Mark Gregory. NBN – ageing copper network and structural separation.

The Australian telecommunication industry is in crisis and centre stage is an ageing copper network that some would have you believe is good for another hundred years and others argue it is time to move to an all fibre access network.

But the problems extend far beyond copper versus fibre and go to the heart of what an industry needs if it is to be a successful contributor to the Australian economy. As Australia struggles to find out how this sorry saga will end, questions should be asked of our politicians and telecommunication industry leaders why there is no plan for the future.

To understand why criticism can be levelled at the development of one of Australia’s most important industries it is necessary to wind back the clock to 1982 when the Davidson Enquiry recommended the introduction of a competitive telecommunications industry.

At the time Australia had three telecommunication organisations. The Australian Telecommunications Commission (ATC), trading as Telecom Australia, was responsible for the provision of terrestrial telecommunication services within Australia. Aussat Pty Ltd was responsible for satellite telecommunication and broadcasting services within Australia, and the Overseas Telecommunications Commission (OTC) was responsible for the provision of international telecommunication services. Aussat was established with a restrictive license that prevented competition with Telecom Australia, and to ensure this was adhered to, Aussat was effectively prevented from raising the capital it needed to flourish and two directors of Telecom were appointed to the Aussat Board.

The Davidson Enquiry’s recommendation was timely and if it was implemented carefully the Australian telecommunications industry could have entered a period of expansion, competition and prosperity. So what went wrong? Everything.

The first mistake, which has never been corrected, was a failure to map out the future of the fixed infrastructure, which at the time was largely copper in the access network and coaxial cable, microwave radio or copper pairs in the transit links.

Optical fibre was new in 1982 and the Telecom Research Labs had started the process of introducing optical links into the Australian telecommunications network. Enough was known about the potential future capabilities of optical fibre for forward network planning to incorporate it into all major trunk routes by year 2000 and access networks thereafter.

During the 1950s the then Postmaster General’s Department expanded the copper network beyond urban areas and commenced an ongoing maintenance and upgrade program. A key reason the copper network expanded beyond the urban areas was the recently adopted universal service principal by government that resulted after a robust campaign by regional and remote Australians for telephone services.

The modern Australian copper network was progressively rolled out in the 1950s, first in urban areas and then to regional areas, with an anticipated lifetime of 50 years. In some areas the copper network is now more than 10 years beyond the anticipated lifetime. Copper networks do degrade over time, due to the effects of water leakage, the environment and mechanical damage. Over the decades the cost of maintaining the copper network has been steadily climbing.

In the period 1982 to 1992 the fate of the three monopoly telecommunications providers was debated within the federal government, and initially the focus appeared to be on how to ensure each organisation remained viable rather than how to promote competition. For example, proposals for Aussat and OTC to merge were rejected in favour of OTC being merged with the ATC which was renamed AOTC in 1991 and finally became Telstra Corporation in 1993. Aussat was sold to a new entrant, Optus, as part of a deal enabling it to share a duopoly with Telstra in 1991-97 as a first step towards national infrastructure competition.

Guidance on how the fixed infrastructure network could be expected to change over the next 50 years was not provided and was put into the hands of the telecommunications market to best determine, within the constraints of an amended Trade Practices Act (1997). But the reality was and remains that the future of the fixed infrastructure remained largely in Telstra’s hands until the advent of the 2009 National Broadband Network (NBN) policy, though this policy was flawed and Telstra retained ownership of exchanges, pits, ducts, traps and other infrastructure to be utilized by the NBN.

In 1997 the government made extensions to the Trade Practices Act 1974 that guaranteed access to Telecom (Telstra) infrastructure on terms that were to be negotiated and ultimately regulated by the Australian Competition and Consumer Commission (ACCC). In 1997 the Australian telecommunications market was formally opened to full competition in accordance with the Telecommunications Act 1997.

Or so the government would have us believe, because by carefully restructuring the existing incumbents the government created two monopolies that remain today: Telstra (national copper access network) and Aussat (later Optus – satellite broadcasting).

Whilst other companies have launched satellites, installed undersea cables, installed fibre networks and built mobile cellular networks, Telstra and Optus remain dominant because each was provided with public infrastructure and in Telstra’s case the public infrastructure included the thousands of telephone exchanges and tens of thousands of kilometres of pits, ducts and traps that house the copper network.

So Australia slipped into a regime where “competitors” would pay Telstra and Optus to utilise their infrastructure at rates negotiated or set by the ACCC, which ultimately include a profit component that ensures Telstra and Optus remain viable. The degree to which Optus retains an anti-competitive advantage has diminished more than Telstra’s anti-competitive advantage.

Telstra in particular has taken every opportunity to leverage its infrastructure to optimise profit, often arguably at the expense of competition. As mobile telephone networks became more prevalent Telstra was able to convince the government that the mobile network should be used to provide aspects of black spot remediation, provision of emergency information and services that might be considered to be better provided under the universal service for which Telstra was most recently awarded another contract for 20 years in 2012.

What this means is that Telstra has been able to draw on local, state and federal government funds to assist in the build out of the Telstra mobile cellular network. The extent of public funding received by Telstra for mobile network expansion has been difficult to quantify.

At the last election the government announced that $100 million would be provided to assist with mobile cellular network expansion and black spot remediation. Telstra will argue that its network is best placed to facilitate the government’s aims, but only if all the money or the greater proportion goes its way.

By the early 2000s Telstra found itself with two infrastructure competitors in the mobile cellular market and about 10 infrastructure competitors in the provision of DSL over the copper network. Prior to 2008 Telstra charged DSL providers for fixed telephone connection line rental in conjunction with a line rental cost for the provision of DSL. Effectively for every DSL provider customer Telstra would benefit through the provision of a fixed telephone service ensuring Telstra’s profit related to the copper network remained high.

The decision by the ACCC, which Telstra fought all the way to the High Court in 2008, to introduce unconditioned local loop provisions effectively ended Telstra’s ability to force DSL providers to include fixed telephone connections with DSL.

The loss of this income and the ACCC’s ongoing review of the charges that Telstra could levy DSL providers for DSL only connections meant that Telstra put the fixed network infrastructure into a holding pattern whilst Telstra focused its investment on expanding and upgrading its mobile cellular network.

In the Howard government years between 1996 and 2007 questions were asked of Telstra about upgrading the copper network to FTTN for broadband delivery, and as time progressed the FTTP option was also discussed. The Rudd government asked the same questions and received the same answers, which amounted to Telstra asking for a government handout to upgrade to FTTN or overbuild to FTTP.

By the 2000s there was a dawning realisation that effective competition would only flourish if there was a way to do what should have been done in the mid-1980s and that was to split Telstra into retail and wholesale organisations, so that future privatisation would facilitate effective retail growth whilst ensuring the wholesale organisation could go to the market when demand dictated to upgrade or overbuild infrastructure.

In the Australian context this means upgrading or overbuilding the entire network, no piecemeal approach, no urban cherry picking of high value areas, because the universal service legislation effectively enshrines the right of every Australian to fair and equal access to a standard telephone service (it does not dictate fair and equal access to broadband or mobile services, which are left to the market). The 2012 government review and update of the universal service obligation did not include the provision of data services in the legislation and for this reason the outcome was flawed. Any thought that regional and remote Australia would accept anything less than a socially acceptable national outcome would return us to the robust campaign days of the early 1950s that led to the universal service in the first place.

Whilst not discussing the national broadband network at this point, but staying focused on the reasons why the Australian telecommunications industry is not truly open and competitive, it needs to be pointed out that by “leasing” access to Telstra’s infrastructure for the national broadband network the government has effectively ensured that Telstra will retain its market dominance, because it can undercut any provider using the national broadband network knowing that it can make up the income shortfall through the profit it receives through the infrastructure lease agreement and maintenance arrangements.

So where to from here? Australia is long overdue for a non-political rethink of how to facilitate an open and competitive telecommunications industry that results in effective structural change that includes Telstra’s separation into retail and wholesale organisations and also provides forward looking guidance on what the industry’s infrastructures needs will be over the next millennium.

 

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University. His blog can be found here.

 

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