ACCC slashes Telstra wholesale broadband prices by 9.4 percent

The competition watchdog has decided on a 9.4 percent cut to the prices Telstra can charge its wholesale customers for use of its copper network.
Written by Corinne Reichert, Contributor

The Australian Competition and Consumer Commission (ACCC) has published its final decision on fixed-line pricing, slashing the prices that Telstra can charge its wholesale customers for use of its legacy copper network during the transition to the National Broadband Network (NBN) by 9.4 percent.

While the ACCC had originally planned to reduce prices across seven of its fixed-line wholesale services by just 0.7 percent, its revised draft decision on the price cut, announced in June, said the amount that Telstra charges retailers for use of its broadband internet services would be cut by 9.6 percent from October 2015.

The competition watchdog then amended this to 9.4 percent in its final decision on Friday morning.

"The ACCC has dealt with a number of complex issues during this inquiry, including the unique circumstances of the transition from Telstra's copper network to the NBN. Our final decision on prices is the result of a number of considerations, with downward pressures more than offsetting upward pressures," ACCC Chairman Rod Sims said.

"Downward pressures largely come from lower expenditures, falling cost of capital, the treatment of the effects of migration to the NBN, and updated information on the NBN rollout. These more than offset upward pressures from a shrinking fixed-line market due to consumers moving away from fixed-line services and to mobile services."

Telstra spoke out against the draft decision in July, saying the price slash could impact the migration of customers onto the NBN, as retailers would "have a profit motive to keep their customers on the higher-margin copper network for as long as possible".

"This would make migration to the NBN even harder to achieve, and put important revenue to NBN Co at risk. In this way, a cut to prices on the legacy network poses a serious danger to the success of the NBN policy," Telstra warned in a blog post.

The government released its draft Migration Assurance Policy detailing the process for customers to be migrated from Telstra's legacy copper network to the fixed-line NBN in July. An estimated 3.27 million premises could be serviced by the hybrid fibre-coaxial (HFC) networks being taken over from Telstra and Optus, with customers beginning to be connected from March 2016.

Sims stated that customer migration to the NBN was precisely the reason why it had opted to slash prices, as customers stuck on Telstra's legacy copper network during the transition should not be forced to pay higher prices while waiting for an NBN connection.

"Importantly, users of Telstra's network should not pay the higher costs that result from fewer customers as NBN migration occurs. If there is no adjustment for these higher costs, then customers who have not yet been migrated to the NBN will ultimately pay significantly higher prices for copper based services," Sims said on Friday morning.

"The ACCC has taken this approach because it considers that users of the fixed-line network have not caused the asset redundancy and under-utilisation, and will not be able to use those assets and capacity in the future. It would not be in the long-term interests of end users for costs to be allocated to users of the network who do not cause them, particularly when Telstra has an avenue to recover those costs."

Telstra suggested, however, that the consumer watchdog had ignored the NBN and its resultant rise in maintenance and investment costs for Telstra.

"As consumers and businesses progressively shift to the NBN, our unit costs on the legacy network will inevitably -- but modestly -- increase. Many of our costs are fixed, so as people leave the network, the cost of maintaining it for each of the remaining customers will rise. Additionally, we want to keep investing in the network for broadband customers who don't yet have access to the NBN," the telco's blog post said.

"Having accepted our cost and demand forecast, the ACCC's approach then effectively pretends that the NBN is not happening, thereby assuming higher demand for Telstra's services and accordingly lower average costs."

Telstra also accused the ACCC of misrepresenting its AU$11 billion deal with the Australian government, saying the amount detailed in the revised agreement relates to "a loss of future revenue after services are disconnected from the copper network, not the cost of maintaining our network for those customers who remain on it as the NBN is rolled out".

The Department of Communications mirrored Telstra's perspective in its own submission [PDF], saying that the ACCC's decision should be amended, both to allow Telstra to recover its costs, and to prevent cost discrepancies from dissuading customers from migrating to the NBN.

"The ACCC's treatment of redundant assets and adjustments to cost allocation to deal with asset under-utilisation and loss of economies of scale appear to prevent Telstra recovering relevant costs, and this is inconsistent with fixed principles," the department said.

"The department is concerned that the proposed price decrease for fixed-line services will discourage migration throughout the migration window, and could lead to a significant number of customers remaining on the old network in the lead-up to the disconnection date."

This in turn led to the Competitive Carriers' Coalition (CCC) -- made up of Vodafone, Macquarie Telecom, iiNet, Nextgen Networks, and MyNetFone -- demanding that the department withdraw its submission, arguing that government involvement in an independent price debate is "dangerous", especially when calling for consumers to pay higher prices.

"The Department of Communications' intervention in the ACCC's independent price-determination process to advance the interests of Telstra is extraordinary, unwelcome, unwarranted, and sets a dangerous precedent," the CCC said.

"For a government department to be calling for higher prices for ordinary consumers, and against the interests of competition, is surely a first at the federal level... For it to be doing so in the context of fixed-line communications services, where we Australia has (sic) the national disgrace of the highest prices in the developed world, beggars belief."

The CCC accused the government of wanting "to see millions of dollars transferred from the pockets of Australian consumers to Telstra, one of the most profitable telecommunications companies in the world".

Fellow telcos Optus and TPG then threw their weight behind the CCC's declaration that the department's submission was inappropriate and "dangerous", also voicing concerns that the federal government should not have made a submission to an independent review, that the government's submission misconstrues Telstra's costs, and that it is incorrect in claiming that lower copper prices could prevent or slow customer migration to the NBN.

"The migration event is an important one, and all carriage service providers are competing heavily to make sure that they get their share of the NBN migrations," TPG said in its submission [PDF].

"Even today, the costs of supplying an NBN service are higher than the costs of supplying a copper-based service, but this is not stopping all carriage service providers from trying to win customers to their NBN services."

Optus agreed in its submission [PDF], saying: "At the core of the department's submission is the request that access prices be kept high now so that consumers don't face any price changes when they migrate to the NBN. This proposition is inconsistent with consumer interests and the matters that the ACCC has to take into account in setting access prices."

In regards to Telstra's costs, TPG argued that the pricing still allows for the "significant" over-recovery of costs under the Definitive Agreements.

Optus claimed that the government department "appears to misunderstand" the basis upon which the ACCC made its draft decision into fixed-line pricing.

"The proposed access prices are largely based on Telstra's data and cost allocation factors. Costs in the model reflect the relevant use of Telstra's assets by services which caused those costs to arise. Changes to Telstra's cost of capital are the main driver of the price decline; and specifically lower government bond rates. This has little to do with ACCC discretion and nothing to do with NBN," Optus said.

"In addition, it is incorrect to claim that the decision limits Telstra's ability to recover costs. The modelling allows Telstra to recover all costs across all users. Consistent with the fixed principles, only costs caused by the provision of regulated services are to be recovered from access seekers. Other costs are recovered by Telstra across its full suite of non-regulated wholesale products and retail services.

"In fact, the current approach is more likely to achieve cost over-recovery because of the rollover of existing prices."

The CCC on Friday welcomed the final decision by the ACCC, saying the price cut was both "necessary and sensible", pointing out that retaining what is close to being the highest fixed-line pricing in the world would impact the overall Australian economy in a negative way.

"The 9.4 percent reduction represents an overdue change; nevertheless, the commission deserves praise for holding the line in the face of unprecedented pressure to allow Telstra to continue to enjoy monopoly rents," CCC chairman Matt Healy said.

"Anything less would lack credibility, and would have had terrible, economy-wide consequences, as the Australian economy struggles to move from the mining boom to a digital economy."

Healy added that Telstra has already been compensated for the price cut thanks to the "windfall" it received as a result of its HFC and copper contract with NBN, and that customer migration will continue thanks to the higher speeds being offered.

"This decision will have no impact on the transition to the NBN, which is far more dependent on the speed of the rollout than the cost of legacy services," Healy concluded.

The new prices will come into effect on November 1, 2015, and will remain in place until June 30, 2019.

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