ACCC rejects Telstra's undertakings for fixed interconnection and local call resale services: Sets indicative prices

The Australian Competition and Consumer Commission today made two decisions on related matters regarding fixed interconnection, local call resale and wholesale line rental.  The ACCC issued its final decision to reject Telstra's undertakings for fixed interconnection (PSTN) and local call resale (LCS) services and has released indicative prices for fixed interconnection, local call resale and wholesale line rental services.

Telstra's Undertaking for Fixed Interconnection and Local Call Resale

Telstra's proposed undertaking prices would involve a substantial reduction in the headline local call resale prices and a substantial increase in the headline fixed interconnection prices.

"The ACCC is not satisfied that Telstra's proposed prices, which have been presented to the ACCC as a package, are reasonable", ACCC Chairman, Mr Graeme Samuel, said today.

"Telstra's proposed pricing approach for the fixed interconnection and the local call resale services would represent a fundamental shift in the competitive dynamics in the fixed line services markets.  Telstra's proposed pricing would significantly disadvantage facilities based access seekers".

The ACCC also continues to have concerns as to whether Telstra's proposed network cost estimates, which rely on its PIE II cost model, are reasonable.  On the material available to the ACCC to date, the ACCC is not satisfied that Telstra's proposed charges were based on reasonable estimates of efficient costs.

Indicative Prices for Fixed Interconnection, Local Call Resale and Wholesale Line Rental Services

The ACCC also released its final determination on pricing principles for fixed interconnection and local call resale services, as well as for the wholesale line rental service.  Associated with the pricing principles, the ACCC also issued indicative prices for all three services.  The principles and indicative prices will operate up to 31 December 2007.

With the rejection of Telstra's undertakings, the price of access to the fixed interconnection, local call resale and wholesale line rental services will continue to be subject to agreement between Telstra and its wholesale customers.  Where commercial agreement is unable to be reached, it will be subject to arbitral determination by the ACCC.  The ACCC's pricing principles and indicative prices for the three services are used as a guide in any such arbitrations.

Consistent with the draft issued by the ACCC on 28 July 2006, the ACCC has determined a cost-based (TSLRIC+*) approach to the pricing of the fixed interconnection and maintained a retail minus retail cost approach for the local call resale and wholesale line rental. 

"The ACCC's approach in applying a retail minus approach to both these services is to ensure that regulated pricing is explicit, transparent and, most importantly, competitively neutral", Mr Samuel said.

The ACCC notes that indicative access prices set out in a determination are non-binding on parties to arbitrations or undertaking assessments.

"The purpose of the determination is to provide guidance to industry on prices that are likely to guide the ACCC when considering an access dispute for these services".

The ACCC, however considers that any indicative prices relating to the pricing of LCS and WLR for 2006-07 will be transitional in nature. They will stay in place while the ACCC undertakes more detailed analysis on assessing efficient LCS and WLR costs and prices using appropriate costing models.

Copies of the ACCC's final reports and other documentation relevant to the access undertakings and pricing principles and indicative prices (including the undertakings, Telstra's supporting submissions and other material) will be available on the ACCC website.

Background

Fixed line interconnection (PSTN OTA) services are, in general, used as inputs by competitors primarily to supply long distance calls as well as fixed-to-mobile and mobile-to-fixed calls.  They can also be used by competitors to interconnect with Telstra's fixed network.

The local call resale services (LCS) is used by competitors to supply local calls to end users.  It allows competitive entrants to resell local calls without deploying substantial alternative infrastructure.

Undertakings

On 22 March 2006 Telstra lodged access undertakings specifying price-related terms and conditions upon which it undertakes to meet its standard access obligations to supply the PSTN OTA and the LCS.

Telstra's proposed 'headline' charges are as follows:

Telstra's proposed undertaking prices involve a substantial reduction in the headline local call resale prices and a substantial increase in the headline fixed interconnection prices. 

On 17 July 2002, the ACCC exempted Telstra under section 152AT of the Act with respect to the supply of local call resale in the CBD areas of Sydney, Melbourne, Brisbane, Adelaide and Perth to take effect on 17 July 2003.  

Pricing Principles and Indicative Prices

On 28 July 2006 the ACCC released its Local services review—final decision. The ACCC decided to re-declare the local call resale and explicitly regulate wholesale line rental (by declaring the service).  The ACCC also published its draft determination on pricing principles and indicative prices for both services at this time.  In Declaration inquiry for the ULLS, PSTN OTA and CLLS—final determination, the ACCC decided to declare the ULLS and fixed interconnection and published its draft determination on pricing principles and indicative prices for fixed interconnection. The ACCC invited submissions on the draft pricing principles and indicative prices set out in both decisions.

 The ACCC price-related terms and conditions for fixed interconnection, local call resale and wholesale line rental are as follows:

• for fixed interconnection a headline rate of 1c
• for local call resale 17.92c per local call
• for wholesale line rental indicative price of $23.12 for HomeLine Part and $25.84 for BusinessLine Part.

Prior to declaration of wholesale line rental, the ACCC pricing principles for the local call resale has imputed the retail costs of line rental as a discount to local calls. With declaration of wholesale line rental and the development of pricing principles and indicative prices for the key fixed-line services of fixed interconnection, local call resale and wholesale line rental, the need for discounts has disappeared. On this basis, the ACCC has been able to set indicative prices to more effectively promote efficient telecommunications investment and consumption decisions - which will promote more positive consumer outcomes.

*TSLRIC+ is the forward-looking estimate of total incremental costs associated with the provision of a service. The "plus" refers to an adjustment that is allowed to recover common costs.