An important court case looms for the telecommunications industry on the back of a claim recently lodged by Telstra in the Federal Court. The outcome could significantly impact the prices charged to consumers for fixed line telephone services and internet. At stake for Telstra and its competitors is approximately $120 million in annual revenue.

On 5 November 2015, Telstra Corporation Limited[1] lodged a claim in the NSW registry of the Federal Court against the Australian Competition and Consumer Commission’s[2] fixed line services declaration of 9 October 2015.

ACCC’S PRICE DETERMINATION

Following a public inquiry first initiated in 2013, the ACCC determined in October 2015 that Telstra’s wholesale price for a number of services should be reduced by 9.4 per cent. 

For Telstra, the price cut equates to an $80 million loss of revenue for financial year 2016 from the date of the October decision until 30 June 2016. 

Conversely, Telstra’s competitors will benefit from cheaper wholesale pricing which may ultimately drive down the retail price of telephony and internet for millions of Australian consumers.

THE ARGUMENTS: TELSTRA V COMPETITORS

In the lead up to the determination, Telstra had argued its wholesale prices should rise by 7.2 per cent given the staged migration of end users to the newly built Australian National Broadband Network (NBN). 

Telstra expects demand for fixed line services to fall by as much as 60 per cent over the next five years as customers migrate across to the NBN. Telstra argued that, as fewer and fewer users remain on the legacy copper network, its net returns for maintaining the network are diminished. Thus a price rise is justified to offset decreased revenue.

Telstra’s competitors took a contrary position. They argued Telstra had effectively already been compensated for the impact of customers transitioning to the NBN through an $11 billion dollar deal between Telstra and NBN Co Limited (NBN Co). 

That deal provides for a staged migration of Telstra customers from the copper network to the NBN and the acquisition and leasing of certain infrastructure in the copper network by NBN Co.

THE FEDERAL GOVERNMENT’S POSITION

In July of this year, then Communications Minister, and now Prime Minister, Malcolm Turnbull and Finance Minister Mathias Cormann publically wrote to the ACCC urging it not to take into account Telstra’s $11 billion dollar deal with NBN Co when assessing the appropriate wholesale pricing. 

They argued that doing so would undermine the deal between Telstra and NBN Co as it would weaken the returns to Telstra shareholders and therefore also weaken Telstra’s commitment to assist with the NBN rollout.

THE ACCC REPORT

The ACCC nevertheless has taken a contrary view in reaching its decision. In publically releasing its report, ACCC Chairman Rod Simms said:

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”.

On the specific issue of the $11 billion dollar deal with NBN Co, the ACCC noted that payments Telstra receives from NBN Co under the deal relate specifically to the migration of customers from the copper network to the National Broadband Network. It stated in its report that:

Given that Telstra has undertaken to only provide fixed line services over the NBN where the NBN is deployed, Telstra will be receiving a financial benefit in return for the permanent loss of wholesale and retail customers on its fixed line network”.

BASIS FOR TELSTRA’S LEGAL CHALLENGE

Telstra’s legal challenge in the Federal Court is based primarily on administrative law grounds. Its argument is that the ACCC took into account irrelevant considerations by not correctly factoring in Telstra’s $11 billion dollar deal with NBN Co when reaching its price determination.

The matter is next listed for a case management hearing on 3 December 2015.