ACCC issues new accounting separation rules for Telstra

The Australian Competition and Consumer Commission today issued three record keeping rules for Telstra as the initial phase of developing an improved competitive environment under the Federal Government's new accounting separation regime.

The rules seek to encourage a more transparent, accountable and informed regulatory market by improving the provision and disclosure of information on Telstra's operations to the ACCC, industry, the public and the Government.

ACCC Chairman, Professor Allan Fels, said the rules are intended as a start to addressing the anti-competition and discriminatory concerns arising from Telstra's market power and the level of vertical integration between Telstra’s wholesale and retail operations.

The three RKRs deal with the initial reporting requirements for Telstra through the provision of information on:

• current cost accounting (the CCA regime)
• key performance indicators (the KPI measures) on non-price terms and conditions
• imputation analysis of core telecommunications services (imputation testing).

The requirements for the rules are set down in the recently finalised Ministerial Direction on the accounting separation of Telstra.

"Given the tight timeframes involved in the preparation of the initial reports, which are due to be supplied to the ACCC by the end of November 2003, it is necessary to give Telstra sufficient time to develop its data systems to ensure these first reports get to the ACCC on time.

"I should emphasise that these are initial record keeping rules and cover only the first reports under the new accounting separation regime. The ACCC intends that this is a transitional phase only, toward producing a more comprehensive, credible accounting separation regime for subsequent reports from Telstra.

"This of course means that the subsequent reports will be under new rules after the ACCC has had sufficient time to consult industry properly and Telstra has developed the capacity to supply the required information to the ACCC".

CCA Regime

The CCA regime requires Telstra to provide detailed accounts of the current costs of providing its services in addition to the provision of historical cost information. This provision of current cost information will create more transparency about Telstra's costs as an ongoing, sustainable business.

Professor Allan Fels said the ACCC had considered Telstra's current systems and procedures when it drafted the rules for the CCA regime.

"Discussions with Telstra revealed that its current reporting systems are not presently suitable for the preparation of full CCA reports for the initial report", he said.

Given the tight timeframes for that first report and Telstra's data problems, it has been decided that the initial report will be based on a more limited set of current cost adjustments as compared to subsequent reports.

The form and content of subsequent reports will be subject of a discussion paper from the ACCC (to be issued shortly) seeking industry comment on the key issues on CCA going forward.

KPI measures

The KPI measures in the rule require Telstra to prepare reports comparing the key non-price terms and conditions of supplying core telecommunications services to itself and other access seekers. This will help to ensure Telstra is competing fairly and treating its wholesale and retail customers with an equivalent standard of service. The rule addresses services such as the ordering and provisioning and management of faults.

The ACCC issued a discussion paper in April 2003 seeking the views of interested parties on this issue and the submissions received informed the drafting of the RKR.

"While the KPIs for the initial report will achieve many of the stated objectives, certain limitations in Telstra's systems means that the KPIs will require further modification and enhancement over time to ensure that these KPI measures develop into an effective regulatory regime", Professor Fels said.

"To that end, the ACCC intends to adopt a phased approach to the development of KPIs and will continue to discuss with Telstra and industry a number of possible options to improve the KPIs in order to effectively meet the objectives of accounting separation".

Imputation testing

Imputation testing assists in detecting anti-competitive price squeezes in a retail market. A price squeeze could occur where Telstra reduces the margin between retail and wholesale prices to a level that inhibits competition.

The Ministerial Direction requires imputation testing to be undertaken and a report be supplied by Telstra to the ACCC on retail services using Telstra's core wholesale services, with the test, the results and analysis to be published by the ACCC each quarter.

"The imputation testing will assist the ACCC and industry in identifying whether Telstra’s pricing is harming competition.

"The ACCC has already consulted widely with industry players on this issue in its recent paper on bundling and will offer another opportunity for interested parties to comment when it issues a discussion paper on this rule shortly. This input will be crucial in developing an effective imputation test for future reports from Telstra.

"Telstra, industry and the public should be under no illusions about the ACCC's intentions. The approach to the initial report is a pragmatic one that should in no way be construed as an endorsement by the ACCC that the initial report framework will be used as a basis for the preparation of future CCA reports. Indeed, the ACCC believes that the initial reports framework is largely unsuitable as a longer term approach to the development of an effective accounting separation regime for Telstra".

Background

On 24 September 2002 the Minister for Communications, Information Technology and the Arts, detailed a range of measures aimed at increasing the level of competition and investment in the telecommunications market to benefit consumers and business.

One of the key measures announced was the encouragement of a more transparent regulatory market by requiring an augmented system of Accounting Separation (AS) of Telstra’s wholesale and retail operations. AS was seen as a means of addressing competition concerns arising from the level of vertical integration between Telstra’s wholesale and retail services and improving the provision of costing and price information to the Australian Competition and Consumer Commission, access seekers and the public.

On 19 December 2002 the Telecommunications Competition Act 2002 came into force. Section 151BUAAA of the Telecommunications Competition Act allows the Minister to give a Ministerial Direction to the ACCC about Telstra's wholesale and retail operations. It also provides the Minister with a power to direct the ACCC to prepare or publish reports using its existing broad record-keeping rule powers under Part XIB of the Trade Practices Act 1974.

On 19 June 2003, the Minister issued a Ministerial Direction instructing the ACCC to use its existing powers under Part XIB of the Trade Practices Act 1974 to ensure that:

• Telstra prepares current cost accounts, as well as existing historical cost accounts, to provide more transparency to the ACCC about Telstra's cost as an ongoing sustainable business
• Telstra prepares reports for the ACCC on current cost and historic cost key financial statements in respect of 'core' interconnect services
• Telstra's reports be disclosed by the ACCC with an accompanying assessment statement by the ACCC
• The ACCC publishes an "imputation" analysis (based on information provided by Telstra, which assumes that Telstra purchases the "core" interconnect services at the price that it charges external access seekers)
• Telstra prepares reports for the ACCC on information comparing its actual performance in supplying "core" services to itself and to external access seekers in terms of key non-price terms and conditions
• The ACCC prepares and publishes a six-monthly report on competition in the corporate segment of the market.

The Ministerial Direction requires that Telstras initial reports under the CCA regime cover the two half years and full year of 2002-03. Those for the KPI measures and imputation testing are required for the first quarter of 2003-04. All the initial reports must be supplied to the ACCC no later than 30 November 2003. The ACCC is then required to publicly disclose much of the data provided in Telstra's reports with statements assessing the content of these reports by 31 December 2003.

Definitions

Core telecommunications services are:

• The declared domestic PSTN origination and termination services are used as inputs by access seekers primarily to supply long distance, fixed-to-mobile and mobile-to-fixed calls to end-users in Australia. They can also be used by other network operators to interconnect with Telstra's fixed network
• The ULLS involves the use of unconditioned cable (typically copper) between end-users and a telephone exchange, where the line terminates. This service enables access seekers to supply advanced, high-speed data services, such as xDSL (digital subscriber line), to customers as well as local and long-distance voice services in competition with Telstra
• The LCS is a service for carriage of telephone calls from customer equipment at an end-user's premises to separately located customer equipment of an end-user in the same standard zone. It allows access seekers to provide local calls on a resale or wholesale basis in competition with Telstra.

Non-price terms and conditions are terms and conditions relating to faults or maintenance; ordering or provisioning; availability or performance; billing or notifications; and such other matters that the ACCC considers to have a material effect on Telstra's performance in relation to the supply of services to its retail arm vis-à-vis external access seekers.

RAF means the Telecommunications Industry Regulatory Accounting Framework (Record-keeping rules) made by the ACCC under section 151BU of the Act as in force or existing from time to time.