As if Telstra didn’t have enough to deal with, the Australian Competition and Consumer Commission has raised the prospect it will do an about-face on its attitude to Telstra’s wholesale ADSL access regime, threatening to declare the service in rural and regional areas. That could have meaningful implications for the profitability of Telstra’s regional broadband operations and also, perversely, could adversely impact the national broadband network’s economics.

More than three years ago, during Sol Trujillo’s combative tenure, Telstra upgraded its exchanges to enable them to provide ADSL2+ but chose not to offer the service in regions where there was no competitive infrastructure because it was concerned they would be declared by the ACCC and that it would be forced to sell access to the service on terms set by the ACCC.

The impasse was ultimately resolved when Communications Minister Stephen Conroy wrote to the company, referring to its concerns and referring to a series of advice he had received from ACCC chairman Graeme Samuel that indicated the commission believed it was unlikely the service would be declared and expressed its preference for infrastructure-based competition rather than the re-selling of Telstra services.

Conroy said that advice provided a high degree of regulatory certainty. Within days Telstra had switched on hundreds of exchanges.

Earlier this year, after being heavily under-cut in broadband pricing by competitors using ULL access and their own digital subscriber line access multiplexers installed in Telstra’s exchanges, Telstra dropped its ADSL2+ prices nationally to stem the outflow of customers. It became competitive.

That generally wasn’t an issue for the ACCC, given that in the urban areas the competition was facilities-based. But the regulator started receiving complaints from the smaller internet service providers that in areas where there wasn’t competitive infrastructure, and therefore competitors were simply re-selling Telstra services, Telstra had dropped its retail prices but not its wholesale price — it had created a price squeeze.

Part of the reason there hasn’t been much competitive investment in the regions is that the ACCC has held to a policy of de-averaged prices for ULL access, which makes it far more attractive for competitors to focus on the cities than in the bush.

The averaged wholesale pricing the Trujillo regime argued for (which would have mirrored the mandated averaged national retail prices) would have pushed access prices up slightly in urban areas but reduced them significantly in the bush and made it more attractive for competitors to install their own infrastructure.

In any event, just as Telstra is on the verge of losing its fixed line dominance, indeed its network, the ACCC wrote yesterday to industry participants saying it now believed there might be a case for an inquiry into the potential declaration of a wholesale ADSL access service.

Any inquiry would focus on geographic areas where effective DSLAM-based competition is unlikely to develop in the foreseeable future, with the commission “not currently” contemplating an inquiry to consider a declaration on a national basis.

What happened to the reliance of competitive infrastructure using ULL or line-sharing access? There had been limited deployment of DSLAMs in rural and regional areas, perhaps because there wasn’t the same ability to exploit economies of scale that there was in CBD and metropolitan areas.

That’s hardly a revelation — Telstra’s competitors have focused on the urban areas because that’s where most of the customers and profits are. That was immensely predictable and could have been foreseen when Trujillo was assured a declaration was unlikely.

The commission also thinks the deployment of the NBN might have implications for fixed line broadband in future and the strategy of encouraging ULL and LSS take-up rather than wholesale access might no longer be compelling. Really? No-one is going to make any major new investment in infrastructure that will be stranded once the NBN is rolled out.

If the commission were to declare Telstra’s ADSL2+ services in the regions it would effectively tear up the assurances that it provided via Conroy, albeit assurances that weren’t absolute.

It would be damaging Telstra through a situation at least partly of the commission’s own making — its insistence on de-averaged wholesale pricing and the long-held government policy of averaged retail prices has discouraged competing investment outside the cities and created the potential for prices squeezes, whether deliberate or inadvertent, in those regions.

But with the NBN looming, if there is a problem it will be conclusively dealt with by the NBN.

One of the challenges for NBN Co is that the ACCC appears determined to continue to drive down access prices during the transition to the NBN even though in the areas where competition is vibrant — urban Australia — retail prices have been driven down, led by Telstra’s competitors.

Given that NBN Co has given assurances that the wholesale prices for entry-level broadband products will be set at similar levels to those it displaces, lowering access prices today means lowering the prices NBN Co can charge tomorrow.

Peter Fray

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