The first major changes in telecommunications structure and regulation were brought about by the Telecommunications Act 1989 and related legislation. The pressures for change, however, began well before 1989.
In telecommunications services were first provided by the Postmaster-General's Department. The Telecommunications Act 1975 created a new statutory authority, the Australian Telecommunications Commission (Telecom) and gave it the exclusive right to erect and maintain telecommunications infrastructure. Anyone wanting to attach a line, equipment or apparatus could only do so with Telecom's permission.[1] Telecom could also make by-laws which set standards for any equipment or services attached to its network.[2] As one observer noted: `Telecom giveth and Telecom taketh away'.[3]
Telecom's early objectives were national, inward looking goals of expanding its infrastructure and customer base, with particular focus on providing telephone service in rural and remote Australia.[4] As described in the government's 1988 telecommunications policy statement, Telecom's `principal policy objective' in the 1980s was the provision of telephone services throughout Australia on a non-discriminatory, uniform basis at affordable prices'.[5]
The 1980s brought with them, however, strong pressures for change. Some of those pressures were technological; the possibility of new services and new ways of service delivery. There were other pressures as well. The position of Telecom as both service provider and regulator was under criticism. The Government's micro-economic reforms inevitably included telecommunications providers. With the launch of AUSSAT, Telecom also began facing limited competition in the provision of services.
There were also international pressures for change. The introduction of competition in telecommunications overseas pointed towards increased pressure for change within Australia. The Uraguay Round of the General Agreement on Trade And Tariffs (GATT) negotiations, which included trade in services, meant liberalisation of telecommunications regimes was truly on the international agenda.
The Davidson Inquiry recorded many of the pressures for change.[6] While the Report was not implemented at the time, many of its recommendations were put in place in the reforms of 1989 or 1991.
Micro economic reform was a major component of the Government's economic policy. The Economic Planning Advisory Council (EPAC) was established following the National Economic Summit in 1983. EPAC's charter waslargely to assist government in medium and longer term economic policy assessment, including micro economic strategies.[7]
An important component of the micro-economic reform agenda was reform of Government Business Enterprises (GBEs). The 1987 Policy Guidelines on GBE reform recommended GBEs having more clearly defined objectives and goals with more efficient and accountable processes, generally in exchange for removal of onerous day to day bureaucratic constraints on GBE operations.[8] Specific reforms for communications GBEs (Telecom, OTC and AUSSAT) were announced as part of the Government's 1988 policy statement.
Some of the issues raised by EPAC were a foretaste of later debates during telecommunications reforms. Many enterprises funded their social objectives through cross subsidisation. In EPAC's view, there were other ways of achieving those objectives which would rely on direct subsidies or levies on producers and involve a more transparent process for defining and funding those objectives.[9] Privatisation was another issue. While conceding there may be resulting efficiency gains, EPAC said those gains would not necessarily be achieved and may be offset by making it harder for government to pursue social and other non commercial objectives.[10]
The government's micro economic reform policies were one strong pressure for change; new technologies for both new services and new service delivery were another.In the early 80s, there was an `increasing variety of services that can be offered through the telecommunications infrastructure and an ever increasing number of people prepared to pay for them'.[11] As noted American commentator Eli Noam said:
The driving force for restructuring of telecommunications has been the phenomenal growth of user demand for telecommunications, which in turn derives from the shift toward a service-based economy. The large users of telecommunications are corporate headquarters, banks, insurance firms, law offices, media organisations and providers of other services ... For all these reasons, electronic information transmission, ie telecommunications, became of ever increasing importance to the new services sector.[12]
Telecom's status as both monopoly provider of basic services and industry regulator was also a key issue.[13] Many submissions to the Davidson Inquiry complained of Telecom's `conflicting' roles as regulator and service provider.[14]
During the 1980s, areas of Telecom's monopoly were liberalised including the maintenance of PABXs and their supply. However, Telecom still set most equipment standards and the terms of interconnection and was monopoly provider of standard telecommunications equipment and basic services. The passage of the Trade Practices Act 1974 meant that, sooner of later, that position would be challenged.
In 1987, the Trade Practices Commission sought legal advice on whether Telecom's monopoly was in breach of the Act: the advice given was that it could be.[15] The Australian Telecommunications Users Group (ATUG) also released legal advice it had sought showing that Telecom's monopoly on equipment maintenance and its interconnect policy might also be in breach of the Act.[16] The Federal Court decision in Tytel[17] also confirmed anti-competitive behaviour of Telecom in equipment supply. For the government, the need to address the trade practices issues in telecommunications structure was clear.
Liberalisation of telecommunications overseas, including the privatisation of British Telecom and the introduction of infrastructure competition in the early 80s and deregulation of telecommunications in New Zealand beginning in 1987 pointed towards pressures for reform in Australia as well.
There was also the threat of competitive challenge within Australia. The Satellite Communications Act 1984 created AUSSAT, whose first domestic communications satellites were launched in 1985-6. The Act prevented AUSSAT from providing domestic public switched voice or data communications, except to Telecom, OTC or Australia Post. It could, however, provide satellite capacity for private telecommunications services, as long as the services were used by a single organisation or to joint users with a `common interest'.[18] While restrictions on AUSSAT prevented it from becoming a competitor to Telecom in public telecommunications services, it did have the potential to attract some corporate telecommunications revenue away from Telecom.
Telecom itself was also part of the problem. The most common complaints were Telecom's `lack of responsiveness' to user concerns and an `unwillingness to concede that users had real problems'. In the eyes of some, Telecom had abused its monopoly position'.[19] The result was increasing pressure by users and industry on Government for reform.
By the mid 80s, Telecom itself also recognised the inevitability of change. Telecom had, in response to industry demands, clarified its policy on permitting connection of value added services.[20] It also undertook internal restructuring to give it a more customer oriented focus.[21]
Telecom's then Managing Director Mel Ward said there was `recognition within Telecom as early as there 1980 would be change'; Telecom's aim was to `manage the change in a `graceful way.'
I think that basically Telecom's strategy in the 80s was to recognise that the explosion of the industry was going to cause more competition. It was a question of how that introduction was managed.[22]
Shortly after Labor was re-elected in July 1987, Senator Gareth Evans was appointed Minister of the newly amalgamated portfolio of Transport and Communications. One of his first major announcements was the establishment of a departmental task force to look at structural adjustment and reform in telecommunications. The task force[23] was to report by the end of the year or early 1988 on four key areas including
* the nature and extent of telecommunications carriers' monopoly powers
* the extent of private sector involvement in providing telecommunications
equipment and services
* the extent carriers might be restructured or relieved of government
constraint
* how the industry should be economically and technically regulated.[24]
The inquiry would look into the relationship between Telecom, OTC and AUSSAT. It should ask whether `some of the traditional monopoly areas should be wound back and the role of the private sector expanded to meet the increasing range and diversity of user needs'. Whether private equity should be sought for any of the carriers was another issue for the inquiry. And, addressing the looming trade practices issues, he said the inquiry should also address the possibility of establishing an independent telecommunications regulator. For one team member, one of the issues facing the task force was the dual role of Telecom as regulator and service provider. There was `no transparency' of regulation and `no regulatory framework'.[25]
The task force reviewed different competitive models for telecommunications, including competition in the provision of network infrastructure. One of the major arguments against introducing infrastructure competition, though, was the cost of Telecom's service obligations.[26]
Under the 1975 Act, Telecom was to, as far as `reasonably practicable', make its telecommunications services available throughout Australia.[27] It was generally accepted that Telecom made a loss in meeting that obligation, particularly in rural and remote Australia, and funded that loss through internal cross subsidies. What was not known was the amount of that cross subsidy. Particularly if the cross subsidy were substantial, Telecom's ability to continue to fund its service obligation out of its revenues would be jeopardised if network competition were allowed.
At Ministerial request, Caucus also established the Caucus Liaison Group to participate in the policy reform process.[28] That group met with interest groups, including unions, equipment manufacturers and industry. One of the major issues to be addressed was the development of an industry policy which would continue Telecom's substantial support for Australian telecommunications industries. Other issues covered included promoting efficiencies and accountabilities within Telecom and the establishment of a telecommunications regulator. In the end, the results of both the Task Force and caucus consultations and recommendations were reflected in the government's major policy statement on telecommunications reform.
The government's major Policy Statement on telecommunications reform was made by Senator Evans in May 1988. The Statement reflected the major debates on telecommunications and its recommendations became the blueprint for the 1989 legislative reforms. It also highlighted issues which would be the subject of continuing debate and reform.
The Statement acknowledged the obvious: `telecommunications is no longer just traditional telephone, telegram and telex services.... It includes access to information, computers, new services and the world's markets'. And it warned: `Australia's success in both providing and using these wider services will be crucial to success in re-structuring for growth in advanced economic activities'.[29]
The statement sought to resolve five `fundamental questions':
The Statement acknowledged, however, that there were constraints on how the Government could respond effectively to the `challenges of change'. They included
One of the major policy issues facing Government was whether to allow competition in the provision of basic services and infrastructure.
The Statement reviewed the argument that the provision of telecommunications infrastructure was a `natural monopoly' because of the interaction of `significant economics of scale and scope with high sunk costs'. While not necessarily accepting the argument, the Statement accepted that more than one operator in the Australian market `could result in overcrowding and a consequent wasteful use of resources'.[32]
The more persuasive argument was the threat that infrastructure competition would pose to the policy objective of universal service. The services which were cross subsidised, and therefore not likely to attract significant competition, were `remote network services and the provision of basic access from local exchanges to customers' premises'. Competitors would, instead, target the highest profit markets - `the heavily trafficked trunk or international routes' where `prices are presently well above current costs of provision'.[33]
The overseas examples of the US and the UK, where competition in basic network facilities had been introduced, were cited. There, the resultant `tariff rebalancing' had led to higher residential connection charges and basic access rentals. That outcome was seen as `counter to the social policy equity policy objective of sustaining universal affordable access to standard telephone services'.[34]
The sticking point for government was the extent of the cross subsidy. Telecom estimated cross subsidy levels of approximately $670 million; another estimate of the cross subsidy based on different costing methods was $250 million.[35] The government's fear was that, if the amount of cross subsidy were as large as Telecom claimed, network competition would erode Telecom's continued ability to provide universal service through its cross subsidy pricing.[36] The Statement therefore recommended the retention of monopoly provision of basic telephony by Telecom within Australia and by OTC internationally.[37] In exchange, the government expected that Telecom and OTC `will use their monopoly advantages to energetically develop basic network facilities and the services reserved to them'.[38]
The Statement also expressed concern that amount spent by the carriers `to meet what are essentially governmental social and equity objectives, are largely unknown ... and are outside the Government's own control and accountability provisions. The Statement also, therefore, recommended that the Bureau of Transport and Communications Economics (BTCE) report on the `costs and cross-subsidies associated with meeting identifiable community service obligations now met by Telecom'.[39]
Once the policy decision was made to preserve carriers' rights over basic telephony services, the issue was how those monopoly rights would be delineated and what areas would be open to competition. The statement described the reservation as giving Telecom `the rights and obligations associated with the exclusive operation of the national standard telephone service'. That reservation would apply to providing `standard switched voice services, including the use of facilities derived from Telecom's network, from OTC, from AUSSAT or provided by any other entity.[40]
Elsewhere in the Statement, the reservations went further. It listed services including public switched data, text and video services, public switched ISDN, leased circuits and mobile telephone services which would be included in carrier monopolies because `opening them to competition at this time would impose excessive adjustment burdens' on them or their customers.[41] Telecom's exclusive right to provide payphones would also continue.[42]
Another area for scrutiny was Telecom's monopoly over the provision and maintenance of the first telephone. The arguments for maintenance of that monopoly included the ability of Telecom to accept responsibility for service quality and maintenance of the telephone service. The Statement also recognised the importance of Australian content rules on telephones to Australian manufacturers.[43]
The Statement questioned the high cost of Telecom's `first telephone' handsets and maintenance costs, which it felt might drop with a more liberal regime. Nevertheless, it recommended Telecom retain its current monopoly over supply of the first telephone, with specific exemption from the Trade Practices Act, until 30 June 1991 (the arrangements would be reviewed by 31 December 1990). Competitive supply of standard telephones for second telephones would be allowed from 1 January 1989. The boundary of the network would be set, for residential users, at the first telephone socket from 1 January 1989 and, by that date, Telecom would be required to provide a cheaper alternative first telephone.[44]
Services delivered by radiocommunications were also discussed. Some services, such as radio paging and two way information exchange had developed. Telecom, however, had a monopoly on cellular mobile telephony (CMT).
While allowing competition in CMT would not substantially harm Telecom's ability to fund its social obligations, the government had two concerns with opening CMT provision to competition: it might jeopardise Telecom's expansion of the CMT network infrastructure; and the current allocation of radio frequency based on there being a single national operator.[45] The Statement therefore postponed a decision on allowing competition in CMT provision, pending a report by the independent regulator on the implications of licensing an additional CMT operator.[46]
One of the main issues facing government was the extent to which competition in telecommunications services and infrastructure could be allowed without jeopardising the carriers' reserved rights. The view finally adopted was for a more open regime for value added services, but continued restrictions on private networks.
Value added services (VAS) were defined as services `delivered or accessed by telecommunications means' and involving the `addition of significant value to the basic switching and transmission functions...' [47] The basic rule, recommended by the Statement, was that any telecommunications service not explicitly reserved to the carriers would be open to competitive provision. And the licensing regime should ensure that value added services not intrude on monopoly services reserved to the carriers[48]
The carriers (including, for the first time, AUSSAT) would be allowed to provide VAS, but would be required to charge themselves and other VAS providers equally for provision of basic telephony service.[49]
Private networks were another matter. Private networks generally are communications networks usually set up by businesses for their own communications purposes ranging from a network within a business premises to, for example, EFTPOS networks established by banks, which connect a bank's automatic teller machines to a central computer, allowing that bank's customers to use any of the bank's ATMs.
Private networks could use one of four types of communications technology: leased Telecom lines, satellite capacity leased from AUSSAT, privately owned lines (within customer premises or with Telecom's authority) or microwave links (licensed under the Radiocommunications Act). There were restrictions on using any of the four systems which confined private networks to use by one person or business and did not allow resale of spare capacity on the private network to third parties.[50]
The Statement conceded that private networks were valuable in allowing corporate users to `develop innovative telecommunications geared to their specific requirements' which `contribute to efficiency and productivity in the economy as a whole'. Because, however, pricing of leased lines `contained an element of bulk discount', allowing shared use and resale of the leased lines could `jeopardise the source of revenue for financing community service obligations. Shared use and resale of private network capacity obtained from Telecom, OTC and AUSSAT would, therefore, continue to be restricted.[51]
Establishing an independent regulator, AUSTEL, (Australian Telecommunications Authority) was another major policy decision. AUSTEL would assume Telecom's functions as regulator, including responsibility for network safety, quality and inter-operability, responsibility to develop national standards and specifications for equipment and for attachment of equipment to the network.[52]
AUSTEL would also have responsibility for `policing' the government's boundary between services reserved to carriers and those open to competition. That would include both ensuring the carriers' monopoly was not infringed and protecting competitors from unfair carrier practices through administering requirements for separate accounting arrangements for carriers' competitive activities and identifying possible breaches of the Trade Practices Act.53
AUSTEL would take over Telecom's role in permitting competitive telecommunications services attached to the public network. The Statement proposed a form of class licence system for VAS providers, administered by AUSTEL. Under the system, AUSTEL would screen proposals to provide VAS using a class licensing mechanism. And, unless challenged within a fixed period, notification of a proposal would `automatically confer a right to provide the nominated service'.[54]
The provision of private networks would still be restricted to closed user groups. However, AUSTEL would review the current arrangements and report to government on its findings.[55]
Another important AUSTEL function would be monitoring government price control arrangements. The Statement recognised that, generally, the costs of providing customers with access to the telecommunications system were high while usage charges were low. However, `to encourage a wide customer base - for both commercial and social reasons', access charges were set below direct cost, and the difference made up through higher usage charges. Geographic equalisation of costs and prices added to the price distortions.[56]
Moving towards a more competitive telecommunications environment would necessitate better aligning the prices charged for access and usage with their underlying costs. However, the Government did not want to pursue policies `which result in sudden large or potentially disruptive changes to prices for monopoly services'.[57] The Statement, therefore, foreshadowed a price control regime which would limit the rate at which prices for the basic telephone service could be rebalanced.[58]
The government also felt that, in the absence of competition in reserved services, price controls were necessary to ensure Telecom and OTC realised `maximum efficiency gains' which would be passed on to customers. AUSTEL's would monitor compliance with those price controls.[59]
The Statement reviewed the relationship between Telecom, OTC and AUSSAT. There had been argument for a closer working relationship between the three through `amalgamation, common or overlapping Board membership, or through appropriate joint ventures'. The government also, however, saw `value in the diversity of style and managerial approach' of the three. In the end, the government found `no compelling case' for changing the current structural arrangements of the carriers. The Statement did however, recommend that once the major elements of the reforms were in place, structural arrangements would be reviewed.[60]
A policy statement on reform of the transport and communications GBEs was released concurrently with the major policy Statement.[61] The GBE reforms included revised corporate and financial structures with new planning and accountability mechanisms to government, in exchange for a removal of government restrictions on GBEs over their Loan Council borrowings, industrial relations policies, executive remuneration, superannuation and other day-to-day controls.[62]
The telecommunications equipment manufacturing industry was (and is) very important; customer equipment manufacture in Australia then employed approximately 1700 people and produced goods worth $480 million. And the industry was heavily reliant on Telecom, which took between 65% and 75% of industry output in the equipment and network areas, under Australian preference arrangements.[63]
The Statement recognised that liberalisation of the equipment market might effect that industry. In the government's view, there was a `clear need to ensure the stability of the manufacturing industry, but without removing pressure for appropriate structural adjustment'.[64] The government's aim was building `a dynamic export oriented industry ... integrated into opportunities ... in world markets but also recognised the need for `an adequate transition period' for companies to assess and respond to new opportunities. The Statement, therefore, recommended that current preference arrangements be replaced by new industry development arrangements, to be established by 31 December 1988.[65]
Once the Policy Statement had been made, the major task for government was turning policy decisions into legislation. One of the first acts of government was the passage of Trade Practices Regulations which exempted Telecom's monopoly areas from action under the Trade Practices Act, pending the establishment of the proposed telecommunications structure. Other legislation implementing aspects of the Statement followed.[66]
In December 1988, legislation was passed largely implementing the proposed GBE reforms to communications.[67] Telecom, as the Australian Telecommunications Commission, was abolished and recreated as the Australian Telecommunications Corporation. The new Telecom was freed from some government approvals for contracts and borrowings. OTC became the public company OTC Limited and AUSSAT implemented some of the proposed GBE reforms. Telecom By-laws, gazetted in December, also opened up the markets for cabling and wiring of customer premises, PABX maintenance, and the provision of the second and subsequent telephone handset.
Consultation continued throughout the year, with the Department of Transport and Communications (DTC) working to what it said were `extremely tight timing constraints'.[68] As Ms Fanning said, however, the government had set the `policy parameters; it was how the policy framework had been interpreted' which was the subject of consultation.[69]
The consultative process culminated in a seminar where the draft 1989 legislation was analysed and reforms suggested by a range of participants.[70] As a result of the suggestions made, the draft legislation was amended with the `general thrust' of the amendments to `make more explicit the pro-competitive intention of the parts of the Bill relating to the non reserved services and to strengthen competitive safeguards....[71] In the end, the resulting legislation reflected the policy debates leading up to telecommunications reform and to the government's 1988 Statement. [1] Section 94, Telecommunications Act 1975.
[2] Section 111, Telecommunications Act 1975.
[3] Ian Cunliffe, `AUSTEL: Functions and Powers', in Armstrong 1990, p. 237.
[4] Section 6, Telecommunications Act 1975 required Telecom to perform its functions so as to `best meet the social, industrial and commercial needs of the Australian people for telecommunications services and ... so far as it is ... reasonably practicable .. make its telecommunications services available throughout Australia for all people who reasonable require those services'. In meeting that obligation, Telecom was to have regard to, inter alia, `the special needs for telecommunications services of Australian people who reside or carry on business outside of the cities'.
[5] Minister for Transport and Communications, 1988 (hereinafter referred to as the 1988 Statement) pp 1-2.
[6] Committee of Inquiry into Telecommunications Services in Australia (J. A. Davidson Chairman,1982 (hereinafter called the Davidson Report) Recommendations in Vol. 1 pp 28-39.
[7] See sections 5 and 6, Economic Planning Advisory Council Act 1983 for the Council's objects and functions. For EPAC recommendations on the importance of telecommunications to the national economy and for necessary components of public trading enterprise reform, see Economic Planning Advisory Council, 1987, p. 16 and Economic Planning Advisory Council 1989 p. 5.
[8] For discussion of GBE reforms as applied to the transport and communications sector, see Minister for Transport and Communications 1988b
[9] EPAC 1987, p. 16.
[10] Ibid., p. 42.
[11] Davidson Report, Vol 1, p. 6.
[12] Eli Noam, 1987,, p 33-34.
[13] Interview with ATUG Executive Director Wally Rothwell.
[14] Davidson Report Vol. 1, p. 104.
[15] Anne Davies, `The Origins of the Act'. in Armstrong, 1990 p. 53.
[16] Ibid, citing Australian Financial Review of 11 May, 1987.
[17] Tytel Pty Ltd v Australian Telecommunications Commission 67 ALR 433.
[18] Sections 14 and 18, Satellite Communications Act 1984.
[19] Interviews with W. Rothwell and John Saunderson, former Chairman of the House of Representatives Standing Committee on Transport, Communications and Infrastructure.
[20] 1988 Statement, para 4.31-4.32.
[21] A. Davies, Op. Cit., p. 53.
[22] Mel Ward, 1992, p. 47.
[23] The task force was headed by Mike Hutchison, First Assistant Secretary, Telecommunications Policy, Department of Transport and Communications and included Tony Shaw, Bob Horton and Thomas Arthur from within Telecommunications Policy in the Department.
[24] Australian Financial Review, 4 September, 1987.
[25] Interview with Tony Shaw, former member of the Task Force.
[26] Interview with T. Shaw and Jane Smith, former Telecommunications Adviser to the Minister for Transport and Communications.
[27] Section 6, Telecommunications Act 1975.
[28] Interviews with Roger Price, former Chairman of the Caucus Committee on Transport and Communications and J. Saunderson.
[29] 1988 Statement, para 1.10.
[30] Ibid., para 2.74.
[31] Ibid. para 2.55.
[32] Ibid. paras 3.25-33.27.
[33] Ibid. para 3.31.
[34] Ibid. para 3.32.
[35] Ibid. para 3.40.
[36] Interview T. Shaw.
[37] 1988 Statement, para 3.52.
[38] Ibid. para 3.102.
[39] Ibid. paras 3.41-3.43.
[40] Ibid. paras 3.55-3.56.
[41] Ibid. para 3.63.
[42] Ibid. para 3.76.
[43] Ibid. para 5.78.
[44] Ibid. para 5.127.
[45] Ibid. paras 3.68-3.70.
[46] Ibid. para 3.72.
[47] Ibid. para 4.4.
[48] Ibid. para 4.37.
[49] Ibid. Para 4.42.
[50] See Stephen Menzies and Ian Philip, `Private Networks' , in Armstrong, 1990 pp 72-76.
[51] Ibid. paras 3.59 - 3.61.
[52] Ibid, para s 6.14 and 6.18.
53 Ibid, paras 6.14 and 6.32.
[54] Ibid, paras 6.38.
[55] Ibid, para 6.46.
[56] Ibid, para 2.61.
[57] Ibid, para 2.62.
[58] Ibid, paras 6.76 to 6.89.
[59] Ibid, para 8.53.
[60] Ibid, paras 3.95-3.99.
[61] Minister for Transport and Communications, 1988b
[62] Ibid, pp 6-11.
[63] 1988 Statement, para 5.42-5.44.
[64] Ibid., para 5.92.
[65] Ibid, para 5.21.
[66] Trade Practices (Telecommunications Exemptions) Regulations 1988 exempted Telecom from action under section 46 of the Trade Practices Act for its monopoly over supply of the first telephone and its right to approve small business telecommunications systems for connection until 30 June 1989. Other Telecom rights over the first telephone and PABX systems were also protected.
[67] The legislation included the Telecommunications Amendment Act 1988, the OTC (Conversions into Public Company) Act 1988 and the Satellite Communications Amendment Act 1988 .
[68] Vanessa Fanning, (First Assistant Secretary, Telecommunications Policy in DTC) `Issues Faced in Drafting the Regulatory Legislation', in Armstrong 1990 p. 38.
[69] Ibid.
[70] The papers presented at the March 1989 seminar were incorporated in Armstrong, 1990.
[71] V. Fanning, Op. Cit., p. 39.