$250 Million win For telecommunications consumers

The Australian Competition and Consumer Commission has today issued a draft report rejecting Telstra's proposed wholesale charges to competitors using its fixed line telephone network.

Competitors use Telstra's telephone network to supply long distance, fixed-to-mobile and mobile-to-fixed calls to consumers. Telstra's wholesale charges represent between 30 and 45 per cent of their costs.

"The ACCC's analysis shows that Telstra's competitors are paying too much for the use of its network", ACCC Chairman, Professor Allan Fels said today.

The ACCC has estimated that the charges proposed by Telstra are approximately 30 per cent higher than the costs that an efficient operator in a competitive market would incur.

"Consumers, both household and small business users in city and country, bear the brunt of Telstra's overcharging. The ACCC's work indicates that consumers will be up to $250 million better off if Telstra reduced its charges to efficient cost levels".

Telstra's proposed charges were set out in an undertaking given to the ACCC on 24 September 1999 and relate to services known within the industry as Domestic Public Switched Telephone Network (PSTN) Originating and Terminating Access. They cover the period 1999-2001.

Over the past six months, the ACCC has undertaken extensive costing work to assess these charges, and has consulted widely within the industry.

This work indicates that the charges should be, on average, 1.8 cents per minute for 1999-2000 and 1.5 cents per minute for 2000-2001. Telstra's proposed charges are 2.3 cents per minute for 1999-2000 and 2.0 cents per minute for 2000-2001.

"Charging above?cost for the use of Telstra's network hampers the ability of telecommunications service providers to compete with Telstra on the basis of their true merits. As a result, Telstra enjoys an artificial competitive advantage, which can only harm consumers over the long term".

The ACCC expects that the lower charges should become available to Telstra's competitors over the next month.

Currently, the ACCC is conducting a number of arbitrations where Telstra's charges for its fixed line telephone network are the principal issue in dispute. The ACCC would expect this decision to be a key input into the prompt assessment of Telstra's charges in those arbitrations.

When the ACCC commenced regulating Telstra's charges in late 1997, Telstra's charges were approximately 4.7 cents per minute. Telstra's proposed charges are now around half of that amount and the ACCC estimates that they should be reduced further.

"Telstra's charges, when the ACCC started in late 1997, were around 250 to 300 per cent of where the ACCC now estimates they should be.

"The ACCC is encouraged that Telstra has taken note of the ACCC's previous assessment of its charges. However, while the prices in Telstra's current undertaking are lower than the original price of 4.7 cents per minute, they are still too high".

Since 1997-98, cost reductions and an increase in traffic volumes, along with recent increases in line rental charges, mean that per minute costs have declined. Prices should now be approximately 40 per cent of the original 4.7 cents per minute.

In terms of international comparisons, Telstra's proposed charges would have placed it in the high end of the range of international charges. The outcome of the ACCC's decision is that Telstra would be around the bottom of the range.

The ACCC notes that undertakings are voluntary. However, it would urge Telstra to seriously consider giving the ACCC an undertaking in line with the assessment set out in the draft report.

"By giving the ACCC an undertaking setting efficient charges for the use of its network, Telstra can significantly reduce the level of disputation within the industry. This would seem to be in the interests of all concerned - Telstra, its competitors, and most importantly, consumers".

The competitors likely to be affected by this decision include Cable & Wireless Optus, AAPT, Primus and other telecommunications carriers. Altogether there are around 37 carriers.

Impact of reductions in charges

Currently, Australian consumers pay about $5 billion per year for national and international calls (divided equally between national and international long-distance). Telstra has about a 75 per cent share of national long distance services and a 50 per cent share of international services.

Consumers also pay about $3.8 billion per year for mobile services. Telstra accounts for about 50 per cent of mobile connections, with Cable & Wireless Optus and Vodafone accounting for around 32 and 18 per cent respectively.

Charges for these services are between 30 and 45 per cent of the costs incurred by service providers in supplying long distance, fixed-to-mobile and mobile-to-fixed calls to consumers. Reducing charges for Domestic PSTN Originating and Terminating Access services would provide cost savings of around $70 to $80 million per year.

Competition between providers of long-distance services, and mobile services, should result in most of these savings being passed on to consumers through lower prices. Lower prices offered by long-distance carriers would be likely to create pressure on Telstra to reduce its prices for long-distance calls.

As a consequence, reducing the proposed charges to the level of efficient costs could provide benefits to consumers in the vicinity of $200 to $250 million per year.

What are the benefits for users (consumers, small business)?

The $250 million savings will be widely dispersed. There are 10 million telephone lines in Australia and most users will benefit. Some will receive a substantial benefit.

Reducing these charges should reduce long distance call prices by up to 5 per cent. Consumers could expect to save, on average, around $20-25 per year on their phone bills, with greater savings for larger users of telephony services.

Some heavy users will save hundreds of dollars each year, particularly small business users. Rural users, who frequently make long distance calls, are also likely to gain significantly. This will add to the benefits they recently received from the introduction of neighbourhood call charge rates. Likewise, a small business user who makes on average five national long distances calls each week day, of around three minutes each is likely to save around $30 a year on those calls.

Telstra's proposal would have put is prices at the higher end of the international range. Today's decision will put it at the bottom end of the range, to the benefit of consumers.

Comments on the decision

The draft report will be available from the ACCC's web-site (www.accc.gov.au). Comments are due by 26 May 2000.  

Background

On 24 September 1999, Telstra submitted to the ACCC an undertaking specifying the terms and conditions upon which it proposes to supply services known as Domestic PSTN Originating and Terminating Access. The ACCC must accept or reject the undertaking.

What are these services used for?

These services are used by Telstra's competitors to supply national and international long-distance telephone calls to customers connected to Telstra's network. They are also used to supply fixed-to-mobile calls and mobile-to-fixed calls to customers connected to Telstra's network.

If a caller makes a long-distance call from Melbourne to Sydney using Cable & Wireless Optus., Telstra carries the call from the caller to a point of interconnection with the Cable & Wireless Optus long-distance network in Melbourne. Optus transports the call between Melbourne and Sydney and then hands the call back to Telstra who carries the call to the party receiving the call. Similarly, if a caller makes a fixed-to-mobile call from a fixed line phone in Sydney to a Vodafone mobile phone customer. Telstra carries the call from the caller to a point of interconnection with the Vodafone network in Sydney. Vodafone then carries the call to the mobile customer receiving the call. The reverse occurs for a mobile-to-fixed call.

As 98 to 99 per cent of fixed telephone users are connected to Telstra's fixed-line network, this service is vital for competition and consumer choice in the long-distance call market, and for fixed-to-mobile calls.

What is the ACCC's role in relation to these services?

The Domestic PSTN Originating and Terminating Access services are 'declared' under the Trade Practices Act 1974. This has two important consequences.

First, Telstra must supply these services to each of its competitors upon request.

Second, if a competitor cannot agree with Telstra about the terms and conditions of supply (eg price) then one of them can notify the ACCC of an access dispute. The ACCC can then arbitrate and resolve the dispute. This includes setting the price on which Telstra must supply these services to its competitors.

The ACCC is currently arbitrating four disputes in relation to these services. These involve Telstra and Cable & Wireless Optus Limited, AAPT Limited, Primus Telecommunications Pty Limited and Flow Communications Pty Limited. Telstra's charges are the principal issue in dispute.

Rather than wait for the ACCC to arbitrate each dispute, Telstra can give the ACCC an undertaking setting out the charges for these services. If the ACCC accepts the undertaking, it must not make an arbitral determination inconsistent with the undertaking.

The ACCC's draft report

Under the Trade Practices Act, the ACCC must not accept an undertaking unless, among other matters, it is satisfied that the terms and conditions in the undertaking are reasonable.

The undertaking sets out charges on which Telstra is willing to supply these services to its competitors between 1 July 1999 and 30 June 2001.

To assess these charges, the ACCC used a cost model prepared for it by National Economic Research Associates, which has extensive international experience in modelling the costs of telecommunications networks.

Cost modelling undertaken by the ACCC indicates that Telstra's charges are approximately 30 per cent more than the costs an efficient operator would incur. The cost modelling suggests that charges should be, on average, 1.8 cents per minute for 1999-2000 and 1.5 cents per minute for 2000-2001.

What costs do the charges represent

Charges for the Domestic PSTN Originating and Terminating Access services cover the costs of carrying calls between a customer's premises and a point of interconnection. They also provide a contribution to Telstra's PSTN access deficit.

Telstra's PSTN access deficit arises because Telstra is currently prevented, by legislation, from raising line charges to a level sufficient to fully recover line costs. Line charges are charges for services such as line rental and new connections. The shortfall between line revenue and costs is known as the access deficit. This deficit is recovered from call charges, including charges for the Domestic PSTN Originating and Terminating Access services.

The charge of 1.8 cents per minute, which the ACCC estimates to be the efficient costs for 1999-2000, consists of conveyance costs of 0.9 cents per minute and an access deficit contribution of 0.9 cents per minute.

The charge of 1.5 cents per minute, which the ACCC estimates to be the efficient costs for 2000-2001, consists of conveyance costs of 0.8 cents per minute and an access deficit contribution of 0.7 cents per minute.

Why have costs fallen?

The reduction in costs from 1999-2000 and 2000-2001 is due to cost reductions and an increase in the volume of traffic. The resulting effect is that per minute costs decrease from 1999 to 2001.

Also, the rebalancing by Telstra, which increased line rental charges, means that the access deficit will be lower in 2000-2001 than 1999-2000. The effect of that rebalancing, which required that the smallest users be protected, saw the price of local calls fall to 22 cents per call. An additional effect of that decision is also to reduce the access deficit which in turn reduced the cost of the services used to supply national long distance and international calls.

International comparisons

The ACCC has compared Telstra's proposed charges for 1999-2000 with those in other countries where charges are cost based as shown in Diagram 1



Diagram 1 - Comparison of Telstra's charges with those in other countries (source: Ovum and Telstra)



Diagram 2 - Comparison of Telstra's net charges with those in other countries (source: Ovum and Telstra)

The comparison places Telstra at the high end of the range - see Telstra (proposed charges). In the ACCC's view, Telstra should be towards the bottom end of the range, as indicated by Telstra (ACCC). Today's draft decision puts those conveyance costs at world's best practice, on a par with UK carrier, British Telecommunications plc.

Telstra's previous undertaking

Telstra has previously given the ACCC an undertaking for the Domestic PSTN Originating and Terminating Access services. In June 1999, the ACCC rejected that undertaking.

At the time of rejecting that undertaking, the ACCC indicated that the proposed charges for 1998-99 were about around two cents per minute above efficient costs. The ACCC estimated that the efficient costs for 1998-99 were between 1.87 and 2.77 cents per minute.

Since that time, cost reductions and an increase in the volume of traffic have further reduced per minute costs. In addition, Telstra has recently raised line rental charges. This means that the access deficit, which accounts for approximately half of the charge, is now lower.