Regulated prices on the Telstra network
Posted on July 22, 2015
4 min read
Telstra’s copper network supports the voice and internet services that keep millions of Australians connected. We provide these services directly to our retail customers and we also make our network available to our Telstra Wholesale customers so they can deliver their services.
Everyone who uses our network, regardless of whether they are a retail or wholesale customer, receives equal treatment and it is an accepted regulatory principle that the costs of operating the network should be borne equally by everyone who uses it.
The prices our wholesale customers pay for using the copper network are set by the Australian Competition and Consumer Commission (ACCC). The ACCC is currently considering what the prices should be for the next four years. This is a complex task at the best of times, but the ACCC’s current review is occurring at a time of unprecedented change in our industry as the National Broadband Network (NBN) is being rolled out to replace Telstra’s copper network in most parts of the country.
As consumers and businesses progressively shift to the NBN our unit costs on the legacy network will inevitably – but modestly – increase. Many of our costs are fixed, so as people leave the network the cost of maintaining it for each of the remaining customers will rise. Additionally, we want to keep investing in the network for broadband customers who don’t yet have access to the NBN.
The ACCC agrees that unit costs are on the rise. In their latest draft pricing decision the ACCC accepted our forecast expenditure and their model showed a one-off price increase of 5.5% is required in order for Telstra to have an opportunity to recover our costs over the next four years. Accounting for inflation, this one-off increase is actually equivalent to a price reduction in real terms of 4% by 2019.
Despite their model and pricing principles indicating this modest increase is required, the ACCC draft decision was that prices for wholesale customers should be cut by 9.6%.
This draft decision has some serious flaws and contradicts the ACCC’s own principle of full cost recovery. Having accepted our cost and demand forecast, the ACCC’s approach then effectively pretends that the NBN is not happening, thereby assuming higher demand for Telstra’s services and accordingly lower average costs. The ACCC has also mischaracterised the deal we did with the Government to facilitate the NBN, which is about 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 impact of a 9.6% cut in wholesale prices would be significant. It would mean the prices other companies pay to use our network would be below our actual cost to the tune of hundreds of millions of dollars over several years, with consequences for both Telstra’s network and the new NBN.
The ACCC’s decision would apply to both our existing infrastructure and new infrastructure Telstra might invest in to provide services in areas where the NBN is not yet available. It would also mean service providers would have a profit motive to keep their customers on the higher margin copper network for as long as possible, rather than move their customers across to the NBN. 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.
We remain hopeful the ACCC will amend its draft in line with Telstra’s actual costs. Certainly, the ACCC and Telstra agree on much in this review in terms of what the costs of operating the network will be, so it comes down to making sure these costs are borne fairly by all the companies using it, as the ACCC’s pricing principles require. We keenly await the final decision to see how they plan to do so.