As one might expect, the newspapers are full of portentous commentary attempting to explain to the great unwashed what $17.70 Band 2 ULL means. Indeed, it will probably take about $250m+ a year off Telstra’s revenues and yesterday alone took about $1.1 billion off its market capitalisation. So the commentary understandably focuses on what this means for Telstra.

But equally importantly, the ACCC’s latest decision prices ULL in a manner which, in my view, sends incorrect price signals and actually encourages DSLAM overbuild by Telstra’s competitors. This could lead, counterintuitively, to a “ULL bubble” that might undo the competitive carrier sector— exactly what happened in the United States in 2001 when its competitive local exchange carrier (CLEC) sector collapsed after five years of an unbundled network elements—platform (UNE-P) regime that had more than a passing resemblance to the regime currently favoured in Australia.

Back at the turn of the century, the ACCC first started thinking about ULL and reasoned that there wouldn’t be too much demand for it. As a result, it was sympathetic to the idea that Telstra should be able to return more of its costs off access seekers in the face of high set-up costs—and hence it favoured Band 2 pricing at levels around the $35 mark.

Then as time marched on a few things happened that the ACCC will never admit to, but were major factors in its changed thinking. Firstly, Chinese manufacturers such as Huawei, ZTE and UT Starcom became big global players and helped drive down equipment prices, including for ADSL ports. They were also aggressively chasing market share and thus spurred reactions from the European makers, so suddenly Tier Twos—the Primuses, Internodes and Optus’ of this world—found themselves targeted with attractive enablers to get into ULL.

Secondly, Telstra cut retail entry prices for broadband to below-cost levels following very noisy public policy complaints about low penetration, spurring demand to record growth levels, but also dramatically changing the preferred path to market for competitors. Offering attractive voice-data bundles now became the main game, and this required access to the copper line. The demand for ULL was now there, and hence the ACCC thinks the price should be lower, just $17.70 in the dominant Band 2 areas. This is great stuff in the short term for the competitive carriers. As both Optus and Primus have documented, their gross margins effectively double when they move customers from wholesale offerings to their own DSLAMs. And for smaller Internet service providers, ULL provides an avenue to jump into the big time and become fully-fledged carriers. But with attractive financing deals offered by those aggressive vendors and a regulatory regime inching ever closer toward giving competitive carriers more than they ever expected, one can all see all the hallmarks of excessively low barriers-to-entry, incorrect pricing signals and emerging bubble conditions.

BEEN SEEN BEFORE: To paraphrase Sol Trujillo, it’s all been seen before. In the US, hundreds of CLECs piled into the same target markets (while several states never had a sight of even one CLEC), all with business plans that in aggregate called for a market several times bigger than the one actually there. Don’t believe it can’t happen here: there are some exchange-serving areas in Sydney served not only by five competing DSLAMs offering DSL, but also two sets of cable modem infrastructure, the three wireless broadband offerings of Unwired, PBA and BigAir, plus the four substitutes of cellular networks. There’s a clue in the fact that it’s a Gang of Nine! Most of the famous gangs of history tended toward the four, five or seven mark!

And don’t think I’m taking my cues from Telstra on this one: AAPT’s regulatory chief David Havyatt, for instance, shares the same sentiment, even as his business colleagues flirt with DSLAM deployments in light of the attractive prices on offer.

There’s one obvious lateral commercial solution to all this, but first it requires an admission of the problem and an abandonment of the kibbutz-style economics that characterises what purports to be 2006 Australian telecom policy. The ACCC should reward scale—which is the greatest determinant of efficient network deployment—by only allowing large carriers the best price. That’s right, if I’m Optus or Primus and want to migrate 200,000 customers across the country I should get a better ULL price than a genuine cherry picker serving a small area. In other words, create some incentives for competitor consolidation or wholesale collaboration so we don’t end up with liquidators Ferrier Hodgson owning and flogging several hundred abandoned DSLAMs in two years time.

REVIEW THE BAND REGIME: Oh, and while we’re at it, let’s take a look at the four band regime. It was hardly the creation of science, and is bizarrely arbitrary—under the latest pricing, a ULL connection in Wodonga costs twice that of a ULL connection in sister city Albury. Optus made an unusually thoughtful submission to the ULL review process, written by Frontier Economics last month, suggesting that a more rigorous and multi-tiered approach to the banding regime might be a good thing. The ACCC’s rejection of Telstra’s one-band approach is a lazy and convenient red herring —if it genuinely wants to de-average access prices, it needs to examine the band approach in detail. I’ve seen no evidence that it has.

Will the ACCC take a fresh look at this issue? Probably not at this late stage, indeed probably not again until the 2009 review. The ACCC has taken nine months to get to this point on ULL and shows every sign of regulating Telstra harder than it did this time last year—or three years ago for that matter. For all its rhetoric about listening to carriers and, indeed, its constant review processes, it never seems to find a profit margin in telecoms that it likes. Perhaps that’s the idea: squeeze all the value out of telecom investment by perversely distorting incentives across the board. Wipe billions of dollars off Telstra, spur a bubble that ultimately hurts competitive carriers, and while you’re at it, undermine the incentives for competing HFC and wireless infrastructure. At least everyone gets equity of a sort!