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Is Telstra full of it on congestion claims?

Telstra and its fixed-line resellers are locked in a months-long debate over whether wholesale prices for ADSL should be kept higher to avoid "congestion," but is it right?
Written by Josh Taylor, Contributor

Telstra has been accused of gouging its wholesale customers while seeking to profit from the National Broadband Network (NBN), in an ongoing war of words about wholesale ADSL pricing.

The Australian Competition and Consumer Commission (ACCC) is looking at setting a price for wholesale ADSL. It is addressing areas where Telstra's retail competitors, such as iiNet, Internode, and Optus, don't have their own DSLAM infrastructure and are therefore required to wholesale the entire broadband service from Telstra. In these areas, commonly referred to as "off-net" areas, Telstra has been under fire for charging wholesalers more than it charges retail customers through BigPond.

The issue of congestion has been on the boil since August, when Telstra told the ACCC (PDF) that prices should be kept higher to ensure that congestion is managed.

The congestion on the network is broken down into a number of parts: congestion in the exchange and the DSLAMs; congestion in the transmission; and congestion in Telstra's network core. Telstra argued that when demand exceeds supply in any of these areas, traffic will be rationed and the speeds offered to customers reduced.

Telstra said that it makes investments in the ADSL network on the basis that it will make that money back, and also sets retail pricing to manage congestion on the network. As customers begin using more data over Telstra's network through video streaming and other data-intensive applications, this leads to congestion on the ageing network.

Telstra said that the ACCC must therefore consider the cost of congestion, and that current congestion prices for ADSL in Australia do not reflect "optimal congestion prices," being lower than Telstra would like.

"Achieving a less-congested network will be difficult if the network owner must make available resale services at a price that does not reflect the congestion cost," Telstra said. "The network provider cannot account for congestion in its prices alone. Customers would get a similar service but at a lower price from resellers. The attempt to account for congestion in prices would be undermined as customers shift to resellers. At a lower price, demand and congestion will be higher."

The ACCC went back to the industry in September, seeking feedback on Telstra's claims and how it should affect wholesale pricing.

AAPT said flatly that "there is no congestion problem" (PDF). The company said that while ADSL networks are susceptible to capacity issues, this is managed by service providers, which will buy more capacity if required.

Herbert Geer, on behalf of Adam Internet — before Telstra announced plans to acquire it — and iiNet, argued (PDF) that due to the uneven playing field between what Telstra Retail is offered and what wholesale resellers get, Telstra Retail is "disproportionately contributing to congestion."

Macquarie Telecom accused Telstra (PDF) of gaming the ACCC's pricing determination process by trying to link congestion with the wholesale ADSL service.

Optus said (PDF) that the current wholesale pricing model takes into account congestion pricing while still allowing access seekers to account for congestion in their retail pricing offered to customers. Optus said that Telstra was saying transmission capacity is an issue, while at the same time upgrading its transmission network to meet the needs of the NBN rollout, which will give Telstra AU$500 million per year in the leasing of ducts, racks, and dark fibre over the next 30 years.

"The current position of Telstra appears to be: invest in sufficient capacity to meet future demand of all Australian households and businesses through the NBN; and claim there is insufficient capacity in its transit network for current levels of ADSL traffic."

Optus, Macquarie Telecom, and Herbert Geer argued that Telstra could reduce congestion by selling wholesale services unbundled from transmission services.

"Given that congestion occurs in the transmission component of the service, congestion can be ameliorated by enabling access seekers to use their own transmission services, thereby taking traffic off Telstra's network," Macquarie Telecom said.

Telstra then responded last week (PDF), saying that Telstra's wholesale customers are not aware of the congestion at the DSLAM other than through customers complaining. Telstra argued that it couldn't split up its wholesale product to allow access seekers to use more of their own backhaul infrastructure, because it would require reengineering of Telstra's network "from an efficient, centralised topology to an inefficient decentralised topology."

The company also compared its situation with the unusual argument of post-World War II rent control in New York City. Rent prices were kept artificially low by the government, and, as a result, there was a shortage of apartments and a lack of investment in apartment housing until 1982. Telstra has said that the same could result for its wholesale network, because there will be capacity constraints and little incentive for the company to invest in improving its network if prices are kept low.

The difficulty around the argument is that Telstra believes it will have to heavily invest in something that it won't make much money back on before the completion of the NBN rollout. Its competitors disagree, and say that capacity isn't as big an issue as Telstra is making out, and still want prices reduced. However, Telstra's competitors have the option of putting in their own DSLAM infrastructure, and therefore avoiding Telstra's wholesale ADSL costs, but they then also face the prospect of the NBN coming along and making that DSLAM investment redundant before the company can make its costs back.

At the same time, Telstra's 2012 annual report shows that in the last financial year, wholesale broadband revenue fell by 13.1 percent to AU$352 million, mainly due to the loss of 102,000 services from wholesale customers who deployed their own DSLAM equipment. Telstra said in its annual report that expenses in wholesale increased by 1.8 percent in the last financial year, but that this was driven by higher labour costs, particularly around NBN readiness.

Although Telstra's situation is somewhat unique, in being a structurally separated company that still owns the network and also offers end-user services on that network, it is not the first to be accused of using congestion as an excuse to impose new limits on offerings. In 2011, when AT&T introduced download caps in the US for its DSL services, it said at the time that it was a move designed to decrease congestion on its network. But the company encountered similar criticism from the industry, stating that upgrading backhaul and DSL infrastructure was relatively inexpensive, and would keep congestion issues to a minimum.

In Canada, Bell also came under fire in 2011 after proposing to implement a data cap for its wholesale customers, and an excess-usage charge for every gigabyte used over the top. Bell said that it was necessary to bring it in, because some of the customers of its wholesalers were responsible for a disproportionate amount of congestion on the network. The Canadian Radio-television and Telecommunications Commission overnight approved new capacity-change service charges for these companies.

Telstra's competitors say that while the NBN makes wholesale ADSL pricing a temporary issue, they are concerned that if the ACCC accepts Telstra's argument about congestion pricing, it will set a precedent for allowing this sort of charge to be used in the future.

The ACCC has yet to make its final access determination.

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