I do declare - ACCC releases updated draft guideline to Part XIC

What you need to know

• On 1 June 2016, the Australian Competition and Consumer Commission (ACCC) released draft guidelines (Guidelines) on the declaration provisions under Part XIC of the Competition and Consumer Act 2010 (Cth) (CCA).
• The Guidelines reflect the post-NBN amendments to Part XIC and are much more pointed than the previous iteration of the Guidelines from July 1999. It uses examples of public inquiries and declarations from the last 17 years, which makes the Guidelines more instructive for telcos.
• Generally speaking, in order to declare any service, the ACCC must be satisfied that the object of Part XIC has been met – that the declaration will promote the long term interests of end users (LTIE).
• While the Guidelines are not particularly revolutionary, they do provide some insight into how the ACCC determines service descriptions and whether it considers a proposed declaration will promote the LTIE. The Guidelines give some welcome clarity to providers, as the LTIE test can be very broad.
• Public comment on the Guidelines can be submitted to the ACCC until 13 July 2016.

Background 

Previous guideline from July 1999 updated to reflect post-NBN landscape.

Why declare a service?

Since there is no general right to access another provider's telecommunications services, the ACCC is empowered under Part XIC of the CCA to make legislative instruments that deem certain eligible services to be declared services. A carrier or carriage service provider that supplies a declared service must generally then comply with the relevant standard access obligations under Part XIC, including supplying the service to an access seeker upon request.

It is clear, from both the object of Part XIC and the Guidelines, that the ACCC's decision whether or not to declare a service is closely tied to the promotion of the LTIE. But the apparent simplicity of this phrase belies its deeper and much more complex meaning. For example, wrapped up in the LTIE is a consideration of whether a declaration would promote innovation in service offerings or encourage investment in telecommunications infrastructure.

The declaration process

Generally speaking, the catalyst for a declaration is either a public inquiry or the submission of a standard access undertaking (SAU) to the ACCC from a provider. We have provided a brief overview of each of these processes, as well as associated ACCC considerations, in the table below.

	Public inquiry	SAU (for a non-NBN company)
Overview of process	Whether on its own initiative (see CCA s 152AM(2)(a)), on request (see CCA s 152AM(2)(b)) or on a direction from the Minister (see Telco Act s 496), the ACCC may hold a public inquiry for any number of declaration issues (e.g. whether a declaration should be made, varied or revoked). In determining whether to hold a public inquiry, the ACCC will consider (among other things) whether the service in question is already subject to access obligations (eg under other legislative provisions). Part 25 of the Telecommunications Act 1997 (Cth) (Telco Act) sets out the procedures for a public inquiry. It prescribes, for example, that the ACCC allow at least 28 days for public submissions on the proposed declaration (see Telco Act s 500). In most cases, the public inquiry process runs for 6 – 12 months.	A provider may give the ACCC a SAU in connection with access to a service that has not yet been declared (see CCA ss 152CBA, 152CBC and 152CBD). The SAU must contain certain commitments, including that the provider agrees to be bound by the standard access obligations on the terms of the SAU. To accept a SAU, the ACCC must first publish it and invite the public to make submissions on it. If the ACCC neither accepts nor rejects the SAU within 6 months of receiving it, it will be taken to have accepted it (see CCA s 152CBC(5)) (unless that 6 month period is extended).
What the ACCC considers in making the declaration	The LTIE test (see CCA ss 152AL(3) and (8A)) (see below).	Terms of an SAU must be: consistent with the standard access obligations (see CCA s 152CBD); and reasonable, having regard to (among other things) the: (i) LTIE test; (ii) legitimate business interests of the provider concerned; and (iii) economically efficient operation of a service, network or facility (see CCA s 152AH).

The Guidelines

The Guidelines provide some insight into the ACCC's decision-making process as to whether or not to declare a service and specifically how it:

• determines the appropriate service description for a service; and
• conducts the LTIE test.

We canvass each of these in turn below.

Service descriptions

While ultimately guided by the LTIE, the Guidelines reveal that the ACCC generally applies the following principles in developing service descriptions:

• a description should be technologically neutral and should be in functional terms in order to provides access seekers with flexibility to determine the most efficient way of supplying the service;
• providing access seekers with greater control over their own business and products is preferable and, accordingly, access to services should be provided as close to the bottleneck as feasible; and
• for the sake of clarity, avoid the inclusion of carve-outs (though this may be appropriate in some circumstances, e.g. if there is already a competitive supply of the service in a particular region or to a particular class of customer).

Example – the superfast broadband access service (SBAS)
On 23 May 2016, the ACCC published an updated service description for the SBAS that contains a carve-out for business, public body and charity customers in designated CBD areas. This reflects the ACCC's view that there is already sufficient competition in this sector of the market.

For bundled services, the ACCC will also need to determine the granularity for a service description (i.e. whether a higher level service like ADSL, or some part of it, e.g. interconnection services, should be declared). Some of its considerations in this respect are:

• the level of demand for the constituent unbundled elements; and
• efficiency (e.g. whether the separation of internal processes that would be required for the provision of unbundled services may involve additional transaction costs that could be passed down to end users).

LTIE test

Scope

According to the Guidelines, the ACCC interprets the phrase "long term interests of end users" as follows:

• long term is the entire period over which the effect of declaration will be felt, and is considered from an economic perspective – the time within which suppliers can vary all factors of production (e.g. responding to increased customer demand);
• interests are economic interests (e.g. lower prices, increased quality and greater diversity in service offerings); and
• end users are consumers (including businesses) of carriage services, but not all end-users will necessarily be considered in the scope of the test (e.g. the benefit of a declaration may be confined to some specific group of end users in some circumstances).

Application

For the ACCC, the LTIE test involves three aspects of consideration: how the proposed declaration would a. promote competition, b. achieve any-to-any connectivity (i.e. communication between end users on different networks), and c. encourage economic investment (and efficiency) in infrastructure (see CCA s 152AB(2). In relation to each of these three aspects, the CCA prescribes some considerations for the ACCC (see CCA s 152AB(3)). However, although those considerations are exhaustive, the Guidelines reveal that each of these considerations are interpreted by the ACCC quite broadly.

a. Promote competition

From Part XIC of the CCA

Objective	Promote competition in the market
Statutory considerations	The extent to which the declaration will remove obstacles to end users gaining access to the services, and any other considerations(see CCA ss 152AB(4) and (5)).

From the Guidelines

The ACCC takes a three-step approach to determine whether a declaration will promote competition in the market.

1. Identify and define relevant markets in which the proposed service will be supplied. Generally, "market" here means the downstream product market, and may be geographically confined.

2. Assess current state of competition in that market. In assessing the competition in a market, the ACCC has a wide array of considerations which include:

• (market share and concentration) is there potential for collusion, price leadership and unilateral exercise of market power?
• (entry barriers) are new entrants to the market placed at a significant disadvantage compared with incumbents? These could include legal or regulatory hurdles, brand loyalty and retaliation by incumbents.
• (future market features) is there potential for sustainable competition to emerge?

If these questions are answered in the positive, there is a more compelling case for declaration.

Example – the mobile terminating access service (MTAS)

In its 2014 MTAS inquiry, the ACCC determined that declaration would promote competition in downstream markets for retail mobile and fixed voice services. It considered that each mobile network operator had a monopoly over terminating voice calls on their own networks, and that they had incentive to (for example) set the price of access at inefficiently high levels. It concluded that the absence of declaration may create a higher retail price floor and that, conversely, declaration would promote competition by: reducing competitive advantage enjoyed by horizontally-integrated operators; and providing operators with greater flexibility in making retail offers.

3. Consider likely future state of markets with and without declaration.

Once the ACCC has formed a view about the current state of competition in the market, it can speculate on whether the proposed declaration will promote competition. Questions here include:

• (importance to downstream competition) do downstream competitors require the service? Does it represent a large component of their costs?
• (competitive dimensions) could declaration cause the creation of new and innovative services? This may be the case, for example, with more complex services (more so than with simple and easy-to-replicate services).

b. Achieve any-to-any connectivity

From Part XIC of the CCA

Objective	Achieve any-to-any connectivity
Statutory considerations	None

From the Guidelines

• This objective is only achieved if each end user of a service that involves communication between end users is able to communicate with each other via that service irrespective of whether or not they are connected to the same network.
• Generally, the ACCC will examine whether any-to-any connectivity will be agreed between service providers in the absence of declaration, including the time and cost associated with negotiating connectivity arrangements.

c. Encourage economic investment in infrastructure

From Part XIC of the CCA

Objective	Encourage economic investment (and efficiency) in infrastructure
Statutory considerations	Whether it is, or is likely to become, technically feasible for the service to be supplied and charged for. The legitimate commercial interests of the supplier of the services, including the supplier's ability to exploit economies of scale and scope. The incentives for investment in infrastructure. Any other considerations (See CCA s 152AB(6) and (7).

From the Guidelines

This one is a question of economic efficiency. For example, the ACCC will consider the extent to which declaration would encourage innovation (e.g. would it lead to new services being developed or production techniques being improved?). Broadly speaking, the ACCC will consider the following four elements.

1. Technical feasibility

Relevant considerations include whether available technology makes it feasible to supply and charge for the service. If unclear, the ACCC may look at the experiences of other jurisdictions or seek independent expert technical advice.

2. Legitimate commercial interests of supplier

• A supplier's ability to exploit economies of scale and scope will be assessed on a case-by-case basis. This has a number of dimensions, including the supplier's need to recover the costs of providing services and to earn a normal commercial return on its infrastructure investment.
• The ACCC will consider direct costs to a supplier that arise from its obligation to comply with the standard access obligations (and may seek input from providers about what these costs would be). It will not, however, consider indirect costs (such as costs arising from increased competition post declaration). The ACCC will then consider whether the costs are "reasonable" on a case-by-case basis. The Guidelines state that they are likely to be unreasonable, though not necessarily fatal to declaration, if there is no prospect of the costs being recovered (e.g. from access seekers on the terms and conditions of access).

3. Incentives for investment in infrastructure

• The ACCC may examine the cost structure associated with the service. For example, if the supply of a service is characterised by increasing returns to scale (i.e. it will be cheaper for providers that are already providing a service to increase their output of that service than it will be for a new market entrant to provide that same service), then declaration of that service may be inefficient, as this would cost the end-user more than it would to just have the service supplied by a single supplier.
• Conversely, if the economies of scale and scope are relatively small and more entrants to the market could be accommodated, then investment by new entrants may be considered efficient.
• There is an exemption process in relation to the standard access obligations in the CCA (see CCA ss 152ASA(1) and 152ATA(4)). Under this process, the ACCC may exempt an individual or a class of individuals from complying with one or more of the standard access obligations in relation to a declared service. For example, this exemption could be used in cases where declaration may discourage investment in infrastructure due to access costs.

Key takeaways for telcos

The Guidelines provide further insight into how the ACCC determines service descriptions and whether it considers a proposed declaration will promote the LTIE.

Telcos should frame discussions with, and submissions to, the ACCC on the basis of the updated Guidelines. For example, in drafting a submission in relation to a declaration inquiry, you may wish to consider and include:

• (promotion of competition) whether new entrants to the market are placed at a significant disadvantage compared with incumbents (e.g. because of legal or regulatory hurdles, brand loyalty or retaliation by incumbents); and
• (legitimate commercial interests of supplier) whether direct (but not indirect) costs to a supplier that arise from it being compelled to comply with the standard access obligations are reasonable (but note that you can apply for a pre-emptory exemption under the CCA); and
• (incentives for economic investment (and efficiency) in infrastructure) whether the cost structure associated with a proposed declared service (e.g. if the supply of a service is characterised by increasing returns to scale, then declaration, i.e. duplication, of that service may be inefficient, as this would cost the end-user more than it would to just have the service supplied by a single supplier).

Comment on the Guidelines can be submitted to the ACCC until 13 July 2016.