ACCC issues decisions on ULLS and LSS undertakings

The Australian Competition and Consumer Commission today issued its final decision on Telstra's Unconditioned Local Loop Service (ULLS) and Line Sharing Service (LSS) monthly charges undertakings, and its draft decision on Telstra's ULLS and LSS connection charges undertakings.

The two services allow access to use the most basic elements of Telstra's customer access (copper) network. They are considered key inputs into the development of infrastructure-based competition in Australian telecommunications and can be used by all telecommunications companies to provide a wide range of services to end users.

"The ACCC's final decision is to reject Telstra's monthly charges undertakings for the ULLS and the LSS", ACCC Chairman, Mr Graeme Samuel, said today.

"The ACCC has also reached a draft decision to reject Telstra's ULLS and LSS connection charge undertakings. The ACCC is not satisfied, at this stage, that the terms and conditions of those undertakings are reasonable".

The background note (below) provides further details on the ACCC's undertaking decisions.

In assessing Telstra's undertakings, the ACCC needs to have regard to specific statutory tests which require it to ensure Telstra can recover its costs and take account of the legitimate commercial interests of Telstra and access seekers. This is in addition to promoting competition and efficient investment objectives.

Consistent with this, both the ACCC and Telstra agree that the ULLS monthly rates should contain two cost elements – the cost of the copper lines themselves and a component to recover certain IT and system costs associated with Telstra's obligation to provide the ULLS.

One component, the cost of the copper lines, is conservatively estimated to be in excess of $3 billion per year. The other component, the ULLS-specific costs, amount to less than $5 million per year. The ACCC largely accepts the appropriateness of these costs.

However, the ACCC has formed the view that the monthly access charges proposed by Telstra are higher than what is required to recover these costs in full. The key issue in dispute revolves around the way the $5 million in costs should be recovered. The ACCC considers Telstra's approach – recovering them over too few services – leads to unreasonably high charges distorting competition and investment outcomes.

"The undertaking assessment process only involves a decision on whether the prices proposed in Telstra's undertakings are reasonable. In the absence of approved undertakings, specific charges are expected to be set through negotiations or ultimately through arbitrations if no agreement can be reached", Mr Samuel said.

At the present time, the ACCC is considering three arbitrations relating to ULLS and LSS charges, including two which specifically deal with monthly rates. The decision today on these undertakings does not deal with these arbitrations.

The ACCC has accordingly not made any decision to set or determine ULLS or LSS charges.

Separate to the undertaking process, the Government has now decided to make explicit Telstra's retail price parity obligations and has asked the ACCC to provide advice about the impact of this policy on the approach that should be taken to ULLS pricing. More particularly, the ACCC will report to Government on the compatibility of ULLS pricing with the Government's policy on retail pricing parity.

The ACCC is also separately beginning a major inquiry into the regulation of fixed network services, which primarily results from the need to review the current declaration of the ULLS and PSTN (and related) access services in 2006. However, the ACCC will also use this opportunity to look more broadly into the regulation of fixed networks (see A.C.C.C. Initiates Broad Ranging Strategic Review Of Fixed Network Services, MR 324/05).

Background

Monthly rate undertakings for ULLS and LSS

In its assessment of Telstra's ULLS and LSS undertakings, the ACCC is of the view that Telstra's proposed monthly charges are not reasonable.

On the basis of revised demand estimates provided by Telstra, and using Telstra's own preferred cost recovery approach for service-specific costs, reasonable prices for the monthly access charges for both services should still be lower (around 13 per cent lower, on average, for the ULLS in the main city-metro areas) in the current period than those previously considered by the ACCC and proposed in the undertakings.

If the ACCC were to apply a different method of cost recovery for ULLS and LSS specific costs, to recover them over a broader service base, the appropriate charges would be significantly below those proposed by Telstra. Further, the ACCC considers that Telstra's preference for additional surcharges on monthly ULLS and LSS prices, cannot be justified.

In its undertaking assessment process, the ACCC does not need to form a view on whether monthly charges should be geographically averaged or de-averaged.

Connection/disconnection charges undertakings for ULLS and LSS

The ACCC's preliminary view on the connection charge undertakings is that the ULLS connection charges proposed by Telstra appear reasonable for connections of new ULLS lines on a one-off or single event basis.

However, they appear unreasonably high for connections involving the one-off transfer of an existing ULL service.

Telstra's proposed charges for ULLS connections is a 'one size fits all' approach and does not make any distinctions between different connection types. The ACCC for its part is limited to either accepting or rejecting the undertaking and cannot approve an undertaking on a conditional basis.

The ACCC has also reached a preliminary view that Telstra's proposed LSS connection charges are excessive for all LSS connections and disconnections. Further, the ACCC considers that it is inappropriate in many cases for a separate disconnection charge to be levied.

The ACCC is also concerned that neither connection charge undertaking provides sufficient certainty to access seekers on what charges will be levied for mass service migrations, where large numbers of transfers take place at a time. As drafted, the undertakings could potentially be used by Telstra to apply indiscriminately to all connections, whether of a single event or mass migration nature.

Copies of the ACCC's final report on the monthly charge undertakings, the ACCC's draft report on the connection charge undertakings, and other relevant documents (including the undertakings, Telstra's supporting submissions and other material) will be available on the ACCC website.

The ACCC seeks submissions by interested parties on its draft view on Telstra's connection charge undertakings by no later than 3 February 2006.