NBN causing inevitable copper cost increase for users: Telstra

Telstra has said that as it is saddled with fixed costs on its copper network, coupled with declining user numbers as customers move to the NBN, it is inevitable that the cost per user will rise.

The telco made its argument in a submission (PDF) to the Australian Competition and Consumer Commission (ACCC) inquiry into pricing on fixed-line services.

Demand for fixed-line services is expected to decrease by 60 percent over the next five years, said Telstra, which argued that it will not be able to cut costs in line with the decrease. Consequently, it said, the ACCC should allow it to push up wholesale fixed-line prices.

"Given these market realities, regulated wholesale fixed-line service prices will need to increase, at least in nominal terms, between now and 2019," Telstra said.

"This approach would deliver real price stability across the four years — indeed, by FY2019, real prices are likely to have fallen given forecast CPI increases — and maintain current price differentials between products."

Not surprisingly, Optus said it is opposed to the move to increase prices, and that Telstra is simply engaging in an exchange to shift cost from its retail to its wholesale arm.

"Telstra's EBITDA margin for fixed voice remains at 60 percent — the same level at the beginning of the 2011 FAD — and 44 percent for fixed data — increasing from 37 percent. Optus further notes that the relative magnitude of regulated revenue is small compared to overall Telstra revenue," the company said in its submission (PDF) to the ACCC.

Optus argued that Telstra is "largely protected" from the decline in fixed services because it stands to gain from users switching to mobile, an area where Telstra is by far the largest player, as well as payment pending the renegotiation of AU$11 billion definitive agreements between NBN Co, Telstra, and the government.

"[If] access prices were increased, then Telstra would be compensated twice for each customer migration, once by NBN Co through its migration payments, and a second time by its remaining customers on the CAN [customer access network] through higher access prices," Optus said.

"This would inevitably allow Telstra to over‐recover its costs and damage competition during and after the transition to NBN. It would provide Telstra with a significant first-mover advantage to the NBN."

Telstra said any consideration of its agreement with NBN Co in setting access prices is irrelevant, a view shared by the federal government.

"Where an asset class is used in providing a declared service, the costs associated with the declared service should, as happens today, be allocated to the actual users of that declared service," the Department of Communications said in its submission (PDF).

The department warned the ACCC that setting favourable pricing for the copper network could delay migration onto the NBN, and hence revenue to NBN Co.

"This will make it more difficult to operate its network efficiently and reduce real prices," it said. "If NBN Co needs to respond by lowering wholesale prices to match those on the Telstra network and induce migration, this will reduce its resources for proceeding with the rollout.

"It will also further reduce its ability to achieve a rate of return on the rollout."

The ACCC currently expects that it will make a decision on pricing by the middle of 2015.