The Australian Competition and Consumer Commission (ACCC) has recently issued a draft final access determination (FAD) for the declared 'fixed line' services and the domestic transmission capacity service (DTCS). Each of these draft decisions proposes important and significant reductions to the wholesale prices which access providers can charge for these services.
These draft decisions have been issued in the context of major shifts in the Australian communications industry, arising from:
- the ongoing rollout of the NBN and the migration of fixed line carriers' customers to this network, principally Telstra; and
- the accelerating demand for data services from Australian consumers, business and government, which in turn is driving significant change in the wholesale transmission market.
Fixed line services and DTCS
'Fixed line' services are voice and data services supplied using Telstra's legacy copper network. They comprise the unconditioned local loop service (ULLS), Line Sharing Service (LSS), public switched telephone network (PSTN) originating and terminating access, wholesale line rental, local carriage service and wholesale ADSL services.1
DTCS is a point to point transmission service to allow access seekers to carry data between those points. DTCS typically enables users to connect to other networks, including Telstra exchanges and others. The ACCC breaks down domestic transmission into the following geographic categories: inter-capital routes, regional routes, metropolitan routes and tail-end services.
Both fixed line and DTCS have been declared since 1997 although the ACCC has only had the power to make a FAD since 2011. Since the time the first FAD for each service was made, the wholesale market has undergone major changes due to the developments mentioned above.
Fixed Line Draft FAD
The ACCC released a draft FAD in June 2015, setting out a one-off 9.6% decrease in primary prices of the declared fixed line services, for the four years between 1 October 2015 and 30 June 2019.
This draft decision is intended to replace the existing FAD (which took effect at 1 August 2014). The existing FAD is based on the 'fixed principles', that pricing should reflect the relative usage of the network and direct costs should be allocated to the service to which they relate.
This draft decision replaces an earlier draft FAD (released in March 2015), which provided for fixed line prices to fall by a much more modest 0.7%.
Fixed line services: ACCC and Telstra's positions
The ACCC has stated that one reason for the proposed dramatic fall in wholesale regulated prices for fixed line services is the migration to the NBN.
As services are disconnected from Telstra's fixed line copper networks, some Telstra assets will be made redundant and the efficiencies of servicing a large number of customers will be progressively lost. As such, customers who have not migrated to the NBN will face higher costs for the copper based services.
The ACCC considers these customers should not bear these higher costs caused by loss of economies of scale in the NBN migration. It also believes Telstra has had the opportunity to recover these costs through the definitive agreements with NBN, through which Telstra will receive several billion dollars for facilitating the implementation of the NBN.
Telstra strongly disagrees with this position. In public submissions, it has stated:
- it is incorrect to separately calculate and allocate NBN related unit costs;
- the ACCC has not accounted for Telstra's real costs and is denying Telstra the ability to recover those costs, which is inconsistent with the fixed principles and the legislative criteria for declared services;
- Telstra has not recovered the costs, which are proposed to be removed from the regulatory asset base, from NBN or the government;
- Telstra did not cause the loss of economies of scale from NBN migration;
- the underutilised assets are not being 'disposed of' within the meaning of the Australian Accounting Standards; and
- the proposed adjustment will create price instability or 'sticker shock' in the transition to the NBN.
DTCS: ACCC's position
The ACCC also released a draft DTCS FAD in September 2015, which provides prices that are (on average) 22.2% lower than prices in the 2012 FAD.
The precise decline varies depending on the geographic route type, capacity and distance of the service. For instance, average regulated pricing for the DTCS is 17.6% lower in metropolitan areas and 23.8% lower on regional routes.
In reaching this conclusion, the ACCC proposes to adopt:
- a framework to determine whether or not a particular route is competitive by reference to a number of factors including the number and identity of competitors offering services on that route. Routes which are adequately competitive (for example, intercapital routes, some regional and metropolitan routes) are already removed from regulation and are therefore not subject to the draft FAD; and
- a benchmarking approach to price DTCS in regulated uncompetitive routes as if they were competitive. That is, transmission prices on competitive routes are used to determine prices that would be expected for declared regulated routes as if these routes were priced competitively.
It appears that the ACCC's approach is in response to the ever growing demand for higher capacity services. This growth is due to many factors, including but not limited to the explosion in mobile data usage, the rollout of high speed broadband networks including the NBN and the introduction of streaming video on demand (SVOD) services - the so called 'Netflix effect'.
Increasing demand for data services has been accompanied by greater competition. Consistent with this, the ACCC found that there has been a significant downward trend in transmission prices for higher capacity competitive routes as compared to lower capacity routes.
DTCS: Telstra's position
Although Telstra has not yet published a response to the draft DTCS FAD, the draft decision is potentially inconsistent with the Telstra submissions, which stated that periodic re-pricing during the FAD has significant risks and gives rise to unnecessary regulatory intervention.
Telstra's formal position in relation to the draft DTCS FAD remains to be seen.
It appears that the ACCC's draft decisions are informed by the considerable flux and transition in the fixed line services and DTCS markets. These markets are being affected by the NBN and the dramatic increases in demand for data services that are mentioned above.
In turn, the ACCC's draft decisions have the potential to have a further profound effect on wholesale participants in those markets.
Submissions to the ACCC on the draft DTCS FAD are due by 2 October 2015.
The ACCC intends to release the final decision on fixed line services FAD in September 2015.