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Authors
Thomas Jones  
Special Counsel

Danet Khuth  
Solicitor

Simon Brinsmead  
Solicitor

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Thomas Jones  
Special Counsel
T +61 2 9296 2203

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Sydney
Kristin Leece  
Thomas Jones  

Melbourne
Neil Carabine  
 

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Mallesons Stephen Jaques has assisted Telstra winning significant regulatory rollback from the ACCC.

The Australian Competition and Consumer Commission (ACCC) has made a final decision to exempt Telstra from its obligation to supply the wholesale line rental service (WLR) and local carriage service (LCS) within 248 exchange service areas (ESAs) in metropolitan Australia. The decision confirms its draft decision of 29 April 2008 to exempt 229 ESAs but contains some additional conditions.

The exemptions, which take effect in 12 months time, will significantly limit the ACCC’s ability to set terms and conditions for the supply by Telstra of WLR and LCS. These services allow Telstra’s competitors to resell line rental and local calls without investing in their own infrastructure.

This is a significant decision for Telstra, and for infrastructure owners more generally, because it reflects the ACCC’s recognition that the timely removal of regulation is necessary to improve outcomes for consumers as well as overall economic efficiency by encouraging competitors to invest in their own infrastructure rather than simply resupplying the incumbent's services. New network investment by Telstra’s competitors is likely to deliver more effective and vigorous competition than competition based solely on price.

The final decision grants exemption to Telstra in 248 of the 387 ESAs for which exemption was sought. The 248 ESAs were selected on the basis that they:

• have 14,000 or more addressable services in operation (ie customers who can be supplied by competitors of Telstra using ULLS (an access service which requires some competitor infrastructure)), or

• have three or more ULLS-based competitors to Telstra.

In addition, the ACCC has granted class exemption orders which apply to carriers other than Telstra enabling them to also gain the benefit of exemption.

The individual exemption orders are subject to a number of conditions. As a result of these conditions, Telstra will not obtain exemption in respect of:

• an ESA where the Telstra exchange is “capped” - that is, subject to certain constraints on the ability of access seekers to locate digital subscriber line multiplexer (DSLAM) equipment needed to provide ULLS services;

• an access seeker, in a specific ESA, that joined a queue to enter into Telstra’s exchange buildings within the 12 months before the exemptions take effect for so long as they remain in the queue;

• supply to an access seeker in respect of customers for whom that access seeker has been using LSS, LCS and WLR to supply a bundled fixed voice and broadband service - unless Telstra develops and implements a LSS to ULLS migration process meeting certain guidelines.

The exemptions will continue until the earlier of the expiry of the exemption order on 31 December 2012 or the expiry or revocation of the requirement to provide WLR/LCS services or ULLS services.

Reasons for the decision

The ACCC found that granting the exemptions would promote competition in the supply of voice services through a combination of increased take-up of ULLS and more efficient use of access seekers’ existing DSLAM infrastructure. This in turn would give consumers a greater variety of products at cheaper prices due to the greater opportunity for differentiation afforded by infrastructure investment.

Telstra’s submissions to the ACCC, supported by Paul Paterson of Concept Economics, argued that the ongoing necessity for regulated access to WLR and LCS had been affected by the significant competitor uptake of ULLS. Professor Martin Cave, a well-known exponent of the “ladder of investment” hypothesis, also observed that the ongoing deployment of DSLAMs was evidence of a movement by access seekers up the ladder.

The ACCC supported Telstra’s position by exempting from regulation any ESA in which at least three ULLS-based competitors to Telstra are present. However, it based its threshold for exemption upon a strong observed correlation between the size of the addressable market in each ESA and the extent of DSLAM rollout in that ESA.

While acknowledging concerns that a fibre development (such as FTTN) may ultimately render DSLAM equipment obsolete, it rejected those concerns on the basis that exemptions will not require access seekers to invest in significant amounts of new infrastructure. This is because in the majority of the 248 ESAs, a competitively-priced commercial offering of a resale voice service is likely to be available. Moreover, the ACCC considered that any investment in new infrastructure would be efficient, since it would allow an access seeker to build their reputation and customer base and make a better transition to the fibre-based world than pure resale operators.