ISPs stare down Telstra backhaul cost increase

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ISPs stare down Telstra backhaul cost increase
A rebound in regulated AGVC costs surprises industry.

Why regulated costs are rising against a backdrop of falling prices.

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ISPs and telco executives have been caught off-guard by a draft plan to raise the price of the transmission backhaul that is bundled with Telstra's wholesale ADSL ports.

The draft decision by the Australian Competition and Consumer Commission (ACCC) will see the aggregating virtual circuit (AGVC) fee increase from $33.65 per Mbps to $36.08 per Mbps in 2013-14. (pdf)

On paper, the proposed rise bucks a longstanding downward trend in backhaul prices as infrastructure competition has increased on a number of routes.

The Government's $250m Regional Backbone Blackspots Program is known to have forced Telstra to drop its backhaul prices on previous monopoly routes, in one case by as much as tenfold.

The proposal also halts the trend set in the preceding interim access determination (IAD) for Telstra wholesale ADSL prices, where backhaul costs fell from $45.50 to $33.65 per megabit per second.

Why prices went up, not down

The ACCC's official explanation for the surprise price rise has set industry tongues wagging.

Officially, the commission changed the model it uses to calculate draft prices and softened its estimates for backhaul usage in 2013 and 2014. The former isn't as controversial as the latter.

A key input into the calculation of the AGVC charge happens to be usage forecasts supplied by Telstra.

The ACCC now says that the forecasts it used in 2012's interim determination — which cut backhaul prices to $33.65 per Mbps — were simply too high.

The regulator knows this because the forecasts exceed the actuals that Telstra has since provided in quarterly Telstra Economic Model (TEM) reports.

When calculating the new draft prices, the ACCC had no usage forecast data from Telstra at all.

Telstra, the ACCC says, was "unable" to provide it, so the commission used the actuals from the 2011-12 TEM reports and assumed data growth over the next two years would stay the same as in 2011-12.

The net result is a proposed $2.43 per Mbps rise in AGVC costs.

ACCC's communications group general manager Michael Cosgrave told iTnews it would be wrong to read the increase as a clawback or as compensation for the AGVC being set too low in the interim determination as a result of the overzealous forecasts.

A congestion charge, by another name?

Some see the proposed AGVC price increase as the introduction of a congestion charge by another name.

Telstra has argued that an increase in wholesale ADSL prices would help manage growing congestion on its network, though the ACCC publicly neutered that proposal this week.

"They [the ACCC] talk about it not being reasonable to introduce a congestion charge, and yet what they've done is increase the charges for AGVC along the lines of what you would describe as a congestion charge," iiNet chief regulatory officer Steve Dalby told iTnews.

But Cosgrave countered that the AGVC price increase "doesn't involve in any way a view as to congestion pricing.

"I guess people are making judgments around why that [AGVC price increase has] occurred," he said.

"We quite explicitly find that congestion pricing at the wholesale level would not be effective."

According to Cosgrave, the proposed increase in AGVC pricing is simply based "around a better understanding of [backhaul usage] data."

"We ended up with a lower forecast for data traffic growth than our previous decision and that means the per unit AGVC charges increased," he said.

Cosgrave is cognisant of the apparent conflict between raising AGVC prices amid falling backhaul costs, but he believes it is not strictly an apples for apples comparison.

"I guess the AGVC charges are a combination of internal transmission, switching, routing plus some joint and common costs in there as well," he said. "It's not solely around the cost of internal transmission."

Dispensing with reality

Whether Australia's internet industry buys the explanation is another matter.

A selection of telecommunications regulatory executives and analysts polled by iTnews universally expressed surprise at the ACCC's draft plan to increase the AGVC charges.

"There does seem to be a disconnection between what the market thinks is a fair price and what Telstra thinks is a fair price for backhaul," iiNet's Steve Dalby said.

Competitive Carriers Coalition chairman Matt Healy said the lobby group is "puzzled and concerned that the ACCC continues to regulate with outcomes that are fundamentally anti-competitive.

"The history of DSL regulation is a sad and sorry tale with misuse of market power cases against Telstra that don't resolve, inquiries that appear never-ending, and now pricing decisions from eight years after they were first called for that don't reflect market reality," Healy told iTnews.

"We don't understand why they didn't align [the AGVC fees] with where NBN Co's backhaul charges are lining up, or [with] some of the transmission modelling that the commission itself had done".

Macquarie Telecom raised a similar argument in April last year, when it argued the AGVC costs in the interim determination were "excessive" (i.e. even before they were proposed to go up again in this draft pricing determination).

"Macquarie considers such prices to be excessive in comparison to NBN Co's pricing of its connectivity virtual circuit which is currently $20 per megabit per month," the firm said. (pdf)

The ACCC has dismissed the idea of bringing Telstra's AGVC in line with NBN Co's similar CVC charge.

Although the product constructs "appear to be similar", the regulator said the underlying costs, network architectures and degrees of aggregation involved were too dissimilar to bring prices for the two transmission backhaul products into line.

Other telco analysts and regulatory executives expressed similar concerns over the draft AGVC pricing, but declined to speak on-the-record prior to lodging formal submissions to the consultation, which closes April 5.

Optus corporate & regulatory affairs vice president David Epstein declined to speak to iTnews but issued a statement that the telco is "still reviewing the details of [the draft] decision" and that its "initial view is that it appears inconsistent with recent statements on NBN pricing principles."

Several industry players privately raised fears about flow-on impacts that the ACCC's calculation assumptions might have on regulatory decisions concerning the NBN.

No choice

Rather than see the Telstra and NBN pricing align, iiNet is instead seeking a wholesale ADSL product construct that does not require a bundle of ADSL port, AGVC charge and PSTN line.

"At the moment the ACCC is saying nobody else is allowed to supply backhaul to Telstra DSLAMs," Dalby said.

"When you say that it's OK to make a forced bundle of backhaul, it doesn't give the market a chance to operate.

"If we could source our backhaul for Telstra ports from the market at large, you'd find you'd have a different rate at every location and that's how it is today.

"On the other 410 DSLAMs that we operate, we pick and choose from what's available in the market, and our operating costs are far lower than the operating costs of a Telstra AGVC."

Dalby believed that unbundling the Telstra wholesale ADSL construct would result in cheaper backhaul fees.

"Let the market deliver competitive backhaul and drive the prices down," he said.

The current construct is "prohibiting competition", he added. "And how is that in the role of the ACCC to prohibit competition? It's a huge conflict."

Healy raised a similar argument. "We don't understand why we can't have an unbundled DSL product where we could pick it up in the regions and use our own backhaul rather than the inflated Telstra concentration."

The ACCC said its draft view was to maintain the wholesale ADSL product construct as-is. It also kept the "status quo" on requiring an active PSTN service on a line before ADSL can be provisioned.

Read on for how ISPs might react to the proposed prices...

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