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Telstra's copper pricing cuts to remain: Federal Court

The Australian Federal Court has handed down its decision in Telstra’s proceedings against the Australian Competition and Consumer Commission (ACCC)’s final access determination (FAD) on wholesale copper pricing, with the judgment reaffirming the regulator’s decision.

The ACCC’s FAD, published in October last year, cut the prices that the telecommunications giant can charge wholesale customers for use of its legacy copper network during the transition to the NBN by 9.4 percent.

“Telstra has failed to show that the ACCC committed any reviewable error in the course which it took, ” Foster J said.

“At best, the grounds of review advanced by Telstra rise no higher than impermissible review of the merits of the ACCC’s decision and impermissible attacks on methodologies employed by the ACCC which were plainly open to it.

“I propose to dismiss Telstra’s application for judicial review.”

Under Justice Foster’s decision, Telstra must also pay the costs of the ACCC. If the other respondents, including TPG and Optus, wish to seek costs from Telstra, they must make their applications by April 4.

“All of Telstra’s grounds of review address the same essential issue … that part of the ACCC’s decision which removed from the calculation of the allowable revenue under the BBM [building block material] such of the increased unit costs of supplying the declared services as resulted from NBN-induced under-utilisation or redundancy of assets,” Foster J added.

“It was open to the ACCC to excise these particular costs from the calculation of revenue under the BBM.”

The court’s judgment was handed down more than a year after arguments were made by Telstra, TPG, Optus, and the ACCC during the hearing in early March last year.

During the trial, Telstra had argued that the ACCC’s decision to slash wholesale prices will prevent it from recovering “substantial” depreciation and maintenance costs associated with the copper network.

During the first six months of the current financial year, Telstra said the FAD, along with the ACCC’s mobile terminating access service (MTAS) decision, impacted Telstra’s income by AU$400 million. Telstra’s overall net profit of AU$1.8 billion was down by 11.8 percent for the half year.

“There will be a degradation of the economies of scale, a lessening in the economies of scale, and therefore a rising of costs,” Archibald, counsel for Telstra, said last year.

The telco had evaluated its copper to have a useful life out until 2022 without the NBN; however, with NBN now stretching its use far beyond that — after deciding to connect the highest percentage of premises with fibre to the node, fibre to the basement, and fibre to the distribution point, all of which utilise the copper line — and compounded by the conflicting use-by dates for the copper, Telstra has been precluded from recovering the investments it made in the copper line once its own 2022 timeline has lapsed.

This “NBN effect” was not considered by the ACCC, Telstra argued.

“Far from accepting the reality of the impact of the NBN, the commission ignores it. The commission says we’re going to ascribe to these copper cables the useful life, extending it then by a number of years after 2022,” Archibald said.

“They [copper cables] remain in the regulated asset base, they attract an annual depreciation, but that depreciation is calculated not on a seven-year life — 2015 to 2022 — but say a 20-year life. Therefore, the depreciation is less than that which is [associated] with looking after the true useful life of the asset … the dollars associated with it are very significant.

“What it means is that Telstra is precluded from recovering, during the current regulatory period with the new determination, the extent of depreciation that is a proper affliction of the remaining asset line of the copper cable. Thereafter, as of 2022, there will be substantial unrecouped depreciation that will never be recovered.

“It will never get back its costs of efficient investment in this copper cable.”

While Telstra conceded that “there’s no compulsion of the fixed principles” for the ACCC when making a FAD, it said the principles should still be used as the steps taken to make a determination.

“The function of the principles in light of the statutory provision and in light of the explanatory memorandum is to establish a principle which will be enduring and which will be observant,” Archibald said.

“The function of the principles in substance, in our contention, is to free the commission from the burden of revisiting the subject matter.”

During the hearing, TPG and Optus had argued that the regulator ignored neither its own principles nor the impact of NBN in making its wholesale fixed-line pricing decision.

The rival telecommunications providers argued in court that none of Telstra’s suggestions on how the ACCC should have made its pricing decision are backed up by statute, and that it had been Telstra’s decision in the first place to enter a AU$11 billion definitive agreement (DA) to sell off its copper network to NBN.

Optus added that the ACCC had in fact directly addressed the NBN in its pricing considerations.

Optus and TPG joined the regulator’s court case against Telstra at the end of 2015, having agreed with the ACCC’s draft decision in June. The Competitive Carriers Coalition (CCC), formed by Australia’s non-dominant telcos, also subsequently joined the case.

Despite being the first respondent to the case, the ACCC did not make any arguments of its own during the hearing, simply saying that it backed the statements of TPG, Optus, and the CCC.

Telstra had first spoken out against the draft decision in July 2015, accusing the ACCC of misrepresenting its DAs with NBN. The telco said the amount detailed in the revised agreement related to “a loss of future revenue after services are disconnected from the copper network, not the cost of maintaining our network for those customers who remain on it as the NBN is rolled out”.

Telstra then argued in October of that year that it should conversely be permitted to increase its wholesale fixed-line prices, because it will lose the economies of scale and face higher costs to maintain its network as it progressively hands over ownership to NBN.

Telstra said the reduced costs to be paid by retailers for use of its copper network would fall well below the company’s actual costs of maintaining it. The telco added that the “decision has some serious flaws, and contradicts the ACCC’s own principle of full cost recovery”.

Optus and TPG had previously stated that the fixed-line pricing allows for the “significant” over-recovery of costs under the NBN DAs.

The new prices came into effect on November 1, 2015, and will remain in place until June 30, 2019.

(via PCMag)