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Telstra: ACCC decision will cause 'substantial' loss in NBN copper cost recovery

Substantial unrecouped depreciation associated with its copper network will never be recovered thanks to the ACCC's decision to cut wholesale copper pricing by 9.4 percent, Telstra has argued in court.
Written by Corinne Reichert, Contributor

Telstra has presented its arguments to the Federal Court in its battle against the Australian Competition and Consumer Commission (ACCC), arguing that the decision to slash wholesale prices will prevent the telco from recovering "substantial" depreciation costs associated with the copper network.

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

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

Telstra's submissions to the court on Thursday, which took up much of the day's hearing, focused on the NBN's impact on its fixed-line assets. The incumbent argued that due to what it labelled "NBN-induced declining demand", Telstra is being prevented from recovering its maintenance costs.

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

In making the fixed-line access determination, the ACCC effectively ignored the existence of the NBN, Telstra added.

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.

"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," counsel for Telstra 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."

Telstra had first spoken out against the draft decision in July, accusing the ACCC of misrepresenting its AU$11 billion deal whereby NBN would take ownership of its copper and HFC network assets. 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".

In response, rival telecommunications provider TPG -- which, alongside Optus, joined the regulator's court case against Telstra at the end of last year, having agreed with the ACCC's draft decision -- claimed in court on Thursday that Telstra's arguments were not held up by supporting laws.

"In the statute, in our submission, it is just not possible to find anything even vaguely approaching --even vaguely approaching! -- the full cost recovery of prices," counsel representing TPG said.

Justice Foster noted, however, that the laws themselves 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.

Telstra has also previously pointed out that 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".

ACCC chairman Rod Sims disputed this last year, saying that customers stuck on Telstra's legacy copper network during the NBN transition should not be forced to pay higher prices while waiting for an NBN connection.

The ACCC is due to present arguments in court on Friday, alongside Optus and the Competitive Carriers Coalition (CCC).

Optus and TPG had previously stated that Telstra's claims were incorrect. In regards to Telstra's costs, TPG had argued that the pricing still allows for the "significant" over-recovery of costs under the NBN Definitive Agreements.

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.

"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 hearing will continue on Friday.

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