Economic regulation in the face of declining demand

Telstra v Australian Competition & Consumer Commission (ACCC)

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Overview of decision

On 28 March 2017, the Federal Court dismissed Telstra's appeal against the ACCC's October 2015 decision setting the prices for fixed line telecommunications services.

In upholding the ACCC's decision, the Federal Court observed that the key issue was the ACCC's decision to remove from the calculation of the allowable revenue using a building block methodology the increased unit costs of supplying the regulated services resulting from national broadband network (NBN) induced under-utilisation or redundancy of Telstra's network assets.

The Court concluded that:

  • It was open to the ACCC to conclude that users of the regulated services should not bear any increased costs arising from the NBN induced loss of economies of scale and to disallow those particular costs in calculating allowable revenue. Telstra failed to show that the ACCC made any legal error in doing so
  • The regulatory framework did not require that the determination provide for full cost recovery of Telstra's efficient costs of supplying the regulated services or for Telstra to be compensated for the loss of its incumbency status
  • For the purposes of Part XIC, an ACCC regulatory decision is not required to be consistent with any fixed principle applying in respect of it; it suffices for the ACCC to consider the fixed principles in making its decision
  • The ACCC considered the fixed principles which were applicable and did so in the context of considering other relevant mandatory considerations
  • Telstra's judicial review application was an impermissible attack on the merits of the ACCC's decision

Key implications

The judgment provides a reference point for understanding the degree of flexibility available to regulators balancing competing objectives in the face of rapidly changing network industries.

Regulated businesses should note the Court's comments regarding the importance of the overall regulatory framework and, where their regulatory regime provides for fixed principles, the conclusion that an ACCC decision which is inconsistent with a fixed principle may nevertheless be consistent with that overall regulatory framework.

Critical to the Court's reasoning was Telstra's negotiation of agreements with the NBN owner under which it agreed not to migrate customers to the NBN, not to compete with the NBN and to lease or divest assets to the NBN owner, and received compensation. The ACCC's Decision and its submissions to the Court (which were accepted) distinguished declining demand and the associated loss of economies of scale resulting from NBN migration from other sources of declining demand. The ACCC conceded that it was appropriate for all users to bear the costs of declining demand due to the evolution of the market for the regulated services but considered this did not hold for the impact of NBN migration due to Telstra's negotiation of these agreements with the NBN owner.

It follows that network businesses should be particularly attentive to the consequences of negotiating any arrangements with providers of disruptive technologies when faced with the redundancy of their incumbent networks as this may have implications for the regulatory recovery of their network costs.

However, the applicable regulatory framework and circumstances of the case were also critical to the Court's reasoning. In particular, the regulatory framework for the making of telecommunications access determinations requires the ACCC to take a number of competing considerations into account including whether the determination will promote the long term interests of end users, the legitimate business interests of a service provider, the interests of users and the direct costs of providing access to the services. In many respects, that framework differs from those applicable to other economically regulated businesses, providing those businesses with a basis to distinguish the Court's decision.