Telstra has stepped up its campaign against the Australian Competition and Consumer Commission’s proposed unbundled local loop prices with a series of 14 regulatory submissions that make the core claim that the regulator is in danger of breaching its own legal mandate and undermining government policy.

Telstra has zeroed in on the ACCC’s stated belief that Telstra’s unbundled local loop costs should be shared between all ten million lines on the customer access network – and not be recovered exclusively from access seekers. The ACCC’s position has been supported by submissions from the Competitive Carriers Coalition, Macquarie Telecom and Optus and is founded on the premise that there is a positive externality for the general public from the supply of competitive broadband services.

But Telstra has skewered the ACCC’s and access seekers’ arguments across several hundreds of pages in its submissions, with the centerpiece of the attack coming from eminent US telecom economist and legal expert Gregory Sidak. Sidak is the principal of Criterion Economics, a visiting professor at Georgetown University and has presided as an official or adviser at the Federal Communications Commission, NTT and the Economic Advisory Council to the US President.

HODGEPODGE: In his submission, Sidak characterises the ACCC’s draft decision as based on “unsound economic reasoning” and a “hodgepodge” that is “intellectually indefensible as a matter of economic policy”.

Sidak writes that the “ACCC would compel Telstra to produce the opposite of a margin squeeze—call it a margin wedge—that would give access seekers a lower input cost and a higher retail price. Such a policy could be justified only in the presence of a positive externality in the use of ULLS by access seekers.”

But Sidak, backed by the other Telstra submissions, argues that the ACCC has failed to demonstrate the presence of a positive externality. “Its failure to do so undermines the entire argument for subsidy.” ACCC NOTION FRIVOLOUS: Sidak says “the notion that there is universal consumer benefit whenever a single access seeker uses an unconditioned local loop is frivolous. However, it is critical to a regulator’s objectives of reducing an access seeker’s cost of an unconditioned local loop to the maximum extent possible, so as to encourage access-based entry that would be marginally uneconomic at a higher ULL price. The regulator may then claim credit for facilitating the appearance of competition, using the number of accessbased entrants as a measure of regulatory success.”

“Without the ACCC’s implausibly large positive externality to consumers from the leasing of unconditioned local loops, and without the proposition that regulators rather than access seekers are the actual parties who cause the costs associated with Telstra’s compliance with the policy of mandatory access to customer access network, the ACCC could not slice off a slab of the costs that access seekers would otherwise have to pay under an access pricing regime that employed correct analysis of cost causation and of the marginal contribution of a single entrant to the long-term interests of end-users.”

A FORM OF TAXATION: Sidak says the ACCC has overstepped its charter and wants to effectively mandate a form of off-budget taxation on Telstra. “The ACCC’s plan resembles a legislative choice concerning taxation and appropriation. It creates an off-budget funding source for a program that the ACCC believes will promote economic welfare in Australia. The ACCC’s goal is qualitatively different from setting the price for one of Telstra’s regulated services to ensure that it is just and reasonable in light of the long-run incremental cost of providing that service on a forward-looking basis. This novel subsidisation of access seekers gives fresh meaning to Judge Richard Posner’s famous term taxation by regulation.”

INCORRECT FORECASTS: Elsewhere in its submissions, Telstra argues that the ACCC has demonstrated ongoing inconsistency in its statements on preferred ULLS pricing – it initially suggested a monthly rate of $35 in 2002, then later suggested $22 and now $13. But the ACCC’s costings were based on highly erroneous forecasts – Telstra says the 43,811 ULLS connections in service at June 2005 represented just 11% of the ACCC’s 2002 forecasts and onethird of its 2003 forecasts. The ACCC’s preference for ULLS cost recovery from across all 10m CAN users would see just “0.44%” of ULLS costs recovered from actual access seekers, based on June figures. Telstra says the proposed prices contradict the statutory underpinnings of competition policy and the Trade Practices Act. They would “distort economic incentives, discourage resale and infrastructure investment, shift customers from resale to ULLS and LSS” as well as encourage cherry-picking of city customers, discourage fixed wireless deployments and encourage underinvestment in the CAN.

GIBSON QUAI CRITICISED: Access seeker arguments were also targeted in a 47 page appendix to the core submission. The Competitive Carriers Coalition’s hired consultants Gibson Quai-AAS came in for special attention, following its previous submission that justified a $8.61 monthly charge. This costing “relied on a demand estimate of between 201,000 and 400,000 users at June 2005,” Telstra claimed, which was wildly over the real number. The appendix also contrasts AAPT’s arguments with the detailed criticisms of unbundling made by its parent Telecom New Zealand. Telstra concludes that the core argument of access seekers – that the CAN is a natural monopoly – is belied by market outcomes, with competitive local loops offered by Optus, TransACT, Unwired, iBurst and others. It also denies that it has worked to counter a wholesale market for DSL per se, pointing to the 60 wholesale agreements it has signed with ISPs.

CCC QUESTIONS GAMING: Meanwhile, the Competitive Carriers Coalition has criticised what it terms the persistent gaming of the ULLS undertakings process by Telstra. “By the time the ACCC has concluded its consideration, the undertakings would be valid for at best eight months,” the CCC said. “The process of dealing with these undertakings will have consumed millions of dollars in industry and ACCC resources by the time it is concluded. The direct and indirect costs to the CCC alone would be valued in the many hundreds of thousands of dollars. The attitude of Telstra has been vexatious and it can only be assumed that there is no effective incentive for it to take the undertakings process seriously.”

For its part, the CCC says that Telstra’s desire to pass on all ULLS costs to access seekers would “fundamentally undermine the concept of equivalence”.

CONNECTION PRICES UNREASONABLE: Matt Healy, national regulatory manager Macquarie, argues in its submission that it also supports sharing

ULLS costs across the CAN and adds that Telstra’s proposed charges for multiple connections are “manifestly unreasonable” and “appear designed to impose costs and inconvenience on access seekers”.

Andrew Sheridan, general manager, interconnect and economic regulation at Optus, argues that Telstra’s claimed costs exceed efficient levels and presents an extended defence of why low ULLS prices provide a public benefit. “These benefits are derived from the emergence of a more competitive fixed-line telephony market, and may be manifested in factors such as lower prices and better non-price conditions, such as, for example, service levels. An important feature of these benefits is that all users can benefit from them, regardless or whether or not they take a ULLS service.”

This piece originally appeared in Communications Day.