The price in question is for the Unconditioned Local Loop Service (ULLS) in metropolitan areas. Some 70 percent of the 10 million lines in Australia fall into this category and the price is crucial to the viability of companies that provide ADSL services from their own DSLAMs.
Telstra proposed the price of $30 in an access undertaking lodged in March 2008. The ACCC issued a draft decision rejecting it in November 2008. Telstra has now lodged an appeal against that rejection.
In June The ACCC set final indicative ULLS prices for 2008-09 and issued a discussion paper on Telstra’s ULLS undertaking. Prices, to apply from 1 July 2008 to 31 July 2009, were increased slightly over the ACCC’s previous determination. The CBD (band 1) indicative price rose from $6.20 to $6.60, metropolitan (band 2) from $14.30 to $16.00 and band 3 (regional) from $28.50 to $31.30. The ACCC said the increase reflected the rise in interest rates and input costs. No price was determined for band 4 (rural) as there had been no demand for this service.
At the core of Telstra's price proposal is its Telstra Efficient Access (TEA) pricing model which has been a source of great controversy between Telstra and the ACCC. In its appeal, Telstra accuses the ACCC of deliberately applying the model incorrectly so as to minimise the price of the ULLS.
In its submission it says: "The ACCC chooses to assume a new network build for some inputs and an old network build for others, whichever reduces the TEA model's cost estimate. Specifically, the ACCC assumes that the TEA model should model the costs of a network provider that benefits from the cost savings associated with building a network (and carrying out trenching work) over many past decades, while also benefiting from the cost savings associated with building a network today (using the latest technologies and most efficient practices). As hard as one might try, a network provider can have a network that is new or old, not both.
"The ACCC uses the tilted annuity formula to push cost recovery far into the future, allowing it to set low prices today. The extent of the ACCC's backloading is shown with the modelling used by the ACCC to set current prices ($12.30 to $16). The network cost component of prices, under those determinations was assumed by the ACCC to increase 50 percent in nine years, over 100 percent in 15 years and 200 percent in 23 years...The price increases required under this approach to ensure cost recovery ever occurs lack all credibility, and hence greatly increase the risk being placed on the access provider; yet the ACCC pretends that the provision of ULLS at regulated terms is a low risk activity, which merits a corresponding low cost of capital.
"The ACCC has to adopt unprecedented inputs for the TEA model's result to be below $30. The ACCC assumes that 100 percent of trenching is undertaken in turf, which implies that all roods, footpaths, driveways in Band 2 areas of Australia are turf. The ACCC adopts a WACC that is 93 basis points below its WACC determined for the some period in June 2008 despite a global financial crisis that is making it more difficult by the day for firms to raise capital. And as explained above, the ACCC backloads depreciation to such on extent that virtually no capital recovery would occur during the term of the Undertaking but provides no recompense for the greatly increased risk this back-loading causes."