ACCC affirms its decision to reject Telstras interconnect proposal: Telstras prices should be halved

The Australian Competition and Consumer Commission has today rejected Telstras proposed charges to other carriers for interconnecting to its network to provide international and national long distance calls.

"Telstras proposed charges were double costs when they were submitted and the excess of charges over costs is even greater now," ACCC Chairman, Professor Allan Fels, said. "Telstras undertaking, submitted in 1997, provides for an average interconnection charge of 4.73 cents per minute. The ACCC considers that this charge should be around 2 cents a minutes in 1998-99."

The ACCCs assessment is based on the costs that an efficient operator would incur in providing these services. The assessment also takes account of cost reductions over time driven by lower labour costs and increases in traffic volume which means that the per call contribution to network costs is lower (ie the costs of the network are now recovered over a larger number of calls).

Interconnection allows carriers to gain access to customers connected to Telstras network to provide international and national long-distance calls (a $5 billion market). Charges for interconnection are a major part at least 35 per cent of the costs of providing national long-distance calls. If interconnect charges were halved to be in line with costs, the prices of national long-distance calls could be reduced by up to 15per cent.

The costs calculated by the ACCC include a contribution to Telstras access deficit, that is, the shortfall that Telstra incurs because of line rentals being less than line costs. The Government recently announced changes to the price cap arrangements, including the cap on line rentals, which will apply from 1 July 1999. It is too early to determine the likely magnitude of any reduction in the access deficit and conflicting views of the impact have already been received from Telstra and access seekers. The ACCCs preliminary view is that the decision is likely to have a not insignificant effect on the size of the access deficit.

The ACCC has also examined the structure of Telstras proposed charges, including peak and off-peak charging.

"I am particularly concerned that Telstra chooses to charge its competitors peak interconnection rates in the period 7pm to 10 pm while charging its own retail customers off peak rates. This is an important period for residential long distance callers and Telstras proposed charges would be likely to deter competition for those customers," Professor Fels said.

On 19January 1999 the ACCC issued a draft decision to reject the undertaking based on its finding that the non-price terms and conditions were not reasonable. The final decision to reject the undertaking is also on the basis that the non-price terms and conditions are not reasonable. For example, the undertaking provides opportunities for Telstra to reject applications and to suspend services to access seekers on the basis of Telstras reasonable opinion of matters such as credit worthiness. This would provide Telstra with significant discretion and create uncertainty for access seekers. The undertaking also imposes obligations on access seekers that are not imposed on its own operations.

The draft report also noted that the ACCCs preliminary view was that the costs of providing the services was 2.02 cents per minute. As a consequence of further analysis by the ACCC and consideration of industry comment on the draft decision, the ACCC now estimates that the efficient cost of providing these services in 1998/1999 is between 1.73 to 2.53 cents per minute. The major reasons for this change are new estimates of Telstras trench lengths, revised assumptions regarding the level of trench sharing with other utilities and changes in the estimates for operating and maintenance costs of the CAN. The range in the cost estimate is largely due to varying estimates of Telstras trench lenghs. While it is not necessary for the ACCC to specify an exact price that it considers reasonable for the purposes of assessing the undertaking, it is establishing a consultancy to provide an independent estimate of Telstras trench lengths. This will be reduce this uncertainty and be a significant input into the ACCCs consideration of any future undertaking.

Under the Trade Practices Act 1974, Telstra may voluntarily submit an undertaking to the ACCC specifying the terms and conditions on which it proposes to provide interconnection. The ACCC would expect that charges in any future undertaking submitted by Telstra would be based on the ACCCs undertaking assessment taking into account changes in relevant factors and any new information that becomes available. The changes to the retail price controls and the findings of the trench length consultancy will be important in this regard.

The undertaking assessment will also be a major input into the ACCCs determinations in the current arbitrations between Telstra and AAPT and Telstra and Primus.

A report detailing the reasons for the ACCCs final decision will be available on the ACCCs web site: http://www.accc.gov.au under telecommunicatons.

Further information Professor Allan Fels, Chairman, pager (016) 363 536 Mr Michael Cosgrave, Senior Assistant Commissioner, Telecommunications (03)9290 1914 or (0416) 043 160 Ms Lin Enright, Director, Public Relations, (02) 6243 1108 or (0414) 613 520

Background

Telstra provided an undertaking setting out its proposed terms and conditions (including the proposed charges) for interconnection in an undertaking submitted in November 1997 to the ACCC. The ACCC must not accept the undertaking unless it believes the terms and conditions are reasonable.

The ACCC conducted a full investigation of the Undertaking. This involved a number of projects including: an independent analysis by international experts National Economic Research Associates of the costs of providing interconnection in Australia based on efficient telecommunications practices; an examination of the costs Telstra incurred in the past in providing interconnection; and comparisons with best practice charges for interconnection overseas. Each of these studies led to the conclusion that Telstras proposed charges should be halved.