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Australia: Encouraging investment revisited September 22, 2006

Posted by Jasper in Uncategorized.
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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:

The foundations of the discussions with Telstra were clearly spelt out from the beginning. On 7 April 2006, a letter was written to Telstra to say that “the ACCC accepts that Telstra should be entitled to recover its actual costs arising from the FTTN upgrade” and that “the ACCC accepts that Telstra faces a significant risk that should be reflected in the cost of capital used to calculate access prices.”

This a wholly appropriate starting point which is consistent with existing regulations. The recovery of actual costs will in this case more or less be equal to TSLRIC, as the FTTN represents a forward-looking investment. Further, incentives to invest will be preserved (disregarding the option argument, see here) when the specific risk characteristics of the investment are reflected in the cost of capital. If Telstra was attempting to depart from this starting point or strike a better deal, then a breakdown of discussions would have been inevitable. 

In his speech, the Chairman also highlights another on-going debate between Telstra and the ACCC on the ability (or lack thereof in the current case) to cross-subsidize between different geographic regions. But as he explains this can hardly be a decisive factor in Telstra’s decision:

In relation to the issue of the level of any cross-subsidy for rural and regional areas, the fibre network plan was originally proposed to be rolled out to the five largest capital cities, but contained no detail for how and when the system would be extended beyond that. Certainly through all the discussions, it was clear that the fibre network plan did not extend to rural and remote Australia, even in the distant future.

Further, the draft determination to reject Telstra’s ULLS undertaking (where it proposes geographically averaged ULLS prices) was published more than a month before the Telstra decision to stop their investment plans.

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