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Optus, TPG join Telstra in court for ACCC wholesale pricing decision

The two second-largest fixed-line providers will back the consumer watchdog over its decision to cut the prices Telstra can charge its wholesale customers for use of its copper network.
Written by Corinne Reichert, Contributor

Optus and TPG have thrown their weight behind the Australian Competition and Consumer Commission (ACCC) in its Federal Court battle against Telstra over the decision to slash 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.

After having agreed with the ACCC's draft decision, rival telcos TPG and Optus joined court proceedings on Thursday morning. According to Computerworld, arguments are set to be heard in March.

While the ACCC had originally planned to reduce prices across seven of its fixed-line wholesale services by just 0.7 percent, its final decision in October stated that it would be cutting prices by 9.4 percent.

Telstra CEO Andrew Penn revealed in late October that the price cut is expected to reduce Telstra's revenue by up to AU$80 million for FY16, adding that the telco was looking to appeal the decision.

"We are disappointed in this decision, given that it does not follow the ACCC's own fixed price principles we have relied on in making key decisions for shareholders in relation to the NBN. We are therefore considering our options for appeal," Penn said during Telstra's Investor Day presentation [PDF].

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.

ACCC Chairman Rod Sims argued that customer migration to the NBN was 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.

"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 had also accused the ACCC of misrepresenting its AU$11 billion deal whereby NBN would take ownership of its copper and HFC network assets, 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, while every other Australian telco applauded the decision.

Optus and TPG at the time voiced concerns that the federal government should not have made a submission to an independent review, that the government's submission misconstrued Telstra's costs, and that it was 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 new prices came into effect on November 1, 2015, and will remain in place until June 30, 2019. The Federal Court trial is slated to continue in March 2016.

"The Federal Court has agreed to allow Optus to join the proceedings," an Optus spokesperson told ZDNet. "Optus will make submissions in due course."

Article corrected on Thursday, December 3, at 3.25pm AEDT: This article previously stated that TPG and Optus would be joining Telstra's side in the court case.

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