High Court: History is important
Wednesday, 12 March 2008
On 6 March 2008 the High Court of Australia unanimously ruled against Telstra’s claim that the telecommunications access regime involved the acquisition of its assets on less than ‘just terms’ as required under the Australian Constitution. In effect, the High Court ruled that the PSTN assets which were vested in Telstra were already subject to an access regime at the time of privatisation and hence Telstra (and its shareholders) never held the property rights they claimed were being ‘acquired’ by the access regime. In making this decision the court emphasised the need to appropriately recognise the context and history of Telstra’s interest in the PSTN.
This reflection on history from the High Court has potentially broader significance than merely upholding the constitutional validity of the telecommunications access regime. It may be a salutatory lesson to those assessing other claims by Telstra under the access regime and telecommunications regulation which are related to Telstra’s ownership of the PSTN. To ignore history risks granting rights to Telstra that it never actually held and also risks giving returns to Telstra’s shareholder that are inconsistent with their reasonable entitlements.
Since Telstra (and its predecessors Telecom/OTC and AOTC) was incorporated and certainly prior to its privatisations (in 1997, 1999 and 2006) it has been subject to laws that impact on the value of its assets. These include controls on its retail prices which began as far back as 1989, regulation of the funding it receives from providing universal service at least as far back as the Telecommunications Act of 1991 and rules setting access prices under 1991 Act’s regime and as amended in the Telecommunications Act 1997.
Despite this context most regulatory decisions ignore history and promote forward-looking concepts to value Telstra’s assets. For example, the price for access to the line into the home (the so-called unbundled local loop) is based on models which value the lines at the cost of replacing them today. These models adopt the so-called ‘hypothetical new entrant’ paradigm which is used by telecommunication’s regulators both in Australia and internationally. Under this paradigm, regulated access prices are based on the forward looking cost of a ‘hypothetical new entrant’ replacing existing assets. This side-stepping of history has sent some regulatory debates down what can only be described as ‘Alice in Wonderland’ hypothetical rabbit holes.
For example, Telstra has argued, and the ACCC has implicitly agreed, that Telstra should be compensated for the cost of replacing trenching in all areas, even though many trenches were dug by a developer and Telstra was given free access to them. The logic being that a ‘new entrant’ would have to dig a new trench if it were replacing the network today, anew. In fact, Telstra has argued that they should be compensated for the cost of digging up driveways to lay a new trench because that is a cost a new entrant would incur today (even though the existing trench was, naturally, dug by the developer before anyone laid any driveways).
Arguably such claims fall fairly and squarely in the category of the ‘synthetic and unreal’ - to use the High Court’s words.
Access regulation is not the only area where history may be important. For example, estimates of compensation required by Telstra’s shareholders for meeting universal service obligations (USO) in rural and remote Australia have often been based on estimates of the cost of replacing all rural and remote assets. However, history tells us that Telstra’s shareholders purchased those assets with both universal service obligations attached and therefore requirements to maintain those assets but also a universal service compensation regime already in place. We understand that around the time of Telstra’s initial privatisation in 1997 the fund was around $250 million yet recently has fallen to around $145 million. An investigation of these historical arrangements appears relevant to any estimate of Telstra’s reasonable entitlements to compensation for meeting USO obligations today.
The High Court’s decision shows that it is not always possible, or desirable, to ignore history. No matter how messy, history can be fundamental to many regulatory issues and ignoring it has the potential to result in decisions that are at odds with common sense.