Access pricing principles for fixed line services review

The legacy services that make up the key wholesale and access services delivered over Telstra’s copper network include:

• unconditioned local loop service (ULLS)
• wholesale line rental (WLR)
• line sharing service (LSS)
• public switched telephone network originating access (PSTN OA)
• public switched telephone network terminating access (PSTN TA)
• and local carriage service (LCS).

Any questions regarding the review should be directed to:

John Skinner at john.skinner@accc.gov.au or on 02 9230 3855
Clare O'Neil at clare.o'neil@accc.gov.au or on 02 9230 3845

Parties that wish to gain access to an unredacted version of the draft report are required to provide a confidentiality undertaking in favour of Telstra Corporation Limited.

On 10 November 2010 the ACCC requested further information from Telstra regarding cost information for fixed line services. Telstra supplied the material on 22 November 2010.

As much of the information in Telstra's response is confidential to Telstra the ACCC posted a redacted version of the response on its website. Parties wishing to gain access to the confidential version of the response should contact Mr Sandy Flecknoe-Brown at Telstra directly at sandy.flecknoe-brown@team.telstra.com or 02 8576 2745.

The following questions arose during the course of consultation on the draft report and the ACCC’s response. The ACCC is publishing these questions and answers to ensure this information is available to all interested parties.

1. Q: Do the monthly ULLS prices include a specific cost component?

A: Yes, the costs that were previously identified as specific costs are now part of the ULLS monthly charge calculated by the Ovum building block model. They are no longer separately identified.

2. Q: How have the ULLS band prices been calculated?

A: As stated in the draft report (page 101), the ACCC has de-averaged the estimated average ULLS price by applying the existing relativities between the existing Bands 1-3 prices.

The existing band relativities are applied to the draft ULLS average price. The calculation is as follows:
Band 1 price = existing Band 1 price/ existing demand-weighted average price X draft average price
Band 2 price = existing Band 2 price/ existing demand-weighted average price X draft average price
Band 3 price = existing Band 3 price/ existing demand-weighted average price X draft average price
Notional Band 4 price = $100

In calculating the demand-weighted average price, the ACCC used the demand numbers in the June 2010 CAN record keeping rule.

3. Q: Why is the national average WLR price lower than the national average ULLS price?

A: The draft WLR price is $20 and the (services in operation) SIO-weighted national average ULLS price is $28.42 (see pages 101-103 of the draft report).

As the note to table A10.1 explains, the SIO-weighted national average ULLS price of $28.42 is a notional price because it has been calculated by applying weights derived from the distribution of SIOs across the bands, that is, by assuming that all SIOs are ULLS lines.

In contrast, the draft prices are based on unit costs estimated by the model using forecast demands, as explained in the draft report on pages 96-98. In calculating band prices, costs have effectively been allocated to bands in proportion to current ULLS demand in each band (as explained in the answer to the question ‘How have the ULLS band prices been calculated?’ above). Currently, 94 per cent of ULLS services are in Band 2 and the indicative price for ULLS in this band is $16. Given the very low demand in the Band 4 region, a notional Band 4 price of $100 has been used.

4. Q: In relation to the national average ULLS price, are the costs allocated to each band a function of the cost relativities produced by the PIE II model?

A: Yes.

The costs allocated to each band are effectively a function of the cost relativities produced by the PIE II model. Page 101 of the draft report notes: “the ACCC has de-averaged the estimated average ULLS price for each year by applying the existing relativities between prices across Bands 1-3. The existing price relativities were derived from Telstra's PIE II model which estimates disaggregated network costs and volumes into the four geographical bands.”

5. Q: How did the ACCC determine the LSS monthly charge of $2.50? What factors were taken into account?

A: Section A9 of the draft report (pages 99-100) discusses how the draft LSS price was estimated.

The LSS Specific Costs Model was only one of the factors taken into account by the ACCC in determining the draft LSS price. The ACCC did not have available information to allow it to update the inputs to the model and consequently had concerns about the accuracy of the estimated costs.

Taking into account these circumstances and noting the market conditions, and having regard to price stability and the reasonableness of the proposed charge, the ACCC proposes maintaining the existing indicative price of $2.50.

6. Q: How did the ACCC estimate the asset life inputs to the RAB?

A: As noted on pages 79-80 of the draft report, the ACCC used asset lives obtained from the Analysys model for assets other than ducts and pipes. The Analysys model is available on the ACCC’s website under “Review of fixed line wholesale services pricing 2009-10”.

To calculate remaining asset lives, the ACCC applied the estimated undepreciated percentage of each asset class (derived from RAF data) to the average asset life used for that class (see pages 79-80 of the draft report), using the following method. The depreciated percentage for each asset class is calculated by taking the values in the accumulated depreciation row (in the RAF accounts) divided by the values in the historical/revalued value row (in the RAF accounts) for each asset class. The resulting depreciated percentages are deducted from 100 per cent to obtain the undepreciated percentages. The estimated average asset life for each asset class is then multiplied by the undepreciated percentage for that asset class to calculate the remaining average asset life. For example, if the undepreciated percentage for an asset class is 50 per cent, then the average remaining asset life would be half of the average total asset life.

The draft report (pages 79-80) highlighted the uncertainties and controversy surrounding estimates of asset lives and noted a number of qualifications to the method used by the ACCC to estimate remaining asset lives.

The Ovum BBM uses average total and remaining asset lives for each asset class. The ACCC recognises that Telstra’s assets have been put in place over a number of years. Some assets are relatively new, while others are much older.

It is also relevant to note that the asset lives included in Telstra’s RAF are those assumed for depreciation purposes and are not necessarily consistent with actual asset lives. For example, some assets such as ducts and pipes may continue in use after they have been fully depreciated in Telstra’s accounts. As noted in the draft report (page 80), the accuracy of the depreciation schedules included in Telstra’s RAF data will affect the reliability of the estimates for remaining assets lives and, for assets put in place many years ago, such as ducts and pipes, the records may not be as robust for those older assets.

7. Q: Is Telstra’s RAF data publicly available?

A: The RAF data is confidential to Telstra. The ACCC is unable to release it without an extensive consultation process, set out Division 6 of Part XIB of the Trade Practices Act 1974. This Division does contain a provision for parties to formally request access to the RAF data. In addition, Telstra may nominate the information under item 1(c) of Attachment 1 to the confidentiality undertakings which are applicable to this review.

8. Q: In applying the cost allocation factors from the Analysys model, do the draft prices include an adjustment for each geotype?

A: No.

The ACCC has adjusted the cost allocation factors included in the Analysys cost model to remove the impact of optimisation but does not have sufficient information to make adjustments by geotype. The Analysys model contains disaggregated data by geotype but these geotypes do not correspond exactly to the four-band structure, particularly for Bands 3 and 4, where a geotype can include a town that would be in Band 3 while the surrounding area would be in Band 4.

The ACCC has de-optimised the cost allocation factors for ducts, pipes and copper cables by equalising unit costs per line (see pages 90-92 of draft report). The ACCC highlighted that because the percentage of lines used to provide ULLS, WLR and other services differs by band, these factors may not accurately reflect the actual unit costs of providing these services.

The draft report stated that "the ACCC does not have cost information by band to enable it to take into account any potential differences in unit costs" (page 92).