ACCC issues report on Telstra's compliance with its price controls

The Australian Competition and Consumer Commission today issued its annual assessment of Telstra's compliance with the price control arrangements.

This is the second report prepared under the Government's latest price control arrangements which apply for the years 2002-03 to 2004-05.

"The ACCC is satisfied that Telstra has adequately complied with its price control arrangements", ACCC Chairman, Mr Graeme Samuel, said.

"The ACCC is concerned, however, that changes in Telstra's pricing of services to pensioner customers has permitted further increases in line rental prices. The ACCC considers that this practice by Telstra is inconsistent with the structure and objectives of the price control arrangements".

The report can be obtained from the ACCC's website, ACCC offices or by calling 1300 302 502.

Background

Price controls

The Government determines the price control arrangements and the ACCC's role is to assess the adequacy of Telstra's compliance with them. Price controls on Telstra were first introduced in 1989. Since then, the Government has commissioned periodic reviews, the most recent changes being introduced from 1 July 2002. Under the arrangements, the ACCC is responsible for developing a methodology by which to measure price changes, assessing the accuracy and completeness of Telstra's report and providing an annual report to the Minister on Telstra's compliance.

The current price control arrangements include separate price caps on three baskets of services:

• the first basket comprises local calls, trunk calls and international calls, which has a cap of CPI - 4.5 per cent
• the second basket comprises line rentals, which has a cap of CPI + 4 per cent, and
• the third basket comprises connection services, which has a cap of CPI - 0. 
   

These caps apply to the weighted average prices of the services in the baskets as supplied to all Telstra's retail customers. Carry-over of the unused component of a cap is permitted from one year to the next and from the previous price control arrangements. This means that the prices of services supplied to groups of customers may exceed the level of the caps and that the overall average price increase for a basket in a given year may exceed the value of the cap.

The price control arrangements also require untimed local call charges to be broadly similar for both metropolitan and non-metropolitan consumers and for Telstra to comply with a number of other specific pricing and notification requirements.

Changes to pricing of services to pensioner customers—Effect on line rental pricing

In March 2003 Telstra altered its customer terms so that all discounts given to pensioner customers, including those that are given as a result of call charges being incurred, are wholly offset against line rental charges.

A consequence of Telstra reporting reduced line rental revenues in this way is that it allows Telstra to further increase its line rental charges. This is because the price cap on line rental charges operates on average prices charged.

To illustrate, in June 2004 pensioner customers on Homeline Complete would face Telstra charges of $23.95 per month before making any calls—that is, for rental of the line only. Should these customers make calls within the month to a notional value of $9.25, they would still face Telstra charges of $23.95 per month—that is, these calls would generate no incremental revenues. Telstra however reports on the basis that such a customer has paid $9.25 for calls and $14.70 for line rental. By reporting that such a customer has paid $14.70 rather than $23.95 for line rental, Telstra reduces its average reported line rental charge and effectively increases the amount it can charge for line rentals and stay within the price cap.