Australia: ACCC FAD sees dramatic price cuts for declared services

On 21 April 2016, the Australian Competition and Consumer Commission (ACCC) released its final access determination (FAD) setting out price and non-price terms and conditions for the Domestic Transmission Capacity Service (DTCS) (the 2016 FAD). These terms and conditions create a benchmark for access providers and access seekers who are unable to negotiate access terms or if there is no commercial access agreement in place. The 2016 FAD sets DTCS pricing significantly lower than the regulated prices set in the ACCC's 2012 final access determination (2012 FAD), particularly on regional routes where some reductions are close to 80%. Regulation of the DTCS is intended to deliver benefits to consumers by ensuring that bottleneck inputs are supplied at competitive prices.

WHAT IS DTCS?

The DTCS is a wholesale transmission service which carries large volumes of voice, data and video communications from one point to another, often over large distances. Every time you make a call or access videos, music, news or other information over the internet, you create communication traffic which is carried over the DTCS. Carriers and carriage service providers (CSPs) pay an access fee to the transmission network owner or access provider to carry that traffic.

The DTCS is a declared service for the purposes of Part XIC of the Competition and Consumer Act 2010 (Cth) (the CCA). Because there is not effective competition between DTCS providers in most parts of Australia, the ACCC regulates the terms and conditions, including the price, of supply.

BACKGROUND TO THE CONSULTATION

The DTCS was first declared in June 1997 and was most recently re-declared in March 2014, with the ACCC de-regulating some DTCS routes where it found effective competition.

The ACCC made its first DTCS FAD in 2012. The 2012 FAD (which was due to expire on 31 December 2014) was extended by the ACCC several times to allow for the 2016 FAD consultation period. This made for a lengthy consultation period.

Under the CCA, when making a FAD, the ACCC must have regard to the matters set out in subsection 152BCA(1) of the CCA. These include consideration of whether the FAD will promote the long term interest of end-users and the legitimate business interests of transmission providers.

The data collection process

Over approximately two years, the ACCC and its consultant Economic Insights, engaged to provide advice and econometric modelling, consulted with stakeholders and their experts on the relevant terms and conditions to be included in the 2016 FAD. The ACCC received around 55 submissions to its various discussion papers, consultation papers and draft reports from stakeholders including Telstra, Vodafone Hutchinson Australia, Optus, NBN Co, Nextgen, TPG, Macquarie Telecom and the Competition Economics Group. The ACCC collected pricing data from 11 providers of DTCS services for both regulated and deregulated routes. Expressed as the actual amount billed by DTCS providers to access seekers (excluding GST), the final 2016 FAD dataset contains a total of 20,262 price observations and about 40 variables for each observation.

HIGHLIGHTS OF THE ACCC'S FINAL DETERMINATION

The 2016 FAD continues to adopt the domestic benchmarking approach used in the 2012 FAD but with significant modifications and refinements to the regression analysis upon which the benchmarking was based. Benchmarked prices are intended to mimic cost efficiencies achieved on competitive routes to ensure that monopoly prices are not charged on uncompetitive routes. The main changes to the 2012 FAD benchmarking model were to control for:

  • outliers and route-specific heterogeneity;
  • the observed non-linear relationships between price and the primary price determinants (capacity and distance).

Relevant variables

  • The underlying variables of the final pricing model are:
  • capacity (Mbps) - the data rate of the connection measured in Megabits per second;
  • distance (km) - the radial distance between the A-end ESA and B-end ESA. Distance, together with capacity, are observed to be the primary drivers of price;
  • route type - identifies whether the route is inter-capital, metropolitan, regional or tail-end based in the DTCS service description;
  • interface type - identifies whether the service is either Ethernet or SDH, and
  • service provider - identifies the provider of each service.

Low capacity, short distance services

Towards the end of the process, the ACCC introduced a dummy variable to account for low capacity (less than 2.5Mbps), short distance services (less than 5km) due to concerns that the regression model set charges for those services too high. The ACCC observed that most short distance, low capacity services are:

  • SDH services;
  • provided by Telstra; and
  • primarily used to provide services to small to medium enterprises.

Dynamic pricing

One of the issues raised during the 2016 FAD consultation was whether the pricing model should reflect expected changes in the price across the 2016 FAD term given the significant decrease in pricing between the datasets for the 2012 FAD and 2016 FAD.

Ultimately, the ACCC chose not to include a mechanism for dynamic pricing due to the perceived difficulty in accurately predicting price changes over time. This may impair the FAD's effectiveness in the medium term.

PRICE IMPACT OF THE 2016 FAD

Under the ACCC's 2016 FAD, DTCS pricing is significantly lower than the prices set out in the 2012 FAD. The ACCC estimates that, when compared to the 2012 FAD:

  • average prices for short distance, low capacity services (2Mbps) decline by 13 percent in metro areas and 22 percent in regional areas, and
  • average prices for long distance, high capacity services (100Mbps) decline by 76 per cent in metro areas and 78 percent in regional areas.

For example, the pricing for a 100km regional link with a capacity of 100 Mbps was $110,921 under the 2012 FAD and is now $29,827 under the 2016 FAD, a 73% decrease:

Diagram 1 – Comparison of 2012 FAD and 2012 FAD – regional 100Mbps1

Another welcome change in the 2016 FAD is the addition of a user friendly DTCS pricing calculator which generates an estimated DTCS price based on inputs in relation to route category (such as whether it is metro or regional), data rate and distance.

Whilst the calculator provides an estimate only, it acts as a useful reference point for telecommunications companies during contract negotiations. The DTCS pricing calculator is available here.

The DTCS prices will apply from April 21, 2016 to December 31, 2019.

CONCLUSION

Undoubtedly, the ACCC's 2016 FAD is a step in the right direction in promoting the long terms interests of end users. The ACCC's latest annual report on the telecommunications sector stated that overall prices fell by a modest 0.5% in 2014-2015. In light of this 2016 FAD decision, one may hope that a more significant decrease will be realised in the next couple of years, particularly in regional areas where the FAD may also lead to the introduction of new fixed and mobile services.

The 2016 FAD is available here.

Footnote

1ACCC 2016 DTCS FAD, page 67

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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