One of the big risks posed by the intensity of the Gillard government’s commitment to the national broadband network and by the marginal, at best, economics of the network is that of regulatory capture.
The regulator, the Australian Competition and Consumer Commission, has been intimately involved in developing the NBN concept, which represents its own triumph after nearly a decade and a half of battling Telstra. With the NBN paving the way for structural separation of Telstra, it would be tempting for the ACCC to do what it can to help the parlous economics of the project.
The first real test of the commission’s approach to regulating the NBN relates to its recommendations on the numbers of points at which retail service providers can connect to the NBN.
The ACCC’s recommendations on the number of points of interconnection had to be handed to the government by November 30 and there have been a number of reports, which the commission won’t confirm or deny, that it has recommended against NBN Co’s preferred model.
NBN Co’s preferred option of 14 POIs — two in each capital city — ignited a fierce backlash from the industry because that option would strand or undermine the returns on a vast amount of existing backhaul fibre. At the moment there are about 550 POIs in Telstra’s network. A limited number of POIs would also effectively extend NBN Co’s monopoly.
NBN Co has argued that having fewer POIs would enable it to lower the combined costs of accessing the NBN and providing backhaul to the retailers and help to promote greater competition at the retail level. It would also make it easier for it to meet the government policy of national uniform pricing.
The ACCC would be conscious that it is firm government policy that there will be national uniform pricing at the wholesale level and that having only a handful of POIs would be the most obvious way of delivering that objective. Conversely, the fewer the number of POIs the bigger the NBN Co monopoly and the less competition.
It would appear the ACCC favours having a larger competitive dimension in backhaul provision, presumably using other mechanisms — like direct subsidies — to produce uniform pricing.
If the ACCC has advocated several hundred POIs it would be difficult for the government to reject that advice, particularly as those telcos with their own fibre — and there is a lot of fibre out there — have been threatening to seek compensation if their fibre is stranded.
In the summary of the NBN Co business case that was released last week, however, NBN Co warned that a rejection of its preferred option would cut 50 to 80 basis points from its own projected internal rate of return, although the IRR would still remain above the long-term government bond rate. The implication in the summary was that the IRR would be marginally above the risk-free rate but substantially below NBN Co’s estimate of its weighted average cost of capital of 10-11%.
While the ACCC may have been frustrated in the past at the extent to which Telstra managed to retain its dominance of fixed line telecommunications, the access regime had allowed competitors to install their own infrastructure within Telstra exchanges and compete for its customers. NBN Co’s monopoly, while wholesale, will be more complete.
That, and the shaky economics of a project that will cost $35.7 billion — and potentially far more — means that it is imperative that the ACCC protect the long-term interests of end users of the network by emphasising competition wherever it can and ensuring that the footprint of the monopoly is as small as possible.
Ironically, that will provide common interest between the ACCC and Telstra and the rest of the sector, who have also found themselves in the novel position of siding with Telstra on the POI issue.
NBN Co will inevitably try to improve its financial position as much as possible. As we’ve seen with Telstra that is a natural and indeed desirable organisational ambition — NBN Co needs to be as efficient and commercial as possible if consumers and taxpayers’ interests are to be maximised — but it does demand vigilance and a “competition first” mentality from the regulator if the natural instincts of a commercial organisation are to be disciplined.
By the sound of it, the ACCC is off to a good start — provided the government heeds its advice.
*This article was originally published on Business Spectator
It will be tricky for ACCC to balance a requirement for a suitable amount of direct subsidy to other backhaul fibre providers to ensure consistent pricing with a larger POI bass. Other backhaulers are just geographic monopolies in themselves, so competition isn’t a fantastic, however the balance of unneccessary duplication should be heeded so one would hope some kind of arrangement could be made….
What exactly will 100Mbps get me after the $43B (pre-blowout estimate ) of optical fibre NBN is laid out?
Steve, the ACCC acronym is about “Consumers” and not only “Competition”. As a taxpayer, I don’t want to see a few companies force NBNCo to add more POIs for non-operational reasons. They would increase network complexity, potentially add latency to regional network users, and certainly impose costs for NBNCo operational staff in regional areas, which would be passed on in a higher universal wholesale access charge. NBNCo wants to have two redundant POIs in each capital city for a lot of good reasons.
Third party fibre owners also have lucrative VPN customers such as government departments and large companies, and this won’t change. They can also lease their fibre to NBNCo for backhaul. They will not lose money on their investment, unless they were already going to anyway.
Telstra and Optus failed to deliver broadband to 40% of Australians during fifteen years of competition, and now they want us to pay extra. In 2001 the Productivity Commission inquiry into telecoms regulations urged (pp 3-4) that a few incumbents not be favoured at the expense of optimal service delivery to customers. They will be big retail service providers of NBN-backed services, anyway. Nice try, fellas, but my taxes are paying for this network, and its cost and robustness trump your commercial preferences.
@John Marlowe, the $35.7 billion includes two redundant satellites and enough wireless towers to deliver guaranteed minimum 12 Mbps wireless to 97% of Australians. And the wireless will need fewer towers and be congestion-free, because all large towns (which means 93% of us) will also have fixed fibre taking the heavy load off the airwaves. The other benefit of fibre is that your connection will never become a bottleneck. If you request a 10 MB PDF from a government website while two computers in your home are downloading Windows or antivirus patches, and someone else is watching a catch-up TV program, you will all feel as if you are the only user. And all your phone calls will be free, clear, and never drop out.
@Umbria: so you say Labor’s pre-blowout $43Billion in optical fibre rollout of 100Mbps Broadband will not deliver 100mbps but only “12 Mbps then since I am alreay getting 5 with ADSL2 in regional Australia – what a bloody extravagant waste!
Can the project! Obviously the business case is crap! I support Turbull’s call for a business case.
Gillard is obviously all about stay in power spin like her begging NSW puppet Keneally.
South Korea is aiming at 1GBPS so get with the times!
http://gigaom.com/2009/02/01/by-2012-koreans-will-get-a-gigabit-per-second-broadband-connection/
I’m glad that $43 billion is being spent so in the circumstance that I am downloading a 10 mb doc, while patches are uploading and someone else is on the TV, that it doesn’t register, what a comfort. Written from my 3G iPad….go figure.