Tale of two countries' views on competition

As Telecom was being accused of abusing its position in NZ, the Australian regulator helped its quest for AAPT.


By Richard Braddell

WELLINGTON - It is no small irony that while Telecom was being accused last week of abusing its dominant position, Australia's competition regulator, the ACCC, was acting to hugely improve Telecom's position in its quest for control of AAPT.

While Telecom was in court fending off Telstra New Zealand, the ACCC was ruling out a merger between Australia's second largest carrier, Cable & Wireless Optus, and the third largest, AAPT, on the grounds that it would reduce competition in the market.

For Telecom, the outcome was great news. With risk of a bidding war gone, Telecom was able to proceed against AAPT at its leisure and with less risk that a high offer would leave it owning too much of its target.

By New Zealand standards, the ACCC's unintentional benevolence is surprising, since it is unlikely the Commerce Commission would have hesitated to authorise such a merger, particularly as a combined C&W Optus and AAPT would be much smaller than Telstra.

The ACCC took a different view, deciding that the elimination of AAPT would take away an important competitor in the retail market, while the harm would be even greater in a wholesale market where carriers depend on other carrier's facilities to deliver traffic.

Underpinning the ACCC's decision, and the Telstra/Telecom dispute in New Zealand, is the question of the terms on which carriers gain access to each others' networks.

As the ACCC chairman Professor Alan Fels summarised, reliance on competitors' networks is something unique to the telecommunications industry. "The removal of AAPT as only one of three national network service providers would be likely to have substantial effects on competition," he said.

Without AAPT's vigorous competition, Internet service providers and niche carriers - the equivalents of WorldxChange in New Zealand - would be paying more for access to carriage facilities and so would find it harder to compete.

In New Zealand, it is hard to imagine such an argument being raised by the Commerce Commission. And even in Australia, there have been some murmurings since if AAPT and C&W Optus were to merge, the combination would be a much stronger adversary to Telstra.

But while the Commerce Commission, which lost badly when it took on Telecom early in the decade, has largely stood back from such issues, the Telstra High Court action for an interim injunction last week is but one of many occasions when new entrants have resorted to the courts with grievances.

Indeed, Telstra, which has prided itself as "a doer, not a suer", is acting out of character since it is fighting new entrants on many of the same issues in Australia. But it argues that Telecom's move to withdraw what is known as carrier re-billing poses a critical threat to its business which has been built around providing business customers with integrated management of their telecommunications.

Inevitably, that has involved using services provided by Telecom and other competing carriers. But instead of Telstra buying those services and reselling them to the customer, the practice has often been for the customer to remain with Telecom, but for Telstra to act as agent, receiving the bills and arranging any service modifications on behalf of the customer.

In an affidavit to the High Court, a former Telecom industry manager, Geoff Weston-Webb, said the re-billing idea was his and was first formulated to help customers moving to other carriers to retain existing 0800 numbers.

But to Telecom's concern, re-billing has mushroomed, with one former Telecom customer testifying that by moving its telecommunications management to Telstra, it had got rid of 40 separate invoices from Telecom, eliminating a time-consuming processing task.

Telstra, meanwhile, claims the re-billing is essential to managing clients' needs since the bills provide key analytical data on calling traffic and operations.

In affidavits presented to the High Court, a number of Telstra customers were emphatic they were getting better service with Telstra. "Telstra also identified substantial areas of saving, such as disconnected numbers, that we were still paying Telecom line rental for, and which were still being advertised in the Yellow Pages. A conservative estimate of the amount we saved by switching to Telstra is around $250,000," one customer said in a sworn affidavit.

Surely the customer could simply shift all its business with Telstra, thus enabling carrier billing to continue? But that simple solution was unacceptable because it would result in the loss of all its existing telephone numbers. "We would not have been prepared to accept the cost, disruption and inconvenience to customers involved in changing the numbers," Telstra's customer said.

Telstra also said it was not an option to simply resell Telecom since there were cases where Telecom was charging its own retail customers less than the wholesale rates agreed with other carriers.

Telstra is not alone in being concerned about the wholesale and retail rates charged by Telecom. Long distance carrier WorldxChange, which has played no small part in forcing down residential toll rates, protests that a recently announced residential toll deal makes a mockery of Telecom's wholesale rates and threatens competition in the toll market. "Competing telecommunications companies are forced to pay charges which can be nearly double those offered to Telecom's residential customers," WorldxChange's managing director, Steven Stanford, said.

In fact, there are those who argue there has been a hardening in Telecom's attitude to its carrier relationships. A delegation of six carriers recently approached the enterprise and commerce minister, Max Bradford, with a litany of complaints ranging from Telecom's cancellation of re-billing to its data pricing, onerous access code conditions, discriminatory interconnection pricing and inadequate service level guarantees.

There is good reason to think Telecom's attitude has changed in the last nine months. According to Mr Weston-Webb, a 1996 restructuring had made Telecom's provision of interconnection services to other carriers more oriented towards getting more of their network business and, thus, more of their revenue.

"Telecom set out to obtain additional network business with a view to being the telecommunications network provider of choice," Mr Weston-Webb said. "Naturally, Telecom had to price its services attractively in order to win the business of carriers like Telstra and Clear. So we developed pricing deals which encouraged other telecommunications service providers to come to Telecom. In addition, the business of these telecommunications service providers would lead to an increase in network usage and lower unit costs; that is more profit for Telecom."

A favourable flat rate toll charge developed by Mr Weston-Webb was such that providers such as Telstra could establish prices for tolls that were lower than those offered by Telecom to its own end users.

But according to Telstra, Telecom's former legal counsel, Richard Dammery, had been surprised when he took over in September last year that the interconnect group "had assumed responsibility for functions unrelated to interconnection or wholesale service provision, and more directly related to the provision of retail services."

Telstra's court submissions offered no view on whether the Dammery review extended to wholesale toll rates, but it was in no doubt that it resulted in the cessation of re-billing. Defending the action, Telecom argued that the re-billing letters of authority re-billing did not constitute a contract and were simply of no legal effect; Telstra that the issue was a fundamental one of access and anti-competitive behaviour. The court's decision will be of more than academic interest.