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Australia: Is it time to apply the stick? August 9, 2006

Posted by Jasper in NGN, Regulation.

Monday evening this week Telstra announced that it had ditched its plans to build their proposed fibre to the node network (FTTN). The main arguments for this move were:

  • the inability to reach an agreement with the Australian Competition and Consumer Commission (ACCC) regarding the price competitors should have to pay for access to their network; and
  • the existence of inconsistencies in government pricing requirements.

Obviously this is a bold and highly controversial move by Telstra. However, Telstra has been playing hardball with the Government and ACCC ever since Sol Truiljo was appointed chief executive. In that respect it is less of a surprise that it might come to this, rather it is the timing and way it is has happened that caught me by surprise.

The ACCC was perplexed by the move:

The ACCC last received documentation from Telstra on a FTTN access service and its pricing for this new service in late June, and was awaiting details on a transition plan for access seekers from current unconditioned local loop arrangement. Given that Telstra only recently said that the discussions between it and the ACCC were ’98 per cent’ complete, the ACCC is perplexed that Telstra has now chosen to discontinue these discussions and withdraw its proposed fibre roll out.

It is our view that it would have been preferable for Telstra to place details of its proposal on the table for public examination, but Telstra appeared unwilling to do so.

The ACCC would be concerned if Telstra’s decision not to proceed at this time were as a consequence of the ACCC’s call last week to lay the FTTN plans open for public scrutiny. We are perplexed as to why Telstra would not want to do this.

So is this end of the line for Telstra. Can they credibly afford not to invest in a FTTN network? In my opinion the answer to this question is no – there is simply too much at stake. Telstra has a unique position in the Australian market and should be expected to fully exploit this possibility.

As long as Telstra is required to provide access to their network based on cost (including a reasonable return on investment) incentives to invest should be preserved. Competitors benefit from access according to their market share and compensate Telstra accordingly, while Telstra retains compensation for the remaining investment. I struggle to imagine that the ACCC are offering returns to Telstra that are below what they have been receiving historically – returns that to my knowledge are in line with those incumbents receive in other jurisdictions and who importantly are willing to upgrade their network. That said, the business case for FTTN must neccessarily be built on long-term demand forecasts of broadband-based services, that are uncertain and difficult to quantify.

However, if Telstra is requiring benefits that imply an exploitation of market power then it will get nowhere with the ACCC because such benefits are economically unjustified. In fact, Telstra may be provided with over-incentives to invest with the existence of monopoly power.

Maybe the move has more to do with creating uncertainty for its competitors and delay tactics? It is certainly difficult to second-guess Telstra’s motives. Nevertheless, the main question to ask now is: what will happen next?

A group of companies dubbed G9 has proposed sharing the cost of a AU$4.1 billion FTTN. The group includes amoung others Optus, Macquarie Telecom, PowerTel, Primus and AAPT. They believe that under Telstra’s plans, there would be no way of unbundling the FTTN infrastructure, thus leaving the incumbent with a monopoly in fiber-based access. However, their FTTN plan hinges critically on access to the Telstra network so there is still considerable uncertainty as to its viability in the current regulatory environment. But it does pose a welcome and interesting alternative that has gained renewed weight with the recent Telstra decision.

As an alternative the Government could force Telstra to invest. Clearly, Telstra is not swayed by the regulatory carrot, so maybe it is time for the Government to apply the stick and give renewed thought to the privatisation decision. But surely there must be other avenues to pursue before it comes to this.



1. Australia: Coonan on FTTN investment « Telconomics - September 8, 2006

[…] News.com.au brought an article earlier today on Senator Coonan’s expectations for Telstra’s fibre investment. I have previously commented on this issue here and here.  Here are some of her rather convoluted statements: […]

2. US/EU report on optical networking « Telconomics - September 11, 2006

[…] Maybe this is an option for the G9 in Australia (see previous post) who have proposed to build an alternative FTTN network.  This way they could completely by-pass the Telstra access network. […]

3. Australia: Encouraging investment revisitied « Telconomics - September 22, 2006

[…] I have previously discussed Telstra’s refusal to investment in FTTN and the breakdown of discussions with the ACCC (See here and here). This morning I had a quick flick through a speech by the ACCC chairman from 22 August.  In it he states: […]

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