A Regulatory background This appendix provides an overview of the development of telecommunications policy in Australia in recent decades. It draws on a number of government policy statements and other reports to give some context to the issues discussed in the body of this report. The appendix ends with a brief overview of the main elements of the current regulatory regime. Their implications for competition regulation are examined in the main body of the report. A.1 Introduction Telecommunications services in Australia, a Commonwealth responsibility under the Constitution, have long been provided by a government agency on a monopoly basis. From Federation in 1901 until 1975, this was the responsibility of the Postmaster-General’s Department. In 1975, in response to the Vernon Commission of Inquiry into the Australian Post Office, the Government established the Australian Telecommunications Commission (which later became Telecom), and gave it responsibility for domestic telecommunications services. International telecommunications remained the responsibility of the Overseas Telecommunications Corporation (OTC), established by the Commonwealth in 1946. Nevertheless, telecommunications remained a government monopoly, albeit subject to price regulation and other constraints on operations. This appendix provides a brief summary of the processes by which telecommunications in Australia has evolved in recent decades: from originally being supplied by a government monopolist; to the managed competition of the early-to-mid 1990s; to the situation today where greater competition prevails. Key milestones were the policy changes which took effect in 1991 and 1997, and which continue to have a significant influence over the shape of the industry. The next section looks briefly at developments in the 1970s and 1980s and the lead-up to the 1991 policy changes, while section A.3 examines developments subsequent to 1997. The final section provides an outline of today’s regulatory environment. REGULATORY 583 BACKGROUND A.2 Policy changes in the 1970s and 1980s During the 1970s and 1980s increasing attention was being given to the effects of technological developments — and in particular, advances in microwave, satellite and optical fibre technologies — on the relevance of any ‘natural monopoly’ conditions in the industry, and on the costs of new entry in some areas. At the same time, demand for reliable, high speed telecommunications services continued to rise. Moreover, during this time, regulatory attitudes in many countries were being revised. Closer attention was being paid in areas such as aviation, land and sea transport, and finance to the capacity of a less heavily regulated and more competitive industry structure to generate a wider range of services, often at lower costs to users. In the case of telecommunications, governments and regulators revisited the case for monopoly provision of facilities and services, and in the process, reassessed arguments about the claimed natural monopoly characteristics of parts of the network. In so doing, consideration was being given to the scope to introduce competition in areas such as the provision of handsets, PABXs and value added services such as fax and radio paging. Government telecommunications providers During this period, only three telecommunications carriers — all owned and operated by the Commonwealth — were permitted to operate in Australia. Each was limited to a prescribed market and required to complement, rather than compete with, the other carriers: • Telecom had monopoly rights to provide and operate the domestic (non- satellite) network, to install, maintain and operate telecommunications infrastructure, and to attach lines or equipment to the system (or authorise others to do so). It was required to meet the ‘universal service’ objective of governments to provide reasonable access for all Australians to such services as standard telephones and payphones. • OTC had exclusive rights to provide and operate services over the international network, using terrestrial and Intelsat satellite technologies. But it was prohibited from providing domestic infrastructure, and paid Telecom for the carriage of international traffic over the domestic network. 584 TELECOMMUNICATIONS COMPETITION REGULATION • Aussat was established in 1981 to exclusively own and operate Australia’s domestic communications satellite capacity.1 It was permitted to provide satellite based networks for broadcasting and private network services interconnecting with Telecom, but not permitted to compete with Telecom in the provision of standard telephone services, nor to seek access to international markets outside its prescribed footprint. (Consequently, it provided only marginal competition to OTC.) Some milestones Some key developments during this period included: • the Davidson report of 1982, which recommended opening up the equipment market to allow competition in the resale of telecommunications capacity, permitting the installation of private networks and their interconnection with the public network, and requiring more transparent funding of social objectives (these recommendations were initially rejected, but were later reflected in the 1988 Ministerial Statement); • the 1988 Ministerial Statement (Evans 1988a), which formalised a trend already underway to open competition in value added services and private networks (this was part of a wider agenda of reforms covering all transport and communications government business enterprises (Evans 1988b)); • the establishment in 1988 of a telecommunications-specific regulator, the Australian Telecommunications Authority (AUSTEL), to administer the new rules put in place in 1988, to protect carriers, consumers and competitors from unfair practices and to promote carrier efficiency and undertake technical regulation; • changes to the corporate structures of Telecom, OTC and Aussat between 1988 and 1990 to better reflect their status as, respectively, a statutory corporation, a commercial operation and a private company. For example, Telecom was corporatised, and given greater operational freedom, clearer objectives and a more business-like structure;2 and • the emerging financial difficulties faced by Aussat. 1 It was incorporated, and shares held by the Commonwealth (75%) and Telecom (25%). 2 One such influence was the Commonwealth’s 1989-90 Review of Ownership and Structural Arrangements, which looked at the relationship between the three carriers. REGULATORY 585 BACKGROUND Box A.1 Summary box: pre 1990 1975 Telecommunications responsibilities were removed from the PMG Department and vested in a new statutory authority, the Australian Telecommunications Commission (Telecom). 1982 The Davidson report recommended opening up the equipment market to allow private networks and competition in the resale of telecommunications capacity. 1988 The May Economic Statement allowed for increased competition in cabling and wiring of customer premises, PABX maintenance and in the supply of the standard telephone. Telecom’s service provider and regulatory functions were separated. AUSTEL was established as the independent industry regulator. A.3 Initial liberalisation — 1990 to 1996 In November 1990, following considerable debate about the manner in which the long-standing monopoly arrangements for providing basic telecommunications services might evolve into more open competition, the Government announced a package of reforms to promote network competition in telecommunications (Beazley 1990). Effectively, the Telecommunications Act 1991 sought to move towards sustainable competition in telecommunications facilities and services by permitting limited infrastructure competition together with full resale of telecommunications services. New carrier licences To this end, the Government licensed a limited number of carriers, who were insulated from open competition by being granted certain exclusive rights. A duopoly in fixed line carriage services was introduced: • Telecom and OTC were merged in January 1992 to become the publicly owned Australian and Overseas Telecommunications Corporation (AOTC — later known as Telstra).3 3 The two carriers were to continue as separate divisions within AOTC, to avoid any cross- subsidisation. To this end, OTC negotiated a transfer price with the Telecom division for provision of services and access to its domestic network. 586 TELECOMMUNICATIONS COMPETITION REGULATION • The loss-making Aussat was privatised and formed part of the package for the second carrier licence, awarded to Optus. Optus initially paid Telstra to carry calls on its behalf until its own domestic optical fibre network was operational.4 AUSTEL arbitrated an initial interconnect price after unsuccessful negotiations between the carriers. The Government licensed two new mobile carriers, Optus and Vodafone, who commenced operating in 1992 and 1993 respectively. Both initially interconnected to Telstra’s mobile network while they established their own infrastructure. All three carriers were required to establish digital networks rather than replicate Telstra’s analogue (AMPS) network. An access regime Where a carrier ‘reasonably requested’ another carrier to supply services necessary or desirable for the access seeker to supply its services to its customers, the access provider was obliged do so on terms agreed by the parties or, failing agreement, on terms determined by AUSTEL. Nevertheless, certain carrier activities were exempt from the TPA, and they had preferential access rights