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adc-uso-03-06-25-web version

adc-uso-03-06-25-web version

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Published by Core Research

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Published by: Core Research on Jan 09, 2009
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05/09/2014

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25th June, 2003
Evaluating Telstra\u2019s Undertakings for
CAN Cost Recovery
A Report on behalf of AAPT Ltd
Joshua Gans and Stephen King

The analysis here represents the views of CoRE Research Pty Ltd (ACN 096 869 760) and should not be construed as those of AAPT Ltd.

Executive Summary

This report considers Telstra\u2019s claim that it should receive an uncovered PSTN CAN contribution (or UPCC) as part of its PSTN interconnection pricing undertaking. The UPCC is essentially equivalent to the access deficit contribution (or ADC) that was part of previous undertakings.

Building on our earlier report on the ADC, we argue here that:

1. The UPCC is ill-defined as the USO payments that offset shortfalls between CAN costs and basic access subscription revenues themselves depend upon the level of PSTN access pricing.

2. The counter-factual question that drives the argument for a UPCC \u2013 namely,

what price should a stand-alone CAN provider be able to charge downstream firms for access to the CAN? \u2013 along with what appears to be Telstra\u2019s answer: that in order to ensure that an efficient provider of the CAN can recover all of its costs (including sunk costs), the CAN access price should be sufficient to cover the shortfall between the revenues Telstra would receive for basic access and its CAN costs both are

problematic.

a. The answer assumes that PSTN services should all be treated equally in terms of recovering CAN costs; instead, a regard for demand elasticities should be taken into account.

b. More importantly, the question is ill-founded in the current environment because Telstra is not a stand-alone basic access provider and, indeed, appears to benefit from its vertically integrated status. The benefits from vertical integration should also offset UPCC calculations. Such benefits are recognised in government policy regarding universal service payments that themselves presume benefits from vertical integration.

3. The UPCC also suffers from several implementation problems:

a. Considering the USO scheme, the UPCC should, in principle, be zero if it took into account all of the benefits Telstra receives as a provider of basic access.

b. It omits other products that utilise the CAN (such as ISDN and DSL
lines).
c. The local call surcharge effectively treats local calls as a special
product in contributing to the CAN.
d. There is the possibility of entrenched and continual PSTN price rises
as a result of the current definition of the UPCC.

4. Competitive neutrality will not be implemented if a UPCC is granted. Given Telstra\u2019s vertical integration, competitive neutrality can only be assured by prices reflecting marginal or incremental costs.

5. As the price cap on basic access is being lifted, the UPCC should fall to zero in a matter of years. For this reason, its inclusion or not will not likely impact on long-term investment incentives for Telstra.

6.When evaluating the appropriateness of the UPCC, the ACCC should
consider some sanity checks including a comparison with Telstra\u2019s internal
transfer pricing practices and appropriate international benchmarks.

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