Turnbull's TPG Tangle

Turnbull's headlong rush to find a solution to the TPG problem has had unexpected consequences for the telecommunication industry. The mess being created by Turnbull could take years to fix and considerable compensation for the companies affected by the telecommunications chaos. This week in Business Spectator the government's attempt to regulate a solution to TPG's FTTB cherry picking is discussed and what this will mean for the industry is identified.

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The government’s draft carrier licence condition (CLC) has drawn the ire of the telecommunications industry and does not appear to prevent TPG from benefiting from the chaos.

In a statement on October 15, 2014 the Communications Minister Malcolm Turnbull stated that “the Government is conscious that the Australian Competition & Consumer Commission has announced a declaration inquiry under Part XIC of the Competition and Consumer Act 2010, which is relevant to the issue of access. However, such inquiries take time and cannot provide for functional separation.”

Headaches and heartache

So rather than wait for the ACCC to complete the declaration inquiry the government has rushed out a draft CLC in a bid to rein in TPG’s fibre-to-the-basement (FTTB) rollout. Given the subsequent discontent from all quarters of the telecom industry, one wonders how deeply the government has thought through the consequences of the draft CLC.

In a bid to temper TPG’s ambition, the government has inadvertently dragged the rest of the industry into the mire, posing headaches and heartache for all and sundry, not just TPG.

Turnbull went on to say that “the draft licence condition would require owners of high-speed networks servicing residential customers to functionally separate their wholesale and retail operations, and to provide access to competing service providers on the same non-discriminatory terms as those provided to their own retail operations.

The carrier's wholesale company would also need to supply a Layer 2 Wholesale Service to other carriers and service providers, with the price of that service set at $27 per month.”

In opposition the Coalition was scathing on many occasions of the former government’s plan for a National Broadband Network (NBN) and extolled the virtues of infrastructure competition, yet in little over a year Turnbull has been forced to take actions to protect NBN Co’s viability and in doing so entrenched the NBN.

The government argues that Telstra’s upcoming structural separation and NBN Co’s operation as a wholesale provider of access network products justifies action to clarify TPG’s move into the FTTB market.

The CLC states "to the extent that the operations of the specified carrier in respect of the designated telecommunications network are not operated on a wholesale only basis at all times during which Section 5 applies, the specified carrier must, in respect of the operations of the designated telecommunications network, establish and maintain a wholesale company and a retail company.”

The CLC goes on to stipulate thirteen additional conditions that access network operators must comply with under the “Separation Obligations”.

The CLC defines a designated telecommunications network as a fixed-line telecommunications network (or part of a network) which:

(a) incorporates local access lines or parts of local access lines necessary for the provision of carriage services; and

(b) is used to supply superfast carriage services; and

(c) is not :

(i) subject to either sections 141 or 143 of the Act; or

(ii) the subject of a ministerial exemption in force under section 141A or section 144 of the Act; or

(iii) any of the following types of networks:

(A) the national broadband network; or

(B) a Specified HFC network; or

(C) a fixed-line network that is used to supply carriage services wholly or principally to business customers and/or public bodies, provided that any incidental supply of carriage services to residential customers using the network does not represent more than [0.05%] of the total number of customers serviced by the network at any time; or

(D) a fixed-line network in existence immediately before 1 January 2011 that is used to supply carriage services principally to large business customers and/or public bodies and which is extended on or after 1 January 2011 by more than 1 kilometre from any point on the infrastructure of the network (as it stood immediately before 1 January 2011), provided that any incidental supply of carriage services to residential customers using the extended network does not represent more than [0.05%] of the total number of customers serviced by the network at any time; or

(E) any fixed-line network in existence immediately before 1 January 2011 which is situated in a real estate development project that is extended on or after 1 January 2011 to an area that was developed as another stage of the project; and

(d) is situated anywhere in Australia.

The definition of a designated telecommunications network covers the legislative loophole in the Competition and Consumer Act 2010 Section 152AGA (6) that permitted TPG to commence a FTTB rollout in inner urban areas where it had pre-existing fiber.

As the original NBN legislative framework did not specify just FTTB, but could be applied more broadly, the CLC is constrained. It's not a silver bullet that can be used to justify targeting FTTB rollouts only.

But what about the many other carriers and service providers that own and operate various forms of access networks?

TPG brings in the lawyers

In an article in Business Spectator on January 20 a range of companies from the very large (Telstra and Optus) through to the very small (Oziplex and Halenet) were scathing of the government’s rush to prop up NBN Co.

On January 6, TPG announced that it put the FTTB products on hold because “there has been insufficient time to complete those steps before January 1 so until we complete the required changes we are required to remove our FTTB products from sale.”

For TPG the option to seek compensation through the courts for what can only be seen to be a targeted action to prevent fair and open competition looms large.

The High Court has taken a very predictable approach when determining compensation claims against governments that take arbitrary actions that cause loss and there is no doubt that TPG has incurred losses due to the government’s actions.

Whether the government’s actions are fair or not, the CLC captures the entire telecommunications industry in its web, for if it did not then it would be anti-competitive and discriminatory; and such an outcome would provide TPG and others another opportunity to seek compensation through the courts.

The government’s position becomes even more tenuous by permitting non-compliant companies to continue offering products and services when TPG has ceased offering FTTB products until it's compliant. 

And what is the ACCC going to do if the draft CLC is finalised in its current state and most of the industry remains non-compliant?

Yes, the CLC is a draft, but the start date and the two year duration are troublesome. The government had 18 months to put in place a resolution to the cherry picking loopholes in the earlier legislation. Why is the government unprepared to propose a legislative amendment?

Can and should the Senate step in to strike down the CLC and force the government to propose legislative amendments that can be properly scrutinised by the parliament? Potentially this is an opportunity for the Australian Greens to step up the pressure on the government.

And who is going to enforce the CLC and when is this to occur? Or is the CLC to remain in draft form until such time as NBN Co has completed its FTTB rollout?

Added complexity for Telstra

For Telstra, there is the added complexity that it must fast-track structural separation because under the agreement entered into with the former government, Telstra had to complete its structural separation undertaking (SSU) by July 1 2018. The CLC will in effect override Telstra’s SSU just as it has overridden the root cause of the current problem found in the Competition and Consumer Act 2010 Section 152AGA (6).

And who is going to pay for the entire industry to undertake structural separation? You that’s who.

For TPG, the CLC opens up the potential for a significant compensation claim but little else. TPG is likely to continue rolling out FTTB (and should increase the pace at which this is occurring) while it makes the administrative and operational changes. The opportunity to become a mini-NBN Co and provide FTTB to about three million premises in inner urban high value areas is just too great a prize for TPG to walk away now.

For NBN Co, the CLC opens the door to a negotiated settlement with TPG where the telco would sell the FTTB already rolled out to NBN Co. TPG would retain its core fibre network and lease access to NBN Co which would become the owner of the FTTB connections to the buildings and any in-building infrastructure installed by TPG.

But TPG is unlikely to do this as the FTTB network has real potential for earnings growth.

The draft CLC will add to the telecommunications chaos created by the government over the past 18 months and the compliance cost to the telecommunications industry will be substantial. Not only has the government targeted TPG but it has set the scene for the telecommunications industry to become one of the government’s major critics in the lead-up to the next election.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University.