But what if the asset is not for sale? How do you value a business asset – a car or a computer for example – for the purpose of a balance sheet? 

There is a well established and eminently sensible approach that covers most cases. Take what was paid for the asset (the historic cost), subtract an amount every year for wear and tear (depreciation) and the value is what is left.

Sometimes, working out how much to subtract for wear and tear can be a bit hit and miss. In rare cases, assets appreciate in value because of scarcity or some other special condition.

But for the most part, common sense dictates that if you start with the historic cost, you won’t go too far wrong. 

The ACCC is presently discussing how to determine the value of Telstra’s fixed line network. It is doing this to calculate the appropriate rent that should be charged for other carrier to access, or use, the monopoly parts of that network.

Seemingly in defiance of common sense, the Commission is starting the process by offering up a list of alternative ways to calculate the starting value.

It is asking this question even though it has already calculated the depreciated historic cost of the network using information provided to it by Telstra under the law. That is, it has calculated already what Telstra’s network cost and what should be written down to account for how much it has been “used up” in the years since.

One of the other ways of working out the value of the network suggested by the ACCC is Depreciated Optimal Replacement Cost. This method basically involves constructing a model that tries to work out how much it would cost to build the Telstra network today.

This is a bit like working out what your car is worth by calculating how much it would cost you to build it in the backyard yourself.

From scratch.

Another method being considered is the Net Present Value method. This involves adding up all the income that Telstra gets from the network, multiplying the income by the number of years that it might continue to generate money and calling that the value of the assets.

The problem with this is that the ACCC believes that Telstra charges more than it should from those using its network. So NPV would simply turn inflated prices into an inflated asset value. 

Both DORC and NPV obviously and fundamentally fail the common sense test.

So why are DORC and NPV being considered at all? Because Telstra and other large incumbent telecommunications companies around the world have invested millions of dollars over decades dragging regulators such as the ACCC into theoretical nonsense games.

Compare the different outcomes from the different approaches and it soon becomes clear why Telstra is willing to make the investment in this regulatory fight.

According to figures presented by the ACCC to the Government, the accounts Telstra as provided to the ACCC indicate that the actual price Telstra network paid for its network minus deprecation (depreciated historic cost) is $8 billion.

But the model that Telstra has constructed to work out what it would cost to build its network today (Depreciated Optimised Replacement Cost) would value exactly the same network at closer to $40 billion.

It is easy to dismiss these arcane regulatory debates as egg head shenanigans, but there is a very good reason to pay attention.

The Commission’s choice of methodology will determine how much each and every telephone call, broadband connection and line rental costs for years to come. The price every Australian pays for basic phone services could be four times higher under the DORC methodology than under the depreciated historic cost approach

In the next few months, the Commission is going to have to make a decision about whether it stands up to Telstra and delivers the best deal for consumers and competition, or whether it trades their interests off to avoid a fight with Telstra.

Watch this space.

The attitude of some parliamentarians to what is a package that is supported by every stakeholder except Telstra is difficult to understand.

The CCC and others spent many hours dealing one by one with all the furphies that Telstra presented in order to discourage these much needed reforms from being implemented. Yet still there persisted nonsense ideas such as that Telstra should not have “gun to its head” in the form of a restriction on its ability to bid for more wireless spectrum.

As the CCC has repeatedly asked, what is the alternative to restricting Telstra’s access to this public asset? Should Telstra be allowed to expand without constraint into new markets when all the independent analysis says that competition in Australian communications markets has failed and that it is Telstra dominance across so many platforms that is to blame?

The Government’s proposed regulatory reform represents the first time in years that there has been an attempt to truly address the core problems facing the industry. Consumers, competitors, independent analysts and commentators are united in supporting the action. Only one very powerful vested interest and its associates are opposed.

The Government has said it is determined to bring the Bill back next year. Telstra will do everything it can in its negotiations with the Government over possible structural separation to prevent this. If the Government stands firm, the Parliament will again be put to the test and will have to consider whose interests it thinks are most important.

The letter reflects a growing worry in the industry that the Commission has not grasped just how fragile competition truly is. The ACCC itself, in its most recent annual report on the state of competition, pointed out that the industry is one of the most concentrated in the world, and had been getting more concentrated over the past three years. The graph below is from that report, which concluded:

• Three service categories measured were all well above the “competition concern” threshold under the index methodology employed
• Fixed line voice market concentration was “more than twice the threshold … and increasing,” and;
• “Concentration levels in broadband increased by more than one third.”

Yet the Commission has made a series of decisions that competitors had warned would make this situation worse. The most troubling of these was the determination of the Commission to press ahead with plans to exempt Telstra from having to provide competitors with basic wholesale voice services in locations where competitors had installed their own equipment in exchanges. The Commission has forced through these exemption even though competitors equipment cannot, in many cases, provide voice services.

The CCC said at the time the Commission first announced it plan to do this that it was tantamount to punishing competitors for the failure of the regulatory regime to control Telstra’s market power. It seems the Commission has a long way to go before it understands the commercial pressure competitors are under.