something brewing?, page-10

Telstra to battle iiNet Limited and Vocus Communications Limited in court
The Motley Fool AustraliaBy Claude Walker | The Motley Fool Australia – Wed, Jan 22, 2014 8:29 AM AEDT

On January 3 2014, Telstra Corporation Limited (TLS.AX) filed an originating application against Vocus Fibre Pty Ltd, a subsidiary of Vocus Communications Limited (VOC.AX). Two subsidiaries of iiNet Limited (IIN.AX), Adam Internet and Chime Communications, and the Australian Competition and Consumer Commission (ACCC) were subsequently joined to the proceedings.

The dispute revolves around Telstra wanting to increase the amount it charges Vocus and iiNet for access to its exchanges and underground ducts. The increases would be in line with the consumer price index, but the smaller telcos appealed the price increase to the ACCC. Telstra says that the increase is contractual, and the ACCC has no legal right to arbitrate the disagreement. As a result, Telstra has taken the three to court.

The Australian Financial Review has quoted a spokesperson for Telstra arguing that the company has a "commercial contract with Adam, Chime and Vocus and there is no suggestion that we have breached it, so there is nothing for the ACCC to arbitrate when it comes to these charges." This statement deserves a little scrutiny.

The Competition and Consumer Act 2010 prevents a corporation entering into a contract that would substantially lessen competition as well as regulating third party access to nationally significant essential facilities. The existence of a breach of contract isn't a prerequisite for the involvement of the ACCC, as a general rule.

I don't know how the court proceedings will work out, but first direction hearings are scheduled for February 13. In the meantime, we can assume that the longer the action drags on, the more the lawyers' fees will mount. This makes virtually no difference to Telstra, and would have minimal impact on iiNet. Vocus is a small-cap company and as a result legal costs could be more significant. If the smaller telcos lose, the combination of legal fees and increased costs might make an impact on their bottom line. This Fool believes the companies should tell the market how much is riding on the outcome of this case.

Foolish takeaway

Legal actions are rarely good news for a company; there's always money on the line. In this case, I suspect that there isn't much at stake, but we don't know for sure. From September 2012 to September 2013, the weighted median CPI increased by 2.3%. This kind of increase would impact the margins of iiNet and Vocus, but it wouldn't be a major problem for the businesses.

However, the bulk of Vocus's network is located in Telstra's underground ducts, so it would be nice to hear comment from the company. Of course, Vocus and iiNet might be right: it's not impossible that Telstra does charge excessive fees for duct space, considering the cost of the ducts has been depreciated over many years.