The Vertigan panel recently released its Market and Regulatory Report - the final instalment of its cost-benefit analysis of the National Broadband Network (NBN).

The report includes a number of significant recommendations to increase competition in the Australian broadband market including the disaggregation of NBN Co along technology lines into a number of competing entities, loosening existing legislative restrictions in the Telecommunications Act 1997 (Cth) on competing superfast networks, and opening up competition in the supply of NBN infrastructure in new developments.

The report also recommends establishing a specialist “networks regulator”, changing the subsidising of non-profitable NBN services so that subsidies are targeted, transparent and market-tested and funded by the government or by a broad industry levy and closing the “loophole” being used by TPG to rollout fibre to the basement (FTTB) in multi-dwelling units.

The government has stated that it does not intend to disaggregate NBN Co until after the completion of the NBN rollout, but it is considering the other recommendations of the panel.

What is the significance?

The report completes the cost-benefit analysis of the NBN, a key election promise of the Coalition government. The recommendations in the report are primarily relevant to the telecommunications and network infrastructure sectors, but some recommendations are also relevant to property developers and end-users of the NBN:

  • while the government does not intend to disaggregate NBN Co until after completion of the NBN rollout, if it ultimately decides to do so it may put the operation of certain NBN services out to tender, creating a number of opportunities for network operators;
  • if the government enacts the recommended changes to the Telecommunications Act, constructing and operating a broadband network in competition with NBN Co in certain areas may be a viable business prospect;
  • if the recommendations about NBN infrastructure in new developments are adopted, the market for the supply of fibre infrastructure to these developments would expand dramatically, but this would see developers and (ultimately) new home buyers paying more; and
  • if the government pursues the recommended model for subsidising non-profitable NBN services, it may impose a broad networks industry levy to fund the necessary subsidies.

Separating NBN Co along technology lines

The report recommends that NBN Co be divided into a number of competing entities along technology lines. NBN Co would retain its fibre to the node (FTTN) and fibre to the premises (FTTP) networks but would divest its transit, satellite, fixed wireless and hybrid-fibre coaxial cable (HFC) networks. The result would be a different company operating each of the different NBN networks.. The main reason for this disaggregation is to end the monopoly given to NBN Co, and to create a competitive market and increase efficiency. This would, for example, enable existing copper infrastructure to be used to compete with HFC in certain areas.

Although the panel acknowledges the disaggregation would increase the cost of the NBN, it also thought that if the creation of competition leads to efficiencies so the duration of the rollout is reduced by one year, the overall economic benefit to the country would outweigh the costs.

Government subsidies would also be disaggregated so that satellite and fixed wireless networks would receive the bulk of the government subsidies, while the FTTN network may be able to be operated without any subsidy. The report recommends this and several other measures to ensure government broadband subsidies are more targeted, transparent and market-tested.

In response to the Report, Malcolm Turnbull has stated that the government does not plan to disaggregate NBN Co, at least until after the rollout of the NBN is complete.

Removing legislative restrictions on competing on broadband networks

The report recommends repealing some parts (and significantly amending others) of theTelecommunications Act to remove some of the restrictions place on operators of competing networks to the NBN. These were restrictions introduced by the former Labor government to protect the competitive position of NBN Co. At the moment, Parts 7 and 8 of the Act together require anyone who wishes to create a consumer or small business superfast (>25 Mbps) broadband network to make that network available on a wholesale-only basis. This is to place any competitor in a similar position to NBN Co, but without NBN Co’s substantial government funding - greatly reducing the incentives to do this.

The recommended changes would allow competing networks but would still impose certain “default” conditions on competitors. The “default” conditions would permit competitors to be vertically integrated (ie supply the broadband services at both the wholesale and retail level) but would require them to be structurally separated, so that the competitor would have to supply the broadband service to its retail arm on the same terms and conditions that it makes it available to other competing retail service providers.

Importantly, a competing network operator could avoid the “default” conditions by giving an undertaking to the ACCC which would likely include the terms and conditions on which the competitor would make its broadband network available at the wholesale level. The ACCC would have to accept an undertaking unless to do so would be contrary to the long-term interest of end-users in the area the network operator intends to service.

The changes would make building and operating a competing network to the NBN, a much more palatable prospect than under the existing regime.

Closing the TPG FTTB “Loophole”

The panel recommends that the exemption for extensions of existing networks by 1 km or less, be removed. This is the exemption that is being used by TPG to build a fibre to the basement network supplying superfast broadband services to residents of apartment buildings in high-density areas. The panel recommends that any existing network built under this exemption be protected to avoid any potential constitutional challenge as an “acquisition of property other than on just terms”. However, under the panel’s recommended changes to Parts 7 and 8 of the Telecommunications Act, there may well still be a commercial case for continuing a rollout of a competing network after the exemption is removed.

Opening greenfields up to competition

At present, NBN Co does not charge anything to install NBN fibre infrastructure in new estate developments (greenfields). The panel recommends that, going forward, NBN Co should charge for the installation of fibre infrastructure in greenfields estates. This would mean the private sector could compete on a level playing field with NBN Co in this market and NBN Co would remain an infrastructure provider of last resort. Developers, and ultimately new home buyers, would bear the costs of installing fibre infrastructure rather than the taxpayer.

Legislating NBN Co’s obligations

The panel recommends that NBN Co’s universal service obligation and uniform wholesale pricing requirements be enacted in legislation – at the moment, both of these form part of the “Statement of Expectations” provided to NBN Co by the government (as NBN Co’s 100% shareholder). Enacting these through legislation would increase industry certainty and open them up to public scrutiny and debate.

The panel generally agrees with the “price cap” approach to wholesale pricing of NBN services, but recommends this eventually transition to a cost-reflective pricing model with appropriate subsidies provided where needed.

Subsidising the NBN – direct subsidies to the consumer

Wholesale access to the NBN is currently provided at a similar price across all services. The effect of this is that consumers pay the roughly the same for high-cost NBN services (such as satellite services and other services in rural areas) as for low-cost NBN services (such as FTTB in large apartment buildings). This internal cross-subsidy is how NBN Co is able to provide loss-making services such as its satellite services.

The panel is critical of the internal cross-subsidy model and recommends that where subsidies are needed to fund loss-making services they should be explicit, subject to parliamentary debate and market-tested.

The panel recommends that subsidies be provided directly to consumers as needed and that ongoing subsidies be funded from the government’s consolidated revenue, but should that not be acceptable, money could be raised through a broad industry levy.

A new networks regulator

Following the recommendation of the Harper Review in its recent Draft Report, the panel recommends that regulation of networks industries be undertaken by a specialist “networks regulator” rather than the ACCC. The new regulator would have responsibility for access regulation of all network infrastructure industries.

Removing retail price controls on Telstra service on the NBN

The panel considers that the NBN creates a level playing field for retail services providers to compete. Because of this, it recommends that while the power for the Minister to make price control determinations should be retained, retail price controls should not be applied to Telstra services on the NBN unless there is clear evidence of consumer detriment due to Telstra facing inadequate actual and potential competition in a particular market segment.

The full text of the Vertigan NBN Market and Regulatory Report is available here.