7930410_2.DOC

PUBLIC VERSION OF TELSTRA’S SUBMISSION IN RESPONSE TO THE AUSTRALIAN COMPETITION AND

CONSUMER COMMISSION’S DISCUSSION PAPER IN RESPECT OF SSS DATED MARCH 2005

INDEX

A INTRODUCTION page 2

B CONFIDENTIALITY page 2

C BACKGROUND page 3

D MONTHLY ACCESS CHARGE page 3

D1 Cost modelling issues in relation to SSS-specific costs page 3

D1.1 Asset life page 3

D1.2 Demand forecasts page 5

D1.3 Other SSS Specific Costs modelling issues page 6

D2 Line Related Costs page 9

D3 Questions raised by Commission page 10

D3.1 The reasonableness criteria page 10

D3.2 Pricing page 11

D3.3 ULLS page 11

E CONNECTION AN DISCONNECTION CHARGES page 12

E1 The cost of labour page 12

E1.1 Overhead costs page 12

E1.2 Disconnection costs page 14

E1.3 The conversion from total costs to hourly costs page 14

E2 Multiple versus individual service connections page 14

E3 Questions raised by Commission page 15

E3.1 Reasonableness criteria page 15

E3.2 Competitive Neutrality page 15

E3.3 Pricing page 15

F NON-PRICE TERMS AND CONDITIONS page 16

G CONCLUSION page 17

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A INTRODUCTION

1 On 13 December 2004, Telstra gave to the Australian Competition and Consumer

Commission (“the Commission”) two undertakings pursuant to section 152BS of the

Trade Practices Act 1974 (“the Act”) in respect of the High Frequency Unconditioned

Local Loop Service (otherwise known as Spectrum Sharing Service) (“SSS”) namely:

(a) one dealing with the monthly charges; and

(b) second one dealing with the connection and disconnection charges;

that are to apply when Telstra provides SSS in 2004/05 and 2005/06 (collectively the

“Undertakings”).

2 On 7 March 2005 Telstra provided to the Commission submissions in support of the

Undertakings as follows:

(a) Submission in Support of the SSS Monthly Charges Undertaking (“SSS Monthly

Submission”); and

(b) Submission in Support of the SSS Connection and Disconnection Charges

Undertaking (“SSS Connection / Disconnection Submission”).

3 On 10 March 2005 the Commission published a Discussion Paper titled “Telstra’s

Undertakings for the Line Sharing Service”. On 15 March 2005, Telstra received a

confidential version of that Discussion Paper (“Discussion Paper”).

4 In this submission Telstra responds to the matters raised by the Commission in the

Discussion Paper. Telstra has prepared its response by adopting the headings set out in

the Discussion Paper.

B CONFIDENTIALITY

5 This submission has all of the confidential information deleted and thus may be disclosed

publicly.

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6 Telstra will provide the confidential version of this submission and the confidential

information contained in it to approved interested parties upon those parties signing

appropriate confidentiality undertakings.

7 The confidentiality undertakings do not limit the extent to which approved interested

parties and the Commission can analyse and comment on the content of this submission.

Rather, they are intended to prevent the distribution and use of the confidential material

contained in this submission for purposes other than participating in the Commission’s

public inquiry relating to the Undertaking.

C BACKGROUND (section 1.1)

8 The Commission has stated that it is concerned that Telstra’s approach in supporting a

charge of $9 per month is aimed at increasing the area of contention and slowing the

regulatory process1. Telstra rejects this suggestion. The reasons for proposing a price of

$9 per month are outlined in detail in the SSS Monthly Submission. Relevantly, it is to

increase certainty as to pricing of SSS. That price is well justified by the costs incurred

by Telstra in respect of SSS. Further, the suggestion that Telstra’s aim is to slow the

regulatory process is unjustified. The Act gives primacy to undertakings and provides a

time frame in which a decision is to be made in respect of them. Therefore, if anything,

Telstra’s aim was to act consistently with the Act and seek to provide a speedier

resolution of the issues raised with the widest possible applicability to the industry.

D MONTHLY ACCESS CHARGE (section 3.4.1)

D1 Cost modelling issues in relation to SSS–specific costs

D1.1 Asset life

9 The Commission states that Telstra has reduced the number of years over which the cost

of investment in SSS specific assets is recovered from 5 to 4 years. In that context, the

Commission appears to claim that, since Telstra proposes to recover ULLS specific costs

over 6 years, recovering SSS specific costs over 4 years is ‘less than compelling’2. The

Commission has misconceived how Telstra is proposing to recover the SSS specific costs.

The SSS monthly cost model:

1 Discussion Paper, page 2.2 Discussion Paper, page 18.

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(a) calculates the annualised (using a tilted annuity) capital costs for each year over

the 5 year average lifetime of the relevant assets;

(b) calculates a levelised price over a 4 year period that fully recovers the annualised

costs falling within, and before, this 4 year period. A 4 year period is used as this

represents the time from when SSS was first provided to the end of the term of the

Undertaking. This is done by calculating the present value of the annualised

capital costs (and other costs) over the period from when SSS was first provided

by Telstra (with costs incurred in earlier years brought forward into this period)

until the end of the term of the Undertaking3. The present value of these costs is

then levelised using the present value of actual and forecast demand over the same

period to find a unit cost per SSS that allows Telstra to just recover its costs, if the

demand forecasts are realised. Given that the levelised price is set to recover

efficiently incurred costs and no more, it is Telstra’s view that the Commission’s

characterisation of this as “less than compelling” is unwarranted. Levelisation

avoids access seekers from having to pay relatively high prices for SSS in the

early years, when the average cost is relatively high due to low levels of demand,

and low prices in later years, when the average cost is relatively low due to higher

levels of demand.

10 This is consistent with the method of cost recovery used in the ULLS monthly cost model

in that:

(a) both the ULLS and SSS specific cost recovery periods end at 2005/06, the end

date of the Undertakings; and

(b) the cost recovery periods have different lengths because the provision of ULLS

and SSS began at different dates.

In that regard, Telstra relies on the report of Henry Ergas entitled “Confidential Expert

Report on ULLS and SSS Specific Cost Models - Levelisation” (“the Levelisation

report”).

3 The justification for using this period, and bringing costs forward from earlier periods, is outlined in the report of Henry Ergas entitled “Confidential Expert Report on ULLS and SSS Specific Cost Models - Levelisation” (“Levelisation report”).

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D1.2 Demand forecasts

11 The Commission seeks views as to what method should be utilised for forecasting SSS

demand4. Telstra relies on the Statement of Ashwini Pradhan dated 26 May 2005 (“the

Pradhan statement”) as to the methodology used to forecast SSS demand for 2004/05

and 2005/06. Telstra submits that this methodology and the resultant Telstra forecasts are

reasonable.

12 The Commission states that, in the past, Telstra (and the Commission) was unduly

conservative in forecasting SSS demand and therefore Telstra’s demand forecasts are

more likely than not to be pessimistic and may need to be revised upwards5. Telstra

responds as follows:

(a) the forecasts to which the Commission refers were estimated by Telstra in mid

2003;

(b) SSS was declared on 30 August 2002. Consequently, at the time Telstra prepared

the 2003 forecasts, it had experienced less than a year of take-up of SSS on which

to base its forecast;

(c) in the period from 30 August 2002 to 30 June 2003 there were only “c-i-c” SSS

acquired. All but one of those services were taken up in June 2003, that is, in the

last month of the first period of that service;

(d) in short, Telstra had very little information upon which it could base its 2003/04

forecasts;

(e) to state, as the Commission does, that as a consequence Telstra’s current forecasts

are “more likely than not to be pessimistic and may need to be revised upwards” is

disingenuous;

(f) in contrast, Telstra now has significantly more comprehensive information on

which to base its forecasts;

(g) as at 30 April 2005 the take-up of SSS was “c-i-c”;

4 Discussion Paper, page 19.5 Discussion Paper, page 18 and 19.

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(h) the projections provided to the Commission and the marketplace by access

seekers are often “broadbrush” and therefore unrealistic. As an example, an

access seeker may look at its total number of customers and provide an estimate

on the basis that it will be able to migrate all of those customers to SSS. In

reality, however, it may only be able to migrate a proportion of those customers

for a number of reasons including:

(i) it will not be profitable to migrate all of the customers to SSS;

(ii) the access seeker may only invest in infrastructure in certain exchanges,

thus reducing the number of customers it is able to migrate to SSS;

(iii) investment in infrastructure involves a significant capital outlay, which

may need to be spread over a long period of time in order to enable

recoupment of the expenditure already expended before further

investment is undertaken. This is particularly the case given that the

majority of the access seekers who take up SSS services are relatively

“small players” in the industry and therefore do not have the financial or

operational ability of larger players.

D1.3 Other SSS Specific Costs modelling issues

13 The Commission raises the issue of using average as opposed to end of year demand

figures to unitise costs6. In addition to the matters set out in the SSS Monthly Submission,

Telstra relies on the report of Michael Potter entitled “Confidential Report on

Appropriateness of Demand Assumptions” dated 15 April 2005.

14 The Commission has also raised the issue of the WACC used7. The values for the various

WACC parameters and resultant WACC estimates proposed by Telstra are set out in

Appendix 1 to Annexure B of Telstra’s SSS Monthly Submission. Given the SSS-specific

context in which the estimates are to be used, the values of the various parameters were

SSS-specific where possible. In that regard, Telstra relies on the report of Professor

Robert Bowman entitled “WACC for ULLS and SSS” (“the WACC report”), in which

Professor Bowman opines on the appropriate parameters for a SSS specific WACC.

6 Discussion Paper, page 19.7 Discussion Paper, page 20.

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Those parameters and resultant WACC exceed the WACC estimated by Telstra.

Therefore the WACC proposed by Telstra is conservative.

15 In the past, the Commission has simply adopted the WACC from the PSTN originating

and terminating access (“PSTN OTA”) context without an examination of whether the

value of any of the component WACC parameters would actually be different in the SSS

context. Given that the WACC is clearly context specific, Telstra considers that this

represents a major oversight by the Commission.

16 The critical difference between the SSS and PSTN OTA contexts relates to the assets

included and the consequent divergence in systematic risk and hence asset beta. In the

SSS-specific context, the main assets employed by the access provider are the software

assets constructed specifically to facilitate SSS. The relevant WACC therefore is one

which explicitly focuses on these SSS-specific software assets. The network capability

required to deliver the SSS could be seen as effectively being purchased from the PSTN

OTA supplier.

17 The SSS WACC is upwards differentiated from the PSTN OTA WACC by two factors.

First, there is heightened operating leverage associated with the SSS software assets given

that the costs associated with construction of the SSS specific software systems are

largely independent of volumes. Higher operating leverage increases the sensitivity of

the overall return for SSS to the market/economic cycle as there is reduced capability for

expense variation to offset revenue variation. This factor by itself would, all other things

equal, tend to push the asset beta relevant to the SSS higher than that applicable to PSTN

OTA.

18 Secondly, the demand for the SSS is essentially a derived demand based partly on the

end-consumer demand for ADSL. Given the more discretionary nature of ADSL demand,

the asset beta relevant to the SSS would likely be higher than that applicable to the PSTN

OTA service.

19 Telstra also makes the following additional comments, in relation to the WACC

estimates:

(a) The WACC is a critical consideration in determining the appropriate price of SSS.

From a regulator's perspective, there is a clear requirement to balance the

potentially competing objectives of ensuring an adequate return on the access

provider's assets used in providing the SSS, whilst protecting the interests of

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access seekers and consumers. If the overall return on capital (WACC) is too

low, the SSS provider will be unable to recover the efficient and prudently

incurred capital costs associated with SSS provision. Whilst this may provide

short term benefits to access seekers and consumers in the form of lower current

prices, it would be detrimental in the medium to long term as it would reduce the

incentive for the SSS-provider to re-invest in SSS assets and would discourage

access seekers from building an alternative SSS capability, even if they were more

efficient than the access provider. Conversely, if the overall return on capital was

too high, the SSS provider will potentially over-invest and access seekers may be

motivated to build a network, even if less efficient than the access provider.

(b) However, there is an asymmetry in the ultimate effects of a mis-application of the

WACC. If the WACC is lower than appropriate, prices to consumers will also be

set below their optimal level. This disincents future investment and/or

modernisation which will not occur (at least not to the socially optimal level).

This has significant consequences for the extent of innovation and quality of

service. In circumstances where lower prices incent extra demand above the

socially optimal level, aggregate demand (i.e demand up to the optimal level and

any extra demand incented by low prices) will be provided with a sub-optimal

quality of service. However, if the WACC is too high the resulting over-

investment results in an allocative inefficiency (as higher final prices disincent

some customers from purchasing services) but does not have the same negative

implications for innovation and quality of service. Importantly, the quality of

service provided is not degraded for all customers.

(c) The New Zealand Commerce Commission (“NZCC”) has grappled with this

WACC-related impact asymmetry in the context of a decision in relation to the

gas sector8. The NZCC has recognised the impact of this asymmetry and chosen a

WACC above its central point estimate. The WACC adopted has been at the 75th

percentile of the valid WACC range based on reasonable estimates of the range

for each of the component parameters.

(d) Telstra considers that the Commission should adopt a similar perspective,

including in the current SSS context. Specifically, a WACC adjusted to reduce

the negative impacts of under-enumeration of the WACC should be used by the

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Commission as the benchmark against which to assess the reasonableness of

Telstra’s recommended WACC. More generally, in future decisions concerning

access-related and other regulation of major infrastructure, Telstra considers that

an adjusted WACC should be used directly in costing.

(e) Regulatory decisions regarding the appropriate WACC critically affect the returns

ultimately earned by infrastructure providers and, over time, therefore affect the

ability and willingness of infrastructure providers to continue investment and

innovation. If returns are perceived as inadequate, relative to the risks involved,

under-investment will ultimately result.

(f) Recent debate in Australia has focussed on the GDP growth slowdown in the

second half of calendar 2004 which some commentators claim may be due, in

part, to the emergence of capacity constraints, predominantly in various

infrastructure. This may in part be an early manifestation of the impact of

regulation that consistently biases WACC estimates on the low-side. As indicated

above, this ultimately results in under-provision of infrastructure relative to the

socially desirable level.

D2 Line Related Costs

20 The Commission asserts that, as a practical matter, the proposed monthly price of $9 does

not include Telstra’s estimates of contribution to line-related costs9. This is not correct.

Paragraph 65 of the SSS Monthly Submission sets out the quantification of shared CAN

costs allocated to SSS.

21 The Commission raises the difficulties of, in practice, applying Ramsey pricing principles

to the pricing of the SSS and other services to address the recovery of common costs10.

However, Telstra has presented a simple method of determining an appropriate proportion

of shared CAN costs to be allocated to SSS in Annexure G of the SSS Monthly

Submission.

22 The Commission asserts that Telstra has not provided any substantive evidence to support

the contention that, in the absence of an allowance for line related costs in the price of

SSS, access seekers will bias their provisioning of data and voice services toward SSS and

8 NZ Commerce Commission, Gas Control Inquiry, Final Report, 29 November 20049 Discussion Paper, page 20.10 Ibid.

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away from ULLS-based services to the detriment of productive efficiency and the loss of

economies of scope from ULLS-based provision of services11. Telstra has illustrated the

distorting effect of excluding a contribution to CAN costs in the SSS price in Annexure E

of the SSS Monthly Submission.

23 The Commission considers that, while an in principle case can be made to include line-

related costs in SSS charges, this would be on the basis that other adjustments should be

made to all other fixed network service prices to ensure Telstra does not over-recover

network costs and Telstra has not made any proposal for doing so in its submissions12.

Telstra presents evidence, in paragraphs 59 to 62 of the SSS Monthly Submission, that

this is unnecessary as inclusion of line-related costs in the price of SSS would not result in

over-recovery of CAN costs. This is because Telstra does not fully recover its CAN costs

from basic access prices and the access deficit contributions (“ADC”), by virtue of the

fact that the Commission does not allow Telstra to fully recover the access deficit.

Telstra’s calculation of the share of CAN costs that can be recovered from SSS prices is

less than the extent to which Telstra fails to recover its CAN costs from basic access and

the ADC. Therefore, Telstra submits that it is reasonable for Telstra to recover its

proposed share of CAN costs from SSS prices.

24 The Commission refers to its Discussion Paper on ULLS as to issues it has raised in

relation to the recovery of the access deficit and the costs of the IEN. Telstra relies on its

response to those issues in its response to the ULLS Discussion Paper, the relevant

extracts of which are Annexure A to this Submission.

D3 Questions raised by Commission

D3.1 The reasonableness criteria

25 The Commission has sought interested parties’ views on how Telstra’s proposed monthly

price for SSS meets each of the reasonableness criteria in Section 152AH of the Act and

in particular whether the proposed price promotes competitive neutrality with regard to an

efficient access seeker’s ability to compete with Telstra in dependent downstream

markets13. Telstra submits that the Undertaking prices for SSS promote competitive

neutrality. In this regard Telstra submits that it is appropriate to assess the Undertaking in

11 Discussion Paper, pages 20 and 21.12 Discussion Paper, page 21.13 Discussion Paper, page 21.

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the context of long-run (rather than short-run) competitive neutrality. Using a short run

definition of competitive neutrality is not necessarily appropriate for an assessment of the

long-term interests of end-users. Tye’s definition of ‘weak’ competitive neutrality and

Gans and King’s extension of Tye’s weak competitive neutrality are both strongly focused

on the short run and, therefore, are inappropriate tools to assess the long-term interests of

end-users.

26 Tye also defines ‘strong’ competitive neutrality, which is focused more toward achieving

long run economic efficiency. Strong competitive neutrality requires that equally efficient

firms have the same opportunity to recover their total costs. This long-run definition of

competitive neutrality would not be satisfied if SSS prices do not include a contribution to

common CAN costs, access deficit or IEN costs. SSS access seekers would be able to

offer broadband services to customers without including in their retail prices a

contribution to those costs. When competing against SSS access seekers’ retail prices,

other equally efficient broadband service providers that have competing customer access

networks (for example, wireless broadband networks, HFC cable networks, ADSL

networks built on ULLS) would not necessarily be able to recover costs. In addition,

Telstra would be unable to recover a share of the costs it incurs from ADSL customers

when competing against the retail prices that SSS access seekers would be able to offer.

27 For the reasons outlined above, long-run competitive neutrality is likely to hold only if

SSS prices include an appropriate contribution toward those costs.

D3.2 Pricing

28 The Commission seeks comment on what it states is Telstra’s contention that the

proposed SSS monthly price is consistent with currently negotiated rates14. To clarify,

Telstra has never contended that this is the case. In its SSS Monthly Submission, Telstra

stated that the proposed SSS price is “consistent with the structure and level of standard

prices Telstra is offering in the market”. However, the $9 monthly price is consistent

with prices being negotiated by Telstra with access seekers.

D3.3 ULLS

29 The Commission has sought the views of interested parties on whether there is any

commonality in the efficient provision of the SSS and ULLS to access seekers, and any

14 Ibid.

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implications this commonality may have for the calculation of efficient SSS-specific

costs15. Although some of the steps undertaken are common in the provision of ULLS and

SSS, Telstra has taken that into account in costing SSS, in that it has only allocated costs

attributable to SSS or ULLS to each of those respective services.

30 The Commission has also sought the views of interested parties on the appropriateness of

Telstra’s proposed SSS charge relative to the ULLS charges proposed by Telstra in the

ULLS undertakings, lodged on 13 December 200416. As indicated in the SSS Monthly

Submission, Telstra considers that its Undertaking price is below the efficient costs of the

supply of the SSS service. This is discussed in Annexure E of the SSS Monthly

Submission.

E CONNECTION AND DISCONNECTION CHARGES (section 3.4.2)

E1 The cost of labour

E1.1 Overhead costs

31 The Commission asserts that Telstra’s calculation of the percentage contributions to

overhead costs for Human Resource Management, Information Technology, Accounting

and Finance, Business Administration and Property Management are based on Telstra’s

actual previously incurred costs, which are not necessarily efficient or forward looking17.

This is incorrect. The methodology used to calculate these overhead costs is set out in the

statement of Andrew Harvey Briggs dated 26 May 2005 (“the Briggs statement”). In

particular, the total overhead costs are calculated by applying a percentage mark-up to the

estimate of labour costs. These percentage mark-ups have been derived using historical

cost information from the regulatory accounts for the second half of 2003/04. Telstra

does not agree that the use of this historical data to derive these mark-ups means that

those mark-ups are not necessarily efficient or forward looking. To the extent that the

historical accounts reflect inefficiencies (and Telstra does not necessarily accept that they

do), it is reasonable to assume that this will show up in both the numerator (overhead

costs) and the denominator (direct costs) used to derive the ratio. The approach of

deriving overheads using percentage mark-ups should therefore ensure that the overhead

costs represent the costs of an efficient operator. The use of percentage ratios to derive

15 Discussion Paper, page 21.16 Ibid.17 Discussion Paper, page 23.

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overhead costs in this way is standard practice in TSLRIC modelling and is an approach

the Commission used in the NERA modelling undertaken for the purposes of assessing

PSTN OTA costs.

32 The Commission questions whether the IT overhead costs claimed by Telstra are directly

attributable to the labour involved in connection18. The labour costs to which the

overhead costs are applied relate to the labour involved in jumpering the cable, the data

activation centre (“DAC”) and the Wholesale Customer Service Group (“WCSG”). The

tasks performed by these workers are set out in the statements of Natalie Luscombe dated

25 May 2005 (“Luscombe Statement”), Arthur William Thornton dated 27 May 2005

(“Thornton statement”) and of Ethel Turner in her statement dated 30 May 2005

(“Turner Statement”). The IT costs represent the IT costs associated with these workers

such as computers, IT planning and production support. All of the technical staff

performing the jumpering of cable have a computer and use it as outlined in the

Luscombe statement . The DAC and WCSG staff work in an office at a computer and use

the computer to perform the tasks described in the Turner and Thornton Statements.

Therefore, IT costs are directly attributable to the labour necessary for connection and

disconnection of SSS.

33 The Commission questions whether the Business Administration costs are also included

in SSS-specific costs, which include the cost of the ‘front-of-house connection group19.

The Business Administration costs represent the administrative costs associated with the

staff involved in SSS connections and disconnections. They do not include the costs of

the connection group, which have been specifically excluded from the costs used to

calculate the overhead allocation.

34 The Commission asserts that Telstra’s indirect cost loading in this context seems to

conflict with the indirect cost loading calculated as part of the SSS specific costs20. The

Commission appears to misunderstand the difference between the modeling approaches

used by Telstra to estimate the SSS specific costs and that used to estimate the connection

and disconnection costs. Because connection and disconnection costs cover a discrete

process over a limited period (involving various groups and staff), the approach used to

calculate these costs was different to that used for the SSS specific costs. That is, the

connection/disconnection cost modeling attempts to simply measure the time it takes

18 Discussion Paper, page 23.19 Ibid.

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particular staff to perform certain functions (eg jumpering) and then multiplies those

timeframes by a labour component. The labour component includes not just labour, but

all the other costs incurred in providing those functions.

E1.2 Disconnection Costs

35 In the SSS Connection/Disconnection Submission Telstra claimed that the DAC

undertook the necessary tasks for disconnection of an SSS. The tasks required for SSS

disconnection are not carried out by the DAC but rather by WCSG. These tasks are set

out in the Turner Statement and take approximately “c-i-c” minutes per SSS

disconnection.

E1.3 The conversion from total costs to hourly costs

36 The Commission questions Telstra’s calculation of the number of effective annual hours

spent on assignments21. This calculation is set out in the Briggs Statement, on which

Telstra relies. On that basis, the calculation of the labour rate is reasonable. Furthermore,

the Briggs statement sets out comparison rates which have been obtained. The labour rate

estimated by Telstra is well below all of the comparison rates and is therefore reasonable.

E2 Multiple versus individual service connections

37 The Commission states that there are no express provisions in the Undertakings that

provide access seekers with certainty that discounts may be available for connection

charges as part of mass network migrations22. Connection costs incurred in the context of

mass network migrations are different to the costs incurred in single connections. The

Undertakings are not intended to apply to mass network migration connections and

Telstra is negotiating separately with relevant access seekers as to the appropriate prices

of mass network migration connections.

38 The Commission also states that there may be other group or batch situations where a

discounted charge would be more reflective of efficient costs23. Telstra relies on the

statement of Peter Clive Cooke dated 26 May 2005 (“Cooke statement”) as to why

batching of requests is not undertaken by Telstra. The batching of requests would be a

complex process given Telstra’s customer service guarantee obligations and access seeker

obligations. At this time Telstra does not have a process in place to facilitate batching of

20 Ibid.21 Discussion Paper, page 23.22 Discussion Paper, page 24.

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connection requests because, to date, the demand for SSS has been insufficient to justify

the incurring of costs to introduce such a process.

39 The Commission notes that some access seekers have expressed concerns about the

adequacy of discounts offered by Telstra for managed network migrations and it may be

appropriate for it to consider promulgating pricing principles for multiple connections in

the managed network migration context24. Given the negotiations taking place, Telstra

considers such an approach to be premature at this stage.

E3 Questions raised by Commission

E3.1 Reasonableness criteria

40 The Commission seeks interested parties’ views on how Telstra’s proposed connection

and disconnection charges meet the reasonableness criteria under Section 152AH of the

Act25. For the reasons set out in the SSS Connection / Disconnection Submission, Telstra

considers that the Undertaking prices are reasonable in accordance with the statutory

criteria.

E3.2 Competitive neutrality

41 The Commission has sought comment on whether the proposed SSS prices promote

competitive neutrality with regard to an efficient access seekers’ ability to compete with

Telstra in dependent downstream markets26.

42 Telstra’s Undertaking prices for connection and disconnection of SSS are based on the

costs that Telstra incurs in connecting and disconnecting SSS. Therefore, for the reasons

set out above, the proposed SSS prices are competitively neutral since they allow equally

efficient firms an equal opportunity to recover their total costs.

E3.3 Pricing

43 The Commission has sought interested parties’ views on Telstra’s contention that the

proposed connection and disconnection charges are consistent with currently negotiated

rates27. To clarify, Telstra has never contended that this is the case. In the SSS

23 Ibid.24 Ibid.25 Discussion Paper, page 25.26 Ibid.27 Ibid.

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Connection / Disconnection Submission, Telstra stated that the proposed SSS price is

“consistent with the structure and level of standard prices Telstra is offering in the

market”. However, the proposed connection and disconnection charges are consistent with

prices currently being negotiated by Telstra with access seekers.

44 The Commission has sought the views of interested parties on the appropriateness of

Telstra’s proposed SSS connection and disconnection prices relative to similar prices

proposed for the ULLS28. Telstra’s approach to connection and disconnection prices is

consistent between SSS and ULLS in that in both cases, the prices are supported by the

costs estimated by Telstra. Whilst the timing of cost recovery differs for ULLS and SSS

disconnection costs, the methods of recovering ULLS and SSS disconnection costs are

consistent in the sense that for both services, the efficient costs are sought to be recovered.

F NON-PRICE TERMS AND CONDITIONS (section 3.4.3)

45 The Commission has sought comment from interested parties on whether the amendments

Telstra has made to the Undertakings address concerns over access to SSS in the context

of network modernisation undertaken by Telstra29.

46 Telstra submits that the amendments should address any concerns held by access seekers

in this regard.

47 The relevant amendments include a clarification that the network modernisation

provisions in the Undertaking are not intended to over-ride other terms and conditions of

supply relating to matters such as variations to services or service specifications, or the

applicable notice periods for those variations. These terms and conditions, which

generally provide for written verification of charges finalised by a period of consultation,

give adequate protection for access seekers and allow them to factor any such variations

into their planning processes. Furthermore, if the parties are unable to reach agreement on

these matters, an access dispute can be notified.

48 In addition, references to the alteration of deployment classes for authorised equipment,

which are no longer applicable to SSS, have been removed from the provisions relating to

network modernisation.

28 Ibid.29 Discussion Paper, page 26.

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49 Finally, Telstra has amended the provisions of the Undertaking regarding compliance with

the Network Deployment Rules to address concerns expressed by the Commission that the

requirement in the 2003 Undertaking that that access seekers comply with Deployment

Class 6 (excluding 6(c)) of the Network Deployment Rules may have made the

Undertaking inconsistent with the standard access obligations. While being firmly of the

view that the Commission’s concerns were unfounded, Telstra has made the change to

clarify that the provision in question was not intended to limit the use of the service by

access seekers to particular applications, but rather to ensure that agreed industry

standards were met. Provisions requiring compliance with agreed industry standards are,

Telstra submits, reasonable because they promote any to any connectivity and the

efficient and safe operation of networks.

G CONCLUSION

50 For all of the reasons set out above, Telstra considers that the Undertakings are reasonable

and ought to be accepted by the Commission.

DATED: 27 May 2005

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7930410_2.DOC

ATTACHMENT A TO THE PUBLIC VERSION OF TELSTRA’S SUBMISSION IN RESPONSE TO THE AUSTRALIAN COMPETITION AND CONSUMER

COMMISSION’S DISCUSSION PAPER IN RESPECT OF SSS DATED MARCH 2005

Extract of Telstra’s Submission in response to the ACCC’s Discussion Paper in respect of ULLS

C3 Access deficit contribution (“ADC”) (section 4.3)

1 Telstra relies on the report of Henry Ergas entitled “Confidential expert report on access

deficit” (“the ADC Report”) as to the existence of the ADC and its recoverability as part

of the prices for ULLS.

2 The Commission states that it has not previously accepted an ADC for ULLS and it would

only be inclined to do so if there are new arguments which justify the change30. Telstra

respectfully submits that the Commission should change its position on any issue if there

are new arguments that justify such a change OR if the Commission’s earlier position was

incorrect. Telstra has provided arguments in its ULLS Monthly Submission and in the

ADC Report, which Telstra considers justify a change in the Commission’s position.

3 As to the Commission’s specific comments, Telstra responds below.

4 First, as ULLS is a service provided over the PSTN, the Commission’s concern about

spreading the ADC to services beyond the PSTN31 is misplaced.

5 Second, the Commission considers that there is no longer an ADC associated with PSTN

OTA prices32. Telstra disagrees for the reasons set out in the ULLS Monthly Submission

and the ADC report.

6 Third, according to the Commission, Telstra’s argument relies on the fact that the

consumers not targeted by ULLS access seekers are net loss making customers33. This is

incorrect. Telstra’s argument relies on the fact that ULLS access seekers target the most

profitable customers rather than those customers that make a negative contribution to the

access deficit. Telstra provides ample evidence to support this in paragraph 47 of its

30 Discussion Paper, page 2331 Discussion Paper, page 2332 Ibid

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ULLS Monthly Submission. In any event, it would be irrational for ULLS access seekers

to target other than the most profitable customers. In that regard, there is currently

virtually no take-up of ULLS in Bands 3 and 4.

7 Fourth , the Commission asserts that the USC is aimed at recovering costs of net loss

making customers34. This is not the case and Telstra relies on the statement of Geoffrey

David Sims dated 26 May 2005 (“Sims Statement”) in that regard. In summary, the

USO cost-sharing regime is focused on recovering the avoidable costs associated with

delivery of the USO and is not aimed at recovering the full cost of delivering service in

USO areas. Moreover, it only requires other industry participants to contribute to the

costs of serving high cost customers when Telstra makes a loss and hence does not

achieve competitive neutrality. In any event, the number of customers in USO areas is

around 500,000, whereas there are in excess of “c-i-c” customers in Band 4 alone.

8 Fifth, the Commission notes that it is not clear that there is effective competition for

services in rural and provincial areas and, in the absence of competition, it is possible that

Telstra is able to price above cost in at least some, if not, all of these areas35. Again, the

Commission is incorrect to suggest that Telstra can price above cost in rural and

provincial areas. Telstra faces national price caps that prevent it from increasing prices by

more than set thresholds. Furthermore, Telstra competes, at the retail level, with access

seekers who acquire wholesale services from Telstra, many of which are regulated such

that Telstra supplies those wholesale services at or below cost. Therefore, to the extent

that access seekers are as efficient as Telstra, Telstra is unable to price retail services in

regional and rural areas at above cost.

9 Sixth, the Commission considers that there is significant potential for Telstra to be able to

recover the access deficit from non-regulated products that also use the CAN, such as

ADSL36. Telstra’s DSL customers already contribute toward the access deficit through

local, STD, IDD, F2M or PSTN OTA prices. This is the reason why access seekers who

supply ULLS-based voice and DSL services should also contribute toward the access

deficit. Otherwise those ULLS-based access seekers will have a competitive advantage

relative to Telstra and be able to take the market in spite of being less efficient than

Telstra. In any event, the market for broadband services (which relies on ADSL) is

extremely competitive. This is evidenced by the competitive price offerings available

33 Ibid34 Ibid35 Discussion Paper, pages 23 and 24

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from Telstra’s competitors, the number of competitors in that market and by the

alternatives to Telstra’s network such as Hybrid Fibre Coaxial (“HFC”) Cable and optical

fibre (eg Optus, Transact and Neighborhood Cable) and wireless solutions (eg Unwired,

Personal Broadband, BigAir and Iburst). Therefore it is incorrect to suggest that Telstra

could recover the ADC from ADSL prices.

10 Seventh, the Commission asserts that as PSTN prices are based on an estimate of total call

volumes over the PSTN, PSTN prices will, overtime, adjust to account for the movement

of customers away from the PSTN37. Telstra assumes that the Commission intends this to

refer to ‘PSTN OTA prices’ and not ‘PSTN prices’ as not all PSTN prices are based on an

estimate of total call volumes. If so, then the Commission’s reasoning is incorrect.

Telstra will not be able to increase the ADC component of its PSTN OTA prices, to

account for the movement of customers away from the PSTN while the Commission

remains committed to removing such a contribution, particularly if access seekers target

high volume or low cost customers. In that regard, Telstra refers to paragraphs 45 to 52

of its ULLS Monthly Submission.

11 Eighth, the Commission notes that it is not clear that all ULLS lines provide voice calls

and to the extent that they do not, Telstra’s ADC charge would constitute double

dipping38. ULLS is a multi service access technology which allows access seekers to offer

both telephony and high speed data to a customer. Therefore it is reasonable to assume

that customers will use ULLS for voice telephony.

12 Ninth, the Commission considers that it is not clear that all ULLS lines lead to a loss of a

line to Telstra39. It does in the vast majority of cases. Approximately “c-i-c” of the

forecast ULLS demand will be constituted by mass network migrations. As those

migrations relate largely to residential customers, it would lead to the loss by Telstra of

either a retail or wholesale basic access service or line. As to the remainder of the

demand, Telstra either has lost or will loose (in respect of new ULLS services taken up)

either a wholesale or retail basic access service or line because the line used for ULLS

will no longer be supplied by Telstra. The only instance when this would not be the case

is when ULLS is sought in respect of a line on which ULLS is already provided. The

Commission’s reference to a “vacant” pair being provided for ULLS by Telstra is

misconceived. It may be that Telstra, for ease of provisioning of ULLS, provides a vacant

36 Discussion Paper, page 2437 Ibid38 Ibid

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pair for the purposes of ULLS. But, in order to provide ULLS Telstra disconnects the

Telstra in use pair. In that regard, Telstra relies on the statement of Natalie Monique

Luscombe dated 25 May 2005 (“the Luscombe statement”).

13 Tenth, the Commission considers that Telstra’s competitive neutrality argument to justify

an ADC appears fundamentally flawed in conceptual terms as there is significant evidence

to suggest that an ADC cannot be considered competitively neutral40. Telstra relies on the

ADC Report, which sets out why imposition of an ADC is competitively neutral. In

summary, the significant evidence referred to by the Commission, being the Gans and

King paper, is an extension of a short run concept of competitive neutrality developed by

Tye. Its short-run focus makes it inappropriate for assessing the long-term interests of

end-users. Instead, the Commission should have regard to Tye’s concept of strong

competitive neutrality, which requires that equally efficient firms have the same

opportunity to recover their total costs. Preventing Telstra from recovering an access

deficit as part of ULLS prices is inconsistent with strong competitive neutrality, since an

equally efficient ULLS-based access seeker would not need to recover an ADC from its

customers, yet Telstra would.

C.4 IEN costs (section 4.4)

The Commission has invited comment on the IEN costs which Telstra seeks to recover as

part of the price of ULLS. In that regard, Telstra relies on the Report of Henry Ergas

entitled “Confidential Expert Report on ULLS and SSS Prices - IEN Costs” (“the IEN

Report”).

C4.1 Contribution to common costs

14 The Commission questions what Telstra means by “common costs” in this context. The

common IEN costs to which Telstra refers are those IEN costs which are incurred when

any one IEN service, or combination of several IEN services, is supplied. Hence these are

the IEN costs that do not change when customers switch to ULLS-based access seekers.

15 In making the statement that “Telstra has to incur common costs whether or not it

provides the IEN and, therefore, regardless of whether it is the COLR”41, the Commission

has misunderstood Telstra’s position. The common costs to which Telstra is referring are

the common costs of the IEN, not Telstra’s common costs more broadly. These IEN

39 Ibid40 Ibid41 Discussion Paper, page 25

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common costs are only incurred if Telstra provides an IEN service and are not incurred

otherwise.

16 Notwithstanding the above misunderstanding of the nature the common costs to which

Telstra is referring, the Commission considers that Telstra’s argument must be interpreted

as stating that when access seekers make use of ULLS, Telstra will no longer be able to

spread its common costs over as many PSTN minutes and should be entitled to recover

those costs from the access seeker42. This is correct.

17 The Commission goes on to state that this argument relies on the assertion that customers

making use of the ULLS still benefit from the IEN common costs that are incurred by

Telstra43. This is also correct. Such customers can return to Telstra at any time, and

Telstra is required to provide them with a standard telephone service (“STS”). However

the Commission considers that the argument does not hold because Telstra would have to

incur the costs regardless of whether the end user has the benefit of switching to Telstra44.

On the Commission’s reasoning, however, all STS customers should make no

contribution toward IEN common costs. In short, under the Commission’s reasoning

common costs would never be recovered. Contrary to the Commission’s view, it is

completely standard in economic theory for all parties that share a common cost to

contribute toward its recovery, not least because cost recovery from all service users is

more efficient than recovery from a narrower base of users. In the present case, ULLS

comes with COLR insurance, which jointly shares the IEN common costs with Telstra’s

STS customers. However, without a contribution to common costs in the ULLS price,

Telstra loses its ability to recover the IEN common costs from ULLS end-customers and

since those customers do not need to contribute to those common costs, its ability to

recover it from Telstra’s STS customers for whom it competes with ULLS based

providers.

18 The Commission takes issue with Telstra’s claim in its supporting submission that it may

be inefficient for the customer to shift to ULLS-based service in the absence of a

contribution to the IEN common costs because ‘…the social costs (which are the sum of

the costs necessarily borne by Telstra and access seekers) would be higher as a

consequence.’ The Commission states that if this is true, it would imply that the IEN is a

42 Ibid43 Discussion Paper, page 2644 Ibid

23

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natural monopoly because it would not be possible for the service to be provided more

cheaply by two providers and that Telstra has presented no evidence to this effect45.

19 The point being made by Telstra does not rely on the IEN being a natural monopoly.

Rather, Telstra’s argument is that not requiring ULLS customers to make a contribution to

the recovery of common IEN costs could lead to inefficient investment in ULLS and

downstream services whereby service would not be provided at the lowest resource cost

to society. If ULLS prices do not include a contribution toward the IEN common costs

(which, as previously explained, is standard in economics), then the prices of ULLS-based

retail services will not reflect these costs. Rather ULLS access seekers will obtain the

COLR insurance for free. Even if Telstra does not adjust the prices that lead its STS users

to contribute more towards IEN common costs, this will allow access seekers to profitably

provide their services at a quality adjusted price below Telstra’s retail prices for the same

service46. Demand for ULLS-based retail services relative to demand for Telstra’s STS

will be greater than is efficient, leading ULLS-suppliers to over invest and over supply

their services. Worse, in these circumstances, if Telstra is to recover its IEN common

costs, it must increase the prices that allow cost-recovery from its own STS, and this

would further accentuate the inefficient shift in demand toward ULLS-based service47.

20 The Commission also rejects Telstra’s argument that access seekers should contribute to

Telstra’s IEN common costs on the basis that it could mean that the access seekers would

have to contribute to their own as well as Telstra’s common costs48. This is indeed

correct, and appropriate from an economic efficiency perspective. That is, as Telstra

incurs some costs that would not be diminished if some (or even all) PSTN services

switched to ULLS provision, the price access seekers need to face to give an efficient

outcome (i.e. service provision at the lowest resource cost to society) needs to reflect this

cost which Telstra incurs.

45 Ibid46 Such lower prices will necessarily eventuate if the Commission’s purpose in making ULLS available (which is to increase retail competition bringing prices more in line with costs, and spurring innovation) is sound.47 Over time such a price increase would become unsustainable (see footnote 46), and Telstra would be forced to price at the market level (see footnote 54). Market prices would, however, continue to be below costs, and output and investment by Telstra’s rivals inefficiently high. At the same time, while Telstra could have inefficiently high levels of output, its investment incentives would be inefficiently weak, since it is not allowed to recover the full costs of the investments necessary to supply an IEN when it faces a COLR obligation.48 Discussion Paper, page 26

24

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21 Oddly, the Commission indicates that requiring a contribution from access seekers would

mean that Telstra would be able to force access seekers out of the market49. In fact,

without a COLR contribution, Telstra is subsidising its rivals. In a competitive market

that ULLS is intended to create, if Telstra provides COLR insurance for all customers,

and access seekers do not have to pay for this, then the market price (including Telstra’s

price) would reflect the costs of the ULLS service as if COLR insurance was costless. Of

course, the COLR insurance is not costless, and Telstra would fail to fully recover the

costs of its IEN. Telstra would be forced operate at a loss while subsidising its rivals50.

Moreover, Telstra is not asking that it be allowed to charge ULLS access seekers an

arbitrarily large contribution toward its IEN common costs, but rather one that essentially

recovers IEN costs on a per line basis.

22 In summary, Telstra considers that the long term interests of end users and the efficient

investment are best met if Telstra recovers common IEN costs over a wide tax base,

including the ULLS. To do otherwise would mean that Telstra would have to bear these

costs which would lead to a range of inefficiencies.

C4.2 Recovery of traffic sensitive costs

23 Telstra seeks to recover from ULLS access seekers a contribution to the common costs of

the IEN and the IEN COLR costs that are attributable to ULLS. To estimate these costs

Telstra has measured the long run incremental costs of supplying all IEN services (which

the Commission sometimes calls TSLRIC+) at the wholesale level using the PIE II model.

24 When discussing Telstra’s need to provision its network with spare capacity to supply

future demand, regardless of any COLR obligation, the Commission states that “in

modeling network costs, this additional capacity should already be taken into account.”

Telstra agrees with the Commission on the need to provision the network for future

demand, but notes that the Commission (inconsistently) does not allow Telstra to

provision any spare capacity in the PIE II model for future demand. However, merely

because Telstra must supply excess capacity for its own STS customers in no way means

that Telstra has supplied sufficient spare capacity to meet its COLR obligations, given the

presence of end-users with ULLS-based services. The COLR obligation is additional to

Telstra’s supply of STS, and requires additional capacity if Telstra is to be able to supply

49 Ibid50 The alternative of exit on Telstra’s part would likely be more costly, as it still would incur the IEN costs necessary to meet its COLR obligation, but gain no revenues at all from STS customers.

25

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a customer that decides to switch to Telstra from a ULLS-based access seeker. These

costs should be recovered from ULLS access seekers since it is the end users who acquire

ULLS-based services who benefit from being able to switch back to Telstra.

25 The Commission suggests that when customers switch to Telstra as a result of an access

seeker ceasing to operate because of financial difficulty, it may be possible to meet the

needs of these customers in other ways. For example, through Telstra leasing the (failed)

access seeker’s facilities in order to continue to meet its service guarantees51. There are

many reasons why Telstra could not plan to lease a failed access seekers’ network to

comply with the COLR. These are outlined in the statement of Barlennan Straede dated

25 May 2005 (“the Straede Statement”). In summary, Telstra’s COLR obligations

require it to supply customers with STS within strict time constraints. It is not certain that

Telstra would be able to lease a failed access seekers’ facilities within these time

constraints. Second, access seekers use a variety of different equipment types which may

work in a different way to the equipment used by Telstra, impacting on Telstra’s ability to

guarantee that the equipment performed to the requisite standard. Third, the network

management and billing systems used by the access seeker will be different to that used

by Telstra. This would result in a lot of work for Telstra, including training staff to use

the access seeker’s system or taking over the access seeker’s staff. There is no guarantee

that this could be achieved within the required time frames. Finally, the access seeker

may have failed because its network does not provide adequate service, in which case

Telstra could not use it to comply with its COLR obligation.

26 According to the Commission, the key question seems to be whether Telstra will be able

to reduce the size of its IEN when access seekers take up ULLS. Telstra submits that it

cannot reduce the size of its IEN due to its COLR obligations. If those obligations did not

exist, Telstra would reduce the traffic sensitive costs of the IEN. In any case, Telstra’s

cost estimates are forward-looking, and are based on forecasts of Telstra STS demand and

ULLS demand. They are in no way predicated on Telstra’s existing network. Indeed, the

actual size of Telstra’s existing network is irrelevant to a regulatory regime based on

forward-looking efficient long run (incremental) costs. Moreover, if the Commission

considers history to matter, and if it were the case that Telstra’s existing network was

more than sufficient to meet the COLR demand, then the regulatory creation of ULLS in

51 Discussion Paper, page 27

26

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effect stranded investments made in good faith by Telstra, and Telstra should be

compensated for this.

C4.3 Estimation of IEN costs

27 The Commission states that Telstra provides no details of its estimation of IEN costs. The

IEN costs were obtained directly from the PIE II model, which has been supplied to the

Commission. They have been calculated as follows.

2004/05 IEN costs

28 The 2004/05 IEN costs are an output of the PIE II model. The results include the total

annualised cost of the IEN which can be accessed by using the following menus: PIE

Front End; Costing and Analysis; Detailed Cost Reports; Summary Reports; and Network

Cost Summary. A copy of the Network Cost Report is Annexure C to this submission and

shows that the total annualised costs of the IEN (being the sum of transmission and

switching costs), for 2004/05, are:

CBD Metro Provincial Rural Total

“c-i-c” “c-i-c” “c-i-c” “c-i-c” “c-i-c”

29 The total number of PSTN services in operation assumed by the PIE II model is:

CBD Metro Provincial Rural Total

“c-i-c” “c-i-c” “c-i-c” “c-i-c” “c-i-c”

30 The 2004/05 IEN costs per SIO are calculated by dividing the annualised cost of the IEN

in each area by the number of SIO’s in the area.

2005/06 IEN costs

31 To calculate the 2005/06 IEN costs, the outputs of the PIE II model for 2003/04 and

2004/05 were used. The Network Cost Report is Annexure D to this submissions and

shows that the total annualised cost of the IEN (being the sum of transmission and

switching costs), for 2003/04, are:

CBD Metro Provincial Rural Total

27

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“c-i-c” “c-i-c” “c-i-c” “c-i-c” “c-i-c”

32 The 2004/05 IEN costs set out in paragraph 28 above were then multiplied by the ratio of

the IEN costs for 2004/05 and 2003/04. The IEN costs for 2005/06 are:

CBD Metro Provincial Rural Total

“c-i-c” “c-i-c” “c-i-c” “c-i-c” “c-i-c”

33 These costs were then divided by the number of SIOs set out in paragraph 29 above.

34 The Commission asserts that Telstra’s approach to the calculation of IEN costs would

only be appropriate if Telstra could not reduce the size of its network at all which is not

likely as not all ULLS consumers will return to Telstra’s IEN52. Telstra considers that the

full costs of the COLR exist where there is any likelihood of customers returning to

Telstra’s IEN because to do otherwise would risk Telstra not meeting its COLR

obligations.

35 In any event, Telstra considers that the IEN costs estimated by it are reasonable for the

reasons set out in the IEN Report. In summary the IEN Report indicates that Telstra has,

at most, over-estimated the IEN cost contribution to be paid by ULLS access seekers by

“c-i-c” per cent, and likely by less than this. This estimate does not take into account

economies of scale and that ULLS access seekers tend to target high volume customers

which would serve to reduce this figure. This margin of error is well within the

Commission’s forecast errors with respect to the take-up of ULLS.

36 The Commission further considers that the IEN argument as outlined by Telstra appears

to only apply to ULLS which are used to provide voice calls, and where that voice call is

carried on a network entirely separate to Telstra’s IEN. The Commission states that it

does not know to what extent this characterises the current and future use of ULLS53.

Telstra expects that the majority of ULLS will provide voice services.

52 Discussion Paper, page 2853 Ibid

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ANNEXURE C TO THE PUBLIC VERSION OF TELSTRA’S SUBMISSION IN RESPONSE TO THE AUSTRALIAN COMPETITION

AND CONSUMER COMMISSION’S DISCUSSION PAPER IN RESPECT OF ULLS RECEIVED MARCH 2005

Network Cost Report which shows the total annualisedcosts of the IEN for 2004/05

PSTN Ingress / Egress model2004/05 Base Case

Total Costs by Network

CBD Metro Prov Rural Total

TransmissionTNS to TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS to TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS to LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

RAU to LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

SwitchingSTP $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

RAU $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

AccessLead Ins $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

Access $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

TotalTotal $“c-i-c” $“c-i-c” $“c-i-c” $”c-i-c” $“c-i-c”

29

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ANNEXURE D TO THE PUBLIC VERSION OF TELSTRA’S SUBMISSION IN RESPONSE TO THE AUSTRALIAN COMPETITION

AND CONSUMER COMMISSION’S DISCUSSION PAPER IN RESPECT OF ULLS RECEIVED MARCH 2005

Network Cost Report which shows the total annualisedcosts of the IEN for 2003/04

PSTN Ingress / Egress model2003/04 Base Case

Total Costs by Network

CBD Metro Prov Rural Total

TransmissionTNS to TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS to TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS to LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

RAU to LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

SwitchingSTP $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

TNS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

LAS $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

RAU $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”

AccessLead Ins $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”Access $”c-i-c” $”c-i-c” $”c-i-c” $”c-i-c” $”c-i-c”

TotalTotal $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c” $“c-i-c”