commentary The proposed regulatory reforms ahead of the roll-out of the National Broadband Network rely on a finely balanced carrot and stick approach, with the government dangling the carrot of access to spectrum to Telstra to push it towards structural separation and providing the stick to the ACCC when it comes to industry regulation.
Telstra has not shied away from fighting for what it considers to be its rights in the past and it is hard to imagine a situation where those rights have been more at risk than they now are.
But will this carrot and stick approach succeed in reining in Telstra's power and enhancing competition, particularly in the important transition period to the roll-out of the NBN, or will it simply result in a new round of legal and regulatory challenges for the industry?
Just how successful the carrot is may well determine how strong the stick needs to be, and that success depends, in turn, on Telstra's appetite for structural separation or for a fight with the government over the terms of any such separation. Telstra has not shied away from fighting for what it considers to be its rights in the past and it is hard to imagine a situation where those rights have been more at risk than they now are.
At its most fundamental, Telstra may choose to argue that the effect of the proposed reforms and the incentives to structurally separate fall foul of the guarantee in the Constitution that any compulsory acquisition of property by the government can only occur on just terms.
The critical issue here is whether the government, despite its insistence that Telstra has the flexibility to choose the future direction of its business, has effectively made Telstra an offer it can't refuse and which, if accepted by Telstra, is likely to result in the government's NBN Co or Telstra's current or potential competitors, acquiring Telstra assets at steeply discounted prices in what amounts to a forced sale scenario.
You do not need to be unduly cynical to imagine a scenario where the government and the ACCC may see an upside to competition in having NBN Co or others acquire Telstra's divested assets at deflated prices and seek to achieve this through Telstra's "voluntary" separation undertaking. This is where an argument about the scope of the Constitutional guarantee arises.
Has the government indirectly created a scenario where there is a compulsory acquisition of property, where it would not otherwise be permitted to do so other than on just terms? The cases indicate that such an argument, although by no means a foregone conclusion, may be open to Telstra.
Then again Telstra may choose to agree to structurally separate but find itself at odds with the ACCC and the government over the terms of that separation. The proposed reforms, which provide for approval of the terms of any structural separation to be subject to unspecified matters to which the ACCC (with input and direction from Senator Conroy) may have regard, seem to be fertile ground for a fight should Telstra wish to pursue it.
In all of this, the ACCC has been put in the box seat by the government. Its enhanced powers to deal with access to telecommunications infrastructure by, among other things, issuing binding rules of conduct and rejecting serial undertakings, its role in approving any structural separation undertaking offered by Telstra, advising the minister in respect of any functional separation undertaking which may be required of Telstra will not only strengthen its regulatory function but provide it with a critical role in the design and shape of the industry into the future.
There is much to commend the government's approach of seeking to regulate competition in the market in the important transition period to the NBN principally through means of incentives for Telstra to structurally separate.
Its success will rely as much on the terms of any such separation as on the fact of the impending separation resulting in changes to market behaviour of Telstra and other industry participants in the intervening transition period. It is in respect of the terms of the separation and the conduct of Telstra in the intervening period that the enhancement of the powers of the ACCC both to approve any structural separation undertakings offered by Telstra and to determine access terms and conditions, becomes all the more important.
The two will be intrinsically related in the long nine-year transition period to the NBN and these powers mean that the ACCC will have perhaps the most critical role in shaping the future of the telecommunications industry in Australia.
Whether the government's attempt to strike a balance between regulation and the impact of market forces consequent upon structural separation will be sufficient to control Telstra or whether it will result in the ACCC becoming a de facto industry participant remains to be seen. One outcome, however, seems likely, and that is that we have not yet seen the end of the battles between Telstra, the government and the ACCC.
This article was first published in the Australian Financial Review on 28 September 2009 and is re-published here with the permission of the copyright owners, Truman Hoyle.
Truman Hoyle is a Sydney-based law firm serving the new economy industries across the Asia-Pacific region. Its partners and staff are recognised experts in their fields which include telecommunications, corporate, competition and regulatory, employment and industrial, intellectual property and property law.
Edghill is a partner and co-leader of Truman Hoyle's Competition and Regulatory Group. She has 20 years' experience representing and advising some of Australia's largest businesses on all aspects of the Trade Practices Act and associated competition and consumer protection laws. Her expertise includes obtaining merger clearances from the ACCC, preparing authorisation applications and notifications to the ACCC in respect of anti-competitive conduct, advising on and structuring agreements for compliance with the Trade Practices Act, conducting marketing and advertising reviews, representing clients in immunity applications and litigation involving cartel conduct, preparing and delivering trade practices compliance programs and litigating trade practices disputes.
Maher is a partner and co-leader of Truman Hoyle's Competition and Regulatory Group. Graham has 20 years' experience including 10 years as Australian in-house counsel for a leading multinational manufacturing company. He also has extensive experience in competition law and litigation at a number of major law firms. Graham's experience includes applications for merger clearances to the ACCC, ACCC investigations and disputes, applications to the ACCC for leniency and immunity in respect of cartel conduct, litigation between competitors and with regulators involving allegations of anti-competitive conduct, structuring of commercial agreements to ensure compliance with competition laws, preparing and delivering trade practices compliance programs and advising clients on consumer protection laws.
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"The two will be intrinsically related in the long nine-year transition period to the NBN and these powers mean that the ACCC will have perhaps the most critical role in shaping the future of the telecommunications industry in Australia."