Future scope of the Local Carriage Service exemption final report... · Future scope of the Local Carriage Service ... Wireless Local Loop Networks ... 6.2 TECHNICAL FEASIBILITY OF

Future scope of theLocal Carriage Service

This final decision is in response to an application by TelstraCorporation Limited for an individual exemption from the Standard

Access Obligations in relation to the Local Carriage Service in theCentral Business Districts of Sydney, Melbourne, Brisbane, Adelaide,

and Perth and consideration of a separate class exemption for all othercarriers and carriage service providers in these same areas.

FINAL DECISIONJuly 2002

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Table of Contents

1. INTRODUCTION........................................................................................................................... 1

2. TELSTRA’S APPLICATION FOR EXEMPTION ..................................................................... 3

CBD definition................................................................................................................................... 3Effect of exemption ............................................................................................................................ 4

3. LEGISLATIVE FRAMEWORK................................................................................................... 6

3.1 DECLARATION OF THE LOCAL CARRIAGE SERVICE ....................................................................... 63.2 INDIVIDUAL EXEMPTION................................................................................................................ 73.3 CLASS EXEMPTION ........................................................................................................................ 83.4 LONG-TERM INTERESTS OF END USERS ......................................................................................... 8

4. THE MARKET.............................................................................................................................. 10

4.1 MARKET DEFINITION PRINCIPLES ................................................................................................ 104.2 PRODUCT MARKET....................................................................................................................... 114.3 FUNCTIONAL MARKET ................................................................................................................. 124.4 GEOGRAPHIC MARKET................................................................................................................. 124.5 TEMPORAL DIMENSION OF THE MARKET...................................................................................... 134.6 CONCLUSION – MARKET DEFINITION ........................................................................................... 13

5. COMPETITION ANALYSIS....................................................................................................... 15

5.1 PRINCIPLES ................................................................................................................................. 155.2 MARKET CONCENTRATION IN THE RETAIL LOCAL CALL MARKET ................................................ 175.3 SUBSTITUTE INFRASTRUCTURE AND DECLARED SERVICES .......................................................... 18

5.3.1 Substitute infrastructure ......................................................................................................... 20Fibre Optic and Hybrid Fibre Coax networks..............................................................................................22

Coverage and use in supplying local call services..................................................................................23Possible service specific barriers to entry...............................................................................................26

Wireless Local Loop Networks ...................................................................................................................27Coverage and use in supplying local call services..................................................................................29

Mobile networks ..........................................................................................................................................31Satellite technology .....................................................................................................................................32

Coverage and use in supplying local call services..................................................................................325.3.2 Substitute declared services .............................................................................................. 33

Local and domestic PSTN originating and terminating service. ..................................................................33Coverage and use in supplying local call services..................................................................................34Service specific barriers to entry ............................................................................................................35Conclusion..............................................................................................................................................36

Unconditioned local loop service................................................................................................................36Coverage and use in supplying local call services..................................................................................37Service specific barriers to entry ............................................................................................................40

5.3.3 General barriers to facilities entry ......................................................................................... 41Economies of scale and scope ................................................................................................................41Complex local number portability ..........................................................................................................42Complete service offering ......................................................................................................................42

5.4 OVERVIEW OF COMPETITION IN MARKETS ................................................................................... 435.5 PRICE CONDUCT .......................................................................................................................... 485.6 CONCLUSION - COMPETITION ...................................................................................................... 51

6. EFFICIENT INVESTMENT IN INFRASTRUCTURE ............................................................ 53

6.1 PRINCIPLES.................................................................................................................................. 53Competition and efficiency..........................................................................................................................54

6.2 TECHNICAL FEASIBILITY OF CHARGING AND SUPPLYING THE SERVICE ........................................ 546.3 LEGITIMATE COMMERCIAL INTERESTS OF ACCESS PROVIDERS .................................................... 546.4 INCENTIVES FOR EFFICIENT INVESTMENT IN INFRASTRUCTURE ................................................... 556.5 CONCLUSION – EFFICIENT INVESTMENT IN INFRASTRUCTURE ..................................................... 56

7. ANY-TO-ANY CONNECTIVITY............................................................................................... 58

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7.1 PRINCIPLES ................................................................................................................................. 587.2 EFFECT OF THE EXEMPTION ON ANY-TO-ANY CONNECTIVITY...................................................... 58

8. ARBITRATIONS .......................................................................................................................... 59

9. TIMING OF THE EXEMPTIONS.............................................................................................. 60

10 CONDITIONS ON TELSTRA’S INDIVIDUAL EXEMPTION .............................................. 61

11 CONCLUSION AND FINAL DECISION .................................................................................. 64

APPENDIX 1: COPY OF TELSTRA’S INDIVIDUAL EXEMPTION ORDER ............................. 66

APPENDIX 2: COPY OF CLASS EXEMPTION DETERMINATION............................................ 70

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1. Introduction

In August 1999, pursuant to Part XIC of the Trade Practices Act 1974 (‘the Act’) theAustralian Competition and Consumer Commission (‘the Commission’) declared aservice known as the ‘Local Carriage Service’. The Local Carriage Service is awholesale service involving the carriage of telephone calls over a Public SwitchedTelephone Network (PSTN) from customer equipment at an end-user’s premises toseparately located customer equipment of another end-user in the same standard zone.It is used by access seekers to supply local calls to end-users.

Declaration ensures that access seekers have access to the inputs they need to supplycompetitive telecommunication services to end-users and in accordance with theStandard Access Obligations (SAOs) set out in section 152AR of the Act. Specifically,declaration means that any carrier or carriage service provider who supplies the LocalCarriage Service (to itself or another person) must supply the Local Carriage Service toother service providers upon request in accordance with the SAOs. The terms andconditions of supply can be agreed through commercial negotiations. If however, theparties cannot agree on the terms and conditions of supply, either of them can seek anoutcome arbitrated by the Commission.

On 7 June 2000, Telstra Corporation Limited (Telstra) applied to the Commissionunder section 152AT of the Act, for an individual exemption from the SAOs in relationto supply of the Local Carriage Service. The exemption application relates to thesupply of the Local Carriage Service within the central business district areas (CBDs)of Sydney, Melbourne, Brisbane, Adelaide and Perth.

The Commission released a discussion paper in August 2000, detailing itsconsideration of the exemption application and a possible class exemption and soughtsubmissions from interested parties on key issues.

Submissions were received from:

AAPT LimitedTelstra Corporation LimitedOptusMacquarie Corporate TelecommunicationsPowerTel LimitedPrimusRSL COM Australia Pty LimitedVodafone

Following the receipt of submissions, the Commission conducted a range of marketinquiries to aid consideration of the issues central to a decision on the exemptionapplication and a class exemption, and to assess the effect of any such exemptions onthe long-term interests of end-users. This process resulted in the release of theCommission’s draft decision report in September 2001. The Commission’s draftdecision was to grant a class exemption for all carriers and carriage services providerswithin the areas specified in Telstra’s individual exemption application with a lag of

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one year from any final decision to grant the exemption. The Commission invitedsubmissions on this draft decision. Submissions were received from:

AAPT LimitedTelstra Corporation LimitedMacquarie Corporate TelecommunicationsOptusPowerTelPrimus

This final decision report is based on the consideration of these submissions and earlierinformation before the Commission. It is also based on consideration of Telstra’scommercial agreements with other service providers in relation to the supply of theLocal Carriage Service and the Unconditioned Local Loop Service (ULLS). Thesewere obtained from Telstra by a Commission Record Keep Rule direction issued on 21December 2001. The commercial-in-confidence nature of these agreements preventsdiscussion of them in this report.

The Commission’s final decision is to grant Telstra’s exemption subject to a lag of oneyear and a number of conditions, and to grant a class exemption immediately for allother carriers and carriage service providers without conditions.

Section 2 of the final decision report outlines Telstra’s exemption application. Section3 details the legislative framework under which services are declared and by whichindividual and class exemptions to a service declaration can be made. Section 4outlines the market definition principles that that Commission uses to consider Telstra’sexemption application. Section 5 examines the state of competition in the LocalCarriage Service and related markets and the likely impact of the exemption oncompetition in these markets. Section 6 considers the likely effect of the exemption onthe incentives for efficient investment in infrastructure. Section 7 considers the impacton any-to-any connectivity. Section 8 discusses the possible impact of Telstra’sindividual exemption on Local Carriage Service arbitrations brought before theCommission. Section 9 discusses the date of effect of the exemptions. Section 10outlines the conditions on Telstra’s individual exemption. Section 11 provides generalconclusions and details the Commission’s final decision on Telstra’s exemptionapplication and the class exemption.

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2. Telstra’s application for exemption

On 7 June 2000, Telstra made an application for individual exemption from the SAOsin relation to the supply of the Local Carriage Service in the five CBD areas of themainland capitals.

In its submission in support of its application for an exemption, Telstra stated that it:

…believes that at least within the CBD areas – characterised by high density and relativelyhigh average consumption of telecommunications services – competitive service providers canprofitably service the market using their own facilities.

Telstra argued that at the existing level of infrastructure available in each of the CBDareas specified in the exemption, there was no longer any basis to justify Telstraproviding the Local Carriage Service in these areas under the regulatory regime set outin Part XIC of the Act. Further, Telstra submitted that a decision by the Commission togrant the exemption would encourage further provision of alternative facilities.1

CBD definition

In its application, Telstra has sought an exemption from the SAOs in relation to theLocal Carriage Service in the CBD areas of the five major mainland capitals. Telstrahas defined these CBD areas according to the Exchange Service Areas (ESAs) as setout in its Ordering and Provisioning Manual as amended from time to time.

In response to the Commission’s discussion paper, a number of submissions fromcarriers expressed concern that this CBD definition would potentially allow Telstra thediscretion to change the areas covered by an exemption. For example, in its submissionAAPT stated that it did not in principle object to an approach of nominating particularexchange services areas but was weary of any arrangement whereby Telstra coulddecide which ESAs could be defined as CBD in the future.

The Commission understands that the CBD definition in Telstra’s Ordering andProvisioning Manual is altered infrequently and generally only to add new numbers tothe ESAs. This does not appear to allow Telstra the discretion to choose the ESAs thatare included in the CBD definition. However, the Commission considers that eventhough this may be the case, section 49A of the Acts Interpretation Act 1901 preventsan exemption or instrument to refer to a manual that ‘may be in force from time totime’. For this reason, the Commission proposes that the CBD definition be fixed at thedate of the Commission’s exemption order for Telstra’s individual exemption and thedate of gazettal of the exemption determination for the class exemption. TheCommission has been advised by Telstra that the geographic definition of CBD areas towhich its exemption relates is the same as when its exemption was made on 7 June2000.

1 Telstra Corporation, Application for exemption from the Standard Access Obligations, Submission insupport, 7 June 2000.

Effect of exemption

Telstra has requested an exemption from providing the Local Carriage Service withinthe CBD areas of the five major mainland capitals. This means it applies to thewholesale supply of end-to-end local calls originating and terminating in the CBD areasof these cities and those wholesale local calls originating in the CBD areas andterminating in the same standard zone2 outside these CBD areas (ie all local callsoriginating in these CBD areas and terminating in the applicable ‘local call zone’). Inother words, on granting an exemption, Telstra would not be subject to the SAOs inrelation to the carriage of local telephone calls from customer equipment at an end-user’s premises to separately located customer equipment of an end user, within theCBD areas of the five major mainland capitals, and also those calls originating in theCBD areas and terminating within other areas of the applicable local call zone.3

The wholesale local calls covered by Telstra’s exemption application are shown in thediagram below.

Diagram 2.1: Local call types covered by the exemption application

In considering Telstra’s exemptiodistinguish two local call types.

The first type is local calls that ormajor mainland capitals – ‘Type I

2 The term ‘standard zone’ is defined i3 The exemption application does not i

call zone outside the CBD areas and capitals.

METROKEY

Type Icalls

Type II
CBD
calls
Local CallArea
4

n application, the Commission has found it useful to

iginate and terminate in the CBD areas of the five calls’.

n s.227 of the Telecommunications Act 1997.

nclude the wholesale supply of local calls originating in the localterminating in the CBD areas of the five major mainland

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The second call type is local calls that originate in the CBD area and terminate outsidethe CBD areas of these cities but within the local call zone (typically the metropolitanareas of these cites) – ‘Type II calls’.

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3. Legislative framework

Part XIC of the Act establishes an industry specific regime for regulated access totelecommunications services. The primary objective of Part XIC is to promote the long-term interests of end users of carriage services or services provided by means ofcarriage services.

3.1 Declaration of the Local Carriage Service

There is no general right of access to telecommunication services. The rights andobligations under Part XIC only apply in respect of ‘eligible services’ which are‘declared’ by the Commission.

The declaration decision is in essence, a decision by the Commission to apply the rulesand regulatory processes in Part XIC of the Act to eligible services covered by thedeclaration. It can declare a service on recommendation of the TelecommunicationsAccess Forum (TAF) or alternatively, by conducting a public inquiry and be satisfiedthat the declaration will promote the long-term interests of end-users of carriageservices or service provided by means of carriage services (the LTIE test).

Following the declaration of a service, standard access obligations, as set out in section152AR of the Act, apply to any carrier or carriage service provider who supplies thatservice to itself or to other persons. One of these obligations is to supply the declaredservice, on request, to any service providers, along with specified ancillary services.The access regime thus enables service providers to supply carriage or content servicesto end-users without the (potentially anti-competitive) restriction of access to keyservices supplied by upstream providers. In the event that parties are unable tonegotiate access to declared services, a party can notify the Commission that a disputeexists and the Commission can arbitrate the terms and conditions of access to thatservice.

In August 1999, the Commission declared the ‘Local Carriage Service’ following apublic inquiry examining (among other things) competition for local telephony services(ie, local calls and line rental). The Commission’s reasons for declaring the LocalCarriage Service are set out in its report, Local Telecommunications Services, publishedin July 1999.4

In declaring the Local Carriage Service, the Commission noted that it was satisfieddeclaration would promote the LTIE through improving the conditions for competitionin the local telephony services market. This was expected from the availability of theLocal Carriage Service:

! serving to encourage competition for the retail dimension of local calls;

4 Australian Competition and Consumer Commission, Local Telecommunication Services, July 1999(the Local Telecommunications Services report).

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! enabling one bill for local and long -distance telephony services; and

! providing a ‘stepping stone’ into the market by reducing the risks associated withroll out of alternative infrastructure.5

Since declaration, the Commission has been notified of nine access disputes concerningsupply of the Local Carriage Service by Telstra. At the time of the draft decision theCommission was arbitrating six of those disputes. These have all since been resolvedby commercial negotiation.

3.2 Individual exemption

Under section 152AT of the Act, a carrier or carriage service provider may apply to theCommission for a written order exempting it from any or all of the standard accessobligations that apply to a declared service — an individual exemption.

Essentially, the Commission’s consideration of an individual exemption is similar todeclaration, in that both actions must promote the long-term interests of end usersbefore a service can be declared or an exemption order made. In relation to individualexemption applications, sub-section 152AT(4) states that:

The Commission must not make an order under paragraph 3(a) [an order exempting theapplicant from one or more of the SAOs] unless the Commission is satisfied that the making ofthe order will promote the long-term interests of end-users of carriage services or of servicesprovided by means of carriage services.

If the Commission is of the opinion that an order made in respect of an application foran individual exemption is likely have a material effect on the interests of a person, theCommission must publish the application and invite submissions on whether theapplication should be accepted.

After considering the application for an individual exemption, and submissionsreceived in response to it, the Commission must make a written order exempting thecarrier or carriage service provider from one or more of the standard access obligations,or refuse the application. It is noted that where the Commission makes a decisionrefusing an application, the Commission must provide the carrier or carriage serviceprovider with a statement of reasons as to why the application has been refused.

Where the Commission makes an order for an individual exemption, the order may beunconditional, or subject to such conditions or limitations as are specified in it.

Decisions of the Commission in relation to an individual exemption are subject toreview by the Australian Competition Tribunal, upon application from a personaffected by the decision.

5 Ibid. p. 100.

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3.3 Class exemption

Under section 152AS of the Act, the Commission can determine that each member of aspecified class of carrier (eg, current and future carriers supplying the Local CarriageService in specified areas), or a specified class of carriage service provider, are exemptfrom any or all of the standard access obligations — a class exemption.

In its discussion paper, the Commission invited comments on whether it shouldconsider a class exemption in relation to the supply of the Local Carriage Service in theCBD areas of the five major mainland capitals.

In its submission in response to the discussion paper, PowerTel argued that if anindividual exemption were to be granted to Telstra, a class exemption should also begranted. Similarly, Telstra submitted that if it were to be granted an individualexemption, a class exemption should be considered.

Optus argued that the test for exemption should be based on market power. Using thistest, Optus considered that a class exemption should be granted to all providers that donot have a substantial degree of market power. Therefore in Optus’s, view anexemption should be granted for all carriers other than Telstra.

The Commission considers that if it were appropriate to grant an exemption to Telstrain the areas specified by its application, a class exemption should be granted for allother carriers and carriage service providers in the same areas. In this regard, theCommission notes that Telstra is the only carrier with ubiquitous network coverage ofthe areas in question and the main current supplier of a Local Carriage Service. Thus,if it were determined that granting an individual exemption to Telstra would be in theLTIE, it is considered that a class exemption would also be in the LTIE.

A class exemption is a disallowable instrument for the purposes of section 46A of theActs Interpretation Act 1901.

3.4 Long-term interests of end users

In consideration of an exemption application the Commission is required to have regardto the long-term interests of end users (LTIE). The effect on the LTIE is assessed byconsidering whether:

• competition would be promoted in the markets for carriage services and servicessupplied by means of carriage services;

• the economically efficient use of, and economically efficient investment in, theinfrastructure by which carriage services and services provided by means ofcarriage services are supplied would be encouraged;6

6 In considering this objective the Commission Section 152AB(6) requires the Commission to haveregard to whether it is technically feasible for the service to be supplied or charged for, the legitimate

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• any-to-any connectivity would be achieved, for carriage services involvingcommunication between end-users.

The Commission’s approach in considering exemption applications is to form a viewabout the likely result of a particular exemption on the achievement of each of thesecriteria. Following this it makes an overall assessment of whether the exemption willpromote the LTIE, having regard to the likely effect on the three criteria.

To assess the likely impact of an exemption on the LTIE, the Commission uses a ‘withand without test’. That is, the Commission considers the future without an exemptionand compares this to the future with an exemption. The ‘with and without test’ is not atest in its own right, but is used to isolate the effects which are likely to occur as aresult of the exemption. Further detail and discussion of the Commission’s approach toapplying the LTIE test is in its Telecommunications services – Declaration provisionsguidelines.7

A relevant consideration in determining whether the exemption will promotecompetition or encourage economically efficient use of and investment in infrastructureis whether the market is likely to function efficiently in the absence of the servicedeclaration. Related to this is the principle that if the market works effectively withoutregulation, then regulation will impose unnecessary costs to the economy. Removal ofregulation will therefore remove these costs, which in turn would be likely to promotecompetition and encourage efficient investment. Accordingly, if it is likely that themarket would function efficiently without regulation, granting the exemption shouldpromote the LTIE.

Therefore in considering the competition criterion, what is assessed is whether themarket is sufficiently competitive so that price and service offerings are likely to bemaintained or improved in the absence of a service declaration. In relation to theefficient investment criterion what is considered is whether the incentives for efficientinvestment will be unaltered or enhanced in the absence of a service declaration.Recognising the relationship between competition and efficient investment, a keyconsideration will be whether the market is considered to be sufficiently competitive toencourage efficient investment signals in the absence of the service declaration.

commercial interest of access providers and the incentives for the efficient investment in theinfrastructure by which the access services are supplied.

7 Refer to pp. 34-37 of that guideline.

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4. The Market

In considering how granting of an exemption with respect to a declared service mightpromote the long-term interests of end-users, the Commission must consider how theexemption is likely to affect competition in markets for particular services – namelymarkets for carriage services and services supplied by means of carriage services.

Where competition in a market for the supply of a service is effective, and is likely toremain so, continued declaration of the service in those markets is unlikely to benecessary to ensure services are supplied at a competitive price and of the requisitequality. However, if there is not effective competition, continued declaration isexpected to be necessary to achieve these outcomes and to preserve competition inmarkets for downstream services.

4.1 Market definition principles

Market definition is an integral part of analysing competition in a market.8 Thisprovides the Commission with a starting point from which to analyse the extent ofcompetition in a given market.

The market definition process begins by identifying the service under consideration andthe firm(s) supplying that service.

In having regard to the markets in which competition may be affected, the Commissiongives consideration to the markets in which the service is supplied as well asdownstream markets.

Market boundaries incorporate all other sources and potential sources of closesubstitutes with which the firm supplying the service would compete. Section 4E of theAct provides that:

... ‘market’ means a market in Australia and, when used in relation to any goods orservices, includes a market for those goods or services and other goods or services thatare substitutable for, or otherwise competitive with, the first-mentioned goods orservices.

As noted by the High Court:

This process of defining a market by substitution involves both including productswhich compete with the defendant’s and excluding those which because ofdifferentiating characteristics do not compete.9

To identify services that are ‘substitutable for, or otherwise competitive with’ theservices under consideration, the Commission uses the ‘price elevation test’. The logic

8 The Commission’s approach to market definition is discussed in its Merger guidelines, June 1999 andits information paper, Anti-competitive conduct in telecommunications markets, August 1999.

9 Queensland Wire Industries Pty Ltd v. BHP Ltd (1989) ATPR 40-925, p. 50,008 per Mason CJ andWilson J.

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is that the availability of close substitutes (on both the demand and supply sides)constrains the ability of suppliers to profitably divert prices or quality of service fromcompetitive levels. The resulting market is the smallest area over which a profitmaximising monopolist could impose a small but significant and non-transitory priceincrease.

In addition, the Commission takes account of ‘commercial reality’ to ensure that themarket which it identifies accurately reflects the arena of competition.10 That is, firms’decision-making in relation to demand and supply substitution is constrained by thepracticalities of using such substitutes; in which case, the Commission would need toconsider modifying the market definition to reflect how firms operate.

In identifying relevant markets, it should be noted however, that the Commission’sapproach to market definition in relation to service declaration and exemption does notrequire the determination of a definitive or determinative market definition as is thecase in a Part IV or Part XIB investigation.11

Accordingly, as noted by the Commission in previous inquiries, market analysis underPart XIC should be seen in the context of shedding light on how declaration orexemption would promote competition rather than in the context of developing ‘allpurpose’ market definitions.

4.2 Product market

The delineation of the relevant product dimension of a market requires identification ofthe product (or service) in question, and the sources or potential sources of substituteproducts or services.

In the case of the Local Carriage Service, the Commission is of the view that therelevant service for consideration is the wholesale supply of local call services to othercarriers or carriage service providers by Telstra or other carriers. Therefore, inexamining the impact of an exemption on competition the Commission’s inquiries areconcerned with the supply of these services to other carriers or carriage serviceproviders who provide local calls to end-users. A local call is defined as a call whereboth the calling and called party are located in the same standard zone.12

This definition includes alternative wholesale services to the Local Carriage Servicewhich other carriers and carriage service providers could purchase from Telstra or othercarriers to supply retail local call services to end-users.

10 See, for instance, paragraphs 5.49 and 5.66 of the Commission’s Merger guidelines, June 1999.11 See the Commission’s Telecommunications services – Declaration provisions, July 1999.12 The term ‘standard zone’ is defined in s.227 of the Telecommunications Act 1997.

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4.3 Functional market

The functional dimension of a market refers to the activity, or group of activities,involved in the supply chain. To define the functional market, the vertical stages ofproduction and/or distribution need to be identified by considering whether there areefficiency gains from vertical integration and whether substitution possibilities atadjacent vertical stages can constrain the exercise of market power. Where there areoverwhelming efficiencies of vertical integration between two or more stages, it isinappropriate to define separate functional markets.

The Local Carriage Service is provided by Telstra and other vertically integratedcarriers to other carriers and carriage service providers to enable them to offer retaillocal call services to their own customer end-users. In providing a Local CarriageService to these access seekers the providing carrier will use a number of functionalnetwork elements that it either supplies itself or purchases from other carriers. Thesefunctional elements might include originating and terminating access and localtransmission (which are themselves declared services).

It is evident that retail local call services are supplied by non-vertically integratedsuppliers such as resellers. Carriers and carriage service providers also purchaseorigination, termination and transmission services as separate services and asalternative wholesale services to the Local Carriage Service. The major example ofthis is when carriers have their own directly connected customers and these customersmake local calls to customers connected to other networks. It therefore would appearthat there are not overwhelming efficiencies from vertical integration. This suggeststhat there are various wholesale functional markets and a retail functional market thatshould be considered part of the relevant market. In the context of this final decisionreport, the wholesale local call market and the retail local call market are referred totogether as the ‘local call services market’.

4.4 Geographic market

Delineation of the relevant geographic market involves the identification of the area orareas over which the carrier or carriage service provider and its rivals currently supplyor could supply the relevant service.

In the Commission’s report, Local Telecommunication Services, the customer accessmarket and the local telephony market were defined as national in scope. However, theCommission recognised that the dimensions of the market could change in the future.

Given that Telstra’s exemption application is restricted to the supply of the LocalCarriage Service in the CBD areas Sydney, Melbourne, Brisbane, Adelaide and Perth(known collectively as the “five major mainland CBDs”) the Commission considersthat there is merit in examining whether a market for the Local Carriage Service existsin these areas which is distinct from the national market. In so doing it takes account ofthe differences in demand characteristics and the number and cost of substitutionpossibilities in these areas compared to the rest of the national market. It also takes intoaccount whether there are differences in these features across these different capital citymarkets which would warrant treating one or some cities differently from the others.

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Moreover, the Commission takes into account of how particular conditions may havechanged since the Local Carriage Service was declared in August 1999.

Telstra’s application for an exemption from each of the standard access obligationsrelates to the supply of the Local Carriage Service within the five major mainlandCBDs, including local calls originating in these CBD areas and terminating within thelocal call zone.13

As such, the Commission considers that in the context of its exemption decision, thedimensions of the geographical market for the wholesale supply of local calls is definedas that for the local call zone within which local calls originating in the above five CBDareas terminate. This definition incorporates two geographic aspects. The definition ofCBD areas and the definition of the local call zone. The former is defined as per thegeographic boundaries of Telstra’s CBD Exchange Service Areas. The latter is theapplicable local call zone relevant to these CBD Exchange Service Areas.

4.5 Temporal dimension of the market

Time dimension of the market refers to the period over which demand and supplysubstitution possibilities should be considered.

In considering the substitution possibilities which are set out in section 5, and inreaching its final decision on the exemptions, the Commission has sought to consideralternatives to the Local Carriage Service available to service providers at present andin the foreseeable future. While the Commission has not necessarily set out to engagein short-term or long-term analysis of the time aspect of the relevant market, theCommission is of the view that a cautious approach should be taken in considering thetime dimension of the relevant market. This is in recognition of the significance ofremoving the Standard Access Obligations, and the fact that substitution of alternativeinfrastructure or services for the Local Carriage Service may not be able to be achievedimmediately.

In considering the time dimension of the market the Commission has givenconsideration to the extent to which market conditions have changed since declarationof the Local Carriage Service in 1999.

4.6 Conclusion – market definition

Based on the various dimensions of the market considered above, the Commission is ofthe view that the relevant market is the wholesale supply of local call services to othercarriers and carriage services providers via the Local Carriage Service or other meansin the geographic areas covered by Telstra’s exemption application. It is also of theview that given these wholesale services are used as inputs into the supply of retaillocal calls to end-users, the retail market for local calls is also a relevant market forconsideration. Therefore, the Commission also considers the possible impact of an

13 Further details are provided in section 2.

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exemption decision on the supply of local calls at the retail level, and the possibleeffect of alternative sources of supply of local calls at the retail level.

Discussion of possible alternative infrastructure and services and their degree ofsubstitutability for the Local Carriage Service at the wholesale and retail level isprovided as part of section 5.

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5. Competition Analysis

In this section, the Commission assesses the level of competition in the market for localcall services in the five major mainland CBD areas, and how an exemption would belikely to affect competition in this market. To do this the Commission considers thelevel of concentration in the retail local call market, whether there are effective localcall service substitutes for Telstra’s Local Carriage Service in the five major mainlandCBDs, the possible barriers to entry to further network roll out and the degree of pricecompetition and product differentiation in the market.

5.1 Principles 14

The concept of competition is of fundamental importance to the Act and has beendiscussed many times in connection with the operation of Part IIIA, Part IV, Part XIBand Part XIC of the Act.

In general terms, competition is the process of rivalry between firms, where eachmarket participant is constrained in its price and output decisions by the activity ofother market participants. The Trade Practices Tribunal (now the AustralianCompetition Tribunal) stated that:

In our view effective competition requires both that prices should be flexible, reflectingthe forces of demand and supply, and that there should be independent rivalry in alldimensions of the price-product-service packages offered to consumers and customers.

Competition is a process rather than a situation. Nevertheless, whether firms competeis very much a matter of the structure of the markets in which they operate.15

Competition can provide benefits to end-users including lower prices, and a betterquality and range of services over time. Competition may be inhibited where thestructure of the market gives rise to market power. Market power is the ability of afirm or firms profitably to constrain or manipulate the supply of products from thelevels and quality that would be observed in a competitive market, for a significantperiod of time.

Market power may be drawn from the ownership of infrastructure required forproviding services in the downstream market. Without access to the services providedby the infrastructure, a firm would not be able to operate in the downstream market.Therefore, the establishment of a right for third parties to negotiate access to certainservices, on reasonable terms and conditions, can operate to constrain the use of marketpower, which could be derived from the control of these services.

14 This discussion is derived from the ACCC’s Domestic Transmission Capacity Service report, May2001.

15 Re Queensland Co-operative Milling Association Ltd and Defiance Holdings Ltd (1976), AustralianTrade Practices Reporter 40-012, at 17,245.

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An access regime such as Part XIC, or Part IIIA of the Act, attempts to change thestructure of a market, to limit or reduce the sources of market power and consequentanti-competitive conduct, rather than directly regulating conduct which may flow frommarket power (which is the role of Part IV and Part XIB of the Act). When thestructure of the market becomes more competitive as a result of the access regime ordue to other factors, the Commission may consider exempting an access provider orproviders from the service declaration or revoking or varying the service declaration.In this situation, maintaining declaration of the eligible service may not have mucheffect in terms of promoting further competition. In this regard the ExplanatoryMemorandum for the Trade Practices Amendment (Telecommunications) Bill 1996states:

It is not intended that the access regime embodied in this Part impose regulated accesswhere existing market conditions already provide for the competitive supply ofservices. In considering whether a thing will promote competition, consideration willneed to be given to the existing levels of competition in the markets to which the thingrelates.16

This statement recognises the costs of access, such as administration and compliance,as well as potential disincentives to investment. A continuation of regulated provisionof services will only be desirable where it leads to benefits in terms of lower prices,better services or improved service quality for end-users, which outweigh any costs ofregulation.

As with the case of declaration of a service, when considering whether an exemptionfor a service should be granted (or a service declaration should be varied or revoked),the Commission’s task is to determine the extent to which this is likely to promotecompetition. The question of whether competition will actually improve or increasewill be highly relevant but is not determinative of this issue. The key issue whenconsidering an exemption is whether the exemption will assist in establishingconditions by which such improvement will be more likely to occur. Thisinterpretation of promoting competition (in the context of a declaration) was recentlyendorsed by the Australian Competition Tribunal, which stated that the concept ofpromoting competition:

…involves a consideration that if the conditions or environment for improvingcompetition are enhanced, then there is a likelihood of increased competition that is nottrivial.17

It is, however, not enough to determine if an exemption will promote competition bysimply examining its impact on the competitive process in the market. Rather, theextent to which an exemption promotes competition should be examined from theend-users’ perspective; that is, to have regard to the likely results from increasedcompetition in terms of price, quality and service diversity.

16 Item 6, proposed s. 152AB.17 Re Review of Declaration of Freight Handling Services at Sydney International Airport (2000),

Australian Trade Practices Reports 40,775, at para 107.

17

In interpreting the objective of promoting competition, subs. 152AB(4) of the Actrequires that regard must be had to, though not limited to, the extent to which thearrangements will remove obstacles to end-users gaining access to carriage services.The Explanatory Memorandum to Part XIC of the Act states that:

... it is intended that particular regard be had to the extent to which the particular thingwould enable end-users to gain access to an increased range or choice of services.18

Further, in determining the extent to which an exemption is likely to promotecompetition, the Act provides that:

... regard must be had to the extent to which the thing will remove obstacles toend-users of listed service gaining access to listed services.19

Where, for example, an exemption is likely to result in increased service diversity,end-users will be able to gain access to an increased range or choice of services. Insuch a case, an exemption may be expected to promote competition to a greater extentthan continuing declaration that results in a larger number of suppliers in the market,but means all suppliers essentially offer the same service at the same price.

5.2 Market concentration in the retail local call market

As at 30 June 1998, Telstra’s market share in the total local call market was estimatedat 94 per cent.20 Information supplied by Telstra indicates ongoing erosion of its retailmarket share since this time, largely on the basis of resale competition. This is evidentfrom Table 5.1 below which shows the market share of Telstra’s competitors in thetotal local call market.

Table 5.1: Non-Telstra market share for local calls

1996-97 1997-98 1998-99 1999-00 2000-01(est.)

Total retailmarket share[Telstracommercial-in–confidencedata removed]

c-i-c c-i-c c-i-c c-i-c c-i-c

Own facilitiesonly (incl.ULLS) 0% 1% 4% 6% 7%

Source: Telstra correspondence to Commission, 24 May 2001.

18 Explanatory memorandum for the Trade Practices Amendment (Telecommunications) Bill 1996 -item 6, proposed s. 152AB.

19 Subs. 152AB(4).20 ACCC, Local Telecommunications Services, July 1999, p.55

18

Table 5.1 indicates that although Telstra’s market share in the local call market remainsrelatively high, new entrants appear to be eroding that share not only by reselling localcalls, but also by investment in facilities and using other wholesale services. In supportof this, a recent survey by Deloitte Touche Tohmatsu on telecommunicationspurchasing decisions by the top 100 companies in Australia found that these companiesare continually reviewing their telecommunications suppliers and are willing to changesuppliers if better prices or products are offered. For example, this survey found that71 per cent of respondents had conducted a review of telecommunications supplierarrangements since November 1999.21

It is expected that the erosion of Telstra’s market share in the local call market wouldbe greater in the CBD areas. This is because CBD areas are typically characterised bya higher percentage of business customers that generate higher telephony revenues thanon average, and therefore are particularly attractive to competing service providers.These areas have also been the focus of telecommunications infrastructure investmentby new entrants. Commercial-in-confidence data provided by Optus reveals that on aretail line basis, in CBD areas Telstra has a market share of c-i-c per cent, Optus c-i-cper cent and other carriage service providers c-i-c per cent.

Although many of the new entrants are targeting the data segment of the businessmarket, the Commission understands that the infrastructure being invested in can alsobe used in the provision of voice services.

5.3 Substitute infrastructure and declared services

In this section, the Commission considers whether the various technologies anddeclared services available to carriers in providing telecommunications services serveas effective substitutes for Telstra’s Local Carriage Service in the local call servicesmarket.

In so doing, the Commission considers the ability of alternative technology anddeclared services to provide a substitute for voice grade services. In other words, canthe technology or declared service be feasibly used to provide local calls at thewholesale and retail level? If the technology or declared service is consideredsufficiently suitable for the provision of local calls, the Commission assesses whether ithas sufficient coverage to serve as an alternative to the Local Carriage Service andthereby constrain Telstra’s behaviour in the supply of the Local Carriage Service in theabsence of ongoing declaration.

If it is considered that an alternative technology or service does not have sufficientcoverage, the Commission assesses whether the barriers to entry are sufficiently lowsuch that the threat of entry would constrain decisions in relation to the supply of theLocal Carriage Service. However, the Commission considered in its LocalTelecommunications Services report, that actual entry by carriers, of sufficient scale, islikely to be necessary to generate effective competition. In this regard, the Commissionstated that there are a number of features that limit the ability of new entrants and

21 Deloitte Touche, Tohmatsu: Deloitte Top 100 Companies – Consumer Telco Purchasing decisionsSurvey Report, November 2000, p. 5

19

existing players to roll out customer access networks. These factors include economiesof scale, the sunk nature of investment and negotiating access to facilities. In such anenvironment the threat of entry may not be sufficient to constrain a firm’s conduct.22

At a conceptual level there are a number of wholesale alternatives to the Local CarriageService supplied by Telstra by which other carriers or carriage service providers with orwithout their own infrastructure can use to provide local calls. These alternatives aresummarised in the Table 5.2.

Table 5.2: Alternative methods of supplying local call services

Local calls — forms of supplyA B C D E

Callorigination

Telstra orig.access

Telstra ULLSplus own line

cards, etc

Own network (opticfibre, LMDS,microwave)

Own network

Calltermination

LCS

Telstra termaccess

Telstra termaccess

Telstra termaccess

Own network

Type ofcompetition

Access basedcompetition

← Partialfacilities based

competition

→ Full facilitiesbased

competition

Firstly, a carrier may provide an ‘on net’ call. This is where the entire local call (ie anend to end call within the same standard zone) is carried on the one network. Such acall is more likely to occur for calls entirely within CBD areas (ie Type I calls) thanthose from CBD to metropolitan areas (ie Type II calls) given the amount ofinfrastructure deployed in CBD areas relative to metropolitan areas. The ability of acarrier to provide such a call is dependent on the number of customers directlyconnected to its network and whom these customers call. If the called party is notdirectly connected the carriers network then an ‘on net’ call is not possible.

The second way a carrier can use its own network to provide a local call is to use itsinfrastructure in conjunction with the local or domestic PSTN terminating services. Inthis scenario, a carrier would originate a local call on its own access network andpurchase the local or domestic PSTN service to terminate the call if necessary. Asoutlined in section 5.3.1, the local and domestic terminating PSTN services aredeclared services for third party access. The fact that these services are declared is animportant consideration for the Commission in the context of its exemption decisions.It means that that facilities based competition need not be ubiquitous for a carrier tosupply local calls.

A third method would be for the carrier to use the unconditioned local loop service(ULLS) in place of its own infrastructure for use with PSTN terminating access asdescribed in the second alternative above. The ULLS is also a declared service forthird party access. The granting of the exemption could thereby encourage greater useof such services, which has its own implications for the nature of competition in the

22 ACCC, Local Telecommunications Services, July 1999, p. 49.

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market. This is also likely to be the case with declared PSTN originating andterminating access services. This is considered further below.

A fourth alternative for carriers or carriage service providers to provide local calls issolely via declared PSTN originating and terminating services. This is likely to requiresome extra network functionality to be provided by the access seeker than the case ofthe Local Carriage Service (although less than for the other alternatives outlinedabove). Nevertheless it does enable an access seeker to offer local call services withminimal network infrastructure of its own.

An analysis of the extent to which various infrastructure and services are present andare being used for supplying local call services is considered below.

5.3.1 Substitute infrastructureIn August 2001, the Commission issued a report prepared for it by BIS ShrapnelTelecommunication Infrastructures in Australia 2001 (the BIS Shrapnel Report 2001)which provides an audit of the various types of telecommunications infrastructure inAustralia. The report shows that there is a number of competing local accessinfrastructures to Telstra’s PSTN in place, under construction or being planned in theCBD areas of the capital cities under consideration for the exemption. These includefibre optic, microwave and advanced broadband wireless networks. It is evidenthowever that there is considerably less alternative infrastructure servicing or intendingto service metropolitan areas (ie parts of the local call zone outside of CBD areas).Details of the various local access networks reported by BIS Shrapnel are provided inTable 5.2 below.23

Table 5.2: Local access networks in Australia

Technology Operator Launch Coverage

PSTN Copper Telstra Since 1900 Nationwide (99.5% of population covered)

PSTN Copper TransACT 1999 A local network in Canberra

Optic Fibre AAPT 6 CBDs (Sydney, Melbourne, Canberra, Brisbane,Adelaide and Perth)3 rural cities in Victoria (2002)

Optic Fibre Agile 2000 Adelaide CBD

Optic Fibre Amcom(Fibertel)

1998 4 CBDs (Adelaide, Darwin, Perth and Hobart)30 cities excluding Melbourne & Sydney in 2003

Optic Fibre C&W Optus 1993 9 CBDs (Sydney, Melbourne, Brisbane, Canberra,Adelaide, Perth, Darwin, Hobart and Launceston)

Optic Fibre Davnet 1999 4 CBDs (Melbourne, Sydney, Brisbane and Perth)Others CBDs (Hobart and Adelaide) in 2003

Optic Fibre Ipera 2000 Newcastle Metro

Optic Fibre PowerTel 1999 CBDs (Sydney, Melbourne, Brisbane, Gold Coast,Canberra(p) and Newcastle(p))

Optic Fibre Primus 2000 CBDs in Melbourne and Sydney

23 It is to be noted that xDSL networks are excluded as these are predominantly predicated on access toother networks, notably the Telstra copper network.

21


Optic Fibre Smart RadioSystem

2000 Cooma

Optic Fibre Swiftel 2000 Perth CBD

Optic Fibre Telstra 1990 CBD in Sydney, Melbourne, Brisbane, Canberra,Adelaide, Perth and Hobart

Optic Fibre TransACT 1999 Canberra Metro

Optic Fibre Ue Comm 1999 CBDs (Sydney, Melbourne, Brisbane, Gold Coastand Perth)

Optic Fibre WorldCom 2000 Sydney CBD and Melbourne CBD

HFC Austar(Windytide)

1999 Darwin

HFC C&W Optus 1995 Metro and Urban areas in Sydney, Melbourne andBrisbane.

HFC NeighbourhoodCable

1999 Mildura, Ballarat, Bendigo(c) and Albury-Wodonga(c)

HFC Telstra 1995 6 Metro and Urban areas (Sydney, Melbourne,Brisbane, Gold Coast, Adelaide and Perth)

HFC West CoastRadio (iiNet)

2000 Perth (Ellenbrook area)

Cellular AAPT 2001(terminated)

Network deployment was terminated in 2001

Cellular Hutchison 2000 Sydney, Melbourne, Brisbane, Perth and Adelaide

Cellular One.Tel 2001(terminated)

Sydney, Melbourne, Brisbane, Perth and Adelaide

Cellular C&W Optus 1993 Nationwide (94% of population covered)

Cellular Telstra 1987 Nationwide (96% of population covered)

Cellular Vodafone 1993 Nationwide (93% of population covered and 100%coverage with Globastar Satellites)

LMDS AAPT 2001 (on-hold)

6 CBDs (Sydney, Melbourne, Canberra, Brisbane,Adelaide and Perth)3 rural cities in Victoria (2002)

LMDS/MMDS AUSTAR 2001 Adelaide, Melbourne, Sydney, Brisbane, Canberraand Perth (planning)

LMDS C&W Optus(XYZed formerlyAgility)

2001(on-hold)

CBD areas (where complimentary to its DSL andfibre coverage) in Sydney, Melbourne, Brisbane,Adelaide, Perth and Hobart

LMDS/MMDS Unwired 2001 Metro areas and regional Australia (planning)

Microwave AAPT 1998 CBD and metro areas in Melbourne, Sydney,Brisbane, Adelaide, Perth and Canberra

Microwave Airnet 1999 A small network in Adelaide

Microwave Agile 2000 Adelaide and regional areas in SA

Microwave BushTel 2000 Rural and remote areas

Microwave Datafast 2000 Melbourne CBD

Microwave Davnet 1999 CBD and metro areas in Sydney, Melbourne, Perthand Brisbane

22


Microwave Netcare (PaladinResources)

2000 Perth

Microwave Ntl Telecom 2000 Providing regional access in country VIC and NSW

Microwave OMNI connect Melbourne CBD

Microwave Pulsat 2000 Metro areas in Perth, Melbourne, Sydney andBrisbane

Microwave Third Rail (AMXResources)

2001 Tamworth

Satellite C&W Optus Since 1992 Rural and remote areas in Australia

Satellite Austar 1999 Regional areas in Australia

Satellite Bincom Rural areas in Perth

Satellite Heartland 2000 Rural and remote areas

c = constructing p = planningNote: Not all of the operators listed above have succeeded in rolling out their networksSource: BIS Shrapnel, Telecommunication Infrastructures in Australia 2001, A research report preparedfor the ACCC, July 2001 with ACCC revisions.

The extent to which these local access infrastructures can be considered substitutes tothe Local Carriage Service in the areas covered by Telstra’s exemption applications isdiscussed in turn below. Generally a certain degree of caution needs to be exercised inmaking conclusions about the coverage of this infrastructure. Coverage does notnecessarily mean that it covers an entire area, only that it is present in that area. Thismeans that not all customers within particular areas (such as ‘CBDs’) couldimmediately be offered services by this alternative infrastructure. On the other hand, itwould tend to suggest that the servicing of these areas by the various types ofinfrastructure has actual or potential technical and economic viability.

Fibre Optic and Hybrid Fibre Coax networksA fibre optic network uses glass or plastic threads (fibres) to transmittelecommunications services such as data, video and voice telephony. It has greaterbandwidth than metal cables and is less susceptible to interference. With newnetworks, optical fibre is increasingly used (sometimes combined with coaxial cable)for customer connections, and in existing networks, copper is being replaced withoptical fibre.

Hybrid Fibre Coax (HFC) is used to deliver video, voice telephony, data and otherinteractive services over coaxial and fibre optic cables. A HFC network consists of aheadend office, distribution centre, fibre nodes and network interface units. Theheadend office receives information such as television signals, Internet packets, andstreaming media and then delivers therm through a SDH ring to distribution centres.These distribution centres then send the signals to neighbourhood fibre nodes, whichconvert the optical signals to electrical signals and redistribute them on coaxial cables

23

to homes and businesses where network interface units send the appropriate signals tothe appropriate devices (eg. telephone).24

The Commission considers that HFC and fibre optic technologies provide effectivevoice and data services. This is evidenced by the fact that these technologies arecurrently being used for such applications. Given this, the Commission considers thatlocal call services provided over fibre optic and HFC networks are technologicalsubstitutes for the Local Carriage Service. However, to be an effective substitute thesenetworks need to be sufficiently widespread.

Coverage and use in supplying local call servicesThis section assesses whether fibre optic and HFC infrastructure is sufficientlywidespread to be considered an effective substitute for the Local Carriage Service inthe CBD areas under consideration.

The Commission’s discussion paper sought opinions from carriers on whether thisinfrastructure should be considered an effective substitute for the Local CarriageService. Most carriers, however, did not comment on the substitutability of fibre opticor HFC services for the Local Carriage Service. Of those carriers that did makemention of the substitution possibilities, they argued that fibre optic and HFCinfrastructure deployment was not of sufficient scale to constitute an effectivesubstitute for the Local Carriage Service. For example, AAPT noted that fibre opticwas a possible substitute for the Local Carriage Service, but that its coverage waslimited.

The Commission considers it useful to examine the state of the market at the time ofdeclaration and its development since this time. Such information provides anindication of the progress of investment and the extent of new developments and entryin the market. The following table summarises the state of the market at the time ofdeclaration and how the market has developed subsequently to date.

24 BIS Shrapnel, Telecommunication Infrastructures in Australia, July 2001, p.95.

24

Table 5.3: Development of CBD fibre optic and HFC infrastructure 1999 to 2001Telstra fibre optic infrastructure in all five CBDareas under consideration. Also HFC pay-TVand broadband data network passing 2.5 millionhomes.

Telstra continued investment in fibre opticinfrastructure. Its fibre network operates in all fivemajor capitals under consideration.

Optus optical fibre rings in the CBD areas ofBrisbane, Sydney, Melbourne, Canberra,Adelaide and Perth. Also HFC Pay TV,broadband data and telephony network passingabout 2.2 million homes in Brisbane, Sydney andMelbourne.

Optus continued its fibre optic roll out. Its networkoperates in the CBD areas of the five mainlandcapital cities under consideration. HFC network hasless than 500,000 telephony subscribers inmetropolitan Brisbane, Sydney and Melbourne.

PowerTel had rolled out optical fibre in theCBDs of Brisbane, Sydney and Melbourne

PowerTel operates fibre optic networks in Sydney,Melbourne and Brisbane.

Worldcom Australia Pty Ltd had recentlyentered the Australian telecommunicationsindustry with the objective of deploying networksin Sydney and Melbourne

Worldcom is operating its fibre optic services inthe CBD areas of Sydney and Melbourne

United Energy Telecommunications (Uecomm)had been involved in providing high capacitybroadband services on its optical fibre network inMelbourne on private networks of corporatecustomers

Uecomm is operating its fibre optic network in theCBD areas of Sydney, Melbourne and Brisbane

AAPT was rolling out optical fibre cables in theCBDs of Brisbane, Sydney, Melbourne andAdelaide, as well as selected regional centres

AAPT has rolled out fibre optic loops and cablingin the five CBD areas covered by Telstra’sexemption application;

Primus was installing its cable network in theCBDs of Sydney and Melbourne

Primus is operating its fibre optic services in theCBD areas of Melbourne, Brisbane, Adelaide andSydney, and is in the process of constructing anetwork in the CBD area of PerthAmcom has fibre optic infrastructure in the CBDareas of Perth and Adelaide

Davnet is operating in the CBD areas of Sydney,Melbourne, Brisbane and Perth

Swiftel has optical fibre infrastructure in the PerthCBD

Agile is operating its fibre optic network in theCBD area of Adelaide

Source: ACCC Local Telecommunications Services report 1999 and BIS Shrapnel 2001.

This indicates that, excluding Telstra there are:

• two carriers offering telecommunications services over their own fibreinfrastructure in all five CBD areas concerned;

• four carriers offering the telecommunications services over their own fibre in fouror more CBD areas concerned;

• ten carriers offering services over their own infrastructure in at least one of theCBD areas concerned.

25

Since the Commission’s July 1999 report, it is apparent that investment ininfrastructure in CBD areas has increased and that new entrants are attractingcustomers to their networks. The Commission notes that although carriers other thanTelstra have not obtained full coverage in CBD areas, they have the ability to providelocal call services using this infrastructure by combining it with other infrastructure anddeclared services. Moreover as there can be expected to be considerable up-front costsassociated with rolling out small fibre optic loops, the marginal costs of extending theloop and adding additional customers is likely to be relatively low. This cost structureshould also mean that once a fibre loop has been installed, the infrastructure ownershould have every incentive to try and connect as many customers as possible.

The Commission is aware that a number of carriers have announced plans to deployfurther infrastructure in the CBD areas over the next few years. Although theCommission considers that actual entry (ie. the actual existence of infrastructure) islikely to be required to constrain the actions of incumbents, this information providesan indication of the likelihood of increased facilities-based competition in the longerterm.

In its draft decision report the Commission reported that of buildings wired to fibreoptic infrastructure, carriers other than Telstra covered around 30 per cent of buildings.Telstra advised in its submission to the draft report that where buildings are wired toother carriers, these building are also likely to be wired to Telstra. The Commissionhas revised its figures accordingly (see Table 5.4). The revised figures indicate thatcarriers other than Telstra have wired around 45 per cent of buildings that Telstra iswired to. To the extent there is doubling up by competitors in the same buildings, thiswould overstate the number of buildings that are contestable. These figures are alsoprobably not very good indicators of customer market shares on the basis that largebuildings will often have multiple customers and the number of services per customerconnected will also vary.

Table 5.4: Buildings wired to fibre optic infrastructure of various carriersCompany Buildings wired % of buildings wiredTelstra 5500 100%Optus 1230 22%PowerTel 400 7.3%UECom 300 5%Amcom 270 4.9%AAPT 250 4.5%Swiftel 30 0.5%Primus na naOthers na naSource: BIS Shrapnel 2001, na = not available.

The Commission also notes that Optus’s HFC network is used to offer local and othertelephony services to customers in the metropolitan areas of Sydney, Melbourne andBrisbane. However the number of customers is relatively low (less than its 500,000cable TV subscribers). This would tend to mean that in the vast majority of cases,carriers and carriage service providers with their own infrastructure in CBD areas willbe reliant upon Telstra’s PSTN terminating access services for offering local callservices.

26

In response to the Commission’s draft decision, Optus submitted that it does notconsider that alternative infrastructure such as HFC is an effective substitute for theLocal Carriage Service. Optus argued that it remains highly reliant on Telstra foraccess to the Local Carriage Service in those areas where it has no network coverage orfor buildings not yet directly connected to the Optus network.

Similarly, MCT submitted that while optical fibre is a relevant consideration as acompeting local access infrastructure, it is not currently an effective substitute. Inparticular, MCT argued that, ‘…the connection of customers and buildings to alternateoptic fibre infrastructure, even in CBD areas, will be limited to newer prestige or “A”class buildings which house high volume and high value customers.’25

In considering these submissions, the Commission recognises that the networkcoverage of optical fibre is not ubiquitous, and likely to be highly skewed towardsbusiness customers. However the Commission considers that it is a substitute for theLocal Carriage Service for larger customers in CBDs, particularly if used inconjunction with other declared access services. The Commission also considers thatOptus’ HFC network is a relevant substitute for the termination of calls in non-CBDareas although recognises its coverage is limited.

Possible service specific barriers to entry! Access to buildings

In order for a licensed carrier to directly connect customers to its network, it needs tohave access to buildings in which customers are located. In CBD areas this frequentlymeans obtaining access to high rise buildings.

Schedule 3 of the Telecommunications Act 1997 provides licensed carriers with thestatutory right to access a building for the purpose of deploying low-impact facilities.26

Nevertheless, carriers have certain obligations to fulfil prior to entering a building todeploy infrastructure. These obligations include the need to give notice to the owner ofthe land, to do as little damage as practicable, to comply with industry standards, and tocompensate persons for financial loss or damage suffered as a result of the deploymentof facilities.

Despite the right of statutory access to buildings, a number of carriers informed theCommission that access to buildings can add to delays and additional costs inconnecting customers. Examples were also provided of building owners chargingcarriers for laying cables in their buildings.

The Commission is not convinced that these represent insurmountable barriers toaccess to customers. It also notes that the Australian Communications Industry Forum(ACIF), in conjunction with the Property Council of Australia and Telecommunications

25 MCT, Macquarie Corporate Telecommunications submission to the Commission on draft report onfuture of local carriage service declaration, 12 October 2001, p. 1.

26 Low impact facilities is defined in the Telecommunications (Low-Impact Facilities) Determination1997, made by the Minister for Communications and the Arts, pursuant to Schedule 3 of theTelecommunications Act 1997 and section 4 of the Acts Interpretations Act 1901.

27

User Groups, has developed a Draft Industry Code for building access. This code aimsto create more efficient and effective building access for Carriers, Carriage ServiceProviders and Property Owners by standardising procedures across thetelecommunications industry with resulting savings in the administrative costs of allparties involved.27 The Code appears to address a number of the issues raised bycarriers in seeking access to buildings to deploy cabling. Although the Code is notbinding on property owners, ACIF noted that it understands that as the PropertyCouncil of Australia was involved in the development of the code, it will be recognisedas best practice by Property Owners and adopted as standard business procedure.

Given this, the Commission considers that access to buildings for telecommunicationscarriers to deploy cabling should be improved in the future, thus somewhat reducingthe barriers to entry in directly connecting customers.

Wireless Local Loop NetworksWireless Local Loop (WLL) services can be provided using a variety of technologies,and can be used for a range of voice and data services. In considering the substitutes tothe Local Carriage Service within the local call area, the following discussion willfocus on microwave technology and LMDS technology.

Microwave technology is capable of providing bandwidth of up to 135Mbps, but inpractice its average optimum capacity is about 35Mbps. In a microwave radio system,traffic is transmitted in the form of directed beams of microwaves. Microwave repeaterstations are set up within line-of-sight of each other, with microwave transmitting andreceiving antennas set on tall towers.

These networks can be deployed to provide customer access, and are capable ofproviding voice and data services. They can also be installed as backbone transmissionnetworks for access to regional areas. Microwave technology is considered a matureradio technology.

Local Multi-point Distribution Service (LMDS) technology, however, represents thenewest type of broadband wireless network. While LMDS technology is also a radio-based system, it operates at a high radio frequency band, ranging from 24GHz to 38GHz. It enables point to multi-point connectivity, and can deliver high capacity andhigh-speed voice, data and Internet services.

Like microwave technology, LMDS technology is used to offer service providers andInternet service providers last mile connectivity between their fixed networks andcustomer sites. With LMDS technology, network coverage is increased by connectingthe existing carrier network to a Base Transceiver Station (BTS) through a CustomerInterface Point. This connection is extended using high frequency radio transmission,to an antenna located at the customer’s premises. Figure 5.2 illustrates how LMDStechnology operates.

27 ACIF, Draft for Public Comment Industry Code – Building Access Operations and Installation, April2001, p.1.

28

Figure 5.2: LMDS technology

Source: BIS Shrapnel 2001

The Commission understands that LMDS signal quality and reliability are comparableto conventional technology. It also benefits from lower construction and maintenancecosts than fixed wire technology. It can serve as a means of allowing a carrier todirectly access customers in city and metropolitan areas where buildings are difficult toaccess and where fibre deployment could be uneconomic.

Another advantage of LMDS is that it has minimal impact on end-user sites. Theequipment consists of an antenna and Network Interface Unit (NIU), both of which aresmall, unobtrusive and installed on the customer’s rooftop. However, LMDStechnology requires line of sight in order to achieve reception, and is dependent onclimatic conditions. These do however make it more suited for use in CBD andmetropolitan locations than in other locations.

There are other wireless systems, namely MMDS (multi-channel multipointdistribution system), and MVDS (microwave video distribution system), which operateat 2-4Ghz and 40-42Ghz, respectively. MMDS has been used to deliver pay TVbroadcasts, and also, like LMDS can be used as a local loop network.

29

Coverage and use in supplying local call servicesThe Commission notes developments in wireless local loop network deployment inTable 5.7.

Table 5.7: Wireless local loop technologies

Operator Type ofInfrast-ructure

Operator Status Coverage

Microwave • Operating • CBD and metro areas in Melbourne,Sydney, Brisbane, Adelaide, Perth andCanberra.

• Regional Victoria in 2002.

• Used in combination with othertechnologies including xDSL and fibre, toprovide broadband services.28

AAPT

LMDS • Completed testing onsome CBD nodes.

• Plans to provide coverage to all capitalCBD areas to complement existing andplanned AAPT optical fibre cable, all keymetropolitan areas, and over 20 selectedregional centres.

Davnet Microwave • Operating • CBD and metro areas in Sydney andMelbourne.

• Plans to roll out laser network to linkCBD buildings in Sydney and Melbourne.

DataFast Microwave • Operating • Melbourne CBD area, distributes voice,data and video simultaneously.

• Backbone network spans someMelbourne metro areas and regional areasof Victoria.

Pulsat Microwave • Commenced in metroareas of Perth.

• Further rollout planned for metro areas ofMelbourne Sydney, Brisbane, Adelaideand Canberra

Agile Microwave • Operating • Adelaide metro areas and regional areasin SA.

XYZed LMDS • Has wholesale LMDScustomers in Perth andTasmania.

• Intends to extend rollout the network to 50locations over the next

• Intends to roll out in CBD areas ofSydney, Melbourne, Brisbane, Perth,Adelaide, Hobart and Darwin.

• Proposed nodes will provide networkcoverage to all metropolitan and major

28 www.aapt.com.au

30

12 months, regional centres in Australia.29

UnwiredAustralia

LMDS orMMDS

• Obtained spectrum

• Expected to beginoperations in 2002.

• Plans to sell wireless local loop wholesaleservices to network carriers and ISPs,nationally. 30

WalkerWireless

LMDS orMMDS

• Obtained spectrum • Regional Australia.

Austar MMDS • Operating • Regional and rural Australia.

Source: BIS Shrapnel 2001

The Commission recognises that networks based on microwave, LMDS and MMDStechnology are potentially substitutable for the Local Carriage Service in CBD areas,given their ability to supply the local call service. Operators of this infrastructure canalso use them as a compliment to their fixed network infrastructure (notably fibreloops) and other declared services.

With the exception of Telstra, all submissions to the Commission’s draft decisionargued that wireless technologies such as LMDS technology is not yet an alternative tothe LCS in CBD areas. For instance, Optus indicated that progress on its LMDSnetwork has stalled, and has:

…concluded that there were not sufficient customer numbers, at this time, in each geographiclocation to achieve economies of scale and density to justify such an investment and hassubsequently postponed the rollout of LMDS.31

It is also unclear as to whether AAPT’s LMDS network will be fully operational in thenear future other than on a very limited basis. AAPT does however have a microwavenetwork operating which it uses to provide broadband services.

The Commission accepts that wireless infrastructure has not progressed as quickly andsmoothly as it indicated in its draft decision report. The Commission recognises thatthere is currently limited coverage of wireless networks in CBD areas, but notes that itcan be deployed as a viable alternative to fixed networks.

29 Communications Day, 22 May 2001.30 Communications Day, 15 November 2001.31 Optus, Optus submission in response to the ACCC’s draft decision Future Scope of the Local

Carriage Service, 29 October 2001, pg.23.

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Mobile networksMobile technology allows calls to be made from any location covered by relevantspectrum. The two most common types of mobile services are GSM and CDMA,which utilise spectrum allocated in the 1.8GHz, 800MHz and 900MHz ranges.

In its Competition for long distance mobile telecommunication services report, theCommission concluded that fixed line calls were not a sufficiently close substitute formobile services.32 In this regard, the Commission noted that there were importantdifferences between the two services which limited the extent to which the pricing offixed services constrained the price of mobile services. The premium paid for mobilityprovided an indication in the Commission’s view that the two services were in differentmarkets. The untimed feature of most local call charging and the timed feature of mostmobile call charging would suggest that this is even more the case with respect to localcall services.

Oftel has also recently expressed the view that calls from mobiles are not in the samemarket for calls from fixed services. In support of this it referred among other things,its own survey of residential customers in May 2001 in which 79 per cent ofrespondents considered the home fixed telephone as their main method of making andreceiving calls.33

The Commission notes that developments of new ‘multipurpose’ products that combinethe characteristics of both fixed and mobile phones are likely to result in increasedsubstitution between mobile and fixed telephony services. For example, HutchisonTelecom is offers a product, which allows a customer to make untimed local calls for18 cents per call at anytime as long as the call is made from the customer’s nominated‘TalkZone’ surrounding a residence or business.

However, consumers that purchase this local call service are in essence also purchasinga mobile service and incur mobile rates for other types of calls. It is also onlycurrently available in Sydney and Melbourne and the number of subscribers is onlyabout 1 per cent of the total fixed line customer base at this stage. For these reasons theCommission does not believe that this service is yet to reach the stage where it can beregarded as fully substitutable for a PSTN local call service.

In conclusion although there is likely to be some substitution of mobile services forfixed services the Commission considers that at this time such services are unlikely toconstrain the prices charged for fixed local call services to the degree that they shouldbe considered in the same market.

32 ACCC, Competition for long distance mobile telecommunication services, January 2000.33 Oftel, Competition in the provision of fixed telephony services, 31 July 2001.

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Satellite technologySatellite technology can be used for point-to-point communications but is mainly usedfor point-to-multi-point communication services. Satellites receive microwavetransmissions from an uplink station on earth, and retransmit those down to thedownlink location or region on earth.

Depending on the altitude of the satellite, satellite systems are termed as Low EarthOrbit (LEO) at 600-1500 kilometres or Medium Earth Orbit (MEO), and GeostationaryEarth Orbit (GEO) at 36,000 kilometres above earth. Currently, the most commonsatellite systems in operation are geostationary satellites. These satellites will orbit atover the same point on earth - hence, the term geostationary.

Geostationary satellites have the ability to send phone, fax, telex and data messagesacross vast distances very quickly. However, satellite communications areconsiderably more expensive for serving CBD and metropolitan areas than wire andfixed wireless local loop networks. In addition, if the satellite is used for two-waycommunications, the signal round trip from the ground to the satellite and back takes adelay time of roughly half a second.

Satellite technology does have niche application as part of the customer access networkin situations where alternative terrestrial technologies are not cost effective or notavailable, such as in rural and remote areas. It can also be used as a backbonetransmission technology, but is not widely used.

Coverage and use in supplying local call servicesMany satellites (mostly US based) have some coverage over Australia, but Optus andPanAmSat have GEO satellites with Australian dedicated footprints.34 Optus remainsthe only Australian domestic satellite operator, and international operators such asPanAmSat and GlobalStar are also offering services in Australia.

Optus uses its satellites to provide broadcast services to large customers such as FoxTeland Austar. It also provides interactive telephony services to remote areas for largebusiness customers and government agencies. Optus does not resell satellite capacitybut rather leases capacity over the satellite to its customers where it retains control overthe operation and functioning of the satellite capacity. Telstra uses SkyBridge as awireless technology to complement its terrestrial backbone network, where it providesbroadband satellite services to regional Australia.

It is noted that satellite technology has the potential to be a substitute for the existingfixed network.35 However, given the nature of satellite technology and the current trendof usage, it appears to be only a substitute for the fixed network in rural and remoteareas.

34 The region which a satellite transmits to is described as the satellite’s footprint.35 An observation also noted in the Commission’s Local Telecommunication Services report

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5.3.2 Substitute declared servicesLocal and domestic PSTN originating and terminating service.Local and domestic PSTN originating and terminating services enable access seekers tooriginate and terminate calls with customers connected to an access provider’s publicswitched telephone network. These are declared services and are generally associatedwith fixed line telephone networks. The services can be used in whole or part (alongwith an access seeker’s own direct connections) as substitutes for the Local CarriageService, but require greater functionality to be provided by the access seeker. Theextent to which this is feasible is considered below.

Local PSTN originating and terminating access services involve the carriage ofcommunications between a customer’s premises and the access provider’s local switch,including the switching provided by the local switch. The access seeker interconnectsat the trunk side of the switch and runs or leases a transmission link to its ownswitch/exchange.36

Domestic PSTN originating and terminating services are similar to the local PSTNoriginating and terminating services. The main difference is that interconnection isassociated with a ‘gateway’ exchange rather than the local switch closest to the end-user. This means that the service will frequently involve greater reach and networkfunctionality than local PSTN originating and terminating services. The Commissionunderstands that there are 66 exchanges or points of interconnection (POIs) that serveas gateway exchanges in Telstra’s network which give Australia-wide coverage for thisservice. Given this it tends to be used to provide origination and termination of non-local calls such as national long distance. These gateway exchanges will often be alocal switch, thus making the service functionally identical to local PSTN originating orterminating access where the customer is connected directly to these exchanges. InCBD areas, the gateway exchange tends to be associated with the trunk switch (or TS)resulting in additional components to be recovered in the charge for the service.

The Commission has made a number of arbitration determinations in which it has setthe price for domestic PSTN originating and terminating access services, as well asissued undertaking decisions in which it has touted suitable cost-based prices for theseservices. The coverage facilitated by the services and their associated cost, plus thepricing of the services on a timed basis, means that they are most appropriately used fornational long-distance, international, fixed-to-mobile and mobile-to-fixed calls.However this would not preclude their use for local calls, particularly for shorter-heldcalls. Indeed, unlike the Local Carriage Service, the services are priced on ageographically de-averaged basis so they are likely to be more cost reflective than thegeographically averaged Local Carriage Service price in the areas sought by theexemption. Notwithstanding this the Commission accepts that there are potentialallocative inefficiencies from use of the domestic PSTN originating and terminatingaccess services to provide local call services given that the charges are based on theiruse for other purposes.


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As the Commission noted in its Local Telecommunications Services report, it istechnically feasible to use the declared local and domestic originating and terminatingaccess services to provide a local call. If an access seeker does not have directlyconnected customers at the originating and terminating end, it will require bothoriginating and terminating access. The absence of a preselection determination forlocal calls means however that the customer musts enter an override code to avoidusing the access provider’s (eg Telstra’s) retail local call product. The Commissionunderstands that customers with PABX and other advanced telephone systems canprogram an override code into their systems that would mean it would not be necessaryfor callers to do this each time a local call is made.

Where an access seeker has a directly connected customer at the originating end of acall but not at the terminating end it will need to purchase terminating access only. Inthis instance no override code or preselection determination is necessary toautomatically obtain retail local calls from the access seeker.

Coverage and use in supplying local call servicesAs declared services, all operators of PSTN networks are required to provide local anddomestic originating and terminating access to access seekers that request it. If theaccess provider and the access seeker cannot agree on the terms and conditions ofaccess the Commission can arbitrate. The Commission understands that local ordomestic PSTN originating and terminating access services are used only on a verylimited basis by access seekers to provide local calls. While there may be a number ofreasons for this, one the major ones is likely to be the availability of the declared LocalCarriage Service itself.

Access seekers have indicated to the Commission that the use of local PSTNorigination and termination services to supply local call services has not been extensivedue to the up-front costs that need to be incurred by access seekers in establishingpoints of interconnect and transmission links for all exchanges where they wish to offerlocal call services. This would tend only to make it economical to use these servicesonce a threshold number of customers and calls can be achieved.

The terms and conditions for access to local PSTN originating and terminating tend tohave been commercially negotiated. Some access seekers have indicated to theCommission that they do use this service as a substitute for the Local Carriage Service,and pay Telstra a timed rate. However, some service providers indicate that because oftimed access, they are unable to provide calls profitably to end-users. Furthermore,using this service is considered a risky option, where a long-held local call to anInternet Service Provider could wipe out the profits earned on several short durationlocal calls. Nevertheless the Commission understands that the length of business voicecalls average around 2.5 minutes such that local call provision using a local PSTNoriginating and terminating service will often be economical for a service provider.

As discussed above, domestic PSTN originating and terminating services are notcommonly used by service providers for the provision of an end-to-end local callsbecause they are designed and priced for other purposes and will often beuneconomical for the service provider. Nevertheless the Commission has been madeaware of instances where they are used to offer local call services. For example, it hasbeen told that there are some new entrants that are wholesaling a Local Carriage

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Service by linking domestic originating and terminating access services via a gatewayswitch.

As mentioned above, the Commission has the power to set the terms and condition ofaccess to the local PSTN originating and terminating access services if the parties areunable to agree. Therefore if an access seeker is unhappy with the terms and conditionsby which is receiving access to these services it can seek an arbitration determinationfrom the Commission. To date the Commission has not received notification ofdisputes in relation to local PSTN originating or terminating access. As flagged in theLocal Telecommunications Services report such a price could be set in accordance withgovernment regulatory requirements in relation to the pricing of local calls (such as therequirement by all carriers to offer untimed local calls, Telstra’s 22 cent cap and themetropolitan and non-metropolitan parity requirement) in order ensure competitiveneutrality in the provision of retail local calls.37 This suggests that a per call price or acapped time rate may be appropriate.

Service specific barriers to entryWhen it declared the local PSTN originating and terminating service the Commissionindicated it could be used to supply local calls. However it expressed the view that apre-selection determination by the ACA enabling end-users to select a service providerfor the carriage of local calls was necessary to enable service providers to fully exploitthe use of this service for local calls. There continues to be no such pre-selectiondetermination for local calls. However, as pointed out previously, customers withadvanced telephone systems can overcome this requirement and avoid theinconvenience of entering in an override code before each call is made. Moreover theconstruction of a range of competing infrastructure and the availability of theunconditioned local loop service since the time of the declaration inquiry means that itis much more feasible for carriers to directly connect customers in CBD areas.

Preselection is only really an issue with respect to the origination end of a call. At thetermination end, the issue is whether terminating access is available on reasonableterms, given that Telstra has the vast majority of directly connected customers and willcontinue to be the main terminating carrier in these instances. This can be ensured onthe basis that PSTN terminating access services are declared services.

Nevertheless, to take advantage of local terminating access many access seekers arelikely to need to extend points of interconnect and transmission to local switches inmetropolitan areas of the local call zone or purchase local transmission services to theseexchanges from Telstra or other carriers. As a possible impediment to this, AAPTraised in its submission to the Commission’s draft decision that it was concerned thatTelstra did not have interconnect billing functionality at the local switch level. TheCommission has been advised by Telstra that its local switches can readily be equippedto provide interconnect billing capability where this does not already exist. Moreovertechnical advice provided to the Commission for the Local TelecommunicationsServices inquiry indicated that:


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Interconnection software is available at all Telstra LAS exchanges, a result of switch operatingsystems standardisation; along with…the functions to manage inter-carrier switching and theability to supply billing information.38

In the Commission’s view such requirements may serve as a barrier to entry in the shortterm but the Commission is not convinced they constitute high barriers in the longerterm.

ConclusionThe Commission considers that local PSTN originating and terminating access can beused as a substitute to the Local Carriage Service in a technical sense either on its ownor in conjunction with an access seeker’s own facilities to which customers are directlyconnected. It is however recognised that impediments may possibly exist to the moreextensive use of these services. These include the absence of a preselectiondetermination for local calls and the costs of establishing interconnection at the localexchange level in the face of uncertain demand. Overall however it believes that thesedeclared services, and local terminating services in particular form an effectivesubstitute when used in conjunction with other infrastructure and services such as theunconditioned local loop and local transmission services.

Unconditioned local loop serviceThe unconditioned local loop service (ULLS) is an access service that involves the useof unconditioned copper pairs between the network boundary at an end-user premisesand a point at which the copper terminates.39 Given that new networks tend to involvethe use of transmission media other than copper, Telstra is the only supplier of thisservice throughout Australia.

The ULLS is used by access seekers as a component for the supply of high bandwidthend-to-end services, for the carriage of voice or data communications or both. TheULLS can also be used to supply telephony services either with, or independently of, axDSL (digital subscriber line) service such as Asymmetric Digital Subscriber Lineservices (ADSL).40 It is important to note, however, that in most cases a serviceprovider supplying a xDSL service to a customer would need to provide both the xDSLservice and voice services on the single copper line, given that the declared ULLSrefers to a copper line to the customer, usually a single line. The exception to this iswhen a customer has more than one line, such that different services can be providedseparately on each line.

The way in which the ULLS is supplied to an access seeker depends on the xDSLcarriage technology. Typically, however, the ULLS involves co-location of the accessseeker’s equipment with Telstra’s customer access module. This involves establishinga connection between the point at which the copper cable is terminated (ie the maindistribution frame) and the service provider’s ‘card’ in the co-located facility such as

38 ACCC, Local Telecommunication Services, July 1999, p. 95.39 Ibid. p. 1340 The term ‘xDSL technology’ is a generic name for a technology that enables twisted copper pairs to

be capable of providing high speed data access.

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contained within a Digital Subscriber Line Access Multiplexer (DSLAM). The serviceprovider runs or leases a transmission link from the DSLAM to its own exchange.Figure 5.1 illustrates how access to the ULLS is typically achieved:

Figure 5.1: The unconditioned local loop service

DSLAM

Source: AdvaTel

There are a number of benefits to the use of the ULLS. Most significantly, the accessseeker is able to add its own technology in supplying voice and data services to users,as it uses twisted copper pair without conditioning or specific carriage technology.However, the Commission considers that it is likely to be most feasible for an accessseekers to purchase the service in order to supply both voice and data services.

Coverage and use in supplying local call servicesThe ULLS provides an alternative means for access seekers to gain direct access tocustomers to deliver local call services.

Table 5.5 below indicates the number of access seekers that have sought access to aparticular number of exchanges in each of the CBD areas covered by the exemption forthe purposes of utilising the ULLS. It shows that the number of exchanges for whichactivations have been sought cover most CBD exchanges. The figures reported relateto 5 competing access seekers in total The Commission has also referenced moredetailed figures in informing its views on ULLS take-up but has not been able to reportthese for reasons of commercial sensitivity.

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Figures on the extent of take up on a line basis would offer more useful informationabout the state of competition, but this information was not available. The Commissiondoes understand however that such numbers are currently very small. Nevertheless thefigures on exchange activations indicate that there is interest in providing this serviceby a number of access seekers across the various CBD areas. Importantly, once accessseekers have incurred the expense of investing in equipment and access exchanges toenable them to utilise the ULLS, they have every incentive to maximise the number ofULLS connections to spread these costs over as many services as possible.

Table 5.5: Number of access seekers which have sought access to Telstra exchanges for the ULLSin CBD areas as of end August 2001Capitalcity

No. ofCBDexchanges

Number of access seekers which have sought ULLSactivations at given number of exchanges:

Five Four Three Two One

Sydney 5 4 - - - 1

Melbourne 3 3 2 -

Brisbane 4 3 2 - -

Perth 3 3 1 -

Adelaide 2 3 -

Source: Telstra correspondence to Commission 3 September 2001

It is important to note that in considering the exemptions, the Commission isparticularly interested in the degree of competition in the origination of local callservices. Accordingly, DSL network roll out in CBD areas provides an indication ofthe likely take up of the ULLS, albeit with a focus on the provision of data services.

Since declaration of the ULLS, a number of competitors have invested in thedeployment of xDSL technology. In particular, the Commission notes the followingdevelopments in xDSL rollout, illustrated in Table 5.6.

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Table 5.6: xDSL rollout

Operator Operational Status Coverage

XYZed, a fully-owned subsidiary ofOptus

• Currently providing awholesale DSL service toservice providers

• CBDs of Sydney, Melbourne,Brisbane and Perth.

• At the completion of the proposednetwork roll out, XYZed will beaccessible by more than 75% ofAustralian businesses.41

• Do not currently provide services toretail or residential customers.

AAPT • Initial rollout to 22 exchangesin metropolitan areas ofSydney, Melbourne andBrisbane.

• Planned rollout in CBDs in Sydney,Melbourne, Brisbane, Adelaide,Perth, Hobart.

• Final rollout expected to encompassall capital cities with the exception ofDarwin.42

Request DSL • Provides a wholesale DSLservice, and has gained accessto 20 exchanges. 43

• CBD and metropolitan areas ofMelbourne, Sydney, Brisbane andPerth.

Davnet • Has a HDSL network • CBD areas in Sydney and Melbourne

FlowCom • Still under development • Plans to target the metro areas inMelbourne, Sydney, Brisbane andPerth.

Pahth Telecom • Plans to construct an ADSLnetwork in 2001.

• Initially Perth metropolitan region,followed by Adelaide and then othercities.

Primus • Has been constructing its DSLnetwork in 2001.

• CBDs of Sydney and Melbourne.

Qala Australia • Plans to roll out in 2002. • Initially Sydney CBD then movingout to the metropolitan area and thenexpanding to other capital cities.

NEC • Sought access to several Telstraexchanges.

• CBD areas

Source: BIS Shrapnel 2001 with ACCC revisions.

As the above information indicates, most carriers appear to be still in the process ofdeploying their networks or constructing their xDSL networks. Much of this rollout is

41 Optus submission, 3 October 2000, p. 12.42 Communications Day, 22 May 200143 Communications Day, 22 May 2001

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focused in the CBD areas of the state capitals, but there has also been some deploymentof xDSL networks in metropolitan areas.

In view of the relatively significant number of carriers rolling out xDSL networks, theCommission considers that the ULLS could potentially be used as a competitivesubstitute to the Local Carriage Service for originating local calls in CBD areas.However, there are a number of considerations which indicate that the ULLS may notyet have developed to a stage where it could be considered a ready-made substitute tothe Local Carriage Service in its own right, and particularly in non-CBD areas of thelocal call zone.

Firstly, it tends to be most economically viable for carriers to use the ULLS to offervoice calls in conjunction with a xDSL service, except in high call volume cases. Optussubmitted that wholesale xDSL services that are currently being rolled out using theULLS are targeted at supplying data services rather than telephony.44 In this regard,services supplied using the ULLS are likely to be targeted at corporate and small tomedium-sized enterprises, which tend to concentrate in CBD areas, relative tometropolitan regions. Customers in metropolitan regions are likely to be mainlyresidential in nature, and as such, demand for the bundled voice and data combinationdelivered on xDSL technology are likely to be relatively small. The implications ofthis are that the ULLS would appear to be most substitutable for the Local CarriageService in CBD areas, where business customer are willing to purchase the bundledvoice and data combination offered by carriers. However, in non-CBD areas, theULLS is likely to be less substitutable for the Local Carriage Service as residentialcustomers are less likely to take up the voice and data combination or make highvolumes of voice calls.

Secondly, and following from the first point, users of the ULLS will still need topurchase terminating access in those cases where customers are not directly connectedto their own networks. This will occur for most calls terminating in metropolitanregions, ie Type II calls, where Telstra will tend to terminate the call. In addition, evenin CBD areas, the chances are that many calls will terminate on networks operated byother carriers. In these instances access seekers do however also have the benefit ofaccess to terminating services that have been declared by the Commission. Used incombination with these declared services, the Commission regards the ULLS as aviable substitute for the Local Carriage Service in the areas under consideration.

Service specific barriers to entryLeading up to the release of the draft report several market participants indicated thatthey did not believe that the ULLS was a viable substitute for the Local CarriageService. In particular, market inquiries indicated that a number of access seekers hadexperienced a number of difficulties in utilising the ULLS. The main obstacles citedby some carriers were difficulties in arranging timely access to Telstra’s exchanges andthe high commercial cost of the ULLS to access seekers. These issues, particularly thehigh price of the ULLS were also raised by access seekers in submissions in responseto the Commission’s draft decision.

44 Optus submission, 3 October 2000, p. 3.

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In its draft decision report the Commission indicated that it did not believe these werehigh barriers. The Commission is also now more satisfied that the process of access toTelstra’s exchanges seems to have improved vastly following the imposition by theCommission of a Record Keeping Rule on Telstra on this matter. In anotherdevelopment, since the draft decision report was issued, the six arbitration disputesoutstanding at that time over the price of access to the ULLS have all been resolvedcommercially. Moreover the Commission released recently, indicative cost-basedprices for the ULLS. In most CBD areas this price is $13 per month (the charge forBand 1).45 On this basis it is inclined to take the view that issues raised by accessseekers in relation to access to the ULLS are no longer applicable.

In making its final decision on Telstra’s individual exemption, the Commission hastaken account of the terms and conditions of the supply of the ULLS under commercialagreements existing between Telstra and access seekers. The commercial-in-confidencenature of these agreements prevents discussion of them in this report.

In the Local Telecommunications Services report, the Commission expected that theULLS could provide a competitive alternative to the Local Carriage Service, and thisview has been reinforced by recent developments in the availability and pricing of thisservice in the market. As the above analysis indicates, the Commission considers thatthe ULLS serves as a feasible alternative to the Local Carriage Service in the CBDs ofthe state capitals under consideration, and that this will likely to be increasingly thecase over time.

5.3.3 General barriers to facilities entryEconomies of scale and scopeIn its Local Telecommunications Services report, the Commission stated that given thevast majority of costs for the customer access network - such as trench and cable costs -are fixed, significant economies of scale are likely to exist in the provision of thecustomer access network.

However, the Commission noted that competitors may still find it profitable to providededicated lines for a small number of high volume customers, as their high demand canexhaust economies of scale on those particular lines. This is likely to be the case inCBD areas.

According to Telstra:

On the supply side, the concentration of a high volume of demand in a smallgeographic space, with many large multi-site lines, materially reduces the costs of by-pass, as there is especially great scope for directly connecting customer premises to

45 ACCC, Pricing of Unconditioned Local Loop Services (ULLS), Final Report, March 2002.

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fibre rings. As a result, one would expect, and indeed observes, distinctive patterns ofcompetition in CBD areas.49

Moreover, beyond the access network, for certain modular and readily duplicablenetwork components such as switches, access seekers are expected to realise scaleeconomies once they have a threshold number of customers.

Complex local number portabilityAfter the release of the draft report the Commission was notified of several complaintsfrom access seekers about Telstra’s charging practices and timeliness for complex localnumber portability (LNP). As complex number portability has relevance to thecompetitive dynamics of the CBD business market in particular, the Commissionbelieved the complaints were relevant to its decision on Telstra’s exemption.

Subsequent investigation of the complaints by the Commission revealed that:

! many of the components of Telstra’s complex LNP charges were in contraventionto the Commission’s LNP pricing principles; and

! Telstra was potentially using its market power to impose an exit penalty on exitingcustomers and thereby preventing other service providers from competingeffectively for the supply of local call services.

To alleviate these concerns, the Commission suggested a number of charge reductionsfor complex LNP be made by Telstra.

Following negotiations with the Commission, Telstra agreed to reduce its charges to alevel in line with those levied by other carriers and carriage service providers. Thisamounted to a reduction of around 50 per cent on average and will result in appreciablylower costs for service providers and ultimately for business customers wishing to porttheir numbers. These lower charges took effect in early July.

In view of this outcome, the Commission is satisfied that Telstra’s charging practicesfor complex LNP should not be a significant barrier to entry.

Complete service offeringMany carriers note that customers generally prefer one carrier providing all theirtelecommunications needs, eg national long distance, local, international and fixed-to-mobile, rather than having separate carriers for various services. This suggests newentrants must be able to provide the entire range of services in order to competeeffectively with incumbent networks.

This is the result both of consumer preferences and also bundled service offerings bycarriers. In relation to the later point, national long distance, international and fixed-to-mobile services are included in the preselection basket, and as such are automaticallypurchased as a bundle. The Commission understands that many households and

49 Telstra’s submission in response to the Commission’s Discussion Paper, p. 3.

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organisations also purchase, or would prefer to purchase, local call services from thesame carrier that it purchases these services from. The Deloitte Touche Tohmatsusurvey on telecommunications purchasing decisions found that 73 per cent ofcompanies purchased local, national long distance and international calls from the samesupplier.50 However somewhat inconsistent with this finding, only 20 percent of thecompanies used a single telecommunications company to supply all theirtelecommunications services.

However the Commission understands that most customers generally prefer to be ablepurchase all call services from one carrier. As such, a carrier must be able to offer localcalls, long distance calls, international calls and fixed-to-mobile calls. Carriers are ableto effectively target consumers based on their preferences for these services. Forexample, some carriers offer cheap long-distance calls in an attempt to attract thosecustomers for which such calls make up a large percentage of their telecommunicationsbudgets. However, other services must also be offered so that the carrier remainsattractive to the customer.

Essentially for carriers to be able to compete effectively for one telecommunicationsservice, they must be able to compete effectively for all telecommunications services.This means being able to provide all services via their own networks, or being able topurchase competitively priced telecommunications access services. The Commissionconsiders that in the CBD areas under question, these options are available.

5.4 Overview of competition in markets

Table 5.7 summaries the alternative local infrastructure within the confines of the fiveCBD areas that can be used to supply local call services. In addition to Telstra’s copperand optic fibre networks, there are:

! 7 alternative carriers capable of offering services over 9 alternative networks inSydney;

! 8 alternative carriers capable of offering services over 10 alternative networks inMelbourne;

! 6 alternative carriers capable of offering services over 8 alternative networks inBrisbane;

! 5 alternative carriers capable of offering services over 7 alternative networks inPerth;

! 6 alternative carriers capable of offering services over 8 alternative networks inAdelaide.

50 Deloitte, Touche, Tohmatsu: Deloitte Top 100 Companies – Consumer Telco Purchasing decisionsSurvey Report, November 2000, p. 4.

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It is to be noted that these figures exclude DSL networks on the basis that thesepredominantly utilise other networks, notably the Telstra copper network.

Table 5.7: Alternative networks in relevant CBD areas

Operator Sydney Melbourne Brisbane Adelaide Perth

Telstra C/O C/O C/O C/O C/O

C&WOptus

O O O O O

AAPT O/W O/W O/W O/W O/W

Primus O O O O

PowerTel O O O

WorldCom O O

Ue Comm O O O O

Swiftel O

Agile O/W

Davnet O/W O/W O/W O/W

Pulsat W

AirNet W

Datafast W

C = copper O = optic fibre W = Wireless Technologies (including microwave, LMDS and MMDS)

Source: BIS Shrapnel, Telecommunication Infrastructures in Australia 2001, A research reportprepared for ACCC, July 2001 with ACCC revisions.

It is apparent from Table 5.7 that the number of alternatives to Telstra’s infrastructureare reasonably evenly spread over the five different CBD areas in question, althoughslightly more concentrated in Sydney and Melbourne. Access to alternative declaredservices is also available ubiquitously across the five CBDs. In the Commission’s viewthis means that it is not necessary to consider the various CBD areas as distinct marketsfor the purposes of considering the exemption applications.

Table 5.8 provides a summary of available facilities and declared services that can beused to supply local call services in both the CBD and metropolitan areas of the fivemajor mainland capitals. The column headings indicate the various facilities anddeclared services that are supplied over these facilities. For example, the tableindicates that Primus has fibre optic infrastructure, which partially covers the CBDareas in four of the five mainland capital cities subject to the exemption application andit is also obliged to supply the Local Carriage Service and originating and terminatingaccess on this infrastructure to carriers or carriage service providers which request it.

It is apparent that investment in infrastructure has been concentrated in the CBD areasrelative to metropolitan areas. It is likely, that for calls terminating in the metropolitanareas of the local call zone in particular, carriers utilising their own facilities in theCBD areas will need to utilise PSTN terminating services to provide an end-to-endlocal call.

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Telstra, in a confidential submission to the Commission, presented analysis which itclaims illustrates that at least 80 per cent of CBD sites would be profitable to servicewith alternative fixed network infrastructure for voice traffic alone. It claims that theinclusion of data traffic, more liberal assumptions about the ability of alternativeproviders to exploit economies of scale and scope and the use of the ULLS to servicesmaller CBD sites would make virtually all CBD sites viable for competition by thismeans.52

As noted above, in its submission in response to the draft report, Macquarie CorporateTelecommunications expressed the view that optic fibre networks are only used toconnect large or ‘A-class’ buildings containing high-value customers. TheCommission accepts that this will often be the case, but that the ULLS is a viablesubstitute for smaller customers in CBD areas where it is not viable for them to beconnected to optic fibre rings.

52 Telstra confidential submission to the ACCC Discussion Paper on the Future Scope of the LocalCarriage Service Declaration dated 4 September 2000 and confidential supplementary submissiondated 3 October 2000.

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Table 5.8: Alternative local network infrastructure and declared services

Carrier Local callsPSTNcopper

Local callsfibre/HFC

Local callsw/less

LCScopper

LCSfibre/HFC

O & T PSTNcopper

O & T

Fibre/ HFC

ULLS PSTNcopper

C M C M C M C M C M C M C M C M

Telstra F5 F5 P5 P5 F5 F5 P5 P5 F5 F5 P5 P5 F5 F5

CWO P5 P3 P5 P3 P5 P3

Primus P4 P4 P4

AAPT P5 P5 P5 P5

PowerTel P3 P3 P3

Agile P1 P1 P1 P1

Amcom P2 P2 P2

Davnet P4 P1 P4 P4

Worldcom P2 P2 P2

Swiftel P1 P1 P1

Uecomm P3 P3 P3 P3 P3 P3

Airnet P1

Datafast P1

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Pulsat P1

Notes

F = full presence; P = part presence; C = CBD; M = Metro areas; 1-5 = no. of cities out of those covered by the exemption.

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5.5 Price conduct

The level of prices and the types of product offerings in the market provide a good indicationof whether there are competitive pressures at play in the market. As such, examination of theretail price and product offerings in the local call market is useful.

If sufficient alternative infrastructure is available and can be used to provide local calls, itshould constitute a threat to Telstra’s market share in the local call market. In this situation itwould be expected that local call prices would be declining towards cost as new carriers enterthe market and compete for customers.

In its report Changes in prices paid for telecommunications services in Australia 1996-97 to1999-2000, the Commission found that between 1996-97 and 1999-2000 the average price oflocal calls decreased by 13 per cent. The majority of this decrease occurred between 1998-99and 1999-2000 where the price of local calls fell by 9.6 per cent. As can be seen from Figure5.3 below, this price decrease was significantly more than in the periods 1996-97 to 1997-98periods and 1997-98 and 1998-99 where prices decreased by 3 per cent and less than1 per cent respectively.53

These reductions in local calls prices were at least partly driven by Government retail pricecontrols applying to Telstra. Notwithstanding this, if there was no competitive pressure in themarket for local calls, it is unlikely that the decreases would have been of the samemagnitude.

53 ACCC, 2001, Changes in the prices paid for telecommunications services in Australia, 1996-97 to1999-2000, p. 4.

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Figure 5.3: Change in the price of local calls, 1996-97 to 1999-2000

(a): Chained Index for local calls

(b): Year on year percentage changes in the index for local callsa

-2.7-0.8

-6.5-0.3

-3.1

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

1996-1997 to

1997-1998

1997-1998to

1998-1999

1998-1999to

1999-2000

BusinessResidential

-3.0

-0.7

-9.6

100.0 97.0 96.387.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

1996-1997 1997-1998 1998-1999 1999-2000

Chained indexLinear Trend

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(a) The sum of the percentage points attributed to each major component of the index may not sum to thetotal percentage change due to rounding.

Source: ACCC, Changes in prices paid for telecommunications services in Australia 1996-97 to 1999-2000.

Another indication of increased competition in a market is the range of products offered toconsumers. With local calls, the usual way products and service offerings are distinguished isthrough pricing plan options and discounts. The most common type of tailoring is on thebasis of volume. Many carriers offer cheaper local calls and higher line rental or plan fees tolarge volume callers, and higher local call rates and cheaper line rental and plan fees to lowvolume users.

Prices for retail local calls offered by various carriers and carriage service providers areshown in Table 5.8 and 5.9 below. It is evident that there is substantial variation in priceofferings among the various companies. Prices for business local calls range from 14 cents to22 cents per call with varying levels of line rental. Residential prices for local calls rangefrom 13 cents to 22 cents, again with varying levels of line rental.

Table 5.8: Local Call Rates – Business

Service Provider Call price Monthly Access Fee/Linerental

AAPT 17.6c $34.45

DigiPlus 16c $31.95

Dingo blue 18.5c $31.95

Ecomtel 15c $31.95

EzTel 15c $31.95

Optus 20c $32.00

Optus 15c $37.50

RSL COM 16c $31.95

Telstra 22c $31.95

Telstra 16c $34.95

Telstra 22c $31.95

TransACT 14c $25.00

Source: www.phonechoice.com.au (accessed 31August 2001).

http://www.phonechoice.com.au/

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Table 5.9: Local call rates – Residential

Service Provider Call price Monthly Access Fee/Linerental

AAPT 17.6c $19.95

Digiplus 18c $17.50

Dingo blue 18.5c $17.50

Ecomtel 13c $17.50

Ecomtel 15c $17.50

EzTel 15c $17.50

Optus 20c $17.50

Optus 20c $14.50

Optus 15c $24.50

Optus 15c $19.50

Primus 16c $21.19

Primus 18.5c $17.50

Telstra 22c $17.50

Telstra 18.5c $19.50

Telstra 22c $17.50

Telstra 19c $14.50

Telstra 22c $19.70

TransACT 18.5c $17.50

TransACT 20c $12.00

Source: www.phonechoice.com.au (accessed 31 August 2001).

5.6 Conclusion - competition

The Commission considers that granting an exemption from the SAOs in relation to thesupply of the Local Carriage Service in the five major mainland CBDs will not be detrimentalto competition in the market. The Commission is of the view that there is alternative localaccess infrastructure and declared services (local PSTN originating access and ULLS) fororiginating local calls in these areas either being used, or that can readily be used, by

http://www.phonechoice.com.au/

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alternative carriers and carriage service providers. The presence of such alternativeinfrastructure and services is believed to be sufficient to serve as substitutes to the LocalCarriage Service and act as a constraint on the Local Carriage Service price that Telstrawould be able to charge in the absence of the Commission’s power to determine a LocalCarriage Service price upon the granting of an exemption in the areas covered by Telstra’sexemption application. On this basis, the Commission considers that the continueddeclaration of the Local Carriage Service is not necessary in these areas to ensure competitivemarket outcomes and deliver benefits to end-users.

Moreover the Commission is of the of the view that the availability of the Local CarriageService is preventing these alternative infrastructure and services from being used moreextensively to originate calls than is the case at present. This is on the basis that the LocalCarriage Service provides an easier means of entry into the market with minimal investment.The Commission believes granting of an exemption would serve to encourage greater use ofthese alternative infrastructure and services for originating local calls. It is also of the viewthat this would mean that alternative service providers would have to make more of aconcerted effort to obtain and retain customers. As a result the Commission expects theexemption will produce an increase in service diversity and that end-users will be able to gainaccess to an increased range or choice of services which will be in the long-term interest ofend-users of local call services. This should in turn constrain the price of the Local CarriageService offered by Telstra in the absence of the service declaration.

It is recognised that some carriage service providers may find it more difficult to compete inthe origination market upon the granting of the exemption. This will however benefit carrierswith their own facilities and increase the scope or depth of competition to Telstra by thismeans. Carriage service providers have other market segments for voice traffic, such as thebusiness and residential market in metropolitan areas where they will still be able to competewith minimal infrastructure.

The Commission is of the view that the termination of local calls in CBDs is not subject tothe same degree of potential competition as origination given the absence of directrelationship with a customer for such services. However, local PSTN termination is adeclared service, plus access seekers can access this service without a preselectiondetermination. In CBD areas there will also not be a need for a carriers to build additionalinfrastructure to access this service as most carriers will have already interconnected atTelstra’s exchanges for the purposes of offering long-distance and fixed to mobile services.

The Commission is of the view that the termination of calls in the local call zone outsideCBD areas is not currently subject to substantial competition from alternative infrastructure.However alternative declared termination services, notably the local PSTN terminatingservice, are available to carriers and carriage service providers on regulated terms. Moreoverit is the origination end of a call that is the main potential bottleneck for winning customers.

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6. Efficient investment in infrastructure

6.1 Principles

In giving consideration to an exemption the Commission is required to have regard to theobjective of encouraging the economic efficient use of, and investment in infrastructure bywhich the carriage service or the services supplied by means of the carriage service aresupplied. Section 152AB(6) of the Act provides that, in interpreting this objective, theCommission must have regard to, but is not limited to regard of, the following factors:

! whether it is technically feasible for the services to be supplied and charged for,having regard to:

! the technology that is in use or available;

! whether the costs that would be involved in supplying, and charging for, theservices are reasonable; and

! the effects, or likely effects, that supplying, and charging for, the serviceswould have on the operation or performance of telecommunications networks;

! the legitimate commercial interests of the supplier or suppliers of the service,including the ability of the supplier or suppliers to exploit economies of scale andscope; and

! the incentives for investment in the infrastructure by which the services are supplied.

The phrase ‘economically efficient use of, and the economically efficient investment in,infrastructure’ refers to the economic concept of efficiency, which has three components,namely productive efficiency, allocative efficiency and dynamic efficiency.

Productive efficiency refers to the efficient use of resources within each firm such that allgoods and services are produced using the least cost combination of inputs.

Allocative efficiency refers to the efficient allocation of resources across the economy suchthat the goods and services that are produced in the economy are the ones most valued byconsumers. It also refers to the distribution of production costs amongst firms within anindustry to minimise industry-wide costs.

Dynamic efficiency refers to the efficient deployment of resources between present andfuture uses such that the welfare of society is maximised over time. Dynamic efficiencyincorporates efficiencies flowing from innovation leading to the development of newservices, or improvements in production techniques.

Efficient infrastructure investment makes an important contribution to the promotion of theLTIE. It can lead to more efficient methods of production, fostering increased competition

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and lower prices, as well as enhancing the level of diversity in the goods and servicesavailable to end-users.

Competition and efficiency There is also a strong relationship between competition and efficiency. The Commission’sanalysis of the likely impact of a variation on competition will, therefore, also influence itsanalysis of the impact on efficiency. For instance, if the Commission comes to a view thatsupply of the eligible service is not yet subject to effective competition, then it couldconclude maintaining declaration would:

! facilitate the provision of the declared service to access seekers at a price which is closerto underlying costs, resulting in a more efficient allocation of resources; and

! diminish the potential for inefficient duplication of infrastructure used to supply thedeclared service.

Maintaining regulation is, however, likely to have other impacts on efficiency, both positiveand negative. For instance, while declaration may promote efficient investment indownstream markets, it may also result in costs as potential access providers continue tocomply with the standard access obligations, or discourage efficient investment ininfrastructure used to supply the declared service.

6.2 Technical feasibility of charging and supplying the service

Given that the Local Carriage Service is currently supplied in the market, the Commissiondoes not believe the granting or otherwise of the exemption in full has a bearing on thetechnically feasibly of supplying or charging for the Local Carriage Service. This is becausethe removal of the declaration is not going to have bearing on the ability of access providersto offer the service if they choose to do so.

Feasibility issues surrounding the use of alternative facilities and services by access seekersare covered in the discussion on substitute services in section 5 on competition.

6.3 Legitimate commercial interests of access providers

The legitimate commercial interests of access providers includes a commercial return on itsinvestments, its interests in maintaining contractual commitments and its interests in usingthe network for future requirements. The legitimate commercial interests of access providersalso include their ability to exploit economies of scale and scope.

The Commission accepts there are differences in costs of providing local calls betweendifferent geographical areas, with the costs being highest in more remote areas and lowest inbuilt up areas such as CBDs. Under the Government’s retail price controls Telstra faces a 22cent cap on the price of local calls and a requirement to maintain a high level of price paritybetween the price of local calls in metropolitan and non-metropolitan areas. Taking these

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into account, it has been the Commission’s practice to specify a Local Carriage Service pricebased on a retail minus methodology using an averaged wholesale local call price.

It would appear to the Commission that the Local Carriage Service price determined via theretail minus methodology more than compensates Telstra’s legitimate business interests inthe areas covered by Telstra’s Local Carriage Service exemption application. This is becausethe costs of the local call service are lowest in these areas. This means that the margins forthe Local Carriage Service are likely to be highest in the areas sought by the exemption.Taking all areas together however, it has been the Commission’s view that the retail minusapproach to Local Carriage Service pricing best protects Telstra’s legitimate businessinterests given the retail price constraints it faces.

The issue therefore would appear to be one of whether granting the exemption would furthercompensate Telstra beyond its legitimate business interests. This will ultimately depend onthe level of competition in the markets affected, which is assessed in section 5. The fact thatTelstra has made the exemption application would tend to suggest that an exemption is notlikely to be contrary to its legitimate business interests. The same reasoning can be applied toother access providers, such as Optus which have supported exemptions for themselves undera class exemption.

6.4 Incentives for efficient investment in infrastructure

In the context of the declaration of the Local Carriage Service, the Commission gaveconsideration to the possible impact on incentives for efficient investment in infrastructure inrelation to investment in:

! existing PSTN infrastructure

! new infrastructure; and

! infrastructure used to supply other services.

It focused its considerations on incentives for efficient investment in new infrastructure,given that it received little information in submissions from interested parties on the likelyeffects on the other two.

The Commission expressed the view that the declaration of the Local Carriage Service wouldserve to facilitate market entry and enable service providers to obtain information aboutdemand characteristics and the likely response of competitors, thereby reducing the risksassociated with new infrastructure investment. This was considered to be important inenabling service providers to make efficient decisions about the deployment of alternativeinfrastructure. The Commission also expressed the view that it did not believe thatdeclaration would serve as a deterrent to efficient investment more broadly.

The Commission considers that the past 3 years in which the declaration has been in effecthas provided ample time for service provides to make assessments about the state of themarket in the areas covered by the exemption. Further it is believed that granting a period of

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one year before Telstra’s individual exemption comes in to effect, will serve to offer serviceproviders sufficient time to plan alternative arrangements and to obtain further necessaryinformation about the operation of the market.

The Commission is of the view that the retail price control arrangements tend to encouragealternative providers to build infrastructure to provide local call services in areas where thecosts of delivering local call services are lower than the average, most notably in CBD areas.As indicated in section 5 of the report, there is substantial evidence of infrastructureduplication in CBD areas. The Commission does not believe that regulating or otherwise ofthe Local Carriage Service in these areas will bear one way or another on this particularoutcome.

Also relevant is the availability of the declared ULLS, for which the Commission hassignalled cost-based prices on a geographically de-averaged basis.54 Indeed the Commissionstated at the time of the declaration of the various local call services, that once the ULLS (andlocal originating and terminating services) could be used to supply local calls, the importanceof the Local Carriage Service would diminish. Moreover, the Commission believes theavailability of the Local Carriage Service is in fact acting as a disincentive for investment ininfrastructure associated with these services.

In respect to the possible use of local PSTN origination and terminating access as analternative to the Local Carriage Service the Commission has not been required to arbitratecharges for this service. It has however signalled that it would be inclined to price such aservice on a per call and geographically averaged basis to make it compatible with theuntimed local call retail price.55 As a practical matter the Commission’s view is that thiswould lead to a wholesale charge structure not substantially removed from the current LocalCarriage Service price. It would therefore no more encourage inefficient investment ininfrastructure by access seekers than is likely to be occurring already and may improveincentives to invest in infrastructure associated with these services.

A possible counter argument is that access seekers are unable to achieve the economies ofscale and scope to compete with Telstra in building infrastructure used in conjunction withthe ULLS and local PSTN originating and terminating access. On the other hand oncecarriers invest in infrastructure to use these services to offer local calls, it can also be used inoffering national long-distance, international and mobile to fixed calls. This would help toameliorate the costs of this infrastructure by spreading it over these calls as well.

6.5 Conclusion – efficient investment in infrastructure

In CBD areas the Commission does not believe that the exemption will any more encourageinefficient duplication as has been the case with the Local Carriage Service declared. TheCommission considers that the availability of the Local Carriage Service may have served toreduce efficient investment associated with other declared services, notably ULLS and local

54 ACCC, Pricing of Unconditioned Local Loop Services (ULLS), Final Report, January 2002.55 ACCC, Local Telecommunications Services, July 1999, p. 97.

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PSTN originating and terminating access. This is on the basis that the Local Carriage Serviceprovides an easier means of entry into to market with minimal investment. The Commissiontherefore believes increased investment associated with such services will be in the LTIE dueto the service and pricing enhancements this is likely to bring to bear in the local call servicesmarket.

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7. Any-to-any connectivity

7.1 Principles 56

In addition to examining the impact of an exemption on competition and efficient investment,the Commission must consider whether granting an exemption from the SAOs for the supplyof the Local Carriage Service in the CBD areas of the five mainland capitals is likely to resultin the achievement of the objective of any-to-any connectivity in relation to carriage servicesthat involve communications between end-users.

The reference to ‘similar’ services in the Act enables this objective to apply to services withanalogous, but not identical, functional characteristics, such as fixed and mobile voicetelephony services or Internet services which may have differing characteristics. The any-to-any connectivity requirement is particularly relevant when considering services that involvecommunications between end-users.57 When considering other types of services (forexample, carriage services which are inputs to an end-to-end service), the Commissionconsiders that this criterion will be given less weight compared to the other two criteria.

7.2 Effect of the exemption on any-to-any connectivity

The Commission is satisfied that with the presence of alternative infrastructure and declaredservices, the exemption will not have bearing on any-to-any connectivity.

56 ACCC, Domestic Transmission Capacity Service, Final Report, May 200157 Trade Practices Amendment (Telecommunications) Bill 1996, Explanatory Memorandum.

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8. ArbitrationsIn response to Commission’s Discussion Paper a number of carriers commented on theconsideration of an exemption application in light of the arbitration process. The majority ofresponses centred on the fact that at the time the exemption application was made the LocalCarriage Service arbitrations had not been finalised. A number of carriers considered that anexemption application should only be considered once the effects of arbitrationdeterminations on the local call market could be assessed. Given this, most carriers’considered it premature for the Commission to be considering an exemption application.

AAPT, for example, commented that the Commission should not consider the exemptionapplication until the ULLS has been widely available for at least 12 months. AAPT statedthat this is the minimum time it estimates for modest penetration of the ULLS in CBD areas.58

RSL COM commented that the effects of the declaration of the Local Carriage Service cannotbe determined until all access disputes regarding pricing methodology are resolved and therelevant market has had an opportunity to become self-sustaining in its operation.59

The Commission notes that all six arbitration disputes it had before it in relation to the LocalCarriage Service at the time of the draft decision report, as well as those in relation to theULLS, have been settled commercially. Moreover based on the 1 year delay before Telstra’sexemption is to take effect, there remains the opportunity for arbitration disputes over thesupply of the Local Carriage Service to be brought before the Commission during this time.The Commission does not believe that the exemption decision will in any way impede theCommission’s ability to resolve any arbitration disputes for the Local Carriage Service withinthe confines of this period.

58 AAPT submission to the Discussion Paper.59 RSL COM submission to the Discussion Paper, p. 1.

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9. Timing of the exemptionsIn its draft decision the Commission considered that if a final decision to issue an exemptionwere made, it should come into effect one year after the date of the final decision to grant theexemption. This was on the basis that carriers would likely need time to adjust their businessplans in the wake of an exemption of the Local Carriage Service in the areas covered. Thisalso recognised that potential alternatives to the Local Carriage Service may take time to bearranged. The delay was considered necessary to help satisfy the objectives of promotingcompetition and encouraging economically efficient use of an investment in infrastructureand thereby promote the LTIE.

In response to the draft decision most parties other than Telstra indicated that they did notbelieve this was sufficient time. The Commission is not persuaded by these views,particularly given that Telstra has indicated repeatedly to the Commission that it intends tocontinue to offer a Local Carriage Service to access seekers on a commercial basis in theCBD areas concerned. The Commission also believes that any longer period before theexemption were to take effect would defeat the basis for granting the exemption.

Telstra by contrast, claimed a delay before its exemption were to apply was not necessarygiven the presence of alternative infrastructure and decaled services as assessed by theCommission, its ongoing provision of the Local Carriage Service to access seekers and theample time access seekers have already had to plan for alternatives should the service beremoved from declaration. The Commission believes Telstra’s view misses the point of thereason it has recommended this delay – that is to enable access seekers to plan and implementnew arrangements, rather than any concern on the part of the Commission that alternatives tothe Local Carriage Service do not exist.

The Commission’s final decision on this matter is that Telstra’s individual exemptionapplication should be delayed for one year from the date of the exemption order for the samereasons stated in the draft decision report. The Commission does not however believe thatthere is reason to delay the date of effect of the class exemption applying to all other carriersand carriage service providers. This is on the basis that none are major suppliers of the LocalCarriage Service in the market at present. Accordingly the class exemption is to take effectfrom the date it is gazetted.

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10 Conditions on Telstra’s individual exemption

To safeguard its final decision to grant Telstra an individual exemption, the Commission hasdecided to impose a range of conditions on Telstra’s individual exemption that were notspecified in the draft decision. These take the form of notification by Telstra of any decisionit makes not to supply the Local Carriage Service in the applicable CBD areas, andmonitoring of the terms of the supply (including price) of the Local Carriage Service (andany applicable substitute services), where the terms of supply differ to those outside theseareas. The conditions apply for a period of two years from when the exemption takes effect.

The inclusion of these conditions as part of Telstra’s exemption is a response to:

! continuing objections by access seekers in granting an exemption to Telstra; and

! a more moderate level of alternative infrastructure in place than the Commission was ledto believe existed when it made its draft decision.

The conditions as they appear in Telstra’s individual exemption order are as follows:

(a) Telstra is required to give written notice to the Commission of the occurrenceof any of the following four types of event, such notice to be given within 14days of the event’s occurrence and to contain information as is specified:

The first type of event occurs where either: -

(i) Telstra makes an agreement to supply LCS in a CBD area in question toa carrier / carriage service provider on terms (including price) that differto the terms (including price) upon which Telstra supplies LCS in an areaother than a CBD area in question; or,

(ii) Telstra makes an agreement to vary the terms of such a supply of LCS.

The information to be contained in the written notice is as follows: -

(i) The carrier / carriage service provider involved;

(ii) The CBD area(s) involved;

(iii) The terms (including price) of the supply that differ to those applying inrespect of an area other than a CBD area in question, and a statement asto how those terms so differ;

(iv) The date upon which the agreement was made; and,

(v) The date upon which the supply is to commence or the variation to theterms of supply (including price) is to take effect.

The second type of event occurs where either: -

(i) Telstra refuses to supply LCS in a CBD area in question to a carrier /carriage service provider; or,

(ii) Telstra is advised that a final offer it had made to supply LCS in a CBDarea in question to a carrier / carriage service provider is not accepted,unless the offer to supply was made on the same terms (including price)

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upon which Telstra supplies LCS in an area other than a CBD area inquestion.




(iii) The terms (including price) upon which Telstra had refused to supply, ora carrier / carriage service provider did not accept the final offer tosupply, that differ to those applying in respect of an area other than aCBD area in question, and a statement as to how those terms so differ;and,

(iv) The date upon which the supply was refused or Telstra was advised thatthe offer to supply is not accepted.

The third type of event occurs where, following the occurrence of a secondtype of event, either: -

(i) Telstra makes an agreement to supply a service other than LCS in a CBDarea in question to that carrier / carriage service provider for the purposeof allowing that carrier / carriage service provider to supply local calls ina CBD area in question; or,

(ii) Telstra makes an agreement to vary the terms of such a supply.




(iii) The service that is supplied;

(iv) The terms (including price) of supply; and,

(v) The date upon which the agreement was made; and,

(vi) The date upon which the supply is to commence or the variation to theterms of supply (including price) is to take effect.

The fourth type of event occurs where Telstra makes a decision to withdrawLCS in a CBD area in question, or to vary terms (including price) upon whichit supplies LCS in a CBD area in question such that the resulting terms woulddiffer to the terms (including price) upon which it supplies LCS in an areaother than a CBD area in question, to all carriers and carriage serviceproviders.


(i) The type of decision;


(iii) The terms (including price) of supply which would apply (if any) andwould differ to those applying in respect of an area other than a CBDarea in question, and a statement as to how those terms would so differ;

(iv) The date upon which the decision was made; and,

(v) The date upon which the decision is to take effect.

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(b) Telstra is required not to cease to supply, or to vary terms (including price)upon which it supplies, LCS in a CBD area in question to a carrier / carriageservice provider in any circumstance in which it would be required to givenotice under paragraph 5(a) above, until 14 days after it has given such notice,unless the ceasing of supply or variation to the terms (including price) ofsupply has been agreed to by the carrier / carriage service provider(s)involved.

(c) The requirements listed in paragraphs 5(a) and 5(b) above are tocontinue until two years following the date upon which this Ordercomes into effect.

It is believed that the above conditions should be sufficient to moderate Telstra’s behaviour inthe wake of it being granted the individual exemption, and alleviate residual concerns byaccess seekers about Telstra’s conduct in the absence of the declaration.

The Commission does not believe that conditions on the class exemption are necessary on thebasis that no other carriers and carriage service providers are major suppliers of the LocalCarriage Service in the market at this time.

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11 Conclusion and final decision

The Commission is of the view that there is sufficient alternative infrastructure (such as fibreloops) and declared services (local PSTN originating access and ULLS) for originating localcalls in CBD areas either being used or can readily be used by alternative carriers andcarriage service providers. The presence of such alternative infrastructure and services isbelieved to be adequate to serve as substitutes to the Local Carriage Service and act as aconstraint on the Local Carriage Service price that Telstra would be able to charge in theabsence of the Commission’s power to determine a Local Carriage Service price upon thegranting of an exemption.

It is of the view that the availability of the Local Carriage Service is preventing theseinfrastructure and services from being used more extensively to originate calls than is thecase at present. This is on the basis that the Local Carriage Service provides an easier meansof entry into to market with minimal investment. The Commission believes granting of anexemption would serve to encourage greater use of these alternative infrastructure fororiginating local calls and encourage greater investment in infrastructure associated withother declared services. This should in turn lead to increased efforts by access seekers toconnect customers by these means, leading to greater service diversity and price competitionwhich would be in the long-term interest of end-users of local call services.

It is recognised that some carriage service providers may find it more difficult to compete inthe origination market upon the granting of the exemption. This will however benefit carrierswith their own facilities and increase the scope or depth of competition to Telstra by thismeans. Carriage service providers have other market segments for voice traffic, such as thebusiness and residential market in metropolitan areas where they will still be able to competewith minimal infrastructure.

The Commission is of the view that the termination of local calls in CBDs is not subject tothe same degree of potential competition as origination given the absence of a directrelationship with a customer for such services. However, local PSTN termination is adeclared service, plus access seekers can access this service without a preselectiondetermination. In CBD areas there will also not be a need for a carriers to build additionalinfrastructure to access this service as most carriers will have already interconnected atTelstra’s exchanges for the purposes of offering long-distance and fixed to mobile services.

The Commission is of the view that the termination of calls in areas of the local call zoneoutside CBD areas is not currently subject to substantial competition from alternativeinfrastructure. However alternative declared termination services, notably local PSTNterminating services are available to carriers and carriage service providers on regulatedterms. Moreover it is the origination end of a call that is the main potential bottleneck forwinning customers.

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On the basis of the analysis and reasoning detailed in this final decision report, theCommission’s final decision is to grant:

! in response to Telstra’s exemption application of 7 June 2000, an individualexemption to Telstra in relation to the supply of the Local Carriage Service in theCBD areas of Sydney, Melbourne, Brisbane, Adelaide and Perth to take effect oneyear from the date of the Commission’s exemption order and subject to theconditions specified in that order; and

! a class exemption, applying to all other carriers and carriage service providers otherthan Telstra in the same areas as for Telstra’s individual exemption, to take effectfrom the date of gazettal of the Commission’s exemption determination.

Copies of Telstra’s individual exemption order and the class exemption determinationmade by the Commission on 17 July 2002 are provided atAppendix 1 and Appendix 2 of this report respectively.

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Appendix 1: Copy of Telstra’s individual exemption order

TRADE PRACTICES ACT 1974

Order under paragraph 152AT(3)(a)

Individual exemption from standard access obligations

The Australian Competition and Consumer Commission under paragraph 152AT(3)(a) of theTrade Practices Act 1974 provides that, subject to the conditions and limitations specifiedbelow, –

Telstra Corporation Limited (ACN 051 775 556)

is exempt from the standard access obligations specified below.

1. Title

This Order may be cited as Individual Exemption Order No. 1 of 2002.

2. Commencement

This Order comes into effect on 17/07/2003.

3. Interpretation

(1) Unless the contrary intention appears, where words or phrases used in thisOrder are defined in the Trade Practices Act 1974, the TelecommunicationsAct 1997 or the instrument declaring the declared service, those words orphrases have the same meaning in this Order.

(2) In this Order, unless the contrary intention appears –

Central Business District Area in relation to a city means theexchange service areas that are classified as CBD for the purposes ofthe ordering and provisioning procedures set out in the TelstraOrdering and Provisioning Manual as in force on the date of thisOrder;

declared service means the LCS declared by the Commission as adeclared service under subsection 152AL(3) of the Act on 4 August1999;

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LCS means the Local Carriage Service declared as a declared serviceand described in Annexure 4 of the Commission Declaration undersubsection 152AL(3) of the Act dated 4 August 1999;

Telstra means Telstra Corporation Limited (ACN 051 775 556);

the Act means the Trade Practices Act 1974.

4. Exemption

Telstra is exempt from the standard access obligations as they relate to thesupply of LCS within the Central Business District Areas of Sydney,Melbourne, Brisbane, Adelaide and Perth.

5. ConditionsUnder subsection 152AT(5) of the Act, the exemption from the standard accessobligations given to Telstra is subject to the following conditions and limitations –

(a) Telstra is required to give written notice to the Commission of the occurrenceof any of the following four types of event, such notice to be given within 14days of the event’s occurrence and to contain information as is specified:

The first type of event occurs where either: -

(iii) Telstra makes an agreement to supply LCS in a CBD area in question toa carrier / carriage service provider on terms (including price) that differto the terms (including price) upon which Telstra supplies LCS in an areaother than a CBD area in question; or,

(iv) Telstra makes an agreement to vary the terms of such a supply of LCS.


(vi) The carrier / carriage service provider involved;

(vii) The CBD area(s) involved;

(viii) The terms (including price) of the supply that differ to those applyingin respect of an area other than a CBD area in question, and a statementas to how those terms so differ;

(ix) The date upon which the agreement was made; and,

(x) The date upon which the supply is to commence or the variation to theterms of supply (including price) is to take effect.

The second type of event occurs where either: -

(iii) Telstra refuses to supply LCS in a CBD area in question to a carrier /carriage service provider; or,

(iv) Telstra is advised that a final offer it had made to supply LCS in a CBDarea in question to a carrier / carriage service provider is not accepted,unless the offer to supply was made on the same terms (including price)upon which Telstra supplies LCS in an area other than a CBD area inquestion.


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(v) The carrier / carriage service provider involved;

(vi) The CBD area(s) involved;

(vii) The terms (including price) upon which Telstra had refused to supply, ora carrier / carriage service provider did not accept the final offer tosupply, that differ to those applying in respect of an area other than aCBD area in question, and a statement as to how those terms so differ;and,

(viii) The date upon which the supply was refused or Telstra was advisedthat the offer to supply is not accepted.

The third type of event occurs where, following the occurrence of a secondtype of event, either: -

(iii) Telstra makes an agreement to supply a service other than LCS in a CBDarea in question to that carrier / carriage service provider for the purposeof allowing that carrier / carriage service provider to supply local calls ina CBD area in question; or,

(iv) Telstra makes an agreement to vary the terms of such a supply.


(vii) The carrier / carriage service provider involved;

(viii) The CBD area(s) involved;

(ix) The service that is supplied;

(x) The terms (including price) of supply; and,

(xi) The date upon which the agreement was made; and,

(xii) The date upon which the supply is to commence or the variation to theterms of supply (including price) is to take effect.

The fourth type of event occurs where Telstra makes a decision to withdrawLCS in a CBD area in question, or to vary terms (including price) upon whichit supplies LCS in a CBD area in question such that the resulting terms woulddiffer to the terms (including price) upon which it supplies LCS in an areaother than a CBD area in question, to all carriers and carriage serviceproviders.


(vi) The type of decision;

(vii) The CBD area(s) involved;

(viii) The terms (including price) of supply which would apply (if any) andwould differ to those applying in respect of an area other than a CBDarea in question, and a statement as to how those terms would so differ;

(ix) The date upon which the decision was made; and,

(x) The date upon which the decision is to take effect.

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(d) Telstra is required not to cease to supply, or to vary terms (including price)upon which it supplies, LCS in a CBD area in question to a carrier / carriageservice provider in any circumstance in which it would be required to givenotice under paragraph 5(a) above, until 14 days after it has given such notice,unless the ceasing of supply or variation to the terms (including price) ofsupply has been agreed to by the carrier / carriage service provider(s)involved.

(e) The requirements listed in paragraphs 5(a) and 5(b) above are tocontinue until two years following the date upon which this Ordercomes into effect.

[Signed] [Signed] [Signed]

…………………… …………………… ……………………

Chairperson Commissioner Commissioner

Dated: 17/07/2002

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Appendix 2: Copy of class exemption determination

TRADE PRACTICES ACT 1974

Determination under subsection 152AS(1)

Class exemption from standard access obligations

The Australian Competition and Consumer Commission under subsection 152AS(1) of theTrade Practices Act 1974 determines that each member of the class of carrier specified belowand each member of the class of carriage service provider specified for the purposes of thisdetermination is exempt from the standard access obligations specified below.

1. Title

This Determination may be cited as Class Exemption Determination No. 1of 2002.

2. Commencement

This Determination comes into effect on the date that this Determination isnotified in the Gazette.

3. Interpretation

(1) Unless the contrary intention appears, where words or phrases used in thisDetermination are defined in the Act, the Telecommunications Act 1997 orthe instrument declaring the declared service, those words or phrases havethe same meaning in this Determination.

(2) In this Determination, unless the contrary intention appears –

Central Business District Area in relation to a city means theexchange service areas that are classified as CBD for the purposes ofthe ordering and provisioning procedures set out in the TelstraOrdering and Provisioning Manual as existing when thisDetermination comes into effect.

declared service means the LCS declared by the Commission as adeclared service under subsection 152AL(3) of the Act on 4 August1999;

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LCS means the Local Carriage Service declared as a declared serviceand described in Annexure 4 of the Commission Declaration undersubsection 152AL(3) of the Act dated 4 August 1999;

specified class of carriage service provider means the class ofcarriage service provider specified in clause 5 of this Determination;

specified class of carrier means the class of carrier specified in clause4 of this Determination;

Telstra means Telstra Corporation Limited (ACN 051 775 556);

the Act means the Trade Practices Act 1974.

4. Specified class of carrier

The class of carrier which is specified for the purposes of thisDetermination, is the class of all carriers excluding Telstra.

5. Specified class of carriage service provider

The class of carriage service provider which is specified for the purposes ofthis Determination, is the class of all carriage service providers excludingTelstra.

6. Exemption

Each member of the specified class of carrier and each member of thespecified class of carriage service provider is exempt from the standardaccess obligations as they relate to the supply of LCS within the CentralBusiness District Areas of Sydney, Melbourne, Brisbane, Adelaide andPerth.

[Signed] [Signed] [Signed]

…………………… …………………… ……………………

Chairperson Commissioner Commissioner

Dated: 17/07/2002

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