Telecommunications networks are characterised by extensive economies of scope (that is, cost savings that result from providing many different services jointly). Those economies arise from the fact that many services are provided over a common set of assets, most notably the links that run from customers’ premises to points of traffic aggregation (such as routers, multiplexers and switching systems) and shared traffic-management facilities (including switching and network-management systems). Reflecting those economies, the incremental costs of any particular service tend to be low relative to average costs (that is, the unit cost of all traffic considered jointly).[9] As the ACCC itself has stressed, were access charges set only on the basis of incremental costs, total costs would never be recovered and long-run supply would be compromised.[10]
Forward-looking costing systems deal with this through cost-allocation rules that attribute to each service responsibility for recovering some share of joint and common costs. Those rules work on the basis of ‘cost drivers’, which (at the network level) involve the attribution of the costs of individual network elements to services on the basis of each service’s share of each network element’s use. A key feature of these rules is that the resulting allocations ‘add up’. A failure to ‘add up’ obviously implies a shortfall between total costs and the revenues that would be generated were each service sold, by the hypothetical operator, at a price that reflected its allocated cost responsibility. Any regulatory outcome that thus failed to ‘add up’ would breach the participation constraint that underpins the TSLRIC thought experiment (that is, would not induce the construction of a new network capable of providing the set of services).
In practice, the ACCC’s setting of telecommunications access prices has failed to respect the multi-service adding-up constraint. This is for two reasons. First, prices for individual services have been set below attributed costs without the resulting shortfall being added to the amount to be recovered from other services. Second, price structures have been set in such a way that arbitrage between services would impede full cost recovery from ever being achieved. I deal with each of these in turn in the discussion below. As that discussion requires some familiarity with the nomenclature of telecommunications, sets out a list of the various telecommunications services that are referred to in this paper, along with their standard abbreviations and a brief description of what each service involves.
|
Abbreviation |
Name |
Description |
|---|---|---|
|
ADSL |
Asymmetric Digital Subscriber Line |
A broadband technology offering high speed internet access. ‘Asymmetric’ means data is transmitted ‘downstream’ to the customer faster than it is sent ‘upstream’ to the service provider. |
|
CAN |
Customer Access Network |
Enables the connection of customer equipment to switching equipment in a telecommunications network. It consists of a network of conduits and pipes with a mixture of cables. |
|
LCO |
Local Call Over-ride |
Access seekers can provide local carriage service over Telstra’s network either by using the Local Carriage Service, or by using the PSTN OTA service (see below). The latter involves ‘over-riding’ the default routing of the call by inserting a long-distance code in front of the called number and hence is referred to as ‘Local Call Over-ride’. |
|
LCS |
Local Call Service |
A service for local call resale. It provides for the carriage of telephone calls from customer equipment at an end-user’s premises to separately located customer equipment of an end-user in the same standard charging zone. |
|
LSS |
Line Sharing Service |
Enables a Telstra competitor to use the high-frequency part of the phone line to provide ADSL using its own equipment, while Telstra still provides the normal voice service. |
|
PSTN |
Public Switched Telephone Network |
The global collection of interconnects originally designed to support circuit-switched voice communication. The PSTN provides the traditional Plain Old Telephone Service (POTS) to residences and many other establishments. Parts of the PSTN are also utilized for xDSL, VoIP and other Internet-based network technologies. |
|
PSTN OTA |
Public Switched Telephone Network Originating and Terminating Access |
The PSTN originating and terminating access services respectively allow access seekers to buy the carriage of telephone calls from a calling end-user to a point of interconnection (POI) with the access seeker’s network, and the carriage of telephone calls from a POI to a receiving end-user. The two services allow telecommunications companies to provide services such as national long-distance calls, international calls and calls between fixed and mobile networks. |
|
TELRIC |
Total Element Long Run Incremental Cost |
The incremental cost of supplying a specific element of a network. It is defined as a forward-looking long-run cost. |
|
TSLRIC |
Total Service Long Run Incremental Cost |
The incremental cost of supplying an entire service (such as telephony). It is defined as a forward-looking long-run cost. |
|
ULLS |
Unconditioned Local Loop Service |
Allows Telstra’s competitors access to the copper wire, without dial tone or carriage service, between an end-user customer and a telephone exchange. Competitors use the ULLS with their own equipment in exchanges to provide a range of services, including traditional voice services and high-speed internet access, to the end-user. |
|
WLR |
Wholesale Line Rental |
Allows access seekers to resell the basic line rental that allows an end-user to connect to the traditional voice network, make and receive voice calls and have a telephone number. |
[9] Strictly speaking, average costs are not generally uniquely defined for a multi-product technology. Here, the term is used to refer to the unit cost estimate generated by the unique cost allocations of a particular TSLRIC model.
[10] The importance of recovering common costs is recognised by the ACCC in ACCC 1997: 39 and 41; and footnote 41.