Tuesday, March 17, 2009

Federal Court and Part XIC

I've had a few people contact me to ask my opinion of the decision last week of the full Federal Court to set aside the Australian Competition Tribunal's decision to overturn the ACCC's decision to grant some exemptions to Telstra for the supply of the Wholesale Line Rental Service and the Local Carriage Service (WLR and LCS).

I don't think I'm being primarily asked my opinion on the law - I am no lawyer. But I'm more than happy to give my bush lawyer interpretation. I'm primarily being asked my interpretation on strategy and policy implications.

Let's talk strategy first - as Telstra is peddling this as a great win. On one level I don't see that. If Telstra successfully withdraws the resale products it simply drives its wholesale customers faster onto the ULL and LSS based products. So Telstra has spent money to win a court case to speed up its revenue losses. The precedent value could be useful in other cases, though the Telstra application in relation to Optus HFC was rejected. But really the precedent value was not that significant (as we will see the Full Court provided some guidance about discretion and the need to consider all matters, but as an indication nothing in the judgement would help Telstra in the HFC matter).

The second question is whether the inferred support of the Court (at para 275) for the "ladder of investment" has an impact on policy and hence the NBN. Thankfully the court in this case is merely only required to interpret law and its actions may facilitate the way law is drafted to give effect to policy, not require policy to be formed in certain ways. The real import of the Court's comment was that it is insufficient for the ACCC to believe that an action didn't promote competition as the LTIE test includes three "limbs" and the limb on promoting efficient investment also had to be analysed.

This is actually a terribly depressing conclusion because it reflects on the ongoing inability of the courts to understand competition. I exchanged words with a few lawyers in the pages of the AFR (behind a paywall) about this in the context of the "Birdsville amendment". The lawyers were taking the view that the concept of competition was clear because the High Court had pronounced what it was!

My issue in the current matter is that the Court has confused the promotion of investment with the promotion of efficient investment. Put simply, efficient investment is that category of investment that would be made in a competitive market. As such, a half-way decent economist can demonstrate that competition will be promoted IF AND ONLY IF efficient investment is also promoted. They are not different limbs to the test - they are the same test expressed in different ways.

Hopefully the matter of the ACCC's acceptance of the undertaking will now be reconsidered and the lawyers appearing for the access seekers can mount three different but superior arguments. These are;

1. The relevant market
The Act requires the ACCC to consider the whole market, not part of it. In the current matter the ACCC, in its consideration of the applications, assessed the effect of the exemptions in relation to the Exchange Serving Areas subject to the exemption application. They did not assess the impact outside those areas. This is significant because there is a scale efect in deciding to offer wholesale based services, and service providers can be expected to withdraw from the entire resale and preselection markets if the exemption applies in the ESA's applied for.

This action was contrary to the ACCC's own Telecommunications services declaration provisions: a guide to the declaration provisions of Part XIC of the Trade Practices Act July 1999 which states.

In the Commission’s view, to be satisfied that declaration will promote the long-term interests of end-users, it need not be satisfied that all end-users will benefit. In some instances, the benefits may be confined to a group of endusers,
while in other instances some end-users may be adversely affected. The Commission’s approach will be to consider the flow of benefits and costs, and determine the net or overall benefit to end-users.54 Where the impact of declaration on some end-users is likely to differ from the impact on others, it may be appropriate to identify and
group the end-users for the purpose of analysing the impacts.

The Regional Telecommunications Review was concerned that the Commission was not adequately considering the impact of these geographically based services on regional consumers and recommended;

2.6.1 - The Australian Government require the Australian Competition and Consumer Commission (ACCC), in making a declaration, revocation or exemption determination for a defined geographic area, have regard to the impact in regional Australia of its decisions.

Unfortunately this is one of only four recommendations rejected by the Government, which stated;

The Government rejects this recommendation. In making decisions under the telecommunications access regime, the ACCC already considers the impact on competition in relevant markets. Including the proposed additional legislative criteria would create regulatory uncertainty, delay decision making and increase the possibility of regulatory error.

This is patently untrue as the ACCC did not, in breach of its statutory obligations and its own guidelines, consider the effect of the exemption outside the ESAs subject to the exemption application. The criteria as specified was not "additional" it was merely guidance to ensure the statutory obligation was pursued. It would not increase uncertainty, it would create certainty by ensuring the impacts in other markets were considered. It would not create delay any more than doing its job properly creates delay. It would reduce the risk of regulatory error by reminding the ACCC to include the effects on all markets.

2. Discourage efficient investment
The exemption decision will not promote efficient investment, it will impede it. If access seekers had known in advance that the rule of thumb the ACCC applied would be applied, then the access seekers would never have invested.
The theory of the ladder of investment in one iteration goes that as people climb the ladder you knock out the rungs below. This is nonsense. Firstly it creates barriers to entry for further entrants (hence foregoing the investments they would make to participate at the lower levels), but more importantly it acts as a discouragement to climb the ladder. The ladder is an appropriate analogy - ask yourself would you start climbing a ladder if you knew the rungs beneath you would be knocked out or would ou stay on the ground.

3. Exemption not available
There are very real reasons to believe that the whole concept of a geographically based exemption is contrary to the purpose and intent of the Act. The Act has concepts of declaration and revocation to cover the circumstances where a service has to be provided and when that requirement may no longer apply. The concept of an exemption - both class and individual -is to cover the circumstance of one or more specific CSPs.

Let's first consider the class exemption in 152AS. Is the appropriate procedure if a service should no longer be declared that an exemption for the lass of service providers that is all service providers, or is the appropriate procedure for the declaration to be revoked. The facts are that the legislation provides different procedures for these two circumstances. In general where legislation provides a structure and process for the revocation it should not be permissible to circumvent them.

In the specific instance of the WLR and LCS there is only one service provider who provides the service. The exemption applied for is effectively an exemption for the entire industry. It is clear from the Explanatory Memorandum accompanying the original Bill that this was never the intent of the provision.

This section will enable individual carriers or carriage service providers to present a case to the ACCC that the long-term interests of end-users will be promoted by the limitation or removal of the standard access obligations on that carrier or carriage service provider or which may in the future be placed on that carrier or carriage service provider. Given the service declaration itself (which has industry wide application) was made on the basis that it would promote the long-term interests of end-users, it is appropriate that a similar test apply where an individual seeks to have the relevant obligation removed.

This mechanism could be used in circumstances where infrastructure investments of national or regional significance are proposed which would provide long-term and substantial benefits to end-users of carriage services and services supplied by means of carriage services, but would not proceed or would be severely hampered if the standard access obligations applied in their entirety. The provision is drafted in broad terms because ACCC judgments about the giving of an exemption and the precise nature of exemptions given need to be made on a case-by-case basis.

It is irrelevant what the ACCC's assessment is. The correct process is the process for revocation or variation of the declaration, not the process for exemption.

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