Telstra’s unconditioned local loop service (ULLS) and line sharing service (LSS) undertakings.
On 21 December 2005 the ACCC 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 ACCC’s final decision was to reject Telstra’s monthly charges undertakings for the ULLS and the LSS. The ACCC also reached a draft decision to reject Telstra’s ULLS and LSS connection charge undertakings. The ACCC was not satisfied that the terms and conditions of those undertakings were reasonable.
The ACCC formed the view that the monthly access charges proposed by Telstra are higher than what is required to recover these costs in full, and that the method of cost recovery leads to unreasonably high charges distorting competition and investment outcomes.
Telstra withdrew the ULLS connection charge undertaking it had provided to the ACCC on 13 December 2004. The ACCC had issued a draft decision to reject that undertaking. It will now not be able to make a final decision on that undertaking.
Telstra has not withdrawn its line sharing service (LSS) connection and disconnection charge undertaking. The ACCC accordingly continues to seek submissions on its recently issued draft decision on Telstra's connection and disconnection undertakings for the LSS.
On 23 December Telstra submitted another monthly charges undertaking in relation to the ULLS.
The ULLS is a service for access to unconditioned cable, usually a copper wire pair, between a telephone exchange and an end user's home or office. The ULLS essentially gives an access seeker the use of the copper pair without any dial tone or carriage service. This allows the access seeker to use its own equipment in an exchange to provide a range of services, including traditional voice services and high speed internet access, to the end-user.
Telstra's undertakings specify terms and conditions on which Telstra undertakes to supply the ULLS to access seekers. The undertakings propose a uniform geographically-averaged price of $30 a month for the ULLS.
The ACCC made public Telstra's latest ULLS monthly charge access undertaking on 16 January 2006. The ACCC intends to release a discussion paper on this undertaking early in 2006.
Vodafone MTAS undertaking draft decision
On 22 December 2005 the ACCC announced its draft decision to reject the access undertaking submitted by Vodafone on the supply of the mobile terminating access service on its second generation GSM network.
The undertaking proposed price and non-price terms under which Vodafone offered to supply the MTAS, declared by the ACCC in June 2004.
The ACCC rejected this undertaking because it considers that the terms and conditions contained within it are not reasonable.
The ACCC was concerned with methodological and empirical aspects underpinning Vodafone’s proposed prices, in addition to some of the specific requirements on fixed-network operators to pass-through changes in the MTAS price to end-users making fixed-to-mobile calls. The ACCC was also concerned that some of the non-price terms and conditions contained in the undertaking empower Vodafone beyond what might be considered necessary to protect its legitimate business interests.
Fixed-line services access disputes
In the December quarter the ACCC received notification of two separate access disputes relating to the supply of the unconditioned local loop service (ULLS) by Telstra.
An access dispute was notified by Optus concerning the connection, monthly rental and other charges for the supply of the ULLS by Telstra.
The first access dispute notified by Chime/iiNet also relates to various price and non-price terms of supply of the ULLS from Telstra to Chime.
Chime notified the ACCC of two other access disputes. The second access dispute relates to various price and non-price terms of supply of the LSS from Telstra to Chime. The third access dispute relates to the connection and annual charges for the supply of the domestic transmission capacity service from Telstra to Chime.
Mobile terminating access service—dispute notification
Five telecommunications access disputes were notified to the ACCC in December and January, under Part XIC of the Trade Practices Act.
Telstra Corporation Limited has notified the ACCC of three access disputes, one with Hutchison Telecommunications (Australia) Ltd (HTAL) and the other with Hutchison 3G Australia Pty Ltd (H3GA). These two access disputes relate to the price paid by Telstra for the domestic mobile terminating access service supplied by HTAL and H3GA.
Telstra also notified the ACCC of an access dispute with Optus over the price paid by Telstra for the domestic mobile terminating access service (MTAS) supplied by Optus by means of its mobile networks for 2006.
In addition, HTAL and H3GA have each notified the ACCC of an access dispute with Vodafone Network Pty Ltd.
Both of these disputes relate to the price paid by Vodafone for the domestic mobile terminating access service supplied by HTAL and H3GA.
The ACCC has begun the arbitration processes for these access disputes.
Given that the legislation contemplates that arbitrations be conducted in private, the ACCC will not be making any public comment at this stage.
The domestic mobile terminating access service is a wholesale input, used by providers of fixed-to-mobile and mobile-to-mobile calls, to allow their customers to call mobile phone users. It allows consumers (either fixed-line or mobile) to call mobile users connected to another network. The carrier whose customer initiates the call pays the carrier whose customer receives the call for the mobile terminating access service.
The ACCC is vested with arbitration powers enabling it to make directions and 'do all things necessary for the speedy hearing and determination of an access dispute'. For the ACCC to engage in arbitration, an access seeker and/or access provider must notify the ACCC of an access dispute. The ACCC may arbitrate an access dispute only if:
a declared service is supplied or proposed to be supplied by a carrier or carriage service provider
one or more standard access obligations apply or will apply to the carrier or carriage provider in relation to the declared service and
an access seeker is unable to agree with the carrier or carriage service provider regarding the terms and conditions on which the carrier or carriage service provider is to comply with the standard access obligations.
If a dispute cannot be resolved after private negotiations, mediation and/or conciliation, either of the access parties may refer the matter to the ACCC. Arbitration by the ACCC would be considered as a final solution for the parties in dispute. When the ACCC is notified of an access dispute the ACCC must determine the matter, unless it decides to terminate the arbitration or the notification is otherwise withdrawn.
Telstra accounting separation report for September quarter 2005
In December 2005 the ACCC issued its ninth imputation testing and non-price terms and conditions report under the enhanced accounting separation regime for Telstra.
The report presents key performance indicators that compare particular aspects of Telstra’s customer support services when supplied to wholesale and retail customers. ADSL-related performance indicators are being reported for the first time, in addition to basic access performance indicators.
The report also presents an imputation analysis that compares Telstra’s retail prices with the prices of three core telecommunications access services. The analysis is designed to reveal whether there are sufficient margins between Telstra's retail prices and the prices it charges other service providers to use the core services (plus related costs) to allow efficient firms to compete at the retail level. The analysis is not intended to detect all forms of potentially anti-competitive conduct.
The three core access services are:
the local carriage service
the PSTN originating and terminating access service
the unconditioned local loop service—the ULLS allows a competitor to lease the use of the customer's line to supply any combination of access, voice, ADSL or other data services.
Key findings for this quarter were:
for fixed-line voice services margins improved slightly, although negative imputed margins were again reported for local services (line rental and local calls combined)
there was a clear positive margin across the bundle of fixed telephony services
for services supplied over the unconditioned local loop core service (ULLS) margins improved, although they remain negative except when the ULL is used to supply a bundle of ADSL and voice services to business customers
little overall change in Telstra’s performance against the key performance indicators and in the reported imputed margins for the September quarter.
Fifth Telstra accounting separation current cost reports
On 13 December 2005 the ACCC issued the fifth current cost accounting separation report relating to Telstra.
The report is intended to provide greater transparency of Telstra’s operations to ensure that it does not unfairly discriminate between access seekers using its network services and its own retail operations.
The report contains current cost financial information for ‘core’ telecommunications access services. The report provides present-day valuations of Telstra’s assets that are compared with the historical or original cost of these assets. The report also includes profit and loss and capital employed statements prepared on a current cost basis.
The pending operational separation arrangements for Telstra may have implications for the necessity to report Telstra’s financial data in this way, or the form that any future reporting may take.
The ACCC has therefore recently agreed to a Telstra request for a six-month deferral of a complete implementation of current cost asset valuations.
Review of fixed-line telecommunications services
On 21 December 2005 the ACCC announced an inquiry to examine the future regulation of certain key fixed network and wholesale services and issued a discussion paper seeking industry and public views.
The inquiry has primarily resulted from the continuing need to review several existing declarations of certain fixed services, as required by the Trade Practices Act. These reviews must be completed during 2006.
However, the ACCC also intends to look at the broader question of whether regulation of certain fixed services is required, including what combination of services may still need to be regulated, in light of emerging market, technological and network developments.
The adoption of such a broad inquiry departs somewhat from the ACCC’s traditional approach of reviewing declarations individually. However, there is currently before the ACCC a range of related issues which, taken together, strongly suggest that the assessment of the need and form of regulation are best undertaken jointly.
These current and emerging developments are:
the pending expiry of declarations of a number of key network services: in particular the ULLS; the domestic PSTN originating and terminating access (domestic PSTN OTA) services; and the local carriage service (LCS)
Telstra’s announcements in November 2005 of its plans to introduce an IP core network, including plans to deploy ‘fibre-to-the-node’ (FTTN) covering some four million addresses (however, on 21 December Telstra indicated that these plans had been put on hold)
the evolution of potential substitute technologies such as new generation mobile and other wireless services and their effect on the sustainability of the existing fixed customer access bottleneck
continuing competition concerns surrounding the wholesale supply of certain currently non-declared services such as wholesale line rental (WLR) service, and various forms of wholesale digital subscriber line (DSL) services.
The initial consultation process concludes on 17 February 2006.
ACCC issues consultation notice to Telstra over wholesale line rental increase
On 22 December 2005 the ACCC issued a consultation notice on Telstra’s decision to increase the price for line rental that it charges to its wholesale customers.
The potential competition concerns arise from Telstra’s recent introduction of changes to the Home Access rate plan to its wholesale customers and HomeLine Part rate plan to its retail customers. The ACCC received a number of complaints from Telstra’s wholesale customers stating that the prices offered by Telstra for the line rental component of the majority of its retail fixed-line services are below Telstra’s prices for the line rental component of its wholesale Home Access service.
The ACCC is concerned that Telstra’s conduct raises the costs of its competitors in the retail fixed services market and substantially hinders their ability to compete for the supply of fixed-line services to consumers.
The issue of the consultation notice does not necessarily mean that the ACCC will ultimately issue a competition notice. The ACCC will consider all relevant submissions put to it and several other factors before determining whether to issue a competition notice.
Snapshot of broadband deployment—September 2005 quarter
The take-up of broadband services has passed 2.5 million, according to the latest ACCC snapshot of broadband deployment.
The report shows that at the end of September 2005 there were 2 593 600 broadband services connected across Australia. As with the results of the previous quarter, this is an increase of more than one million customers, or 98 per cent, over the preceding 12-month period. This outcome continues the growth of broadband take-up that was stimulated by a more competitive broadband market that emerged during 2004–05.
Total quarterly growth in broadband was 19 per cent for the September 2005 quarter. This is broadly in line with the June 2005 growth (18.4 per cent).
The take-up of ADSL services continues to outstrip other broadband technologies, however, the take-up of satellite broadband services is also growing steadily.
The report details the deployment of broadband services throughout Australia at 30 September 2005 and is based on data provided by major carriers of broadband services. The report includes aggregated data on the availability of broadband services and gives estimated numbers of services in operation for cable, satellite, ADSL, other DSL and miscellaneous offerings (including additional wireless figures). It should be noted, however, that not all broadband providers are included in this survey and therefore the ACCC considers that the figures may understate total subscriber numbers. The ACCC is currently also working to resolve some outstanding data issues to enhance the integrity of the data.
Main findings were:
at 30 September 2005 total broadband take-up was 2 593 600.
broadband take-up has increased by 1 282 500 or 98 per cent, from the September 2004 figure of 1 311 100.
the take-up of ADSL services is now at 1 895 400.
AER
Regulatory accounting methodologies
There are two accounting approaches to finding the point in time when capex is included in a transmission network service provider’s (TNSP’s) regulatory asset base:
the ‘as-incurred’ approach with the record of capital expenditure in any one year being based on expenditure in that year
the ‘as-commissioned’ approach where the record of capital of expenditure depends on whether the asset related to that expenditure has been commissioned.
TNSPs in the national electricity market (NEM) have adopted different regulatory accounting methods. The choice of accounting approach affects the compilation of regulatory accounts. More importantly it also affects the calculation of allowed revenues during the regulatory control period; and the method for establishing the closing regulatory asset base at the end of the regulatory period. As a result of this, the choice of accounting methodology is a significant input underpinning the operation of the AER’s regulatory regime.
The AER’s statement of regulatory principles (SRP) does not currently provide any guidance on this issue. Given the revised regulatory arrangements under the SRP, the AER released a position paper inviting comments from interested parties on the two accounting methodologies in terms of the:
compatibility of each accounting approach to the ex-ante incentive arrangements
administrative complexity
consistency of comparing expenditure across the TNSPs.
The AER’s preliminary position based on an examination of the issues identified in the paper is to favour an ‘as-incurred’ accounting approach that should be applied by all TNSP’s in the NEM.
The majority of submissions received in response to the position paper supported the adoption of the as-incurred approach to be applied by all TNSP’s. However, a number of submissions supported the adoption of a modified as-incurred methodology, where the depreciation of capex is only recognised when assets are commissioned. These submissions also stated that assets should only begin to be depreciated when an asset is commissioned as this is consistent with accounting standards. Further, submissions stated that any requirement to depreciate assets on an as-incurred basis would be administratively onerous.
The AER expects to make a decision on this matter in early 2006.
Pass-throughs and revenue-cap re-openers—position paper
In December 2005 the AER released a position paper inviting comments from interested parties on approaches under the national electricity rules in relation to varying a transmission network service provider’s (TNSP’s) revenue cap allowance within a regulatory period in response to exogenous events.
The paper seeks comment about the practice, adopted for the recent TransGrid and EnergyAustralia revenue resets, of providing TNSPs with detailed pass-through rules that specify the type of events that qualify for, and the mechanism by which a service provider can apply for, a revenue cap adjustment. In the position paper, the AER indicates a preference for replacing the revenue cap re-opener provisions specified in the Statement of Regulatory Principles with detailed pass-through arrangements.
The AER understands that the AEMC will be releasing its proposed amendments to chapter 6 of the NER in early February 2006 and that these proposals are likely to address the issues of re-openers and pass-throughs. The AER, in finalising its position, will reflect the regulatory framework proposed by the AEMC and will make necessary amendments. Submissions from interested stakeholders are due by 24 February 2006. The AER hopes to release a final determination on the issues raised in this paper in April 2006.
AER submission to MCE’s expert panel review
On 22 December 2005 the AER made a submission to the MCE’s expert panel review of revenue and network pricing across the energy market. The AER made the following comments on the main issues raised by the panel:
While the AER believes that there are advantages in implementing a common regulatory approach across electricity and gas, and transmission and distribution, such an approach must be flexible enough to accommodate the differences between the sectors, particularly for gas transmission for which a different regulatory approach may be appropriate.
The AER believes the current regulatory frameworks set out in the national electricity rules and the gas code largely reflect an appropriate balance between prescription and discretion, and that they deliver the certainty associated with a more prescriptive regulatory approach without the risks. Over-prescription may result in insufficient flexibility for the regulator to accommodate the circumstances of changing market or individual businesses, or the benefits of evolving theory and practice as well as potentially increase regulatory costs to both the regulator and market participants.
The AER considers that a propose–respond model already effectively operates in electricity and gas regulation but believes the model used in gas is deficient in that it discourages consistency across decisions and increases the complexity of regulatory processes for all parties. In addition it may not deliver optimal outcomes for the market and might encourage regulatory gaming.
The AER considers the current 12-month decision-making process appropriate for transmission pricing reviews, but will continually seek opportunities to streamline its regulatory processes.
The AER would caution against rigidly specifying the detail of regulatory processes in laws or rules as this would considerably reduce flexibility to respond to issues as they arise during a regulatory reset and may compromise the quality of decisions.
AER submission to the MCE consultation paper on a national framework for energy distribution and retail regulation
The MCE has agreed to transfer economic regulation of distribution networks to a national regime by 1 January 2007. Enabling legislation for the transfer of specified retail and distribution functions to national regulatory arrangements is scheduled for development by the end of 2006.
In January 2006 the AER made a submission to the Ministerial Council on Energy's (MCE) consultation paper ‘Public consultation on a national framework for energy distribution and retail regulation’.
The AER's submission discusses consistency in price regulation arrangements across gas and electricity, and across transmission and distribution. It also considers service standard incentives, and notes that service performance incentive mechanisms are a necessary component of incentive-based economic regulation and should be incorporated into the national regulatory framework. The AER's submission also considers the consultation paper's proposal for governments to issue mandatory directions to the AER on certain matters. The submission suggests that any jurisdiction-specific arrangements that are established should be subject to some form of oversight.
The AER continues to publish weekly market reports that set out the spot price for each 30-minute trading interval in each region of the National Electricity Market. These reports highlight instances where wholesale market prices are more than three times the weekly average. The analysis involves comparing the demand and price forecasts published by NEMMCO four and twelve hours ahead of dispatch with actual outcomes and providing the most probable reasons for significant variations between actual and forecast prices. These reports are available on the AER website www.aer.gov.au.
Four pricing reports, describing the circumstances that led to the 30-minute trading price exceeding $5000/MWh were also published. These reports cover the events of 31 October, 30 November, 7 December and 9–10 December 2005.
Investigations into the events of 31 October 2005 in New South Wales are continuing.
ACCC energy activities
Central Ranges pipeline—final decision
On 7 December 2005 the ACCC issued its final decision to approve an amended access arrangement proposed by Central Ranges Pipeline Pty Ltd for its planned transmission pipeline in the Central Ranges of NSW.
The ACCC was satisfied the amended access arrangement incorporated the amendments that it had identified when it issued its draft decision on 26 October 2005.
The ACCC is currently the regulator of the Central Ranges transmission pipeline under the national gas code. However, it is intended that this function will pass to the AER. In making this final decision, the ACCC has been assisted by advice from the AER.
The ACCC had earlier approved a competitive tender process for the pipeline which established key provisions, including the reference tariffs that may be charged until 2019.
Gas access arrangement process guideline
On 9 December 2005 the ACCC issued its access arrangement process guideline.
The guideline was developed to advise service providers and other interested parties on ACCC and AER processes to meet the access arrangement approval requirements of the gas code including arrangements to conclude approvals within the specified six-month time period.
The ACCC currently regulates natural gas transmission pipelines under the gas code. However, governments have agreed that this function will be undertaken by the AER, along with regulation of natural gas distribution pipelines. The ACCC was assisted by advice from the AER in developing the guideline.
Application by GasNet Australia under s. 8.21 of the national third party access code for natural gas pipeline systems
On 23 December 2005 GasNet lodged an application under section 8.21 of the gas code seeking the ACCC’s agreement that forecast capital expenditure (new facilities investment) in constructing the Corio Loop will meet the requirements of s. 8.16(a) of the gas code for roll-in to GasNet’s capital base. The effect of such an agreement would be to bind the ACCC’s decision when it considers revisions to GasNet’s access arrangement in 2007. This is the first application of this nature made to the ACCC.
GasNet is the owner-operator of the GasNet system (GNS), which is the primary transmission system for the delivery of gas throughout Victoria. VENCorp, the independent system operator of the GNS, identified in its annual planning review a major system capacity constraint facing the GNS in winter 2008, and recommended that GasNet undertake a major system augmentation to ensure that the GNS has sufficient usable system linepack to cover supply–demand imbalances at this time.
VENCorp identified a number of ways to achieve the required augmentation, and on the basis of cost–benefit analysis has recommended the extension of the southwest pipeline from Lara to Brooklyn (Corio Loop). The proposed project involves construction of a 57 km, 500 mm diameter pipeline, running from the Brooklyn compressor station for 12 km using an existing easement, and then along a greenfields route to meet the southwest pipeline in Lara. The total capital cost of the project is expected to be $70.7 million.
Interested parties have been invited to make submissions on any issues relevant to the application by GasNet and supporting information by Friday 10 February 2006. The ACCC will consider submissions received, and expects to release a draft decision in April 2006, and a final decision no later than June 2006.
Authorisations
Papua New Guinea gas project—draft determination
On 16 January 2006 the ACCC released its draft determination proposing to authorise the joint marketing in Australia of gas from the PNG gas project.
The project is a joint venture enterprise involving the production and sale of PNG gas to customers in Australia. The project is expected to begin gas sales into Australia in 2009 after a gas pipeline from PNG to Queensland is built.
Joint marketing means that the joint venture partners (ExxonMobil Group, Oil Search Group, the Mineral Resources Development Company Limited Group, and the Merlin Petroleum Company) can agree on common terms and conditions including the price at which they will offer the gas for sale to potential customers.
Such conduct could potentially breach the Trade Practices Act unless the parties involved can demonstrate there are sufficient public benefits to outweigh any anti-competitive detriment.
Public submissions supported the need for joint marketing arrangements so the project might begin production. However, concerns were raised about the applicants' proposal for the authorisation to apply for the life of the project (about 30 years) and to be extended to all future participants.
The ACCC considers that the project will generate substantial public benefits. However, it cannot be certain that the benefits will outweigh any potential anti-competitive detriment for a period as long as the life of the project. For reasons outlined in the draft determination, the ACCC proposes to grant authorisation for a period of 16 years and to extend authorisation to future participants who meet certain criteria.
The applicants demonstrated a willingness to address concerns raised in submissions about the possibility of commercially sensitive information being used in an anti-competitive manner.
They have agreed to establish ring fencing measures to restrict the transfer of commercially sensitive information obtained through the joint marketing conduct.
The ACCC invited interested parties to request a conference in accordance with s. 90A of the Act by 30 January 2006, or to provide written submissions by 6 February 2006 in response to the draft determination.
