ACCC expresses concern as Telstra further increases line rental charges

Telstra has today announced its intention to increase line rental charges from $17.50 to $19.90 per month (Goods and Services Tax-inclusive) from 1 September 2001, an increase of 13.7 per cent.

The Australian Competition and Consumer Commission has been requested by the Minister for Communications, Information Technology and the Arts, Senator Richard Alston, to provide advice on Telstra's proposal to increase line rental charges.

"This will be the third increase in Telstra's line rental charges since March 2000, representing an overall increase in these charges of 70 per cent in nominal terms over this time", ACCC Chairman, Professor Allan Fels, said today.

"The ACCC considers it notable that an enterprise as profitable and well performing as Telstra has not matched these substantial increases in line rental charges with more generous price falls in other products and services for customers. Given Telstra's very strong profits and its extremely high return on equity, averaging nearly 30 per cent a year over the last five years, this is unfortunate.

"Only firms with an exceptional degree of market power are able to achieve price rises of this magnitude in such a short period of time in the modern, generally more competitive Australian economy.

"The ACCC is not opposed to Telstra rebalancing its prices i.e. increasing rents while lowering other charges, notably local call charges, subject to certain safeguards concerning low income consumers. The ACCC sees some benefit in rebalancing provided the safeguards are observed.

"The ACCC will be examining Telstra's overall compliance with the Government's retail price control arrangements at the end of the financial year. These arrangements impose a number of price caps on Telstra products and services.

"The ACCC is required to assess Telstra's compliance with the Government's retail price control arrangements at the end of each financial year on an ex-post basis.

"The ACCC has made it clear in other regulated industries that where prices are capped by a CPI-based escalation, that escalation should be modified to take account of New Tax System changes, currently estimated by the Commonwealth Treasury (on annual basis) at 2.5 per cent. The ACCC believes Telstra is aware of this policy and the ACCC has been looking to Telstra to implement it in this instance.

"Telstra has today stated to the ACCC that in estimating Telstra’s scope for price adjustments, it is assuming that the ABS CPI is discounted (for price control purposes) to exclude the effect on the 2000/1 CPI of the introduction of the New Tax System", Professor Fels said.

"The ACCC is still assessing Telstra's arrangements to protect low-income consumers. Telstra is required to satisfy the ACCC that products or other arrangements will be available to ensure the average telephone bill of the lowest 10 per cent of residential customers do not increase in real terms. The ACCC will be making a determination on this issue in the near future.

"However the general rise is not subject to ACCC approval. It is permitted, providing it is within the price cap set by Government. The ACCC's role is limited to checking that the actual rise is within the Government's price cap. The ACCC must also approve the element of the rise relating to the lowest 10 per cent of residential customers".

Background

Section 18 of the Telstra Carrier Charges – Price Control Arrangements, Notification and Disallowance Determination No. 1 of 2001 (the Determination) sets out a requirement for Telstra to obtain the consent of the ACCC prior to altering its line rental pricing to the lowest-bill residential customers, when the proposed alteration would increase the line rental price by more than CPI.

Section 8 of the Determination describes the price capping arrangements that apply to the second basket of services, comprising the line rental and local call services. While these arrangements afford Telstra some ability to adjust its line rental pricing, there is a requirement that there is no real increase in the average telephone bill for lowest-bill residential customers.

The ACCC considers that the rebalancing between the price of access and the prices of calls is of benefit. Access prices (line rental charges) have been below the cost of provision, making it generally unviable for Telstra’s competitors to roll-out facilities to provide direct access for residential customers, even where such duplication of services would be economic from a general community perspective. Rebalancing should therefore lead to even more facilities-based competition.

Consequently, the ACCC considers allowing line rental charges to increase towards cost is likely to benefit end-users in the long run by facilitating the development of further competition, subject to appropriate safeguards especially with respect to the impact on low income consumers.

This is in the context, of course, of other Telstra prices falling to such a degree as to outweigh the line rental charges increase in the average impact on residential users and protection for those low-income consumers who would save less in lower call prices than the increase in line rental charges.