Issue: 06/08

Communications Whitepaper

February 20, 2008

At the ATUG 2007 Conference ATUG announced a series of Future Forums looking at the communications future facing Australia in the medium to long-term. Four meetings have been held in Sydney and Melbourne with plans for ongoing meetings and webinars during 2008 to include all members across Australia. A report on the forums will be presented at ATUG 2008 and all members will be asked for their feedback on the issues and ideas in the report.

The four meetings have looked at:
• Demand for new communications services
• The technology landscape
• Investment and business models
• Next generation policy and regulation

This ATUG Opinion reflects the discussion on policy and regulation at the Melbourne Forum earlier this week

Fibre Update – Global developments

The forum started with an update from the FTTH (Fibre To The Home) Council Asia Pacific on the emerging regulatory approaches in support of fibre network deployments. The update highlighted the fact that different approaches are being taken dependent on who is building/owning the network. Where vertically integrated, incumbent carriers are deploying the network, the core regulatory issues are about the access and access pricing regime. By contract where municipalities, property developers or utility companies build the network they do so as a “born wholesale” operator with a view to stimulating retail competition. The core regulatory issue in this context is preventing overbuild. Where networks are government funded, open access is required as a means of enhancing competition.

The US market now has 2 million connected fibre to the home customers, with Verizon having 1 million of these connections, ATT being the other major provider and more than 1000 municipal governments involved in fibre deployments for their communities. In the EU, municipal and utility build-outs have now seen incumbent operators respond with deployment plans of their own eg France, Netherlands. In Asia Pacific, Japan has 10 million of the 23.2 million connections. In Japan there are now more fibre connections than DSL connections. In Hong Kong more than 20% of households are now connected to fibre.

In summary, countries that are succeeding in fibre deployment have Governments with a strong regulatory and policy commitment to a fibre network. Policies are squarely focused on promoting fibre deployment - they are not technology neutral but fibre favourable. These countries also have strong end user demand for higher speeds and strongly competitive broadband supply markets.

Access Policy Issues for Fibre investment

Two specific access policy issues canvassed at the Forum were:

• Structural Separation
• Investment Certainty

Structural Separation

This idea was first put forward in Australia in 1981 in the Davidson Report. ATUG argued for network and retail separation in the lead in to the duopoly arrangements established in 1990. The issue was looked at by a short-lived House of Reps Committee in 2003 with Accounting Separation being introduced. Overseas, BT voluntarily undertook “Functional Separation” in 2005 (BT will discuss their experience with this at ATUG 2008) and now the EU is debating the introduction of Functional Separation as a remedy available to regulators to deal with persistent discrimination. The Commission for Information Society strongly supports the additional remedy. Telecom Italia has just announced a voluntary functional separation. Telecom New Zealand is also working towards a model of functional separation. Ernie Newman from TUANZ will discuss this development and the UK experience, from a users’ perspective, at ATUG 2008. Australia’s Operational Separation framework was introduced in 2005 as part of the T3 sale package of legislation.

In Singapore, IDA in announcing the tender for the Singapore fibre network roll-out has specified a three layer, separated model (physical layer, transmission and switching layer and applications layer) as part of the tender requirements with limits on cross equity ownership between layers. The layers reflect the different economic life span of the assets involved and the different business cases involved in supporting investment in each of the layers.

The Forum discussion focused on the approach needed to encourage major investment which achieves a fair return for investors and a fair environment for competition. Structural separation was seen as a way of creating a level playing field through access arrangements (which must reflect non-discriminatory outcomes for both price and non-price terms and conditions) and fair access prices by eliminating cross-subsidies between retail and wholesale operations. Structural separation can address potential network design strategies which exclude competitors.

Structural separation was discussed at the Forum as an important tool in the context of new network investment where Government funding was part of the network deployment business case. Discussion identified the early learnings with Government funding for infrastructure deployment in the broadband market over the last 5 years.

Investment Certainty

Investment of the size needed for FTTH roll-out needs certainty. Examples from different markets were discussed comparing the SME market, where investment is driven by the need to innovate and the competitiveness of the market increases the uncertainty of returns, with the Electricity market, where due to market structure investment is less risky and innovation is not a key driver.

Investment risk is also associated with size – larger players have lower risk profiles and funds are cheaper for them, although not risk free. Smaller players who replicate investment will do so at a higher price because of their risk profile.

The telco market was described as a more competitive market with increased investment uncertainty but strong need for investment for innovation. The telco market also requires connectivity across networks to deliver any-to-any communications, and so access arrangements will always be a feature of the market. One approach to access pricing in markets where new investment is occurring would be “risk-adjusted” access prices. This suggestion raises questions of “efficient” investment and whether new access pricing principles should be considered in the context of new fibre deployments.

The discussion also canvassed how pricing principles should reflect the different rates of return which exist between pure utility companies building infrastructure (8-9%) compared to vertically integrated companies with benchmark overall rates of return of 25%.

Broader Policy Considerations for the Communications Marketplace

The Forum reflected on the confusion in communications policy in recent times with a range of initiatives being brought forward in rapid succession. For example on the issue of accelerated broadband deployment developments included HiBIS, Australian Broadband Guarantee, OPEL, Expert Taskforce for FTTN, ADSL2+ delays and then delivery. This confusion both drives and reflects market uncertainty which results in investment uncertainty and slower investment than is optimal.

The Forum discussed the emergence of the National Broadband Network as a way forward and the issues which need to be considered:

• Ensuring the emerging broadband competition is facilitated and that service providers are able to differentiate and innovate on services, speed, quality, features and price

• Facilitating competition in service provision from the node to the premises

• Network design to allow FTTH services to be delivered if there is demand for these

• Contract provisions for access arrangements instead of legislative and regulatory tools. Some participants at the forum suggested that the experience of State governments in these contract arrangements should be reviewed for effectiveness as compared to regulatory tools.

On the wider front, the issues of policy and regulatory approaches in a converged, data centric, global communications world - including existing approaches to Universal Service and equity, fixed network regulation, call zones, local calls, number and address portability, service availability, network reliability regulations, spectrum allocations - need a very broad discussion with all stakeholders.

A White Paper to kick start a new Communications Act?

One of the important ideas discussed at the Forum was that of a Communications White Paper to start a wide discussion among stakeholders of the issues that the sector needs to address over the next 10 years.

While the framework of policy and legislation that has been in place for 10 years has worked well on the issues of the last decade, it was felt that “more of the same” or a “bit of tweaking” was not the right approach to developing the framework for the next 10 years. There is a need to reflect on the new communications marketplace – both the demand side and the supply side – and the public policy issues raised. Then legislation and regulation can be developed that are “fit for purpose” through a process of consultation and discussion.

Desired outcomes need to be identified for all user segments – residential, SME, business, government and for industry participants – and for carriers and service providers, equipment, system and network suppliers, content service providers and developers. Experience from other countries and markets should be part of the research and analysis.

The discussion needs to look at very fundamental issues such as Australia’s approach to regulation – light handed or targeted but interventionist; the role for alternative dispute resolution compared to court battles; the approach to consumer protection; the role of government in communications infrastructure expansion; industry innovation policies; licence fees and regulatory costs; and no doubt many other issues.

The recently announced Defence White Paper could be seen a model for this initiative. The Communications White Paper could reflect the outcomes of the Ideas Summit proposed by the Prime Minister and should involve all stakeholders who depend increasingly on communications to achieve their goals - companies and government agencies across all sectors of the economy, communities and individuals.

ATUG would be pleased to receive any comments or feedback from members – email lauren.mcginley@atug.org.au