ࡱ> UWT!` *bjbj\\ .<>>!   8$&-2Nddzzzzz$_hJgzzggzzgzzgzB nߜ0-,   z"zzz=pzzz-gggg$    Submission on the WLR/LCS Draft Pricing Principles May 2008 The CCC welcomes the opportunity to comment on the ԭs draft indicative prices for the WLR. Members of the CCC have used the WLR and LCS services extensively in the past and continue to do so to provide competitive services to customers across Australia, in residential and business markets. The CCC has previously submitted its views on the pricing principles that the Commission has applied to this service. A submission prepared by Frontier Economics for the CCC in August 2006 pointed out to the Commission the methodological weakness in its use of unbundled retail line rental products as the benchmarks against which WLR is calculated using the retail minus approach. The Frontier paper noted, inter alia, that: Only a small proportion of Telstras retail customers the CCC estimates fewer than 5 percent actually purchase unbundled local services. (T)he current methodology has provided strong incentives for Telstra to price downstream competitors out of the market by choosing unbundled retail prices that are extremely unattractive in comparison to its bundled local services prices. The Frontier paper further described the change in relativities between the annual revenue Telstra had recovered from wholesale and retail lines respectively, using data from Telstra annual reports. These changes suggested that Telstra had indeed been taking advantage of the weaknesses in the Commission methodology and oversight procedures to disadvantage access seekers. While from FY 2005 to FY 2006, annual wholesale revenues per line had increased from $307 to $336, recoveries from retail lines had fallen from $338 to $333. It was notable that WLR recoveries exceeded retail line recoveries, suggesting that there was already evidence that the retail minus methodology was being exploited by Telstra. If the situation reported by Frontier in 2006 was troubling, the evidence from Telstras annual report last year is verging on scandalous. For that year, Telstra reported recoveries from retail line rental had again fallen marginally to $332.50. Wholesale line rental recoveries, by contrast, had risen dramatically to $377 per line. So, in a three year period Telstra has increased its revenue per wholesale line by 22.8 percent while the retail recoveries per line has fallen 1.6 percent. Telstra now recovers $44.50 more per year from its wholesale line rental customers than from retail lines. On average, wholesale lines now cost 13.4 percent more than Telstra retail lines, based on what Telstra reports it actually receives in revenues from these lines. It is clear that Telstras WLR and LCS access seekers are subsidizing ever increasing discounts that Telstra retail offers to customers in the form of bundled products. Rather than Telstra suffering a ratcheting-down of its retail rates as a consequence of access seekers driving retail rates down, Telstra is benefiting from capturing higher and higher revenues from wholesale customers whilst cross subsiding these revenues into Telstra retail discounts. The CCC points out that it warned the Commission that the methodology it insisted on employing to calculate the retail minus benchmark created an incentive and an ability for Telstra to raise rivals costs while reducing its prices for equivalent retail services. The evidence that this is indeed occurring is now clearly on the public record from Telstras own annual reports. The CCC submits that it is difficult to understand how this situation could have arising if the Commission had to exercised sufficiently diligent oversight of the developments in telecommunications markets. With the benefit of the warnings and evidence provided to the Commission by the Frontier paper, the CCC would have expected the Commission to be monitoring the evidence of developments in the basic access markets. In the past, the Commission was prepared to acknowledge the potential for Telstra to ratchet-up wholesale customers unbundled reference rate for basic access. That such price squeeze conduct was taking place was also confirmed in the investigation and issuance of a Competition Notice. In allowing this situation to occur, the CCC submits that the Commission has failed in its duty to consumers and competitors. In this context, it is staggering that the Commission now proposes to affirm the demonstrably flawed application of the RMRC pricing principle. The CCC submits that for the Commission to be proposing to further exacerbate this situation by increasing the WLR benchmark prices by about 15% is irresponsible in the extreme. The CCC cannot see how, by any definition, this can be seen to be in the long term interest of end users. In its consultation document the Commission notes that the proposed pricing principles may help guide commercial negotiations by providing greater certainty as to the Commissions views on reasonable access prices. This is clearly not the reason for publishing the proposed increased WLR pricing, as the Commission had already formed a view that access prices exceed cost-based prices, particularly for WLR. The decision by the Commission to publish such arbitrarily inflated pricing is clearly inconsistent with the objects that underlie the Commissions indicative pricing powers. The proposed pricing will not guide commercial negotiations closer to the Commissions views on reasonable access pricing and there is no justification for the Commission to publish such artificially inflated indicative pricing. Perversely, the only real outcome of confirming such pricing would be to discourage access seekers from lodging access disputes because of the likely extended and significant cash flow impacts from the Commission imposing an Interim Determination at the presently proposed indicative pricing. This is a real concern to access seekers who have to consider the risk that the Commission might impose an interim determination even if they object. The CCC reiterates its view that the proposed indicative prices are an arbitrary construct. The CCC can see no evidence in the Commissions discussion paper that it has sought to determine if price movements of the HomeLine Part and BusinessLine Part products are inconsistent with the movements of prices of its other retail basic access offerings. Further, the Commission has provided a table to describe how it came to determine that Telstras avoidable costs have decreased, with the effect of increasing wholesale prices, on the basis of data from Telstras regulatory accounting framework accounts, but this table is populated with no data due to commercial in confidence constraints. It is therefore not possible for the CCC to reach a judgment on whether these elements of the proposed increases in Telstras margin are justified. The Commission also says that the retail minus methodology will be replaced when the Commission has completed work on its own network cost model. The CCC submits that this intention does not excuse the continued application of a demonstrably flawed methodology. Further, the CCC submits that neither it nor the Commission can have confidence that the Commissions proposed model will be completed or able to be put into practice in 12 months to coincide with the term of these indicative prices. It is highly likely that the Commissions model will be challenged by Telstra if it results in prices that are lower than those Telstra claims as appropriate. This suggests that the reaffirmation of the present flawed methodology could have implications for the medium term, unless it is corrected immediately. The CCC also urges the Commission to progress the development of its cost model as quickly as possible, in anticipation of the likely challenges to it that will delay its application to develop future pricing principles. It is also likely that the proposed NBN build will make this model partially irrelevant. The CCC therefore submits that the ԭ should: withdraw the draft indicative price for the WLR published in April 2008 instigate a Part XIB inquiry into the pricing of Telstra basic access services, based on the clear evidence from Telstras own annual report that it recovers more from wholesale customers than from retail customers publish new pricing principles for the WLR that establishes a weighted average retail prices derived from the full suite of Telstras bundled and unbundled basic access services, as proposed by the Frontier paper in August 2006  Figure  SEQ Figure \* ARABIC 1 TLS Retail vs Wholesale per line revenue 2005-06-07. Source, TLS annual reports.   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