Optus, TPG: ACCC did not 'ignore' NBN in Telstra copper pricing

The Federal Court hearing between Telstra and the Australian Competition and Consumer Commission (ACCC) has wrapped up, with rival telecommunications providers TPG and Optus arguing that the regulator ignored neither its own principles nor the impact of National Broadband Network (NBN) in making its wholesale fixed-line pricing decision.

The ACCC's final access determination (FAD), published in October last year, cut the prices that Telstra can charge wholesale customers for the use of its legacy copper network during the transition to the NBN by 9.4 percent.

Optus and TPG joined the regulator's court case against Telstra at the end of last year, having agreed with the ACCC's draft decision in June. The Competitive Carriers Coalition (CCC), formed by Australia's non-dominant telcos, joined the case last month.

The three argued in court on Friday that none of Telstra's suggestions on how the ACCC should have made its pricing decision are backed up by statute.

Optus' argument addressed Telstra's claims that the ACCC had ignored the effect of the NBN, saying conversely that the ACCC had directly addressed the NBN in its pricing considerations.

"We have two lines of answers to that: The first is that it [Telstra] does misapprehend what is described with respect to the decision-making process, because as we see it, the commission did not say that it was excluding part of the efficient costs. In fact, it determined the opposite: To exclude the NBN-induced costs from being treated as part of the efficient costs. There was no inconsistency," Lancaster, counsel representing Optus, said.

"In any event, even if the commission had decided to omit or require pricing at a level that it did not account for efficient costs for that particular service, it was entitled to do so, so long as it did so by reference to the long-term interests of end users and the other statutory criteria, which it did."

On Thursday, Telstra had presented its initial arguments to the court, arguing that the decision to slash wholesale prices will prevent it from recovering "substantial" depreciation and maintenance costs associated with the copper network.

CEO Andrew Penn has previously stated that the determination will reduce Telstra's revenue by up to AU$80 million for FY16 alone.

"There will be a degradation of the economies of scale, a lessening in the economies of scale, and therefore a rising of costs," Archibald, counsel for Telstra, said on Thursday.

The telco had evaluated its copper to have a useful life out until 2022 without the NBN; however, with NBN now stretching its use far beyond that -- after deciding to connect the highest percentage of premises with fibre to the node or fibre to the basement, which utilises the copper line between the node and the premises -- and compounded by the conflicting use-by dates for the copper, Telstra has been precluded from recovering the investments it made in the copper line once its own 2022 timeline has lapsed.

This NBN effect was not considered by the ACCC, Telstra said.

"Far from accepting the reality of the impact of the NBN, the commission ignores it. The commission says we're going to ascribe to these copper cables the useful life, extending it then by a number of years after 2022," Archibald said.

"They [copper cables] remain in the regulated asset base, they attract an annual depreciation, but that depreciation is calculated not on a seven-year life -- 2015 to 2022 -- but say a 20-year life. Therefore, the depreciation is less than that which is [associated] with looking after the true useful life of the asset ... the dollars associated with it are very significant.

"What it means is that Telstra is precluded from recovering, during the current regulatory period with the new determination, the extent of depreciation that is a proper affliction of the remaining asset line of the copper cable. Thereafter, as of 2022, there will be substantial unrecouped depreciation that will never be recovered.

"It will never get back its costs of efficient investment in this copper cable."

In regards to Telstra's assertion that the pricing disparity was caused by "NBN-induced declining demand", Lancaster pointed out that it had been Telstra's decision in the first place to enter a AU$11 billion definitive agreement (DA) to sell off its copper network to NBN .

"Telstra decided in its DAs with NBN -- for good money -- to shut down its old copper network, and migrate its access seekers and their customers to the NBN," Lancaster said.

"The commission said repeatedly and justifiably end users should not be saddled with costs arising from that decision of Telstra, which was not a decision of end users or caused by end users."

TPG, which began its arguments on Thursday afternoon after Telstra's submission had wrapped up, also disputed that the ACCC's fixed-line pricing principles are a standard by which to make FADs, as proposed by Telstra.

"What's being attacked here is the decision making that produced the FAD," Walker, the lawyer representing TPG, said on Friday.

"And I stress: Obviously, the latest iteration of these principles are not available as a standard to be used by its discretion, as a standard applicable for making the FAD itself.

"That's nonsense."

Therefore, Telstra cannot argue that the regulator ignored its own principles in making the FAD, TPG said.

"Nowhere in the statute, and indeed nowhere in their own terms -- that is, internally or in the context of the previous FADs -- do they [fixed-line principles] govern the making of the replacement FAD," Walker added.

"We will win on this point, because whatever they are, they are not standards that apply for the making of an FAD. They are standards for conduct under the FAD."

In its rebuttal on Friday afternoon, Telstra conceded that "there's no compulsion of the fixed principles" in making an FAD, but said they should still be used as the steps taken to make a determination.

"The function of the principles in light of the statutory provision and in light of the explanatory memorandum is to establish a principle which will be enduring and which will be observant," Archibald put forward.

"The function of the principles in substance, in our contention, is to free the commission from the burden of revisiting the subject matter."

Despite being the first respondent to the case, the ACCC did not make any arguments of its own, simply saying that it backed the statements of TPG, Optus, and the CCC.

"We adopt the oral submissions of the other respondents," counsel for the ACCC said.

Telstra had first spoken out against the draft decision in July, accusing the ACCC of misrepresenting its DAs with NBN. The telco said the amount detailed in the revised agreement related 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".

Telstra then argued in October that it should conversely be permitted to increase its wholesale fixed-line prices, because it will lose the economies of scale and face higher costs to maintain its network as it progressively hands over ownership to NBN.

Telstra said the reduced costs to be paid by retailers for use of its copper network would fall well below the company's actual costs of maintaining it. The telco added that the "decision has some serious flaws, and contradicts the ACCC's own principle of full cost recovery".

On Thursday, Walker had said the governing statute did not "even vaguely approach ... full cost recovery".

Justice Foster noted, however, that the laws were not designed with clarity on the matter.

"There's nothing in the statute about the model to be adopted ... whereas there is in other industries in great detail," Foster J said.

Optus and TPG had previously stated that in regards to Telstra's costs, the fixed-line pricing allows for the "significant" over-recovery of costs under the NBN DAs. Optus claimed that the incumbent "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 at the time.

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

As Optus' Lancaster pointed out, the Federal Court does not have the power to amend the ACCC's determination, and can only set it aside.

Justice Foster will deliver a judgment at a later date.