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Regulation Impact Statement
Carrier Licence Conditions (Telstra Corporation Limited)
Declaration 1997 (Amendment No. 2 of 2003)
Authorised by the Minister for Communications, Information
Technology and the Arts, September 2003
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Introduction
On 16 August 2002, the Minister for Communications, Information Technology and
the Arts announced the establishment of the independent Regional
Telecommunications Inquiry (RTI). The RTI was established to report on whether
telecommunications services in regional, rural and remote Australia are adequate, as
well as the arrangements that should be put in place to ensure that all Australians
continue to share in the benefits of further service improvements and developments in
technology. The RTI report was released in November 2002.
On 25 June 2003, the Government announced its comprehensive response to the 39
recommendations of the RTI. As part of this response, and to ensure the adequacy of
current services, the Government accepted Recommendation 4.1 of the RTI that:
The benefits provided by the Internet Assistance Program for users of dial-up
Internet services should be guaranteed into the future. A licence condition should
be placed on Telstra that would require all Australians to be guaranteed dial-up
Internet speeds, or equivalent throughput, over the Telstra fixed network of at least
19.2kbps. As part of the licence condition Telstra should be required to report on
its compliance with the requirement, and more generally on the data speed
performance of its regional network, which should be maintained at least at
current levels.
The RTI did not document any assessment of different regulatory options to address
the identified problems, nor any analysis of the costs and benefits of these options.
This Regulation Impact Statement sets out the Government’s analysis of the options
and their costs and benefits in support of its decision to accept this recommendation
and to implement the licence condition proposed by the RTI.
Problem
All Australians with a fixed telephone line connection can access the Internet via an
Internet Service Provider (ISP) and using a modem. According to the most recent
data available to the RTI, there were approximately 4.2 million people in Australia
who have access to the Internet via a dial-up service.1 Of these, 3.7 million are
household services, and 505 000 are business services 2. Latest data show these
numbers have increased.
1
Australian Bureau of Statistics, Internet Activity - 8153.0, March 2002, p.9
RTI, Connecting Regional Australia Report of the Regional Telecommunications Inquiry, November 2002.
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2
Dial-up Internet access is provided using the public switched telephone network
(PSTN) which, for historical reasons, is primarily operated by Telstra. Dial-up
customers may be the customers of Telstra or they may be the customers of
competitors who are resellers of Telstra’s PSTN service or, in some circumstances,
operate their own PSTN facilities.
The speed at which Australians can access the Internet via dial-up has been a
long-standing issue. With current technology the minimum dial-up speed that can be
achieved is 56 kbps. In practice, however, a range of factors mean that actual dial-up
speeds vary considerably across Telstra’s public switched telephone network (PSTN).
These include:
 the quality and configuration of customer equipment (primarily PC and modem),
and the connection by the customer into the Telstra network;
 the quality (including length) of the Telstra link from the customer to the
exchange (and from there to the ISP);
 the quality and adequacy of the ISP equipment and links to the Internet; and
 the quality and adequacy of links within the Internet to the requested server
(website), and the quality and adequacy of that server.
In 2000 the Telecommunications Service Inquiry (TSI) examined the adequacy of
telecommunications services levels in Australia. The TSI expressed concern that a
small but significant minority of dial-up Internet users experienced slow dial-up
speeds. In this context, the TSI recommended the Government take measures to
provide a minimum dial-up throughput. The TSI concluded ‘data speeds of between
14.4kbps and 28.8kbps provide a reasonable service for the current usage of most
residential customers’.3
As a result of the TSI report, the Government established the Internet Assistance
Program (IAP). The IAP applies in all of Australia except Telstra’s so-called Outer
Extended Zones. The IAP is aimed at ensuring Internet users can achieve an effective
dial-up Internet throughput of 19.2kbps or equivalent throughput over Telstra’s fixed
network.4 Assistance is provided to dial-up users on request. The IAP operates on an
impartial and competitively neutral basis; that is, irrespective of whether customers
belong to Telstra or its competitors. 19.2 kbps was selected as the benchmark for
throughput as it allows effective basic email use and web-browsing.5 At the same time,
this level of performance could be provided at a reasonable cost to Telstra and the
wider community. The IAP is a three-year joint initiative between the Government and
Telstra (formalised through a deed of agreement), ending in June 2004.
Separate arrangements are in place to address the needs of users in Telstra’s Outer
Extended Zones. The Extended Zones Tender offered $150 million to provide
3
TSI, Connecting Australia, Report of the Telecommunications Service Inquiry, September 2000, p.100
The TSI noted that 14.4kbps was a reasonable speed for email and web-browsing. In establishing the
Internet Assistance Program, the Government, with the agreement of Telstra, determined that 19.2kbps
was an appropriate data speed.
5
Consumers wanting faster Internet access have access to a 64 kbps ISDN service or comparable
one-way satellite services under the DDSO upon request and payment of applicable charges. Access to
faster services is available on a commercial basis, with the Higher Bandwidth Incentive Scheme
(HBIS) to provide assistance in some circumstances.
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4
untimed local calls in remote Australia, with the successful tenderer becoming the
exclusive Universal Service Provider for three years. The tender was won by Telstra.
Under the Extended Zones Agreement, Telstra is required to ensure a line speed for
Internet access of 14.4kbps is available. This obligation is in place until 2011.
Telstra’s Outer Extended Zones comprise the most remote parts of Australia, covering
about 28,000 consumers.
The RTI found that the IAP and EZA had led to welcome improvements in dial-up Internet
access across Australia. However, it concluded that there were still people who had dial-up
data throughputs below 19.2 kbps, and that future subscribers could have a similar
problem. Information provided to the RTI showed that 2.6 per cent of users who accessed
Telstra’s BigPond Internet server in June 2002 achieved speeds under 19.2 kbps. With a
view to ensure all people in Australia have access to a reasonable minimum dial-up Internet
experience on an ongoing basis, in Recommendation 4.1 the RTI therefore proposed that a
minimum Internet throughput of at least 19.2 kbps be provided for into the future.
In making Recommendation 4.1, the RTI report noted that:
the need for the IAP will continue beyond the current three year term of the
agreement with the Government, and that it needs to be extended in both time
frame and scope. The following issues need to be addressed in revised
arrangements:

once the upgrade to services in Extended Zones is complete, dial-up users in
those areas need to be brought under the scope of the IAP; and

consumers need to be reassured that they will be guaranteed a data speed of
19.2kbps (or equivalent throughput), over the Telstra fixed network, rather
than provision of that level of service on a ‘best endeavours’ basis.6
Objectives
In light of the findings of the RTI and its recommendation 4.1, the Government’s policy
objective is to put in place arrangements that will provide dial-up Internet users across
Australia with a uniform level dial-up Internet access equivalent to at least 19.2 kbps.
Implicit in the RTI’s recommendation is that a minimum equivalent throughput be locked
in through a licence condition is the need for certainty as to the durability of this outcome.
Subsidiary objectives in pursuing this key objective are:
 the overall cost of providing the solution;
 the impact on industry investment, commercial operation and competition;
 the administrative burden;
 the ease and timeliness of implementation.
Options for achieving these objectives are assessed below in terms of their
effectiveness in achieving these objectives.
6
Regional Telecommunications Inquiry, Connecting Regional Australia the report of the Regional
Telecommunications Inquiry, November 2002.
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
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Stakeholders
The key stakeholders affected by the issues discussed in this RIS, and whose interests
it considers are:
 residential and business consumers of telecommunications services;
 particularly those in regional, rural and remote Australia who the IAP and
EZA currently target, namely the small number of customers with dial-up
access of less than 19.2 kbps; and
 consumers generally, who will benefit from improved communications with
direct beneficiaries, and who ultimately fund telecommunications services
through their payments;
 Telstra and its shareholders, including the Commonwealth – in terms of additional
costs, potential competitive disadvantage, and possible loss in shareholder value;
 other telecommunications service providers, especially Internet Service Providers
(ISPs) – as both wholesale customers and retail competitors of Telstra, and
contributors to the ACA’s costs – and their shareholders; and
 the Commonwealth and the ACA – as the policy-maker, as the regulator required
to monitor the industry and administer regulatory requirements regarding the
guaranteed minimum, and a potential source of funding.
Description of Options
Four options are considered realistic and meriting detailed consideration.
Option 1 – Continuation of the status quo (allow IAP and EZA to run their course)
Option 1 would continue the existing arrangements whereby minimum Internet
throughputs are guaranteed the current IAP and EZA. The IAP would continue to
provide assistance to users to achieve a minimum throughput of at least 19.2 kbps, until
its expiry on 30 June 2004. After this time, the provision of IAP-like services – such as
the self-help website, phone service and technical support service – would be at the
discretion of Telstra, which may well choose to discontinue the services. Services that
had been upgraded under the IAP would likely continue to operate at 19.2 kbps,
however the upgrade of further services to 19.2 kbps would not be guaranteed.
As the IAP does not apply to customers covered in the Outer Extended Zones, users in
these areas would continue to have a minimum line speed of at least 14.4 kbps, until
the expiry of the EZA in 2011. As with the IAP, Telstra would not be required to
provide a minimum line speed once the EZA expires.
Once both the IAP and EZA expire, data speeds would depend on available
commercial solutions.
Option 2 – Introduce a regulatory requirement on Telstra to guarantee a 19.2 kbps
minimum dial-up speed across its network nationally, on request
Option 2 would entail a regulatory requirement on Telstra to guarantee the provision of a
dial-up Internet throughput of at least 19.2 kbps, to all Australians on request. ‘On
request’ means that customers who cannot achieve an Internet throughput of at least 19.2
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
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kbps would request Telstra to provide it. As far as practicable, the requirement would
reflect the obligations in the existing IAP Deed of Agreement between the Commonwealth
and Telstra. However, these obligations would be extended to include customers in the
Outer Extended Zones, thus establishing a uniform, national requirement. Telstra would
be required to promote its obligation and report to the ACA on its compliance with it.
A variation of Option 2 would be to require all carriers operating networks providing
telephone services to provide an Internet throughput of at least 19.2 kbps upon
request. This variation is not considered appropriate because such networks, unlike
Telstra’s, are not extensive and there is no evidence that dial-up data speeds on these
networks are problematic.
Option 3 - Introduce a regulatory requirement on Telstra to guarantee a 19.2 kbps
minimum dial-up speed as a default standard across its network
Option 3 would entail a regulatory requirement on Telstra as per Option 2. However,
rather than the 19.2 kbps being guaranteed to customers ‘on request’, Option 3 would
require Telstra to upgrade all lines on its network to provide the guaranteed minimum
dial-up Internet speed as a matter of course (ie. as a default). This would avoid the
need for customers to request action on Telstra’s part to provide the minimum
throughput as it would be readily available as a matter of course across the network
once the required upgrades have occurred. Telstra would be required to promote its
obligation and report to the ACA on its compliance with it.
A variation of Option 3 would be to require all carriers operating networks providing
telephone services to provide an Internet throughput of at least 19.2 kbps as a default.
Again, this option is not considered appropriate because such networks, unlike
Telstra’s, are not extensive and there is no evidence that dial-up data speeds on these
networks are problematic.
Option 4 – Conduct a tender (or negotiations) for the commercial delivery of a 19.2
kbps minimum throughput, nationally, on request or as a default
Option 4 would entail a competitive tender for the supply on a commercial basis of a
19.2 kbps minimum equivalent throughput. Delivery would cover all of Australia,
including the Outer Extended Zones. Provision could be on an ‘on request basis’ or
on the basis of a uniform upgrade.
Given practicalities of the delivery of the solution, it may be a competitive tender
would not be practical (see below). In this context, commercial negotiation may be
necessary with Telstra.
A variation of Option 4 would be the establishment of commercial arrangements with
all carriers operating networks providing telephone services to provide an Internet
throughput of at least 19.2 kbps on request or as a default. Again, this option is not
considered appropriate because such networks, unlike Telstra’s, are not extensive and
there is no evidence that dial-up data speeds on these networks are problematic.
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
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Reliance on other assistance schemes
Another option would be to take no action to guarantee a minimum dial-up
throughput and rely on customers obtaining faster Internet access under the DDSO or
the Higher Bandwidth Incentive Scheme. This approach would require customers to
incur additional expense and is not considered consistent with the objective of
providing a minimum dial-up throughput.
Impact analysis
An assessment of the effectiveness of each option and an analysis of its impact on key
stakeholders follows.
Option 1 – Continuation of the status quo (allow IAP and EZA to run their course);
customer pays thereafter
Consumers: Option 1 would continue to guarantee the majority of dial-up customer
access to an Internet throughput of at least 19.2 kbps until the end of the IAP Deed on
30 June 2004. For those who have achieved that minimum or a higher throughput by
that date, they are likely to have ongoing access to that speed, though that would not
necessarily be guaranteed. (While unlikely, Telstra would be free to undertake actions
which could reduce Internet throughput below the current 19.2 kbps minimum.)
Similarly, customers in the Outer Extended Zones would continue to have dial-up
access of at least 14.2 kbps until the termination of the Extended Zones Agreement in
2011. They would likely have ongoing access beyond that date to a 14.4 kbps
minimum throughput as the EZA is requiring the network generally to support that
outcome. Under Option 1 the OEZ customers would not achieve any improvement in
guaranteed minimum Internet throughput.
Option 1 would not involve any additional costs for consumers in the short term.
Following cessation of the relevant contracts however, they may find they need to
meet the cost of measures to achieve a minimum throughput of 19.2 kbps, or purchase
an alternative higher speed service.
Telstra and its shareholders, including the Commonwealth as majority shareholder:
Option 1 would be cost neutral to Telstra and its shareholders as the current IAP and
EZA have already been entered into by Telstra of its own volition and on a
commercial basis. In the case of the IAP, Telstra is receiving $10 million from the
Commonwealth to 30 June 2004, and committed to spending up to $38 million itself.
In the case of the EZA, Telstra is receiving $150 million from the Commonwealth.
As Option 1 does not involve any further regulation of Telstra it would be positive for
Telstra and its shareholders.
Other telecommunications service providers, content providers and their shareholders:
By definition Option 1 would not impact on competitors as it is the status quo. The IAP
has been designed and is being administered in a way that is competitively neutral. (The
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
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IAP is available to competitors’ customers serviced used Telstra’s underlying network.)
Upon termination of the IAP, Telstra’s competitors could loss the benefits of the IAP, or
find themselves in a situation where they must meet the cost of providing any upgrade.
To the extent the contracts improve users’ ability to use the Internet, the delivery of
content is improved, potentially improving content providers’ businesses. Licence
charges would be unaffected, as the ACA would not face additional costs.
Commonwealth and ACA: The Commonwealth would achieve its objective of
guaranteeing a minimum Internet throughput for a limited period, however a uniform
minimum service level across the country would not be assured. The cost to the
Commonwealth would remain at is current levels. There would be no additional cost
imposts on the ACA. (The ACA currently monitors compliance with the EZA.
Telstra’s compliance with the IAP is monitored by the IAP Advisory Panel.) As a
significant provider of online services, the Commonwealth would benefit from
improved data speeds, to the extent they eventuate.
Summary: Option 1 would benefit consumers by guaranteeing the delivery, upon
request, of an Internet throughput of at least 19.2 kbps in most areas and, by default,
of 14.4 kbps in the Outer Extended Zones, but only for a specified period. There
would be no ongoing safeguard. Depending on industry initiatives, beyond this date
customers may need to fund their own solutions, but with the advantage of the Higher
Bandwidth Incentive Scheme (HBIS). Options 1 would not involve additional costs
for Telstra, competitors or the Commonwealth. There would be no significant
competitive impact on competitors. There would be no financial impact for
shareholders.
Option 2 : Telstra to provide 19.2 kbps minimum throughput on request nationally
Consumers: Option 2 would guarantee dial-up customers using Telstra’s network,
either directly or indirectly, with access to an Internet throughput of at least 19.2 kbps
when they requested it. As the obligation would apply nationally it would increase the
minimum throughput available to customers in the Outer Extended Zones by 4.8 kbps
from 14.4 kbps to 19.2 kbps. A regulatory requirement would provide a high level of
certainty for consumers and could be implemented quickly if done by a licence
condition. The requirement would provide a guarantee into the future. Option 2 would
not involve any additional direct costs for consumers seeking a minimum equivalent
throughput. To the extent Telstra incurs additional costs in meeting the obligation,
these might be passed on to some extent to consumers, through its wholesale and retail
prices. Telstra’s scope to do so, however, would be subject to ACCC scrutiny in the
case of wholesale charges and price controls in the case of retail prices.
Telstra and its shareholders, including the Commonwealth as majority shareholder:
Option 2 would mean that, from the date the obligation commences, Telstra would
incur costs in the Outer Extended Zones that it would not otherwise incur. Similarly,
Telstra will be likely to incur costs after 30 June 2004 elsewhere in Australia that it
would not otherwise incur. The level of these costs will be determined by demand for
upgrades under the obligation, which in turn will depend on computer usage and
demand for dial-up Internet access. The other key factor will be the cost of solutions,
these could range from tens of dollars where issues can be addressed online or
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
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over-the-phone, to several thousands of dollars where field work or alternative
solutions are required.
On the basis that Telstra entered into the IAP on the assumption that it may need to
upgrade all services needing an upgrade and committed to expending $38 million, $38
million can be assumed to be a reasonable cost of the obligation as it pertains to
Australia outside the Outer Extended Zones. As Telstra expenditure under the first
three years of the IAP has been significantly less than expected, it can be argued that
Telstra still has available to it funding for this purpose. In the case of the Outer
Extended Zones, Option 2 will involve additional expenditure Telstra would not
otherwise have incurred because the infrastructure it is deploying under the EZA may
not always readily provide a throughput of at least 19.2 kbps. In this area more use
may need to be made of more expensive satellite solutions. (As well as equipment
and installation costs, satellite solutions involve additional ongoing usage costs
because of the need to purchase satellite capacity.) If it is assumed that 5% of the
40,000 OEZ premises require an upgrade at a capital cost of $5,000 (a reasonable
allowance for a satellite solution), a total cost of $10 million would be involved.
An important factor to bear in mind is that because upgrades are only provided upon
request, costs are not incurred providing upgrades where they are not wanted.
Consideration also needs to be given to the extent to which customers may seek to
take advantage of the Higher Bandwidth Incentive Scheme (HBIS) to obtain subsidies
to access faster Internet services, thereby by-passing upgrades of their dial-up access
and reducing the cost to Telstra.
As the IAP is in place, Telstra would not be expected to incur significant
implementation costs. Administration, promotional and reporting costs incurred
under the current arrangements would continue but these are relatively small.
In the overall context of Telstra’s operations, the additional costs of Option 2 would
be small and are unlikely to have a discernible impact on shareholder value.
Other telecommunications service providers, content providers and their
shareholders: Option 2 would be expected to be beneficial for overall for other
telecommunications service providers. As noted, Telstra would be required to fulfil
its obligation in a completely neutral manner, thus carriers and ISPs providing
services over Telstra’s network would be able to provide their customers with the
benefit of the minimum equivalent throughput. As the minimum throughput
obligation is on Telstra, Telstra is not expected to pass these costs on to its
competitors. To the extent improved Internet throughput facilitates content delivery,
content providers will benefit.
It is unlikely that the proposed requirement would put other carriers at a disadvantage.
The limited number of carriers providing comparable infrastructure are likely to
already be providing these dial-up speeds and, as noted above, resellers of Telstra
services will benefit from the obligation. There may be some increase in carrier
licence charges as a result of increased ACA administrative responsibilities, but the
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Regulation Impact Statement - Carrier Licence Conditions (Telstra Corporation Limited) Declaration
1997 (Amendment No. 2 of 2003), September 2003
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increase is estimated to be small, most will be funded by Telstra and otherwise be
spread over a large number of carriers.
As the impact on competitors is likely to be slight and most likely positive, the impact on
shareholders, similarly, is likely to be slight and most likely positive, if at all discernible.
Commonwealth and ACA: The Commonwealth would achieve its objective of
guaranteeing a minimum Internet throughput nationally and on an ongoing basis.
There was be no significant cost for the Commonwealth. There would be some
additional costs for the ACA through monitoring, reporting on, and if necessary,
enforcing the regulatory requirement. As noted above, the costs are eventually
recovered though carrier licence charges. Given the size of the obligation in the
context of Telstra’s overall business, it is not expected to have a discernible impact on
the value of Commonwealth’s majority shareholding in Telstra. (It should be noted,
however, that the Commonwealth’s financial interest is not considered in deciding on
regulation.) As a significant provider of online services, the Commonwealth would
benefit from improved data speeds.
Summary: Option 2 would deliver an Internet throughput of at least 19.2 kbps
nationally on an ongoing basis, thus ensuring consumers could have access to a
reasonable dial-up Internet experience. It would involve additional costs for Telstra,
the amount depending on demand and the cost of solutions. $38 million has been
previously allocated in this context. There is likely to be no discernible impact on
Telstra shareholders. The impact, if any, on other stakeholders would likely be slight
and most likely positive. Competitors would have the benefit of improved services
over Telstra’s network. The Commonwealth would achieve its policy objective at no
significant cost to it. The ACA would face some additional administration costs.
Option 3 : Telstra to provide 19.2 kbps minimum throughput nationally as a default
Option 3 would have many of the impacts of Option 2. The main difference would be
the higher cost to Telstra.
Consumers: Option 3 would provide all customers using Telstra’s network, either
directly or indirectly, with access to an Internet throughput of at least 19.2 kbps as a
matter of course. The capability would be available to them whether or not they
wished to use the Internet and whether or not they wanted dial-up access or some
other form of access. As the obligation would apply nationally it would increase the
minimum throughput that could be requested by customers in the Outer Extended
Zones by 4.8 kbps from 14.4 kbps to 19.2 kbps. A regulatory requirement would
provide a high level of certainty for consumers and could be implemented quickly if
done by a licence condition. The requirement could provide a guarantee into the
future. As the requirement would establish a default standard of operation, once the
necessary work had been done, the minimum throughput would be readily available,
and consumers would not need to wait for work to be done after they requested it.
Option 3 would not involve any additional direct costs for consumers seeking a
minimum equivalent throughput. To the extent Telstra incurs additional costs in
meeting the obligation, these might be passed on to some extent to consumers,
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1997 (Amendment No. 2 of 2003), September 2003
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through its wholesale and retail prices. Its scope to do so, however, would be subject
to ACCC scrutiny in the case of wholesale charges and price controls in the case of
retail prices.
The opportunity cost of such a requirement is also worth considering as it would
represent a significant diversion of funds from other initiatives for which there is
greater consumer demand, for example, the provision of broadband.
Telstra and its shareholders, including the Commonwealth as majority shareholder:
Option 3 would mean Telstra would be likely to incur significant additional costs as a
result of the need to upgrade its network to provide a minimum throughput of 19.2
kbps as a matter of course. These costs are estimated to be significant. Most of the
cost of upgrading a line is incurred by the labour required to visit sites, inspect plant,
test circuits and, if required, replace cable and equipment. In its 1998 Digital Data
Inquiry, the ACA reported that Telstra’s estimated capital cost for upgrading relevant
lines to a minimum data speed of 14.4 kbps was over $2 billion.7
Such an upgrade would be potentially wasteful because it would require all services
currently below 19.2 kbps to be upgraded even though all customers may not want to
access the Internet or, even if they did, may not want dial-up. For example, they may
want faster access than is ever possible via dial-up, preferring broadband access that
must be delivered by cable, ADSL or satellite. This is one of the key reasons a
default dial-up minimum throughput has not previously been mandated.
(Such an approach may not even be practicable in that throughput cannot be provided
to premises without computers and Internet access. Throughput is also dependent on
factors outside the Telstra network, so having the Telstra network alone operate at a
certain level will not necessarily deliver the desired outcome.)
Telstra would incur costs nationally that it would not otherwise have incurred from the
date the obligation commences. The level of these costs will be determined by the
number of services requiring upgrade and the cost of solutions. Given that all services
currently operating below 19.2 kbps would need to be upgraded, the cost of the upgrade
would be significant. As noted above, this cost would likely exceed $2 billion.
Consideration also needs to be given to the extent to which customers may seek to
take advantage of the Higher Bandwidth Incentive Scheme (HBIS) to obtain subsidies
to access faster Internet services, thereby by-passing upgrades of their dial-up access
and reducing the cost to Telstra.
As the IAP is in place, Telstra would not be expected to incur significant
implementation costs. Ongoing administrative costs may be lower as a default
performance would be established, however, as noted above, factors outside the
network may still need to be addressed, requiring ongoing administration. Telstra
would incur promotional and reporting costs as under Option 2.
7
ACA, Digital Data Inquiry, Melbourne, 1998, pp.126 and A.6.3 of Appendix 6. On page 126 the
ACA reports that Telstra estimated the cost of an upgrade to 28.8 kbps at $3.95 billion. In Appendix 6
the ACA reports that Telstra estimated the cost of an upgrade to 14.4 kbps was $1.3 billion less,
indicating an estimated upgrade cost of $2.65 billion.
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As Option 3 would be likely to incur significant additional costs for Telstra, it could
have an impact on its profitability, with a follow-on effect for its shareholders. The
opportunity cost of such a requirement is also worth considering as it would represent
a significant diversion of funds from other initiatives for which there is greater
demand, for example, the provision of broadband.
The additional costs of Option 3 could be significant, as such Option 3 is more likely
than any other to impact adversely on Telstra’s shareholder value.
Other telecommunications service providers, content providers and their shareholders:
The impact of Option 3 on other telecommunications service providers, content providers
and their shareholders would appear much the same as Option 2, but magnified. In
particular, competitors may be competitively advantaged by the need for Telstra to direct
considerable funding and management resources uniformly upgrading its network.
Competitors may be disadvantaged to the extent the obligations prevented Telstra
undertaking other investments (eg. ADSL enablement) from which they might otherwise
benefit. As with Option 2, there may be some increase in carrier licence charges as a
result of increased ACA administrative responsibilities.
As the impact on competitors is likely to be slight and most likely positive, the impact on
shareholders is similarly likely to be slight and most likely positive, if at all discernible.
Commonwealth and ACA: The Commonwealth would achieve its objective of
guaranteeing a minimum Internet throughput nationally and on an ongoing basis.
There was be no significant direct cost for the Commonwealth, however any impact
on shareholder value would impact on the Commonwealth as the major shareholder in
Telstra. (Note, the benefit of regulation is considered without regard to the impact on
the Commonwealth’s shareholding.) There would be some additional costs for the
ACA through monitoring, reporting on, and if necessary, enforcing the regulatory
requirement. As noted above, the costs are eventually recovered though carrier
licence charges.
Summary: Option 3 would deliver an Internet throughput of at least 19.2 kbps
nationally on an ongoing basis, thus providing consumers with access to a reasonable
dial-up Internet experience. It would likely involve significant additional costs (likely
over $1 billion) for Telstra, which may impact on investment in higher priority areas
like broadband, which may adversely affect consumers, and Telstra’s shareholder
value. Competitors would have access to improved services over Telstra’s network.
The Commonwealth would achieve its policy objective, without significant direct cost.
The ACA would face some additional administrative costs.
Option 4 – Tender or negotiation of a new contract for the provision of minimum
equivalent throughput nationally, on request or by default
Option 4 involves significant risks because its success is contingent on the voluntary
participation of Telstra and/or other service providers, which may not be forthcoming,
at least at a reasonable price.
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Consumers: Providing the Commonwealth could conclude an agreement that would
achieve the desired outcome, Option 4 would continue to guarantee the majority of
dial-up customers access to an Internet throughput of at least 19.2 kbps on an ongoing
basis nationally. While the risk of a regulatory obligation may provide an incentive
for Telstra or some other party to come to an agreement, there is some question as to
whether such an agreement could be achieved, thus calling into question the viability
of this option. Option 4 would not involve any additional costs for consumers.
Consumer generally may benefit from Telstra being able to invest its own funds in
other areas. There would also be no need for Telstra to try to pass upgrade costs on to
consumers.
Telstra and its shareholders, including the Commonwealth as majority shareholder:
Given the objective being pursued (ie. the provision of a minimum throughput on
Telstra’s public switched telephone network), Telstra would have a considerable
advantage in bidding for any such contract. By being funded to provide the minimum
equivalent throughput, Telstra would be advantaged in terms of its ability to deliver
services and it would be funded to do so, therefore it would not suffer any financial
disadvantage. This would allow Telstra to direct its own resources to other investment
priorities. As the level of funding is not likely to be significant in the context of
Telstra’s overall business (assuming an ‘on request’ approach), the impact on
shareholders is likely to be slight if at all discernible. Shareholders may benefit more
from Telstra not suffering the opportunity cost of having to meet the costs of upgrades.
Other telecommunications service providers, content providers and their shareholders:
Option 4 would provide competing operators with the opportunity to bid for the business
involved in providing the minimum equivalent throughput. However, given the close
linkage between the throughput outcome and Telstra’s network, it is questionable
whether competitors would be interested in offering these services, or would, in fact be
able to do so in a meaningful way. (For example, it would be complex process for
competitors to undertake upgrade work on Telstra's network.) While such an approach
might appear competitively neutral in theory, it may not be practical.
On the assumption that Telstra would win the contract, competitors would have the
advantages outlined above. They would also be likely to benefit from Telstra investment
in other areas. At the same time, however, their competitive position vis-a-vis Telstra
could suffer as a result of Commonwealth funding of Telstra. However, the funding
would be directed at benefiting the wider industry, as upgrades would be available to
customers serviced using resold Telstra services.
Licence charges could increase if the ACA were assigned responsibility for contract
monitoring as in the case of the EZA. The impact on shareholders would be expected to
be slight and most likely positive.
Commonwealth and ACA: Providing the Commonwealth could negotiate a
satisfactory contract, the Commonwealth would be able to achieve the desired
outcome. Option 4 would involve additional costs for the Commonwealth in terms of
the administrative cost of conducting the tender or entering into the agreement (say
$100,000 plus); and more importantly, funding the provision of minimum equivalent
throughput. The cost to the Commonwealth of providing minimum equivalent would
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be expected to be comparable to that estimated under Option 2. However, as Telstra
would likely be the only viable provider of the required solution, Telstra may seek to
exploit this position and increase the price offered. This could, of course, be balanced
by the Commonwealth’s ultimate power to regulate. There is clearly, however, a high
degree of risk here. The Commonwealth has not allocated funds for this outcome and
so this is not an option. Costs would also be incurred either directly or indirectly via
the ACA in monitoring compliance with the contract. If administered by the ACA,
these costs could be recovered from the industry through licence fees.
Summary: Option 4 involves a high risk that the Commonwealth would not be able to
conclude a satisfactory contract with Telstra or another provider to deliver the desired
outcome, particularly at a reasonable cost. If this were the case, consumers would
have no ongoing guarantee of a reasonable minimum Internet dial-up experience. The
option also involves a significant cost for the Commonwealth that the Commonwealth
has not considered it necessary or appropriate for it to meet. Provided Option 4 could
be implemented, it could provide a reasonable dial-up Internet experience for
consumers and the service provider would be fully funded. Competitors would have
access to improved services over Telstra’s network. The ACA would face few
additional costs.
Consultation
In undertaking its assessment, the Regional Telecommunications Inquiry invited
public submissions and met with over 40 key stakeholders on a range of issues of
relevance to the Inquiry. Views were sought on the adequacy of current arrangements
as they relate to dial-up Internet access. A key theme emerging from submissions was
the need for improved speed of Internet services – demonstrating the greatly increased
awareness in regional, rural and remote areas of the value of higher bandwidth
Internet services, and a rapidly growing, real level of demand for these services.
(Thirty-seven per cent of submissions to the RTI noted concerns with dial-up Internet
speeds and the quality of service provided. The majority of Internet-related
complaints concerned problems with dial-up speeds.8
Between the release of the RTI’s report and the release of the Government’s response,
the RTI recommendations, including 4.1, were discussed with a range of stakeholders
including State and Territory representatives (eg. through the sub-groups of the
Online Council), industry participants (eg. Telstra, Optus, Vodafone, Comindico,
AAPT) and business and community organisations (eg. the Australian
Telecommunications Users’ Group, the National Farmers Federation and the Isolated
Children’s Parents’ Association). No strong opposition was voiced to a regulatory
obligation as proposed by the RTI in Recommendation 4.1. Telstra has indicated it is
willing to accept the requirement proposed by the RTI.
Telstra has been be consulted during the drafting of the proposed licence condition,
consistent with the requirements of the Telecommunications Act 1997. The ACA and
TIO have also been consulted. The ACA has also held discussion with Telstra about
future administrative and reporting arrangements.
8
RTI, Connecting Regional Australia, p.155
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Conclusion and Recommended Option
Option 1 would not provide a uniform minimum throughput nationally (ie. it would
not cover the Outer Extended Zones) and would not guarantee the outcome on an
ongoing basis. Option 4 would potentially deliver the required outcome but it is
dependent on the agreement of external parties that may not be forthcoming.
Moreover, the Commonwealth does not have funding available to pursue this
approach. As neither of these options provides the required certainty that they will be
effective in delivering the minimum throughput, that leaves Options 2 and 3.
Option 2 would provide the minimum throughput required by those who seek it upon
request, without the considerable cost of a uniform network upgrade. Option 3 has
the clear disadvantage of requiring a significant upgrade cost that may be
economically wasteful as it would upgrade services of people who may not want
Internet access or dial-up access. As noted, the cost of such an upgrade has been
estimated to be over $2 billion. In the relation to other lesser criteria, there is little
difference between Options 2 and 3. Telstra has indicated its willingness to accept
Option 2. Other stakeholders have not expressed concerns about Option 2.
The recommended option, therefore, is Option 2, a regulatory requirement that Telstra
provide a minimum throughput upon request.
Implementation
There are two main ways a regulatory requirement of the type required could be
implemented, through a licence condition on Telstra or through amendment of the
relevant primary legislation. A licence condition is proposed because this mechanism
is already provided for in the legislation for the implementation of such requirements.
Compared to a statutory amendment, it can be implemented relatively quickly. It is
also relatively simple to modify in the future should circumstances prove it is
appropriate. This approach is also consistent with that recommended by the RTI. A
licence condition has therefore been prepared.
Licence conditions can be imposed by a Ministerial declaration under section 63 of
the Telecommunications Act 1997. The proposed declaration will amend the Carrier
Licence Conditions (Telstra Corporation Limited) Declaration 1997 to require Telstra
to provide an Internet assistance program with a view of providing a minimum
equivalent throughput as it does under the IAP.
It is proposed that the licence condition work in parallel with the Commonwealth’s
pre-existing Deeds of Agreement with Telstra in relation to the IAP and the Extended
Zones.
Review
Because of the size and significance of the telecommunications industry and the
rapidity of change in the sector, the impact of regulation is monitored closely on an
ongoing basis by the ACA and the Department of Communications, Information
Technology and the Arts (DCITA). Each year the ACA must publish a report on
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industry performance. This will require the ACA to report on Telstra’s compliance
with the licence condition. The ACA is also able to report on the effectiveness of
regulation such as that imposed by the licence condition. Historically DCITA has
also reviewed regulation on a regular basis (ie. every 3-5 years).
Given the origins of the licence condition it is envisaged that its effectiveness and
operation will be assessed under the proposed regular reviews of the state of regional
telecommunications provided for in the Telstra (Transition To Full Private
Ownership) Bill 2003. These reviews are in response to RTI recommendation 9.1
The proposed Regional Telecommunications Independent Review Committee
(RTIRC) will be required to review the adequacy of telecommunications services in
regional, rural and remote parts of Australia. These reviews must occur at least every
five years.
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