew Sheridan is quick to point out the approach of threatening to remove the ability to compete on spectrum auctions was not something Optus had put forward to the government — they had asked that Telstra be forced to divest itself of its stake in Foxtel. The wireless spectrum was all just an added bonus for them, really! And as for threatening Telstra to rid itself of its share of Foxtel, is that just another piece of corporate blackmail?

Sheridan: In many jurisdictions HFC cable and pay TV operations have been used essentially as a means to bring competition to the incumbent operator, particularly in the provision of voice and broadband services. Clearly, if you enable the incumbent telco to take a dominant position in that market then you are not going to get infrastructure-based competition, and that is exactly what we have seen in the Australian context. If you look at other jurisdictions such as the US, incumbent telcos face strong competition from cable operators. There are examples of that around Europe as well, where cable companies offer very strong competition to incumbent telcos through voice and broadband services.

Dobbie: Of course Optus had a go at their own pay TV infrastructure — they just didn't do it very well. So what about the need for Telstra to provide equivalent services to its wholesale customers to those it provides its own retail division. Interestingly, Telstra had argued that they already provided that, and could do even better soon, but the man from Optus says no.

Sheridan: We are strongly of the view that we do not get equivalence of access. Perhaps the best example of that is an issue that we raised with Telstra three years ago when were activating customer lines in an apartment building. We felt that we were not being given equivalent treatment because we were required to send out a Telstra technician and an Optus technician and it took eight to 10 days to provision the line. And the customer has to be home during that period — so it is very inconvenient. But Telstra Retail could do it remotely, and that would have taken a day. So we raised this issue with Telstra, and they said, "We don't have to provide equivalence because we are taking a different service."

Dobbie: A different service that Telstra retail clearly has access to. It gets very messy, doesn't it, when you start looking at all the operational support and management systems. Just how much should Telstra be providing for what is considered an equivalent service? It's part of the mess that has seen Optus spend $200 million or so in legal fees over recent years. Speaking of money, what about the cost to Telstra have splitting itself functionally ...

Sheridan: We have some problems with Telstra's claim that it would cost Telstra over $1 billion when BT — which is a company at least twice the size of Telstra in terms of revenue and three times the size in terms of its workforce — only spent $153 million. And I do not understand why it would be in BT's interests to under-cook this figure in its financial statements.

Dobbie: Unwired's David Havyatt as always had some interesting observations including:

David Havyatt (Unwired): Telstra still represents 90 per cent of the profit pool of this industry and only represents 70 per cent of the investment, which actually means it has been under-investing. That is an indication of the market power that exists in this industry. Only if there is market power in a firm can you afford to survive in an industry by not investing; only people with market power can withhold investments.

Dobbie: And he refers to Telstra's claim in its submission to the inquiry that it can provide transparency and equivalence without being split up.

Havyatt: I do not know how you can reconcile those two views: that you can get equivalency and transparency in a wholesale structure with a vertically integrated firm, yet the vertically integrated firm has a lower cost structure and a greater ability to innovate than any other firm in the market. Quite frankly, if the first statement is true, that vertical integration reduces costs and facilitates innovation, then we should not attempt to have a competitive telco regime.

Dobbie: Yes, let's just call it Telecom, renationalise it and I'll pay 50 cents a minute to call my mum over in England. And a final point from Mr Havyatt:

Havyatt: Finally, on competition: Telstra continues to identify the number of new carrier licences and ongoing price reductions as indicators of a vibrant, competitive marketplace, completely ignoring the figures included in the explanatory memorandum which show the extraordinarily high figures for the HHI, the Herfindahl-Hirschman Index, for this industry. That is a standard measure of concentration in industry that shows this industry is basically as concentrated as a dysfunctional duopoly. So we have got those characteristics that have been ignored.

Dobbie: So he's a fan of the Bill then. Strange how all Telstra's competitors seem to love it. Like Matt Healy from Macquarie Telecom.

Matt Healy (Macquarie Telecom): It is clear that Australian consumers are not well served by the level of competition in our sector, and the primary constraint in relation to that competition is Telstra's market power.

Dobbie: Yep, I think that's a point we keep hearing. He says at each stage of the sale of Telstra there were opportunities for reform but they were held back to see how competition unfolded.

Healy: There have been many regulatory reviews but in each instance when a decision was to be made we have really gone for the light-handed option of tweaking around the edges of competition.

Dobbie: But this new Bill — this is the real deal.

Healy: Here we have it well set out in a coherent and coordinated manner. We urge the Senate to take this forward.

Dobbie: Pleeease. Well, it looks like they might get their way. John Horan from Primus was another voice at the hearing saying reform was needed because Telstra really has no incentive to provide services to other carriers. Every wholesale customer is a retail opportunity lost, I guess.

John Horan (Primus): We continually face price and non-price discrimination. Telstra grudgingly says, we'll carry your services; the High Court has told us we have to, but things just do not get delivered to customers when they should and they arrive battered and broken.

Dobbie: A bit like shopping on eBay really. And thank god John Horan said it because no one has so far this week. The proposed regulatory reforms will deliver a ...

Horan: ... a level playing field.

Dobbie: And he says that the whole industry, including Telstra will grow under the new scenario. Really, Telstra too? We'll see on that one. He says it'll come from innovative services — David Havyatt says most of the innovation so far has not come from Telstra.

Havyatt: Firstly, ADSL2+, the higher-speed ADSL, first introduced to the marketplace by the people who were accessing Telstra's copper network, not by Telstra; and, secondly, the 3G mobile network. The first 3G mobile network in Australia came, in fact, from Hutchison, not from Telstra. Telstra, in its submission, tries to claim that innovation is an important thing driven by vertical integration, yet the two biggest innovations in recent times came from non-Telstra firms.

Dobbie: So would it have been different with the split of Telstra? Matt Healy says yes, it would. And it would get over that issue where Telstra retail has a service that is not available to wholesale customers because it has not been "productised" for wholesale.

Healy: We do not think that the incentive to fail to meet wholesale customers' needs will prevail in a structurally separated and effectively functionally separated market in Australia.

Dobbie: But there is an option — David Havyatt says Telstra can separate, voluntarily, without divesting itself of any of its assets. It's all in the timing.

Havyatt: Telstra agrees to let NBN Co use its ducts, wires, poles and exchanges for building the NBN — and have to spend thriftily. At the same time Telstra gives an undertaking to NBN Co that as it builds the NBN Telstra it will migrate its customers onto the NBN. At the end point of the NBN being built, Telstra would be structurally separated within the meaning of the act and would never have actually divested itself of a single asset. So, Telstra can structurally separate without any of this fear mongering of its need to break itself up etcetera. In fact, the greater risk for Telstra and its shareholders is to decide that it does not want to pursue that route and decides it wants to fight.

Dobbie: That means ultimately, of course, one network which all end users ultimately end up on. No room for infrastructure competition here, says David Havyatt:

Havyatt: It is as economically inefficient to have duplication on fixed-line networks as it would be to have duplication of electricity distribution networks, especially when you move to the point of an all-fibre network that can perfectly perform the functions of both telephony and pay TV.

Dobbie: And he says the only reason Telstra argue for the opposite is because they don't like the idea of not controlling the access network. He thinks they're control freaks, in other words! Of course when Telstra has been found to be anti-competitive, the ACCC is after them flapping a copy of the Trade Practises Act in their face. Telstra has every incentive to move slowly on any arbitration — the "negotiate-arbitrate" model is slow and allows for delays. It needs to be fixed says Pipe Networks' Dale Clapperton, but the new legislation might actually make things worse.

Dale Clapperton (Pipe Networks): Virtually all of Telstra's competitive carriers have a contractual framework with Telstra called a CRA, customer relationship agreement, under which they obtain access to eligible facilities and declared services. At the moment it is very difficult to negotiate substantive amendments to the CRA with Telstra. Telstra has a significant advantage in bargaining power over the competitive carriers. Because there is no alternative source for many of these services, the only real constraint on that is that the competitive carriers go through the currently broken negotiate-arbitrate process resulting in a more reasonable outcome on the terms that they have agreed to under protest. Under the new regime as it is currently drafted the terms of a negotiated agreement between the parties, and I use the term "negotiated" loosely — remembering that we are dealing here with Telstra who have no incentive to negotiate better terms, especially in relation to aspects such as pricing — will trump any access determinations or rules of conduct that the ACCC might make.

Dobbie: Which does sound like a step backwards for everyone except Telstra. And, of course, you can change the Telco legislation or make changes to the Trade Practises Act — but when you have a vertically integrated Telco, you'll always have difficulty proving anti-competitive conduct — and you'll always have suspicion. Here's Macquarie's Matt Healy again.

Healy: The most recent example that hopefully illustrates the sort of conduct that we have to deal with but also illustrates the opportunity, if we restructure the market, to remove that kind of conduct concerns the Deakin Exchange in Canberra. That Telstra exchange is in a building that a third party owns, so Telstra obviously has a lease with that third party to use the basement as a telephone exchange. That lease had lapsed and indeed the building owner had decided to redevelop. We, as an access seeker who has equipment in that exchange and have customers that we service from that exchange, were given weeks of notice that we needed to be out of there and we were not offered any real comparable service to move to on the shutting down of that exchange. You could just imagine that, for the weeks that we and other access seekers were given notice of when we needed to be out, how do you think that would stack up against the actual lease terms in terms of how long Telstra knew that it would be able to be in that exchange, and what sort of changes it needed to make to its investments to move to another operation and set it up so that it could transition all its customers onto another exchange? We got weeks but we suspect they probably got years. They certainly had a lease that allowed them to run to a certain point and they would have been given notification by the landlord that they were repossessing it in order to redevelop the building. All of that notice would have been absorbed within the integrated Telstra and made its way through to the retail arm so that it could deal with its customers to migrate them to the other building that would replace the Deakin Exchange.

Dobbie: And every telecommunications company has their own examples — we could talk about case studies for hours, maybe years — and not be any nearer proving the accusations as true or otherwise. Imagine, if Telstra did split, and all these allegations disappeared — what would their lawyers do? I still think they are the ones at most risk from this proposed legislation. Let's just have a moment's sympathetic pause for telecommunications lawyers.

Very sad. So, is the new legislation essential to the delivery of the NBN. Pipe networks won't say, Primus says it's more to do with the short term and David Havyatt from Unwired says there is the issue about whether, without it, Telstra would frustrate the progress of the NBN. Senator Birmingham raised the very real question of what if the Bill isn't passed — couldn't Telstra ramp up its investment only in the most profitable areas. If the NBN is built, isn't that fair enough. For example, competing ISPs obviously place their DSLAMs where they'll make the most money. And another great question from Senator Birmingham — if Telstra is separated, wouldn't they invest in infrastructure and would you, in fact, need the NBN? David Havyatt.

Havyatt: The chance for answering that hypothetical question was passed by Telstra in December 2007 when they chose not to bid for NBN version 1.0. They chose not to bid for NBN version 1.0 at the time on the basis that they could not get any guarantees from the government about structural separation notwithstanding the fact that the government had been clear from the day it announced the NBN process that the intention was that that network would be a structurally separated, wholesale-only network. So the short answer is that Telstra had the chance to go down that route and said no.

Dobbie: Although that was the politics of a vertically integrated telco. Split them up and see what happens. As Senator Birmingham points out:

Seantor Birmingham: Perhaps the government went about it in the wrong order. Regulatory reform before throwing out different NBN models might have been a more sensible approach.

Dobbie: Yes. Has it all been done a bit arse about? Maybe a separated Telstra could have done it cheaper — at one stage they were saying they could do it all for $5 billion, although that was, of course fibre to the node, and not for regional Australia. But it would be interesting to see if Telstra had been separated, for example, before Sol Trujillo got here, would its wholesale and network services arm have been investing in an open access fibre network without the need for government money — or perhaps a bit of government money for those hard to reach places. Why, if the restructuring of the industry will cure all known ills, does the government need to step in with public money for the NBN? And is there a risk that by rushing through the Bill, with such far reaching consequences, there's a chance that all the detail hasn't been thought through? Surely not!

Leave us your comments on ZDNet alongside this week's podcast. Next week more of the same, with disgruntled shareholders, the newly founded Australian Communications Consumer Action Network, the Competitive Carriers Coalition, ATUG and the folks in the suits from the Department of Broadband, Communications and the Digital Economy.

Join me for that — and for my daily podcasts on BNET too — for ZDNet.com.au. I'm Phil Dobbie — thanks for sitting through another Senate hearing — you did well. I'll see you next week.