Robust operational separation for Telstra was crucial to ensure the effectiveness of the telecommunications access regime, an ACCC Commissioner, Mr Ed Willett, said today.*
The federal government was committed to a regulatory regime that will promote competition, encourage investment and protecting consumers.
"Increasing transparency about the way Telstra operates its business is fundamental in achieving this objective.
"The ACCC has previously highlighted its concerns that the enhanced accounting separation arrangements that were introduced in 2002 have not succeeded in giving the ACCC a satisfactory handle on the way that Telstra operates its business, and the ACCC is wary of relying on a 'second set of books' that bears no relationship to actual costs or imputed revenues within Telstra.
"In practice, accounting separation does not require Telstra to reorganise its arrangements as if it were operating two or more discrete businesses.
This is essentially what 'operational separation' would entail. In turn, operational separation would provide a superior means of detecting and fixing anti-competitive behaviour", he said.
Mr Willett said that currently operational separation was a "nominal form of regulation" with information highly aggregated and which could hide specifics instances of anti-competitive behaviour.
"Internal separation between a 'retail business' supplying services to end-users, and a 'network business' that would supply wholesale services to all third party access seekers, would enable third parties to obtain prices and service levels that are effectively equivalent to those that are provided to the Telstra retail business.
"The key principles that are necessary for robust operational separation are that the separated units must:
- deal with each other on a commercial, arms-length basis, including explicit pricing, invoicing and billing
- maintain fully separate accounts and reporting systems, capable of capturing all transactions between the businesses, and
- maintain separate management and staff.
"Genuine arms-length trading arrangements that deal equally with all retailers, whether they be from Telstra or a competitor, would provide Telstra's network business with stronger incentives to drive a hard bargain in maximising returns from all its activities, rather than favouring its own retail business. In a similar way, the Telstra retail unit would face the same commercial pressures as its competitors to procure its wholesale services.
"Increased transparency from separate accounts also increases the likelihood of anti-competitive conduct being detected and punished. This should in turn act as a deterrent by reducing the incentives for Telstra to engage in such behaviour in the first place.
"There is no reason for such a regime to hurt Telstra or its shareholders by adding to its costs. A network business and a retail business are fundamentally different, and an understanding of the costs and relative value of each component should assist management in extracting the maximum value out of the company as a whole.
Mr Willett said from the ACCC's perspective, meaningful operational separation for Telstra would involve at a minimum:
- robust separation of key business units – rather than theoretical commitments to provide equivalence, competition would be enhanced with a structure that provides clear incentives for Telstra to engage in competitive arms-length dealings
- equivalent, though not necessarily equal prices – there may be instances where there is an openly justified and verifiable reason for Telstra's prices to be different to those of its customers
- appropriate coverage of monopoly services provided by Telstra
- durability – rather than be based on a static view of market and industry structures, the framework should be able to accommodate emerging bottlenecks
- appropriate interplay with the competition and access provisions of Parts XIB and XIC of the Trade Practices Act. In some cases, appropriate operational separation might mean that some regulation could potentially be relaxed, and
- finally, all of this should be underpinned by enforceable governance arrangements.
Mr Willett concluded that sustainable competition in telecommunications services is critical to making Australian an internationally competitive economy.
"With the increasing dependence on the fixed copper line for high speed broadband, and the slow roll out of facilities based competition in many areas, it is clear that effective and appropriately focused regulation will continue to be necessary to ensure competition develops in telecommunications.
"Ensuring that there is an effective access regime, which is not susceptible to gaming, takes on even greater importance in the absence of effective operational separation", he said. "An effective access regime becomes the critical tool for ensuring that competitors can gain cost-based, non-discriminatory access to telecommunications networks, but meaningful operational separation will go a long way toward enhancing the operation of the access regime and regulatory outcomes".
* Address to the Australian Telecommunications Summit, Sydney