NBN Market and Regulatory Report 2014

Independentcostbenefit
analysisofbroadbandand
reviewofregulation
VolumeINationalBroadbandNetwork
MarketandRegulatoryReport
August 2014

Thispageisleftblankintentionally.

TheHonMalcolmTurnbullMP
MinisterforCommunications
ParliamentHouse
CANBERRAACT2600
14August2014
DearMinister
IndependentCostBenefitAnalysisofBroadbandandReviewofRegulationReport
TogetherwithmypanelcolleaguesMsAlisonDeans,ProfessorHenryErgas,andMrTonyShaw,I
ampleasedtosubmittoyoutheIndependentCostBenefitAnalysisofBroadbandandReviewof
RegulationReport.
Thereportiscomprisedoftwovolumes.VolumeItheMarketandRegulatoryReportexamines
andmakesrecommendationsonthemostappropriateoverallstructureandregulatoryframework
forAustraliasfuturebroadbandmarket,includingtheroleofinfrastructurebasedcompetition
and,particularly,NBNCosroleinthatmarket.Itaddressesthepanelstermsofreferenceclauses
1(b),2(excluding2(a)),3and4.
Asintheotherpartsofthepanelswork,weconsultedbroadlyandsoughtsubmissionsfrom
acrossthetelecommunicationssector.Weagainrecordourappreciationforthetimegivenby
individualsandorganisationsandthequalityandcontentofthesubmissionsreceived.
VolumeIItheCostBenefitAnalysisReportcomparesthecostsandbenefitsofalternative
optionsfordeliveringhighspeedbroadbandtoAustralianhouseholdsandbusinesses.Itaddresses
thepanelsfirsttermofreference.
InpreparingitsCBAReport,thepanelhasbeenablyandprofessionallyassistedindevising
andthenconstructingthisanalysisbyTheCentreforInternationalEconomics,aswellasa
numberofotherindividualsandorganisations.ThepanelalsowishestothankProfessors
NicolasCurien(ConservatoireNationaldesArtsetMetiers,Paris),KennethFlamm(LyndonB
JohnsonSchoolofPublicAffairs,UniversityofTexas,Austin),JonathanPincus(Universityof
Adelaide)andCliffWinston(BrookingsInstitution,Washington)whoprovidedvaluableinput
inreviewingthecostbenefitanalysis.
Thepanelhasreportedtoyouseparatelyonotheraspectsofitstermsofreferencethroughthe
StatutoryReview.
Thepanelhasbeenassistedindevelopingitsthinkingandcompletingitsreportbyasecretariat
andotherstaffwithintheDepartmentofCommunications,aswellasanumberofother
individualsandorganisations.Werecordourappreciationfortheirprofessionalefforts.
Yourssincerely
DrMichaelVertiganAC
Chair
CostBenefitAnalysisandReviewofRegulation
Independentcostbenefitanalysisofbroadbandandreviewofregulation
Contents
Volume I: Market and Regulatory Report
1.Executivesummaryandrecommendations...........................................................................9
1.1 Executivesummary..................................................................................................9
1.2 Summaryofrecommendations.............................................................................25
2.Panelsapproach...................................................................................................................31
2.1 Guidanceforreaders.............................................................................................32
2.2 Consultationandsubmissions...............................................................................33
3.Historicalcontext..................................................................................................................34
3.1 EvolutionofbroadbandinAustralia......................................................................34
3.2 Policyframeworkforbroadbandavailability.........................................................35
3.3 Contextfortheindustrystructureandregulatoryreview....................................39
4.Objectivesandprinciplesforassessingbroadbandmarketstructureandregulatory
options.................................................................................................................45
4.1 Objective................................................................................................................45
4.2 Policyprinciplesusedinassessingstructuralandregulatoryapproaches............45
5.Costbenefitanalysisandpolicydevelopment.....................................................................49
5.1 Thenatureandpurposeofcostbenefitanalysis..................................................50
5.2 ThepanelsCBA......................................................................................................53
6.FuturemarketstructurearrangementsforNBNdevelopment...........................................61
6.1 Contextandrelevantprinciples.............................................................................61
6.2 ConcernswiththecurrentNBNstructure.............................................................63
6.3 OptionsforfutureNBNstructures.........................................................................65
6.4 Conclusionsandrecommendations.......................................................................72
7.Parts7and8oftheTelecommunicationsActandthetreatmentofnewhighspeed
networks..............................................................................................................74
7.1 Introduction...........................................................................................................74
7.2 Thecurrentrules....................................................................................................74
7.3 Submissions............................................................................................................76
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NationalBroadbandNetworkMarketandRegulatoryReport
7.4 Options...................................................................................................................77
7.5 Verticalintegrationissues......................................................................................79
7.6 Networksalreadyexempted..................................................................................83
7.7 Recommendations.................................................................................................84
8.Broadbandserviceprovision.................................................................................................86
8.1 Introduction...........................................................................................................86
8.2 Infrastructureprovideroflastresortobligations..................................................87
8.3 Infrastructureandserviceinnewdevelopments..................................................91
8.4 Affordability...........................................................................................................97
8.5 Subsidy.................................................................................................................101
9.RegulationofNBNCosproducts,pricingandexpenditure...............................................112
9.1 Introduction.........................................................................................................112
9.2 Currentregulatoryframework.............................................................................112
9.3 NBNCoscapitalexpenditureproductsandpricing............................................114
9.4 Generalissuesraisedinsubmissions...................................................................114
9.5 Regulatoryframework.........................................................................................116
9.6 Operationalissuesrelatingtotermsofaccess....................................................125
9.7 NBNCooverbuildingandcompetitiveneutrality................................................131
9.8 Telstraspricecontrols.........................................................................................133
10.PrivatisationandgovernanceofNBNCo..........................................................................137
10.1 Privatisationarrangements..................................................................................137
10.2 ManagementofNBNstructureandassets..........................................................137
11.Administrationofeconomicregulationofthetelecommunicationsindustry.................139
11.1 Introduction.........................................................................................................139
11.2 StakeholdersviewsontheACCCsrole...............................................................139
11.3 Futureadministrationofeconomicregulationofthetelecommunications
industry................................................................................................................140
Appendix1TermsofReference............................................................................................144
Appendix2Currentbroadbandindustrystructureandregulation.....................................146
Appendix3CurrentarrangementsforfundingtheUSOandtheTUSMAAgreement........158
Appendix4NBNCosFixedWirelessandSatelliteReview..................................................159
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Appendix5Newdevelopments:Implementationofthepanelsserviceprovisioning
framework.........................................................................................................163
Glossaryofterms....................................................................................................................168
Volume II: Cost Benefit Analysis

OverviewofvolumeII.................................................................................................................7
1.Introduction..........................................................................................................................22
1.1 Thisreportinthecontextofthepanelstermsofreference................................22
1.2 Whatiscostbenefitanalysis?...............................................................................23
1.3 WhyundertakeaCBA?..........................................................................................26
1.4 Inputsintothecostbenefitanalysis......................................................................26
1.5 Thestructureofthisreport....................................................................................27
2.Understandingtheneedforhighspeedbroadband............................................................29
2.1 Howmuchspeedisneeded,inatechnicalsense?................................................29
2.2 TheCommunicationsChambersreport.................................................................30
2.3 CommunicationsChambersmodelresults............................................................32
3.OverviewofCBAmethodology.............................................................................................36
3.1 Background............................................................................................................36
3.2 Estimatingwillingnesstopay(WTP)......................................................................38
3.3 Analysisofcosts.....................................................................................................38
3.4 GeneralCBAparameters........................................................................................39
4.Thescenariosevaluated.......................................................................................................43
4.1 Speedsavailableundereachtechnology...............................................................46
4.2 Nofurtherrolloutofhighspeedbroadbandornewinfrastructure.....................47
4.3 Unsubsidisedrolloutofhighspeedbroadband....................................................48
4.4 Multitechnologymixscenario..............................................................................49
4.5 Fibretothepremisesscenario...............................................................................50
4.6 Variationofscenarios............................................................................................50
5.Costsofeachscenario...........................................................................................................51
5.1 Approach................................................................................................................53
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5.2 Costdifferencesacrosstechnologies.....................................................................54
5.3 Totalcosts..............................................................................................................55
5.4 Thetimingofcosts.................................................................................................57
6.Benefitsofeachscenario......................................................................................................59
6.1 Willingnesstopayforhigherspeeds.....................................................................61
6.2 Businesswillingnesstopay....................................................................................77
6.3 Valuingpublicandexternalbenefits.....................................................................79
6.4 Residualvalue........................................................................................................81
6.5 Disruptioncosts......................................................................................................81
6.6 Deadweightlossoftaxation...................................................................................82
6.7 Benefitsovertime..................................................................................................82
7.Netbenefitsofalternativeoptionsfordeliveringhighspeedbroadband...........................84
7.1 Netbenefitsoffixedwirelessandsatellite............................................................85
7.2 Sensitivityanalysis..................................................................................................85
7.3 NetbenefitsunderalternativegrowthinWTP......................................................87
7.4 Specificsensitivityanalysis.....................................................................................89
AppendixAGovernmentinvolvementinhighspeedbroadbanddeployment....................93
AppendixBInternetinAustralia............................................................................................98
AppendixCTechnologiesforhighspeedbroadband..........................................................110
AppendixDPreviousanalysisofthecostsandbenefitsofhighspeedbroadband............115
AppendixEActivitieswithbenefitsoutsideofprivatebenefits..........................................121
AppendixFReviewofcostestimatesmadebyNBNCo......................................................137
AppendixGInternationalbroadbandstrategies.................................................................155
AppendixHChoicemodellinganalysis................................................................................165
AppendixISensitivityanalysisinputprobabilities...............................................................189
Glossaryofterms....................................................................................................................194
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1.Executivesummaryandrecommendations
1.1
Executive summary
On12December2013,theMinisterforCommunicationsannouncedapaneltoconductan
independentcostbenefitanalysisofbroadbandpolicyandreviewtheregulatory
arrangementsfortheNationalBroadbandNetwork(NBN).
ThepanelstermsofreferenceareprovidedatAppendix1.
Thisreportexaminesandmakesrecommendationsonthemostappropriateoverallstructure
andregulatoryframeworkforAustraliasfuturebroadbandmarket,includingthepotentialfor
infrastructurebasedcompetitionandtheroleandstructureofNBNCoLimited(NBNCo).This
report(MarketandRegulatoryReport),andtherecommendationsitcontains,shouldberead
inconjunctionwithVolumeIIofthisreport,thereportonthecostsandbenefitsofalternative
approachestothedeploymentofhighspeedbroadband(CBAReport),aswellasthepanels
reportonthestatutoryreviewofPartXICoftheCompetitionandConsumerAct2010
(StatutoryReview)1.
Backgroundandcontext
Australiastelecommunicationspolicyhasbeencharacterisedbydramaticshiftsindirection
andpersistentdisagreementoncrucialissues.Whiletheriseoftheinternetopenedupvast
opportunities,italsogaverisetoalengthy,attimesillinformedandoftenunproductive
debateabouthowthoseopportunitiescouldbestbeexploited.Aftermanytwistsandturns,
thatdebatehasresultedinthecurrentmarketstructure,centredonagovernmentowned
NBNCowithprimaryresponsibilityfordeployingandoperatingahighspeedbroadband
networkonawholesaleonlybasis.
Comparedwithcountriesthathaveincomelevelsandpopulationgeographiessimilarto
Australias,thatstructureishighlyunusualincreatingadefacto,structurallyseparated,
networkmonopolyandinrevertingtogovernmentownershipandtaxpayerfundingof
telecommunicationsinfrastructure.
Itisnotthepurposeofthisreporttoassesswhetherthatdecisionwasorwasnotcorrect.
Moreover,thepanelrecognisedfromtheoutsetthatisitwasneitherpossiblenordesirable
toassessfuturetelecommunicationsregulationstartingwithacleanslate.Rather,NBNCohas
beenestablishedand,althoughithasexperiencedconsiderabledifficulties,itnowhasafibre
1ThisreportwastabledinbothHousesofParliamenton16July2014.
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rolloutunderway,hasmyriadcontractualarrangementsinplaceandisproceedingto
implementanewstrategy.Othermarketparticipantshavefashionedtheirownstrategiesand
businessarrangementsonunderstandingsabouthowthewholesalebroadbandmarketis
expectedtodevelop.Telstrahascommittedtoastructuralseparationprocesswhichcanonly
beimplementedifitscustomerscanbemigratedtoanationalbroadbandnetwork.
Whiletakingthosedevelopmentsasgiven,thepanelwasmindfuloftheneedtolearnfrom
experienceintelecommunicationsreforminAustraliaandelsewhereandtoappraisethe
outcomesofthatexperiencesoastobestinformthedecisionsthatlieahead.Recognisingthe
commitmentsthatarenowinplace,ithassoughttoprovideafactual,rigorousand
transparentbasisforpoliciesthatcanhelpAustraliasecuretheimmensepossibilitiesthat
developmentsintelecommunicationsoffer.Securingthebenefitsfromthosedevelopments
shouldbeahighpriorityforavast,technologicallysophisticatedcountryremotefromits
tradingpartnersbutdeeplyenmeshedintheglobaleconomy.
Thissummaryprovidesanoverviewofthepanelsfindingsandoftheanalysisonwhichthey
arebased.
Principalconclusions
Thepanelhasreachedsevenprincipalconclusions.
1(a). UpgradingAustraliasbroadbandnetworkcandeliversubstantialeconomicbenefits.A
fullycommercialrollout,toareaswheredemandcoverscosts,wouldyieldneteconomic
benefitsof$24billion(innetpresentvalueterms,expressedintodaysdollars)and
wouldreachupto93percentofpremises.
1(b). Themostefficientwaytodeployhighspeedservicesinthoseareasisthrougha
multitechnologyapproach,whichusesamixofcopperandfibrebasedtechnologies,
alongwithhybridfibrecoaxial(HFC).Relyingonsuchanapproachyieldsneteconomic
benefits$16billiongreaterthanwouldberealisedbyrelyingsolelyondeployingfibre
tothepremises(FTTP).Againinpresentvalueterms,thatimpliesthat72percentof
theinvestmentinanFTTPonlyfixednetworkwouldbewasted,inthesenseof
involvingcoststhatarenotmatchedbycorrespondingbenefits.
1(c). Whilethefuturegrowthindemandforhighspeedservicesisinevitablyuncertain,the
MultiTechnologyMix(MTM)approachcanbeupgradedshoulddemandgrowthprove
muchgreaterthanexpected.Incontrast,thecostsofFTTP,oncedeployed,are
irreversiblysunk.TheMTMapproachisthereforerobusttovariationinthegrowthin
demand,whereasanFTTPonlyapproachcommitstoahigherlevelofspendingthat
cannotcurrentlybejustified.HenceanMTMapproachbettermanagestheuncertainty
offuturedemandoriseconomicallyfutureproofinawaythatanFTTPapproach
cannotbe.EvenignoringthescopetoupgradefromMTMtoanFTTPonlyapproach,
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simulationsundertakenforthereviewfindtheMTMapproachyieldsmateriallygreater
netbenefitsthananFTTPonlyapproachin98percentofthecircumstancesmodelled.
1(d). Extendinghighspeedbroadbandtoregionalandremoteareasisinherentlycomplex
andexpensive.Fundamentally,thoseareasareuneconomictoserve:deployingand
operatingNBNCosfixedwirelessnetworkandsatelliteservicecostssome$5billionin
presentvalueterms,whilethepresentvalueofthebenefitsfromtheserviceisinthe
orderof$1billion.
2.
GiventhescaleoftheinvestmentAustraliantaxpayersaremakinginhighspeed
broadband,ensuringservicesareprovidedefficientlyiscrucial.However,relyingon
NBNCoasanintegratedentitytobetheprincipalmeansofdeliveringthoseservicesis
deeplyproblematic.Thecurrentmodel,inwhichNBNCocontrolsthefullspectrumof
technologies,inhibitsthedevelopmentofcompetition,isdifficulttoeffectivelyregulate
andresultsinunacceptablerisksto,andcostson,taxpayersandconsumers.
3.
Whileitisalwaysacaseinpublicpolicythatonewouldnotstartfromhere,the
currentsituationcreatesimportantopportunitiesforatransitiontoeffective
competition.Inparticular,disaggregatingNBNCointocompetingbusinessunits,initially
structuredaccordingtoitsexistingandplannednetworktechnologies,wouldcreate
roughlyequallymatchednetworks.ForthefirsttimesinceAustraliasreformprocess
beganinthe1980s,thiswouldprovideamarketstructureinAustraliawheresimilarly
sizednetworkswouldcompete,muchashappensinNorthAmericaandsignificantparts
ofEurope.Thiswouldprovidethemosteffectiveplatformfromwhichcompetition
coulddevelop,encouraginginnovation,forcingdowncostsandreducingtheneedfor
intrusiveandultimatelyinefficientregulation.
4.
ConsistentwiththeCompetitionPrinciplesAgreement,creatinganenvironmentthat
supportscompetitionandpromotesthelongterminterestsofendusersshouldtake
precedenceoveranyimpactsmicroeconomicreformmighthaveonNBNCosfinancial
position.
5.
RegardlessofwhetherandwhenamovetodisaggregatingNBNCooccurs,the
regulatorystructureshouldbeadjustedtobettersupportcompetition.Statutory
obstaclestomarketentryandotherbarrierstocompetitionshouldbeeliminatedorat
leastreduced,whilestillensuringregulationcandealpromptlyandeffectivelywithany
anticompetitivebehaviour.Introducinggreaterflexibilityintotheregulatory
arrangements,includingthroughtheremovalofblanketprohibitionsthataffect
infrastructurecompetitors,wouldenablegreatertimeliness,innovationand
responsivenessinsupplyandencouragemoreefficientpracticestobeadopted.
6.
Consumers,industryparticipantsandtaxpayersshouldbegivenclarityandcertainty
overtheobjectivesof,andobligationson,highspeedbroadbandserviceprovision.
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Formallyestablishinganationalbroadbandobjective,structuringefficientsubsidy
arrangementsandlegislatinganinfrastructureprovideroflastresortobligation,areall
importantinprovidingclarityandcertainty.
7.
Regulatoryarrangementsandprocessesshouldbebetterfocussed,streamlinedand
mademoreaccountable,includingbyprovidingformeritsreviewofallregulatory
decisionswithlastingimpacts.Responsibilityforeconomicregulationshouldbe
transferredfromtheAustralianCompetitionandConsumerCommission(ACCC)toa
networksregulatorwithresponsibilityforregulatingallmajorinfrastructure,andthe
panelrecommendsthisapproachtotheCompetitionPolicyReview.
Thepanelsrecommendationsfollowfromtheseprincipalconclusions.
Thecostbenefitanalysis
InrespondingtoitsTermsofReference,thepanelhasundertakenacostbenefitanalysis
(CBA)thatbothinformsitsfindingsonfuturedeploymentoptionsforhighspeedbroadband
andhashelpedshapeitsviewsonregulatoryreform.
Thepanelsanalysiscomparesthecostsofalternativeapproachestodeployinghighspeed
broadbandwiththebenefitsthatdeploymentyields.Thebenefitscomprisebusinessand
residentialconsumerswillingnesstopayfortheserviceshighspeedbroadbandprovides,
alongwithanywidersocialgains(suchasreducedcostsfordeliveringeducationandhealth
services)itpermits.Costsincludethoseinvolvedinconstructingandeventuallyreplacingthe
network,aswellasthoserequiredtooperateit.
ConsistentwiththeNBNCoStrategicReviewsofthefixedandwirelessnetworksundertaken
byNBNCoin2013and2014,fromwhichthedataoncostsarederived,theevaluationcovers
theperiodto2040butimputesaresidualvaluetoanypubliclyfundedassetsinplaceatthe
periodsend.Allestimatesarereportedinpresentvalueterms,calculatedusingadiscount
rateof8.3percent,andareexpressedin2014prices.Forthisreason,thecostsintheCBA
Reportcannotsimplybecomparedwithpreviouspubliccostestimatesfortheconstruction
andoperationoftheNBN.
Estimatingwillingnesstopayforhighspeedbroadbandraisescomplexissues.Thetakeupto
dateofNBNCoshighestspeedplansimpliesconsumersplacearelativelylowvaluationon
thosespeeds.Indeed,usingthattakeupdataasthebasisforassessmentimpliesthebenefits
ofdeployingveryhighspeedsthroughFTTPtechnologyfallsignificantlyshortofthecostsin
metropolitanareas.However,thepanelcommissionedtwootherstudieswhichpointedto
greatergains.Atechnologicallyfocussedstudyexaminedthespeedsneededtoaccessthe
maincurrentandprospectiveusesofbroadbandnetworks.Additionally,acarefullystructured
surveywasundertakeninvolvingalargescalestratifiedsampleofconsumers.
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Thesurveywasdesignedtoprovideeconometricestimatesofconsumerswillingnesstopay
forhighspeedservices.Thoseeconometricestimateswereusedastheprimarymeasureof
willingnessofpay,alongwitharangeofpossiblefuturegrowthrates.
Thefirstimportantquestiontheanalysisaddressedwaswhetherthedeploymentof
highspeedbroadbandwouldyieldneteconomicbenefits.Theanalysisfindsthat,compared
withthecurrentsituation,movingtohighspeedbroadbandwouldmakeAustralians$24
billionbetteroffinnetpresentvalueterms.Tothatextent,ensuringwidespreadavailabilityof
broadbandisinthenationalinterest.
Thatassessmentassumesserviceisdeployedonacommercialbasis,thatis,totheareas
wheretheprivateandsocialbenefitsfromdeploymentexceedthecosts.Thoseareas,which
reachupto93percentofpremises,wouldbeservedusingthefixedlinenetwork.
However,deploymentofhighspeedservicesusingsatelliteandfixedwirelesstothebulkof
theremaining7percentofpremisesnotcoveredbyacommerciallydeterminedrollout
involvesanetcostinexcessof$4billion(comprising$4.8billionincostsand$0.6billionof
benefits).
Intermsoftherelativemeritsofalternativetechnologies,thepanelcompareda
multitechnologyoption(includingFTTP,variousformsoffibretothenode(FTTN)andHFC)
withanallFTTPapproachinthefixednetworkareas.
Indoingso,thestudytakesasgivencommitmentsthathavealreadybeenmade,most
notablythroughtheDefinitiveAgreementsreachedbetweenNBNCoontheonehandand
TelstraandOptusontheother.Thecostsassociatedwiththosecommitments,whichare
aroundonefifthofthetotalprojectcosts,areimputedtobothofthemajortechnological
optionsexamined.However,hadanMTMstrategybeenadoptedfromtheoutset,ashareof
thecostsmighthavebeenavoided.Ifthiswerethecase,thelowervalueofthecommitments
requiredtosupportanMTMapproachwouldhaveincreasedthegapinnetbenefitsbetween
theMTMandallFTTPoptions.
However,eventakingthosecommitmentsastheynowstand,theanalysisshowsthat
deployinganallFTTPfixednetworkwouldmakeAustralianssome$16billionworseoff,innet
presentvalueterms,comparedwiththealternativeofanMTMscenario.Thatimpliesthat72
percentofthecostsofdeployinganallFTTPfixednetworkwouldbewasted,inthesenseof
beingwithdrawnfromotherusesthatAustraliansvaluedmorehighly.
Thepanelemphasisesthemanyuncertaintiesinvolvedinanyanalysisofthiskind.However,it
doesnotbelievethoseuncertaintiesundermineitsresultsonthecontrary,properly
understood,theystrengthenthem.Thepanelhasperformedextensivesensitivityanalysisand
findsthatitsresultsareremarkablyrobust.
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AsystematictestingoftheCBAresultsusingawidevarietyofassumptionsshowsthat,in98
percentofcases,theMTMapproachoutperforms(thatis,hasgreaternetbenefitsthan)an
allFTTPoption.
TheMTMapproachhassignificantnetbenefitsrelativetoanFTTPapproacheveniftheper
premisescostsofFTTPcouldbereducedbyoveronethirdrelativetotheNBNCoStrategic
Review(StrategicReview)evaluationofNBNCosexperiencetodate.Indeed,insome
scenarios,deployinganallFTTPfixedlinenetworkwouldmakesocietyworseoffthansimply
freezingbroadbandavailabilityandspeedsatcurrentlevels.
Examiningtwospecificareasofuncertaintyhighlightsandhelpsexplaintherobustnessofthe
results.Thesearetherateofgrowthinwillingnesstopayandtherateoftechnological
progress.
Thegrowthrateofwillingnesstopayforhigherspeedsisamajorsourceofuncertainty,asthe
natureofandwillingnesstopayforfutureapplicationsarenotreadilypredictable.However,
shouldthegrowthrateofdemandultimatelyproveverymuchhigherthanthepanelusesasa
centralprojection,itisalwayspossibleundertheMTMapproachtoacceleratethetransition
toFTTP.Incontrast,shouldanFTTPapproachproceed,andthegrowthrateofwillingnessto
payforhigherspeedsfallbelowinitialexpectations,thecostsofprovidingFTTPcannotbe
reversed.
Thereis,inotherwords,anasymmetrybetweenthescenarios:intheMTMscenario,the
optionofchangingthetimingofanupgradetoFTTPconstrainsthemaximumharmanyerror
inforecastingdemandcancause;intheFTTPscenario,ontheotherhand,oncetheerroris
made,thelossesareirretrievablyincurred.AssuchtheMTMapproachbettermanagesthe
substantialriskthatbroadbanddeploymentplacesonAustraliantaxpayersandconsumers
andisthereforemoreeconomicallyfutureproofthanFTTP.
Therearealsosignificantuncertaintiesintermsoftherateoftechnologicalprogressinboth
wirelessandfixedlinetechnologies.Forexample,technologyproviderswhometwiththe
panelexplainedthatsincetheFTTPmodelhadbeenselectedbythepreviousGovernment,
FTTNtechnologieshadadvancedmorerapidlythanexpected,alteringtheirviewonthe
relativeattractivenessoftheseoptions.Thepanelwasalsotoldofimportantdevelopmentsin
prospectforHFCand,evenmoreso,forwirelessnetworks.
Theseuncertaintieshighlighttheriskoflockinginasingletechnologyasthetechnologyof
choiceforAustraliastelecommunicationsfuture.Doingsocouldexposetaxpayersand
consumerstounnecessarilyhighcostsorprecludetheadoptionofnewtechnologiesasthey
emerge,thusdiminishingthenetbenefitsthattheNBNisintendedtodeliver.
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Thekeypolicylessonsandissues
Overall,itisthepanelsconclusionthattwolessonscanbedrawnfromtheexperienceto
date.
Thefirstisthatwheremajorpolicydecisionssuchasthosesettingnationalminimafor
broadbandserviceavailabilityneedtobetaken,theymustbebasedoncarefulcostbenefit
appraisal,andperiodicallyreviewed.Thisisnotsolelyorevenmainlybecausethatappraisal
canyieldarankingofoptions(suchasthatembodiedinbenefit/costratios)butbecauseitcan
exposethesensitivitiesandhencerisksassociatedwitheachofthecompetingoptions.It
thereforeassistsininformingtaxpayersoftheriskswhicharebeingplaceduponthemand
cancontributetobettermanagementofuncertainty.Moreover,periodicexpostreviewof
decisions,andoftheappraisalsonwhichthosedecisionswerebased,canstrengthenthe
selfcorrectionmechanismsinpublicdecisionmaking,includingbyimprovingthe
informationbasefor,andhencethequalityof,appraisalsovertime.
Thesecond,nolessimportant,findingisthattherearesubstantialgainstomaintainingan
environmentinwhicharangeoftechnologiescancontend,asthatbuildsinthediversityand
flexibilityneededtomanageuncertaintyandensureAustraliansderivethegreatestbenefits
fromtheunpredictablecourseoftechnologicaladvancement.
TheselessonshaveshapedthepanelsapproachtotheregulatoryissuescoveredinitsTerms
ofReference.Thoseissuesinclude:
howbesttoensureendusers,includingthoseinruralandremoteareas,haveready
accesstoreliableandaffordablefastbroadbandandvoiceservicesthatareprovided
costeffectively;
howtoensurecompetitionandcontestabilityworkeffectivelyandefficientlywhere
theycan,whilealsoensuringregulationactsasabackstoporalternativewheremarket
forces,lefttotheirowndevices,willnotadequatelymeetconsumerneeds;and
howtoencourageinnovationanddiversityinproductsandservices,particularlyin
areasormarketsthatarelesscompetitive.
Toguideitinaddressingtheseissues,thepaneladoptedthefollowingobjective:
Toidentifythemarketstructureandregulatoryarrangementsthatwilldeliver
affordableandreliablecommunicationsservicestoallAustralians,includingfast
broadbandservices,inthemosteconomicallyefficientway.
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Futuremarketstructure
Competitivemarketscanplayanimportantroleinachievingtheobjectivethepanelhasset
out.Althoughcompetitioninvariablyfallsshortofthetextbookideal,itwouldbring
efficiencies,investment,innovationandmoreconsumerchoiceatboththeretailand
infrastructurelevel.Aswellasthedirectbenefitscompetitionoffersinconstrainingthe
exerciseofmarketpower,therebyprotectingconsumersandpromotinginnovation,
competitivemarketsreducetheburdenonregulationandmakeiteasierforregulatory
agenciestoproperlyundertaketheirtasks.
Conversely,longexperienceinAustraliaandoverseasshowsthattherearesubstantialrisksin
entrenchingmonopolypoweratthenetworklayer.Italsoshowsthatoncemonopoliesare
allowedtodevelop,dismantlingthemisinvariablycostly,complexandcontentious.Forthis
reason,policymakersthroughouttheOrganisationforEconomicCooperationand
Development(OECD)arearemainstronglycommittedtothegoalofpromotinginfrastructure
competitionintelecommunications.
Thepanelthereforeconcludesthatcompetitioninbothinfrastructureandretailservice
marketsshouldbepromoted.
However,itisclearthatpracticalconstraints,includingthecharacteristicsofparticular
geographicalmarkets,canpreventmarketbasedarrangementsachievingfullydesirable
outcomes.Sotoocanpastdecisionsbygovernmentsandregulators,asthosedecisionsleave
alegacywhichcannotbesimplyerasednorevennecessarilyovercomeatreasonablecost.
Anymovetosustainableandefficientarrangementsmustrecognisethoseconstraints.Itmust
alsorecognisethatcompetitionisnotagoalinitself,butaninstrumentforprotecting
consumersandpromotingefficiency.
Theresultisthatinsomeinstancesagradual,butcredible,transitionmayberequired.
Nevertheless,itremainsimportanttoidentify,asclearlyaspossible,theoptionsfor
maximisingthebenefitscompetitioncanbringtoprovidingfast,reliableandefficient
broadband.
Overall,thepanelconsidersthatanapproachofdeliveringtheNBNthroughasingleentity
(whereNBNCohascomprehensiveresponsibilityforplanning,constructing,operatingand
commercialisinghighspeedbroadbandservicesacrossallplatforms)willinevitablyforeclose
opportunitiesfordiversity,innovation,competitionandchoiceinthelongterm.Entrenching
aninfrastructuremonopolyimposestoogreatariskonconsumers,governmentand
taxpayersandisunlikelytomeettheobjectiveoftimelyandcosteffectivedeployment.
Thepanelbelievestheserisksneedtobemitigatedthroughstructuralandregulatorychanges
thatencouragecompetitiveentryintheconstructionandongoingdeliveryofbroadband
infrastructure.
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Removingunnecessaryconstraintsoncompetitionwouldbeadesirablefirststep.Thepanel
thereforerecommendsthattheTelecommunicationsAct1997(TelecommunicationsAct)be
amendedtoprovideadditionalfreedomforpotentialentrantsintothehighspeedbroadband
market.
Specifically,thepaneldoesnotbelievethereisapolicyjustificationforretainingthecurrent
Part7oftheTelecommunicationAct,which,withsomeexceptions,prohibitsalocalaccess
linebeingusedtosupplyasuperfastcarriageservicetoresidentialandsmallbusiness
customersunlessaLayer2bitstreamserviceisavailable.Havingreviewedarangeofpossible
alternatives,thepanelhasconcludedthattheprovisionsofPart8,which,onceagainwith
someexceptionsandexemptions,preventnonNBNCooperatorsofsuperfastnetworks
enteringretailmarkets,shouldberetainedbutinsubstantiallyamendedform.Specifically,
theprovisionsasamendedwoulddefinesomedefaultconditionsentrantswouldhaveto
meet,includingstructuralseparation.However,thosedefaultconditionswouldbecapableof
beingoverriddenbyexemptionsgrantedbytheregulator,withthelegislationdirectingthe
regulatortoapproveexemptionapplicationsunlessthecostsofdoingsooutweighedthe
benefits.Thepanelenvisagesthattheundertakingsgiveninseekingsuchexemptionswould
specifythetermsandconditionsofthirdpartyaccess.
ReformingParts7and8maybringsomecompetitivepressuretobearonNBNCo.However,
giventheadvantagesNBNCoenjoys,thepanelbelievesthatthemostrealisticchanceforany
significantlongtermcompetitiontodevelopistoallowexistingandfutureinfrastructureto
competeandtoserveasaplatformforcosteffectiveexpansion.Incontrast,underthe
currentpolicyapproach,NBNCowouldbeageographicallyubiquitoussupplierofnetwork
servicesthatcontrolledallthemajoraccessnetworkscapableofbeingusedforhighspeed
broadband,whosecostsbythenwillbesunk.
ThepanelconsideredoptionsaroundcontinuingwiththecurrentNBNCostructureormoving
toadisaggregatedapproach.Thischoiceinvolvesajudgementaboutthepotentialeconomies
ofscaleandscopeavailabletoasingleintegratedentitycomparedwiththeefficiencies,
innovationandchoiceadisaggregatedapproachoffers.Italsorequiresajudgmentaboutthe
extentoftheriskstotaxpayersandconsumersinherentinthevariousoptions.
ThepanelrecommendsthattheGovernmentmovetodisaggregateNBNCoalongthelinesof
itsunderlyingnetworkswhereeachofthesatellite,fixedwireless,HFCandFTTxnetworks
wouldserveasthebasisforacompetingentity.
Disaggregationwouldimprovetheprospectsforinfrastructurecompetitionnowandinthe
future,encourageprivateinvestmentandbringspecialistskillstobearinmanagingeachof
thesenetworks.Ratherthanduplicatefixedcosts,theapproachthepanelrecommendswould
securethemaximumleveragefromexistingassetswhosecostsaresunk,usingthoseassetsas
thebasisforactualandpotentialcompetition.Itwouldpreventassetsconsumershavepaid
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for(includingthecopperinHFCareas)frombeingprematurelyscrapped,insteadharnessing
thoseassetsforthebenefitofendusers.Overtime,thisapproachshouldreducefinancial
riskstotaxpayers,facilitateatransitiontoprivatefundingandimprovethechanceofefficient
andtimelynetworkdeployment.
Disaggregatingthetechnologyplatformscouldleadtosomeduplicationofoperatingand
networkupgradecosts.However,thepanelsmodellingshowsthatifcompetitionspedup
deliverybyoneyearandacceleratedtheannualgrowthrateofproductivityby2.5percent,
itsbenefitswouldmorethanoutweighthosecostsofduplication.Experienceshows
competitivemarketscaneasilyproducegainsofthisorder.Overandabovethesegains,a
competitivestructurewoulddeliverthebenefitsofgreatercustomerresponsiveness,a
loweredriskofmonopolypricingandareducedburdenontaxpayers.
Thepanelrecognisesthatimplementationofadisaggregatedmodelwillrequireplanningand
taketime,andcouldraiseimplementationissuesmadeallthemoreacutebythefactthatthe
speedoftherolloutiscurrentlybeingincreased.Moreover,NBNCoisadjustingtoanew
mandate,leadershipandoperatingmodel,andtherearedangersindisruptingthat
adjustment.Recognisingtheserisks,thepanelsetsoutvariousoptionsfordisaggregation,
includingoptionsfortransitioningtoadisaggregatedstructureovertime.Wereatransitional
approachadopted,thepanelrecommendsthatintheperiodbeforedisaggregation,NBNCo
undertakestepstoensurethatthedifferentnetworksaredevelopedanddesignedinsucha
wayastofacilitatefuturedivestment.Additionally,soastoensureprogressismadeon
disaggregation,theProductivityCommissionshouldbecommissionedtoundertakeafurther
reviewofmarketstructureinnomorethanfiveyearstime.
Clarifyingandfundingserviceobligations
TheGovernmenthasacommitmenttoensuringthatallAustralianshaveaccesstohighspeed
broadbandassoonaspossible,ataffordablepricesandatleastcosttotaxpayers.NBNCois
theprincipalvehicleforthedeliveryofthatcommitment.
Todate,however,thatobjectiveandtheobligationsassociatedwithithavebeenspecified
mainlythroughtheStatementofExpectations(SOE)whichtheGovernment,asthe
shareholder,issuestoNBNCofromtimetotime.
Thepanelbelievestherearecompellingreasonsforspecifyinganyuniversalserviceobjective,
andtheassociatedobligations,inlegislation,notingthatthelegislationshouldprovidethe
flexibilitytoadjustthewayinwhichtheobjectivesandobligationsarepursuedinthelightof
evolvingtechnologiesandmarketstructures.Thereasonsforspecifyingtheseinlegislation
includethesheermagnitudeoftheinvestmenttaxpayersaremakinginNBNCoandthe
importanceofensuringaccountabilityfortheoutcomesofthatinvestment;theneedto
provideNBNCo,itscustomersandcompetitorswithapredictableframeworkforplanning
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theiroperations;andthedesirabilityofsettingaframeworknowthatcanaccommodateany
disaggregationandfutureprivatisationofNBNCo.
Infrastructureprovideroflastresort
Asastartingpoint,thepanelrecommendsestablishinginlegislationaninfrastructure
provideroflastresortobligationthatwouldattachtoNBNCobutwouldbecapableofbeing
vestedinotherentities,shouldthatbeappropriate.Theobligationshouldnotbedefinedina
waythatdisruptstheplanneddeploymentoftheNBN;rather,theobligationwouldcomeinto
effectoncedeploymenthadbeenundertakeninaparticulararea.Insodoing,itwould
provideenduserswiththecertaintythatservice,oncecommenced,wouldremainavailable.
AcontentiousaspectofNBNCosobligationshasbeeninthedeploymentofinfrastructurein
newrealestatedevelopments.Improvingcompetitionintheprovisionoftelecommunications
infrastructureinthesedevelopmentscanhelpholddowncostsandimprovethelongterm
affordabilityofcommunicationservices.ThepanelrecommendsrequiringNBNCotostand
readytoprovideconnectionstothosedevelopmentsundercostreflectivetermsspecifiedin
anundertakingapprovedbytheregulator.Aspartofthismodel,boththeprimeresponsibility
fortherelevantdecisions,andtheburdenofbearingtheinitialcosts,wouldfallondevelopers
(althoughultimately,thosecostswouldbecapitalisedintopropertyprices).Thepanel
recommendstheCommonwealthworkwiththestatesandterritoriestoensureplanninglaws
placeondevelopersanobligationtomakestheservicesavailabletoarequisitestandardin
newestates.
Undertheproposedmodel,developerswouldnotberequiredtoobtainconnectionsfrom
NBNCo,buttheywouldhaveanassurancethatconnectionserviceswereavailablefrom
NBNCoshouldtheychoosetousethem.Atthesametime,thechargesforthoseconnections
wouldsignaltodevelopersthecostsinvolved,thushelpingtoguideefficientlocation
decisions.
Uniformwholesalepricing
Imposingalegislatedobligationtoserveassuresconsumersofaccesstoservicesbutdoesnot
initselfensurethatthoseservicesareaffordable.Asageneralmatter,thebestinstrumentfor
guaranteeingaffordabilityiseffectivecompetition;butevenwithcompetitioninplace,
importantissueswouldremainwithrespecttocostsandchargesforserviceinregionaland
remoteAustralia.
Todate,thoseissues,liketheissuesrelatingtoobligationstoserve,havebeendealtwith
largelythroughtheSOEwhich,underthepreviousGovernment,specifiedaformofuniform
nationalwholesalepricing.Inturn,NBNCosSpecialAccessUndertaking(SAU),asapproved
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bytheACCC,establishespricecapswhichprovidesomeflexibilityforNBNCotovarythe
geographicalstructureofitscharges,butonlysolongasthecapsaremet.
Thepanelbelievesapricecappingapproachshouldberetainedbutismindfulofthe
distortionsuniformpricerequirementsimpose,includingintermsofpreventingthe
emergenceofcompetitioninregionalareas(wherepricesareforcedbelowcosts)and
encouragingpotentiallyinefficientcompetitioninmetropolitanareas(whereuniformprices
mightbeabovecosts).Additionally,evidencefromthepanelscostbenefitanalysissuggests
demandforextremelyhighspeedbroadbandisrelativelyhighlypriceelastic,whichmeans
pricedistortionsimposesignificantwelfarelosses(astheyinducesomeconsumerstodemand
servicestheyvalueatlessthantheircosts,whilediscouragingotherconsumersfrom
demandingservicestheyvalueatmorethantheircosts).Bydisguisingcosts,uniformprices
canalsoreducethepressuresonNBNCotoensuretheirpropermanagement.Aswellas
thosedisadvantages,thepanelnotesthatuniformwholesalepricingofNBNCosservicesmay
notresultinuniformretailcharges,whichisafurtherreasonforconcludingthatitisapoor
wayofpursuingthegoalofserviceaffordability.
Asaresult,thepanelrecommendsagradualmovetocostreflectivewholesalepricing,
accompaniedbysubsidiesprovideddirectlytovulnerableconsumers.Bydirectlyaddressing
theaffordabilityobjective,suchamovewouldallowbettertargetingofsubsidies.Thiswould
prevent,forexample,theperverseredistributionsuniformpricingcaneffectfromlowincome
consumersinlowcostareastowealthierconsumersinhighcostareas.
However,thepanelrecognisesthatatransitiontomorecostreflectivepricingwouldhaveto
begradual.Duringthattransition,changesinmarketstructureandamovetogreater
competitioncouldimpactonNBNCoscapacitytocrosssubsidisenoncommercialnetworks.
Itwouldbeamistake,however,tosuppressthedevelopmentofcompetitiontoachieveother
policyobjectives,allthemoresogiventhecontributioncompetitioncanmaketodelivering
servicequalityandaffordability.
Thepanelsapproachwasthereforefirsttoaddresstheissueofcompetitionandthen
examinehowawholesaleonlynationalnetworksubjecttopricecapscouldbe
accommodatedwithintheproposedcompetitionframework.Thisrequirescareful
considerationofthescopeforanddesignofanysubsidiesthatmightberequiredtopreserve
universalservice.
Subsidies
Thepanelconsidersthatanysubsidiesrequiredtomeetbroadbandaccessandpricinggoals
shouldbetransparent,sourcedinwaysthatminimiseinefficientburdensontaxpayers,
deliveredasefficientlyaspossibleandsustainableinacompetitiveenvironment.
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NBNCoscurrentpricingstructurefailstomeetthesecriteria.Entrenchinganopaque
crosssubsidy,itoffersnotransparencyontheextentoftransfersandprovidesno
benchmarksthatwouldallowanassessmentofwhetherfutureclaimedtransfersare
reasonablecomparedwiththeactualcostsofsupplyandrevenuesreceived.Thereisno
potentialforcontestabilityofthesubsidyandthefundingsourceforthesubsidymaybe
erodedovertimebyentrantsattractedtothehighprofitmarginsinlowercostareas.
Itisthereforeworthconsideringanarrangementthatmadeanysubsidiesexplicitand
transparentlyfunded.
ThiscouldpartlybeachievedbywritingdowntotheirvalueinuseanyassetsNBNCo
acquiresastheyarebroughtintoservice.Werethatdone,theburdenofanysubsidieswould
bebornebytaxpayersandaccountedforintheCommonwealthsbudgetandassociated
financialstatements.Thepanelbelievesthiswouldbeanappropriateapproachtoadopt,asit
wouldsignaltransparentlytotaxpayersthecapitallossentailedinprovidingserviceto
uneconomicareas.Nonetheless,whileitrecommendsproceedingwiththeseasset
revaluations,thepanelrecognisesthattheywouldnotbesufficienttocovertheoperating
andassetreplacementcostsinvolvedinservingnoncommercialareas,especiallyinthe
satelliteandfixedwirelessfootprints.
Byfarthebestoptionforfundinganyongoingsubsidywouldbethroughconsolidated
revenue.Amongotheradvantages,thatwouldallowParliamentandthepublictoassessinan
ongoingwaythebenefitsofusingtaxpayerfundsforthispurposeratherthanothers.
However,shouldthatoptionnotbeadopted,thepanelrecommendsthat,ifanongoing
subsidyisrequiredanditsminimumamountcanbereliablydetermined,asingle,annual,
broadbasedindustrylevy,coveringbothvoiceandbroadbandservices,beimposedtofund
thatsubsidy.ThiswouldbesimilartothecurrentarrangementsfortheUniversalService
Obligation(USO),whichareoutlinedinAppendix3.
However,anynewlevymustnotplaceunreasonableburdensonconsumers.Whenthe
quantumofsubsidyrequiredisnotcapableofbeingmarkettested,thereisariskthatthe
levyitselfwillbecomeameansbywhichpowerfulsuppliersextractbenefitsatthepublics
expense.Thepanelbelievesthatanimportantbenefitofitsdisaggregationproposalsisthat
theprocessofdivestingthesatelliteandfixedwirelessnetworkswouldofferanopportunity
formarkettestingtheamountofanyfuturesubsidythesenetworksmightneed.Butwere
NBNCotoinsteadremainanintegratedentity,itwouldbedifficulttodeterminethesubsidy
requiredandonthatbasistosetanappropriatelevy.Thecostandrevenueuncertainties
associatedwithNBNCosstillveryinitialstageofnetworkdeploymentcompoundthose
difficulties.
Underthosecircumstances,imposingalevycouldcausegreaterdistortionsthanitisintended
toremedy.Asaresult,itisthepanelsconclusionthatifNBNCoremainsstructuredasit
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currentlyis,theGovernmentshouldwaittoseewhetheranyinterventionisrequiredtodeal
withconcernsthatcompetitionmaythreatenNBNCosabilitytocrosssubsidiseservice
provisioninlossmakingareas.Thepanelthereforerecommendsthatabsentdisaggregation,
nospecificmechanismforfundinganysubsidieswithinNBNCobeputinplace,subjectto
reviewinfiveyearstime.
ThepanelnonethelessbelievesanycrosssubsidieswithinNBNCoshouldbequantifiedtothe
extentpossibleandmadetransparenttoconsumersandtaxpayers.Tothatend,thepanel
recommendsthatNBNCoberequiredtoreportannuallyonthequantumofitssubsidiesto
uneconomicareas,accordingtoamethodologytobeestablishedbytheProductivity
Commission.Whileinherentlyimperfect,suchestimateswouldprovideausefulfactbasefor
futurereconsiderationoftheappropriatesubsidyarrangements.
NBNCoscapitalinvestment,productsandpricing
ThepanelstermsofreferencerequireittoreportonthereviewandregulationofNBNCos
capitalinvestment,productsandpricing.ThetermsuponwhichNBNCosproductsand
servicesareofferedwillbecomeincreasinglyimportanttoendusersoverthecomingyearsas
itsnetworkfootprintgrows.Efficientcorporatepracticeswithinthecompanywillbe
necessarytokeepconstructionandoperatingexpenditurestoaminimum.Atthesametime,
efficientregulatoryarrangementsarenecessarytoensure,amongotherthings,thatthe
benefitsfromefficientoperationflowthroughtothepricespaidbyaccessseekersand,
ultimately,endusers.
Arangeofimportantchangestotheregulatoryarrangementshavebeenrecommendedinthe
panelsStatutoryReview.Subjecttothoserecommendationsbeingimplemented,thepanel
seesmeritinthecurrentregulatoryframeworkwhichallowsforscrutinybytheregulatorof
bothgeneralprinciplesenablingNBNCotoseekaregulatedmaximumreturnandthespecific
termsofaccess.Thepanelthereforerecommendsthebroadapproachtoregulatingtheterms
andconditionsunderwhichNBNCoprovidesservicesberetained,butwithsome
enhancementsinrelationtoissuessuchasdevelopingproducts,upgradingitsnetworkand
operationalissuesrelatingtotermsofaccess.
TherulesforNBNCosownershipandgovernanceareestablishedinlegislation.Theserules
allowconsiderableflexibilityinthemanagementofNBNCosassetsandgivetheGovernment
significantpowerstodeterminethestructureofthecompany.Thesepowerscanfacilitatethe
structuralreformstoincreasecompetitionandimprovelongtermindustryoutcomesthatthe
panelrecommends.
Theminimumstandardofbroadbandservicesetasanationalgoalwillneedtobe
reconsideredinthefuture.AsisclearfromtheCBA,greatcaremustbetakenindetermining
whetherthebenefitstoAustraliansfromupgradingthetelecommunicationsnetworkto
particularstandardsoutweighthecosts.Thepanelthereforerecommendslegislatinga
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processwherebyanyproposedchangestotheminimumstandardssetdowninthemost
recentSOEwouldhavetobeassessedandreportedonbytheProductivityCommission.
FullprivatisationofNBNCoisnotanissuethatrequiresimmediateconsideration.However,
theobjectiveofeventualprivatisationshouldinform,andbeconsistentwith,implementation
ofthepanelsrecommendations.Additionally,disaggregationoffersscopeforatimelymove
tomobiliseprivatefundingforatleastaspectsofNBNCosoperations,reducingthefinancial
burdenandrisksbeingplacedontaxpayers.
Efficientandaccountableregulation
Evenwereamoreprocompetitivemarketstructureputinplace,thesectorsfuture
performancewillalsodependontheefficiencyofitsregulatoryarrangements.Thatinturn
dependsnotsolelyontheregulatorspowersbutalsoonthemechanismsthatcanholdthe
regulatortoaccountforthemannerinwhichthosepowersareused.
Thedynamicnatureoftelecommunicationsmarketsinformedthechoiceofaregulatory
frameworkthat,asof1997,vestedsubstantialdiscretionintheregulator.Whateverits
merits,thatdiscretionwasaccompaniedbyrelativelyfewchecksandbalances,andthose
whichwereputinplacewereprogressivelyweakened.Heretoo,Australiaisanomalousby
internationalstandards,bothinplacingtheresponsibilityforinfrastructureregulationina
competitionandconsumerauthorityandinremovingalmostallformsofreviewofregulatory
decisionsontheirmerits.
Whilestrengtheningtheroleofregulation,thepanelhasconsequentlysoughtbothinthis
MarketandRegulatoryReportandinitsStatutoryReviewtostrikeabalancebetween
vestingintheregulatorthepowersitrequiresandensuringthestructureofregulatory
institutionsmakesforregulationthatiswellinformed,transparent,predictableand
accountable.
Thatisallthemoreimportantinanindustrywhichwillbecomeincreasinglycomplex.
Structuralseparationhasitselftransformedissuessuchastheselectionofnewproductsand
theextent,timingandfundingofcapacityexpansionfrombeingprimarilycommercial
decisionstakenwithinaverticallyintegratedentityintodecisionsthatinvolvenegotiations
betweenNBNCoandaccessseekers.Thosedecisionswillinevitablyputgreaterdemandson
theregulatorintheyearsahead.
Itisthepanelsviewthatthosedecisions,andwherepossibleothers,shouldbetakenona
basisconsistentwiththeapproachadoptedinotherregulatednetworkindustries,minimising
theriskofregulatorydistortionstotheallocationofscarcecapital.Placingresponsibilityfor
regulationinanetworksregulator,whosesoletaskwouldbeeconomicregulationof
infrastructurenetworks,includingtelecommunications,wouldfacilitatethis,andwouldalso
betterfocustheregulatorstasksandhenceaccountabilities.Asaresult,thepanel
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recommendsthatsuchaspecialistregulatorbeestablishedandthatthecurrentreviewof
competitionpolicyexaminethescopefortransferringresponsibilityforeconomicregulation
ofinfrastructuremorebroadlytoasinglenetworksregulator.
Itisalsoimportantthatthetelecommunicationspolicycapabilitywithingovernmentbe
strengthened.Moresharplydefiningthedividinglinebetweenpolicyandregulationand
makingitcleartheregulatorsroleistoimplementtherules,notdevisethemshouldbea
componentofimplementingthisreportsrecommendations.
Acompletelistofthepanelsrecommendationsisprovidedinthefollowingsection.Thefull
contextanddetailsofthoserecommendationscanbefoundintherelevantchaptersofthis
report.
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1.2
Summary of recommendations
Thefullcontextfor,anddetailsof,thepanelsrecommendationsforchangesoutlinedbelow
canbefoundintherelevantsectionsofthereport.
Future market structure
Recommendation1:Infrastructurecompetitionbetheguidingpolicyforthedeliveryof
wholesalebroadbandservices.Thispolicybeimplementedexpeditiouslytothemaximum
extentpracticable.
Recommendation2:Thebasisforacompetitivewholesalebroadbandmarketstructurebe
createdthroughthedisaggregationofNBNCo.Thisbedonethrough:
a)
thedisaggregationanddivestmentofNBNCostransit,satelliteandfixedwireless
businessunits,alongwithassociatedobligations,includingwithongoingsubsidiesif
theyprovetobenecessary;
b)
puttinginplacearrangementswiththeaimtohavingtheHFCnetworkownedand
managedbyanonNBNCooperator.IfNBNCoissuccessfulinacquiringthenetwork
andtheGovernmentconsidersthatfulldivestmentisnotachievable,itdisaggregate
NBNCosHFCnetworkfromitsFTTxnetworktothegreatestextentpossible;
c)
werefulldisaggregationnottoproceedimmediately,theGovernmentdirectNBNCoto
movetothetransitionalinternalarrangementsidentifiedasapreparatorystage,witha
furtherindependentreviewofmarketstructurebeingconductedinnomorethanfive
yearstime;and
d)
thecoppernetworkremainingactiveinthesupplyofADSLserviceswithintheHFC
networkareapendingupgradetoFTTNorFTTP.
Parts 7 and 8
Recommendation3:Part7oftheTelecommunicationsAct1997andassociatedprovisionsof
theCompetitionandConsumerAct2010berepealed.
Recommendation4:Part8oftheTelecommunicationsAct1997beamendedto:
a)
removethe1kilometreexemptionandtheMinisterialexemptionprocess,butprotect
existingprovidersrightsinrelationtoinfrastructurealreadyinstalledunderthe
exemptioneitherbyanongoingstatutoryexemptionorbydeemingsuchnetworksto
besubjecttoanundertakingundertheprocesssetoutbelow;
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b)
provideforanundertakingprocessunderwhichsuperfastnetworkundertakings,if
acceptedbytheACCC,replacethePart8provisionsthatrequiresupplyofsuperfast
broadbandcarriageservicesonawholesaleonlystructurallyseparatedbasis;
c)
requiretheACCCtoacceptsuchsuperfastnetworkundertakingsunlesstodosowould
becontrarytothelongterminterestofendusersintheareatheapplicantintendsto
service,havingregard,amongstotherthings,towhethertheproviderhasasignificant
degreeofmarketpower,theincentiveandabilityfortheprovidertodistortcompetition
independentmarkets,theconditionsintheundertakingtoovercometheserisksand
theproposeddurationoftheundertaking;
d)
requiretheACCCtopublishandimplementguidelinesonhowitwillapplythelongterm
interestofenduserstesttoundertakingstheseguidelinesshouldhaveregardtothe
testsalreadyappliedtospecialaccessundertakings;theyshouldalsoincludemodel
superfastnetworkundertakingsforparticularclassesofmarketsandsituations,for
example,smalllocalcarriersservingnewdevelopments,whichcarrierswishingto
servicethosemarketscouldadopt;
e)
requiretheACCCtoconsultpubliclyontheacceptabilityofsuperfastnetwork
undertakingsreceived,andapproveoradviseofconcernswithanundertakingwithin
threemonthsofitsreceipt;whereithasadvisedofconcernsitmustmakeitsfinal
decisionwithinafurtherthreemonthsofthatadvice,withtheundertakingbeing
deemedtobeacceptediftheACCCmakesnodecision;
f)
subjectanACCCdecisiontoacceptorrejectsuchanundertakingtomeritsreviewor,in
theeventmeritsreviewisnotprovided,ensuretheprocessfortheassessmentofsuch
anundertakingissubjecttoclearandspecificdecisionmakingcriteriaspecifiedin
legislation;and
g)
enableaprovidertocombineaspecialaccessundertakingandanundertakingunder
Part8.
Broadband service provision

Recommendation5:NBNCosongoingservicedeliveryobligationsbeenshrinedin
legislation.Newlegislativeprovisionsprovidethat:
a)
allAustralianpremisesbeinapositiontoaccesshighspeedbroadband,sowhereitis
notbeingsoprovidedbyanotherentity,orisnotlikelytobesoprovidedbyanother
entity,NBNCo(oranalternativedesignatedprovider)hasanobligationtosupplythat
access(astheinfrastructureprovideroflastresortIPOLR).Thatobligationbecome
effectivewhenNBNCohascommencedserviceprovisioninanarea;
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b)
wherepremisesarecurrentlyserved(orinfutureserved)byathirdparty,andthatthird
partyexitsthemarket,NBNCo(orthedesignatedprovider)hasanobligationtoprovide
continuityofsupplyusingthemostpracticalmeans,subjecttoarrangementsbeing
madeforrecoveryofcostsnecessarilyincurred;and
c)
thepriceandnonpricetermsandconditionsofNBNCo(orthedesignatedprovider)
provisionofabroadbandconnectionservicetopremisesbeestablishedthrougha
requirementthatNBNCo(orthedesignatedprovider)haveaBroadbandConnection
ServiceUndertakingapprovedbytheACCCsettingoutthetermsandconditionson
whichitwillfulfilitsIPOLRobligations.
Recommendation6:Nothingshouldpreventadeveloperfromrequestinganyprovider
(whetheritbeNBNCoorsomeotherprovider)tosupplyinfrastructurein,andtoservice,
theirestate.TheGovernmentshouldcreateafairandeffectivemarketforthisworkby
implementingthefollowingarrangements:
a)
thecostsofprovisionofbroadbandtelecommunicationsinfrastructureinnew
developmentsshouldbebornebydevelopersandcustomersthroughconnection
charges,therebyfacilitatingcompetitioninthesupplyoftheseservices;
b)
providersservicingnewdevelopmentsshouldhavefreedominsettingtheirchargesfor
developersandconnectionchargesforcustomers;NBNCoschargesshouldbe
competitivelyneutralandestablishedthroughitsACCCapprovedbroadbandconnection
serviceundertaking;and
c)
toensuredevelopersmeetthecostofprovidingtelecommunicationsinfrastructure,the
CommonwealthshoulduseCouncilofAustralianGovernmentprocessestosecure
changestoStateandTerritoryplanninglawstorequiretheprovisionofsuch
infrastructureasaconditionofdevelopmentapprovalandoccupancy;theGovernment
shouldalsofurtherexploreitsabilitytolegislatetoachievethesameoutcome.
Recommendation7:Transitionalmeasuresbeusedtoassistwithimplementationofthe
recommendednewdevelopmentarrangementssoitisleastdisruptivetoserviceprovision
objectives.Aspartofthesemeasures,theGovernmentshould:
a)
setadatefortheintroductionofdeveloperchargingthatminimisestheimpactonthe
costofdevelopmentsalreadyinplanningorunderway,butdoessoinawaythatavoids
arushofdevelopmentsbeinglodgedwithNBNCoandTelstrawithaviewtosecuring
freeinstallationofinfrastructure;
b)
investigatewhetherNBNCosexistingcontractscouldbereallocatedtoalternative
providersinafairandefficientwaywithaviewtomaximisingoperationalefficiency;
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c)
publishaclearroadmapandtimetablefortheintroductionofthenewarrangements
andthetransitionalrulesthataretoapply,includingfordevelopmentsalreadyunder
contract;and
d)
putinplaceacommunicationsprogramtoexplaintherationalefordevelopersbeing
requiredtomeetthecostoftelecommunicationsinfrastructureintheirestates.
Recommendation8:ApolicyofpricecappingforNBNtypeservicesbeadopted,underwhich
pricescontinuetobeaffordablebutnotnecessarilyuniformnationally.Thisshouldbe
accompaniedbyagradualmovetowardscostbasedwholesalepricing,withdirectlytargeted
subsidiesusedtoaddressanyconcernsregardinguseraffordabilitythatmayresultfromthis
change.
Recommendation9:IftheGovernmentacceptsthepanelsrecommendationstodivest
NBNCoofitsfixedwirelessandsatelliteoperations,thesettingofcapsonthepricesthatcan
bechargedforservicessuppliedbythosenetworksshouldbepartofthedivestmentprogram.
Recommendation10:Division16ofPartXIBoftheCompetitionandConsumerAct2010,
whichprovidesauthorisationsforNBNCotoconductactivitiesreasonablynecessaryto
achieveuniformnationalwholesalepricingthatmayotherwisebefoundtobeanti
competitive,berepealed.TherepealdateshouldbedelayedtoprovideNBNCowithan
opportunitytoapplyforanyauthorisationsitmayrequireunderPartIVoftheCompetition
andConsumerAct2010.
Recommendation11:TheimplicationsofdifferentfuturestructuralscenariosforNBNCoand
changedmarketentryconditionsforthefundingofnoncommercialservicesbeaddressedin
thefollowingway:
a)
explicitmechanismsforfundingnoncommercialservicesbeputinplaceifthesatellite
andfixedwirelessnetworksaredivested,andthequantumofthesubsidiesrequiredfor
thosenetworksismarkettested;
b)
anindustrylevybeusedtofundserviceprovisioninuneconomicareaswithinthe
satelliteandfixedwirelessfootprints,withthatlevycombiningtheamountsrequired
fortelephonyandhighspeedbroadbandservices;overtime,thesubsidyshould
becomecontestable,andbeprovidedtoconsumersratherthantoaparticularsupplier;
and
c)
werethedisaggregationoptionsnotaccepted,nospecificmechanismforfundingany
subsidieswithinNBNCobeputinplace,withthisarrangementsubjecttoreviewinfive
yearstime;ifthismarketstructureismaintained,NBNCoberequiredtoreport
annuallyonanycrosssubsidiesusingamethodologydesignedbytheProductivity
Commission.
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Regulation of NBN Cos products, pricing and expenditure

Recommendation12:TheACCCissueguidelinessettingoutitsgeneralapproachindealing
withissuesrelatingtonewproductdevelopmentbyNBNCo.
Recommendation13:Toensurenationalstandardsforbroadbandinfrastructureandservices
areappropriate,anindependentbody,suchastheProductivityCommission,reviewthemat
leastonceeverysixto10years,withtheresultsusedbytheGovernmenttoconfirmoradjust
thenationalbroadbandstandard.Thisreviewrequirementbesetoutinlegislation.Sucha
processshouldbeaprerequisitetoanyimpositionbyGovernmentofanewnational
broadbandstandard.
Recommendation14:If,followinganindependentreview,theGovernmentdecidestoraise
thenationalbroadbandservicestandard,itshouldinitiateaprocesswithNBNCoandother
relevantoperatorstoestablishthemostcosteffectivewayofimplementingthatnew
standard.Indoingso,theprimaryemphasisbeonupgradingnetworkscommercially,
includingthroughincreasedusercharges.TheGovernmentshouldonlyconsiderfunding
assistancewhenadesirableupgradewouldnototherwisebeundertakenonacommercial
basis.
Recommendation15:NBNCoshouldgenerallycontinuetobepermittedtosupplyonly
declaredserviceswithinthemeaningofPartXICoftheCompetitionandConsumerAct2010.
However,toprovideflexibilitytodealwithsituationssuchaspilotsandtrials,theintegration
ofnewnetworks,theprovisionofservicesincontestablemarkets,andgreatercompetition
followingfulldisaggregation,PartXICshouldbeamendedtoallowtheACCCtodetermine
thatspecifiedNBNCoservicesarenottobetreatedasdeclaredservicesincircumstances
wheretheACCCissatisfiedthisisinthelongterminterestsofendusers.
Recommendation16:WeretheGovernmenttodecidetoretainNBNCoasanintegrated
entity,competitiveneutralityrequirementsinrespectofdecisionsaboutentryandexpansion
beestablishedinlegislation.ShouldNBNCobedisaggregated,theGovernmentgiveNBNCo
clearerinstructionsthroughtheShareholderMinistersStatementofExpectationsabouthow
itistobehaveinsituationswheremarketfailureisnotusuallyanissue.Thisincludes:
a)
instructingNBNCotoactinamannerconsistentwithcompetitiveneutralityprinciples
otherthanwhereitisclearlyfulfillingexplicitsocialandeconomicpolicyobjectivesor
hasACCCauthorisation;
b)
instructingNBNCoastoitsprioritiesanditscommercialobjectives,includingensuring
thatwhereitoverbuildsanexistingnetworkitactsasaprudentinvestor,takesfull
accountoftheopportunitycostofcapitalandismindfulofthefactthatoverbuilding
premisesthathaveadequatealternativesreducesitsabilitytoservicethosethatdonot;
and
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c)
ensuringthatconcernsaboutanticompetitivebehaviourbyNBNCoinrelationto
overbuildingareappropriatelydealtwiththroughPartXIBandPartIVofthe
CompetitionandConsumerAct2010.
Recommendation17:RetailpricecontrolsnotbeappliedtoTelstraservicesontheNBN
unlessthereisclearevidenceofconsumerdetrimentduetoTelstrafacinginadequateactual
andpotentialcompetitioninaparticularmarketsegment.TheMinisterspowertomakeprice
controldeterminationsberetainedinaformthatallowsittobeappliedtoservicesprovided
overtheNBN,foruseonlyasareservepowerandsubjecttothatpowerbeingconfinedto
areasofclearmarketfailure.
Privatisation and governance of NBN Co
Recommendation18:ArrangementsrelatingtotheprivatisationofNBNCoasacompanyare
notanissuethatrequiresimmediateconsideration;theyberevisitedoncetheNBNisfurther
established.
Administration of economic regulation of the telecommunications industry
Recommendation19:ThecurrenttelecommunicationsspecificfunctionsoftheACCC,with
theexceptionofthoserelatedtoPartXIBoftheCompetitionandConsumerAct2010,should
betransferredtoanetworksregulator.ThecurrentCompetitionPolicyReview,whichisto
reportbyDecember2014,shouldexaminetheestablishmentofsucharegulatorwhichwould
haveresponsibilityforaccessregulationforallinfrastructureindustries.
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2.Panelsapproach
Thepanelwasrequiredtoexamineandmakerecommendationsonthemostappropriate
regulatoryframeworkforAustraliasfuturebroadbandmarketand,particularly,onNBNCos
roleinthatmarket.ThepanelstermsofreferenceareprovidedatAppendix1.
Inapproachingitstask,thepanelwasconsciousthatissuesofmarketstructurearenotsimply
questionsofregulatoryapproachbutarefundamentallyaffectedbytheeconomics
underpinningthemarketandbythedecisionsofmarketparticipants.Thatsaid,theroleof
NBNCointhemarketisitselfakeydeterminantofthefuturemarketstructure,asistherole
ofestablishedparticipantsandnewentrants.Sowhilethefutureformofregulationwill
influencemarketstructure,marketstructurewillalsoinfluenceregulation.
Thisinterplayrequiredthepaneltoconsiderandmakerecommendationsonindustry
structureaswellasmorepurelyregulatorymatters.Thesestructuralmattersincludetherole
NBNCo,asagovernmentbusinessenterprise,playsinthemarketrelativetootherfirms,
whichisanissueseparatefrom(thoughnotentirelyunrelatedto)itsregulatorytreatment.
Theareasforconsiderationidentifiedinthepanelstermsofreferenceare:
theoverallstructureoftheAustralianwholesalebroadbandmarket,including
infrastructurebasedcompetition;
theroleofNBNCointhatframework;and
themoredetailedregulatorysettingstoapplyinthatindustrystructure.
Thepanelsawthekeyunderlyingpolicyissuestoaddressasbeing:
howbesttoensureendusershavereadyaccesstoaffordableandhighspeed
broadbandandaffordableandreliablevoiceservicesthisincludestheissueof
servicingruralandremoteareasinacosteffectivemanner;
howtoensurecompetitionandcontestabilityworkeffectivelyandefficientlywhere
theycan,whilealsoensuringregulationactsasabackstoporalternativewhere
marketforces,lefttotheirowndevices,willnotadequatelymeetconsumerneeds;
and
howtoencourageinnovationanddiversityinproductsandservices,particularlyin
areasormarketsthatarelesscompetitive.
Competitionatboththeretailandinfrastructurelevelbringsefficiencies,innovationandmore
consumerchoice.NeverthelessthereareareasinAustraliathatareunlikelytosupport
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broadbandinfrastructureand/orretailcompetition;theseareasmayneedongoingsubsidyto
encouragesupplyandmaintainongoingfinancialviability.
TheNBNisfocusedonfixedaccessserviceprovisiontothebroadconsumerandsmall
businessmarket.Thishasalsobeenthepanelsfocus;thedeliveryofbroadbandservicesover
mobiletelecommunicationsinfrastructureandoverinfrastructureservicinglargecorporate
customersaremarketsegmentsthatwouldneedtobeconsideredinexaminingthemarketin
itstotality.
Thequestionsaroundmarketstructureandregulationmustbeconsideredinthecontextof
existingmarketsandregulationthereisnocleanslate,norisitrealistic(ornecessarily
desirable)toenvisagemerelyturningbacktheclock.
InrelationtotheregulationofNBNCo,thetermsofreferencemakeparticularnoteof:
thelongtermownershipandregulatoryarrangementsforNBNCo;
operationalconstraintsonNBNCogivenitsmandatetoefficientlybuild,operateand
maintainawholesaleonlyaccessnetwork;and
howNBNCoscapitalinvestment,productsandpricingshouldbereviewedand
regulated.
Thesestructuralquestionsarefundamentallyimportanttothelongtermoperationofthe
telecommunicationsindustry,toendusersand,morebroadly,toAustraliasfutureprosperity.
Assuch,thepanelconsideredbroadlythequestionsoftheappropriateindustrystructureand
regulation.
2.1
Guidance for readers
Thisreportexaminesthebroaderregulatoryframeworkforbroadbandandtheadministration
oftelecommunicationsgenerally,andthenturnstobroadbandserviceprovisionand
economicregulationofthetelecommunicationsindustry.
Ingeneral,thereportexplainstherelevantprovisionsforreview,identifiespossibleissues,
reportsonsubmissionstothereview,explainstheprincipleswhichhaveguidedthepanels
approachandpresentsthepanelsconclusionsandrecommendations.
Thereportanditsrecommendationsrelatetoboththeindustryarrangementsinthe
transitionalperiodpriortothefullrolloutoftheNBNandtheperiodoncetheNBNrolloutis
completed.
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Thepanelhasprepareddifferentreportstoaddressitstermsofreference:
thisreportwhichisVolumeIoftheindependentcostbenefitanalysisofbroadband
andreviewofregulationisreferredtoastheMarketandRegulatoryReport;
areportonthepanelscostbenefitanalysisofhighspeedbroadbandwhichis
VolumeIIofthisreportisreferredtoastheCBAReport;and
areportfulfillingtherequirementsofthereviewrequiredunders.152EOAofthe
CompetitionandConsumerAct2010(CCA)isreferredtoastheStatutoryReview.
2.2
Consultation and submissions
On13February2014thepanelreleasedaRegulatoryIssuesFramingPaperthatfocussedon
structuralissuesandsoughtviewsfromindustryandthepubliconthestructureand
regulatoryenvironmentforAustraliasfuturebroadbandmarket.Thepanelreceived43public
submissions2.Toencouragesubmissionsthepanelalsoheldanindustryforumon
24February2014,invitinganumberofkeystakeholderstoattendandexpressviews.
On24March2014,thepanelreleasedadiscussionpaperonTelecommunicationsRegulatory
Arrangements3,whichprovidedanoverviewofthePartXICaccessregimeandsought
feedbackonitsprinciplesandoperation.Thepaperalsoprovidedanoverviewofprovisionsin
theNationalBroadbandNetworkCompaniesAct2011(NBNCompaniesAct)thatarerequired
tobereviewedandsoughtfeedback.Submissionsonthispaperwereprimarilyusedinthe
developmentoftheStatutoryReview.Thepanelreceived15publicsubmissions4.
Whilethesetwopapersidentifiedarangeofspecificissuesforcomment,thepanelalso
invitedstakeholderstoraiseotherissuesastheyconsideredrelevant.
Inaddition,thepanelalsohadindividualmeetingswithvariousinterestedpublicandprivate
sectorstakeholders5,andenlistedtheservicesofconsultantsandspecialiststoaidinitswork.
2SubmissionsareavailableontheDepartmentofCommunicationswebsiteat
www.communications.gov.au/broadband/national_broadband_network/costbenefit_analysis_and_review_of
_regulation/telecommunication_regulatory_arrangements_submissions_received_by_the_panel
3TelecommunicationsRegulatoryArrangementsconsultationpaperforthepurposesofs.152EOAofthe
4SubmissionsareavailableontheDepartmentofCommunicationswebsiteat
www.communications.gov.au/broadband/national_broadband_network/costbenefit_analysis_and_review_of
_regulation/telecommunication_regulatory_arrangements_submissions_received_by_the_panel
5Thefulllistofstakeholdersthatthepanelmetwith,eitherattheindustryforumorindividually,is:Australian
CommunicationsConsumerActionNetwork,theACCC,AkamaiTechnologies,AlcatelLucent,AmazonWeb
Services,Cartesian,CiscoSystems,CompetitiveCarriersCoalition,CommunicationsAlliance,CorningOptical
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3.Historicalcontext
ThisreviewisthelateststageinadebatethathastakenplaceovermanyyearsinAustralia:a
debatefosteredbytheriseoftheinternet,theonlineeconomy,andthedemandforreliable,
everfasternetworkstoaccessit.Similardebateshaveoccurredinothercountries6andin
relationtootherinfrastructureutilityindustries.
3.1
Evolution of broadband in Australia
AcentralissueintheevolutionofbroadbandinAustraliahasbeentheperformanceofthe
accessnetworkthatconnectsindividualcustomers,whetherattheirpremisesorindividually,
tothewiderinternet.Historically,theupgradingofthisnetworkhaslargelyfocussedon
addingnewtransmissionequipmentthatcanincreasetheperformanceofthetransmission
medium,whethercopperorspectrum,withattentionalsobeinggiventoreplacingthat
transmissionmediumwithahighercapacitymedium,forexample,HFC,andmorerecently
fibre.Wherethisconnectionisabottleneck,policymakershavealsofocussedonthe
potentialforinfrastructurecompetitiontodevelop.Overlappingandintersectingwiththe
issueofinfrastructurecompetitionhasbeenthequestionofwhether,andhow,tofacilitate
retailservicelevelcompetitionusingthatinfrastructuretoimproveconsumeroutcomes.
Theseeffortshavebeendrivenbythegrowingdemandforbroadbandavailabilityand
capabilityinordertoaccessnewservices.Sincethecommercialisationoftheinternetand
WorldWideWebbeganinearnestinthe1990s,internetaccess,applicationsandusagehave
allexperiencedphenomenalgrowth.Fromsimpledialupconnectionstoaccessemail,simple
bulletinboardsandchatrooms,theonlineworldhasevolvedintosophisticated,
multifunctional,multiaccessecosystems.Thisiswelldemonstratedbythegrowthininternet
subscriptionsandtrafficoverthepasttwodecades.
Astheservicesavailableontheinternethaveevolved,sohavedemandsforbetteraccessto
it.Firstgenerationasymmetricdigitalsubscriberline(ADSL)technologyofferedfasteraccess
(upto512kilobitspersecond(kbps))thanthatavailableovernarrowband,dialupplatforms,
asdidlatergenerationADSL2(upto8megabitspersecond(Mbps))andADSL2+(upto24
Mbps).Theopeningofincumbentnetworkoperatorsexchangesandaccessnetworksto
competingdigitalsubscriberlineaccessmultiplexer(DSLAM)operators,forexample,byACCC
declarationofunconditionedlocalloopservices(ULLS)andlinesharingservices(LSS),fostered
Communications,Ericsson,FetchTV,InstituteforBroadbandEnabledSociety(UniversityofMelbourne),
IPSTARAustralia,KaCommCommunications,MacquarieTelecommunications,Microsoft,NBNCo,Nextgen,
NokiaSolutionsandNetworks,Opticomm,Telstra,TPGTelecom,TheTreasuryandVodafoneHutchison
Australia.
6RefertotheInternationalBroadbandStrategiesdiscussionatAppendixGoftheCBAReport.
34of169
competitionbetweenproviders,furtherspurringinnovation.Atthesametime,thepricingof
thataccessbytheACCCdeterredinfrastructurebasedcompetitionandreducedthe
incentivesforTelstratoupgradethecoppernetworktohigherspeeds.Therewas,asaresult,
acomplex,largelyunresolved,tensionbetweenpromotingcompetitionusingexistingassets
andmaintainingtheincentivesforthoseassetstobeextendedandenhanced.
Incontrast,HFCnetworks,wheretherehasnotbeenthirdpartyaccess,havebeenupgraded
fromdataovercableserviceinterfacespecification1(DOCSIS1)toDOCSIS3tosupportfaster
internetspeeds,althoughthepaceofthatupgradinghasbeenaffectedbythefactthatthese
networksownersoperatedothernetworksoruseddigitalsubscriberline(DSL)technologyon
thosenetworks.Mobilenetworks,whereinfrastructurecompetitionhasbeenthenorm,have
experiencedevenmoresignificantimprovements.
Fromprovidingbasicvoicefunctionality,thosenetworkshavegrowntoencompassfaster
mobileaccesstotheinternet.
Bytheearly2000s,theabilitytofurtherenhancebroadbandspeedsbyupgradingexchange
basedADSL,involvinglongcoppercableruns,wascomingintoquestion.Itwasincreasingly
clearthatfibreandDSLAMswouldneedtobepushedclosertocustomers,forexample,by
thedeploymentofFTTN,toincreaseperformance.However,apolicyandregulatoryimpasse
developedwhichledtothatdeploymentnotproceeding.
3.2
Policy framework for broadband availability
Thedefinitionofbroadbandhasbeendynamic.Whilehighspeedservices,particularlyfor
corporatecustomers,predatedtheriseoftheinternet,ithasbeentheincreasingrangeand
depthofservicesavailableontheinternetthathasgivenrisetotheneedforspeed.The
definitionofbroadbandhaslargelyevolvedwiththetechnologicalcapabilitiesofthe
equipmentavailable.Forexample,whenADSLwasfirstintroduced,broadbandwaslargely
seenasaserviceoperatingatgreaterthan128kbps.ADSLhasevolved,withADSL2+now
capableofprovidingupto24Mbpsinoptimalconditions.Thisisseenbymanyasprovidinga
newbenchmark,eventhoughthespeedcommonlyavailableinthecommunityiswellbelow
thislevel.
ThetechnicallimitationsofexchangebasedADSL2+,theneedforfurthernetworkinvestment
toadvancebroadbandperformanceandtheGovernmentsgoalofensuringthatinvestment
occursaremerelythebackgroundtothepolicytask.
Forthepurposesofthisreview,theissueisnotsomuchdefiningwhatbroadbandis,or
shouldbe,butlookingathowbesttoincreaseconsumeraccesstohigherspeedbroadband
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andpavethewayforevenhigherspeeds.Thecurrentpolicyfocusisonhowtoprovidewider
accesstobroadbandspeedsof25Mbpsormore.Forconvenience,thisiscalledhighspeed
broadbandinthisreport7.
Theemphasishaslargelybeenaroundhowtoincreaseaccessnetworkavailabilityand
capacity,andtheprovisionsforretailserviceproviderstoaccessthenetwork.Farless
attentionhasbeenpaidtocreatingmarketconditionsthatprovideincentivesmostconducive
toachievingthedesiredoutcome.Thisneglecthashadimportantimplicationsthatthisreview
seekstoaddress.
Development of NBN proposals
TelstrafloatedFTTNproposalswithgovernmentsfromaround2005.Thesehelpedpromote
widercommunitysupportforfasterinternetaccess.However,theyalsoraisedconcernsthat
therolloutofFTTNwouldrestrictthescopeforDSLAMbasedcompetition,whichhadalready
ledtoahighlycompetitiveserviceprovidersectorandsignificantbenefitsforconsumers.
ThisledtoanumberofcompetingFTTNproposalsbeingputforwardbyTelstraandbyaccess
seekersundertheG9andFANOCbanners.
InJune2007,theHowardGovernmentannounceditwouldestablishapanelofexpertsto
conductacompetitiveprocesstofacilitatetheconstructionofanFTTNnetwork.Whileitdid
notallocatefundingtoassistwithconstructioncosts,thethenGovernmentindicateditwould
considerlegislativechangesneededtofacilitatetheproject.TheHowardGovernmentalso
initiatedacompetitiveprocesswithfundingforaregionalhighspeedwirelessnetwork.This
ultimatelygaverisetotheOPELproject,ledbyOptusandElders.
WiththeelectionoftheRuddGovernmentinNovember2007,theexistingrequestfor
proposalsfortheconstructionofanFTTNnetworkwasterminated.InApril2008,theRudd
GovernmentannouncedtheOPELprojectwouldnotproceed.Acompetitiveprocessforan
FTTNorFTTPnetwork,onewhichalsoincludedfundingofupto$4.7billion,commencedin
Aprilthatyear.
InApril2009,theRuddGovernmentannouncedthattherequestfortenderprocesshadfailed
tofindaproposalthatwoulddelivervalueformoneyandwasterminated.TheGovernment
establishedacompany,NBNCo,tobuildanewfibrebasedNBN.TheGovernmentthen
proceededwiththisproject,withprojectcapitalexpenditureinitiallyexpectedtobeupto
7NotethatParts7and8oftheTelecommunicationsAct1997definenetworksdeliveringinexcessof25Mbps
downloadassuperfastnetworks.
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$43billionoveranexpectedeightyearbuildperiod.Noappraisalwasmadeofwhetherthe
benefitsfromtheprojectwerelikelytoexceeditscosts.
AftertheSeptember2013election,theAbbottGovernmentindicatedongoingsupportforthe
policyobjectiveofprovidingfasterbroadbandandtheoperationofNBNCo,butalso
indicateditwouldundertakeafundamentalreassessmentofkeyaspectsoftheprevious
GovernmentsNBNapproach.Inparticular,theAbbottGovernmentindicateditsinterestin
ensuringthenewnetworkwouldberolledoutinthemostefficientmannerpossible,
includingthepossibilityofgreateruseofpreexistingcommunicationsassets,forexample,as
partofanFTTNnetwork.Inlookingforamoreefficientandmoretimelyframeworkforthe
provisionoffasterbroadband,theGovernmentalsodecidedtoseekconfirmationofthecosts
andbenefitsofitsinvestmentinbetterbroadbandandtoexaminethebeststructuraland
regulatoryframeworkforanindustryinwhichNBNCoplaysacentralrole.
AustralianGovernmentshavethereforeshownalongtermcommitmenttoprogressively
improvingtheavailabilityofhighspeedbroadband.Table3.1summarisestheevolutionof
thiscommitmentovertime.
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Table 3.1: Government commitments to availability of high-speed broadband

Approximate
Commencement
NameofProgramorPolicy
Technology
Speeds
(Download/Upload)
June2003
HigherBandwidthIncentive
Scheme
Satellite
Wireless,ADSL
256/64kbps
January2006
BroadbandConnectProgram
Satellite
Wireless,ADSL
256/64kbps
March2007
AustralianLaborParty(ALP)
ElectionPolicy
FTTN
12Mbps
April2007
AustralianBroadband
Guarantee
Satellite,
Wireless,ADSL
512/128kbps
June2007
AustraliaConnected:Coalitions
ExpertTaskforcecompetitive
process
Fixedline
1250Mbps
June2007
AustraliaConnected:Coalitions
OptusandEldersjointventure
(OPEL)
Wireless
ADSL2
6Mbps(12Mbpsby2009)
20Mbps
April2009
ALPsNationalBroadband
Network
FTTH
Wireless
Satellite
100Mbps
12Mbps
12Mbps
July2011
NBNCosInterimSatellite
Service
Satellite
6/1Mbps
August2012
NBNCosCorporatePlan
201215
FTTH
Wireless
Satellite
100/40Mbps
12/1Mbps
12/1Mbps
April2013
CoalitionsPlanforFast
BroadbandandanAffordable
NBN
FTTN,HFC
Wireless
Satellite
50Mbpsby2019
25Mbps
25Mbps
December2013
NBNCosStrategicReview
FTTH
FTTN
HFC
Wireless
Satellite
100/40Mbps
50/20Mbps
50/15Mbps
25/5Mbps
25/5Mbps
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OverthepastdecadeAustralianGovernmentshaveprovidedsupportthroughsubsidiesand
incentivestoassistwiththeprovisionofimprovedbroadbandservicesbytheprivatesector.It
hasonlybeeninthelastfewyears(since2007)thatvariousGovernmentshavemadeelection
commitmentstobedirectlyresponsiblefortheprovisionofbroadband,mostrecently
throughNBNCo.ThedecisiontomakeNBNCotheprimaryinstrumentfordeployinganew
taxpayerfundedbroadbandnetwork,includingbyacquiringfromTelstraphysicalassetsand
itscustomerbase,amountstoeffectivelybringingtelecommunicationsinfrastructureback
undergovernmentownership.
Thisbackgroundframestheapproachthepanelhastaken.Giventhedelaystodateinmaking
substantiveprogressonnextgenerationbroadband(closetoadecade),thereisheightened
importanceinmaintainingthemomentumoftherolloutofbroadbandinfrastructure.
However,previousdecisionsrelatingtothisrolloutinvolvedcomplexandinterrelatedissues
thatrequirethepanelsconsideration.Forexample,thepreviousGovernmentlargely
envisagedNBNCowouldhaveamonopolyinthesupplyofmassmarketcustomeraccessand
wouldutilisesignificantcrosssubsidiesfromhighmarginmarketstolossmakingregional
marketstomaintainsomedegreeofuniformnationalwholesalepricing.Italsoputinplace
legislativemechanismstodiscouragecompetinginvestmentthatcoulderodeNBNCos
businesscase.Thesearrangementsallrequireexamination.
Atthesametime,NBNCohasenteredintocomplexcontractswithTelstra,Optusandother
partiestosupporttherolloutandviabilityofitsownnetwork.Forexample,NBNCoentered
intoagreementstoacquireductaccessandmanagedservicesfromTelstraandtomigrate
customersfromboththeTelstraandOptusexistingnetworks.Asaresultofthese
agreements,NBNCohassignificantcontractualobligations,toTelstrainparticular,manyof
whichneedtobemetregardlessofwhethertheNBNproceeds.Conversely,inenteringinto
theseagreementswithNBNCo,Telstrahasspecificcontractualarrangementsastothelong
termvalueitshouldderivefromtherolloutoftheNBN.NBNCointurnhassignificant
contractualcommitmentstoEricssonrelatedtotherolloutofthefixedwirelesscomponentof
itsnetworkandtoSpaceSystems/Loralfortheconstructionofthesatellitecomponent.
ThepanelunderstandsthateveniftheNBNwerenottoproceed,NBNCo(andthusthe
Commonwealth)wouldstillfaceterminationcosts/expenditureofaround$67billion.Telstra
willalsoreceivesignificantfundingundertheseparate20yearTelecommunicationsUniversal
ServiceManagementAgency(TUSMA)Agreement.Thesefinancialconsiderationsplacereal
andsignificantconstraintsontheoptionsavailabletothecurrentGovernment.
3.3
Context for the industry structure and regulatory review
Inadditiontothehistoricalcontextnotedabove,inmakingstructuralandregulatory
recommendationsthepaneltookaccountofacurrentlyanticipatedindustrystructureand
regulatoryframework.Thisinvolvestwobasicelements:theindustryasitoperatesnowand
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theindustryasitisenvisagedtooperatefollowingmigrationtotheNBN.Thepanelalsohad
regardtointernationalbroadbandstrategies,fundingapproachesandoutcomes;information
aboutinternationalhighspeedbroadbanddeploymentisprovidedintheCBAReport.
Intheindustryasitoperatestoday,therearemultiplecarriersoperatingavarietyofaccess
technologies,includingfixedline,terrestrialwirelessandsatellite.Inthefixedlinearea,the
principalaccesstechnologiesandthenumberofsubscribersaresummarisedinTable3.2.
Table 3.2: Principal access technologies and subscriber numbers
Technology
Subscribers(approx.)
ADSL
HFC
FTTP
4.9million
944,000
167,000
Source: Australian Bureau of Statistics 8153.0 - Internet Activity, Australia, December 2013.
Centraltothecurrentoperationoftheindustry,Telstraoperatesacopperaccessnetwork
thatservicesthevastmajorityofpremises.Itoffersvoiceandbroadbandservicesoverthat
networkitselfandisrequiredtoprovideaccesstothatnetworktocompetingoperatorsviaa
rangeofdeclaredservices.Accessseekers(suchasOptus,iiNet,TPGandM2/Primus)use
theseservicesinconjunctionwiththeirowninfrastructure,includingDSLAMsandbackhaul
networks,toprovidecompetingvoice,broadbandandotherservicestoendusers.Telstra
providesaccesstothesedeclaredservicesaccordingtopriceandnonpricetermsand
conditionssetbytheACCCinaccessdeterminationsorasotherwisecommerciallynegotiated.
Inprovidingaccess,Telstraissubjecttoequivalenceandtransparencyrequirementsunderits
StructuralSeparationUndertaking(SSU),acceptedbytheACCCinFebruary20128.
TelstrahasdeployedHFCnetworksinSydney,Melbourne,Brisbane,theGoldCoast,Adelaide
andPerth;thesearecapableofservingapproximately2.5millionpremises.OptusHFC
networksareinSydney,MelbourneandBrisbane,andarecapableofservingapproximately
1.4millionpremises.ThereisasignificantoverlapinthecoverageoftheTelstraandOptus
HFCnetworks.NeighbourhoodCablerolledoutHFCnetworksinGeelong,Milduraand
BallaratinVictoria,whichhavesincebeenacquiredbyTransACT(nowownedbyiiNet).
Coveragedataforthesenetworksisnotpubliclyavailable,butwouldnotexceed100,000
premises.
TheHFCnetworkswereinitiallyrolledouttodeliverPayTVservices,withTelstraandOptus
competingoncontent.TelstraandNewsLimitedformedajointventure,Foxtel,whileOptus
formedajointventurewithContinentalCablevision(nowknownasMediaOne,asubsidiaryof
USAcompanyComcast).Thiscompetitionendedin2002whenFoxtelandOptusagreedtoa
8https://www.accc.gov.au/regulatedinfrastructure/communications/industryreform/telstrasstructural
separationundertaking
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contentsharingarrangementandin2006and2007,aspartofthecontentsharing
arrangements,FoxtelgaveanSAUtotheACCCaswellasundertakingsunders.87Bofthe
CCA.Thes.87undertakingssetoutthataccessseekerscangainaccesstoFoxtelssettopunit
andrelatedservicesandthespecialaccessundertakingsetsoutthetermsandconditions
uponwhichFoxtelundertakestosupplyitsdigitalsettopunitservice.
Withtheintroductionoftheinternetandgrowinginterestinbroadband,Telstraupgradedits
HFCnetworktoprovideinternetservicesinSeptember1996andtoDOCSIS3inDecember
2009;OptusupgradeditsnetworktoprovideDOCSIS1inJanuary2000andDOCSIS3in
August2010.MarketshareissummarisedinTable3.3.
Table 3.3: Retail market shares in fixed line services
Provider
Marketshare
Telstra
Optus
iiNet
TPG
Others
42%
15%
14%
12%
17%
Source: ACCC report: Telecommunications competitive safeguards for 201213, p.26.
TherearethreemobilecarriersTelstra,OptusandVodafoneHutchisonAustraliaoperating
nationalnetworks.Whiletheywereinitiallydeployedforvoiceservicesaccessedthrough
mobilehandsets,theynowoffer3Gand4Gbroadbandservices,accessedthroughsmart
phones,tablets,laptopsandPCs.
Therearenicheoperatorsofwirelessbroadbandnetworkstargetingareasofpoorfixedline
broadbandcoverage,bothincitiesandregionalcentres.Someregionaloperationswere
fosteredbyGovernmentfundingundertheAustralianBroadbandGuarantee(ABG)funding
program,includingHaleNet,ShoalhavenInternet,AussieBroadbandandOceanBroadband.
Anothernichemarketdevelopedinthemid2000s,withoperatorsprovidingmoreadvanced
networksinnewrealestatedevelopments,whichdevelopersusedtodifferentiatetheir
estates.TelstraoffereditsFTTPVelocityproductasapremiumproduct.Othersmaller
operatorslikeOpticomm,OpenNetworks,ServiceElements,Comverge,andPivitenteredthe
market.Togethertheseprovidersareestimatedtoservicearound88,000premises.9
SatellitebroadbandservicesareavailableinallareasofAustralia.However,duetotheirhigh
pricesandperformanceconstraintscomparedwithfixedlineandwirelessservices,theyare
principallyusedwheretheseservicesarenotavailable.WhileOptuswasbuiltaroundthe
nucleusoftheAUSSATsatellitesystem,itsoonfacedcompetitionfromtransbordersatellite
9Dataongreenfieldoperatorsactiveconnectionsisnotavailable.Thefigureofaround88,000wasderivedfrom
subtractingNBNCosactivefibreconnectionsasat31December2013(78,850)fromthetotalnumberoffibre
connectionsreportedbytheABSasat31December2013(167,000).
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providersabletocoverregionalmarkets.ThisincludesproviderslikeIntelsatandInmarsat,
themselvesoriginallyoldintergovernmentalorganisations,andnewcompanieslikeIPSTAR.
SeveralprovidersbenefittedfromcompetitivelyneutralsubsidiesundertheHigherBandwidth
IncentiveSchemeandtheABG.AsatDecember2013,therewereapproximately91,000
satellitebroadbandsubscribersinAustralia.Mostofthesesubscribersweresubsidisedeither
byGovernmentfundingprogramsortheNBN.Servicesaregenerallynotavailable
commerciallyataffordablepriceswithoutasubsidy.Someproviderswilloffercommercial
serviceswhereenduserequipmentisalreadyinplace.
Therehasbeensignificantinvestmentintransmissioncapacityservices,commonlyknownas
backhaul,withinvestmentbyTelstra,Optus,NextgenNetworks,TPG(throughmergingwith
SoulPattinsonTelemediaanditsacquisitionofAAPTandPIPEnetworks),Amcomandsmaller
providerswhooperatespecificlinks(forexample,Basslink).Thishasledtocompetitiononthe
largeinterregionalroutes(eastandsouthcoastsfromroughlyCairnstoPerth),withstrong
competitioninintercitytransmissionservices,particularlyforcorporateandGovernment
customers.
Intermsoffuturemarketstructure,themodelputinplacebythepreviousGovernment
envisagedthat,followingthemigrationtotheNBN,NBNCowoulddisplaceTelstraasthe
mainproviderofthefixedbroadbandaccessnetwork,offeringfasterwholesaleservicesin
doingsoandoperatingitsnetworkonanopenaccess,wholesaleonlybasis.Givenitsnational
coverageandopenaccessarrangements,itwasenvisagedthatmostretailproviderswould
useNBNCosnetworktoservicethemassmarket.
OncetheNBNConetworkwasinplace,Telstrawouldoperateasaretailserviceprovider
(RSP)ontheNBNinthesamewayasotherRSPs.Aspartofthattransition,Telstrawould
progressivelyimplementstructuralseparationofthefixedlinecustomeraccessnetwork
servicingitsvoiceandbroadbandofferingsinthemassmarket.
AspartoftheDefinitiveAgreementstosupporttherolloutoftheNBN,inJune2011,NBNCo
hasobtainedaccesstoTelstrainfrastructureoveraminimum35yearperiod,Telstraagreed
topreferenceNBNCowholesalefixedlineservices,Telstraagreedtomigrateitslegacyfixed
linecustomers(otherthanHFCPayTVcustomers)andinterimarrangementswereputin
placeforNBNCosimmediateaccesstoTelstrainfrastructuretoacceleratenetwork
deployment.NBNCoalsonegotiatedwithOptustomigratetheservicesonitsHFCnetworkto
theNBN.WhiletheACCCconsideredthematterwasfinelybalanced,itauthorisedthe
Agreementin2012.
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Telstraestimatedtheposttaxnetpresentvalue(NPV)ofitsarrangementsunderthe
DefinitiveAgreementsandassociatedGovernmentpolicycommitmentsat
approximately$11billion10;and
Optusestimatedthetotalvalueofitsagreementasapproximately$800millionona
posttaxNPV11.
FollowingtheelectionofthenewgovernmentinSeptember2013,NBNCoundertooka
StrategicReview.ThisreviewconcludedNBNCocouldbuildtheNBNmorequicklyandata
lowercostusingamultitechnologymodel.AswellasanFTTNandFTTPapproachforfixed
lineservices,thiswouldincludeextensiveuseoftheTelstraandOptusHFCnetworks.NBNCo
iscurrentlynegotiatingwiththesepartiesfortheuseofthosenetworksanduseofTelstras
coppernetworkforFTTN.
NBNCoplanstolaunchtwoKaBandsatellitesin2015tosupportitsLongTermSatellite
Service(LTSS)whichwillofferdownloadspeedsupto25Mbps.Itiscurrentlyleasingcapacity
fromOptusandIPSTARtoofferspeedsupto6Mbps.Bothintheinterimperiodandoncethe
LTSSisavailable,NBNCointendstosubsidisethepriceitchargesforitssatelliteservices
throughaninternalcrosssubsidy.
Otherfirmscaninvestintelecommunicationsinfrastructureoftheirown.However,Parts7
and8oftheTelecommunicationsActrequiresuperfast12fixedlinenetworksbuiltor
upgradedafter1January2011servicingresidentialandsmallbusinesscustomerstooperate
onawholesaleonlybasisandtoofferaccessseekersaLayer2bitstreamserviceonanon
discriminatorybasisatapriceregulatedbytheACCC.Insomeinstances,wherenetworksbuilt
before1January2012provideNBNconsistentoutcomes,theyhavebeenrecognisedas
adequatelyservingthoseareas,meaningNBNConeednotbuildinthoseareas.
Specialarrangementswithstructuralandregulatoryimplicationsalsoapplyinnewrealestate
developments.ThesearrangementsaresetoutintheFibreinNewDevelopmentsPolicy
UpdateofJune201113.Insimpleterms,developersfundpitandpipeinfrastructureofan
adequatestandardasaconditionoftheirdevelopmentsbeingserviced.Developerscan
chooseanyprovidertheywishtoprovideothertelecommunicationsinfrastructure,suchas
cablingandelectronics.Ifadeveloperdoesnotchooseanotherprovider,NBNCoorTelstra(in
10Telstramediareleaseof23June2011.
11Optusmediareleaseof23June2011.
12Superfastnetworksaredefinedinthisreportasnetworksdeliveringinexcessof25Mbpsdownload,inline
withParts7and8oftheTelecommunicationsAct1997.Thisisconsistentwiththetermhighspeednetworks
inthisreport.
13http://www.communications.gov.au/policy_and_legislation/fibre_in_new_developments
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thecaseofdevelopmentsoffewerthan100lotsbutwithsomeexceptions)areIPOLRcarriers
andservicetheestateaccordingtotheirrespectiveresponsibilities.
Inthebackhaulmarket,NBNCowouldprovidecarriagefrompremisestoits121pointsof
interconnection(POIs).Beyondthese121POIs,competitioninthesupplyoftransmission
capacityhasbeenencouraged.
Themodelalsoappearstohaveassumedthatthemobilemarketwouldbelargelyuntouched
bytheNBNreforms,althoughtherehasbeengrowinginterestinthescopetoleveragethe
NBNinvestmenttoimprovemobileserviceprovision,forexample,throughthesharingof
towersandbackhaul.RecentactivitiesandannouncementssuggestNBNCoinvestmentin
fixedbroadbandinfrastructuremayhaveprovidedmobilecarrierswithextraincentiveand
freedupresourcestoacceleratetheirownrolloutofhighspeedtechnologieslike4GLTE.
Additionalinformationonthecurrentbroadbandmarketstructureandregulationisin
Appendix2.
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4.Objectivesandprinciplesforassessingbroadband
marketstructureandregulatoryoptions
Thischaptersetsouttheobjectivethepanelusedtoguideitsassessmentoftherelative
economicandsocialcostsandbenefitsofdifferentfuturebroadbandmarketstructuresand
regulatoryarrangements.Italsosetsoutthecriteriaandprinciplesthepanelreliedonto
identifythebestlongtermmarketstructurefromthefeasibleoptionsandtheconcomitant
regulatoryrequirements.
4.1
Objective
Theobjectivethepaneladoptedforthispartofitsworkwas:
Toidentifythemarketstructureandregulatoryarrangementsthatwilldeliveraffordable
andreliablecommunicationsservicestoallAustralians,includingfastbroadband
services,inthemosteconomicallyefficientway.
Thepanelhasbeenguidedbyfourdesirablefeatures,namelythatitsrecommended
arrangements:
meetthechangingcommunicationsdemandsofendusers,includingforfaster,
affordablebroadbandservicesinawaythatenablesprogressiveserviceenhancement
overtime;
offerthebestprospectsforthedevelopmentofanindustrythatiseconomically
efficient,includingbypromotingeconomicallyefficientuseofandinvestmentin
broadbandinfrastructure;
arefeasibleandprovideforthetimelydeliveryoftheGovernmentsinitialbroadband
servicerequirementsandlongtermserviceneeds;and
involveregulationandothermarketinterventionsthatarenomoreintrusiveor
burdensomethanneededandaretransparent,predictableandaccountableintheir
operation.
4.2 Policy principles used in assessing structural and regulatory

approaches
Ownershipandregulatoryarrangementsforthebroadbandmarketconsistentwiththese
featuresaremostlikelytoadvancethelongterminterestsofendusers(LTIE).
TheLTIEisthemainobjectoftheTelecommunicationsAct.Theconcept,whichencompasses
theneedforallocative,technicalanddynamicefficiency,islongstandingandfundamentalin
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itsnature.ItisalsousedinPartXICoftheCCAtodeterminewhetheraserviceshouldbe
declaredbytheACCCandisappliedtotheacceptanceofaccessundertakings.Thecriteriafor
theLTIEtestarethatdeclarationofaservicewould:
promotecompetitioninrelevantmarkets;
promotetheachievementofanytoanyconnectivity(whererelevant);and
encouragetheeconomicallyefficientuseof,andinvestmentin,infrastructure.
ThepanelsrecommendationsaredesignedtopromotetheLTIEinthespecificcontextof
highspeedbroadbandservices.Thisincludesbycreatinganenvironmentwhereservice
deploymentoccursconsistentwitheconomicefficiency.
Inturn,economicefficiencywillbepromotedbyusingcompetitionwherepossible,regulating
whereitisnot,andsettingclearrulesfordistinguishingbetweenthetwo.Thisinvolvesdoing
arangeofthingstomarketstructureandthedesignoftheassociatedregulationtoensure
thatbothcompetitionandregulationareeffectiveinmeetingtheirobjectives.
Thepanelsbasicpremiseisthatcompetitivemarketsgenerallyofferthebestchanceof
advancingtheLTIEandthereforethebestchanceofbeingconsistentwiththepanelsdesired
featuresandsecuringitsobjective.Competitionconstrainsmarketpower,protecting
consumersandpromotinginnovation.Competitivemarketsreducetheburdenonregulation
andmakeiteasierforregulatoryagenciestoundertaketheirtasks.
Conversely,therearesubstantialrisksinherentinentrenchingmonopolypoweratthefixed
networklayer.Forthisreason,policymakersthroughouttheOECDarearemainstrongly
committedtothegoalofpromotinginfrastructurecompetitionintelecommunications.
However,itisalsoclearthatpracticalconstraints,thecharacteristicsofaparticularmarket
andpastdecisionsparticularlybygovernmentsandregulatorscanpreventmarketbased
arrangementsachievingfullydesirableoutcomes.Asaresultthismaymeanthatagradual,
butcredible,transitionisrequired.
Transparency,predictabilityandresponsivenessofthepolicyandregulatoryarrangements
areobjectivesworthpursuingevenseparatelyfromtheirimpactoneconomicefficiency
becausetheyareindispensablefeaturesofgoodpublicpolicy.
Whilepolicyarrangementsneedtopromoteefficientinvestment,itisnotasensiblegoalin
itselftoseektoensureanyparticularinvestmentrecoupsitscosts:indeed,toelevatethat
goalaboveotherswoulddetractfromefficiency.Asaresult,thepaneldidnotseeensuring
NBNCoachievesaparticularrateofreturnasadesirablegoal,anymorethanitwouldbe
desirabletosetthatgoalforsomeotherentity;nordoesthepanelconsiderpolicyor
regulationshouldbedrivenbythatgoal,noworinthefuture.
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SpecificallywhileitisappropriateanddesirableforNBNCotoseektofullyrecoupitscosts,
includingareasonablereturnonitscapital,itwouldnotbeinthepublicinteresttodetermine
thefutureregulatoryarrangementssoastoartificiallyfavourNBNCosabilitytodoso.That
wouldeffectivelyamounttograntingNBNCotaxingpowers.NBNCosabilitytorecoupits
costshoulddependfirstandforemostontheefficiencywithwhichitcarriesoutitsactivities,
includingitscapacitytocontroldeploymentandoperatingcostsanditsongoing
responsivenesstocustomerdemands.
Itwaswithinthisframeworkthatthepanelconsideredhowbesttoachievethebroadband
goalsandobjectivesbeingsoughtbytheGovernment;thatbroadbandservicesproviding
definedminimumuploadanddownloaddataratesshouldbegenerallyavailabletoallend
users,alongwithsuchotherbroadbandproductsasmarketparticipantschoosetoprovide.
TheGovernmenthasexpressedapolicyobjectiveofensuringuniversalaccesstominimum
downloaddataratesof25Mbps.Inconsideringhowtoachievethisobjective,theStrategic
Reviewhasproposedanapproachthatwouldprovide50Mbpstoaround90percentofthe
fixedlinefootprintbytheendof2019.
Thepanelhasalsohadregardtoarelatedgoal:thatregardlessofwheretheyresideorcarry
onabusiness,endusersshouldhaveaccesstodesignatedservicesatanaffordableprice.
Inconsideringhowthesegoalsandobjectivesmightbestbeachieved,thefollowingpolicy
principleswereadopted:
anyrestrictionsimposedbypolicy,statuteorregulationoncommercialinvestmentin
andsupplyoftelecommunicationsservicesshouldbenomoreintrusiveor
burdensomethanneededtopromotethelongterminterestsofendusers;
thereshouldbenorestrictionsonretaillevelcompetition,otherthanthoseneededto
provideforendtoendconnectivityandtoprotectconsumers(wheresuchprotection
isreasonablynecessary);
insofarasanetworkownerhasasubstantialdegreeofmarketpower,thereshould
beeffectivesafeguardsagainsttheabuseofthatpower;
anysubsidiesinherentinmeetingbroadbandaccessandpricinggoalsshouldbe
transparent,sourcedinwaysthatminimiseinefficientburdensontaxpayersandbeas
efficientlydeliveredasreasonablypossible;
thereshouldbecompetitiveneutralitybetweenpublicandprivateserviceprovision;
and
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ingivingeffecttotheprinciples,regulationshouldbenomoreintrusiveor
burdensomethanneeded,shouldbeproportionate,transparent,predictableand
accountableinitsoperation,andshouldbesubjecttoperiodictransparentand
independentreviewtoensureitsbenefitsexceeditscosts.
Thepanelacceptedattheoutsetthatsomearrangementsrelatingtotheprovisionof
broadbandservicesalreadyinplaceasaresultofGovernmentpolicydecisionswould
continue:
NBNCowilloperateonacommercialbasisandprovideabasisforensuringthatthe
Governmentsbroadbandpolicyobjectivesaremet;
NBNCowillprimarilyoperateatLayer2intheservicestacktoprovidescopefor
downstreaminnovationandproductdifferentiation;and
rolloutoftheNBNwillachievethestructuralseparationofTelstrainrespectofretail
fixednetworkservicessuppliedinthemassmarket.
Giventhesearrangements,potentialoptionsneedtobeassessedtakingintoaccountNBN
Cosexistingcontractualobligations,itsdefinitiveagreementwithTelstraanditsagreement
withOptusrelatingtoOptusHFCnetwork.
Inaddition,thecurrentindustrysettingsforresidentialandsmallbusinessfixedline
broadbandlimitthescopeforfundamental,rapid,structuralchange.Thedecisiontocreate
andinvestinNBNCohasbeenmade,substantialtaxpayerfundshavealreadybeenspentor
arecommittedandworktoensureNBNCocanfulfilitscharterisunderway.Furthermore,the
regulationenactedtosupportthatdecisionhasalreadysignificantlyaffectedthegeneral
behaviourandforwardplanningofmarketparticipants.Anypreviouswillingnessofprivate
investorstocommitresourcestotheestablishmentofnewfixedlineaccessfacilitiesona
largescaleislikelytohavebeenseriouslyweakened.
Itistakenasgiventhatregulationsupportingoutcomessuchasanytoanyconnectivity,
appropriatetechnicalstandardsandconsumersafeguardswheretheyarereasonably
justified,willbearequirementofallthemarketstructureoptionsconsidered.Thefocusof
thepanelsworkinthisareawasontheparticularregulationneededtosupportthepreferred
longtermmarketstructureincludinganynecessarytransitionpathtothatstructureand
howthatregulationmightbestbeframedsoastomeetthegoals,objectivesandpolicy
principlessetoutinthischapter.
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5.Costbenefitanalysisandpolicydevelopment
ThepanelsTermsofReferencerequiredittoconductacostbenefitanalysisoftheNBN.A
technicalpresentationoftheanalysisthathasbeenundertakenissetoutinthepanelsCBA
Report.Thischapterplacesthatanalysisincontext,summariseskeyresultsanddiscussestheir
broaderimplications.
Itisimportanttonoteattheoutsetthatunlessotherwiseindicated,alltheestimates
presentedinthischapterarepresentvaluesexpressedin2014prices.Thosepresentvalues
arecalculatedovertheperiodto2040,discountingtothepresentatarateof8.3percent
(real).Thiswayofexpressingvalues,whichistheconventionalapproachinprojectevaluation,
differsfromthatadoptedintheoriginalcostestimatesfortheNBN,aswellasinsome
subsequentanalysesbothfromtheGovernmentandNBNCo,whichsimplysumstreamsof
outlaysorrevenuesoverperiodsoftime,oftenwithoutremovingtheeffectofinflation.By
insteadusingadiscountratetoconvertthosestreamsintovaluesinthepresent,thepanels
analysisrecognisesthatabenefitreceivedmanyyearsfromnowisworthlessthanone
receivedtoday,justasacosttobeborneinthedistantfutureimposeslessofasacrificetoday
thanonethatmustbeincurredimmediately.
Themainpointsmadeinthechapterare:
properlyconducted,CBAisanindispensabletoolforpolicyevaluation,increasingthe
informationbasefordecisions,improvingtransparencyandenhancingthelegitimacy
andaccountabilityofpublicdecisions;
althoughthereisabipartisancommitmenttodeployinghighspeedbroadband,the
largesumsofpublicfundsatstake,thecomplexandcontentiousnatureofmanyof
thedecisionsthatmustbetaken,andthedesirabilityofperiodicallyreviewing
progressmeantaxpayersareentitledtoacarefulanalysisofthecostsandbenefits
thatdeploymentinvolves;
thepanelfindsthatdeployinghighspeedbroadbandonanunsubsidisedbasis(to
areaswheredemandcoverscosts)tothe93percentofpremisesservedbythefixed
linenetwork(describedintheanalysisastheunsubsidisedrolloutscenario)would
makeAustralians$24billionbetteroff,whichcorrespondstoagainofsome$2,430
perhousehold;
althoughitstillgeneratesaneconomicgainofaround$1,810perhouseholdcompared
withsimplyfreezingbroadbandavailabilityandspeedsatcurrentlevels,anMTM
scenariodeliversnetbenefitsthatare$6.1billionlowerthanthoseoftheunsubsidised
rolloutscenario.ThisreductioninnetbenefitsmostlyoccursbecausetheMTM
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extendsserviceoutsidethefixedlineareas,usingfixedwirelessandsatellite,incurring
coststhatgreatlyexceedthebenefits;
anallFTTPapproachseesthenetbenefitofhighspeedbroadbandreducedbya
further$16.1billioninNPVtermscomparedwiththeMTMscenario.Thismeansthat
theFTTPscenarioperformed$22.2billionmorepoorlythantheunsubsidisedrollout
scenario,wipingoutover90percentofthegainAustraliacouldmakefromaccessto
highspeedbroadband;
thepoorperformanceofanallFTTPapproacharisesbecauseconsumersdonotvalue
thegaininspeeditenablesmorethantheaccompanyingincreaseincosts.Atthe
sametime,theFTTPscenarioinvolvesslowerdeploymentandsoimprovesbroadband
accesssignificantlylaterthandoesMTMoranunsubsidisedrollout;and
sensitivitytestsshowtheseresultsarehighlyrobust.Inparticular,evenifwillingness
topayforveryhighspeedserviceincreasesfarmorerapidlythanexpected,theMTM
approachstilloutperformsanallFTTPscenarioasitmeetsimmediateneedsmore
quicklywhileofferingthecapacitytoupgradeasdemandforextremelyhighspeeds
eventuates.
Thechapterbeginsbyexplainingthenatureandpurposeofcostbenefitanalysis.Itthensets
outthemainresultsoftheCBAbeforeexplainingthemajorfactorsthatunderpinthose
results.Finally,itturnstothepolicyconsequencesoftheCBAforthepanelswork.
5.1
The nature and purpose of costbenefit analysis
CBAisatechniqueforevaluatingpublicdecisionsthathingesoncomparingthecostsofa
proposaltoitsbenefits,wherecostsandbenefitsarevaluedinmonetaryterms.Inessence,
theanalysisaskswhetherthevalueplacedonaprojectbytheindividualsitaffectsexceeds
theprojectscosts.Aswellasthewillingnessofthoseindividualstopayforbenefitsthatthey
obtaindirectly,theassessmenttakesintoaccountanyexternalitiesthatis,costsand
benefitsthataccruemorebroadlyandwhichmaybepositive(aswhenaprojectincreasesthe
communitysgainsfrompublicgoods)ornegative(aswhenuseofanewlybuiltroadaddsto
pollution).Generally,aprojectenhancesthecommunityswelfareinthesenseofincreasing
theaggregatevalueitderivesfromscarceresourcesifitpassesaproperlyspecified
costbenefittest.
CBAcanbeviewedinseveralcomplementaryperspectives.
First,inanalyticalterms,CBAisrelatedtothebasicrequirementsforefficiencyinthe
allocationofresources.Itisaconditionofeconomicefficiencythatthemarginaldollarof
publicexpenditurehasabenefitequaltothatofthemarginaldollarofprivateexpenditure
andthatthebenefitofamarginaldollarofpublicexpenditureisequalisedacrossprograms,
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projectsandprojectelements:thisisfortheobviousreasonthatifthemarginalbenefits
differed,thecommunitywouldgainbyreallocatingspendingfromprojectswherethenet
benefitsfromthelastdollarspentwererelativelylowtoprojectswherethosenetbenefits
wererelativelyhigh.Becauseitallowsnetbenefitstobeestimated,CBAprovidesthe
informationneededtotestwhetherthisconditionisbeingmet.
Second,setagainstthebackdropofagivenportfolioofprojects,CBAcanbeusedtoevaluate
whetheroneormorepublicprojectsshouldbeaddedtoorremovedfromthatportfolio.In
otherwords,CBAisatoolthatcanhelpassesswhetherwelfarewouldbeincreasedbythe
decisiontoproceedwithaparticularproject,comparedwithalternativescenarios,whichmay
involvedoingnothing,deferringorotherwisevaryingtheproject,orproceedingwithan
alternativeproject.
Thirdandperhapsmostimportant,CBAisaninstrumentthattaxpayerscanusetomonitor
thedecisionstakenbygovernments,andtoenhancethequalityofthosedecisions.Thus,fora
CBAtobeproperlyconducted,thestudyhastogothroughthekeyelementsofrigorous
policyanalysis,namely,carefulspecificationoftheobjectivesbeingsought,identificationof
thealternativeoptionsforachievingthoseobjectives,ananalysisofthelikelyconsequences
ofeachsuchoption,andconsiderationoftherisksthatattachbothtoeachoptionandtothe
assessmentasawhole.Moreover,itispossibletocompareaCBAmadeatthetimeofproject
approvaltooutcomesatprojectcompletion.Asaresult,therequirementtocarefullyassess,
andreport,thecostsandbenefitsofdecisionscanimprovedecisionmaking,promote
transparencyandincreaseaccountability.
Advantages of costbenefit analysis
Aswellasaddingrigourtopublicdecisionmaking,CBAhasseveralstrengthsthatshapethe
methodologyonwhichCBAreliesandunderpinitslongrecognisedcontributiontogood
publicpolicy.
Thefirstisevaluativestandpoint.ThereisapresumptioninCBAthatthevaluepolicymakers
placeonapolicyoughttobederivedfromthevaluationsoftheindividualswhowillbearthat
policyseffects.Underlyingthispresumptionisthebeliefthatwhereaprojectisbeing
evaluatedonbehalfofagroupofindividuals,thatprojectshouldbeadoptedifthose
individualspreferencesareadvancedbythatdecision,suchthatwerethoseindividualstaking
thedecisionthemselves,theywouldadopttheprojectatissue.
ThatcreatesanaturallinkbetweentheuseofCBAandthelegitimacyofpublicaction.Italso
informsabroadrangeofmethodologicalchoices.Inparticular,whereapolicyaffectstraded
goodsandservices,thevaluationsusedwillbethosecapturedinmarketprices,asmarket
pricesreflectindividualswillingnesstopayforbenefitsandwillingnesstoacceptforcosts.
Equally,itisthispresumptionthatguidesthemethodsusedtocorrectmarketpriceswhere
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theyaredistortedbytaxes,subsidiesorpricecontrols,andtoimputevaluationswherethe
policyseffectsinvolveexternalitiesthatmarketpricesdonotcapture.
Second,decisionrelevance.Aprojectincreasesacommunityswelfareifitsbenefitsexceed
itscosts,includingtheopportunitycostofinsteadpursuingalternativeprojectsorofpursuing
thatprojectonadifferentscaleorwithdifferenttiming.AproperlyconstructedCBAcaptures
thiscriterionbecauseitusesweightsdesignedtoallowthemeaningfulaggregationofbenefits
andcosts,treatsascoststhenetvaluationsforgoneinpursuingthatprojectrelativetoothers,
andtakesaccountoftheoptionofvaryingprojectscale.Moreover,asbothcurrentandfuture
valuationsareexpressedinmonetaryterms,discountingfutureconsequencesintopresent
valuesmakesitpossibletoevaluatealternativetimeprofilesforagivenproject.Together,all
ofthesefeaturesmeanthatCBAallowsdifferentoptions(includingtheoptionofdoing
nothinganddifferentscaleandtimingoptionswithinanygivenproject)tobeevaluatedand
compared.
Third,comparabilitybetweenprojects.AnadvantageofthesystematicuseofCBAisthatit
allowsconsistentvaluestobeusedacrossprojectsforassessingparticularprojectinputsor
outcomes,regardlessofthesectorinwhichthoseprojectsarise.Forexample,usinga
commonapproachtosettingthediscountrateinevaluatingpublicinvestmentsisclearly
necessaryifmeaningfulrankingsofalternativeinvestmentsaretobederived.Equally,where
benefitstaketheformofimprovementsinhealth,theycanbeevaluatedconsistently,
whethertheyarisefrominvestmentsintelecommunicationsorinhealthcareitself.In
carryingoutitsCBA,thepanelhassoughttoensureitadoptstheapproachconventionally
usedinAustraliaforeachcomponentofitsanalysis,thusencouragingthatcomparability.
Fourth,verifiability.TheassumptionsusedinaCBAarecapableofbeingtestedintermsof
theirconsistencywithmarketvaluations,thewayinwhichmarketvaluationshavebeen
altered,andthemethodsusedtomeasureandweightnonmarketedinputsandoutputs.
Moreover,solongasthestudysassumptionsaretransparent,sensitivitiescanbeanalysed,
andtherisksassociatedwithanyuncertaintiesthatbearontheprojectmadeclear.
Fifthandlast,accountability.Byprovidinganexantestatementofkeyexpectedvaluesfor
costsandbenefits,CBAfacilitatesexpostidentificationofvariancesfromthoseexpected
values.Thisbothpromotesaccountabilityandenhancestheselfcorrectionmechanismsin
publicsectordecisionmaking,includingbyinformingongoingchangestotheprojectsdesign.
The relevance of CBA to the NBN
Whilethereisabipartisancommitmenttotheconstructionofanational,wholesaleonly,
NBN,acarefulCBAoftheNBNremainshighlyrelevant.
Taxpayersandconsumersareentitledtoknowwhathasbeendecidedintheirname,andhow
itslikelycostscomparetothebenefits.Thattensofbillionsofdollarsareatstake,with
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consequencesthatarelikelytoaffecteveryAustralianhouseholdandbusiness,only
underscorestheimportanceofmakingthisinformationavailable.
Atthesametime,whiledeploymentofhighspeedbroadbandisunderway,manydecisions
remaincontroversial,asisonlytobeexpectedwithaprojectoftheNBNsscaleand
significance.Thosedecisionsrangefromthechoiceofthetechnologicaloptionstobepursued
throughtothemannerinwhichthecostsoftheNBN,especiallyinregionalareas,shouldbe
recovered.ProperCBAcanhelpresolvesomeofthosedecisions,includingbyclarifyingthe
assumptionsthatneedtobemadeforoneapproachtobepreferredtoanother.
Finally,itisapparentthattheissuesaddressedinthepanelsCBAwillariseagaininfuture.For
example,theminimumlevelofbroadbandaccessthatshouldbeavailabletoallAustralian
householdsandbusinessesmayneedtobereconsideredastechnologiesadvanceandnew
applicationsandservicesdevelop.ThepanelsCBAcanassistininformingthatreconsideration
byprovidingabaselineevaluationofthecostsandbenefitsofthestandardthatisnowbeing
putintoplace.
5.2
The panels CBA
Underlying principles
GiventhenatureofthecontributionCBAcanmaketogoodpublicpolicy,andthespecific
issuesthepanelsCBAsoughttoaddress,thepaneladoptedthreeprinciplesinundertakingits
analysis.
First,thepanelsCBAisforwardlooking.Itisnotconcernedwiththedecisionsthatshould
havebeentakenwhentheNBNwasannounced,althoughithelpsinformanassessmentof
theirconsequences;instead,itsfocusisonthedecisionsthatneedtobemadeasofnow.A
crucialresultofthisfocusisthatthepaneltreatsasgiventhecontractualcommitments
enteredintouptothispoint,includingtheDefinitiveAgreementsbetweenNBNCoontheone
handandTelstraandOptusontheother.Thosecommitmentswerepredicatedontheinitial
FTTPdeploymentinthefixednetwork;theymighthavebeenlessoneroushadanother
strategybeenpursued.Bynonethelesstakingthesubstantialoutlaystheyentailasarising
underalldeploymentscenarios(thatis,asajointandcommoncosttoallvariantsofthe
NBN),thepanelhasprobablydiminishedthedifferencebetweentheoptionsitassesses,
comparedwiththeresultsthatmighthavebeenobtainedinananalysisundertakenbefore
thosecommitmentswereenteredinto.
Second,thepanelhassoughttobeconservativeinitsapproach,whilenonethelessensuring
consistencywithacceptedbestpracticeinprojectevaluation.
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Forexample,inassessingwillingnesstopayforbroadbandaccess(andsothepotential
benefitsoftheNBN),thepanelprimarilyreliedontheresultsofalargestatisticalsurveyit
commissionedfromtheUniversityofSouthAustraliasInstituteforChoice,asthatsurveywas
carefullydesignedtosupporteconometricevaluationofconsumerdemand.Thestated
preferencemethodusedbythepanelinderivingthoseeconometricestimatesisgenerally
regardedasbestpracticeinprojectappraisalforvaluingbenefitswhentheinformation
requiredtodosoisnotavailabledirectlyfrommarketprices.
Equally,onthecostside,thepaneldrewonmodellingcarriedoutbyNBNCoandits
consultants,mostrecentlyaspartofitsStrategicReview.However,inrankingalternatives,
thepanelsCBAonlytakesaccountofresourcecoststhatis,thecostsincurredinactually
usingscarceresourcesandexcludestransfers(whichmerelyshiftincomefromoneperson
toanother),excepttotheextenttowhichfinancingthosetransfersgivesrisetothecostsof
taxation.AstransfersassociatedwiththeagreementswithTelstraandOptushavebeen
publiclyreportedashavingnetpresentvaluesof$11billionand$800millionrespectively
(whichmeansthattheywouldaccountforaroundonefifthofthetotalfinancialcostsofthe
projectinpresentvaluetermsovertheperiodto2040),theexclusionoftransfershasa
significanteffectonthereportedcostdata.
Thirdandlast,thepanelrecognisesthesubstantialuncertaintiesinherentinevaluatinga
projectofthiskind.Indeed,asnotedabove,oneofthegreatstrengthsofCBAisthatitmakes
variablesexplicitandsoallowstheconsequencesofvaryingthemtoberigorouslytested.In
somecases,thoseuncertaintiesreflecttheinherentunknownquantityofthefuture:for
instance,abouthowrapidlydemandforhighspeedaccesswillgrow,orhowquicklythecosts
andcapabilitiesofalternativeaccesstechnologieswillevolve.Inothercases,theyarisefrom
possibledifferencesofviewabouthowcertainparametersarebestsetsuchasthediscount
rateusedinconvertingfuturestreamsofcostsandbenefitsintopresentvalues.Giventhat
scopeforpossiblevariation,thepanelhasreliedoncomprehensivesensitivitytesting,both
forindividualparametersandforcombinationsofparameters,toensureitsresultsarerobust.
The scenarios examined and principal results
TheCBAwasconductedaroundfourmainscenariosfortheperiod2015to2040.The
scenariosdifferintheuploadanddownloadspeedsmadeavailable,inthetimingofdelivery
andintheircoverageofhouseholds.Thosescenariosareasfollows:
1. Nofurtherrolloutscenario.Thisscenarioassumesthereisnofurtherinvestmentin
infrastructurebeyondtheinvestmentsalreadymadeandhencenochangeinspeeds
fromthoseavailabletoday.Thisscenarioisclearlyunrealistic;itsonlypurposeistoact
asabasecaseforestimatingthesocialgainsfromincreasedaccesstohighspeed
broadband.
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2. Unsubsidisedrolloutscenario.Thisscenariomodelstherolloutofhighspeed
broadbandtoareaswhereitcanbeundertakenwithouttheneedforanygovernment
subsidy,usingHFCandFTTNtechnologies.Inimplementingthisscenario,itwas
assumeddeploymentwasprivatelyfundedandthattheinvestorsprovidingthat
fundinghadthesamedegreeofregulatorycertaintyaboutcostrecoveryasNBNCo.
3. MultiTechnologyMix(MTM)scenario.AcombinationofFTTP,FTTN,HFCandfixed
wirelessandsatellitenetworksisusedinthisscenariotoprovidehighspeedaccesson
aubiquitousbasis,assetoutintheNBNCoStrategicReview.Bothinthisscenarioand
theFTTPscenario,itisassumedthattaxpayersfundtheinitialdeploymentofthe
networkandbearanylossesthatnetworkincurs.
4. FTTPscenario.Whilealsorelyingonfixedwirelessandsatellitenetworkstosupply
serviceinregionalareas,thisscenarioassumesonlyFTTPisusedintheareaswhere
fixedlineserviceisprovided.
Threemajorresults,whicharesummarisedinChart5.1,emergefromcomparisonsbetween
thesescenarios.
Chart 5.1: The net benefits of each scenario (present value)
Net benefits relative to no further rollout ($b)
30
24.0
20
Netcostoffixed
wireless/satellite,
someFTTPandgovt
funding
6.1
17.9
16.1
10
Netbenefitsfrom
improvedspeedsto
nonrural areas
usingHFCandFTTN
0.0
Net costoffull
FTTPandslow
rollout
1.8
0
No further rollout
Unsubsidised rollout
MTM scenario
FTTP scenario
Data source: The CIE.
Thefirstisthattherearesubstantialbenefitsfromincreasedaccesstohighspeedbroadband.
Comparedwithholdingnetworkspeedsatcurrentlevels,anunsubsidiseddeployment,based
onprivatesectorfundingandrollingouthighspeedstoupto93percentofpremises,would
makeAustralians$24billionbetteroff.
Second,this$24billionriseinwelfare,whichcorrespondstoagainofsome$2,430per
household,wasusedasthebaselineagainstwhichtoevaluatetheperformanceoftheMTM
scenarioandtheFTTPscenariooverthenext25years.
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TheMTMscenariodeliverednetbenefitsthatare$6.1billionlowerthanthoseofthe
unsubsidisedrolloutscenario.Althoughitstillgeneratesaneconomicgainofaround$1,810
perhouseholdcomparedwithsimplyfreezingbroadbandavailabilityatcurrentlevels,that
gainis$620perhouseholdlessthanwouldariseunderapurelycommercialapproach.
Thisreductioninnetbenefitsoccursbecausethecostsinvolvedinconstructingandoperating
thefixedwirelessandsatellitenetworksgreatlyexceedthebenefits,translatingbothintoan
overallsociallossandintoasubstantialfinancialloss.Thefinanciallossthenincreasesthe
burdenthatmustbeplacedontaxpayersand,asalltaxesdistorteconomicactivity
(generatingwhateconomistsrefertoasdeadweightlosses),thereisanadditionalreduction
inefficiency.
TheFTTPscenarioseesthenetbenefitofhighspeedbroadbandreducedbyafurther
$16.1billioninNPVtermscomparedwiththeMTMscenario.ThismeansthattheFTTP
scenarioperformed$22.2billionmorepoorlythantheunsubsidisedrolloutscenario,wiping
outover90percentofthegainAustraliacouldmakefromaccesstohighspeedbroadband.
ThemainreasonsforthisoutcomearetheslowerrolloutofFTTP(whichdelaystheflowof
benefits),thehighcostperpremiseofanFTTProllout,andthedeadweightlossesgenerated
bythetaxationneededtosustainthosecostsundertheNBNCoapproach.Thisreductionin
netbenefitmakestheFTTPscenarioonly$1.8billionbetterinNPVtermsthanthenofurther
rolloutscenario,generatingagainofamere$210perhouseholdcomparedwithsimply
continuingwithtodaysinadequatenetworkspeeds.
Thirdandlast,sensitivityanalysisfindsthattheserankingsarehighlyrobust.Runningthough
thefullrangeofassumptions,theMTMscenarioperformsbetterthantheFTTPscenarioin
98percentofcases.OnlyinextremecircumstancescouldFTTPeconomicallyoutperformthe
MTMapproacharesultallthemorestrikingbecausethemodellingtendedtofavourFTTP,
includingbysettingFTTNcostsaboveinternationalbenchmarksandthisassumesnoupgrade
ofMTMtechnologiesinthefuture.
Understanding the results
ThesubstantialadvantageoftheMTMapproachovertheFTTPscenarioreflectsseveral
factorsthatpushinthesamedirection.
Thefirstrelatestothenatureofdemandforhighspeedaccess.Thepaneladoptedthree
approachestoevaluatingendusersvaluationsofbroadband:estimationofdemandcurves
fromthetakeuptodateofNBNCosvariousspeedofferings;adetailedtechnologicalstudy
ofthespeedsneededtoaccesscurrentandprospectiveapplications,andofthecosts
imposedonuserswhenaccessspeedsfellbelowthoselevels;andalargescalesurvey,
administeredtoastratifiedrandomsample,designedtosupporteconometricestimationof
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willingnesstopayfordifferingaccessspeeds.Allthreeapproachesfoundthatthegainfrom
higherspeedsdiminishesasspeedincreases.
Inotherwords,usersseesignificantlymorevalueinmovingfrom5Mbpsto10Mbpsthan
from50Mbpsto55Mbps:intechnicalterms,thewillingnesstopaycurveisconcave.This
meansthattheeconomicbenefitsofmakingevenhigherpeakspeedsavailable100Mbps
forexamplearelimited,reducingtheadditionalbenefitsofFTTPoverothertechnologies.14
Italsomeansthatthegreatestgainsinusersvaluationsoftheservicecomefromimproving
speedswhenandwheretheyarelow.
ThisisanimportantreasonwhytheFTTPscenarioperformedpoorlyrelativetotheMTM
scenario.BenefitsarenotmuchhigherintheFTTPscenariothanintheMTMscenarioasthe
higherspeedsthatFTTPprovidesarenotvaluedmuchmorethanthespeedsprovidedby
FTTNandHFC.Inaddition,becausedeployingFTTPisinherentlyslower(andacceleratingits
deploymentwouldsharplyincreasecosts),theadditionalbenefitsofFTTParedelayed,
reducingtheirpresentvalue.
Conversely,theMTMscenario,asitmakesgreateruseofexistingassets(notablytheHFC
networksandthecopperconnectiontocustomerspremisesinthecaseofFTTN)canbe
deployedmorequickly,andsoaddressesareasofespeciallypooraccesssignificantlysooner
thandoesFTTP.
Inshort,becauseAustraliansvaluethemovefromlowtohighspeedsmorethanthemove
fromhightoyethigherspeeds,andbenefitmorethesoonerthatmoveoccurs,theMTM
scenarioismorecosteffective.Thefactthatthecostsofdeploymentaremuchhigherinthe
FTTPscenario,asitdoesnottakeadvantageoftheexistingcopperandHFCassets,then
makestheMTMscenariosadvantageallthegreater.
Atthesametime,comparedwithFTTP,theMTMscenariomanagesuncertaintyand
particularlytheuncertaintyassociatedwiththefuturegrowthrateofdemandsubstan ally
moreefficiently.ThisisbecausetheMTMscenariocanbothbedeployedmorerapidlyand
retainstheoptionofupgradingtoFTTPatalaterdate.
TheeffectsofthishascanbeseenbymodellingtherelativeattractivenessofanMTMand
FTTPscenarioforarangeofgrowthratesforwillingnesstopay.Theresultsaresetoutin
14Itisimportanttorecognisethatthesefindingsarenotinconsistentwiththestronggrowthindatausage
currentlyobservedinAustralia.Demandforpeakspeedanddemandforbroadbandusageisnotthesame
thing,andusagegrowthisonlylooselyrelatedtobandwidthrequirementsovertime.Peakbandwidth
requirementsofanonlinehouseholdaredrivenbythreethings.First,thenumberofpeopleusingtheinternet
inthathousehold(essentiallyflat);second,thelengthoftimethateachuserspendsusingtheinternet,and
thedegreetowhichtheymultitask(stillgrowingbutultimatelylimited);andthirdthebandwidthofthe
applicationsusedwhileonline(stillgrowing,butoffsetbytechnologiessuchasvideocompression).
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Chart5.2.Obviously,shouldwillingnesstopayonlygrowslowly,theMTMapproachwillbe
superiorasitavoidstheveryhighcostsofFTTP:coststhatonceincurred,areirreversibly
sunk.However,werewillingnesstopaytogrowmuchmorerapidlythancurrentlyexpected,
theMTMscenarioallowstheinitialdemandforhighspeedstobemetmorequickly,withthe
upgradingofthenetworkthenaddressingthedemandforextremelyhighspeedsonceit
eventuates.Indeed,evenonconservativeassumptionsabouttheextenttowhichMTMassets
canbereutilisedforFTTP,therelativeadvantageoftheMTMscenarioisactuallygreater
whendemandgrowthisextremelyhigh,thankstothecombinationofrapidinitialdeployment
andupgradeability.Fromaneconomicperspective,thismeansthattheMTMscenariois
futureproofinawaytheFTTPscenarioisnot.
Net benefit of MTM scenario mix over FTTP

scenario ($b)
Chart 5.2 Net benefits of MTM scenario over FTTP scenario under different growth rates in
willingness to pay
20
Panel assumptions
for WTP growth
Threshold to prefer FTTP scenario

(with no upgrade to MTM scenario)
10
0
-10
-20
Net benefit of MTM scenario over FTTP scenario without upgrade
-30
Net benefits of MTM with upgrade over FTTP
-40
0%
50%
100%
150%
200%
250%
300%
10 year WTP growth
Data source: The CIE.
350%
400%
450%
500%
ItisimportanttonotethattheseestimatesunderstatethevalueoftheflexibilitytheMTM
scenariooffers.ThatisbecausetheseestimatesassumeanupgradefromanMTMtoFTTP
wouldaffecttheentirefixedlinenetwork,withallthecoststhatimposes.Inpractice,
however,anyupgradesfrom(say)anFTTNtoFTTPwouldbetargetedto,andgivenpriorityin,
thosegeographicalareaswherethedemandforextremelyhighspeedeventuatedmost
rapidly.Conversely,areaswheredemandlaggedcouldremainonotheraccesstechnologies.
Asaresult,thebenefitsofacceleratedgrowthwouldbecapturedwithoutallofthecoststhe
panelsmodellingimputes.
The cost of ubiquity outside the fixed network
Theanalysisconfirmsthatthehighspeedservicesthatarebeingprovidedoutsidethe93per
centfootprintimposecoststhatarehighbothinabsolutetermsandrelativetousers
willingnesstopayforthoseservices.
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Specifically,datafromNBNCoimpliesitssupplyofhighspeedbroadbandusingsatelliteand
fixedwirelessoutsidethefixedlinefootprintwillcost$4.8billioninNPVterms,excludingthe
$1.1billiondeadweightlossassociatedwiththetaxesfinancingthoseservicesinvolves.
Optionswhichdeliverhighspeedbroadbandserviceinregionalareasatcostssubstantially
lowerthanNBNCo'sarenowbeingimplementedinternationallyusingfourthandfifth
generationmobiletechnologies.
TheapproachadoptedbyNBNCounquestionablyprovidesanextremelyhighgradeof
service:amongthehighest,ifnotthehighest,intheworld.Whatisquestionable,however,is
whetherthatgradeofservicecanbejustified.Thepanelestimatesthebenefitstousersfrom
deploymentofsatelliteandfixedwirelessoutsidethefixedlineareasasbeing$0.6billion.
Hence,evenweretheestimateofuserbenefitsoffbyafactoroffive,itwouldstillfall
materiallyshortofthecosts.
ThequestioniswhethertheendusersservedbyNBNCosfixedwirelessandsatelliteservice
wouldhavebeenbetteroffreceivingagradeofservicemorecommensuratewiththeir
demandforhighspeedbroadband,alongwithacashtransferoftheresulting$5,000to
$10,000savingperhouseholdserved:orwiththosesavingsbeingredeployedtoother,more
highlyvalued,uses.
Bethatasitmay,thecapitalcostsassociatedwiththeseservicesarenowalmostentirely
lockedin.Sotoo,asaresult,arethedeadweightlossesofthetaxesthatwillberequiredto
coverthem.Thepanelestimatesthatthosedeadweightlossesoftaxationamountto
$1.1billion,whichalonecancelsoutallofthebenefitsfromtheservicebeingprovided.Were
thefinanciallossesfundedthroughanarrowindustryspecificlevyratherthanfrom
consolidatedrevenue(whichreliesonamixofbroadbasedtaxes),thelosseswouldbeeven
higher.
TheGovernmenthasalreadydecidedtobearthiscostofubiquityaspartoftheMTMrollout
strategy.However,themagnitudeofthecostshighlightstheimportanceofstrong
managementdiscipline,bothinefficientlyprovidingtheserviceandminimisingtheriskofyet
furthercostblowouts.Thisisacompellingargumentfortheseparationanddivestmentofthe
fixedwirelessandsatellitenetworks,whichwouldprovidegreatertransparencyofcostsand
revenues,increasedfocusonmanagementofrisks,andgreaterincentivesfortheassetstobe
puttothefullestpossibleuse,includinginimprovingmobileserviceinregionalareas.
Concluding observations
Inconcluding,theanalysissuggestsprivateinvestmentcouldhavesecuredvirtuallyallofthe
benefitsofdeliveringhighspeedbroadbandintheNBNfixedfootprint,comprising93per
centofpremises.ExperienceinNewZealandandtheUK,amongmanyothers,alsosuggests
thatacommerciallydrivendeploymentwouldhavebeensubstantiallybettermanaged,
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providingserviceonscheduleandtocost,avoidingthehighcostsofdelaythathavebeen
imposedonAustralianconsumers.Moreover,comparisonsofNBNCoscostswithworldbest
practiceimplyaggregatecostscouldhavebeenupto20to30percentlowerand
technologieswouldhavebeenmorefinelytargetedtouserdemand.Finally,anysubsidies
couldhavebeendirectedspecificallytoareasofmarketfailure,loweringtheburdenon
taxpayers.
ThismeansthattheNBNinterventionhasresultedinsignificantadditionaleconomiccosts.In
particular,taxationtosupporttheprojectgeneratesdeadweightlossesthatareestimatedat
24percentinthisanalysis.Inotherwords,foreveryhundreddollarsoftaxesthatmustbe
collectedtofunddeploymentoftheNBN,$24worthofeconomicvalueisimmediately
destroyed.Thesecostscannotbeavoidedbyborrowingratherthantaxingbecausedebts
mustberepaidwithinterest,andthoserepaymentsgeneratetheirowndeadweightlosses.
EvenintheMTMscenario,closesttoNBNCoscurrentMTMstrategy,thedeadweightlosses
amountto$2.4billioninNPVterms.
Inaddition,taxpayersfundpartofthefinancialtransfersfromNBNCotootherbusinesses,
andbearalloftheriskassociatedwiththeproject.Thereisnoreasontobelievethisisan
efficientallocationofrisk.
Farfromreducingtheburdenonendusers,theresultisthatpriceswillultimatelyneedtobe
higherthantheywouldotherwisehavehadtobe.Thatunderscorestheimportanceof
creatinganenvironmentinwhichtheincentivestomanagecostsefficientlyareaseffectiveas
theycanbe.Inthepanelsview,increasingcompetitivepressureshasacrucialroletoplayin
thisrespect.
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6.FuturemarketstructurearrangementsforNBN
development
ProvisionofinfrastructuretodeliverhighspeedbroadbandservicesthroughoutAustraliaisa
significantproject(orseriesofprojects)withconsequencesoveralongperiodoftime.The
projectisalreadyunderwayandsignificantexpenditurehasbeenincurredoriscommitted.
Undertakingshavebeengivenandsignificantcontractualarrangementsenteredinto.
Expectations,bothwithintheindustryandwithendusers,havebeencreated.
ThecurrentstageofNBNCodevelopmentrepresentsatippingpointinthehighspeed
broadbandindustrystructureapointatwhich,onceadirectionisset,itwillbedifficultto
change.Thepanelfacedadilemmainframingitsrecommendationsonfuturemarket
structurearrangementsforNBNdevelopment.Anydecisiontodeviatefromthecurrent
developmentpathforNBNCowillinevitablyinvolvecostanddelays,potentiallyexacerbating
communitydissatisfactionwiththecurrentprogressoftherollout.Atthesametime,focusing
ontheseshorttermimpactscouldprecludeorseverelylimittheenduringbenefitsthatan
alternativemarketstructurecoulddeliver.
Inaddressingthisdilemma,thepaneltooktheviewthatitshouldfirstidentifythemarket
structurethatoverthelongertermwouldbestsupporttheobjectiveoftimelyandefficient
deploymentofhighspeedbroadband.Totheextentimplementingthemarketstructure
involvedcostsorrequireddealingwithconstraints,thepanelconsideredtransitionaloptions,
whichpreservedthecapacitytomovetothepreferredarrangementwhileallowingthatmove
tobeimplementedinaphasedway.Finally,recognisingthattheweakerthecompetitive
pressures,thestrongermustbetheregulatorysafeguards,thepanelexaminedascenarioin
whichtheproposedapproachwasnotadoptedandspellsoutthechangesintheregulatory
settingsthatwouldrequire.
6.1
Context and relevant principles
Evencomparedwithotherhighincomecountrieswithchallengingpopulationgeographies
Australiaisuniqueinadoptingamarketstructurebasedonadefactomonopolyproviderof
telecommunicationsinfrastructure.InthecountrieswithwhichAustraliacommonlycompares
itself(includingtheUSA,Canada,theEuropeanUnion,Japan,SouthKoreaandNewZealand)
thereremainsastrongemphasisoninfrastructurecompetitionandonfinancingthe
deploymentofnewnetworksthroughprivatesectorinvestment.Thisisnottosaythereis
alwaysstrongandubiquitousinfrastructurebasedcompetition;butitisgenerally
encouraged.Manygovernmentshavedirectlyorindirectlysubsidisedbroadbanddeployment
butnowhereisthatfundingonthescaleoftheNBN,andnoadvancedeconomyhas
effectivelybroughtitstelecommunicationsinfrastructurebackundergovernmentownership,
asAustraliahas.
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Overall,inexaminingtelecommunicationspoliciesinawiderangeofcountries,thepaneldid
notidentifyanygovernmentinterventioncomparabletotheNBN,withthepossible,
somewhatlimited,exceptionsofSingaporeandNewZealand.Eventhere,however,
governmentshavenottakenstepstopreventoreliminateinfrastructurecompetitionacross
fibre,copperandHFCnetworksandhaveremainedprimarilyreliantontheprivatesector.As
aresult,Australiasapproachisatoddswiththatbeingpursuedinternationally.
Australiastelecommunicationsindustrystructure,whichisstillbeingputinplace,couldbe
seenasreflectingfrustrationwiththepurportedfailureofpreviousattemptsatpromoting
infrastructurecompetition;however,suchaviewdoesnotappeartobebasedonany
rigorousanalysisofwhetherthoseattemptsindeedfailedandifso,why.
Whatevertheanswersmaybetothosequestions,itisthepanelsviewthatthemarket
structurewhichemergedfromtheprivatisationofTelstrafailedtoexploitthescopefor
infrastructurecompetitionbetweenthedifferentfixedlineplatformsthecopperbased
networkontheonehand,andHFContheother.Therehad,intheinitialderegulationofthe
fixedlinenetwork,beencompetitiveentrythroughOptusdeploymentofaHFCnetwork.
However,theefficacyofthatentrywashinderedbytheasymmetrybetweenOptusasthe
challengerandTelstraastheincumbent.Telstrasnetworkwasubiquitousanditscostswere
substantiallysunk,whiletheOptusfootprintwaslimitedandcouldonlybeextendedthrough
costlynewinvestment.Regulatoryintervention,whichmaderetailcompetitionusingTelstras
networkfarmoreattractivethaninfrastructurebasedentry,bluntedtheincentivesfor
competinginfrastructuretobedeployed.
Asaresult,whileAustralianconsumersbenefitedsignificantlyfrominfrastructurecompetition
inmobilenetworks(andbetweenthosenetworksandthefixednetwork),comparable
benefitswereneversecuredinafixednetworkcontext.
However,thecurrentrestructuringofNBNCosmandateandrangeofoperationsopensnew
opportunitiesinthatrespect,justasitdoesforthefixedwirelessandsatelliteservicestobe
operatedseparatelyfromthefixedlinenetworks.Asaresult,thepanelhasreexaminedthe
scopeforplatformcompetition,inthelightofthreeoverridingprinciplesthatareconsistent
withtheapproachadoptedbysuccessiveAustraliangovernmentssincethereformsofthe
1980sand1990s,andwiththeCompetitionPrinciplesAgreement.
First,competitionshouldbepromotedunlesstherearecompellingreasonstobelieveitwill
beinefficient.Inmakingthatassessment,thepresumptionmustbeinfavourofcompetitive
marketsandtheonusformakingoutacontrarycasemustrestonthosewhowouldimpose
dejureordefactorestrictionsoncompetition.Thisprinciplederivesfromexperience,which
showsthatcompetitionprotectsconsumers,encouragesinnovationandreducestheburden
onregulation,thusensuringefficientuseofthecountrysscarceresources;moreover,even
wherecontinuingregulationisneeded,competitionincreasesitsefficacybyfacilitating
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benchmarkingandprovidingregulatorswiththecostanddemandinformationgood
regulationrequires.
Second,wheregovernmentbusinessenterprisesareinvolved,thereisanobligationon
governmentstostructureorrestructuretheseenterprisesinwayswhichpromotecompetitive
markets;andthemerefactthatsucharestructuringmaycrystallisefinanciallossesorforce
pricesdowncannotjustifyrefusingtodoso.
Third,whiledevisingtheefficientmarketstructureinvariablyinvolvestradeoffsfor
example,betweenthegainsfromspecialisationontheonehandandthosefromeconomies
ofscaleandscopeontheotherthesetradeoffsarebestundertakenbythecompetitive
processitself,ratherthanonanabstract,aprioriandhenceinherentlyerrorpronebasis.
Althoughthatmayresultintheultimatemarketstructuredifferingfromthatwhichpolicy
makersinitiallyenvisaged(ashasoccurred,forexample,inelectricitywiththereintegration
ofretailingandgeneration),thoseoutcomeswillreflecttheefficienciesdiscoveredby
competitiveprocesses,ratherthanbeingimposedbygovernmentfiat.
Havingregardtotheseprinciples,thischapteridentifiesseveralconcernswiththecurrent
NBNCostructureandconsidersfouralternativestructures:
disaggregationofthetransit,satellite,wirelessandHFCnetworks;
disaggregationofthetransit,satelliteandwirelessnetworks;
aphasedtransitiontodisaggregation;and
thestatusquoNBNComodelwithenhancedregulatorysettings.
6.2
Concerns with the current NBN structure
NBNCoisthemainpolicyinstrumentforthedeploymentandongoingsupplyofhighspeed
broadbandunderthepoliciesofboththecurrentGovernmentanditspredecessor.Underthe
currentpolicyapproach,NBNCoisintendedtospanthevarioustechnologiesusedfor
highspeedbroadbandandtoactasageographicallyubiquitoussupplierofnetworkservices.
Thepanelhasconcludedthatthisstructurehassevensignificantshortcomings.
1.
Itcreatesauniversaldefactomonopolyprovider(NBNCo)tomanagesatellite,fixed
wireless,copper(likelyFTTN),HFCandFTTPnetworks.Whilepotentiallyachievingsome
economiesofscaleandscope,thiseliminatesanyrealprospectforcompetitioninfixed
broadbandinfrastructurefortheforeseeablefuture(except,perhaps,inCentral
BusinessDistricts(CBDs),throughgeographicallylimitedextensionsofpreexisting
networks,andnewdevelopments).GivenNBNCossunkcostsandaccesstotaxpayer
funds,itwillbehardifnotimpossibleforrivals,wholacksignificantassetsto
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leverage,toenterthemarketandactaseffectivesourcesofcompetitivedisciplineon
NBNCo.
2.
Monolithicentitieswithaveryhighdegreeofmarketpower,asNBNCowouldhave
underthecurrentmodel,havepoorhistoriesofworkingefficientlyandgiventheir
defactocontrolofcostanddemandinformationaredifficulttoregulateeffectively.
AlthoughtheseclaimsarecontestedbyNBNCo,somemarketparticipantshavetoldthe
panelthatamonopolycultureisalreadyevidentinNBNCosapproachtoitswholesale
customers.ThereisnoeasywaytoensurethelongtermefficiencyofNBNCowithinits
currentstructure,anditsincentivestobeinnovativewillinevitablyweakenovertime.
3.
ExperiencetodatesuggeststhatastartupentitylikeNBNCowillstruggletoefficiently
manageabusinesswithsuchawidescope,encompassingwireless,satelliteand
potentiallyHFCinadditiontocopperandfibre,especiallyinthecontextofan
unprecedentednetworkrollout.ThetasksthatNBNCofacesareinherentlycomplex,as
arethedemandsthatarebeingplacedonit,andtheywouldstretchevenamuchlarger,
longestablishedorganisation.Placingsuchgreatanddiversedemandsonasinglestart
upentityinvolvessubstantialrisks,bothtoconsumersandtotaxpayers.
4.
TheexpansionofNBNCosmandatetoFTTNcreatesadditionalchallenges.Should
Telstrasinvolvementinthedesign,construction,maintenanceandoperationofFTTN
beextensive,thereisariskitwillperpetuate,andwillbewidelyviewedintheindustry
asperpetuating,manyoftheproblemsstructuralseparationisdesignedtoaddress(for
example,preferentialinformationaccessandscopetoadvantageitsownretail
customers).Conversely,shouldresponsibilityforallmaintenanceandoperationofthe
copperassetsusedaspartoftheFTTNpasstoNBNCo,thiswouldmagnifyconsiderably
themanagementtaskfacedbyNBNCoandthereforetheriskinvolvedinachievingthe
Governmentsgoals.
5.
Itseemslikelythat,underthecurrentarrangements,perfectlygood(copper)
infrastructureintheHFCfootprintwouldbeprematurelyscrappedandhencewasted:
infrastructurethatisvaluableinitsownrightandthatcouldprovideabasisforstrong
competitioninthefuture.Theprematurescrappingofthatinfrastructureamountsto
unnecessarilyreducingthenationscapitalstock,therebyshrinkingthecommunitys
scopetobenefitfromcostsithaslargelycovered(throughthepaymentsmadeforthe
coppernetworkovertheyears)andthatarenowsunk.
6.
Thecurrentstructureimposestheentireburdenoffinancingnetworkdeploymenton
taxpayers,forgoingopportunitiestosecureprivateinvestmentinpartsofthenetwork.
EvenifNBNCoissueddebt,thatdebtwouldbeeffectivelyguaranteedbytaxpayers,so
theeffectivecallontaxpayerswouldnotbereduced.Asaresult,thecurrentmodel
shiftsontotaxpayers(whohavenochoicebuttoacceptthem)costsandrisksthatinall
otheradvancedeconomiesarebeingborneprimarilybyprivateinvestors.
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7.
Thecurrentstructure,whichclosesoffpossibilitiesforfuturecompetitionand
entrenchesopaquecrosssubsidies,createsmajorchallengesfortheultimate
privatisationofNBNCo.Theconcernsthisraisesareallthemoreacutewhenviewed
againstthedifficultiesthathavebeenencounteredinmovingawayfrommarket
structuresbasedonpreviousgovernmentownedmonopolies(Telecom,OTC,and
Aussat).Thesearedifficultiesandcoststhatmightwellneedtobeborneagain,were
thecurrentmodelallowedtopersist.
Takingthoseshortcomingsasgiven,thepanelwasalsomindfulofthepotentialcostsof
infrastructurecompetition.Themostsignificantofthesecostsarethoseassociatedwith
duplicatingexistingnetworkassets.Indeed,whereanentrantwouldhavetoduplicate
existingassets,therisksthatentailsarelikelytodetercompetitiveentryandexpansion.
Additionally,evenifthatentryoccurs,theduplicationcanbeinefficient,causinghighercosts
thansocietywouldneedtobear.
However,usingexistingassetsasthebasisforcompetitionisanentirelydifferentmatterfrom
exnovoduplicationofthecurrentnetwork.Farfromcausingduplication,thatapproachcan
helpensurethoseassetsandsothescarcecapitaltheyembodyareusedasfullyas
possible.Theresultinggainisevengreaterwhenthealternativewouldseesomeperfectly
useableassetsprematurelyscrapped.Asaresult,thepanelhasconcludedthatthemost
realisticandefficientwayofmovingtoacompetitivemarketistoallowexistinginfrastructure
toserveasaplatformforthatcompetitiontodevelop.
6.3
Options for future NBN structures
ThepanelhasthereforefocusedonthescopetodisaggregateNBNCoalongthelinesofits
underlyingnetworkcomponents.Therecould,inotherwords,beseparateentitiesoperating
eachofthesatellitenetwork,thefixedwirelessnetworkandtheHFCnetwork,withNBNCo
operatingtheFTTxnetwork(includingFTTP).Thesemorefocusedentitieswouldhavesmaller,
moremanageablemandates,therebyreducingfinancialriskstotaxpayersandimprovingthe
chanceofefficientandtimelynetworkrollout.Additionally,divestingtheseassetstospecialist
operatorswithestablishedtrackrecordswouldshiftriskfromtaxpayersontotheinvestors
bestplacedtogauge,bearandmanagethoserisks.
SimilarconsiderationsholdforNBNCosextensivetransitnetwork,whichiscomposedofa
mixtureofNBNColinksandleasedTelstracapacity.Werethatnetwork,whichreachesall
NBNCos121pointsofinterconnection,disaggregatedfromNBNCo,itwouldbeapowerful
competitorinthetransitandbackhaulmarket,allowingNBNCotofocusonitsmandateto
operatetheaccessnetwork.
ThedisaggregationofNBNCoassetscouldbeachievedinanumberofwaysthatinvolve
differingdegreesofseparationofentitiesandcompetitionbetweenthem.Thepanelhas
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focussedonfourmainstructuraloptions.Thefirstoptiondiveststhetransit,fixedwireless
andsatellitenetworks,hastheHFCnetworkoperatingasaseparateentity,andNBNCo
retainingtheresponsibilityfortheFTTxnetwork;theseconddiveststhetransit,fixedwireless
andsatellitenetworkswithNBNCohavingresponsibilityforfixedlinenetworks;thethird
involvesoptionsforeffectingaphasedtransitiontodisaggregation;finally,thefourthoption
wouldariseweretheGovernmenttorejectdisaggregation,creatingarequirementforgreater
andmoreonerousregulation.
Ineachofthedisaggregationscenarios,itwouldbenecessarytodefineserviceareasforeach
accessnetworkandtheserviceprovisionresponsibilitiesoftheoperatorwithinthem.The
responsibilitiesofthefixedlineandwirelessnetworkswouldbedefinedbytheirrespective
footprintsandcoveragemaps.Thesatellitenetworkwouldberesponsibleforallotherareas.
Serviceobligationsandtheirfundingwouldbeaddressedonthebasisoftheframeworkset
outinchapter8.Whiletheoperatorsofeachplatformwouldhavedesignatedserviceareas,
theywouldbefreetocompeteoutsideofthoseareas,andwouldnotbelimitedintherange
ofservicestheycouldoffer.Theywouldbesubjecttothestructuralseparationrequirements
ofPart8oftheTelecommunicationsAct(asamendedaccordingtotherecommendations
discussedinchapter7)butcould,undertheprovisionsofthatPart,seekexemptionsfromthe
Partsrequirements.AsummaryofthestructuralmodelsconsideredisatTable4.
Option 1: Disaggregation of transit, fixed wireless, satellite and HFC networks
Underthisoption,thetransit,satellite,fixedwirelessandHFCnetworkswouldbedivested,
recognisingdivestitureoftheHFCnetworkwoulddependontheoutcomeofthecurrent
negotiationsbetweenNBNCoandTelstra.TheremainingNBNCowouldconsequently
becomeastructurallyseparatedversionofacopperbasedincumbent(somewhatsimilarto
ChorusinNewZealand),deployingandwholesalingservicesofthefullrangeofFTTxoptions,
includingitsFTTPinfrastructure.
Eachspecialistnetworkoperatorshouldberesponsiblefortheinterfacewithretailer
operatorsandbeencouragedtocontributecapitaltothefuturedevelopmentoftheplatform.
Aswellasreducingthecallontaxpayerfunds,thiswouldensureeachoperatorhadstrong
incentivestomakethebestuseoftherelevantassets.
Thepanelseesconsiderablebenefitsinthisarrangement.Asastartupventurewithan
exceedinglychallengingmandate,itiscrucialthatNBNCohaveanarrowlyfocussedandwell
definedobjective,againstwhichitcanbeheldaccountable.FinancingtherampupofFTTx
deploymentislikelytorepresenttheprimarycallontaxpayersfunds;concentratingNBNCos
effortsonthistaskcanhelpgivetaxpayersagreaterassurancethattheirfundswillbewell
spent.Atthesametime,NBNCodoesnothavedeepexperiencewithHFC,anditsmanagerial
attentionislikelytobeheavilyfocussedonFTTxdeployment.Allofthatmeanstheefficiency
gainsfromdisaggregatingtheHFCandFTTxnetworksarelikelytobesubstantial.
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Inthecaseofthetransitnetwork,itwouldbenecessarytorespectanycommitmentsmadeas
partoftherenegotiationsoftheDefinitiveAgreementsbetweenNBNCoandTelstra.
However,assumingthatdisaggregationispracticable,thisnetworkwouldprovidevaluable
additionalcompetitioninthebackhaulandtransitmarkets.Participationinthetransit
networkbyexistingindustryplayerswouldallowthemtoextendtheirexistingtransit
coverage,bringingwholesalecompetitiontonewareasandalsoimprovingtheprospectsfor
retailcompetitioninthoseareas.
Finally,internationalexperienceprovidesmanyexamplesofsatelliteandfixedwireless
networksbeingsuccessfullyoperatedonastandalonebasis.Oneaspectofthissuccesshas
beenthecapacityofthespecialistoperatorstoidentifyandsecureawiderangeofrevenue
sources.Conversely,whileNBNCocancontractforthesenetworkstobeoperatedtoits
requirements,itdoesnotitselfhavesignificantexpertiseindevelopingmarketsforthe
servicesthesenetworksprovide.
Inshort,thisoptionwould,forthefirsttimeinAustralianexperience,putinplaceamarket
structurethathadthepotentialforeffectiveinfrastructurebasedcompetitionthrough
leveragingexistingassets.Additionallyandimportantly,thecompetingentitiesinthefixed
networkwouldberoughlysymmetricallyplaced,eachoperatingoffasubstantialservicebase
andeachwithmaterialoptionstoexpand.Inalloftheserespects,thiswouldbeacompletely
differentsituation,andonewhichholdsmuchmoreprospectforenduringcompetition,from
thatwhichprevailedatthetimeoftheinitialmovestoderegulation.
Giventhesepotentialbenefits,thepanelhasexaminedtwoissuesthisapproachwouldraise:
theviabilityofthewirelessnetworks,giventhattheyoperateinveryhighcostareas;andthe
longrunsustainabilityandeffectsofcompetitionbetweentheHFCandFTTxoperators.
The viability of the wireless networks
Thepanelexpectsthisoptiontogeneratesignificantpressuresforexpansionandrevenue
diversificationinboththefixedwirelessandsatellitenetworks.
Withrespecttothefixedwirelessservice,thereareopportunitiesforaspecialistoperatorto
aggressivelycompletedeploymentandupgrade/extendthenetwork.Thiswouldleadtorapid,
costeffectiveimprovementsinthequalityofserviceinawiderangeofnonmetropolitan
areas.Theremayalsobeoptionsforsuchanoperatortoincreaseassetutilisationby
exploitingeconomiesofscopeintomobileservices,increasingcompetitionandchoicein
thoseservices.Equally,aspecialistsatelliteoperatormaybeabletosecureadditional
revenuesinrelatedmarkets,suchasthoseavailablefromRSPsthatsupplyservicestomining
sites,multisitecorporations,governmentdepartmentsandpublicutilities.
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However,despitetheabilitytodevelopnewrevenuesources,thepanelacceptsthatboththe
satelliteandfixedwirelessnetworkscouldrequiresubsidiestocovertheiroperatingcosts.
However,thatwouldbethecaseevenunderthecurrentmodel:thedifferenceisthatinthe
disaggregatedmodelthosesubsidieswouldbetransparent,andhenceaccountable,rather
thandisguised,andhenceunaccountable.Moreover,theprocessofdivestingtheseassets
wouldallowtherequiredquantumofthesesubsidiestobetested,providingconfidencethat
theconsumersortaxpayersbearingthecostsofthosesubsidieswerenotbeingexploited.
Thatisincontrasttothecurrentsituationwhere,intheabsenceofmarkettesting,therecan
benoassurancetheimpliedsubsidiesconsumersandtaxpayersarebearingreasonablyreflect
costs.Howthatmarkettestingcouldbeusedtoinformsubsidiesgoingforward,andthe
optionsforefficientlyfundingthosesubsidies,areissuesaddressedinChapter8ofthisreport.
ThepanelisthereforesurprisedthatNBNCosFixedWirelessandSatelliteReviewconsidered
adrawbackofthedivestmentoptionthatitwouldrequiretransparentsubsidiestothese
services15.Onthecontrary,inthepanelsview,thefactofmakingsubsidiestransparentisa
strengthofthisoption.ThisissueandothersaresetoutmorefullyatAppendix4.
Competition between the HFC and FTTx operators
Underthearrangementsputinplaceatthetimeofdisaggregation,theHFCoperatorwould
berequiredtosupplyaLayer2serviceonaverticallyseparated,wholesaleonlybasis.This
requirementreflectsthepotentiallylargecustomerbaseandsignificanceoftheHFCnetwork
inthebroadbandwholesalemarket.Additionally,itwouldbedesirablefortheoperatorto
haveequityatriskintheHFCnetwork,whichwouldsharpenitsincentivesandreducethecall
ontaxpayersfunds.AnyCommonwealthcontributiontounderwritinganyexpansionor
upgradingcostsfortheHFCwouldneedtobedeterminedaspartofthedisaggregation
process.
Asinthedesignatedwirelessareas,theHFCnetworkoperatorwouldhaveserviceobligations
initsnetworkfootprint,butwouldbefreetoexpandoutsidethatfootprintandwouldface
thethreatofcompetitionfromFTTx,aswellasfromthefixedwirelessnetwork.Thegreatest
riskconfrontingtheoperatoristhatofNBNColeveragingthesunkcostsofitscopperassets
todeployFTTxintheHFCservicearea.However,intheeventofasaleoftheHFCassets,that
riskwouldbepricedintothecontractualarrangementforsale,andshouldleadtheoperator
tomoreaggressivelydeployandpromoteitsownserviceoffering.Thatsaid,totheextentto
whichtheGovernmentbelievesitisdesirabletofocusNBNCoprimarilyonareasnotserved
bytheHFC,itcouldmakethatclearinitsSOE.
15NBNCosFixedWirelessandSatelliteReviewMay2014.
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Thebestdomesticandinternationalevidenceisthatcablemodemservicecanbeprofitably
suppliedincompetitionwithADSLandFTTx.WhilethisisapparentinNorthAmerica,where
cableservicehasanearubiquitousroleinprovidingPayTV,itisalsothecaseinsignificant
partsofEurope,wherehighspeedbroadbandisamoresubstantialanddirectdriverinthe
deploymentofcableinfrastructure.InAustraliascase,thecostsofHFCnetworkassetsare
sunkanddeployedinsomeofthehighestincomepartsofAustralia,whichshouldprovidea
soundbasisforasustainablebusiness.ItistruethatthisHFCnetworkwouldoperateona
wholesaleonlybasis,unlikeitscounterpartsoverseas;butsowoulditsmaincompetitor.
Moreover,ifdemandforhighspeedbroadbandprovessolowthatitisinsufficienttofunda
networkwhosecostsarelargelysunk,thatsuggeststheinvestmentindeployingentirelynew
networkassets(suchasthoserequiredforFTTPandevenFTTN)wouldbecompletely
uneconomic.
TheremaybeconcernsthatdisaggregationoftheHFCwouldunderminetheeconomicsof
NBNCo.However,thereislittleneartermriskoftheHFCoperatorexpandingintoareasthat
arenotcloselycontiguoustoorwithinitsservicearea.Asaresult,NBNCosFTTxoperations
arenotlikelytobeunderminedbyrivalryfromtheHFCunlessitistardyinnetwork
deployment,setspricesthatareundulyhigh,orprovidespoorservicequalityinwhichcase
thecompetitionfromtheHFC(andeventhethreatofthatcompetition)wouldbeclearly
beneficial.
NoristheargumentthatanyexpansionoftheHFCwouldbepromptedbycreamskimming
especiallycredible,allthemoresoas(underthepanelsrecommendedapproach)the
wirelessassetswhichrequirethegreatestsubsidywouldnolongerbeNBNCosfinancial
responsibility.ThatshoulddecreasethecrosssubsidiesembeddedinNBNCosprices,
reducingthethreatofcreamskimmingentry.
Lastly,anyequitycontributionsecuredfromtheHFCspecialistwouldreducethecallon
taxpayers,whilethatspecialistwouldalsobearresponsibilityforitsshareofthepayments
requiredundertheDefinitiveAgreements.Thisshouldtemperanyconcernabouttheimpact
onNBNCosfinancesfromitsinabilitytoachieveearlyrevenuegrowththroughitsaccessto
HFC.
Asaresult,thepanelbelievesthegainsfromthisoptionexceedanyfinancialburdensitmight
entail.ThosegainswouldbeevengreateriftheremainingcopperintheHFCfootprint
continuestobeoperatedonawholesaleonlybasisbyNBNCo,thusprovidingcompetition
againsttheHFCoperator.Obviously,theoperatingarrangementsforcopperwouldneedtobe
agreedwithTelstra;toensurestructuralseparation,itwouldbenecessaryforTelstrato
transferatleasttheoperationofthecoppertoNBNCo.
Astrengthofthismodelisthatitwouldensurethelegacycoppernetworkandcompetitive
DSLAMinvestmentsintheHFCareaswerenotinefficientlyscrapped,aswouldhappeninthe
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MTMmodelproposedinthefixedlinenetworkStrategicReview.Instead,thatnetworkwould
operateasacontinuingcompetitivedisciplineontheHFCoperatorandcouldbeusedforFTTx
deploymentinthatfootprintwhenthatcouldbedonewithoutdistrac ngNBNCofromits
primarymissionandwherejustifiedoncommercialgrounds.Suchanarrangementcouldbe
beneficialforRSPsinthatcompetitionbetweennetworkoperatorswouldputdownward
pressureoninputcosts,offerdiversityofsupplyandencourageinnovation.
TherequirementthattheHFCandcoppernetworksintheHFCfootprintbeoperatedunder
thetermsofPart8oftheTelecommunicationsActshouldaddressanyconcernsthatexisting
ownersofthoseassetsmighthaveregardingtheirfutureuse.Itwouldalsohelpaddress
concernsaboutTelstraspossibleongoinginvolvementinthedeploymentofFTTNinthe
coppernetwork.
Option 2: Disaggregation of transit, fixed wireless and satellite networks
Underthisoption,onlythetransit,satelliteandfixedwirelessnetworkswouldbedivestedto
specialistoperators.AswellasdeployingandwholesalingtheservicesofthefullrangeofFTTx
options,includingitsFTTPinfrastructure,NBNCowouldretain(andpotentiallyexpand)the
HFCnetwork.
Asinthepanelsfulldisaggregationmodel,socialgainswouldcomefromthedivestmentof
thetransit,satelliteandfixedwirelessnetworks.Asthatdivestmentwouldcreatethescope
formarkettestinganysubsidies,thetreatmentoflossmakingservicesinthesatelliteand
fixedwirelessfootprintswouldbeexactlythesameasthatenvisagedforfulldisaggregation.
However,thisoptionforgoesthebenefitsofimmediatecompetitioninthefixedline
footprint,whichaccountsforthevastbulkofcustomersandbusinesses.Additionally,thereis
amaterialriskthatNBNCowoulddiscontinuethecopperinfrastructurewithintheHFC
footprint,eliminatinganythreatoffutureinfrastructurecompetition.Whilethereisno
perfectwayofdealingwiththisrisk,somepossibilitiesareconsideredbelow.
Option 3: Transition arrangements for disaggregation
Itisthepanelsviewthatthestructuralchangesithasproposedshouldbeimplementedas
soonasreasonablypractical.However,thepanelrecognisesthatthereareconstraintsinthis
respect,althoughitbelievestheseapplymainlytothefixedlinenetworks.
Thus,atthetimeofwriting,theHFCandcoppernetworksarestillownedbyTelstraandOptus
andnegotiationsareongoingtohavethemdivestthoseassetstoNBNCo.Assuchthe
Commonwealthisnotinapositiontounilaterallymakedecisionsabouttheultimate
ownershipofthoseassetsandanyproposeddisaggregationwouldraiseissuesthatcould
needconsiderationinthenegotiations.
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Atthesametime,NBNCoisadjustingtoanewmandate,leadershipandoperatingmodel,
andtherearedangersindisruptingthatadjustment.Lastbutnotleast,themovetoa
disaggregatedmodelwillrequireplanningandcouldtaketime,particularlyinthephase
wherethetempooftherolloutisbeingincreased.TheGovernmentmaythereforeconsidera
gradualprocessofdisaggregationwouldbemoresuitable.Tothisend,thepanelhas
thereforeconsideredphasedapproachestoimplementationofitsdisaggregationproposals.
AfirstsuchapproachwouldinvolveNBNCocontractingouttheoperationandmanagement
ofthevariousplatforms.Thecostsandbenefitsofdoingsowoulddependontheprecise
natureoftherelevantcontracts,andinparticularontheextenttowhicheachplatform
operatedasanindependentprofitcentre,withsomedegreeofcontrolovercapital
expenditure.However,evenamorelimitedformofcontractingoutcouldatleastpreserve
theplatformsasseparateentities,therebyfacilitatingeventualdisaggregation.Moreover,
againdependingonhowthecontractsaredevisedandstructured,contractingoutcould
provideinformationaboutcostsanddemandthatwouldbeusefulintheregulatoryprocess.
Additionallyoralternatively,thevariousplatformscouldberingfencedwithinNBNCoitself.
Evenwerethatapproachadopted,thebusinessunitsthatarenotcurrentlyabsorbedwithin
NBNCo,suchastheHFC,couldbekeptasastandaloneoperatingbusinessduringthe
transitionstage.Anyoperatingframeworkfortheringfencing,includingforaccounting
separation,wouldneedtobeapprovedbytheregulator.
Thepaneldoesnotbelievetheseapproachescancomeclosetoyieldingthesignificantpublic
benefitsassociatedwithfulldisaggregation.Itwouldnotbeeasytoreconcilethecontracting
outmodelwithstrongcompetitivetensionsbetweenthebusinessunits.Asforringfencing,it
wouldnotinitselfinvolveorpermitanysuchtensions,andregulatorshaverarelybeen
convincedthatringfencingcanbeproperlypolicedatreasonablecost.Moreover,thereare
risksintheringfencingapproach:forinstance,wereitcleartoNBNCothataparticularring
fencedunitwastobedivested,andwouldthencompetewithit,NBNCowouldhave
incentivestostarvethatunitofcapitalandskills.
Therearenoreadysolutionstotheseproblems.Forexample,seekingtopreventNBNCofrom
deprivingsoontobedivestedunitsofcapitalwouldrequireintrusive,likelyunworkable,
controlsoveritscorporatedecisionmaking.
Asaresult,theseoptionsoughttoonlybeconsideredasshorttermtransitionalstepsto
disaggregation,withtheirinherentweaknessesandrisksrecognisedandfullyunderstood.To
thatend,shouldaphasedapproachbeadopted,theGovernmentshouldcommititselftoa
furtherindependentreviewoftelecommunicationsmarketstructureinnomorethanfive
yearstime.
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Option 4: Status quo NBN Co model with enhanced regulatory settings

Finally,theGovernmentmaydecidetoretainthecurrentmodelforNBNCo,whichwould
thereforecontinueasanintegrated,nationwide,wholesaleonlyproviderofhighspeed
broadbandservices.Forthereasonssetoutabove,thepanelbelievesthiswouldpreclude
substantialbenefitsthecommunitycouldlegitimatelyexpect.
Thesocialcostsofthisoptionwouldbereducedwerethelegacycoppernetworkbroadband
serviceskeptinserviceinFTTxdeploymentareasforsolongasthecopperwasnotbeingused
inFTTxdeployments,andinHFCareas.Thiswouldinvolvesomecontinuingcostsfor
maintainingthecopper,andmaynotbepossibleunderthedisconnectionprovisionsofthe
DefinitiveAgreements.Moreover,evenwereitpossible,RSPsusingtheseserviceswouldrun
theriskoftheservicebeingterminated,reducingtheirwillingnesstoinvest.Thispossibilityis
thereforefarfrombeingacompletesolution.
Retainingthestatusquowouldpreventcompetitiondeveloping.Thiswouldhaveimplications
fortheregulatorysettings,asthemorelimitedistheextentofcompetition,thestrongerand
moreintrusivemustbetheregulatorysafeguards.
Inparticular,assetoutinthepanelsStatutoryReviewandintheotherchaptersofthis
report,underthisoption:
TheACCCshouldbemorevigilantinadministeringthepanelsproposedrevisionsto
theantidiscriminationrules;
Withonlynarrowlydefinedexceptions,alloftheNBNCosservicesshouldremain
declaredservices;
CompetitiveneutralityrequirementsinrespectofNBNCosdecisionsaboutentryand
expansionshouldbegivenlegislativeform;
SinceanysubsidiesNBNComightseekcouldnotbemarkettestedtherecouldbeno
assurancethatthosesubsidieswerereasonable.Asaconsequencenolevyfunded
subsidymechanismtosupportthecostofNBNCosuniversalserviceobligations
shouldbeconsideredatthisstage;andfinally,
TheACCCshouldtakeaccountofNBNCosverysubstantialandenduringmarket
powerinconsideringapplicationsfrompotentialcompetitorsforexemptionsfromthe
provisionsofPart8oftheTelecommunicationsAct.
6.4
Conclusions and recommendations
Overall,thepanelseesgreatmeritinthecommitmentssuccessivegovernmentshavemadeto
theunderlyingprinciplesoftheCompetitionPrinciplesAgreementprinciplesthe
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CommonwealthquiterightlydemandsthattheStatesandTerritoriesrespect.Despitethe
manycomplexitiesinvolved,thereisasignificantopportunitytoplaceinfrastructure
competitiononaviableandeffectivebasis.Conversely,shouldthestatusquobeentrenched,
thereisariskoflockinginastructurethatwillproveasresistanttochangeaswereits
predecessors.
Recommendation1:Infrastructurecompetitionbetheguidingpolicyforthedeliveryof
wholesalebroadbandservices.Thispolicybeimplementedexpeditiouslytothemaximum
extentpracticable.
Recommendation2:Thebasisforacompetitivewholesalebroadbandmarketstructurebe
createdthroughthedisaggregationofNBNCo.Thisbedonethrough:
a)
thedisaggregationanddivestmentofNBNCostransit,satelliteandfixedwireless
businessunits,alongwithassociatedobligations,includingwithongoingsubsidiesif
theyprovetobenecessary;
b)
puttinginplacearrangementswiththeaimtohavingtheHFCnetworkownedand
managedbyanonNBNCooperator.IfNBNCoissuccessfulinacquiringthenetwork
andtheGovernmentconsidersthatfulldivestmentisnotachievable,itdisaggregate
NBNCosHFCnetworkfromitsFTTxnetworktothegreatestextentpossible;
c)
werefulldisaggregationnottoproceedimmediately,theGovernmentdirectNBNCoto
movetothetransitionalinternalarrangementsidentifiedasapreparatorystage,witha
furtherindependentreviewofmarketstructurebeingconductedinnomorethanfive
yearstime;and
d)
thecoppernetworkremainingactiveinthesupplyofADSLserviceswithintheHFC
networkareapendingupgradetoFTTNorFTTP.
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7.Parts7and8oftheTelecommunicationsActandthe
treatmentofnewhighspeednetworks
7.1
Introduction
Akeyquestioninconsiderationofthestructuralandregulatorytreatmentofnewhighspeed
networksiswhether,andonwhatterms,competitionbetweenNBNCoandalternative
providersshouldoccur.Thischapterfocusesonbrownfieldsrollout,bywhichismeantthe
deploymentofhighspeednetworkstopremisesalreadyconnectedtothe
telecommunicationsnetwork.Networkdeploymentinnewdevelopmentsisdiscussedin
chapter8.
TheissueofcompetitiveentryhasbeenhighlightedbyTPGsproposedrolloutoffibretothe
basementnetworkinfrastructuretoupto500,000premises.However,thepaneldidnot
specificallyfocusonthatnetworkproposal,nordiditaddressthelegalissuessurroundingit.
Rather,TPGsproposednetworkexemplifiesthegeneralissuethepanelhasconsidered.
Thepanelsapproachwasguidedbytheobjectivesandprinciplessetoutinchapter4,
particularlythatinfrastructurecompetitionshouldbeencouraged,andbythepanelsview
thatprivateinvestmentcanbringeffectivedisciplinestotheuseofscarcecapital,reducethe
riskbeingplacedontaxpayersandfreetaxpayersfundsforotherpurposes.
Onthebasisthathighspeednetworksservicingbusinesscustomersarenotsubjecttospecial
regulationunderParts7or8,thepanelhasnotconcerneditselfwiththesenetworks.
Telecommunicationsserviceprovidershavegenerallybeenresponsivetotheneedsoflarger
businesscustomersandcanhaveeveryincentivetoremainso.Consistentwiththis
observation,nospecialinterventioninsupportofthosecustomersshouldbeconsidered.
ItisimportanttonotethatthePart7and8rulesdonotapplytoNBNCo.NBNCoissubjectto
similarrulesthroughtheNBNCompaniesActandtheCCA.
7.2
The current rules
Forconvenience,therulesunderParts7and8oftheTelecommunicationsActandassociated
provisionsoftheCCAarereferredtoasthesuperfastnetworkrules.
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Insummary,therulesapplytoalocalaccessline:
used,orproposedtobeused,toprovideafixedlinecarriageservicewherethe
downloadtransmissionspeedisnormallymorethan25Mbps16toresidentialorsmall
businessusers;and
wasbuilt,upgraded,alteredorextendedonorafter1January2011sothatitis
capableofprovidingdownloadtransmissionspeednormallymorethan25Mbps.
Networkupgrades,alterationandextensionsarecapturedbydeemingrules.
Insummary,therulesrequire:
theownerofthenetworktoofferaLayer2bitstreamservice(asdefinedbytheACCC)
onanondiscriminatorybasisatorbelowapricesetbytheACCC(Part7,s.141,and
certainprovisionsoftheCCA);and
thecontrollerofthenetworkoranassociatenottosupplyservicestoanyoneother
thanacarrierorcarriageserviceprovider(thatis,theymustnotsupplytoretail
customers)(Part8,s.143).
Thereareanumberofexemptionstotherules.Therulesdonotapplytonetworksbeing
rolledoutinrealestatedevelopmentsthatexistedon1January2011,tonetworkextensions
oflessthan1kilometreortoanykindofwirelessnetwork.Therulesonlyapplytonetworks
whollyorprincipallyservicingresidentialandsmallbusinesscustomers,thusexcluding
networksthatservelargebusinesscustomers.TheMinistercanalsograntexemptions
(conditionalorunconditional)fromPart7and/orPart8.Exemptionshavealreadybeen
grantedtoTelstraandTransACT.
Subjecttothoseexceptionsandexemptions,therulespreventalternative(thatis,nonNBN
Co)operatorsofsuperfastnetworksfromenteringretailmarkets.Formally,thatmerelyplaces
theminthesamepositionasNBNCo.Inpractice,however,therulesgreatlydiminishthe
commercialincentivestoenterwholesalemarketsbecausenoneoftheconsiderable
efficienciesofverticallyintegratedoperationareavailable,whileatthesametimeentrants
facealmostcertaincompetitionfromataxpayerfundedprovider.
16Anetworkcapableofdelivering25Mbpsdownloadspeedisreferredtointhelegislationasasuperfast
network.Thisisthesamedefinitionthatthisreportusesforhighspeednetworks,butsuperfastisusedin
thischapterinspecificreferencetothelegislationunderdiscussion.
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AccordingtotheExplanatoryMemorandumforParts7and8,therationalefortheserules
wastopreventalternativeverticallyintegratedsuperfastnetworkprovidersfromadvantaging
themselvesoverindependentRSPsandfromunderminingNBNCosabilitytocrosssubsidise:
Amongstotherthings,theNBNImplementationStudyidentifiedthatdifficultiescould
ariseforthedeliveryoftheGovernmentsNBNpolicyobjectivesasaresultofNBNCo
beingsubjecttostrictregulatoryrequirementswhilecompetingagainstother,less
regulated,providersofsuperfastbroadband.Inparticular,theStudynotedthescopefor
competingproviderstotargethighincomeandlowcost,highdensityareas,operateas
verticallyintegratedprovidersandadvantagethemselvesoverindependentretailservice
providers(RSPs)ontheNBN,andignoretechnicalspecificationsemployedbyNBNCo.
Thiscouldmeanthatwhereotherprovidersrolledoutsuperfastnetworksinadvanceof
theNBN,thesewouldnotdeliverconsumersinthoseareasthesamebenefitsasthe
NBN.Moreover,bycherrypickinghighvaluemarketssuchproviderscouldundermine
NBNCosabilitytodelivertheGovernmentspolicyobjectivesfortheNBNnationally.
ThisstatementcrystallisestheissueofNBNCofacingcompetitionfromsuperfastnetworks:
howmighttheyimpactonNBNCosabilitytocrosssubsidiseservicesinregional,ruraland
remoteareas,assumingitwererequiredtodoso;andifthereissuchanimpact,howthat
impactshouldbedealtwith.Italsocrystallisesanassumptionthatcompetitionorthethreat
ofcompetitionatthenetworklevelisoflittlevaluetoresidentialandsmallbusiness
consumersanassumptionTPGsproposal,andinternationalexperience,question.
7.3
Submissions
NBNCostronglysupportedtheexistingrules.Itarguedtheywereimportanttoitoperatingon
alevelplayingfieldandsupporteditsabilitytofundotherwiseuneconomicservicesin
regional,ruralandremoteareas.
Asforotherparties,mostothersubmittersdidnotdirectlychallengePart7and8orthe
notionthatnewcompetingsuperfastnetworksshouldberegulatedinthisway.
Rather,thosesubmissionsgenerallymadebypartiesthatwillbeseekingaccesstotheNBN
seemtoaccepttheseprovisionsaspartoftherolloutoftheNBN.Thesubmissionsby
partiesthatownextensivedistributionandtransmissionassetsappeartobeconcernedbythe
prospectofcompetition.Thesesubmissionssuggestedthatalternativenetworksthatare
operatedonaverticallyintegratedbasiscreatescopeforthenetworkownertofavouritsown
downstreamoperations(therebypotentiallyraisingthesameissuesthatwereofconcernwith
Telstrainthepast).TheseconcernswereechoedbyTelstra,whichhaspreviouslyplacedgreat
emphasisonthebenefitsofverticalintegration,includinginpromotingcompetitiveentryinto
theprovisionoftelecommunicationsinfrastructure.TheCommunicationsAllianceexpressed
concernsthatnetworksemployingvectoredveryhighbitratedigitalsubscriberline(VDSL)
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wouldrequiresomeformofmonopolytooptimisetechnicalperformanceandsuggestedthat
intheseinstancesaccessruleswereparticularlyimportant.
TPGarguedthatcarriersshouldgenerallybefreetoinvestwithinthelimitsestablishedbythe
superfastnetworkrulesandthatthereis(TPGmaintained)alreadysubstantialcompetitionin
theseareasfromHFCand4Gmobilenetworks,sothatanyissuesaboutcherrypickingwill
ariseinanyevent.Itarguedthatifanetworkextensionrepresentedanaccessbottleneck
thenaccessrequirementscouldbeimposedunderPartXICandthatthiswastheusualand
bettercourseofaction.Thatsaid,TPGdidarguethatitsproposednetworkoperatedundera
statutoryexemptionandsodidnotstronglyurgetherepealoftherulesasawhole.
7.4
Options
ThepanelconsideredalternativeoptionsfortherulesunderParts7and8,includingthatthey
shouldbe:unchanged;tightenedtoprovidestrictercontrolsonalternativesuperfastnetwork
providerswhoenterthemarket;orrelaxedtoallowalternativesuperfastproviderstoalso
operateintheretailmarket,butunderconditionsthatstilladdressthepotentialforanti
competitiveconduct.
ArguablytherulesunderPart7arenotasintrusiveasthoseunderPart8.Carrierscanalready
berequiredunderPartXICoftheCCAtoprovideaccesstospecifiedservices.Part8is
significantlymoreintrusivebecauseiteffectivelylimitsanetworkoperatortowholesale
supply.
Thuspreventingalternativesuperfastnetworkprovidersfromenteringtheretailmarketcould
seriouslycompromisetheincentivesforinvestmentincompetitiveinfrastructure.By
discouragingthatinvestmentandstrengtheningadefactoNBNComonopoly,theruleswould
thendepriveendusersofservicesthatmightotherwisebeprovidedor,ifthoseservicesare
provided,mightcausethemtobeprovidedlesspromptlyandefficientlythantheycouldbe.
Werethattooccur,itwouldhardlybeinthelongterminterestsofendusers.Rather,the
resultingdefactomonopolyarrangementswoulderodeboththedisciplinesonwholesale
pricesandincentivesforinnovation,inthemarketgenerallyandforNBNCoparticularly.
Thesearesignificantrisksthatcannotbefullyoffsetbyregulation;thatfactunderscoresthe
presumptionthatcompetitorsshouldnotbeunnecessarilyconstrainedagainstafirmlikeNBN
Cowhichenjoysveryconsiderableadvantages,includingthatofreadyaccesstotaxpayer
funding.
AsforclaimsthattherestrictionsarerequiredtoensureNBNCosabilitytofunditsservice
obligations,thoseclaimsarebothunprovenand,inanyevent,inconsistentwithgoodpublic
policy:ifthereisaneedtosubsidisepricesinregional,ruralandremoteareas,thisshouldbe
donethrougharrangementsthataretransparentandaccountable,ratherthanbymeansof
opaquerestrictionsoncompetition.Asaresult,protectingpoorlytargetedcrosssubsidies
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cannotjustifyretainingtherulesthatarecurrentlyinplace.Alternativearrangementswhich
wouldensureuniversalaccessandaffordabilitymoreeffectivelyandefficientlyaresetoutin
chapter8.
Moreover,ifthepurposeofthecurrentarrangementswastoprevententrythatmight
undermineinternalcrosssubsidies,theyhavesingularlyfailedtodoso,whilecreating
substantialuncertaintyastotheirprecisereachandimpact.
Thisuncertainty,whicharisesfromthepoordesignofthelegislativeprovisions,isapparentin
thecontroversyaroundthelegalityofTPGsnetworkandthescaleofthenetwork(around
500,000premises)thatTPGhasbeenabletoproposeunderthestatutoryexemption.
Potentially,othernetworkinfrastructureownerscoulddothesame,andtoanevengreater
extentiftheyownexistingnetworksthatarelargerthanTPGs.
Therearenocrediblelowcostoptionsforimprovingthenetworkextensionrules.Thus,were
itdesirabletoredesignthestatutoryexemptiontosignificantlyrestrictentrysuchasthat
proposedbyTPG,thelikelyeffectofpossiblerulechangeswouldbetoimposeonerous
restrictionsonlegitimatemaintenanceanddevelopmentactivitiesbyexistingnetwork
infrastructureoperators.The1kilometreexemptionhasanartificialcharacter,andany
workablealternativewillbesimilarlyartificial,creatingtheriskofunexpectedmarketentryas
wellasofunintendedconsequencesinadverselyaffectingtheongoingfunctioningofexisting
networks.
Importantly,therisksinherentinlockingininappropriatemarketstructureswillriseoverthe
comingyears.Whilecurrentknowledgemayleadtosensibledecisionsaboutimmediate
infrastructurerequirementsfromanengineeringperspective,alongtermindustry
arrangementbasedonadefactomonopolysupplyofwholesalebroadbandserviceswill
increasinglyerodedynamicefficiencyastechnologycontinuestoevolve,openingnew
commercialopportunitiesintheprocess.
Asaresult,thenochangeoptionhaslittletorecommendit.Nordoesthepanelfavourthe
optionoftighteningtherulestofurtherrestrictwhatalternativewholesaleprovidersthat
enterthemarketcando.Onthecontrary,tighteningtheruleswouldentrenchadefacto
monopolyandexacerbatethedistortionsitbrings.
Noneofthatdetractsfromthebenefittoendusersfromhavingaccesstoeffective
competitionandchoiceattheretaillevel,evenifthereisasinglenetworkproviderinagiven
locality.Howeverthereisalsobenefitinfirmsbeingabletoenterwholesalemarketsona
competitivebasisrememberingthat,eveninsituationssuchasapartmentblocks,
competitionforthewholesalemarket(throughregularorevenoneoffauctions)canbeas
effectiveascompetitioninthewholesalemarketinprotectingtheinterestsofconsumers.
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Bothretailandwholesalecompetitioncanandshouldthereforebepursued.Theformeris
guaranteedbyPartXICandthespecialaccessprovisionsrelatingtoNBNCo.Thelattercanbe
promotedbyremovingdisincentivestowholesalemarketentrywhileensuringthereis
effectivesupportforretailcompetition,potentiallyintheformofaccess,equivalence,and
appropriatenondiscriminationand/orseparationregulation.Removingthosedisincentivesis
obviouslyallthemoreimportantifNBNCoremainsasanintegratedentity;inthatevent,the
changesproposedbythepanelshouldbetreatedasamatterofconsiderableurgency.
7.5
Vertical integration issues
Inthepanelsconsiderationofrelaxingtherules,akeyissuewasthetermsonwhichan
alternativesuperfastnetworkprovidermayparticipateintheretailmarket.
Submittersimplicitlyacknowledgedtheoptionofallowingalternativenetworkstoengagein
theretailmarket,butalsohighlightedissuesaroundequivalenceofaccess,nondiscrimination
andtheseparationofwholesaleandretailactivities17.Thepanelagreesthatvertical
integrationisanissuethatanynewrulesmustaddress.
However,theneedforandtypeofbroadbandspecificregulationtoaddressvertical
integrationissuesdependsonthenatureandcharacteristicsofanetwork.Forexample,ifa
networkcoversalimitednumberofpremises,andisexposedtotheriskofdisplacement(not
leastbyNBNCo),thecostsofprohibitingverticalintegrationareverylikelytoexceedthe
benefits.Thiswouldparticularlybethecasewherethesuperfastnetworkrulesdonotapply
tothebulkofthepreexistingnetworkasaresultofpreviousgrandfatheringarrangements
(forexample,aswiththeupgradeoftheTransACTnetworkinCanberra).Inthatcase,a
prohibitionwouldrequirewhatamountstoringfencingapotentiallysmallsegmentofa
network,eliminatinganyefficienciesofintegrationwithoutyieldingdiscernablegainsin
greatercompetition.
However,whereanentirelynewnetworkisbeingconsideredtheapplicationofseparation
rulescouldbewarranted,solongastheresultwasnottodeterefficientinvestment.Even
then,however,theprecisearrangementsshouldbenomoreonerousorintrusivethancanbe
justifiedbytheneedtoprotectcompetition,andshouldnotdenycustomersthebenefitsof
rivalry,diversityandchoice.
17Equivalencereferstoaccessseekersbeingtreatedinthesameway,potentiallyinlikecircumstances,asthe
downstreamoperationofanetworkoperator.Separationreferstoparticularorganisationrules(for
example,structural,functional,operational,accounting)separatingbusinessunitstoreinforceequivalence
andnondiscrimination.Nondiscriminationreferstostrictprohibitionsonvariationinthetreatmentof
downstreamoperatorsandcustomers.Equivalenceandnondiscriminationoverlapbutaredifferent.For
example,ifacarrierwasallowedtohaveadownstreamoperationanddiscriminationwasallowed,
equivalencecouldstillberequiredinlikecircumstances,orgenerally.
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Thecaseforsuchalighthandedapproachismadeallthemorecompellingbythefactthat
alternativenetworksare,bydefinition,alternativetoNBNCo.Thatis,theywillfaceactualor
potentialcompetitionfromanextensive,wellfunded,wholesaleonlycompetitor,whose
operationsreceivesignificantsupportfromtaxpayers.Thiswillprovideadisciplineonany
verticallyintegratednetworkproviderinthewholesalemarketthathasnotexistedinthe
past.Addingtothatdiscipline,ifentryconditionsweremoresupportiveofcompetitionthan
thecurrentprovisions,theremightevenbeasecondalternativenetworkprovideracross
largepartsofthenationalmarket.
Giventheseconsiderations,thepanelrejectstheunqualifiedimpositionofanystructural
separation,wholesaleaccessand/orequivalence,separationand/ornondiscriminationrules.
Attemptstoimposearrangementsofthatkindarelikelytoworsentheartificialityofthe
currentarrangementsstiflingcompetitionwhilegivingrisetoperverseandunanticipated
consequences.Moreover,itisdifficulttoseewhythosearrangementswouldbenecessary,
giventheindustrystructurethatcouldemergeunderbetterpolicysettings.
Thatsaid,thepanelrecognisesthatsituationsmayarisewhereimposingstructural
requirementswouldbeintheLTIE.However,PartXICprovidesonlylimitedcapacityto
addressverticalintegrationissuesapartfromtheaccessdeclarationanddetermination
process.Theprocessesitestablishesarelikelytobetooweakorslowtoaddressanyvertical
integrationissuespromptlyandeffectively.Thepanelthereforedoesnotfavourtheoptionof
leavingthoseissuestoPartXICascurrentlydrafted.
Instead,itwouldbepreferabletoadoptanintermediatepositioninwhichdesirablelevelsof
accesscanbeensured,andadditionalcarrierspecificrequirementsrelatingtoequivalence,
nondiscriminationandseparationimposedasrequirementsofentryand/orongoingservice
provision,where(andonlywhere)theyareclearlyjustified.
Withsuchanintermediatepositioninmind,themainoptionsconsideredbythepanelto
addressverticalintegrationconcernswere:
retainrequirementstoofferLayer2wholesaleservices,ascurrentlyrequiredunder
Part7,butgivetheACCCnewpowerstoimposeseparation,equivalence,and/ornon
discriminationruleswhendoingsowouldclearlybeintheLTIE;and/or
retainstructuralseparationrulesascurrentlyrequiredunderPart8,butprovidefora
newundertakingprocess.OnceapprovedbytheACCCfollowinganassessmentbased
ontheLTIE,theprovisionsintheundertakingconcerningaccess,separation,
equivalence,and/ornondiscriminationwouldreplacethestatutoryrequirementsin
Part8.
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Underbothoptions,andtotheextentpossiblehavingregardtoacquisitionofproperty
considerations,the1kilometrestatutoryexemptionshouldbeabolishedtoensurethatall
alternativesuperfastnetworksweresubjecttothenewarrangements.
ThepaneldoesnotfavouranyMinisterialexemptionpowerinthesearrangements.As
NBNCoshareholderrepresentatives,Ministershaveapotentialconflictofinterestintheir
exerciseofexemptionsrelatingtosuperfastbroadbandmarketentryconditions.Instead,any
exemptionpowershouldbeexercisedbytheregulator.
Thefirstoption,ofanenhancedPart7,hasseveralweaknesses.Thedraftingoflegislationto
createspecificnewpowersfortheACCCtointerveneafterarollouthasoccurredwouldbe
complicated,suchpowerswouldbedifficulttoadministerandtheprovisioncouldleadto
unintendedconsequences.Furthermore,thereisariskthatanordertostructurallyseparate
wholesaleandretailactivitiesmayconstituteanacquisitionofproperty;ifso,thestructural
separationremedymaynotbeavailableunderthisoption,oronlyavailableatundulyhigh
cost.
Thesecondoptionhastheadvantagethatrequirementsforaccess,equivalence,non
discriminationorfunctionalseparationcouldbeestablishedasconditionsofexemption.
Further,thestructuralseparationoptioncanbeimplementedsimplybyrefusingexemption,
orcouldbemadearequirementinthefuturewerecertainthresholdconditionsmet.Under
thisarrangement,Part7wouldnotbenecessary.Thissecondoptionisthereforetheonethat
thepanelrecommends.
Intermsofhowthisoptionwouldoperate,thepanelproposesaprocessunderwhichcurrent
andprospectivesuperfastwholesaleoperatorscouldlodgeasuperfastnetworkundertaking
(SNU)settingoutconditionsthatreplacedefaultconditionsthatwouldbedefinedbyPart8.
TheACCCwouldberequiredtoacceptanundertakingunlesstheundertakingwasnotinthe
LTIE.TheLTIEwouldbespecifiedtobethatoftheenduserstheapplicantintendstoservice,
thusmakingimplementationofthetestmorepracticalandtimely.Moreover,byrestricting
considerationtothoseendusersdirectlyaffected,thepanelintendstoexcludearguments
aboutcrosssubsidy,asthoseshouldbetransparentlyaddressedthroughthesubsidy
arrangementsdiscussedinchapter8,ratherthaninthecontextofindividualentrydecisions.
TheamendinglegislationitselfshouldprovidetheACCCwithguidance,forexamplethatin
acceptinganundertakingitassessestheeffectoftheundertakingontheLTIEoftheproposed
endusers.Giventheenduringimpactofthesedecisions,theirimpactsonprivateproperty
rightsandtheirimplicationsforendusers,theACCCsexerciseofthatpowershouldbe
subjecttoreviewonthemerits.
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AlternativesuperfastnetworkproviderscouldofferarangeofconditionsinSNUs:
adoptingstandardaccessobligations(SAOs),orsomeothersetofobligationsthatstill
provideeffectivesupportforretailcompetitionbutaremoreappropriatetothe
providersintendedoperations;
publishingareferenceofferforLayer2wholesaleaccess;
supplyingservicesongenuinelyequivalenttermsandconditions;
supplyingservicesatarm'slengthtoitsownandothersoperations;
providingservicesaccordingtospecifiednondiscriminatoryrules;
providingnonstandardcontractstotheACCCforscrutiny;and/or
implementingaccounting,operationalorfunctional(legal)separationoftheirbusiness
activities.
TheprovisionofLayer2accesswouldbeanormalelementofsuchanundertaking,butthe
ACCCshouldbeabletoapproveanundertakingwithoutsuchaconditionifthisisintheLTIE;
itmayalsonotberequiredifaLayer2accessservicehasalreadybeendeclaredbytheACCC.
Suchanundertakingshouldnotprecludethelodgementofaspecialaccessundertaking
unlesstheundertakingsareinconsistent.
Decisionsabouttheacceptanceofundertakingsbytheregulatorshouldhaveregardto
matterssuchastheproposedsizeofthenetwork,thelevelandnatureofcompetitioninthe
localityofitsfootprint,thematerialityoftheexpectedimpactofthenetwork,thecostsand
benefitsoftheproposedregulation,andultimatelytheLTIEofendusersintheareathe
applicantintendstoservice.ThelegislationshouldalsorequiretheACCCtodefineminimum
undertakingrequirementsforparticularclassesofmarketsandsituations,e.g.smalllocal
carriersservingnewdevelopments,andforittoestablishmodelSNUsfornetworksthatfall
intothosecategories,whichcarriersservicingthosemarketscouldadopt.
TheundertakingprocesswouldgivetheACCCsignificantpoweroverinvestors.Toensure
investmentcertainty:
ACCCdecisionsaboutundertakings,includinganyassociatedconditions,shouldbe
subjecttomeritsreview;
thenewprovisionsshouldalsorequiretheACCCtopublishguidelinessettingouthow
itwillapplytheLTIEtest(theseguidelinesshouldhaveregardtothetestsappliedto
theNBNCoSAU)andtoactinamannerconsistentwiththoseguidelines;
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theACCCshouldberequiredtoconsultpubliclyandtoapproveoradviseofconcerns
withanysuchundertakingwithinthreemonthsofitsreceipt.Whereithasadvisedof
concerns,itmustmakeitsfinaldecisionwithinafurtherthreemonths,withthe
undertakingbeingdeemedtobeacceptediftheACCCmakesnodecision;
theburdenshouldbeontheACCCtoshowthatanundertakingisagainsttheLTIEof
endusersintheareatheapplicantintendstoservice.Inotherwords,theACCCwould
onlybeabletorejectanundertakingifthereareobjectivereasonstobesatisfiedthat
theharmcausedbyacceptingtheundertakingoutweighthebenefits;
undertakingsshouldhaveeffectforupto30years,inlinewithNBNCosSAU;and
theACCCshouldnotbeabletorecommendvariationstosuchundertakingsunlessthe
variationsareessentialtotheLTIEand(asthepanelproposesmoregenerally)should
acceptvariationsmadeinresponsetothoserecommendationsunlesstheyare
insufficienttomeettheconcerns.
Werethepanelsrecommendationsinrespectofmeritsreviewofthesedecisionsnot
accepted,thepanelrecommendsthattheACCCbeprovidedwithclearandspecificcriteriait
mustimplementinconsideringanundertaking.Inparticular,theACCCshouldberequiredto
acceptanundertakingunlessacceptancemeantthat:
Theproponentoftheundertakingwouldhavetheincentiveandmeanstodistort
competitionindependentmarkets;and
Thecostsofthosedistortionswouldbeenduringandmaterial,comparedwiththe
benefitstotheendusersitproposestoservefromitsoperationsandtothecostsof
theproposedregulatoryremedy.
7.6
Networks already exempted
Considerationalsoneedstobegiventohowthecurrentoranynewruleswillimpacton
existingnetworksoperatingunderMinisterialexemptions.
ThoseexemptedsuperfastnetworksthatarecurrentlyoperatedbyTelstraweregiventhis
statusontheexpectationthattheywouldbeintegratedintotheNBN.Iftheyarenot
integratedafterthecompletionoftheNBNrollout,thentheymustbeoperatedinamanner
consistentwithTelstrasSSUandthenewPart8regulatoryarrangements.
TheTransACTVDSLnetwork(whichisownedbyiiNet)hasexemptionsforitsrecentVDSL2
upgrade.ThesenetworksarecurrentlyexempteduntilthedesignateddateforTelstras
structuralseparation(thatis,currently30June2018).Thisisontheassumptionthat,bythe
timeTelstraisstructurallyseparated,TransACTshouldbeputtinginplacesimilar
arrangementsorshouldseeknewexemptions.TheTransACTexemptionsaresubjecttoa
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numberofconditions,includingthatitofferLayer3accesstoISPs.Amoreflexibleapproach
tothatexistingunderParts7and8wouldprovidescopetodealwiththefuturetreatmentof
theseTransACTnetworksinawaythatappropriatelybalancesthecostsandbenefitsof
particularregulatoryrequirements.
Asalreadynoted,thepanelproposesthatthe1kilometreruleberepealed.However,rights
relatingtoinfrastructureinstalledunderthecurrent1kilometreexemption(beforeacertain
datetobedeterminedbytheGovernment)shouldbegrandfathered.
7.7
Recommendations
ThepaneldoesnotbelievethereisapolicyjustificationforretainingthecurrentPart7ofthe
TelecommunicationsAct.Itshouldthereforeberepealed.
Havingreviewedarangeofpossiblealternatives,thepanelhasconcludedthattheprovisions
ofPart8shouldberetainedinsubstantiallyamendedform.Specifically,theprovisionsas
amendedwoulddefinesomedefaultconditionsentrantswouldhavetomeet,including
structuralseparation.Butthosedefaultconditionswouldbecapableofbeingoverriddenby
undertakingsacceptedbytheregulator,withthelegislationdirectingtheregulatortoapprove
undertakingapplicationsunlesstodosowouldbecontrarytothelongterminterestsofend
usersintheareatheapplicantintendstoservice.Thepanelenvisagesthattheundertakings
giveninseekingapprovalwouldspecifytermsandconditionsofthirdpartyaccess.
TheMinisterialexemptionprocessandthe1kilometreexemptioninPart8shouldbe
repealed,withappropriategrandfatheringprovisionsforinfrastructurealreadysubjectto
theseexemptions.Thelegislationshouldbedraftedtoavoidanyconstitutionalissuesarising
fromtheacquisitionofproperty,especiallyinrelationtoinfrastructurealreadyinstalledunder
theexisting1kilometreexemption.
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Recommendation3:Part7oftheTelecommunicationsAct1997andassociatedprovisionsof
theCompetitionandConsumerAct2010berepealed
Recommendation4:Part8oftheTelecommunicationsAct1997beamendedto:
a)
removethe1kilometreexemptionandtheMinisterialexemptionprocess,butprotect
existingprovidersrightsinrelationtoinfrastructurealreadyinstalledunderthe
exemptioneitherbyanongoingstatutoryexemptionorbydeemingsuchnetworksto
besubjecttoanundertakingundertheprocesssetoutbelow;
b)
provideforanundertakingprocessunderwhichsuperfastnetworkundertakings,if
acceptedbytheACCC,replacethePart8provisionsthatrequiresupplyofsuperfast
broadbandcarriageservicesonawholesaleonlystructurallyseparatedbasis;
c)
requiretheACCCtoacceptsuchsuperfastnetworkundertakingsunlesstodosowould
becontrarytothelongterminterestofendusersintheareatheapplicantintendsto
service,havingregard,amongstotherthings,towhethertheproviderhasasignificant
degreeofmarketpower,theincentiveandabilityfortheprovidertodistortcompetition
independentmarkets,theconditionsintheundertakingtoovercometheserisksand
theproposeddurationoftheundertaking;
d)
requiretheACCCtopublishandimplementguidelinesonhowitwillapplythelongterm
interestofenduserstesttoundertakingstheseguidelinesshouldhaveregardtothe
testsalreadyappliedtospecialaccessundertakings;theyshouldalsoincludemodel
superfastnetworkundertakingsforparticularclassesofmarketsandsituations,for
example,smalllocalcarriersservingnewdevelopments,whichcarrierswishingto
servicethosemarketscouldadopt;
e)
requiretheACCCtoconsultpubliclyontheacceptabilityofsuperfastnetwork
undertakingsreceived,andapproveoradviseofconcernswithanundertakingwithin
threemonthsofitsreceipt;whereithasadvisedofconcernsitmustmakeitsfinal
decisionwithinafurtherthreemonthsofthatadvice,withtheundertakingbeing
deemedtobeacceptediftheACCCmakesnodecision;
f)
subjectanACCCdecisiontoacceptorrejectsuchanundertakingtomeritsreviewor,in
theeventmeritsreviewisnotprovided,ensuretheprocessfortheassessmentofsuch
anundertakingissubjecttoclearandspecificdecisionmakingcriteriaspecifiedin
legislation;and
g)
enableaprovidertocombineaspecialaccessundertakingandanundertakingunder
Part8.
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8.Broadbandserviceprovision
8.1
Introduction
TheGovernmenthasmadeclearthatitiscommittedtocompletingtheNBNandensuringall
Australianshaveaccesstohighspeedbroadbandassoonaspossible,ataffordableprices,and
atleastcosttotaxpayers18.
NBNCoisthemainpolicyinstrumentbeingusedtoachievethisobjective.Undercurrent
policysettings,iteffectivelyhassoleresponsibilityforcompletingtheNBNanddelivering
wholesalebroadbandaccesstoallAustraliansataffordableprices.
ThisremitcreatesadefactoobligationonNBNCotoprovideservicenationallyataffordable
prices,fundedbytaxpayersandusersofbroadbandservices.However,despitethe
commitmentssuccessiveGovernmentshavemadeonbehalfofAustralianhouseholds,there
isnoclarityastotheserviceobligationsthatapplytoNBNCoandhowserviceaffordabilityis
tobemanagedintothefuture.TheNBNCoserviceobligationsdiscussedinthischapterwould
alsoapplytoanydisaggregatedNBNCoentity.
NBNCohasraisedwiththepanelitsconcernthatinfrastructurebasedcompetitioninmajor
urbanareaswouldundermineitsabilitytofundaffordableuniversalaccesstobroadband
infrastructureviaaninternalcrosssubsidy.Whetherthiswillbethecase,andtheextentof
anysucheffects,cannotreadilybedetermineduntilcompetitivesupplyemergesandinthe
absenceoftransparentpoliciesprovidingguidanceabout:
NBNCoscurrentandfuturesupplyobligations;
howaffordabilityistobedeterminedandachievedovertime;
theminimumstandardtowhichbroadbandaccessservicesaretobesuppliednowand
infuture;and
howanyrequirednetworkupgradesaretobefunded.
NBNCosinfrastructuresupplyobligations,includingfornewrealestatedevelopmentsand
forsupplyofaccessservicestonewcustomersonceitsnetworkhasbeenrolledoutinanarea
andthepricesitcanchargeforconnectionswillhaveasignificanteffectontheextentof
anysubsidyNBNComayrequire.Sotoowillthestandardtowhichitisobligedtoprovide
serviceandthewholesalepricesitcanchargeforitsminimumserviceoffering,aswellasfor
higherspeedservices.Intheabsenceofclarityaroundthesefactors,itwillbedifficultinthe
18RefertoShareholderMinistersStatementofExpectationslettertoNBNCoof8April2014.
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futuretoidentifywhether(andifso,towhatextent)anypoorfinancialresultsfromNBNCo
areorarenotadirectoutcomeofitsobligationstosupplyservicesinlossmakingsituations.
PolicyclarityintheserespectsisimportantinprovidingNBNCowithaclearunderstandingof
itsmissionandresponsibilities;developerswithlegalcertaintyastoNBNCosobligationsto
supplyservicesfornewdevelopments;RSPsandconsumerswithcertaintyastoNBNCos
serviceprovisionobligationsonceitsownaccessnetworkhasreplacedTelstrasnetwork;and
NBNCosactualandpotentialcompetitorswithcertaintyaboutthelegalframeworkinwhich
theywilloperate.Equally,Australiansdeservecertaintyastowhattheywillreceiveinreturn
forthecapitalcommitmentsmadebytheGovernmentontheirbehalf;andwhattheywillpay
towardsandreceivefromanyongoingsupportthatistobeprovidedtoNBNCoorother
broadbandserviceproviders,beitviacrosssubsidyorfromothersources.Consistentwith
theNationalCompetitionPolicy,consumersandtaxpayersareduefulltransparencyofany
subsidiesandaccountabilityfortheeffectiveandefficientdischargeofsocialobligations.
Inexaminingtheobligationsthatmightbeestablished,itisusefultosetoutsomepreliminary
observations.Unlesspricecontrolsareinplace,anobligationtosupplyahighcostareaneed
not,initself,giverisetolosses:itwillonlydosoifthepricesthemarketcanbeardonotcover
thecostsinvolvedinmakingserviceavailable.Asaresult,theneedforasubsidyhastobe
assessedconsideringbothobligationstoserveandanyconstraintsonthepricesthatmaybe
set.Thediscussionthatfollowsthereforebeginsbyexaminingtheissueofserviceobligations,
includinginnewdevelopments;thenitturnstoaffordableuserpricing;andlastly,itconsiders
howtheongoingsupplyofanymandatedlossmakingservicescanbefundedinanefficient
andsustainableway.Theissueoftheminimumstandardtowhichbroadbandaccessservices
aretobesuppliedandhownetworkupgradesaretobefundedinthefutureisdealtwithin
chapter9,whichconsidersNBNCosproducts,pricingandexpenditure.
8.2
Infrastructure provider of last resort obligations
DespitetheintentionthattheNBNwillreplacetheexistingTelstrafixedlinenetworkinlarge
partsofAustralia,thereisnoexistinglegalobligationforNBNCotoprovideongoingservice
afteritsnetworkrollouthasbeencompletedortooperateastheIPOLRcarrierinthose
serviceareas.Historically,Telstrasnetworkhasbeenusedtofulfilitslegalobligationto
supplythestandardtelephoneservice,whichhasbeenbroadlydefinedintermsofa
requirementtomakeserviceavailableatanyplacewithinAustraliaatwhichpeopleresideor
carryonabusiness.Undercurrentarrangements,Telstrahasa20yearcontractualobligation
tooperateastheretaileroflastresort;butthepanelisnotawareofanycorresponding
ongoinglegalobligationonanycarrier,otherthaninthe36smalladequatelyservedareas,to
providethefixedlineinfrastructuretosupportthisongoingretailsupplyobligation.
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ThissituationreliesontheGovernmentasshareholderdecidingwhen,whereandhow
NBNCoistoprovidefixedlineinfrastructure,andwhatserviceprovisionandcontinuity
arrangementswillapplyaftertheNBNrolloutiscompleted.
Ineffect,NBNCohastodatebeentreatedasifitwereamonopolysupplier.Underthis
assumedstatustheobligationsbeingimposedonitarenotspecifiedinlegislationbutrelyon
theGovernmentprovidingclaritythroughitsshareholderSOE,eventhoughthoseobligations
involvewhatcanmoreproperlybedescribedascustomerrights.TheApril2014SOEtoNBN
CobyitsShareholderMinistersexpressestheGovernmentscommitmenttocompletingthe
NBNbutissilentonNBNCosongoingsupplyobligations.
Inthepanelsview,NBNCosongoingservicedeliveryobligationsshouldbespecifiedin
legislation.Taxpayerequityfundingofupto$29.5billion,acceptancethatongoingservice
supplyinlossmakingareaswillbesubsidised,aswellasfundingtosupportthemigrationof
customersfromTelstrascoppernetworkrepresentamajorpubliccommitment.This
warrantsacorrespondinglegalobligationrelatingtowholesaleserviceprovisionbyNBNCo
andothercarriersthatformpartoftheNBNumbrella.Inanyevent,sucharequirementwill
needtobeputinplacepriortoNBNCobeingprivatisedotherwiseitsnewownerscould
choosetowithdrawfromunprofitablegeographicareasordeclinetoextenditsinfrastructure
intoareasortopremiseswhereitexpectstomakealoss.Thesamerequirementwouldarise
underallthefutureindustrystructuresconsideredbythepanel.
Thepanelappreciatestherewouldhavebeendifficultiesinplacingsupplyobligationson
NBNCowhenitwasastartupcompanywithnoinfrastructureandwithanuncertainrollout
completiontimetable.Itwouldbeundesirableforinconsistenciestoarise,however
inadvertently,betweenthedeploymentschedulefortheNBNthatmadethebestuseof
resourcesandNBNCosmandatedserviceobligations.Butthesituationischangingandwill
changefurtherasdeploymentprogresses.Attheveryleast,propertyownersinareaswhere
theNBNhasbeenprovidedneedtohavecertaintyaboutsupplycontinuingintothefuture,as
dothoseinareasthatwouldbeaffectedbyinfillserviceprovision.
Theissue,inotherwords,isthatofdevisingserviceprovisionobligationsthatareconsistent
withthefactthatthenetworkisstillatanearlystageofdeployment.Thiscouldbeachieved
byIPOLRobligationsonlytakingeffectaftertheinitialNBNrollouthasbeencompletedin
eacharea.ThiswouldprovideRSPswithcertaintyinrelationtoongoingaccessnetwork
provisionsotheycanconfidentlymakecomplementaryinvestmentsinbackhaulandother
servicesupportinginfrastructureinthatarea;andgiveconsumerscertaintythatrequestsvia
theirRSPforNBNCotoprovideinfrastructurewillbemetwhereitisreasonabletodoso.
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WithrespecttotheprecisescopeoftheIPOLRobligation,andassumingtheGovernment
remainscommittedtocompletingtheNBNsoastoensureallAustralianshaveaccesstohigh
speedbroadband,thefollowingapproachshouldbeadopted:
allAustralianpremisesshouldbeinapositiontoaccesshighspeedbroadband:so
whereitisnotbeingsoprovidedbyanotherentity,orisnotlikelytobesoprovidedby
anotherentity,NBNCowouldhaveanobligationtosupplythataccess,consistentwith
theefficientdeploymentofitsnetwork;
wherepremisesarecurrentlyserved(orareinfutureserved)byathirdparty,andthat
thirdpartyexitsthemarket,NBNCowouldhaveanobligationtoprovidecontinuityof
supplyusingthemostpracticalmeans,subjecttoarrangementsbeingmadefor
recoveryofcostsnecessarilyincurred;
fornewestates,developersshouldhavetheoptionofobtaininghighspeed
broadbandfromNBNCosubjecttoNBNCocompetingfairlyinthatmarket,with
NBNCohavinganobligationtosupplyaccessaswellastherighttochargeforthat
accessontermsandconditionsthatallowittorecovercostsitwouldnotincurinthe
normalcourseofbusiness.(Theissueofnewestatesisdiscussedinmoredetailat
section8.3.)
TheserecommendedIPOLRobligationsshouldapplytothebroadbandproviderineachofthe
designatedsatellite,fixedwirelessandfixedlineserviceareasundereachofthepanels
alternativemarketstructureoptions.
Itwouldbeefficientforthesupplyobligationsinthefixedlinebroadbandfootprinttoalso
includetheprovisionofinfrastructurethatsupportsastandardtelephoneservice;todo
otherwisewouldprobablyimposeunnecessarycostsonconsumers.
AnIPOLRobligationobviouslydoesnotmeanthatNBNCo(oranyanotherIPOLRcarrier)
shouldberequiredtoprovidebroadbandaccessfreeofcharge.However,giventheapproach
thathasbeenadoptedtothedeploymentoftheNBN,itwouldbeunreasonabletorequire
customerswhowerebeingforcedtomigratefromtheexistingcopperaccessnetworktothe
NBN(includingthefixedwirelessnetwork)ortotakeupafixedwirelessservicetoberequired
topayforthisreplacementaccessconnection,otherthanbymeansofnormalchargesfor
serviceprovision.Buttheconnectionofnewpremisestothenetworkbetheyinnew
estatesorinbrownfieldareasshouldbesubjecttothepaymentofareasonableconnection
chargethatreflectsthecostincurredinmakingthatconnection.
Thepolicyissueistoensurethereisapricesignalthatcanhelpinformdevelopmentdecisions
fornewpremiseswhilerecognisingthatcustomersinexistingpremisesarebeinggivenno
choicebuttoconnecttotheNBN.Thissituationmakesitdifficulttoframeachargefor
connectionstonewpremisesthatisbothequitableinitstreatmentofexistingandnew
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premisesontheonehandandhelpsguideefficientdevelopmentdecisionsontheother.
Thereisnoperfectwayofreconcilingthesecompetingconsiderations;thepanelsapproachis
toestablishaprocessthatrequiresNBNCotostandreadytomakethoseconnectionson
termsandconditionsapprovedbytheregulator.
Specifically,thepanelrecommendsthatthepriceandnonpricetermsandconditionsof
NBNCoprovisionofabroadbandconnectionservicetopremisesbeestablishedthrougha
newlegislativearrangementwhichrequiresNBNCotohaveanundertakingapprovedbythe
ACCCsettingoutthetermsonwhichitwillfulfilitsIPOLRobligations.Theprinciplewouldbe
thatNBNCohasnoobligationtoprovidenewservicesunlessitiscompensatedfortheir
provisioninaccordancewiththearrangementssetoutinitsapprovedBroadbandConnection
ServiceUndertaking(BCSU).DesignatedIPOLRcarriersinnonNBNCoserviceareasshould
similarlyalsoberequiredtohaveanapprovedBCSU19.
Thisundertakingshouldcoverallnewserviceprovisionsituations:migrationfromanexisting
copperconnection(wherenoconnectionfeewouldusuallybechargedbecausemigrationis
beingforcedonthosecustomers);newestatedevelopments(whereinitialconnectioncosts
shouldbeestablishedusingcompetitiveneutralityprinciplesandrecovered);brownfieldinfill
developments(wherechargesshouldreflecttheconnectioncostsreasonablyincurred,asfor
newestates);andforconnectionstoNBNCosfixedwirelessserviceandtoitssatelliteservice
(whereapplicable).Ineachcase,includingforthesatelliteandwirelessnetworks,the
incrementalcoststoberecoveredfromconnectionchargesshouldatleastrecoverthecosts
NBNCowouldavoidwereitinsteadservingapremisesthatisalreadyconnectedtotheNBN.
IftheGovernmentwishedtoretainpowertoinfluencethemaximumconnectioncharges
allowed,becauseofaconcernaboutongoingconnectionaffordability,itshouldprovidefor
thatinthelegislativeprovisions(andensurethatthereistransparentfundinginplacetodeal
withanyconsequentiallosses).
WhileIPOLRobligationscouldbeimplementedviacarrierlicenceconditions,thebetter
approach,giventheenduringnatureandsocialsignificanceoftheserequirements,wouldbe
toestablishthemthroughnewlegislativeprovisionswhichprovidefortheregulatorto
formallyagreetohowthecarrierwillgiveeffecttoitsobligationsandcreateenforcement
powersthatensuretheobligationsaremet.
LegislatingIPOLRobligationswouldmakefutureserviceprovisionrequirementstransparent;
complementarymechanismsshouldalsobeputinplaceatthattimetoallowforthose
obligationstobepursuedinwaysthatdonotinvolveNBNCo,shouldthatbejudgedtobea
moreefficientapproach.
19ThisenvisagesasituationwhereacarrierotherthananNBNCosuccessorisdesignatedanIPOLRforanarea;
forexample,whereacarrierservicesalargenumberofpremisesinnewdevelopments.
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Recommendation5:NBNCosongoingservicedeliveryobligationsbeenshrinedin
legislation.Newlegislativeprovisionsprovidethat:
a)
allAustralianpremisesbeinapositiontoaccesshighspeedbroadband,sowhereitis
notbeingsoprovidedbyanotherentity,orisnotlikelytobesoprovidedbyanother
entity,NBNCo(oranalternativedesignatedprovider)hasanobligationtosupplythat
access(astheinfrastructureprovideroflastresortIPOLR).Thatobligationbecome
effectivewhenNBNCohascommencedserviceprovisioninanarea;
b)
whereapremisesiscurrentlyserved(orinfutureserved)byathirdparty,andthatthird
partyexitsthemarket,NBNCo(orthedesignatedprovider)hasanobligationtoprovide
continuityofsupplyusingthemostpracticalmeans,subjecttoarrangementsbeing
madeforrecoveryofcostsnecessarilyincurred;and
c)
thepriceandnonpricetermsandconditionsofNBNCo(orthedesignatedprovider)
provisionofabroadbandconnectionservicetopremisesbeestablishedthrougha
requirementthatNBNCo(orthedesignatedprovider)haveaBroadbandConnection
ServiceUndertakingapprovedbytheACCCsettingoutthetermsandconditionson
whichitwillfulfilitsIPOLRobligations.
8.3
Infrastructure and service in new developments
Nothingshouldpreventadeveloperfromrequestinganyprovider(beitNBNCoorsome
otherprovider)tosupplyinfrastructurein,andtoservice,theirestate.However,the
infrastructuresuppliedshouldbeofanNBNconsistentstandard.AnonNBNCocarrier
providinghighspeedcarriageservicesoverthatnetworkwouldneedtobecompliantwiththe
provisionsinPart8(asrecommendedbeamended)oftheTelecommunicationsActor
operateunderaPart8exemptionundertakingapprovedbytheACCC.
ThepanelsrecommendedIPOLRpolicywillprovidedeveloperslegalcertaintythattheyhave
theoptionofobtaininghighspeedbroadbandinfrastructureandwholesaleservicesfrom
NBNCo(orthedesignatedIPOLRcarrierforthegeographicareainwhichtheestateis
located),subjecttoitsreasonablecostsbeingrecovered,withthepricesitchargesandother
termsandconditionsofsupplybeingdeterminedthroughtheBCSUapprovalprocess.
However,wherethedeveloperhasnotprovidedtherequiredpitandpipeinfrastructure,
NBNCo(orthedisaggregatedbusinessunitIPOLR)wouldnotbeobligedtosupplyservice.It
wouldalsohavenosupplyobligationswhereaccessisbeingprovidedbyanotherentitybut,
equally,wouldnotbeprohibitedfromprovidingaccess.Itsobligationtoprovidecontinuityof
supplyintheeventofanetworkproviderfailingwouldneedtobedefinedandstructuredina
practicalmannerandshouldinprinciplebesubjecttotheunderlyingassetspassingtoitorits
costsbeingotherwiserecoverable.
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Therecommendedapproachtoinfrastructureprovisioninnewdevelopmentsissummarised
below.Additionalinformationaboutpossibleimplementationandtransitionalarrangements
isprovidedinAppendix5.
Context
Anumberofcompetitiveneutralityandconsumeroutcomeissueshavearisenintheprovision
oftelecommunicationsinfrastructureinnewestatesunderthecurrentNBNpolicyframework.
Addressingtheseissuesisimportantbecauseeveryyeararound140,000newresidencesare
builtinAustralia.DuringtheperiodoftheNBNrollout,anestimated2.1millionnewpremises
willbebuiltandwillneedaccesstomoderntelecommunicationsinfrastructure20.The
provisionofinfrastructureinnewdevelopmentsisasignificantcapitalexpenseforNBNCo,
involvingplannedexpenditureofover$3billion21intheperiodfrom2010to2020;thisisa
substantialburdenontaxpayerswhenthereis,primafacie,scopeforgreaterprivatesector
involvementthatmightreducethatburden.
Current arrangements
Thecurrentarrangementsarecomplexandhaveonlyapartiallegislatedunderpinning:
NBNCo(fordevelopmentsover100lots)andTelstra(under100lots)shareresponsibilityfor
thesupplyofinfrastructureintheabsenceofanalternativesupplier;anddevelopers(thatare
constitutionalcorporations)arerequiredtoinstallpitandpipeinfrastructureandtotransfer
itsownershiptotherespectivecompaniesasacommercialconditionofprovidingservice.
Thearrangementshaveraisedavarietyofconcerns.Thoseconcernsinclude:NBNCo(and
Telstrafortherolloutofcopper)notimposingupfrontchargestoservicedevelopmentswhile
smalleralternativeprovidersgenerallyseektorecovertheircostsfromdevelopersaspartof
theirbusinessmodels(creatinganincentivefordeveloperstouseNBNCoorTelstrarather
thanalternativesuppliers,regardlessofrelativeefficiency);delaysinnewdevelopmentsbeing
serviced;developersfailingtosubmitinstallationapplications;failureofsmallcarriers
servicingnewdevelopments;andnocostdisciplineindecidingwheredevelopersundertake
developmentsbecausetheydonotbearthecostofprovidingbackhaultoanewestate.
20NBNCoStrategicReview,p.46.
21NBNCo,StrategicReview,p.61.TheStrategicReviewstatescapexonnewdevelopmentstoFY2021was
expectedtobe$3.4billionunderpreviousCorporatePlan(201215CorporatePlanwhichwasendorsedby
theGovernmentandpubliclyreleased)andcapexfortheRevisedOutlooktoFY2024wasexpectedtobe
$3.4billion.
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SubmissionstotheRegulatoryIssuesFramingPaper22fellintotwobroadcamps.Thosewho
generallysupportedtheexistingarrangementslargelybenefitedfromthemNBNCo,
propertydevelopers,andaccessseekers.Thosewhoopposedthearrangementswere
generallyalternativeproviders,suchasOpticommandthemembersoftheGreenfieldFibre
OperatorsofAustralia(GFOA).
Thosewhoopposedthearrangementsarguedthatdevelopershavenoexperienceordesire
todesignandbuildpitandpipe23andthatthereshouldbemarketdriveninfrastructurebased
competitioninnewdevelopments24.Theyalsooutlinedalternativeprovisioningmodels:
limitingNBNCosroleinnewdevelopmentstothedeploymentofnetworksinremote,non
metroareas25;requiringNBNCotochargeforinstallationsinnewdevelopmentsona
commercialbasis26;allowingdeveloperstocontractandfundtheprovisionofinfrastructure,
withsubsidisationfromNBNCo27;andrequiringNBNCotoreopentendersforbuildoperate
transfernetworks28.
Thepanelseesthecreationofanefficientandeffectivemarketplace,whichdeliverstimely,
highquality,sustainableinfrastructureoutcomesforconsumersinnewdevelopments,asthe
keygoalinthisarea.Thatmarketshouldalsoprovidedeveloperswithpricesignalsthatcan
helpguidethelocationalaspectofdevelopmentdecisions.
The proposed approach
ApplicationoftheprinciplesoutlinedaboveforIPOLRprovisionofservicemeansthat
NBNCosprovisionofinfrastructureandserviceinnewestates,includingbackhaulwhere
alternativesupplyisnotavailable,wouldbesubjecttothepaymentofinstallationand
connectionchargesbydevelopersandendusersthatreflectthecostsreasonablyincurred.
ThisapproachreflectsthefactneitherNBNConoranyoneelseshouldberequiredto
subsidisedevelopersandalternativeproviders.Rather,developersshouldfactorinthefull
costsofprovidingalltheinfrastructurerequiredwhenmakingtheirinvestmentdecisions,
ratherthanhavingthosecostspartlybornebytaxpayersorbyconsumersthroughpoorly
specifiedcrosssubsidyarrangements.
22TheRegulatoryIssuesFramingPaperwasreleasedbythepanelon13February2014.
23Opticomm,p.2.
24GreenfieldFibreOperatorsofAustralia,p.2.
25GreenfieldFibreOperatorsofAustralia,pp.45.
26GreenfieldFibreOperatorsofAustralia,p.4.
27PropertyCouncilofAustralia,p.5.
28CommunicationsAlliance,p.10;Opticomm,p.10.
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Developersshouldbearthesecostsbecausetheyaredirectlyrelatedtothedesignand
locationofthedevelopmentbothofwhicharewithinthedeveloperscontrol.Ultimately,
anycostsdevelopersarerequiredtomeetwillbepassedontolandownersandpurchasers,
affectinglocationaldecisions.Renderingthesecostsexplicitandensuringtheyarefactored
intodevelopmentdecisionswillthereforepromoteeconomicefficiency.
Nonetheless,thepanelismindfulofNBNCosmarketpower,andtherisksitposesto
developers,endusersandcompetitors.WherethedeveloperreliesonNBNCo(orthe
relevantdisaggregatedNBNcompany)forinfrastructureprovision,itwouldconsequently
havetobedoneatpricesnohigher,andtermsandconditionsnolessfavourable,thanthose
establishedthroughanapprovedBCSU,aswouldtheconnectionofcustomersusingthat
infrastructure.NBNCoscompetitorsinthismarketcouldthencompeteintheknowledgethat
thosetermsandconditionhadbeenassessedbytheACCCagainstcompetitiveneutrality,
equityandefficiencyprinciples.Thiscreatesafairandeffectivemarketforthesupplyof
connectionservicestonewestates.
Underthepanelsrecommendedapproach,developerswouldbearthecostofinstallingboth
telecommunicationsinfrastructure(whichtheycurrentlydonotifNBNCoorTelstrais
deployingtheinfrastructure)andpitandpipeinfrastructure(whichdeveloperscurrently
fund).Thisapproachisgenerallyconsistentwiththemannerinwhichotherutility
infrastructureisprovidedinnewdevelopments.
Aspartofthescheme,developersshouldberequiredtoinstallpitandpipemeeting
appropriatefibrereadyconstructionstandards.Competingcarriersshouldalsoinstallother
infrastructuretoNBNconsistentstandards.ThiscouldbeachievedbytheCommonwealth
providingguidancethatcouldbereflectedinstateandterritoryplanninglawand/or
establishingappropriaterulesinstatuteorlicenceconditionsoncarriersservicingnew
developments.Whetherthecarriersprovidingtheseserviceswerewholesaleonlyornot
woulddependonwhethertheyhadexemptionsfromtheACCCunderthearrangements
proposedforPart8oftheTelecommunicationsAct.
Anindustrybasedaccreditationschemetoidentifycapableandexperiencedcarrierscould
assistdevelopersintheirchoiceofprovider.Industrycouldalsoconsidermechanismstohelp
coordinatestrategicplanning,assisttheprovisionofinfrastructurebycompetingproviders
acrossdevelopments,bringnetworkoperatorsandRSPstogetherandinformconsumers
aboutwhoisservicingtheirestate.
Acompetingcarrierservicingadevelopmentwouldgenerallybeexpectedtoserviceall
premiseswithinthedevelopment.Intheeventitfailedtodoso,NBNCowouldcontinueto
havetheobligationtoservicethepremisesasIPOLR.Thepaneldoesnotconsideritrealistic
tohaveamosaicofsmallIPOLRsacrossAustralia,servicingamultiplicityofsmallestates.
NBNCocouldfulfiltheseobligationsbyoverbuildingthedevelopment(thusprovidingan
incentivefortheincumbentcarriertoserviceallpremises)orbycontractingwiththe
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incumbentcarrier.Astheincumbentcarrierwouldbesubjecttoaccesschargesthatwere
determinedunderPartXIC(orSchedule1oftheTelecommunicationsActinthecaseofpit
andpipe),thiswouldpreventitdemandingexcesschargesfromNBNCoastheIPOLR.Asa
safetynet,theGovernmentcouldalsoindicateitreservedtherighttoimposeanIPOLR
obligation(specificorgeneral)onanycarrierservinganewdevelopment.
Themainimplementationissuearisingfromthisrecommendedschemeisthat
Commonwealthlegislationcannotimposerequirementsondevelopersthatarenot
incorporatedunderthecorporationspowerandmanydevelopersarenonincorporated.
UnlesstheCommonwealthstelecommunicationspowercouldbeusedtothisend,itwould
benecessaryforstateandterritorygovernmentstoamendtheirplanninglawstoplacethis
responsibilityonalldevelopersachangethatcouldbepursuedthroughtheCouncilof
AustralianGovernments(COAG).Afailureofthestatesandterritoriestoamendplanninglaws
wouldruntheriskthatdevelopersmightchoosenottoprovidetherequisiteinfrastructure
nororganiseacarriertoservicetheirestates,leavingtheirresidentswithoutservice.While
developersleavingresidentswithoutserviceisunlikely,asdoingsowouldreducethevalueof
thedevelopment,itcannotbeentirelyruledout.
AlthoughNBNCo(ortherelevantdisaggregatedNBNcompany)wouldnot,underthepanels
recommendedarrangements,takeonIPOLRresponsibilitiesinitsplannednetworkfootprint
untilithasanetworkpresence,transitionalarrangementsthroughalicenceconditionorthe
shareholderSOEshouldcreateIPOLRlikeresponsibilitiesfornewdevelopmentswithinthe
proposedfootprintbeforethattime.ItwouldalsomakesenseforTelstratocontinueto
servicesmallerdevelopmentspendingitsstructuralseparationorNBNCosrolloutinanarea.
Transitionalarrangementswillbeneededtomovetothenewarrangementsinawaythatis
leastdisruptivetoserviceprovisionobjectives.Theimplementationofanychangesis
complicatedbythefactthatNBNCoalreadyhasover5,000contractscoveringmorethan
200,000newlotsandpremises,andhasassigneditsowncontractorstobuildinsomeofthese
areas.Anycomprehensiveconsiderationoftheissuesmustthereforealsoaddressthese
alreadycontractedareas.Thesecontractscouldbelefttoruntheircourseor,wherepractical,
reallocatedcompetitivelyorofferedtoalternativeoperatorsonafranchisebasis.
Developersmayobjecttohavingtomeetthecostofprovidingtelecommunications
infrastructure,astheyhaveinrespectofotherinfrastructurechargesimposedbystateand
territorygovernments.Moreover,developmentprojectshavelongleadtimesanddevelopers
willarguethatmanyprojectsarewelladvancedandthattheyhavenotfactoredinpotentially
significanttelecommunicationscostsintheircostingandbusinessplans.Someofthese
concernsmaybeallayedbyappropriatetransitionalarrangementsandanacceptable
implementationtimeline.Additionally,asnotedabove,thepanelsrecommendationsinclude
arequirementforNBNCoschargestobereviewedandapprovedbytheregulator,thus
allayinganyconcernaboutpotentiallyunreasonablecharges.Toensuredeveloperandwider
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concernsaboutmeetingthecostoftelecommunicationsareaddressed,asoundlyreasoned
communicationsprogramwillneedtobeputinplace.
Recommendation6:Nothingshouldpreventadeveloperfromrequestinganyprovider
(whetheritbeNBNCoorsomeotherprovider)tosupplyinfrastructurein,andtoservice,
theirestate.TheGovernmentshouldcreateafairandeffectivemarketforthisworkby
implementingthefollowingarrangements:
a)
thecostsofprovisionofbroadbandtelecommunicationsinfrastructureinnew
developmentsshouldbebornebydevelopersandcustomersthroughconnection
charges,therebyfacilitatingcompetitioninthesupplyoftheseservices;
b)
providersservicingnewdevelopmentsshouldhavefreedominsettingtheirchargesfor
developersandconnectionchargesforcustomers;NBNCoschargesshouldbe
competitivelyneutralandestablishedthroughitsACCCapprovedbroadbandconnection
serviceundertaking;and
c)
toensuredevelopersmeetthecostofprovidingtelecommunicationsinfrastructure,the
CommonwealthshoulduseCouncilofAustralianGovernmentprocessestosecure
changestoStateandTerritoryplanninglawstorequiretheprovisionofsuch
infrastructureasaconditionofdevelopmentapprovalandoccupancy;theGovernment
shouldalsofurtherexploreitsabilitytolegislatetoachievethesameoutcome.
Recommendation7:Transitionalmeasuresbeusedtoassistwithimplementationofthe
recommendednewdevelopmentarrangementssoitisleastdisruptivetoserviceprovision
objectives.Aspartofthesemeasures,theGovernmentshould:
a)
setadatefortheintroductionofdeveloperchargingthatminimisestheimpactonthe
costofdevelopmentsalreadyinplanningorunderway,butdoessoinawaythatavoids
arushofdevelopmentsbeinglodgedwithNBNCoandTelstrawithaviewtosecuring
freeinstallationofinfrastructure;
b)
investigatewhetherNBNCosexistingcontractscouldbereallocatedtoalternative
providersinafairandefficientwaywithaviewtomaximisingoperationalefficiency;
c)
publishaclearroadmapandtimetablefortheintroductionofthenewarrangements
andthetransitionalrulesthataretoapply,includingfordevelopmentsalreadyunder
contract;and
d)
putinplaceacommunicationsprogramtoexplaintherationalefordevelopersbeing
requiredtomeetthecostoftelecommunicationsinfrastructureintheirestates.
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8.4
Affordability
Aswellasubiquitousavailability,itisalsoanintegralelementofGovernmentpolicythathigh
speedbroadbandservicebeaffordable.
ThepreviousGovernmentspolicywasforNBNCotoputinplaceanimplicitcrosssubsidyto
achieveuniformnationalwholesalepricingfordesignatedproducts.The2010SOEtoNBNCo
requiredproductsonthesametechnologicalplatformstobeavailablenationallyatthesame
prices.Further,thebasicaccessproduct(thatis,the12/1Mbpsservice)wasrequiredtobe
availableonallplatformsatthesamepricenationally,andsimilaroutcomesweretobe
achievedforotherproductswherepracticable.Effectively,thatmeanttheuniformpricing
provisionappliedtothebasicaccessproduct,butthatotherproductsmightormightnotbe
uniformlypriced,dependingonwhetheritwaspracticableforthemtobeso.
Subsequenttothechangeingovernment,anewSOEwasissued.ThatStatement,releasedby
theGovernmentinApril2014,doesnotcontainarequirementwithrespecttouniformityof
wholesaleprices:amatterwhichfallswithinthetermsofreferenceofthispanel.
NBNCosimplementationreflectsthepolicysettingdeterminedbythe2010SOE.Three
aspectsofthosesettingsareworthnoting.
First,shortlyafterthe2010statementwasissued,NBNCoreleasedwholesaleproducts
providinguniformnationalwholesalepricingonthefibrenetworkandforthe12/1Mbps
serviceacrossplatforms.InFebruary2013,thethenGovernmentannouncedNBNCowould
offer25/5Mbpsservicesonitsfixedwirelessandlongtermsatelliteplatformsatthepriceon
whichtheyareofferedonitsfibrenetwork.
Second,soastoensureNBNCo,ingivingeffecttouniformnationalpricecapswouldnotbein
breachofrelevantcompetitionlaw,thepreviousGovernmentintroducedDivision16into
PartXIBoftheCCA.Division16authorises,forthepurposesoftheCCA,certainconductby
NBNCothatisreasonablynecessaryforittoachieveuniformnationalwholesalepricing.This
conductrelatestorefusaltointerconnectotherthanatlistedPOIs,thebundlingofservices
andcrosssubsidisinginchargingforservices.
Third,NBNCosSAU,acceptedbytheACCCinDecember2013,broadlyreflectedthese
elementsofpolicyasitthenstood.However,itestablishedmaximumpricecaps,ratherthan
actuallyspecifyinguniformprices.
Submissions
Havingsolicitedsubmissionsontheseissues,thepaneldidnotreceiveresponsesexpressing
strongviewsonuniformnationalwholesalepricing.However,NBNCoarguedthattherewasa
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tensionbetweengreatercompetition,itsabilitytoofferuniformnationalwholesalepricing
anditscommercialviability,sayingthat:
infrastructurebasedcompetitioninmajorurbanareaswouldundermineNBNCos
abilitytofundaffordableuniversalaccesstobroadbandinfrastructureviaaninternal
crosssubsidy(i.e.viauniformnationalwholesalepricing).Anychangetoexisting
arrangementswouldrequirethepaneltoconsideralternativemodelsoffunding,suchas
subsidymechanismsandindustrylevies(p.4).
Panels views on affordability
AffordabilityisintendedtoensureallAustralianscanaccesshighspeedbroadbandservices,
shouldtheychoosetodoso,withoutunduefinancialsacrifice.Traditionally,thisgoalhas
combinedverticalequity(thatis,theobjectiveofensuringthatirrespectiveofincomelevel,
allhouseholdscanaffordtheservice)andthegeographicaldimensionofhorizontalequity
(theobjectiveofensuringhouseholdscanaccessagivenserviceonsimilarterms,regardless
ofwheretheyarelocated).Withbothobjectivesbeingpursuedbyasingleinstrument(the
uniformnationalprice),substantialdistortionsarelikelytoresult.
Thus,theuniformpricecouldbenefitwealthyhouseholdsinhighcostregionalareas(who
wouldobtainserviceatlessthancost),whileimposingalarge,butdisguised,taxonlow
incomehouseholdsinlowcostmetropolitanareas(whopaychargeswellabovecosts).Rather
thanadvancingsocialequity,thiswouldundermineit.Indeed,theuniformnationalpricingof
accesstotelephonyinAustraliahadexactlythiseffectformostofthe20thcentury,providing
alargetransfertoownersofagriculturallandattheexpenseofpoorerconsumersinthe
urbanareas.
Atthesametime,sincedemandfortelecommunicationsusage(thoughlesssobasicaccess)is
relativelypriceelastic,theuniformpricecanleadtoallocativeinefficiency(thatis,some
consumerswhovaluetheserviceatlessthantheattributablecostofitsprovisionconsumeit,
whilesomewhovalueitatmorethanattributablecostdonot).Thedistortionsarethen
magnifiedifthefactthatpricesdonotproperlysignalcostsbluntstheincentivesfor
efficiency,asneitherconsumersnorregulatorsarenecessarilyawareofunderlyingcostsand
hencemayhavedifficultyinobservingthepotentialtosecureproductivitygains.
Lastbutnotleast,pricedistortionsbothprovideapolicyrationaleforimpedingcompetition
(soastoprotectcrosssubsidies)andbyencouragingcherrypickingcandistortwhatever
competitionemerges.Thisreadilytranslatesintoaformoftaxationbyregulationthatlacks
transparency,weakensaccountability,andachievesitsobjectivesatunnecessarilyhighcost.
SincetheHilmerreformsofthe1990s,governmentsmindfuloftheserisks,havesoughtto
betteralignpriceswithunderlyingcosts,whileaddressingequityconcernsdirectly.Reflecting
thisbroadlyheldconsensus,thepaneldoesnotsupportimposingauniformnationalpricing
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constraintonNBNCo.Indeed,inthepanelsview,suchaconstraintwouldbeespecially
sociallycostly,forreasonsthatincludethefollowing:
thedemandforhighspeedbroadbandservices,especiallythoseinthetopspeedtiers,
isrelativelypriceandincomeelastic.Thisimpliesboththatdistortingpriceswillleadto
substantialallocativeinefficienciesandthatcrosssubsidiesmayhavearegressive
impactonincomedistribution;
taxpayersratherthanconsumerswill,formanyyears,bearthemajorityofthecostsof
theNBN.Thismakesitallthemoreimportanttoavoidopaque(andpossiblyperverse)
incomeredistributioneffects,butthesearealmostinevitablewhenpricesarenot
alignedwithcosts;and
governmentownershipanditsrelianceontaxpayerfundingmakeitcrucialthat
NBNCobeexposedtocompetition,asitindeedwouldbeevenunderthecurrent
legislation.However,priceuniformityhasthepotentialtodistortthatcompetition,
artificiallyencouragingitinlowcostareaswhiledeprivingendusersinhighcostareas
(wherethesocialgainsfromreducingcostscouldbeparticularlygreat)ofitsbenefits.
Thepanelrecognisesthatgeographicalpricedifferencescouldraiseconcerns.Inconsidering
thoseconcerns,thepanelnotesthataffordabilityprimarilyrelatestoretailprices;butany
uniformpricingobligationonNBNCowouldoperateatthenetworklayer.Evenwithuniform
nationalwholesaleprices,retailpriceswilldependonthecostsassociatedwithserving
particularareas,thelikelydemandinthoseareasandtheextentandnatureofcompetition
betweenRSPs.Asthesemaydiffersignificantlyfromareatoarea,thedegreetowhichretail
consumersultimatelyexperienceuniformpricesisinherentlydifficulttopredict.Moreover,
evenuniformpricesmaybeundulyhighforthemorevulnerableconsumers.Ifthegoalisto
protectthoseconsumers,uniformpricingisbothabluntandpotentiallyineffectivewayof
doingso.
Additionally,experienceshowsthattheprimaryfactorsprotectingandadvancingservice
affordabilityovertimeareproductivitygainsonthesupplyside(whichallowpricestofallin
realterms)andrisingincomesonthedemandside(whichmakethosepricesincreasingly
affordable).Withtelephony,forexample,penetrationincreasedinnonmetropolitanareasas
ofthe1960snotbecauseofpricinguniformitybutbecausehigherincomesandlowercosts
stimulatedconsumerdemand.Equally,thepanelexpectsthatitwillbetheincreased
attractivenessoftheservice,underpinnedbytechnologicalprogress,risingproductivityand
growingincomes,thatwillbebyfarthemostimportantdeterminantoflongtermtakeup.
ThisisconsistentwithNBNCosSAU,whichstipulatesrealannualpricereductionsof1.5per
centovertheperiodto2020,althoughtheimpactofthosereductionsistosomeextentoffset
bytheimpactofrisingrevenuesfromusage.
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Thatdoesnotmean,however,thatpricesfortheserviceshouldbeunregulated.Rather,as
NBNCowillenjoyaverysubstantialdegreeofmarketpower,itisappropriatethatitsservices
bedeclaredanditschargescontrolled,asisindeedthecaseunderthecurrentSAU.
Thepanelthereforerecommendsthataffordableuserchargesbeaddressedintheshortterm
throughauniformnationalpricecappingpolicy;thisisamorerealisticoptionthanauniform
nationalpricingpolicy,whilestillensuringconsumersthroughoutAustraliaareproperly
protectedfrommonopolypricing.Aswellasmatchinglongstandingarrangementsforother
declaredservices(wheretheregulatedchargesareacap,ratherthanafixedprice),this
approachmerelyrecognisestheflexibilityalreadyprovidedforintheSAU.
Overtime,however,chargesandcapsinhighercostareaswouldgraduallymovetolevelsthat
takethosehighercostsintoconsiderationmuchaswasdonebytheACCCinestablishing
pricingbandsforULL;withoutsuchpriceadjustments,customersinthoseareaswillforever
faceongoingmonopolysupplyasbelowcostpricingwillmakeanymarketentryfinancially
unattractive.Thisdifferentialpricingapproachwouldreducethelevelofcrosssubsidywithin
NBNCospricesandthereforediminishthepotentialimpactsofcompetitiononNBNCos
viability.Totheextentthattheresultingpricesraisedconcernsaboutongoinguser
affordability,thoseconcernswouldbebetteraddressedthroughmoredirectlytargeteduser
subsidies(asdiscussedbelow).
Recommendation8:ApolicyofpricecappingforNBNtypeservicesbeadopted,underwhich
pricescontinuetobeaffordablebutnotnecessarilyuniformnationally.Thisshouldbe
accompaniedbyagradualmovetowardscostbasedwholesalepricing,withdirectlytargeted
subsidiesusedtoaddressanyconcernsregardinguseraffordabilitythatmayresultfromthis
change.
Recommendation9:IftheGovernmentacceptsthepanelsrecommendationstodivest
NBNCoofitsfixedwirelessandsatelliteoperations,thesettingofcapsonthepricesthatcan
bechargedforservicessuppliedbythosenetworksshouldbepartofthedivestmentprogram.
Authorisation for uniform national wholesale pricing
WithrespecttoauthorisationsprovidedunderDivision16ofPartXIBofconductreasonably
necessarytoachieveuniformnationalpricing,theseprovisionswerereviewedbyateamfrom
DeloitteAccessEconomicsledbyDrRicSimesin2013.Thereviewfoundthatthestatutory
authorisationshadnotgivenrisetoconductthathasattractedpracticalconcernsaboutthe
operationofDivision16ofPartXIBoftheCCA.Nonetheless,theteamsuggestedthe
arrangementsbekeptunderreview.
Thepanelisnotconvincedthereisaneedfor,ormeritin,thoseprovisions.Thebroadscope
oftheprotectionstheyprovidecouldbeusedbyNBNCotopreventreasonablerequestsfor
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interconnectionandunbundling.Moreover,removingthoseprotectionswouldnotprevent
NBNCoactinginwaysreasonablyrequiredtomeetanypricingobligationsconsequenton
Governmentpolicy.
ThusitisdifficulttoseehowconductthatmerelygiveseffecttoGovernmentpolicywould
amounttotakingadvantageofmarketpowerorhavetheproscribedpurposessetoutins.46
oftheCCA.Asregardsconductthatmightotherwisebreachss.45and47,authorisations
couldbesoughtfromtheACCCforthatconduct,ifthepublicbenefitsitgivesrisetooutweigh
thecompetitivedetriments.
Asaresult,thepanelrecommendsthattheseprovisionsberepealed.RecognisingtheACCC
willrequiretimetoconsideranyauthorisationsthatmightbesoughtalongthelinesdiscussed
above,therepealshouldbedelayedbyaround18months.ThedelaywouldallowNBNCoto
makeanyauthorisationapplicationsitbelievesarewarranted.
RepealingtheDivision16provisionsmayhelpsubjectNBNCotofurthercompetitive
pressures.Forexample,whilethecurrentPOIarrangementsprovideareasonablebasisfor
competitorstointerconnectwithNBNCosnetwork,technologicalinnovationssuchasoptical
switchingmaymakeittechnologicallyandeconomicallyfeasibletointerconnectatmore
pointsofthenetwork.PotentialinfrastructurecompetitionwouldplacepressureonNBNCo
toprovideitsservicesatpricesbelowthelevelwhereitbecomesattractiveforcompetitorsto
demandmoregranularinterconnection.Equally,removingNBNCosabilitytorefuse
unbundlingunderDivision16couldputpressureonNBNCotodelivertheservicesdemanded
byretailserviceproviders,ratherthanrelyingontacticssuchasbundlingtocompelits
customerstopurchaseproductsthattheymaynotrequire.
Recommendation10:Division16ofPartXIBoftheCompetitionandConsumerAct2010,
whichprovidesauthorisationsforNBNCotoconductactivitiesreasonablynecessaryto
achieveuniformnationalwholesalepricingthatmayotherwisebefoundtobeanti
competitive,berepealed.TherepealdateshouldbedelayedtoprovideNBNCowithan
opportunitytoapplyforanyauthorisationsitmayrequireunderPartIVoftheCompetition
andConsumerAct2010.
8.5
Subsidy
Policy principles relating to funding of lossmaking service provision

Securingtheaffordabilityofhighspeedbroadbandservicesinhighcostareashasbeenan
importantelementintheNBNpolicyframework.Underthecurrentarrangements,this
objectiveissecuredthroughNBNCoscommitmenttouniformnationalwholesalepricing,
supportedbyinternalcrosssubsidiesfromlowcostareastohighcostareas,particularlyto
thefixedwirelessandsatellitenetworksinregionalandremoteAustralia.Thisraisesthe
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questionofthepreciseobjectivebeingpursuedandofthemeansbywhichitshouldbe
pursuedinfuture.
Inthepanelsview,theobjectiveisthatofensuringNBNCo(and/oranyotherentityfulfilling
itscurrentrole)isinapositiontorecoverthecostsnecessarilyincurredinprovidingservices
toareaswhichitwouldnotservewereitnotrequiredtodoso.Thearrangementsusedto
pursuethatobjectiveshouldbe:
transparent,sothatthecostsatissueareclearlyidentifiedtoconsumers,taxpayers
andregulators;
accountable,whichmeansthateffectiveprocessesareinplaceforensuringany
paymentsarenogreaterthanthosereasonablyrequiredtoachievethepolicy
objective;
sustainable,inthesensethattheyareconsistentwithfuturedevelopmentsin
technologyandinthemarketplace.Thearrangementsshould,inparticular,be
competitionready,recognisingthatcompetitiveconstraintsmayarisebothfrom
fixedandmobilewirelessnetworksandfromcompetingfixedlinenetworks;and
efficient,inimposingnogreateraburdenonconsumers,taxpayersandthebroader
economythanisneeded.
Current arrangements
AspartoftheagreementsthepreviousGovernmentreachedwithTelstra,newarrangements
wereputinplaceforfundingTelstraslegacyuniversalserviceobligations.Whiletheyare
reasonablytransparent,theydonotinvolveanyclearmechanismfortestingwhetherthe
paymentsbeingmadeareproperlycostreflective.Moreover,theydonotprovidefor
contestabilityofthesubsidiesbeingdisbursed,andhencecreatefewpressuresforefficiency.
Thepanelbelievesoptionsshouldbeexploredforexpeditingthereformofthese
arrangements.
Withrespecttohighspeedbroadband,NBNCoscurrentbusinessarrangementsincorporate
twomainkindsofcrosssubsidy.
First,thedisconnectionpaymentincludedintheDefinitiveAgreements,whichispaidto
Telstrauponmigrationofcustomersoffitscopperandcablenetworks,isgeographically
averaged.ThisamountstoaneffectivecrosssubsidybecausethenetrevenuetoNBNCofrom
thecustomerconnectionmaybeeitherlowerthanthedisconnectionpayment(sayinrural
areas)orhigherthanthedisconnectionpayment(sayinahighpopulationdensityarea).The
resultwouldthenbethatinruralareasNBNCowouldbearaloss,whileinhighdensityareait
wouldreapagain.However,thisisaoneoffeffectthatispartofthetransitiontotheNBN.
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Second,andmoreimportantly,NBNCohasbeencommittedtouniformnationalwholesale
pricing.Asitcurrentlystands,NBNCosSAUsetscapsonpricesthatmayconstrainchargesto
notbealignedwithcosts.Werepricesinsomeareasbelowavoidablecosts,whilepricesin
otherareasexceededavoidablecosts,therewouldbeanimpliedcrosssubsidyfromlowcost
(orhighrevenue)areastohighcost(orlowrevenue)areas.
Thesearrangementsdonotmeetthecriteriasetoutabove.Entrenchinganopaquecross
subsidy,theyprovidenotransparencyastotheextentofthetransfersandimposeno
benchmarksastowhetherfutureclaimedtransfersarereasonablecomparedwiththeactual
costsofsupplyandrevenuesreceived.Thereisnopotentialforcontestabilityofanysubsidy,
whichreducestheincentivetoseekefficienciesinservicedeliveryinhighcostareas.And
evenunderthecurrentprovisionsinParts7and8oftheTelecommunicationsAct,thesubsidy
sourcesarelikelytobeerodedovertimebyentrantsattractedtolowercosturbanareas
underthe1kilometreexemption.Thepanelsrecommendationstoremoverestrictionson
competitionmayexacerbatethaterosion.
Design options for alternative arrangements
Althoughthecurrentschemeisunlikelytobesatisfactoryinthelongrun,itdoesnot
automaticallyfollowthatassistanceisrequiredorthatthereisanimmediatecaseforpolicy
change.Rather,thatdependsonthegainsfromchangerelativetothecosts,includingthe
risksoferrorindeterminingthequantumofanyassistancethatmightbeprovidedandof
inefficiencyinitsuse.Moreover,shouldchangebeconsidereddesirable,thereisarangeof
approachesanynewschemecouldadopt.Therelevantoptionsdifferintermsoftheformany
subsidytakesandthemannerinwhichitisfinanced.Thus,asubsidymaybeupfrontoron
going;itmaybefundedfromtaxpayersgenerallyorfromconsumersoftelecommunications
services,beitdirectly(asinataxontelecommunicationsservices)orindirectly(asinan
industrylevy);anditmaybepaidtosuppliersortoconsumers.
Itisimportanttonotethatanychangetoarrangementsforfundinglossmakingservice
provisiondoesnotrepresentanadditionalcostonbroadbandcustomers.Theseservicesare
currentlybeingfundedthroughNBNCocustomercharges.Movingtoadifferentfunding
optionwilljustchangethemethodofraisingthatfunding,notincreaseoverallcoststo
customers.
Giventhiswiderangeofoptions,thepanelbelievestherearegoodreasonsforpreferringan
explicitsubsidyprovideddirectlytoconsumers.Makingthesubsidyexplicitincreases
transparencyandhencepromotesaccountability,whileprovidingthesubsidytoconsumers
directlyaddressesthegoalofaffordability,allowscarefultargetingandencourages
competition.Asaresult,thepanelrecommendsthatanyarrangementthatisputinplace
eitherinvolvesuchdirect,consumerside,subsidies,orbedesignedtomoveontothatbasis
accordingtoclearlydefinedtransitionpointsandtimelines.Theresultinggainswouldbeeven
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greaterwereanysuchsubsidyfundedfromconsolidatedrevenue;thatwouldensureitwas
fundedrelyingonabroadtaxbasewhileforcingongoingconsiderationoftheopportunity
costofusingtaxpayersmoneysforthispurposeratherthanothers.
Thatsaid,thepanelrecognisesthatthereisatensionbetweenrelyingondemandside
subsidiesandaprojectthatisheavilyfocussedonthesupplyside,andinparticular,that
centresonusingachosensupplierastheprimaryinstrumentforachievingserviceavailability
goals.However,thefactthattheprojectisstillatarelativelyearlystageofdeployment
createsopportunitiesforstructuringitsinitialarrangementsinawaythatminimisesfuture
subsidyrequirements.
AnoptioninthisrespectistowritedownNBNCosassetstotheirvalueinuseastheycome
intoservice,thusreducingtheregulatedassetbaseandasaconsequenceusercharges
determinedusingthisbase.Atitscore,thisapproachwouldacceptthatsomeserviceswould
neverbeprovidedcommerciallysothatanimmediateassetvaluewritedownisrequiredto
reflecttheactualopportunitycostoftheassetsusedinprovidingthem.Inpractice,thisshifts
theburdenoffundingtheinitialinfrastructureontotaxpayers,asthefullcostsofthat
infrastructurewouldneverberecovered.Ifeachareaatleastcovereditsoperatingcosts,the
newcapitalbasecouldallowuniformnationalwholesalepricingtocontinue(orattenuatethe
impactofmovingtocostreflectivepricing)withouttheneedforsupplementarysubsidy,at
leastforthelifeoftheinitialassets.Conversely,wherenetcashflowswerenegative,theonly
ongoingsubsidyrequiredwouldbethatneededtocoveroperatingcostsandpossibly,future
assetrenewal.
Inthepanelsview,suchwritedownshavethemeritofrecognisingimmediatelythefuture
lossestheprojectwillimposeonthecommunityandarethereforeconsistentwithsound
publicsectorpractice.Indeed,totheextenttowhichtheNBNprojectasawholeisunlikelyto
recoveritsappropriatelymeasuredcostofcapital,thepanelbelievesitisincumbentonthe
Governmenttorecognisethatfactanditsfiscalconsequencespromptly,andurgesittodoso.
However,whiletheGovernmentshouldbeinapositiontoassessthelikelylossontheproject
asawhole,itisnoteasytoestimatethequantumofthelossesspecificallyassociatedwith
anycrosssubsidyrequirements.Onlybytestingthemarketinotherwords,seekingto
disposeoftheassetssubjecttothepurchasermeetingspecifiedsupplyobligationscouldthe
requisiteamountbeproperlydetermined.Asaresult,thepanelbelievesitisonlyinthe
contextofsuchmarkettestedvaluationsthattheassetwritedownapproachshouldbeused
asameansofunderwritinguniversalservicecosts.
Inpractice,taxpayerfundingbeitdirect,asundertheproposeddemandsidesubsidy
arrangements,orindirect,asinthecaseofassetwritedownsmayeitherbejudged
unacceptableorproveinsufficient.Forexample,evenwereinitialassetwritedownscarried
out,therecouldbeaneedforongoingsubsidiestocovercashcosts.
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Underthosecircumstances,oneoptionwouldbetoallowNBNCotoimposeanaccessdeficit
contribution:thatis,tomarkupitschargesinsuchawayastorecoveranylossesit
necessarilyincursinprovidingserviceinhighcost(orlowrevenue)areas.However,because
suchchargesaretypicallytrafficbasedorrelatedinsomewaytointerconnection,itisnot
clearwhatformtheycouldtakeinNBNCoscase.
Conceptually,asimilarscheme,basedonaperservicetax,couldbeputinplacetoincrease
thecostsofanypotentialentrantstothebroadbandwholesalemarketsothattheycouldnot
undercutNBNCoswholesalepricesinlowcostareasunlesstheircostsinsupplyingthose
areaswerebelowNBNCos.Thechargeimposedonfacilitiesbasedcompetitorswouldbeset
toreduceincentivesforRSPstoinefficientlychoosealternativestoNBNCosnetwork,thereby
maintainingNBNCosabilitytofundanycrosssubsidy.Revenuescollectedthroughthe
schemewouldbereturnedtoNBNCoasapaymenttooffsetthenetrevenueithadforgone
directlyasaresultofnetworkcompetition.
Themainadvantageofsuchcharges,whichareconceptuallysimilartothosederivedfromthe
EfficientComponentPricingRule,isthattheydirectlytargetthethreattoNBNCosrevenue
fromcompetition,withtheproceedscollectedrisingasinfrastructurecompetitionbecame
morewidespread.Intheory,suchachargecanbesetatalevelthatdiscouragesinefficient
entry(thatis,entrythatinvolveshighercoststhanNBNCos)whilenonetheless
accommodatingefficiententry(thatis,entrywhichinvolveslowercostsorhigherquality
servicethanNBNCos).TheextentofsuchataxdependsonNBNCosavoidablecostsandits
forgonerevenues,withtherevenuesidebeinginfluencedbytheprecisenatureofanypricing
constraintonNBNCo.
Inpractice,itisnotpossibletodeterminethequantumofsuchataxatthisstageofnetwork
deployment.Aprematuredecisionwouldcreatearealriskofthetaxbeingsetincorrectly,
distortingbothNBNCosnetworkdecisionsandthoseofactualandpotentialentrants.The
rationalebehindthepanelsrecommendedmeasurestoincreasecompetitivepressuresinthe
industryistoprovideabasisforcompetitiontodevelop.Imposinganaccessdeficitchargeor
abypasstaxonallpotentialcompetitorstoNBNCowouldworkintheoppositedirectionand
createrisksofdistortionsaswell.Forthesereasons,thepaneldoesnotsupportsuchcharges
beingintroduced.
Analternativewouldbetofundanyrequiredsubsidybyintroducinganewindustrylevyor
increasingtheexistingTelecommunicationsIndustryLevy(TIL)whichsupportsthecurrent
voiceUSOscheme.Thiswouldraiseconcerns,especiallyfromtelecommunicationsproviders,
aboutnewimpostsontopofexistingcharges.TheoverallTIL/levyamountforthe201213
financialyearwassetat$255million.Whilethisisnotalargeamountcomparedwiththe
industrysrevenues,thedistortingeffectofataxrisesmorethanproportionatelywithitsrate
andeventhewidesttelecommunicationsspecificlevywouldstillfallonarelativelynarrow
base.However,itneedstoberememberedthatthislevywouldnotbeanadditionalimpost
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butreplaceanexistingimplicittaxofthesameamount(thatis,throughNBNCochargeson
customerstofundtheinternalcrosssubsidy).Withoutknowingthespecificbaseofanew
levy,changestoNBNCoschargesandtheamountsinvolved,itisimpossibletoassessthe
extentofanylikelydistortionandsobeconfidentaboutsuchaschemesmerits.
Notwithstandingtheseconcerns,itwouldbefarbettertohavesomeformoflevyscheme
thantocontinuerestrictionsonthedevelopmentofcompetitionsoastoprotectanyNBNCo
crosssubsidy.Asforthedesignofsuchalevy,wereonetoberequired,thepanelbelievesit
shouldcoverbothvoiceandbroadbandservices.Asnetworkdeploymentproceeds,thereis
nopolicyjustificationfortreatingvoiceandbroadbanddifferently,thoughtheconstraints
imposedbytheexistingTelecommunicationsUniversalServicesManagementAgency
(TUSMA)contractmaymeanseparatearrangementsarerequiredforaperiodoftime.
Combiningtheseleviesandpoolingtheresultingfundsshouldbeaccompaniedbymovesover
timetomaketheservicesbeingacquiredcontestable(thatis,opentoanyproviderwillingto
deliverthedesignatedservices),beitthroughcompetitivebiddingtoprovidethoseservices
orbyimplementingacustomerrebateorvoucherscheme.Thoughinimplementingsucha
processtochangehowlossmakingserviceprovisionwasfunded,itwouldbeimportantto
ensurethatbroadbandcustomersunderstandwhatisoccurringandthatcostsoverallwere
notincreasing.
Inshort,thepanelconcludesthat:
Anysubsidyschemebedesignedtoevolveintoaschemebasedontargetedsubsidies
toconsumers,ratherthandirectlyfundingproviders.However,thepanelrecognises
thatthereisatensionbetweenrelyingondemandsidesubsidiesandthethrustof
policyasitstands,andhenceassumesthatforsomeperiodoftime,anysubsidies
wouldflowtothesupplyside;
Wherepricingconstraintsmeanthevalueinuseoftheassetsbeingdeployedfalls
shortoftheiracquisitioncost,thoseassetsshouldbewrittendowntovalueinuseas
theycomeintoservice,subjecttothatvaluebeingmarkettested;
NBNConotbeallowedtoimposeanyformofaccessdeficitcontributionorbypass
chargeonnetworkcompetitors;and
Wereanongoingsubsidyrequiredthatcouldnotbefundedthroughconsolidated
revenue,anewlevybeimposed,thatcombinesthefundingofbroadbandandlegacy
universalserviceobligations.
Theseconclusions,however,aresubjecttothefuturemarketstructurearrangements,which
arediscussedbelow.
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Implementation of subsidy arrangements in different structural scenarios

Asdiscussedinchapter6,thepanelhasconsideredfourdifferentfuturestructuralscenarios
forNBNCo.Thesecanbesummarisedasfollows:
Option1:Disaggregationoftransit,fixedwirelessandsatellite,andHFCnetworks;
Option2:Disaggregationofthetransit,fixedwirelessandsatellitenetworks;
Option3:Aphasedtransitionstagetodisaggregationthemovetooption1or
option2wouldbeimplementedthroughatransitionstagewhereNBNCosbusiness
unitsareinitiallystructuredtosupportdisaggregation;and
Option4:StatusquoNBNComodelwithenhancedregulatorysettingsNBNCo
wouldremainintegratedacrossallaccesstechnologies.
Whetherarequirementforsubsidyarises,andifso,howitshouldbemet,needstobe
consideredseparatelyforeachscenario.Theassessmentisundertakenontheassumption
thatchargeswillbesubjecttocapsthatdonotfullyrecovercostsinhighcostareas,resulting
inlossesinthoseareas.Additionally,itisassumedthesubsidieswill,atleastinitially,flowto
thesupplyside,thatistoNBNCooranyofitsformerunits.
1. Disaggregation of transit, fixed wireless and satellite, and HFC networks
ThepaneldoesnotbelievedisaggregatingtheHFCfootprintwouldcauseanyadditional
subsidyrequirement.ItisunlikelythattheHFCoperatorwouldmateriallythreatenthe
profitabilityoftheFTTxareas,unlesstheoperatorinthoseareaswaschargingsuchhigh
pricesastoinducelargescalecompetingentry.Inthatevent,thecompetitiveprocesswould
erodesupernormalprofits,ratherthanunderminingtheviabilityofcrosssubsidieswithinthe
FTTxcoveragearea,andcompensatingtheFTTxoperatorforlossesconsequentialonthe
eliminationofmonopolyrentswouldbeneitherefficientnorequitable.
Ofcourse,theHFCoperatorwouldbesubjecttoanylevyimposedsoastofundtheprovision
ofserviceinthehighcostareas,aswouldbetheproviderofFTTxservices.ConsumersofHFC
serviceswouldthereforecontributetothecostsoflossmakingareasinthesamewayas
wouldthoseusingservicesprovidedbymeansofFTTx.
Thereisalreadyanestablishedcompetitivetransitmarketforbackhaulnotablybetween
capitalcitiesandthelargerregionalmarketswithGovernmentfinancialassistance.Thepanel
alsonotesthe$250millionGovernmentinvestmentintheRegionalBackboneBlackspots
Program(RBBP)comprisessome6000kilometresoffibreopticbackhaulconnectingselected
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locations29toestablishedbackhaulroutes.TheRBBPservicedoesnotrequireongoing
financialsupport.Thepaneldoesnotconsiderdisaggregationofthetransitnetworkwould
causeanyadditionalsubsidyrequirement.
Themainissueunderoption1andoption2ishowtoenforceandfundperformance
guaranteesgiventhatthesatelliteandthefixedwirelessnetworkswillmostlikelyeachincur
capitalandoperatinglosses.
Theextentofanylosseswouldclearlydependonthepricingarrangements.Intheabsenceof
demandsidesubsidies,itislikelythataswellasserviceavailabilityandqualityobligations,the
fixedwirelessoperatorwouldberequiredtopricethedesignatedservicesatnomorethan
somestandardofmetropolitanparity,withthatrequirementimposedthroughalongterm
pricecap.Therewouldalsolikelyberequirementstoupgradethenetworkovertime,inline
withdevelopmentsintechnology,withtheupgradeobligationsbeingtriggeredbya
predictable,transparentprocessinaccordancewiththepanelsrecommendationsinthis
regardinchapter9.Similarly,thesatelliteoperatortoowouldberequiredtomeetpriceand
performancerequirements,atalevelappropriatetosatellitetechnology.
Inthefullknowledgeofthoseobligations,potentialoperatorswouldbidtoacquiretheassets.
Thisbiddingprocesswouldthereforehavetheadvantageofcapitalisingexpectedfuture
lossesonthepricecappedservices,substantiallyreducingthetotalquantumofrequired
subsidiesgoingforward.Nonetheless,asboththesatelliteandfixedwirelessoperatorswould
likelyincurlossesonoperatingcosts,thebidswouldberequiredtoincludethequantumof
subsidydemanded,allowingtheCommonwealthtoevaluatetheminimumsubsidyitwould
needtopayforthoseservicestobemadeavailable.
IncontrasttothefullyintegratedmodelforNBNCo,thefactthatthosesubsidieshadbeen
markettestedwouldbothensuretransparencyandprovideconsumersandtaxpayerswitha
degreeofassuranceastotheirquantum.Thisreducestheriskinvolvedinsettinganylevythat
wouldberequiredtofundthesubsidy.Proceedingwithsuchalevywouldthereforebe
appropriateaspartofputtingthisoptioninplace.
Thepaneldoesnotrecommendthatsubsidyarrangementsextendtotheremainingfixed
networks.Nodoubt,implementationofthisoptionwouldincreasethethreattoNBNCos
FTTxnetworkofcompetitionfromthewirelessserviceoperator(s).However,itisintheareas
adjacenttothedesignatedwirelessfootprintthatthatthreatwouldbemostacute;butthese
areareaswhereexcessprofitsarenotlikelytobehigh.Competitionwouldthereforenot
threatentheareaslikelytomateriallycontributetofinancinganycrosssubsidywithinthe
fixednetwork.Atthesametime,thecurrentburdenonNBNCooffundinguneconomic
29BrokenHill,Darwin,Emerald,Geraldton,Longreach,SouthWestGippslandandVictorHarbor.
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satelliteorfixedwirelessserviceswouldberemoved,whichshouldmorethanoffsetany
effectsfromincreasedcompetitionduetotheamendedPart8provisions.Therewould
thereforenotbeaneedtoprovideassistancetotheoperatorofthatnetwork.
2. Disaggregation of transit, fixed wireless and satellite
Option2differsfromoption1solelyinthattheHFCnetworkremainswithNBNCo.As
discussedabovethemainissueishowtoenforceandfundperformanceguaranteesgiven
thatthesatelliteandthefixedwirelessnetworkswillmostlikelyeachincurcapitaland
operatinglosses.
3. Transition stage to disaggregation and 4. Status quo with enhanced regulatory settings
Underthesetwooptions,NBNCosabilitytocrosssubsidiseserviceprovisionintothefuture
willonlybereducedtotheextentthatcompetitionincreasesduetotheproposedchangesto
Parts7and8oftheTelecommunicationsAct.Thequestioniswhetheranyresultingchanges
arelikelytoprovesomaterial,andtooccursorapidly,astojustifyapolicyresponseatthis
point.
Inconsideringthisissue,thepanelnotesthatNBNCohasyettocommenceoperationsin
manyareaswheresubsidywouldbegenerated,thatis,wheretheprofitmarginonwholesale
supplymightultimatelybehigh.Itsactualcostsandrevenuesinthoseareas,asintheareas
wheremarginsarelikelytobelower,areconsequentlydifficulttopredict.Highlightingthose
difficultiesisthewideerrorrangethathascharacterisedNBNCoscostandrevenueestimates
todate.
Uncertaintooareanylossescompetitionmightimpose.Whilethemagnitudeofthefinancial
impactonNBNCoofentrybyTPGorothercarriersisdifficulttopredict,theeffectcouldbe
smallanditsimpactsignificantlydeferredasthatentryallowsNBNCotoavoidorpostpone
capitaloutlaysitwouldotherwisehavehadtoincur.Ofcourse,NBNComightchooseto
nonethelessacceleratedeploymentinareaswherethethreatofentryisgreatest,butthat
decisionisnotclearlyrequiredforittoachieveitspublicpolicymandatewhichistoensure
availabilityofhighspeedbroadbandservicesinareasnototherwiseadequatelyserved.Asa
result,anyadditionalcoststhataccelerateddeploymentinvolves(andwhichmightbe
imputedtocompetition)shouldnotbeviewedasrequiringcompensation.
Inthelongertermitmayturnoutthatthenetcostofprovisionofbroadbandaccessservices
inlossmakingareasislessthanforecast,eitherthroughdemand(bothforaccessand/or
higherspeeds)beinggreateroroperatingcostsbeinglowerthancurrentlyassumed.Asa
result,actualsubsidyrequirementsmaybebelowthoseNBNCocurrentlyanticipates.Equally,
excessprofitsmightbegreaterthananticipatedinhighrevenue/lowcostareas.Either
situationalone,orthecombinedfinancialeffectofbothoutcomes,couldobviatetheneedto
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considerprovidingNBNCowithadditionalfinancialassistanceasaresultofincreased
competition.
Overall,whilethereisconsiderableuncertaintyaboutactualmagnitudesoftheeffects
associatedwithincreasedcompetition,thepanelbelievestheimmediateimpactislikelytobe
minor.However,astheNBNCosrolloutprogresses,thecasemayimproveforsomeformof
financialsupportorexplicitrecognitioninNBNCosfinancialaccountsoftheconsequences
flowingfromcompetition.Equally,shouldNBNCobeprivatised,anyaccumulatedlossesthat
wereunlikelytoberecoveredinfuturewouldbebroughttoaccountthroughthesaleprice.
Thecostsofestablishingandencouragingcompetitioninthebroadbandaccessmarketwould
thenbebornebytaxpayersingeneral,asisappropriate,sinceitisendusersacrossAustralia
thatwillreceivethemainbenefitsfromamorecompetitivemarketstructure.
Asaresult,unlessitsdisaggregationproposalsproceed(allowingsubsidiestobemarket
tested),thepaneldoesnotbelieveanyspecificmechanismforrecoveringthecostsNBNCo
incursinprovidingserviceinpotentiallylossmakingareasshouldbeputinplaceatthistime.
Rather,thosecostsshouldberecoveredthroughNBNCosexistingregulatedcharges,thus
providingaddedincentivesforittoseekefficienciesinitsoperations.
However,whileNBNCoshouldremainresponsibleforcoveringthecostsofpotentiallyloss
makingareas,itisinthepublicinterestthatthequantumofthosecosts,andthemeansby
whichtheyarefunded,betransparent.Inotherwords,thearrangementsputinplaceinthe
early1990sforassessinganddisclosingtheextentofcrosssubsidieswithinthenetworkof
whatwasthenTelecomAustraliashouldbeappliedtoNBNCo,adaptingthemethodologyto
thedifferenceinoperatingcontext.Moreover,aswellasestimatesofthelosses,estimates
shouldbedisclosedannuallyoftheburdenfundingtheselossesimposeonendusersdirectly
andthecommunitymorebroadly.Despitetheirobviouslimitations,suchestimateswould
helpinformtheprocessofongoingpolicyreview.TheProductivityCommissionshouldbe
taskedwithdeterminingthemethodologytobeappliedinproducingtheseestimates,and
withreviewingtheannualestimates.
Conclusions on crosssubsidy arrangements
Thepanelthereforerecommendsthatexplicitmechanismsforfundinganycrosssubsidies
onlybeputinplaceifthesatelliteandfixedwirelessnetworksaredivested,andthequantum
ofthesubsidiesrequiredforthosenetworksismarkettested.Inthatevent,assumingthe
Governmentisunwillingtorelyonconsolidatedrevenue,thepanelrecommendsanindustry
levybeusedtofundserviceprovisioninuneconomicareas,withthatlevycombiningthe
amountsrequiredfortelephonyandhighspeedbroadbandservices.Overtime,thesubsidy
shouldbecomecontestable,andbeprovidedtoconsumersratherthantoaparticular
supplier.
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ThepaneldoesnotbelievethedisaggregationofeitherthetransitnetworkortheHFCwould
giverisetoanyadditionalsubsidyrequirement,aboveandbeyondthatneededforthe
satelliteandfixedwirelessservices.BoththetransitnetworkandtheHFCshouldcontribute
toanyindustrylevy,aswouldtheFTTxoperator,onacompetitivelyneutralbasis.
Werethedisaggregationoptionsnotaccepted,therewouldnot,inthepanelsview,beacase
forprovidingafullyintegratedNBNCowithanyformofassistancetowardsthecostsofnon
commercialservices.Therisksoferrorinvolvedindeterminingthequantumofanysuch
assistancethatcouldbejustifiedwouldbetoogreat,aswouldthedangerofunderminingthe
incentivesforNBNCotooperateefficiently.Asaresult,theGovernmentshould,inthat
event,postponeconsiderationofanynewlevyuntilanotherindependentreviewofthe
situationhadbeencarriedout.
However,wereNBNCotoremainasafullyintegratedentity,itshouldberequiredtoreport
Commission.Thatmethodologyshouldcoverboththequantumofanyinternalsubsidiesand
theireconomiccosts.
Recommendation11:TheimplicationsofdifferentfuturestructuralscenariosforNBNCoand
changedmarketentryconditionsforthefundingofnoncommercialservicesbeaddressedin
thefollowingway:
a)
explicitmechanismsforfundingserviceprovisioninnoncommercialservicesbeputin
placeifthesatelliteandfixedwirelessnetworksaredivested,andthequantumofthe
subsidiesrequiredforthosenetworksismarkettested;
b)
anindustrylevybeusedtofundserviceprovisioninuneconomicareaswithinthe
satelliteandfixedwirelessfootprints,withthatlevycombiningtheamountsrequired
fortelephonyandhighspeedbroadbandservices;overtime,thesubsidyshould
becomecontestable,andbeprovidedtoconsumersratherthantoaparticularsupplier;
and
c)
werethedisaggregationoptionsnotaccepted,nospecificmechanismforfundingany
subsidieswithinNBNCobeputinplace,withthisarrangementsubjecttoreviewinfive
yearstime;ifthismarketstructureismaintained,NBNCoberequiredtoreport
Commission.
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9.RegulationofNBNCosproducts,pricingand
expenditure
9.1
Introduction
Item4ofthepanelstermsofreferencerequireittoreportonhowshouldNBNCoscapital
investment,productsandpricingbereviewedandregulated.
ThepanelhasreadthereferencebroadlytoalsocoverNBNCosnonpricetermsand
conditionsofsupplyanditsoperationalexpenditure.
ThetermsuponwhichNBNCosproductsandservicesareofferedwillbecomeincreasingly
importanttoendusersasitsnetworkfootprintgrows.Efficientcorporatepracticeswithinthe
companywillbenecessarytokeepconstructionandoperatingexpenditurestoaminimum.At
thesametime,efficientregulatoryarrangementsarenecessarytoensure,amongother
things,thatthebenefitsfromefficientoperationflowthroughtothepricespaidbyaccess
seekersand,ultimately,endusers.Thischapterexaminesthecurrentrequirementsinthese
areasandassesseswhethercurrentmechanismsandprocessesaresufficienttoachievethe
goalsthepanelhasidentified.Wheretheyarenot,itmakesrecommendationsonhowthey
canbeimproved.
9.2
Current regulatory framework
TheframeworkwithinwhichNBNCobuildsitsnetworkandsuppliesservicesisderivedfrom
threebroadsources:
OversightbytheACCCwithinthespecificcompetitionframeworkcontainedinPartXIC
oftheCCA,aswellasthelineofbusinessrestrictionscontainedintheNational
BroadbandNetworksCompaniesAct2011;
CorporategovernancearrangementsundertheCorporationsLaw,PublicGovernance,
PerformanceandAccountabilityAct2013(PGPAAct)30andNBNCosconstitution;and
Shareholderguidance,currentlyprovidedbytheShareholderMinisters.
30ThePGPAcameintoeffecton1July2014,creatingasingleframeworkforCommonwealthentitiespreviously
operatingundertheFinancialManagementandAccountabilityAct1997andtheCommonwealthAuthorities
andCompaniesAct1997.PreviouslyNBNCooperatedundertheCommonwealthAuthoritiesandCompanies
Act.
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ACCC oversight
UnderPartXICoftheCCA,allNBNCoservicesmustbedeclared,creatinganobligationon
NBNCotosupplyservicesonrequestandbringingthetermsandconditionsofwholesale
accesswithintheoversightoftheACCC.Thesetermsandconditionsmaybesetoutinoneor
moreofthefollowingregulatoryinstruments:
astandardformofaccessagreement(SFAA)developedbyNBNCowhich,onceagreed
tobyanaccessseeker,becomesanaccessagreement;
anSAUdevelopedbyNBNCoandacceptedbytheACCC;and
regulatorydeterminationsmadebytheACCC(bindingrulesofconductandaccess
determinations).
ToenableNBNCotoreadilyofferservices,theSFAA,whichNBNCoreferstoasitsWholesale
BroadbandAgreement(WBA),isnotsubjecttoACCCapproval.However,theACCCcanmake
bindingrulesofconductandaccessdeterminationsinrelationtoservicesdescribedinthe
WBAandthesedecisionscanbeusedasabenchmarkfornegotiatingfutureaccess
agreements.NBNCosSAU(approvedbytheACCCinDecember2013)anditsWBA(themost
recentofwhichcameintoeffectinApril2014)areintendedtocomplementeachother.The
panelsrecommendationsontheoperationoftheseinstrumentsareprovidedbelowinthis
chapter.
TheNBNCompaniesActdealswiththeoperationsofNBNCo,includingrestrictionsonitslines
ofbusiness.Theserestrictionsareintendedtoensurethatitfocusesonthewholesale
telecommunicationsmarket.
Corporate governance arrangements
NBNCohasbeenestablishedasacompanyundertheCorporationsLawandisexpectedto
operateonacommercialbasisatarmslengthfromgovernment.Assuch,absentGovernment
directiontothecontrary,itsconduct,includingproductdevelopmentandpricing,isexpected
tobedrivenbycommercialprinciples.
Thatsaid,themerefactthatNBNCohasbeenestablishedbygovernmenttoachievecertain
policyoutcomescreatesatensionbetweenthedecisionsitwouldtakeasacommercialentity
andthosethatbestadvancethepolicygoalsitwasdesignedtopursue.Themannerinwhich
thosetensionsareresolvedoughttobedeterminedbytheSOE,discussedinchapter6and
below.Inpractice,however,theextentofthetensionshasbeensuchthatNBNCohasbeen
moreheavilyinvolvedinthepoliticalprocessthanwouldbedesirable.Oneobjectiveofthe
panelsrecommendationsinrespectofclarifyingandspecifyinginlegislationNBNCossocial
policyobligationsistoreducetheneedforandscopeofthatinvolvement.
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ThePGPAActrequiresgovernmentbusinessenterprises(GBEs)suchasNBNCotoreporton
theiroperationstotherelevantMinisterandParliamentmoregenerally.ThisActrequires
GBEstoprovideannualreports,submitbusinessforecasts,provideauditedfinancial
statements,haveitsdirectorsandofficerscomplywithcertainrequirementsandcomplywith
generalpoliciesoftheGovernment.
Shareholder guidance
ShareholderMinistershavecommunicatedtheGovernmentsexpectationstoNBNCovia
StatementsofExpectations,intheformofletterstotheChairofitsBoard;themostrecent
SOEwasissuedinApril2014.Thesestatementsprovideavehicletospelloutthe
Governmentsrequirements;theycanbeusefulinprovidingguidanceinsituationswhereit
wouldbeinappropriateorundulycumbersometoestablishnewlegislativeprovisionsorrely
onotherexistingregulatoryinstruments.
9.3
NBN Cos capital expenditure products and pricing
ThekeyaspectsofhowNBNCosproducts,pricingandexpenditurearedealtwitharesetout
intheSAUandWBA.Thesearrangementsthemselvesarelargelyestablishedonacommercial
basisandhavebeenproposedbyNBNCoitself,followingconsultationwithitscustomers.
However,theyalsobearthemarkofGovernmentdirection(forexample,onuniformityof
pricing)andACCCintervention(forexample,thoughtheSAUprocess).Inrelationtomatters
outsidetheSAU,NBNCoagaingenerallyhascommercialdiscretion,subjecttoother
regulatoryorpolicyconstraints.Forexample,NBNCoiscurrentlysubjecttostrictnon
discriminationobligations,whichthepanelhasrecommendedbeliberalisedinsomerespects.
9.4
General issues raised in submissions
Whilethepaneldidnotexpresslyseeksubmissionsonthemattersundertermofreference4,
submissionsexpressedsomeconcernswiththeregulationandreviewofNBNCos
expenditure,products,andpriceandnonpriceterms.Extensivecommentsontheseissues
werealsomadeinsubmissionstotheACCCsconsultationprocessesonNBNCosSAUandthe
paneldrewonthissource.
Theissuesraisedinsubmissionscanbegroupedintotwobroadcategories:thresholdissues
concerningthebroaderstructureofNBNCosregulatoryarrangements;andoperational
issuesrelatingtospecifictermsofaccess.Giventhepanelsfocusonbroaderstructuraland
regulatoryarrangements,ithasconcentratedonthefirstcategoryofissues,whilemaking
someobservationsaboutthesecond,butlargelyleavingtheseasmatterstobeconsidered
further,particularlybyNBNCoandtheACCC,withinanyrevisedframework.
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AkeyissueinsubmissionswastheregulatoryarrangementsrelatingtoACCCoversight.Optus
arguedthattheSAUshouldberevokedandreplacedwithdirectregulationbywayofaccess
determinationsandbindingrulesofconduct.ItsconcernswerethattheSAUgivesNBNCotoo
muchdiscretiontosettheframeworkforhowitisregulatedaswellastheauthorityto
removetheframeworkatitsowndiscretion.WhileOptusistheonlyaccessseekerthat
arguedtheSAUshouldbescrapped,otherprovidersneverthelesswereconcernedabouthow
muchcontrolNBNCohasbeengiventosetitsownrulesandthecontrolithasgivenitself
overitsownprocesses.Telstra,forexample,hasexpressedconcernthatNBNCohasundue
swayoverdisputeresolutionprocessessetoutintheSAU.Optusraisedsimilarconcernsin
relationtotheSFAAdevelopmentforum.
RelatedtothisareresidualconcernsthatNBNCoretainstoomuchautonomyinthesettingof
thetermsofitsSFAAs(thatis,itsWBAs).DespitemeasuresintheSAUsettingouthowit
wouldengageindustrystakeholdersonthenegotiationofreplacementSFAAsand
commitmentstomakingSFAAsconsistentwiththeSAU,accessseekersremainconcerned
thattheACCCcannotdirectlyregulatetheWBAandthatNBNCoisabletooffertermsona
takeitorleaveitbasis.InsubmissionstothepanelsTelecommunicationsRegulatory
ArrangementsConsultationPaper31,someindustryparticipants(forexample,Optus,
VodafoneHutchisonAustraliaandTPG)suggestedthattheSFAAshouldformpartofthe
regulatoryhierarchy,withanumber(forexample,MacquarieTelecom,theCompetitive
CarriersCoalitionandNextgen)suggestingthatitshouldbethelowestinstrumentinthe
hierarchy.Theessenceoftheissuehere,however,istheextentofregulatoryrecoursetothe
ACCCthataccessseekersshouldhaveandthepointintheregulatoryprocessatwhichthat
recoursebestoccurs.ThatquestionisaddressedinthepanelsStatutoryReview32.
Inasimilarvein,issueswereraisedabouttheprocessofengagingwithNBNCointheProduct
DevelopmentForum(PDF).TelstraexpressedconcernsintheconsultationontheSAUthatan
RSPscommercialpositioncouldbeweakenedthroughthesharingofitsintellectualproperty
orcommerciallysensitiveinformationinthePDFwithoutrigorousconfidentialityand
intellectualpropertyarrangementsbetweenNBNCoandotherpartiesinplace.Telstra
believesthatRSPswouldbelesswillingtoengageinthePDFprocessesasaresult.iiNet
expressedtheviewinitssubmissionsthatthePDFprocessesweretooconvolutedto
encourageindustryengagement.ThedifficultyforNBNCo,however,isthatitissubjectto
strictstatutorynondiscriminationobligations,whichappeartorestrictitsflexibilityinproduct
development.
31TheTelecommunicationsRegulatoryArrangementsConsultationPaperforthepurposesofs.152EOAofthe
CompetitionandConsumerAct2010wasreleasedon24March2014.
32Thestatutoryreviewunders.152EOAoftheCompetitionandConsumerAct2010wastabledinParliamenton
16July2014.
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Inrelationtocostrecovery,accessseekers,suchasOptus(p.22),andDrJohndeRidder(p.3),
expressedconcernthattheprudencycontrolsonNBNCoarenotstringentenoughtoprevent
excessivecapitalexpenditurethatwouldberolledintotheRegulatedAssetBaseandleadto
higheraccesschargesandenduserpricesoveralongerterm.Mostindustrysubmitterson
theSAUconsultation,includingTelstra,Optus,AAPTandMacquarieTelecom,raisedthe
concernthatNBNCowouldseektorecoveritscoststhroughchargingforusage(whichis
likelytoincreasesignificantly)bymeansofitsConnectivityVirtualCircuit(CVC)chargeswhile
encouragingtakeupthroughbelowcostAccessVirtualCircuit(AVC)charges.Thisconcernis
basedontheexpectationthatasenduserdatausagecontinuestoincrease,theCVCcharge
will,inthespaceofafewyears,cometodominatethewholesalechargesfacedbyaccess
seekers.WhiletheSAUnowcontainspowersfortheACCCtoreviewand,ifnecessary,
rebalanceNBNCosprices,untilthosepowershavebeentestedandprovedeffective,some
industryparticipants,includingTelstra,arguedthepowersmaynotgofarenoughandOptus,
TPGandDrdeRidderexpressedconcernthattheCVCpricingissuehasnotbeenadequately
addressed.
Againsttheseconcerns,however,theACCCsubmittedthattheSAUwilldeliveraframework
fortheregulationofNBNCoservicesthatallowsforvigorousretailcompetition,while
providingsufficientcertaintytoNBNCothatitwillbeabletorecovertheprudentcostsofits
investment,subjecttodemandforitsservicesmeetingexpectations.TheACCCconsidersthat
thecurrentSAUandPartXICframeworkissufficientlyflexibletoallowtheACCC,NBNCoand
industrytorespondtochangingcircumstancesand/orpolicy(submissiontotheframing
paper,p.20).Inthiscontext,thepanelnotesthattheissuesidentifiedabovewerealsoraised
intheSAUconsiderationprocessandassessedbytheACCCastheindependentregulator.
9.5
Regulatory framework
TheissuescoveredbythepanelinitsStatutoryReviewaddresssomeofthesematters.
ParticularlyrelevantherearetheimpactofNBNCosnondiscriminationobligationson
productdevelopmentandthedevelopmentofmoretailoredaccessagreements;also
discussedinthepanelsStatutoryReviewistheoperationofthelegislativehierarchy.While
thepanelsrecommendationsinrelationtoPartXICwillhelptoaddresssomeparticular
issuesrelatingtohowNBNCoscapitalinvestment,productsandpricingarereviewedand
regulated,theymaynotbesufficient.
Current framework
ThepanelhasrecommendedsubstantialchangesinitsStatutoryReview.Subjecttothose
changes,thepanelseesmeritinthecurrentregulatoryframeworkandNBNCosbroad
approach,whichallowsforbothgeneralprinciplesenabling(butnotguaranteeing)NBNCoto
generateamaximumregulatedrateofreturnandsubmittingthespecifictermsofaccessfor
scrutinybytheACCC.
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Thepanelsviewisthatasthenetworkownerandoperator,NBNCoisbestplacedto
understanditscostsandbusinessdynamicsandthustodefineitsproductsand,atleast
initially,proposetermsandconditionsofsupply.Incircumstanceswhereacarrierundertakes
thesetasksingoodfaithanddevelopsanSAUthatisproperlyreviewedbytheACCC,end
userswillbebetteroffthanunderaprocesswhichtransfersthoserolesdirectlytothe
regulator.Indeed,thepanelwouldbeconcernedabouttheappropriatenessandabilityofthe
ACCCoranyregulatortoputitselfintheshoesofanentitysuchasNBNCoanddevelopa
completesetofproductofferings,termsandconditionsandcostrecoverymechanisms.Itis
nottheACCCsroletomanageNBNCosoperations;totrytodosowouldcompromisethe
ACCCsregulatoryindependence.TheACCCdoesnothaveeitherfullvisibilityofthenecessary
dataortheexpertise,andevenifitcouldseektoacquirethese,itwouldbeamassive
undertaking.
Nolessimportantly,itistheboardofNBNCo,nottheACCC,thatisresponsibleforthe
managementoftheundertakingandthatmustbeheldaccountableforoutcomes.Vesting
whatamounttomanagementdecisionsintheACCCwouldcompromisethataccountability,
aggravatingthealreadysubstantialriskstaxpayersbear.Rather,itshouldbethetaskof
NBNCosleadershiptomanage,includingintermsoftakingproductandpricingdecisions,
withintheparameterssetbylegislation,andthatoftheACCCtoregulate,thatis,toreview
thosedecisionsinsofarastheymaybeatoddswiththelegislatedprovisions.
ThepanelisthereforecomfortablewithaframeworkinwhichNBNCoprovidesundertakings.
ConsistentwithNBNCoscommercialorientation,thepanelisalsosupportiveofNBNCo
beingresponsiblefortheworkinvolvedindevelopingthoseundertakings.Thisconclusionwas
reachedontheunderstandingthatNBNCosactivitiesaresubjecttoACCCscrutiny,thatthe
ACCCisfreetorejecttheSAUsandprovideitsowntermsandconditions,andwilldosoif
required;andthattherelevantACCCdecisionwillbefullysubjecttomeritsreview.
WhilethisviewmaybeseenasbeingatoddswiththepanelsongoingsupportfortheACCC
makingaccessdeterminationsunderPartXICinrelationtootherdeclaredservices,the
differenceinapproachcanbereadilyexplained.NBNCoisastartupcompanyundertakinga
complexandfarreachingnewproject.Itdoesnothave,butwillsoondevelop,asubstantial
assetbasewithassociatedsunkcosts.Thefactthatallitsservicesmustbedeclared,andthat
thoseservicesmustbesuppliedonawholesaleonlybasis,meansitsactualcostbaseandits
regulatedcostbasecanandshouldcoincide.
Asaresult,itspositioncontrastssharplywiththatwhichbedevilledtheundertaking
mechanismthatemergedfromthe1997legislation.Thatmechanismappliedfirstand
foremosttoTelstra;itencounteredrecurringdifficultieswithdeterminingandallocatingsunk
costsandjointandcommoncostsinamannerthatcouldreconcilecompetitiveneutrality
withinvestmentcertainty.Theissuesthattensioncreatedwerethenworsenedby
deficienciesintheframeworkitself,andbytheactionsofaccessseekers,accessprovidersand
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theregulatorinrespondingtothosedeficiencies.Thedecisiontoreplacethatframeworkwith
onebasedonregulatorydeterminationswasaninherentlypragmaticone,madeinthe
contextofthetransitiontoanewindustrystructure.Asacleanskinschemefocussedon
NBNCo,thatnewstructurecouldavoidtheproblemsthatundermineditspredecessor,while
theregulatorydeterminationsalreadymadeshouldgivesomecertaintyduringthetransition
totheNBN.
Itis,inotherwords,easiertoapplyanundertakingmodeltoacleanskinNBNCothanitwas,
asamatterofreality,toaverticallyintegratedincumbentwithmyriadproducts,layerupon
layerofjointandcommoncostsandsubstantialsunknetworkcosts.Moreover,theinherent
uncertaintyaboutNBNCosfuturecostsandrevenuesmakessuchaframeworkdesirable,as
itcanreconcilelargelythroughthefixedprinciplesmechanismtheflexibilityneededto
modifyoutcomesasnewinformationcomestolightwiththecertaintythefixedprinciples
provide.ThemodularapproachthathasbeenadoptedintheSAUis,inthepanelsview,a
sensiblewayofpursuingboththosegoals,allowingnewdatatobepluggedintokeypricing
determinationsasandwhenitcomestolight.
Inthepanelsview,theprocesshasthereforedealtadequatelywithmanyoftherecurring
issuesinthisarea,atleasttodate.IthasproducedtransparencyinrelationtoNBNCos
productsandamechanismfordevelopingnewproductsandwithdrawingoldproducts.Ithas
alsoyieldedtransparencyinrelationtoNBNCospricing,whilethosepriceshavebeen
scrutinisedbytheregulatorandaretosomeextentsubjecttotheregulatorsreview.
NBNCoscostscanalsotosomeextentbetested(albeitwithsomesignificantexceptionsand
exclusionsfromtheprudencyrules)andrecoveredovertime.Ineachcase,thesematters
havebeensubjecttotheACCCsscrutiny,withextensiveconsultation,whiletheACCCs
powersgiveitanongoingroleincriticalareas.
Itisimportanttonotethatthepanelisnotnecessarilyendorsingthespecificelementsofthe
SAUortheoutcomeswhichtheymightyield,forinstanceintermsofpricelevelsand
structures.ThepanelunderstandstheissuesabouttheSAUthatsubmissionshaveraisedand
seesmeritinsomeoftheconcerns.However,ithasnotsought,andcouldnotproperlyhave
sought,toplaceitselfinthepositionoftheACCCandredeterminethoseissues.Rather,the
panelstaskistoassesstheadequacyofthepolicyandlegislativeframeworkwithinwhich
thosemattershavebeendetermined:toconsidertherules,ratherthantheirapplicationina
particularfactsituation.
Thepanelsproposalthatmeritsreviewbereintroducedfordecisionssuchasthoserelatingto
theSAUwouldallowtheconcernssubmissionshaveraisedtobetestedbyastructure
designedforthatpurpose.Providingformeritsreviewisallthemoreimportantasthose
concerns,orothersofsubstance,willdoubtlessrecurintheyearsahead.Itisnotsatisfactory
formattersofsuchimportance,andwithsogreatabearingonendusers,taxpayersand
investors,tobedeterminedbyaregulatorybody,operatingunderlegislationthatitself
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providesonlyverygeneralguidance,withvirtuallynopossibilityofsubstantivereview.The
panelsproposalformeritsreviewwouldextendtoredeterminationsmadeundertheSAU,
althoughitwouldexcludereopeningfixedprinciplesoncethosehadbeenaccepted.
Overall,thepanelsconclusionisthatwhilethatframeworkshouldbereformed,includingin
theareasproposedinthepanelsStatutoryReview,itissatisfiedthatthebroadstructureof
theframeworkisadequate.
NBN Co needs more incentive to develop products and upgrade its network
Theprogressiveupgradingofthetelecommunicationsnetworkhasbeenanespecially
contentiousareainAustraliantelecommunicationspolicy.Prolongednegotiationsbetween
TelstraandtheGovernmentintheperiodfrom2005onfailedtoreachagreementona
frameworkfordeployinghighspeedbroadband;twoCommonwealthtenderstosolicitand
considerupgradeproposalsalsofailed;theultimateoutcomewastheformationofNBNCoto
pursuetheobjectiveofuniversalaccesstohighspeedbroadband,withlittleregardtothe
costsinvolved.
Viewsinevitablydifferastothefactorsthatmadetheproblemssointractable.Althoughitis
notthepanelstasktoaddress,muchlessresolve,thatquestionfromahistoricalperspective,
avoidingtherecurrenceofthoseproblemsisattheheartofitswork.Inthiscontext,thepanel
considersthattheseverityofthedifficultieswasgreatlyaccentuatedbytheinteraction
betweenamarketstructureinwhichcompetitionstruggledtodevelopandaregulatory
frameworkwhichlackedpredictabilityandaccountabilityandprovidedtoofewincentivesfor
investment.
ThepanelsrecommendationsseektoplaceAustraliastelecommunicationsfutureona
sounderbasis.ThechangesthepreviousGovernmentmadetotheaccessregime,inparticular
theprovisionforfixedprinciples,wereastepintherightdirection;thosechangesneedtobe
complementedbyreformsthatstrengthenthefixedprinciplesapproach,betterguide
regulatorydiscretionandenhancetheregulatorsaccountability.
Atthesametime,thepanelsproposalsfordisaggregatingNBNCowould,forthefirsttime,
createasustainablebasisfornetworkcompetitionandthemorecompetitiveisthemarket
structure,thegreatertheextenttowhichnetworkupgradeswilloccurasandwhendemand
warrantsthem.Moreover,shouldtheGovernmentconcludethatexternalitiesorsocial
considerationsjustifyagreaterdegreeofupgradingthanmarketforcesalonewouldprovide,
acompetitivemarketstructurecreatesopportunitiestocontractforthoseupgradeson
reasonabletermsandconditions.Thepanelsdisaggregationproposalsarethereforeawayof
ensuringdynamicefficiencythatis,thedevelopmentofnewproductsandservicesinline
withtechnologicalopportunityandconsumerdemandatthenetworklayer.
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However,evenwiththosereformsinplace,theissuesassociatedwithupgradingthenetwork,
andexpandingtherangeofservicesitoffers,willnotdisappear.Andthoseissueswillbe
especiallyacutewereNBNCotoremainasanintegratedfirmwithadefactomonopoly,
eitherforatransitionalperiodorevenmoreso,permanently.Inthatcase,theregulatory
arrangementswouldhavetoreplace,howeverimperfectly,someoftheimpetusfor
innovationcompetitionwouldotherwisegenerate.Atthesametime,structuralseparation
changesthenatureoftheissuesassociatedwithnetworkupgrading,andmayposenew
problemsregulationneedstoaddress.
MainlyatissuehereareNBNCosproductdevelopmentandcapacityexpansiondecisions;
thesearediscussedfirst.Thatisfollowedbyadiscussionoftheroleof,andprocessfor
setting,nationalbroadbandstandards,suchasthosedefined,untilnow,intheSOEsuccessive
governmentshaveissuedtoNBNCo.Takentogether,theseissuesarecentraltotheNBN
problem.
NBN Co product development
ItisunclearwhetherNBNCofacesappropriateincentivestodevelopnewproductsin
responsetocustomerdemand.AccordingtoNBNCo,thefactthatitcanonlyrecoupthecosts
itisincurringbystimulatingdemandforveryhighspeedservicesprovidesitwiththe
incentivesrequired.Thereissomeforceinthisargument,butitneedstobebalancedagainst
thedullingeffectofgovernmentownershipandofthemarketstructureinwhichNBNCo
operates.
Forexample,itcouldreasonablybecontendedthatthefactthatNBNCodoesnotfacethe
threatofdisplacementreducesitsincentivetoinnovate,especiallywheredoingsowould
cannibaliseitsexistingproductlines.Atthesametime,verticalseparationwithregulated
pricesmeansitwouldnotcaptureall,orperhapsevenmost,ofthevalueendusersplaceon
innovations,furtherbluntingtheincentivesforthetimelydevelopmentofnewproductsand
services.Moreover,thestrongerisdownstreamcompetitionbetweenRSPs,themoreitwill
tendtodissipatetherentsRSPscansecurefrominnovation.Asaresult,itisnotclearthat
RSPswillthemselveshavetheincentivestoinnovatethatNBNComaylack.
Nondiscriminationrequirementsmaythenaggravatetheseproblems.Inpractice,those
requirementsmeananyinnovationsanRSPbringstoNBNCowillbecomeavailabletoall
RSPs;ascompetitionbetweenRSPseliminatesanyinnovationrenttheinnovatingRSPmight
otherwisehaveobtained,theincentivetobearthecostsandrisksofinnovationarereduced.
Butevenabsentthoserequirements,verticalseparationcreatestherisk,foraninnovative
RSP,thatNBNCowillseektosecureforitselfalargershareofthegainsfrominnovationwhen
itcan,withthatriskreducingthelikelihoodthattheinnovationwilloccurinthefirstplace.
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Tothatextent,thecombinationofverticalseparationandupstreammonopolymayprove
especiallyharmfultodynamicefficiencydespiteNBNCosneedtorecoupthevery
considerablesunkcoststheNBNinvolves.
Thereisnowayofpredicting,fromananalyticalperspective,whichofthesesomewhat
offsettingforceswillultimatelyprovemostpowerful.Nonetheless,giventheriskshighlighted
above,thepanelisconcernedbyaccessseekerscomplaintsofNBNCostakeitorleaveit
attitudeandbyclaimsthatitconsultsonproductdevelopmentbutdoesnotnecessarilyactor
negotiate.ThepanelnotedNBNCodisputedthischaracterisation.Forexample,inits
supplementarysubmissiontotheRegulatoryIssuesFramingPaper,NBNConotedithas
consultedwidelywithindustryinformulatingitsWBAandthroughitsPDFprocesses(p.17).
ThepanelthereforewelcomesNBNCoscommitmenttoestablishaPDFinwhichitworks
withRSPsonitsfutureproductrange.
Thereisalwaystheriskthatbyencouragingcooperationbetweendownstreamrivals,sucha
forummayweakendownstreamcompetition.Forinstance,informationsharinginthePDF
couldfacilitatetacitcollusionbetweenRSPs.TherequirementonNBNCotodisclose
informationaboutnewproductsonanondiscriminatorybasismightalsounderminethefirst
moveradvantageanyRSPcouldobtain,thusreducingtheincentivetoinnovate.Thepanel's
proposalinitsStatutoryReviewtorelaxthenondiscriminationobligationsshouldassistin
overcomingthisconcern.
Atthesametime,themerefactofconveningaForumwithRSPsdoesnoteliminatetherisk
thatNBNCowillnotberesponsivetotheirdemands.Thus,theSAUconfersonNBNCoan
absolutediscretiontorejectaproductidea(5.6)andthereisnoapparentmechanismforthe
ACCCtointerveneinrelationtosuchadecision.
ThepanelhasthereforeexaminedwhethertheACCCneverthelesshaspowerstointervene.
ThepanelsviewisthatinthecaseofthedevelopmentofproductswhichNBNCosexisting
networkiscapableofsupplying,theACCChaspowersitcanexercise.
UndertheNBNregime,theACCCretainsthepowertodeclareservicesthatNBNCoshould
supply.ThispowerisexplicitlyconfirmedinNBNCosSAUandwillbepreservedunderthe
reformsthepanelhasproposedtotheSAOs.IfNBNCorefusestodevelopandprovidea
productwhichcustomerslegitimatelydemand,itisopentotheACCCtodeclarethatservice
whendoingsowouldbeinthelongterminterestsofendusers.Unlikethesituationwith
otherpotentialaccessseekers,theproductdoesnotneedtobeanactiveservicetobe
declared.
WeretheACCCtodeclaretheservice,NBNCowouldbeobligedtoprovideittotheextentto
whichitwascapableofdoingso.TheACCCwouldthenneedtodeterminepricesinanaccess
determinationandcoulddetermineothernonpricetermsandconditionsifitconsideredthat
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appropriate.Insettingaccessprices,theACCCwouldhavetotakeintoaccountNBNCos
legitimatecostsandothercommercialinterests,includingthecostsofproductdevelopment
andimplementation.Onthisbasis,thepanelconsidersthereisanadequatepathforthe
provisionofnewproductsonexistingplatformsandtoremunerateNBNCofortheoutlays
thatentails.
Havingidentifiedthismechanism,thepanelnotesitisnotwithoutrisksofitsown.Itishardly
desirablefortheACCCtoplaceitselfinthepositionofoverridingNBNCosboardand
managementindeterminingthecompanysproductrange.Asemphasisedabove,itis
NBNCosboardandmanagementthatmustbeaccountabletotaxpayersfortheentitys
performance;butifitdoesnotcontrolitsproductrange,itisnotclearhowitcouldbe.
Moreover,theexerciseofsuchapowerofcompulsionwouldbeespeciallyproblematicwere
NBNCoprivatised,andtheattempttoexercisethosepowersmightgiverisetochallengeas
amountingtoanacquisitionofproperty.
Asaresult,thesepowersshouldbeusedverysparingly,andafuturereviewshouldexamine
theirimplementation.Moreover,beforeusingitspowerstothisend,theACCCshouldissue
guidelinessettingoutitsgeneralapproachtonewproductdevelopmentbyNBNCo.
Nonetheless,onbalance,thepanelbelievesthesepowersprovideanadequateinstrumentfor
resolvinganydisputeswithrespecttoincrementalproductdevelopmentdecisions.
Recommendation12:TheACCCissueguidelinessettingoutitsgeneralapproachindealing
withissuesrelatingtonewproductdevelopmentbyNBNCo.
Capacity expansion and network upgrades
Afurtherissuethepanelhasconsiderediswhetherthecorrectincentivesareinplaceforan
integrated(thatis,nondivested)NBNCotoupgradeitsnetworkovertime,forexamplein
termsofadditionalcapacityupgrades.
TheNBNregulatoryregimewasbasedontheviewthatFTTPwastheultimatenetwork
technologyandthereforelittleupgradingwouldeverberequired.Regardlessofwhetheror
notthatviewwascorrect,itclearlydoesnotholdforthemultitechnologystrategy,inwhich
upgradingdecisionswillariseaboutpushingfibreoutfurthertopremisesintheFTTNandHFC
footprints,adoptingnewtechnologyinthewirelessfootprintasdemandforbandwidth
grows,oracquiringadditionalsatellitecapacity.WhetherNBNCosincentivestoupgradeits
networkarealignedwiththelongterminterestsofenduserswillthereforebecrucial.
Structuralseparationagaincomplicatesthisquestion.Inaverticallyintegratedfirm,its
downstreamoperationwillcapturesome,andpotentiallymuch,ofthegainupstream
capacityexpansioncreates.Tothatextent,theverticallyintegratedfirminternalisesthe
downstreambenefitsofitsdecisions.Thescopeverticalintegrationofferstocoordinate
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upstreamanddownstreaminvestmentsincreasesthestrengthofthateffect,alsobyreducing
theriskinvestmentdecisionsentail.Moreover,informationsharingwithinthevertically
integratedfirmallowsittomoreaccuratelyassessdownstreamwillingnesstopay,further
reducinginvestmentrisk.Whileintegrationcanraiseissuesofmarketpower,itthereforealso
producesadegreeofalignmentofinvestmentincentiveswhichislostunderstructural
separation.
Asaresult,thereisacase,atleastintheory,forseekingtorecreatethesebenefitsina
verticallyseparatedcontextbyestablishingmechanismsthroughwhichdownstreamfirmsin
thiscase,RSPscancrediblysignaltheirwillingnesstopayforupgrades(andmoregenerally,
fornetworkextensionsandexpansions)andonthatbasiscontractwiththeupstreamfirm
(NBNCo)forthoseupgradestooccur.Inpractice,however,themyriadattemptswhichhave
beenmadeinotherverticallyseparatedinfrastructureindustries,suchasairports,rail,ports
andelectricitygrids,todefinesuchmechanismshavebeenbesetwithdifficulties.Having
examinedtheseattempts,thepaneldoesnotbelievetheycouldorshouldbeimitatedinthe
contextoftheNBN.
Ofcourse,initsroleasshareholder,thegovernmentcouldinstructNBNCoregardingits
expectationsofNBNCosperformanceintermsofinnovationandservicedevelopment.
However,whilegeneralguidanceinthisrespectmaybeappropriate,itwouldbeneither
feasiblenordesirablefortheGovernmenttotakemanagerialdecisionsabouthowthose
objectivesshouldbemet.Moreover,guidancefromShareholderMinisterswillobviouslyfall
awayasandwhenNBNCoisprivatised.
Thepanelhasthereforecometotheviewthatthebestwayofdealingwiththeissueof
networkupgradesandcapacityexpansionisfirst,toensuretheregulatoryframeworkoffers
credibleincentivesforinvestment,withtheresultthatprofitmaximisationshouldhelpinduce
timelyextension,expansionandupgrading;andsecond,fortheGovernment,forsolongasit
ownsNBNCo,toensureitsboardoperatesonaclearlycommercialbasis,andsoitselfhas
incentivestorespondtotheprofitopportunitiesofnewinvestment.Whilethesemechanisms
cannotperfectlycorrecttheproblemsstructuralseparationcreates,theyshouldatleast
reducetheirimpact.
Setting a national broadband standard
Theissuesdiscussedabove,andthepolicyfunctionofNBNCo,suggesttherewillbe
continuingpressuresfortheGovernmenttodefineandperiodicallyreviseastandardforthe
levelofbroadbandaccessallAustraliansshouldenjoy.
Whethersettingsuchstandardsisdesirableisobviouslydebatable.Afterall,thelevelof
broadbandaccesscouldbedeterminedprimarilybymarketforces;andunderthepanels
disaggregationproposal,thereiseveryreasontobelievecompetitivepressureswouldprove
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effectiveinsodoing.Ofcourse,investmentmaynotoccurinareaswherecostsareespecially
highand/orwillingnesstopayrelativelylow;andtheremaybeexternalitiesthatgovernment
believesoughttoberemedied.However,selectiveinterventiontargetedtoareasofmarket
failureshouldbecapableofdealingwiththesesituations.
Thatsaid,eveninthecontextofsuchselectiveinterventions,anationalstandardmaybe
helpfulinidentifyingshortfallsinavailabilityandguidingcorrectiveaction.Moreover,atleast
asithasworkedtodate,itisnationalstandardsthathavedefinedNBNCosmission.Were
thepanelsdisaggregationproposalsimplemented,thatwouldnolongerbenecessary,as
competitivepressureswouldprovidetheimpetusforprogressivenetworkupgrading;but
eventhenanationalstandardcouldstillbeofuseininformingpoliciesfordealingwithany
marketfailures.
Inthepanelsview,settinganysuchnationalstandardisasignificanteconomicandsocial
decisionforAustralia.Asthepanelscostbenefitappraisalshows,itiscrucialthatany
decisionaboutsuchastandardbeinformedbyarigorousandtransparentprocessthat
examinesthecostsandbenefitssettingoralteringthattargetinvolves.Thatprocessshould
includeperiodicconsiderationofwhethertheexistingnationalbroadbandstandardis
appropriateorwhetheritshouldbeadjusted,presumablyupwards,forexample,inlinewith
consumerdemandforbroadbandcapability,innovationininfrastructureandapplications,
internationaldevelopmentsandtheresultingcostsandbenefitsofchangingthestandard.The
processcouldalsoincludeadviceonhowanynewstandardwouldbestbeimplemented.
Althoughthefrequencyofsuchreviewsissomewhatarbitrary,thepanelrecommendsthisbe
doneatleasteverysixtotenyears.Thereviewshouldbeconductedbyanindependentbody
suchastheProductivityCommission.Therequirementforsuchareviewshouldbesetoutin
theTelecommunicationsAct,withtheprovisionsspecifyingthatitmusttakeaccountofand
publiclyreportonthecostsandbenefitsofanychangeinthenationaltarget,includingthe
implicationsforconsumersandtaxpayers.
Thatwillnaturallyraisetheissueofhowanyupgradesshouldbefinanced.Itseemsinherently
undesirablefortaxpayerstobeforcedtofinanceinvestmentsthatwouldotherwisebe
undertakenbyprivateinvestors.Asaresult,thereviewshouldberequiredtoidentifythe
componentofanyupgradethatislikelytoproveinherentlyuncommercialandgovernment
fundingoughttobelimitedtothosecomponents.
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Recommendation13:Toensurenationalstandardsforbroadbandinfrastructureandservices
areappropriate,anindependentbody,suchastheProductivityCommission,reviewthemat
leastonceeverysixto10years,withtheresultsusedbytheGovernmenttoconfirmoradjust
thenationalbroadbandstandard.Thisreviewrequirementbesetoutinlegislation.Sucha
processshouldbeaprerequisitetoanyimpositionbyGovernmentofanewnational
broadbandstandard.
Recommendation14:If,followinganindependentreview,theGovernmentdecidestoraise
thenationalbroadbandservicestandard,itshouldinitiateaprocesswithNBNCoandother
relevantoperatorstoestablishthemostcosteffectivewayofimplementingthatnew
standard.Indoingso,theprimaryemphasisbeonupgradingnetworkscommercially,
includingthroughincreasedusercharges.TheGovernmentshouldonlyconsiderfunding
assistancewhenadesirableupgradewouldnototherwisebeundertakenonacommercial
basis.
9.6
Operational issues relating to terms of access
Inadditiontothestructuralissues,submittersexpressedarangeofconcernsrelatingtothe
specificsofNBNCosproducts,prices,othertermsandconditions,andcosts.Similarissues
wereidentifiedbythepanelsownanalysisinthisarea.Interestingly,giventherangeof
mattersinthisareaandthepotentialscopefordisagreement,thenumberofissuesis
relativelysmall.
Nonprice terms and conditions
ThepanelisawareofaccessseekersconcernsinrelationtosomeofNBNCosnonprice
termsandconditions,particularlyrelatingtoservicelevelcommitmentsandliabilityfor
enduserconnections.Thepanelsharesaccessseekersconcernsonthesematters.
TheACCCmadesomehighlevelremarksontheseissuesinthecontextofitsassessmentof
theSAUinearly2013,includingaskingNBNCotoworkwithaccessseekersonfurther
developingwaysofmanagingthem,buthasnotformallyassessedproposedapproachesor
madeanyregulatorydeterminations.
TheSAUcontainsprovisionsforNBNCotoorganiseanSFAAforumtoworkwithaccess
seekersondevelopingfutureWBAs.ThepanelexpectsNBNCowillfurtherdevelopandrefine
itsnonpricetermsandconditionsinresponsetoitsaccessseekersconcernsinthisforum.In
theeventthattheseconcernsarenotaddressedinthenextWBAorSAUvariation,thereis
alsoscopefortheACCCtomakeaccessdeterminationsonthesematters.
TotheextentthataccessseekersconcernsarecausedbyNBNCosrestrictionson
discriminatingbetweenaccessseekers,thatis,requiringNBNCotoofferallaccessseekers
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exactlythesameterms,theseissuesmaybealleviatedbythechangesproposedtothenon
discriminationprovisionsrecommendedintheStatutoryReview.
Points of interconnection for satellite traffic
ThepanelrecognisesRSPsconcernsaroundNBNCosproposedpracticeofroutingsatellite
traffictothepointofinterconnectionthatisgeographicallyclosesttothecustomeronthe
LTSS.Theseprovidersargued(insubmissionstotheACCCsreviewofPOIsandthereviewof
Division16ofPartXIBoftheCCAbyateamfromDeloitteAccessEconomicsledbyDrRic
Simes)thatthiswasanartificialsimulationoftheroutingoftrafficontheterrestrialnetwork,
becausethetrafficisactuallycollectedatoneofNBNCosdataprocessingcentres(DPCs).
Thispracticewould,however,forceRSPsonthesatelliteservicetopurchaseCVCcapacityin
eachpointofinterconnectionwheretheyhadasatellitecustomer.RSPsarguedthatthis
wouldonlybefeasibleiftheycouldacquiresufficientcustomersperpointofinterconnection.
InitsStrategicReviewofthefixedwirelessandsatellitenetworks,NBNCorecommends:
Adopt[ing]asinglePointofInterconnect(POI)architectureforLTSS,whichrecognises
thatgiventhatallLTSStrafficwillnecessarilybeconcentratedattheDPC,itisrequired
toalsoofferinterconnectionatthatpoint.AstheDPChasgeographicalredundancyit
isalsoprudentforthePOItohaveageographicallydiversebackuplocation.(p.43)
Atleastonthebasisoftheinformationavailabletoit,thepanelseesmeritinNBNCos
positioninprincipleandconsidersthatitisamoreefficientwayofdeliveringsatellite
services.
Migration to the NBN
AsindicatedintheStatutoryReview,issueshavearisenasaresultofNBNCoproductsnot
supportingasmoothmigrationfromlegacynetworkstotheNBN.TheNBNrolloutinvolves
significanttransactioncostsforpartiesandthisisreflectedintheresultsoftheCBA.All
partieshaveaninterestinminimisingthesecosts,aswellasprovidingasmoothpathfor
consumers,butverticalseparationinevitablycompoundsthedifficultiesofmigrationandthe
risksofdisruption.ThepanelseesmeritintheCommunicationsAllianceleadingamultiparty
selfregulatoryinitiative,followingonfromtheguidingnotethatithasalreadypreparedin
collaborationwithTelstraandNBNCo.Intheabsenceofthis,regulatoryintervention,for
examplethroughalicencecondition,mightberequiredtoresolvetheissues.Thismatteris
coveredfurtherinsection4.8.3oftheStatutoryReview,includingRecommendation34inthat
report.
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Issues where the panel does not share submitters concerns

Thereareanumberofmattersraisedwherethepaneldoesnotsharesubmittersconcerns.
WhilethepanelhasrecognisedthereareconcernsaroundNBNCosuseoftheICRA,in
particularinrelationtoitseffectsonNBNCosincentivetoupgradeitsnetworkduringthe
costrecoveryperiod,thepanelconsiderstheuseofanICRAisacceptableindeedcanbe
necessaryasameansofrecoveringlargeupfrontcosts.ICRAmechanismshavebeenusedin
otherregulatedindustries.ThefactthattherevenuecapdoesnotapplytoNBNCosrevenue
untiltheICRAisextinguisheddoesnotobviateNBNCosrequirementtoabidebytheprice
capssetoutintheSAU.
IntermsofNBNCospricingofitsCVCproduct,thiswasreviewedbytheACCCinthecourse
ofitsassessmentoftheSAU.TheACCCacceptedthattheSAU,includingthepricing
arrangementscontainedwithinit,asconsistentwiththeLTIE.Thepanelisnotconvincedthat
theACCCscriteriaforassessingtheSAUwereflawedandinanyeventdoesnotregarditas
appropriatetoreplacetheACCCsjudgment.Thepanelnotesthatbyproposingreviewonthe
meritsofACCCdecisionsontheseissues,thepanelhassoughttoensuretherearesafeguards
againstpossibleregulatoryerror.Itisobviouslyofsubstantialimportancethatmeritsreview
shouldapplytodecisionsmadeundertheSAU,ratherthansimplytotheinitialdecisionto
acceptit.
InresponsetosuggestionsthatNBNCoshouldberequiredtoprovideinterconnectionat
locationsotherthanthelistofPOIs,offeritsproductsonanunbundledbasisandofferits
multicastserviceonastandalonebasis,thepanelsimilarlyobservesthatthesematterswere
assessedbytheACCCinitsassessmentoftheSAU.Thepanelhasrecommended,inrelation
touniformnationalwholesalepricing,therepealofDivision16ofPartXIBoftheCCA(which
authorisesNBNCotobundleitsservicesifreasonablynecessarytoachieveuniformnational
wholesalepricing).Intheabsenceofthesestatutoryauthorisations,NBNCocanseekACCC
authorisationunderPartIVoftheCCAifrequired.Theseauthorisationswouldbeopento
appealtotheAustralianCompetitionTribunal.
ItwassuggestedthatNBNCoshouldofferopenpipeservices,wherebyNBNCosvarious
AVCservicesarecollapsedintoasingleservicethatprovidestheenduserwithasmuchspeed
andcapacityasisavailableonthenetwork,andthatitofferLayer1(forexample,darkfibre)
services.Thepanelsresponseisthatthedetailsregardingindividualproductsarebestleftto
theprovider,subjecttoACCCoversight.ThepanelnotesthattheACCCretainsthepowerto
declarenewNBNservices.ThecurrentproductofferingshavebeenscrutinisedbytheACCC
againststatutorycriteriaandprocessesanditissatisfiedthattheyarecapableofsatisfying
consumerneeds,atleastintheshortterm.Itisnotappropriateforthepaneltorerunthe
ACCCsassessment:thosejudgementsareamatterfortheregulatorandtheassociated
reviewmechanisms.
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IthasalsobeensuggestedthatNBNCoshouldmakegreateruseofalternativetechnologies
andleverageitsfixedwirelessandtransitnetworksinregionalandruralareastoprovide
wholesalemobileandmobilebackhaulservicestoendusers,oritsfibreassetstoassistthe
deploymentofsmallcellarchitectureincities.WhileNBNCodoesnotcurrentlyofferthese
services,therearenoregulatoryrestrictionspreventingitfromdevelopingthem.Toprevent
itfromhavinganadverseimpactonexistingcontestedmarkets,NBNCoshouldgenerally
applycompetitiveneutralityprinciples,includinginrelationtoacommercialcostofcapital.
ThepanelalsorecommendsthattheGovernmentshouldmonitorsuchactivitycloselyin
termsofNBNCosappropriateroleinthemarketplace.NBNCoiscurrentlydeveloping
mobilebackhaulproductsincooperationwithmobilenetworkoperators;itsFixedWireless
andSatelliteReviewdidnotrecommendpursuingwholesalemobileproductsatthistime.
Thissituation,combinedwiththestronginvestmentthatiscontinuingtooccurinthemobile
market,makesitdifficulttojustifyanyGovernmentinterventioninrelationtothesupplyof
wholesalemobileproducts.
However,thepanelsdisaggregationproposalswouldresultinspecialisedoperatorsforthe
fixedwirelessandsatellitenetworksthatwouldhaveverystrongincentivestomakethebest
useoftheirassets.Havingpurchasedthoseassetsthroughacompetitiveprocess,therewould
benocompetitiveneutralityconcernsshouldtheyaggressivelypursueopportunitiesin
marketsforwholesalemobileandmobilebackhaulservices.Thepanelthereforeseesits
proposedmarketstructureasthebestwayofaddressingtheconcernssubmittershave
expressed.
SubmitterstotheACCCconsultationontheSAU,includingMacquarie33,Optus34andTelstra35,
expressedconcernthatthenetworkdesignrulesandtheprudentdesignconditionarenot
stringentenoughandunderminetheprudencymeasuresthatareinplace,irrespectiveof
ACCCreviewpowers.ThepanelacceptsthatsomeelementsoftheSAUprudency
arrangementsmayprovideNBNwithscopetogoldplateitsnetwork,leadingtohigherlong
termpricesforaccessseekersandendusers.Thepanelhasdoubtsaboutthewisdomof
provisionsthatdeemedexpenditurebyagovernmentbusinessenterprisetobeprudent;itis
questionablewhetherthoseprovisionsshouldeverhavebeenaccepted.Thatsaid,thepanel
isequallyconcernedthatprudencytestsshouldnotbeusedtoeffectarbitraryassetwrite
33MacquarieTelecomSubmissiontotheACCCConsultationPaperontheNBNCoLimited2012SpecialAccess
Undertaking,January2013(www.accc.gov.au/system/files/Macquarie%20Telecom%20submission%20
%20SAU%20consultation%20paper%20%2818%20January%202013%29.pdf),p.20.
34OptusSubmissiontotheACCCConsultationPaperontheNBNCoLimited2012SpecialAccessUndertaking,
January2013(http://www.accc.gov.au/system/files/Optus%20submission%20
%20SAU%20consultation%20paper%20%2818%20January%202013%29.pdf),pp.5962.
35TelstraSubmissiontotheACCCConsultationPaperontheNBNCoLimited2012SpecialAccessUndertaking,
January2013(http://www.accc.gov.au/system/files/Telstra%20submission%20
%20SAU%20consultation%20paper%20%2818%20January%202013%29.pdf),pp.7275).
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downs,therebycompromisinginvestorsconfidenceintheregulatoryregime.Asaresult,
ratherthandisturbexistingarrangements,thepanelrecommendsthattheACCC,inusingits
stillconsiderablepowersundertheSAUtopreventgoldplating,becarefulnotto
unnecessarilyincreaseregulatoryrisk.
Resolving issues related to access terms
Thepanelhasnotattemptedtodevelopdetailedpoliciestoaddressalltheseissues:norisit
sensibleforittodoso.Most,ifnotall,oftheconcernsraisedcan,ifnecessary,bedealtwith
byNBNCoandtheACCCinupcomingprocesses.
ThepanelsunderstandingisthatbothNBNCoandtheGovernmentexpectthecompanywill
seekavariationtoitsSAUtoimplementthemultitechnologymodel.Inseekingavariation,
NBNCoshouldatthesametimeworktoresolvetheissuesidentifiedinsubmissionsandby
thepanel.TheACCC,inconsideringavariationrequest,shouldalsoseektoresolveresidual
concernsaspartofthevariationprocess.Ifthosepartiesfailtosatisfactorilydealwiththe
issues,accessseekerswillinevitablyraisethemagainduringconsultationontheSAU
variation.Ifthisdoesarise,thecaseforregulatorychangesdesignedtoaddressoutstanding
mattersshouldbeconsideredbytheGovernment.
Recommendation11inthepanelsStatutoryReviewisalsorelevanttotheseissues.Thepanel
recommendedthat:Arrangementsshouldbeputinplacetoenablecarriersandservice
providerstohaveeffectiverecoursetotheACCCforaspecifiedperiodonthetermsand
conditionsofanaccessagreementtheyareenteringintowithNBNCoandwhichthey
considerunreasonable.SucharrangementswouldprovideanincentiveforNBNCoto
preemptissuesandprovideaneffectivemechanismtoresolvethemwheretheynevertheless
arise.
NBNCoshouldworktoresolveanyoutstandingissuesrelatedtoaccesstermsthroughthe
nextNBNCoSAUvariationprocess.
Supply by NBN Co of services that are not declared
UndertheregulatoryframeworkapplyingtotheNBN,NBNCoisonlypermittedtosupply
servicesthataredeclaredforthepurposesofthePartXICaccessregime.Thisisthe
mechanismbywhichNBNCoservicesaresubjecttoACCCoversightandregulationas
required.
InitssubmissiontotheconsultationpaperonTelecommunicationsRegulatoryArrangements,
NBNCoproposedthatincertaincircumstances,itshouldbeallowedtoprovideservicesthat
arenotdeclaredandsoarenotsubjectprimafacie,toACCCregulation.NBNCoproposed
threesuchcircumstances:(1)whereNBNCoisproposingtooffertheserviceonlyaspartofa
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pilotoratrial;(2)servicesrelatedtointegratingothernetworksintotheNBN;and(3)where
NBNCoproposedtooffertheserviceinacontestablemarket.Becauseofthebroadstructural
implicationsofthisproposal,thepaneldecidedtoaddressthisissueinthisreportratherthan
intheStatutoryReview.
Forsolongasitremainsanintegratedentity,NBNCowillhavesubstantialmarketpower,
entrenchedbyitsagreementswithTelstraanditsaccesstotaxpayerfundingonnon
commercialterms.Asaresult,thepaneldoesnotbelieveitwouldbeappropriatetoprovide
NBNCowithasweepingexemptionfromregulatorysupervision.Thepanelrecognises,
however,thattheremaybeaneedforgreaterflexibility.
ThisflexibilitycanbedeliveredinpartundertherelaxationofNBNCosnondiscrimination
obligationsproposedinRecommendation13oftheStatutoryReview.Thisrelaxationwould
provideNBNCowithadditionalflexibilitytotreatparticipantsintrialsinpreferredways;
however,theACCCwouldstillretaintheoversightpowersapplyingtodeclaredservices
generally.
Thisrelaxationcouldalsoassistwithissuesarisingfromtheintegrationofnewnetworksinto
theNBN.AsNBNConotes,theseissuesarelikelytobetransitoryinnatureandadegreeof
flexibilityislikelytoberequired.However,transitionissuescouldalsopotentiallybe
significant.Forexample,NBNCoappearstoberaisingthisinthecontextoftherenegotiation
oftheDefinitiveAgreements,inwhichcomplexissuesabouttheintegrationofthecopperand
HFCnetworksarise.Werethesenetworksindeedtobeintegrated,ratherthanallowedto
compete,thenboththeresultingservicesandthetransitionprocessshouldberegulated.
InthecaseofNBNCosofferingofservicesinacontestablemarket,thepanelquestionswhy
NBNCowouldbeoperatinginthesemarketsgiventhatitsprimarymissionistoprovidenext
generationbroadbandwherethemarkethasfailedinitsdelivery.Thatsaid,whereNBNCo
hasthecapacitytoalsooperateinmarketswhereserviceprovisionisalreadybeingprovided
toanNBNconsistentstandard,therecouldbebenefitsinitsdoingsointermsofimproving
competitivepressure,providingitdoessoonacompetitivelyneutralbasis.Inthese
circumstances,theremaybesomegroundsforNBNCotobeexemptedfromimmediateACCC
oversightunderPartXICbutonlyifappropriatesafeguardswithrespecttocompetitive
neutralityareinplace.
Onbalance,thepanelproposesPartXICbeamendedtoprovideamechanismbywhichthe
ACCCcandeterminethataparticularNBNCoserviceorclassofserviceisnotdeclaredforthe
purposesofPartXICiftheACCCissatisfieditisinthelongterminterestofendusers.Indoing
so,theACCCshouldberequiredtotakeaccountofwhethertherearereasonableassurances
withrespecttocompetitiveneutrality.
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Recommendation15:NBNCoshouldgenerallycontinuetobepermittedtosupplyonly
declaredserviceswithinthemeaningofPartXICoftheCompetitionandConsumerAct2010.
However,toprovideflexibilitytodealwithsituationssuchaspilotsandtrials,theintegration
ofnewnetworks,theprovisionofservicesincontestablemarkets,andgreatercompetition
followingfulldisaggregation,PartXICshouldbeamendedtoallowtheACCCtodetermine
thatspecifiedNBNCoservicesarenottobetreatedasdeclaredservicesincircumstances
wheretheACCCissatisfiedthisisinthelongterminterestsofendusers.
9.7
NBN Co overbuilding and competitive neutrality
ConcernshavebeenraisedwiththepanelaboutwhetherNBNCohasbeenbehavingina
competitivelyneutralmannerinthewayitrecoversitscostsfromservicingnewestates,and
howitmakesdecisionstooverbuildanexistingbroadbandnetworkalreadyprovidingservice
toastandardthatmeetstheGovernmentsbroadbandserviceobjectives.Atissuehereis
whetherNBNCosbehaviourinthesetypesofsituationsisbeingregulatedappropriately.
Aspartofthecompetitionreformsofthe1990s,theGovernmentandallstateandterritory
governmentsundertooktoensurethattheirpubliclyownedbusinessesdidnotenjoyanynet
competitiveadvantagesimplybecauseofbeingpubliclyowned.In1996,eachgovernment
publishedacompetitiveneutralitypolicystatement.NBNCo,asagovernmentbusiness
enterprise,isboundbythecompetitiveneutralityprinciplessetoutintheCommonwealth
CompetitiveNeutralityPolicyStatement1996.
TheCommonwealthGovernmentBusinessEnterpriseGovernanceandOversightGuidelines
(October2011)alsorequireNBNCotooperateefficientlyandpriceefficiently36.This
requirementis,however,qualifiedinthattheGovernmentmayimposepriceconditionson
GBEsprovidinggoodsandservicesinamonopolisticmarketorCommunityServiceObligations
(CSOs).
Almostalltherecommendationsmadebythepanelwill,inonewayoranother,assistin
differentiatingbetweensituationswhereNBNComustadoptstrictcompetitiveneutrality
principlesfromthosewheretheiradoptioncanbetemperedlegitimatelybyCSO
considerations.Forexample,clarifyingwhereCSOsgenuinelyexist,movingtomorecost
reflectivepricingandreducingtheextentofandrelianceoncrosssubsidieswillmakeit
clearerwherecompetitiveneutralityprinciplesmustapplyinfull;whileNBNCoscompetitors
inthenewdevelopmentmarketcancompeteknowingNBNCostermsandconditionof
supplyhadbeenassessedbytheACCCagainstcompetitiveneutralitycriteria.
36AustralianGovernment,DepartmentofFinanceandDeregulation,CommonwealthGovernmentBusiness
EnterpriseGovernanceandOversightGuidelines(October2011),page5.
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ThepaneldoesnotwishtoseeNBNCoundulyrestrictedfromcompetingagainstother
infrastructureproviders,butatthesametimebelievesthatthiscompetitionshouldoccuron
themeritsandthusbefairandeffective.NBNCoshouldthereforebesubjecttoanobligation
toactinamannerconsistentwithcompetitiveneutrality,otherthanwhereitisclearly
fulfillingexplicitlydefinedsocialandeconomicpolicyobjectivesorwhereithasreceived
authorisationfromtheACCCforconductwhichwouldotherwisebreachthatobligation.
However,administeringanynewlegislatedrulesregardinghow,whereandwhenNBNCois
toadoptcompetitiveneutralityprincipleswouldbeimpracticalatthistime.Forexample,it
wouldbedifficulttodeterminewhetherNBNCohadenteredamarketsoastomeetitssocial
obligationtoprovideserviceincasesofmarketfailureorwhetheritwasadvancingitspurely
commercialobjectives.ThereasonsNBNCoentersamarketwilllikelyneverbeclearcut:a
failuretofullyrespectcompetitiveneutralityprinciplesmightbejustifiedwhenentryis
intendedtofulfilitsserviceobligations;orbecauseitwantstoprotectprofitmarginsusedto
fundserviceprovisionelsewherewhichmayitselfbealegitimategoalundercurrentpolicy
settings.
Thatsaid,itwouldbebetterforNBNCotohaveclearerinstructionsthanitcurrentlyhas
abouthowitistobehaveinsituationswheremarketfailureisnotusuallyanissue,andbe
requiredtoreportonhowithasgiveneffecttothoseinstructions.
Thebestwaythiscanbedone,wereNBNCodisaggregated,isthroughtheSOE.Itshould
specifyNBNCo'sprioritiesanditscommercialobjectives;includingensuringthatwhereit
overbuildsanexistingnetwork,ithasactedasaprudentinvestor,takenfullaccountofthe
opportunitycostofcapitalandhasbeenmindfulofthefactthatoverbuildingpremisesthat
hadadequatealternativesreducesitsabilitytoservicethosethatdonot.
ThereshouldalsobearequirementonNBNCotomodifyitsconduct,shouldthatconductbe
thesubjectofacompetitiveneutralitycomplaintthatisupheld.
Concernsaboutanticompetitivebehaviourinrelationtooverbuildshouldbedealtwith
throughPartXIBandPartIVoftheCCA.
Againstthisbackground,thepanelconsidersitisundesirabletoretaintheadequatelyserved
policyintothefuture,asitseemstocutacrosstheNBNCoBoard'sresponsibilityfordeciding
rolloutpriorities.Operatinginawellestablishedpolicyframework,theNBNCoboardshould
takedecisionsonestablishingrolloutprioritiesrelyingontheirrequirementtoact
commercially.
OneoftheimplicationsoftheGovernmentcontinuingwiththecurrentNBNCostructureisan
acceptancethatiteffectivelysacrificesthescopeforcompetitionbecause,evenwitha
competitiveneutralityrequirement,thethreatofNBNCoenteringeverypotentiallyprofitable
marketwilldetercompetinginvestments.Werethisthecase,thepanelrecommends
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competitiveneutralityrequirementsinrespecttodecisionsaboutentryandexpansionshould
begivenlegislativeform.Notwithstandingpotentialadministrativeproblems,NBNCos
marketpowerasanintegratedentityandhenceabilitytodeterinvestmentsbyalternative
providerswillrequirethisstepsoastomakecompliancewithcompetitiveneutrality
principlesalegalrequirementthatcanbeenforced.
Recommendation16:WeretheGovernmenttodecidetoretainNBNCoasanintegrated
entity,competitiveneutralityrequirementsinrespectofdecisionsaboutentryandexpansion
beestablishedinlegislation.ShouldNBNCobedisaggregated,theGovernmentgiveNBNCo
clearerinstructionsthroughtheShareholderMinistersStatementofExpectationsabouthow
itistobehaveinsituationswheremarketfailureisnotusuallyanissue.Thisincludes:
a)
instructingNBNCotoactinamannerconsistentwithcompetitiveneutralityprinciples
otherthanwhereitisclearlyfulfillingexplicitsocialandeconomicpolicyobjectivesor
hasACCCauthorisation;
b)
instructingNBNCoastoitsprioritiesanditscommercialobjectives,includingensuring
thatwhereitoverbuildsanexistingnetworkitactsasaprudentinvestor,takesfull
accountoftheopportunitycostofcapitalandismindfulofthefactthatoverbuilding
premisesthathaveadequatealternativesreducesitsabilitytoservicethosethatdonot;
c)
ensuringthatconcernsaboutanticompetitivebehaviourbyNBNCoinrelationto
overbuildingareappropriatelydealtwiththroughPartXIBandPartIVofthe
9.8
Telstras price controls
Unders.157oftheTelecommunicationsConsumerProtectionandServiceStandardsAct1999,
theMinistercanestablishretailpricecontrolarrangementsforTelstrasservices.Theprice
controlregimehasthreemainobjectives:torestrainsignificantmarketpower;toencourage
efficiencyinservicepricing;andtogiveeffecttoanysocialequityobjectivessuchasthatof
uniformnationalretailpricing.Thecontrolsmayalsosupportthelicenceconditionwhich
requiresTelstratodevelopandcomplywithaplantoassistlowincomeconsumerstoaccess
telecommunicationsservices,andtheregulatoryarrangementsinrespectoftheavailabilityof
untimedlocalcallstocustomersinExtendedZones(regionalandremoteareasofAustralia).
TheTermsofReferencerequirethepaneltoconsider,inthecontextofNBNCosproposed
pricingstructure,theextenttowhichretailpricecontrolsshouldbecontinued.Thepanelhas
determinedthatthemostappropriatewaytotreatthistaskistoexaminethetreatmentof
TelstrasretailpricecontrolsonNBNandgenerally.
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Telstras pricing on the legacy copper network

Inrelationtothelegacycoppernetwork,Telstramayretainadominantpositiononitscopper
networkbothintheleaduptothemigrationtotheNBNfixedlinenetworkandinareas
whereNBNCowillprovidefixedwirelessandsatelliteservicesandTelstrascoppernetwork
willcontinuetobeusedtosupplyvoiceservices.
TheDepartmentofCommunicationshasseparatelycommissionedaneconomicanalysisof
TelstraRetailPricecontrolsastheyapplytoTelstraservicesonitslegacynetworks.Thereport
concludesthattheTelstraretailpricecontrolsarenolongernecessary37.Asaresult,theprice
controldeterminationwasnotrenewed,sosomecontrolswilllapseby30June2015.
Thepanelhasnotduplicatedthatwork.However,itwouldsupporttheremovaloftheseretail
pricecontrolswhereretailcompetitiondoesorcanprovideeffectivedisciplinesoverthe
exerciseofsignificantmarketpower.Moreover,inthoseareaswhereretailcompetitionhas
notdeveloped,theGovernmentshouldconsiderwhetherpricecontrolshavecontributedto
theproblemsbyholdingpricesdowntounprofitablelevelsandifso,shouldremoveorrelax
thosecontrols.However,theGovernmentshouldretainthepowertoapplycontrolsinthe
futuretohelpaddressparticularareasofretailmarketfailure,forexample,inthegeographic
areaswhereTelstraiscontractedtoretainitscoppernetwork.
Telstras pricing on the NBN
InthecontextoftherolloutoftheNBNandthecontrolsonNBNCoswholesalepricing,there
isaquestionofwhetherpricecontrolsonTelstrasservicesremainsrelevantontheNBN.
Since2012,pricecontrolsdonotoperateforTelstraservicesprovidedovertheNBN(orother
networkscapturedbyParts7and8)withtheexceptionofchargesforuntimedlocalcallsand
thedisallowanceprovisionofchargingfordirectoryassistanceservices.Theincreasedlevelof
competitionandlowbarrierstoentryontheNBNwereseenasrenderingretailpricecontrols
onsuchnetworksasgenerallyunnecessary.However,thesetwocontrolsweremaintainedin
theinterestsofsocialinclusionandconsumerprotection.38
The2012reportonpricecontrolssaidtheNBNprovidesanopenplatformforthe
developmentofrobustretaillevelcompetition...itrespondstolongstandingconcernsabout
barrierstocompetitionintheAustraliantelecommunicationsmarketflowingfromTelstras
37http://www.communications.gov.au/deregulation
38PriceControlArrangements,NotificationandDisallowanceDeterminationNo.1of2005(AmendmentNo.1of
2012)ExplanatoryStatementtoTelstraCarrierCharges,p.12.Thedisallowanceprovisionofchargingfor
directoryassistanceservicesenablestheMinisterforCommunicationstodisallowpricingproposalsforthese
services.
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controloftheaccessnetworkanditsverticalintegration.39Further,the2012report
proposedthatalthoughtheTUSMAAgreementdoesnotsetprices,itcouldberenegotiated.
Panels view
ThepanelrecognisesthecomplexitiesofthedebatearoundretailpricecontrolsonTelstrain
thetransitiontoanenvironmentdesignedtoencourageretaillevelcompetition.
TheNBNprovidesabasisforensuringthatallserviceprovidershavescopetocompeteonthe
meritsandthatconsumershaveaccesstoawiderangeofserviceproviders,includingin
regionalareas.ThereisthereforenoreasonforpricecontrolstoapplytoTelstrasretail
servicesontheNBNwhereitwillbecompetingwithotherretailserviceprovidersonalevel
playingfield.Asforaffordabilityissues,thesearebestaddressedthroughthearrangements
recommendedinchapter8.
ThisraisestheissueofwhetherthepoweroftheMinistertomakepricecontrol
determinationsshouldberetained.Thepanelbelievesitshould,forprudentialreasons,but
thatitoughttobemoretightlyconfinedtoclearinstancesofmarketfailure.
Ifthereareareaswherecompetitivemechanismsaredemonstrablynotworkingtoprovide
affordablepricesforconsumers(forexample,becauseRSPshavefailedtoenterorhave
withdrawnfrommarketsegments),theGovernmentshouldexaminecarefullywhythisisthe
case.IntheeventthattherearepricingoutcomesforendusersthattheGovernment
consideredareunacceptable,theseconcernsshouldbeprimarilyaddressedthroughproperly
targetedandtransparentsubsidies,ratherthanthroughtheinherentlydistorting,poorly
targetedandopaqueinstrumentofpricecontrols.However,wheresubsidiesare
inappropriate,theGovernmentmightconsiderthetargeteduseofpricecontrolsdirectedat
theproblemareas,notbroadbrushcontrolsashasbeenthegeneralpracticetodate.Suchan
approachmaybewarranted,particularlyinthesatelliteandfixedwirelessfootprintwhere
voiceserviceswillcontinuetobeprovidedovertheTelstracoppernetworkinthelonger
term.
Thepanelthereforerecommendsthatlegislationbeamendedtoallowretailpricecontrolsto
applyonlytosituationswherethereisenduringmarketfailure;wherepricecontrolswillnot
entrenchthatmarketfailurebydeterringcompetingentry;wherewholesalepriceregulation
doesnotprovideareasonablealternativetoregulatingretailprices;andwhereitis
reasonabletobelievethebenefitsofretailpricecontrolswouldoutweighthecosts.
39NationalBroadbandNetworkCompaniesBill2010TelecommunicationsLegislationAmendment(National
BroadbandNetworkAccessArrangements)Bill2011RevisedExplanatoryMemorandum,p.9.
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Recommendation17:RetailpricecontrolsnotbeappliedtoTelstraservicesontheNBN
unlessthereisclearevidenceofconsumerdetrimentduetoTelstrafacinginadequateactual
andpotentialcompetitioninaparticularmarketsegment.TheMinisterspowertomakeprice
controldeterminationsberetainedinaformthatallowsittobeappliedtoservicesprovided
overtheNBN,foruseonlyasareservepowerandsubjecttothatpowerbeingconfinedto
areasofclearmarketfailure.
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10.PrivatisationandgovernanceofNBNCo
TherulesforNBNCosownershipandgovernanceareestablishedinlegislation.Theserules
allowconsiderableflexibilityinthemanagementofNBNCosassets,andgivetheGovernment
significantpowerstodeterminethestructureofthecompany.Thesepowerscanfacilitatethe
structuralreformstoincreasecompetitionandimprovelongtermindustryoutcomesthatthe
panelhasrecommended.
10.1 Privatisation arrangements

TheNBNCompaniesActestablishesthearrangementsforNBNCoownership,privatisation,
assetdisposalandfunctionalseparation.NBNCoalsooperatessubjecttothePGPAAct,which
setsoutstandardbusinessoversightrulesforCommonwealthownedcompanies,andthe
CommonwealthGovernmentBusinessEnterpriseGovernanceandOversightGuidelines2011.
NBNCowasestablishedinsuchawaythatitcanbeprivatisedinthefuture.However,under
currentlegislation,theGovernmentmustretainfullownershipofNBNCountilaseriesof
actionsaretaken.TheMinisterforCommunicationsmustfirstmakeadeclarationthatthe
NBNisbuiltandfullyoperational.TheProductivityCommissionmustthenconductaninquiry
intoregulatory,budgetary,consumerandcompetitionmattersrelatingtotheNBN,anda
ParliamentaryJointCommitteemustconsiderthefindingsofthatreport.TheFinance
Ministermustthenmakeadisallowabledeclarationthatconditionsaresuitabletosell
NBNCo.
ThesearrangementsmeanthatprivatisationofNBNCowouldnotrequirelegislative
amendments.TransitionalprovisionsalsoallowforNBNCotocontinuereportingtothe
CommunicationsandFinanceMinistersaslongasitremainsinmajoritygovernment
ownership.
10.2 Management of NBN structure and assets

TheGovernmentmayrequireNBNCotoimplementmeasurestoprovidegreater
transparencyandequivalenceoftreatmentinitsoperations,includingtheappropriateform
ofseparationatanytime.Separationarrangementscouldinvolvefullfunctionalseparationof
allbusinessunitsorcouldbemorelighttouch,suchasrequiringseparatefinancial
statementsandassetregistersfordifferentbusinessunits.Thesepowersenablebusiness
unitstobefurtherseparatedifrequired(forinstance,intermsofseparatingthepassive
networkfromtheactivenetwork;wirelessfromfixedline;oralongthelinesofeach
technologyplatform).NBNCoalreadyhasaccountingarrangementstoidentifyactive,passive
andtransitassetsandcosts,andreportsannuallytoShareholderMinistersatahighlevelon
thisbasis.Theunderlyingsystemsallowmuchmoregranularreporting.
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NBNComayalsodisposeofassetsaspartofitsnormalbusinessactivities.UnderDivision4of
Part2oftheNBNCompaniesAct,theCommunicationsandFinanceMinistersmaygive
directionsaboutassetdivestiturebyanNBNcorporation,havingregardtowhetherthiswill
promotetheLTIE.TheMinistersmayalsorequiretheACCCtoprovideadviceonaproposed
divesture.
Panels view
Thepanelsproposalsfordisaggregationinvolvesomedegreeofassetdivestiturebutdonot
requireorentailtheprivatisationofNBNCo.GiventhatNBNCoisstillintheearlyyearsof
deployingFTTx,theownershiparrangementsfortheseassetsshouldberevisitedatalater
stage,forexample,once80percentoftheNBNhasbeenbuiltandisoperational.
Shoulddisaggregationnotproceed,theseparationpowerscouldbeusedtoimprove
transparencywithinNBNCo,particularlywithregardtocrosssubsidiesbetweenthedifferent
networktechnologies,andtopreservetheoptionoffuturedisaggregation.Ataminimum,
establishingdifferentfunctionalbusinessunitswithinNBNCoforeachofthetechnologies
beingusedintherolloutwouldprovidethistransparency,andwouldalsopreparethe
companyforanyfuturedivestitureofnetworks.Thepanelsfullrecommendationsonthis
matterarecontainedinchapter6.
Fullprivatisationisalreadyprovidedforinthecurrentlegislation;however,themechanics
theyenvisagearecumbersome,andratherthanrecognisingtheimportanceofinjectingthe
disciplinesofprivatecapitalmarketsandreducingtheburdenontaxpayerfunding,seem
moresuitedtothedayswhengovernmentownershipwasthedefaultposition.Asageneral
matter,imposingontaxpayersthehighcostsandfarreachingrisksthatprojectssuchasthe
NBNinvolveisundesirable;theGovernmentshouldthereforeactivelyexploreoptionsfor
lighteningtheloadtaxpayersarebeingforcedtoshouldersolongasthatcanbedonewithout
compromisingthepolicyobjectives.However,whileamorestreamlinedlegislativeframework
forachievinganeventualfullsalewouldbedesirable,itisclearlynotanimmediatepriority.
Thepanelconsidersthattheexistingseparationanddivestiturepowersaresufficientto
implementanyofthestructuraloptionsrecommendedbythepanel,sodoesnotrecommend
anychangestothesearrangements.
Recommendation18:ArrangementsrelatingtotheprivatisationofNBNCoasacompanyare
notanissuethatrequiresimmediateconsideration;theyberevisitedoncetheNBNisfurther
established.
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11.Administrationofeconomicregulationofthe
telecommunicationsindustry
11.1 Introduction
Acentralfeatureofthepanelsworkhasbeenidentifyingthebesteconomicregulatory
arrangementsforthebroadbandmarketgoingforward.Inthiscontext,thepanelalso
consideredhowthefutureadministrationofwhatwillinevitablybecomeanincreasingly
complexindustryframeworkcouldbeundertakeninthemostefficientway.
TheACCCiscurrentlyresponsibleforeconomicregulationofthetelecommunicationsindustry
andwasthefocusofthepanelsconsiderationofthisissue.Incontrast,thepaneldidnot
considertechnicalregulationorcarrierandserviceproviderconsumerrelatedregulation
whichlieswiththeACMA.
TheRegulatoryIssuesFramingPapersoughtsubmissionsonwhethertheACCCshouldremain
responsiblefortheeconomicregulationoftheAustraliantelecommunicationsindustry.That
papernotedthatAustraliaisunusualinvestingresponsibilityforeconomicregulationof
telecommunicationsinageneralistbodywhoseresponsibilitiesincludeadministrationofthe
competitionlaws.
TheACCCscurrenttelecommunicationsspecificrolesinclude:
assessingandenforcingthetermsandconditionsofaccesstoservicesontheNBN;
assessingandenforcingTelstrasSSUandplantomigrateTelstrasfixedlinecustomers
totheNBN;
settingwholesalepricesandtermsandconditionsofaccessfordeclaredservices;
monitoringandreportingonpricesandcompetitioninthetelecommunicationssector;
and
investigatingclaimsofanticompetitiveconductbycarriersandcarriageservice
providers,andtheissuanceofcompetitionnoticesandBindingRulesofConduct.
11.2 Stakeholders views on the ACCCs role

SubmissionsinresponsetothepanelsFramingPaperweregenerallysupportiveoftheACCC
andfeltthatitshouldremaintheinstitutiontoregulatetelecommunicationscompetitionand
consumerpolicy.ThemainexceptiontothisviewwasCIMB,whichwascriticaloftheACCCs
impactonindustrycertaintyandinvestmentincentives.
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Mostsubmitterseithermadenosuggestionsforchangeorsoughtmarginalimprovements.
SuggestedchangesthatcouldbemadetotheACCCscurrentroleincludedthatitberequired
toprepareregulatoryimpactstatementswhenmakingdecisionsandmanagearegisterof
costtoindustryforitsregulatorydecisions,alongwiththeestablishmentofaregulatory
reviewpaneltoprovidearighttochallengedecisionsmadebytheACCC(andtheACMA).
11.3 Future administration of economic regulation of the

telecommunications industry
Thepanelismindfulofthefactthatmanyofitsrecommendationswillcreateadditional
regulatorytasksandthat,inanyevent,theindustrystructureassociatedwiththedeployment
ofhighspeedbroadbandserviceswillcreateawiderangeofregulatorychallenges.Farfrom
reducingthecomplexityoftheregulatorytask,structuralseparationimposesnewfunctions
oneconomicregulation,mostacutelyinthetransitionstagebutalsooncethattransitionhas
beeneffected.Thefundamentalquestioniswhatinstitutionaldesignisbestcapableof
meetingthechallengesthatlieahead.
ThehistorythatledtotheACCCscurrentroleishelpfulinaddressingthatquestion.
Fundamentally,theACCCwastaskedwiththeresponsibilityforeconomicregulationof
telecommunicationsasaresultofthreefactors.
ThefirstwastheexperiencewithAUSTEL,theindustryspecificregulatorestablishedasa
resultofthe1989reforms,andwhosepowerswereenhancedwiththeintroductionoflimited
infrastructurecompetitionin1991.Bythetimeoftheduopolyreviewin199596,itwas
recognisedthatrelianceonanindustryspecificregulatorinvolvedanumberofsubstantial
risks,includingthatofdistortinginvestmentthroughdifferencesinthetreatmentof
telecommunicationscomparedwithotherregulatedindustries.
Second,whiletelecommunicationsreformbegansomewhatsoonerthanthatoftheother
industriestraditionallyrunasgovernmentmonopolies,theperiodleadinguptothe1997
reformscoincidedwiththedevelopmentofNationalCompetitionPolicy,andmoregenerally
ofwhatbecameknownastheHilmerreforms.
Animportantthrustofthosereformswastheemphasisonnationaluniformityofapproachto
industryregulation,whichwasacceptedasdesirablebecauseitavoideddistortinginvestment
andbyensuringthatdecisionstakeninrespectofoneregulatedindustrycouldseta
precedentinrespectofotherswouldenhancethecertainty,predictabilityandqualityof
regulation.Additionally,byvestingresponsibilityforregulationinasingleentity,economiesof
scaleandscopecouldbeachievedinundertakingregulatoryfunctions.
Third,atthetimeofthe1997telecommunicationsreforms,itwasenvisagedthatareasonably
timelytransitionwouldoccurtoaworkablycompetitivetelecommunicationsmarket,
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includingattheinfrastructurelayer.Asthattransitionprogressed,industryspecificeconomic
regulationwasexpectedtofallaway,eventuallymergingintomorelighttoucharrangements
basedbothonthenewPartIIIAofthethenTradePracticesAct(nowCCA)andon
enforcementofthegeneralcompetitionlaws.Whileitwasrecognisedthattherewererisks
associatedwiththeverybroadspanofcontrolthatwasbeingplacedontheleadershipofthe
ACCC,vestingregulatoryresponsibilitiesintheACCCwasconsideredanappropriatewayof
facilitatingtheexpectedtransitiontoaregimeincreasinglybasedonthenonindustryspecific
competitionlaws.
Lookingtothefutureoftelecommunicationsregulation,theneedforindustryspecific
regulationwillnotdiminish,atleastintheneartomediumterm,particularlyiftheintegrated
modelfortheNBNremainsinplace.Asaresult,theearlierrationaleforvestingthose
arrangementsintheACCCnamely,theexpectedmovetoanapproachprimarilyrelianton
nonindustryspecificcompetitionpolicyinstrumentsisnolongervalid.
Moreover,thesheerscaleoftheregulatorytasksthatlieaheadandthehighcostsof
regulatoryerrorsuggestaneedforthosetaskstobeundertakenbyanentitywhose
leadershipisfocusedonregulatoryfunctions(particularlynetworkaccessregulation)and
whoseperformanceisprimarilyandtransparentlyassessedonthebasisofitsefficiencyand
efficacyinthedischargeofthosefunctions.
Thesefactorsdonotsuggestrevertingtoanindustryspecificregulator.Eventhoughmany
aspectsoftelecommunicationsregulationwillremainbespoke,therearenowsufficient
commonalitiesbetweenregulatedindustriesforinstance,therelianceonwhatamountstoa
buildingblocksmodelofpricesettingastocreateopportunitiesforeconomiesofscaleand
scopeinnetworkaccessregulation.Additionally,thestresstheHilmerreportplacedonthe
importanceofavoidingthedistortionsthatwouldarise,wereinvestmentinthevarious
regulatedindustriestreateddifferently,remainstimely.Sodoesthedesirabilityofensuring
eachregulatedindustryhasaninterestinmonitoringtheperformanceofacommon
regulator,thusincreasingthepressuresonthatregulatortocarryoutitsfunctionstothe
higheststandards.
Asaresult,thepanelbelievesthereisacompellingcaseforvestingtheeconomicregulation
ofallnetworkindustriesinanetworksregulator,whichshouldbeaspecialisedbodywithits
ownleadershipandstaff.Thisentityssoleresponsibilitywouldbetheeconomicregulationof
networkindustries;itwouldbechargedwithseeking,tothegreatestextentpracticable,
consistenttreatmentofthoseindustries;anditsaccountabilitiesandperformancereporting
wouldbespecifiedintermsofthosefunctions.
ThepanelrecognisesthatthefutureroleandfunctionsoftheACCCarebeingassessedinthe
currentCompetitionPolicyReview.Itthereforebelievesthataspartofitswork,thatreview,
mindfulofthepanelsrecommendation,shouldexaminethescopeforestablishingasingle
networksregulator.Intermsoftheimplicationsfortelecommunications,suchatransfer
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wouldlikelyleavethecurrentcompetitionpowersunderPartXIB(shouldtheyberetained)in
theACCC,whichhoweverwouldberequiredtoconsultthenetworksregulatorinexercising
thosepowers;theothertelecommunicationspecificregulatoryfunctionswouldvestinthe
newentity.
Ifthecompetitionpolicyreviewdidnotrecommendtheformationofsuchanetworks
regulator,orsucharecommendationwasmadebutnotaccepted,theGovernmentcould
considerworkingwiththeStatesandTerritoriestoexpandthescopeofthecurrent
arrangementsfortheAER.AddingthetelecommunicationsfunctionstoaredesignedAER,
whichwouldpresumablycontinueinitscurrentrelationshiptotheACCC,wouldgosomeway
toachievingtheobjectivessetoutabove.However,ashasbecomeapparent,thecomplex
relationshipbetweentheAERandtheACCCblursaccountabilityandhasthepotentialto
reducetheeffectivenessofregulation,makingthisasecondbestoption.
Inshort,takingaccountof:
thescaleandcomplexityoftheregulatorychallengesarisingfromthedeploymentof
highspeedbroadband;
theneedtoensurethosechallengesarevestedinanentitywithamanageablespanof
control,andwhoseprimaryaccountabilityliesintheefficacyandefficiencywithwhich
itdischargesitsregulatoryfunctions;and
thedesirabilityofsecuringuniformityofeconomicregulation,andofthe
administrationofaccessregulation,acrossthenetworkindustries,
thepanelconcludes,onbalance,thateconomicregulatoryfunctionsshouldbevestedina
specialistnetworkregulator,whoseoperationswouldcovertheentirerangeof
infrastructureindustries.
ThepanelnotesthattheACCCspowersunderPartXIBcurrentlyincludebothcompetition
noticesandbindingrulesofconduct.Currently,theseinstrumentshavedifferent(though
overlapping)scope,aresubjecttodifferentformsofreview,andareappliedusingdifferent
tests.Thisarrangementgeneratesuncertaintyaboutthelegislativepowerstobeusedin
particularcases.ThereviewofPartXIBrecommendedbythepanelintheStatutoryReview
shouldconsidertheoutcomeoftheCompetitionPolicyReviewtodeterminehowthese
powersmightbealignedwithbroadercompetitionlawtoimprovetheefficacyofconduct
regulation.
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Recommendation19:ThecurrenttelecommunicationsspecificfunctionsoftheACCC,with
theexceptionofthoserelatedtoPartXIBoftheCompetitionandConsumerAct2010,should
betransferredtoanetworksregulator.ThecurrentCompetitionPolicyReview,whichisto
reportbyDecember2014,shouldexaminetheestablishmentofsucharegulatorwhichwould
haveresponsibilityforaccessregulationforallinfrastructureindustries.
Strengthening the telecommunications policy process
Whilemanyfactorscausedtherecurringdifficultieswhichculminatedintheestablishmentof
theNBN,theproblemswereaggravatedbytheblurringofthedistinctionbetween
responsibilityforpolicy,ontheonehand,andforregulation,ontheother.Theformer
involvessettingobjectivesandframingtherulesrequiredtoensurethoseobjectivesare
pursued;thelatterinvolvesapplyingtherulestoparticularsituations.Whilethedividingline
betweenthesecanneverbewatertight,thereisnodoubtthatitwasconsiderablymore
clearlydefinedintheenergyindustriesthanintelecommunications,whereitbecame
undesirablyunclear.
Inpractice,theACCC,ratherthanadministeringtherules,becameaprimarysourceofpolicy
advice,eveninareaswhereitlackedthenecessaryexpertise.Thepotentialcounterweights,
however,provedinsufficienttoinjectthebalancerequired,creatingriskstothequalityofthe
policyprocess.
Whateverregulatoryandpolicysettingsarenowputinplace,therewillbeaneedfortheir
ongoingreviewinthelightofexperience.Thepanelbelievesitisimportantthattherebea
strongcapabilitywithintherelevantgovernmentdepartmentforthatreview,andurgesthe
Governmenttoconsiderhowthatcapabilitycanbeensured.Italsobelievesitisimportantto
clarifytheseparationbetweenpolicyandregulation,includingbymakingitplain,inthe
accountabilitiessetfortheregulator.
Tobringaddedclaritytothatdistinction,theGovernmentshouldconsiderissuingapolicy
whitepaperontelecommunicationsthat,amongotherelements,couldrespondtothe
panelsreport.Asageneralmatter,thepanelbelievesitisdesirableforsuchpolicy
statementstobeissuedandupdatedregularly,settingoutthecurrentsituation,thepolicy
objectivesbeingpursuedandtheinstrumentsthatwillbeusedtopursuethem,aswellasthe
indicatorsthatcanservetomeasurewhetherthoseobjectivesareindeedbeingachieved.
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Appendix1TermsofReference
ThepurposeoftheIndependentcostbenefitanalysisandreviewofregulationistoanalyse
theeconomicandsocialcostsandbenefits(includingbothdirectandindirecteffects)arising
fromtheavailabilityofbroadbandofdifferingpropertiesviavarioustechnologies,andto
makerecommendationsontheroleofGovernmentsupportandanumberofotherlonger
termindustrymatters.
InformationflowingfromtheNBNCoStrategicReviewshouldbeconsideredasinputtothis
analysis/review.
ThereviewistoreporttotheGovernmentwithinsixmonthsofthesetermsofreference
beingreceivedonthefollowingquestions:
1.
Whatisthedirectandindirectvalue,ineconomicandsocialterms,ofincreased
broadbandspeeds,andtowhatextentshouldbroadbandbesupportedbythe
government?
a. Thisshouldconsidertheeconomicandsocialbenefitsofbringingforward
improvementsinbroadbandspeedandtherespectivebenefitsofalternative/
potentialtechnologies.
b. Itshouldalsoconsidertheextenttowhichmarketpricingmechanismscan
capturethevalueofbenefits(includingbenefitstoAustraliangovernments).
2.
WhataretheoptimallongtermownershipandregulatoryarrangementsforNBNCo?
a. Thisshouldincludecoverageoftherequirementsofthestatutoryreviewofthe
telecommunicationindustryaccessarrangementsrequiredunderthe
3.
HowshouldtheactivitiesofNBNCobeconstrainedgivenitsmandatetoefficientlybuild,
operateandmaintainawholesaleonlyaccessnetwork?
a. Thisshouldincludeconsiderationoftheissuesassociatedwithinfrastructure
basedcompetitionandtheeconomicbenefitofalternatives.
b. RecommendationsshouldbemadeonthestructureoftheAustralian
wholesalebroadbandmarket,includingregulatoryarrangements.
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4.
HowshouldNBNCoscapitalinvestment,productsandpricingbereviewedand
regulated?
a. Thisshouldconsideradviceonhowproductsshouldbestructuredtopromote
efficiency,consumerchoiceandcompetition.
b. Thisshouldalsoconsider,inthecontextofNBNCosproposedpricing
structure,theextenttowhichretailpricecontrolsshouldbecontinued.
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Appendix2Currentbroadbandindustrystructureand
regulation
The Australian broadband market
Broadbandservicesaredeliveredusingarangeoftechnologiestohomesandbusinesses
acrossthecountry.
Fixedline networks
Telstraoperatesthemostextensivefixedlinetelecommunicationscustomeraccessnetwork
nationally,providingnearubiquitouscoveragetoallAustralianpremises.Telstraandother
RSPsusethistodeliverbroadbandservicesviaasymmetricaldigitalsubscriberline(ADSL)
technologywhichreliesonTelstrasextensivenetworkoftwistedcopperpairlines.
Approximately9.9millionpremises(91percent)haveaccesstofixedlinebroadbandservices
deliveredviaADSLtechnology40byTelstraorotherRSPs.AsatDecember2013,therewere
approximately4.9millionDSLsubscribers41.
Theremainingfixedlinebroadbandaccessnetworksinclude:
TelstrasHFCnetworksinSydney,Melbourne,Brisbane,theGoldCoast,Adelaideand
Perth,capableofservingapproximately2.5millionpremises42;
OptusHFCnetworksinSydney,MelbourneandBrisbane,capableofserving
approximately1.4millionpremises43;
TransACT/iiNetsHFCnetworksinVictoria(coveragenotpubliclyavailable)andFTTN
networksintheACT,capableofservingapproximately60,000premises44;
TelstrasFTTPnetworksinSouthBrisbane,capableofservingmorethan13,000
premises45andVelocitynewhousingestates;
40Source:DepartmentofCommunications,BroadbandAvailabilityandQualityReport,December2013,p.3.
41Source:AustralianBureauofStatistics8153.0InternetActivity,Australia,December2013.
42Source:ACCCEmergingMarketStructuresreport(June2003),p.52.
43Source:OptussubmissioninresponsetotheACCCsDraftDeterminationontheApplicationforAuthorisation
oftheHFCSubscriberAgreementbetweenNBNCoLimitedandSingTelOptusPtyLtdandotherOptus
entities,p.8.
44Source:PaulBuddeCommunicationPtyLtd:AustraliaTelcoCompanyProfilesTransACTCommunications
PtyLimited(April2011),p.2.
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NBNCosFTTPnetwork,currentlycapableofserving513,280premises46;and
smallercarriersnetworks,whichincludeFTTPnetworksinnewhousing
developments.
AsofDecember2013,therewerearound944,000HFCsubscribersand167,000fibre
subscribers47.Asat31July2014,NBNCosFTTPnetworkhad168,790activeservices48.
Intermsofretailmarketshareoffixedbroadbandservices,theACCCreportsthat,asatJune
2013,Telstrahad42percent,Optus15percent,iiNet14percent,TPG12percentwith
others(includingtheM2groupwhichownsPrimusandDodo)makinguptheremaining
17percent49(seeChartA2.1).
Chart A2.1: Retail fixed broadband market share
Retailfixedbroadbandmarketshare
Other
17%
Telstra
42%
TPG
12%
iiNet
14%
Optus
15%
Source: ACCC report: Telecommunications competitive safeguards for 201213.
45Source:Telstramediarelease:SouthBrisbaneexchangemigrationscompleted
http://exchange.telstra.com.au/2013/01/24/southbrisbaneexchangemigrationscompleted/
46Source:NationalBroadbandNetworkRolloutInformation,31July2014.
49Source:ACCCreport:Telecommunicationscompetitivesafeguardsfor201213,p.26.
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Mobile and wireless networks

TherearethreemobilenetworkoperatorsintheAustralianmobilemarket:Telstra,Optusand
VodafoneHutchisonAustralia(VHA).Whilemobilenetworkswereoriginallyconstructedto
providevoiceservices,theopportunityofprovidinghighspeedandreliablebroadbandover
thesenetworkshasseenthesecarriersupgradetheirnetworkstoprovideenhanceddata
services,firstover3Gandnowover4G/LongTermEvolution(LTE)technology.
AnalysisundertakenbytheDepartmentofCommunicationsforitsDecember2013Broadband
AvailabilityandQualityReportestimatesthat,nationally,approximately8.8millionpremises
(81percent)haveaccesstoa3Gmobilebroadbandserviceandabout6.4millionpremises
(59percent)haveaccesstoa4Gmobilebroadbandservice.50Telstrahasrecentlyannounced
theextensionofits4Gnetworkcoverageto85percentofthepopulation.
Mobilebroadbandcanbeaccessedviamobilehandsets,tabletdevicesandlaptopsaswellas
PCsusingwirelessmodemsanddongles.AsatDecember2013,thereweremorethansix
millionmobilebroadbandsubscribers.51Whilenetworkcoverageandadoptionofmobile
broadbandiswidespread,itisstillconsideredascomplementarytofixedlinenetworks.The
ACCCreportsthattheamountofdatadownloadedinAustraliaincreasedby59percent
betweenJune2012andJune2013,butofthedatadownloaded,lessthanthreepercentwas
downloadedusingmobilebroadbandnetworks.52
Therearealsoalimitednumberoffixedwirelessnetworks,typicallyoperatedbysmaller
carriersinspecificregionalareaswherefixedlineservicesarenotavailable.Followingthe
rolloutofcomprehensive3Gand4Gservices,manyoftheseprovidersarenowreselling
mobilebroadbandservicesandarealsobeginningtoretailNBNCoswirelessservice.Asat
December2013,therewereapproximately48,000fixedwirelesssubscribersacrossall
networks.53Asat31July2014,NBNCosfixedwirelessnetworkcovered115,468premises,
with18,548activeservices.54
50Source:BroadbandAvailabilityandQualityReport,p.34.
51Source:AustralianBureauofStatistics8153.0InternetActivity,Australia,December2013(note:TheABS
reportsthat,asat31December2013therewere20.3millionmobilehandsetsubscribersinAustralia;forits
figuresformobileinternetsubscribers,theABSadvisesthatISPswithmorethan1000subscriberswereasked
toreportthenumberofsubscriberswithinternetaccessconnectionsviaamobilehandset,asat31December
2013).
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Intermsofretailmarketshareofwirelessbroadbandservices,theACCCreportsthatTelstra
hadapproximately58percent,Optus17percent,VHA10percentandothers(including
iiNet,PrimusandTPG)16percentasat30June201355(seeChartA2.2).
Chart A2.2: Retail wireless broadband market share
Retailwirelessbroadbandmarket
share
iiNet
10%
TPG
16%
Optus
17%
Telstra
57%
Source: ACCC, Telecommunications competitive safeguards for 201213.
Satellite networks
Inadditiontoterrestrialnetworks,allareasofAustraliaarecoveredbysatellitebroadband
networks.However,astheservicequalityisrelativelylowcomparedwithfixednetworksand
thecostsofestablishingandoperatingthenetworksarehigh,satelliteismainlyusedfor
connectingcustomersinouterregionalandremoteareaswherenoothereconomically
feasibletechnologiesareavailable.AsatDecember2013,therewereapproximately91,000
satellitebroadbandsubscribersinAustralia.56
FromJuly2011,NBNCobeganofferingitsInterimSatelliteService(ISS)whichresoldcapacity
onexistingsatellitesownedandoperatedbyOptusandIPSTAR.TheISSwaslimitedto48,000
servicesandreachedcapacityinDecember2013,however,theNBNCoSatelliteSupport
Scheme(NSS)willconnectuptoanadditional9,000servicesuntiltheexpectedlaunchofits
LTSSinlate2015.NBNCoplanstolaunchtwoKaBandsatellitesin2015.
55Source:ACCCreport:Telecommunicationscompetitivesafeguardsfor201213,p.35
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Backhaul networks
BackhaulisthepartofthenetworkcarryingdatafromtheCustomerAccessNetwork(CAN)to
theserviceproviderspointofpresence.Telstrashighcapacityintercapitalcityandinter
exchangenetworksmeanthatithasbyfarthegreatestnetworkcoverageofAustralias
carriers.Optushasthesecondlargestnetwork,usingacombinationoffibreandradio
technologiesaswellasleasedcapacityonothersnetworks.NextGenNetworksisthethird
largestoperatorinthismarketwithanetworkthatlinksAustraliasmajorcapitalcitiesand
manyofthelargerregionalcentres.
OtherprovidersinthismarketincludeTPG(throughmergingwithSoulPattinsonTelemedia
anditsacquisitionofAAPTandPIPEnetworks),Amcom,smallerproviderswhooperate
specificlinks(forexample,Basslink)andutilityproviders.
Inits2010advicetothethenGovernmentonthepointsofinterconnectionfortheNBN,the
ACCCadvisedthatcompetitioninthetransmissioncapacitymarkethaddevelopedinmany
metropolitanandintercapitalmarketsandsomeregionalmarkets.Thismeantthatthevast
majorityofpremisesinAustraliawereservedbycompetitivetransmissionroutes.57Thisled
theACCCtoadvisethethenGovernmentthatNBNCoshoulddeploy121pointsof
interconnectionnationwide,extendingitsnetworkfootprintto,butnotoverbuilding,
competitivebackhaulroutes.Assuch,itisnecessaryforRSPstoutilisebackhaulnetworks
(eithertheirownorthroughawholesaleprovider)toconnecttoNBNCospointsof
interconnection.
Industry consolidation
Severalinternetserviceprovidershavepursuedaggressiveacquisitionstrategiesasawayof
buildingmarketshare,particularlyiiNet,M2CommunicationsandTPG.Amongothers,iiNet
hasacquiredInternode,Westnet,Ozemail,Netspace,TransACTandAdamInternet.M2now
ownsPrimus,DodoandEftel.Asnotedabove,TPGmergedwithSPTelemediaandbought
PipeNetworksandAAPT.
Telecommunications competition regulation and broadband infrastructure

Aspartofthelegislativeframeworksurroundingtheintroductionoffullinfrastructure
competitionin1997,PartsXIBandXICinthethenTradePracticesAct1974(nowtheCCA)
createdaspecialregimeforregulatinganticompetitiveconductinthetelecommunications
57ACCCAdvicetoGovernmentonNationalBroadbandNetworkPointsofInterconnect,November2010,p.23.
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industryandatelecommunicationsaccessregime.Theseregimesarediscussedinthepanels
StatutoryReview.Variousamendmentshavebeenmadetothesepartssincethen.
BroadbandinfrastructuredevelopmentsinAustraliafrom1997to2008weresignificantly
influencedbytheaccessprovisionscontainedinPartXICandthewayinwhichtheywere
administeredbytheACCC.
Beforeaccessseekerscangainregulatedaccesstoaservice,itmustfirstbedeclared.The
ACCCcandeclarecarriageservicesandrelatedservicesfollowingapublicinquiryto
determinewhetherdeclarationwouldpromotethelongterminterestsofendusers.Wherea
servicehasbeendeclared,thestandardaccessobligationsrequireanaccessproviderto
supplytheservicetoanaccessseekeruponrequest,subjecttospecifiedlimitationsand
exceptions.TheSAOssetoutkeyprinciplesforprovidingaccesstotheservice,includingin
relationtotechnicalandoperationalquality,faultdetectionandrectification,orderingand
provisioning,billinginformationandinterconnectionoffacilities.
TheACCChasdeclaredwholesaleaccesstoasuiteofbottleneckservicesonTelstrasnetwork,
allowingaccessseekerstoresellkeyservices.In1999,theACCCdeclaredtheULLS.This
imposedalegalrequirementonTelstratoprovidelocalloopaccesstocompetitorsDigital
SubscriberLineAccessMultiplexer(DSLAM)equipmentinitsexchanges,whichareusedto
provideDSLbroadbandservices.
BroadbandADSLserviceswereinitiallylimitedbyTelstrato1.5Mbpsdownloadspeedand
werebundledwithPSTNvoiceservices.However,otherproviders,usingtheirownDSLAMs,
pioneeredofferingADSL2+,whichisnowthedominantfixedlinetechnologyforaccessingthe
internet.SomeprovidersalsopioneeredofferingnakedbroadbandserviceswithoutaPSTN
voiceservice.
WhiletheACCCsdeclarationoftheULLSledtocompetitioninallCBDexchangesandalmost
80percentofmetropolitanexchanges,only13percentofregionalandruralexchanges,and
lessthanonepercentofremoteexchanges,havecompetitiveDSLAMequipmentinstalled.58
OtherthanDSLAMexchangedbasedinfrastructure,facilitiesbasedcompetitioninAustralia
onlyevolvedinmarketswherecostswerelowand/orrevenueshigh,forexample,CBDs,
backhaul,mobile,andinthosehighvalueresidentialareaswhereOptusrolledoutitsHFC
network.Apartfromthedeploymentofbroadbandequipmentinexchangesandwireless
services,significantinvestmentsbycompetitorstoTelstrainnextgenerationfixedaccess
infrastructurehasnotoccurredsincetheendofOptusrollout.
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OneexceptiontothiswasTransACT.Between2000and2004,asPhase1ofitsnetwork
rollout,TransACTdeployedaVDSLnetworkinCanberrausinganFTTNarchitecture.
TransACTsFTTNnetworkpassedapproximately60,000premises.However,asPhase2ofits
networkrollout,TransACToptedtouseTelstrasULLStoprovideADLS2+servicestothe
majorityoftheremainingpremisesinCanberraandinnearbyQueanbeyan,andfrom2009
onwardsrestricteditsFTTPdeploymentstonewhousingdevelopments.Anotherexception
wasNeighbourhoodCable,nowasubsidiaryofTransACT,whichwasoperatingaHFCnetwork
rolloutinregionalVictoriancitiesMildura,BallaratandGeelongin2003.TransACTs
deploymentwasunderwrittenbyACTEW,Canberrasmonopolysupplierofwaterandpower
anddirectlyandindirectlysubsidisedbyACTratepayers,whoboretheultimateburdenofthe
lossesitincurred.
Giventhelimitedscopeofthesedeployments,Telstraremainsthesoleinfrastructureaccess
providertoalargenumberofpremises.AsatJune2013,ofthemorethan9.4millionvoice
andbroadbandservicesprovidedoveritsnetwork,justover1.3millionserviceswere
providedbycompetitorsusingtheULLSandjustover630,000serviceswereprovidedusing
thelinesharingservice.59
Causes for the slowdown in fixedline infrastructure investments

Tworelatedcausesfortheslowdownininvestmentinfixedlineinfrastructurecanbe
identified:theaccessregimeprovedineffectiveinpromotinginnovationandinvestment,in
partbecauseofthewayinwhichregulatedpricesforaccessweredetermined;andthe
chillingeffectsthishadoninvestmentwereprolongedandaggravatedbyuncertaintyover
whowouldupgradethelastmileofthecustomeraccessnetworkasawhole,combinedwith
concernsthatupgradingwouldstrandexistingDSLAMinvestments.
Underthetelecommunicationsaccessregime,asitappliedfollowingtheintroductionoffull
competitionin1997,accessseekerswouldfirstofallnegotiatetermsofaccesswiththe
accessproviderandthenseekarbitrationfromtheACCCifnegotiationscouldnotproduce
acceptableterms.Thisnegotiatearbitratemodelprovedtobeslow,cumbersomeand
vulnerabletogaming.Betweentheintroductionoffullcompetitionin1997andamendments
beingmadetotherelevantlegislationin2010,182accessdisputeswerelodgedwiththe
ACCCforresolution.OneaccessdisputerelatingtoULLSaccessthatwasnotifiedtotheACCC
inearly2005wasnotfullyresolveduntillate2007,eventhoughpreviousarbitrationsonULLS
hadbeenmade.Eacharbitrationonlyappliedtothepartiestothedisputeanddidnothave
widerapplicationtosupplyasawhole.Increasingly,judicialreviewsoftheACCCsdecisions
werebeingsought,furtherslowingdownresolutionofaccessdisputes.
59ACCC,SnapshotofTelstrascustomeraccessnetworkasatJune2013.
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Whilethosefeaturesoftheregimewouldhaveunderminedinvestmentandinnovationinany
event,theireffectsweresignificantlyworsenedbytheACCCsapproachtodeterminingaccess
pricesfordeclaredservices,particularlyforaccesstoinfrastructure(asagainstresale
services),wheretheapproachwasbasedonthetotalservicelongrunincrementalcost
(TSLRIC)concept.TSLRICswerecalculatedusingthehypotheticalcostsofanoptimisednew
buildnetwork,ratherthanbeingbasedeitheroncurrentreplacementcosts(thatis,thecost
ofreplacingtheexistingassets)oronembedded(thatis,historical)costs.Ingeneralterms,
theaimwastoestablishtheminimumlevelofpaymentsthatwouldhavebeenrequiredto
compensateanaccessproviderforbuildingateachdateanewnetworktoprovidetheservice
inquestion.Theentirelyhypotheticalnatureofthisexercisemadeitinherentlycontentious
andincapableofobjectivetesting;theACCCsapproach,ofredeterminingthesehypothetical
costsatvirtuallyeverydispute,thenmadetheresultsevenmoreunpredictable.Inpractice,
theredeterminationofpricesfromtimetotimebytheACCCtypicallyledtoregulatedprices
fallingsubstantiallyovertheperiodfrom1997atratesthatfarexceededconceivable
increasesinproductivity.
Thenetresultwasthataninfrastructureproviderhadlittleifanychanceofrecoveringthe
costsitincurredindevelopingnewinfrastructuresupportingdeclaredservices,orfacedthe
threatoffutureservicedeclarationlimitingitscostrecoveryability.Incontrast,theprice
settingprocessesfollowedinothersectorshavetypicallyinvolvedafarmoremechanical
approach,thatreliesonestablishinganopeningRegulatedAssetBaseandthenallowingforit
toberolledforward,determininganessentiallyfixedpricepathoveramultiyearperiod.
Somewhatparadoxically,theACCCabandoneditsTSLRICapproachjustasanewnetwork
theNBNbegantobedeployed,largelyeschewingitspreviousfocusonoptimisationdespite
theefficiencyquestionsthatmustarisewheninvestmentandoperationsdecisionsaretaken
byaheavilysubsidised,governmentowned,monopoly.Thepricingprinciplesnowbeingused
bytheACCCfortelecommunicationservicesaremoreakintothoseusedforotherutilities
suchasenergyandlargelylockintheinvestmentsNBNComakes.
Partlyreactingtotheuncertaintysurroundingaccessprices,during2005to2007,Telstra
proposedbuildinganFTTNnetworkinSydney,Melbourne,Brisbane,AdelaideandPerthto
provideaccesstobroadbandspeedsofupto24Mbps.Theplanreliedonasubstantial
financialcontributionfromtheGovernmenttocoverdeploymentoutsidemetropolitanareas,
andsoughtwhatamountedtoaregulatoryholidayfromaccessconditionsparticularly
fromfutureACCCpricingdeterminationsthroughafavourableSAU.ThethenGovernment
rejectedtheproposedapproachlargelybecausetheACCCconsideredtherateofreturn
Telstrawasseekingtobetoohigh,andbecauseofconcernsthatbyextendingthenetwork
fromtheexchangetothenode,TelstrawouldbecuttingofftheDSLAMinvestmentsthatits
competitorshadmade.
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On20April2007,theG9consortiumsubmittedadraftSAUtotheACCC.Thiswasfollowedon
30May2007bythelodgmentofa15yearSAUbyFANOC,acompanycreatedbytheG9.The
FANOCSAUoutlinedbroadconditionsforthirdpartiestoaccessbitstreamservicesonan
FTTNnetwork,utilisingTelstrasexistingcopperinfrastructure.Theprojectwasinitiallytobe
deployedinthefivemainlandStatecapitalcitiesandthentothemoredenselypopulated
regionalcentres.TheFANOCSAUcontaineddetailsonthebasicbitstreamservicestobe
offeredandassociatedpricing.Italsocontainedamethodologyforcalculatingfutureaccess
prices.TheACCCsdraftdecision60wasthatitwasnotsatisfiedthatsometermsand
conditionsintheFANOCSAUwerereasonable.Inparticular,theACCCconcludedthatFANOC
hadtoomuchdiscretiontodeterminepriceandnonpricetermsofconditions.
Giventhatthemajortelecommunicationsplayershadnotbeenabletoputforward
acceptableproposals,on18June2007,thethenCoalitionGovernmentannouncedthatit
wouldestablishanExpertTaskforcetoconductanopenandtransparentprocessfor
assessmentofbidstobuildanFTTNnetwork.DuetothechangeofGovernmentlaterthat
year,thisprocesswasnevercompleted.
In2008,thenewLaborGovernmentinitiatedacompetitiveprocesstoallocatefundingofup
to$4.7billiontoassistcarrierswiththebusinesscasetobuildanFTTNbroadbandnetwork.
Sixproposalswerelodged,butTelstrasproposalwasfoundtobenoncompliant.Thepanel
thatassessedtheproposalsfoundthatnonerepresentedvalueformoney.
The establishment of NBN Co and amendment of the telecommunications

access regime
InApril2009,NBNCowasestablishedasanewnational,wholesaleonlynextgeneration
broadbandplatformthatwouldoperateonanopenaccessandnondiscriminatorybasisto
supportfairandeffectiveretaillevelcompetition.TheestablishmentofNBNCoalso
addressedconcernsaboutTelstrasdominanceinthebroadbandmarket,primarilythrough
providingavehicleforthestructuralseparationofTelstrabytheprogressivemigrationofits
customerstotheNBN.
AtthesametimethattheGovernmentannouncedthatitwouldbuildtheNBN,itindicatedit
wouldconsiderreformstothetelecommunicationsregulatoryregime.Thisledtoapackageof
legislationbeingputforwardin2010toaddressTelstrasverticalintegrationbyprovidingfor
itsfunctionalorstructuralseparationandenhancetheaccessandanticompetitiveconduct
regimes.ThemajorityofthesereformsweretoPartXICoftheTradePracticesAct,now
retitledtheCCA.
60http://www.accc.gov.au/regulatedinfrastructure/communications/fixedlineservices/g9fanocfibretothe
nodesau/draftdecision
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Key changes to the telecommunications access regime

Sinceitwasclearthenegotiatearbitrateapproachwasnotproducingeffectiveoutcomesfor
industryorconsumers,PartXICwasamendedtoallowtheACCCtosetupfrontpriceand
nonpricetermsandconditionsofaccesstodeclaredservicesthroughaccessdeterminations.
AccessDeterminationsprovideaccessseekerswithaneffectivebenchmarktofallbackonin
theirnegotiationswithaccessproviders.
TheACCCwasalsogiventhepowertomakebindingrulesofconductforthesupplyofa
declaredservicewhereitconsidersthatthereisanurgentneedtoaddressproblemsrelating
tothesupplyofthatservice.Althoughnobindingrulesofconducthavebeenmade,industry
submissionstothepanelshowedthattheyareviewedasanactivedeterrenttoanti
competitivebehaviour.
TheprocessforassessingSAUswasalsochangedtoallowtheACCCtosuggestchangestothe
SAUwhiletheassessmentprocessisunderway,ratherthanrejectingitandrequiringthe
partytorelodgeitfromscratch.
ThechangestoPartXICalsoestablishedalegislativehierarchy,inthat,termsandconditions
ofaccesshaveprioritydependingonwheretheyaresetout.Accessagreementshavepriority
(onthebasiscommerciallynegotiatedagreementsshouldprevail),SAUsfollow,thenbinding
rulesofconduct,thenaccessdeterminations.However,termsinanaccessdeterminationwill
applywheretheyarenotinconsistentwithanaccessagreement,SAUorbindingrulesof
conduct.
Regulation of NBN Co
NBNCoissubjecttothecontrolsestablishedinthePGPAActandissubjecttotheexisting
telecommunicationsregulatoryregime.NBNCohasnotbeengivenanystatutorymonopolies
assuchbutspecialrulesapplytobroadbandnetworksbuilt,upgraded,alteredorextended
after1January2011andcapableofdeliveringmorethan25Mbpstoresidentialandsmall
businesscustomers.Givenitsuniquestatus,NBNCoissubjecttospecificlegislative
provisions.
AllservicesthatNBNCosuppliesareautomaticallydeclaredandassucharesubjectto
regulationbytheACCC.ThisreflectstheviewthattheNBN,asabottleneckaccessprovider,
shouldbesubjecttoregulationfromthestart.
TopreventNBNCofavouringparticulardownstreamcustomers,itsservicetermsand
conditionsmustbetransparentandthecompanymustsupplyservicesonanon
discriminatorybasis.AnydifferencesbetweentheaccessagreementsofNBNCoscustomers
mustbereportedtotheACCCandmadepubliclyavailableontheACCCswebsite.Originally,it
wasproposedthatNBNCowouldbeabletodiscriminatewhereitwouldaidefficiency.
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However,thiswasrejectedbytheParliamentlargelybecauseofconcernsfromsmaller
providersaboutNBNCofavouringTelstra,forexample,throughofferingvolumediscounts.
TheNBNCompaniesActseekstoensurethatNBNCooperatesasawholesaleonlyprovider
oftelecommunicationsservices.NBNCoislimitedtosupplyingcarriersandcarriageservice
providers.ThisrespondstoconcernsaboutTelstrahavingtheabilityandincentivetofavour
itsownretailoperations.ThereisastatutoryexemptionforNBNCotoprovideservicesto
utilitiesprovidersthatusetheseservicesforinternalpurposesonly.
Akeypartoftheregulatoryframeworkthatgovernsthepriceandothertermsuponwhich
NBNCosuppliesservicesisitsSAU.Thisdocument,preparedbyNBNCoandacceptedbythe
ACCCinDecember2013,willapplyuntilJune2040.Itcanbevariedatanytimewiththe
agreementoftheACCC,andaftertheinitialbuildperiod,keytermswillbeassessedbythe
ACCCeverythreetofiveyears.
NBNCohasenteredintoastandardformofaccessagreementwithitscustomerstounderpin
theircommercialrelationships.TheagreementisknownasNBNCosWBA,whichisits
standardcontract.Asat15April2014,44retailserviceprovidershadsignedaWBA.
Tofocusitsoperation,NBNCoisalsolimitedtooperatinginthetelecommunicationsmarket
andcannotprovidecontentservices.
ThelegislationalsoestablishedpowersforthefunctionalseparationofNBNCoandforthe
GovernmenttorequireNBNCototransferordivestassets.Itprovidesforthemakingof
licenceconditionsaboutservicesthatNBNCocanandcannotsupply.Thelegislationalso
establishesreportingobligationsonNBNCowhichwouldapplyifitwasnolongerwholly
Commonwealthowned.
ToenabletheGovernmenttopursueitsNBNdeploymentobjectives,includingcoverageand
networkspeeds,theNBNCompaniesActsetsouttheframeworkforthefutureprivatisation
ofthecompany.TheprocessinvolvesaninquiryandreportbytheProductivityCommission,
examinationofthatreportbyaParliamentaryJointCommittee,andtheFinanceMinister
declaringthatconditionsaresuitableforthesalethroughalegislativeinstrumentthatcanbe
disallowedbytheParliament.
UntilthisoccursNBNCoisrequiredtocomplywithPart3ofthePGPA,whichinvolves
notifyingtheShareholderMinistersofsignificantevents,keepingtheShareholderMinisters
informedonoperationalmattersandprovidingacorporateplaneachyear.Italsomeansthat
NBNCoissubjecttononlegislativedirectionsthroughStatementsofExpectationsand
directionsfromtheShareholderMinisters.
Parts7and8oftheTelecommunicationsActandassociatedprovisionsintheCCAapply
specialrulestobroadbandnetworksbuilt,upgraded,alteredorextendedafter1January2011
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andcapableofdeliveringmorethan25Mbpstoresidentialandsmallbusinesscustomers.
Unlessotherwiseexempted,suchnetworksmustofferawholesaleLayer2bitstreamservice
onatransparent,openaccessandnondiscriminatorybasis.TheLayer2bitstreamserviceis
definedbytheACCC,whichalsodeterminesthemaximumpriceforit.Further,suchnetworks
mustbeoperatedonawholesaleonlybasis.Theseprovisionsseektoprovideendusersof
suchnetworkswithserviceoutcomessimilartothoseavailabletocustomersonNBNCos
network.Ineffect,theyalsolimitthecommercialattractivenessofhighspeednetwork
deploymentandtherefore,reducethenumberofcompetitorsthatNBNCowouldotherwise
face.
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Appendix3CurrentarrangementsforfundingtheUSO
andtheTUSMAAgreement
Since1July2012,theUSOandotherpublicinterestserviceshavebeendeliveredundera
new,contractbasedmodeloverseenbytheTUSMA.Themostsignificantelementinthese
arrangementsisa20yearcontractwithTelstraforthesupplyofpublicinterestservices,
including:
theUSOforstandardtelephoneservicesandpayphones;
TelstrasroleastheEmergencyCallPersonfortheemergencycallservice(subjecttoa
competitivetendertoberunby23June2016);and
migrationofvoiceonlycustomersfromTelstrascoppernetworktotheNBNfibre
network.
Thecontract,commonlyknownastheTUSMAAgreement,imposesanumberofadditional
USOrelatedobligationsonTelstra.Telstramustmaintainitscoppernetworkthroughoutthe
countryuntilelementsofitaredisconnectedandservicesmigratedtotheNBNinaccordance
withtheSSUandtheMigrationPlan.Ineffect,thismeansthatTelstramustmaintainits
coppernetworkoutsidetheNBNfibrefootprint.Furthermore,thecontractrequiresTelstrato
supplystandardtelephoneserviceswithinthefibrefootprintusingtheNBNfibrenetwork.It
isexpectedthattheTUSMAAgreementwillberenegotiatedtoincorporatethechanges
requiredbyNBNCosnewMTMmodel.Inparticular,ifcopperassetsweretransferredtoNBN
CotheobligationmayrestthereratherthanwithTelstra.
TheTUSMAAgreementalsorequiresTUSMAtofundthecostsofmigratingpayphonesfrom
coppertoanalternativetechnology.
ThiscontractrepresentsanegotiatedoutcomeofdiscussionsbetweentheGovernmentand
Telstra.ServicesprovidedundertheAgreement,aswellasTUSMAsothercontractsand
administrativecosts,arefundedbyacombinationofBudgetappropriation($50millionper
annumin201213and201314;$100millionperannumfrom201415onwardsforthelifeof
theTUSMAAgreement)andaconsolidatedTILpayablebycarrierswithannualeligible
revenueof$25millionormore.
TheTILoperatesonacostrecoverybasis,whichmakesitdifficultfortheGovernmenttofund
newpolicyobjectivesthroughtheTIL.Itcanonlybeusedtofundpolicyobjectivesoutlinedin
theTelecommunicationsUniversalServiceManagementAgencyAct2012orundertheTUSMA
Regulations.
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Appendix4NBNCosFixedWirelessandSatelliteReview
NBNCosFixedWirelessandSatelliteReviewconsideredtheoptionsofdemergingand
divestingthefixedwirelessbusinessandsatellitebusinessfromNBNCo.Itconcludedthat
divestmentwouldraisemanyquestions61.Onbalance,thereviewassessedthatthedemerger
anddivestmentoptionforitssatelliteandfixedwirelessbusinessesdidnotprovidefinancial
benefitstoNBNCoandshouldnotbepursued.Thepanelconsiderstheconcernsraisedinthis
NBNCoReviewcaneitherbesatisfactorilyaddressedthroughalternativearrangementsas
partofdivestitureprocessesorarenotreasonstorejectthedemergerofthesatelliteand
fixedwirelessbusinesses.
Asageneralmatter,thepaneldoesnotbelievethecriterionforassessingmarketstructure
shouldbewhetherparticulararrangementsareorarenotfinanciallybeneficialtoNBNCo;
rather,thestructuraloptionsneedtobeassessedintermsoftheirimpactsontheAustralian
community.Moreover,theReviewseemstoconsiderpotentialdifficultieswitha
disaggregatedapproachwithoutconsideringanypotentialbenefits,includingthosethat
wouldaccruedirectlytotheCommonwealth.Asaresult,thefindingreachedinNBNCos
Reviewisatbestapartialassessmentoftherelevantissues.Instead,thequestioniswhether
theconcernstheReviewidentifiescanbedealtwithinamannerthatadvancesthepublic
interestasawhole.
AdisaggregationofNBNCowouldcreatetheneedtoaddressclearlyandtransparentlythe
issuesthattheReviewraises,andthisisastrength,notaweakness,ofthisapproach.By
contrast,ifthecurrentNBNCostructureisallowedtopersist,thereisasubstantialdanger
theseissueswillnotbeproperlyaddressed,underminingtheefficacywithwhichNBNCois
regulated,increasingtheriskofpoordecisionsandcompromisingthegoalofensuring
taxpayersandconsumersachievevalueformoneyfromtheirinvestmentinhighspeed
broadbandinfrastructure.
NinequestionswereposedinNBNCosFixedWirelessandSatelliteReview:
Howtoarrangetherequiredsubsidystreamsasthecashflowofthesatelliteandfixed
wirelessbusinessesarenegativeforvirtuallyeveryyearforever?
Howtoadequatelyensurethefullserviceobligationispassedtothatentity?
HowtobalanceNBNCosuniquecoveragerequirementsforfixedwirelesstowers
againsttheneedtogenerateprofitsbyminimisingtowerbuildcosts?
61SeeNBNCo,FixedWirelessandSatelliteReview,FinalReport,May2014,sections6.2,page50andsection
12.3,page76.
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HowtoensureGovernmentretainstheoptiontospecify/approvemodifiedminimum
performancelevels?
Howtomakeprivateownershipofabusinessthatrequiressubsidisation(orcross
subsidisation)financiallyattractiveforanotherowner?
HowtoregulatethecompetitionbetweenNBNCoandtheentitysuchthatitis
beneficialbutdoesnotwastesubsidies?
HowtoensuretheadverseimpactonNBNCo'sfinancialsisacceptable?
HowtoaccountforreducedNBNCooperationalflexibilityonhardtoreachpremises
inthefixedlinefootprint?
Whatdegreeofretailcompetitionisrequiredonthedivestedfixedwireless/satellite
infrastructureandbyextensionhowshouldRSPsbeenabledtoworkonboth
nationalinfrastructureseffectivelyandefficiently,andswitchendusersseamlessly?
Thepanelsresponsetothesequestionsissetoutbelow.
Inrelationtosubsidystreamsandfullserviceobligations,anysubsidythatmayberequired
canbesourcedfromeithergeneralrevenueoraspecificlevyonindustry(includingNBNCo).
Presumablyongoingsubsidyforserviceprovisioninwirelessareasisalreadyfactoredinto
NBNCoaccounts.Replacingthiswithfundingfromgeneralrevenueoranindustrylevywould
provideoffsettingfuturesavingsforthecompany.
Fullserviceobligationsforfixedwirelessandsatellitedeliverycanformpartofcontractual
arrangementsatthetimeofdivestiture,aswouldcoverageobligationsdecisionsabout
remainingfixedwirelesstowerconstructionshouldbelefttothepurchaser.Itispossiblethat
newdevelopments,includinguseof700MHzspectrumwhichisnowbeingused
internationallyforbothfixedwirelessandmobileservice,willresultinthesuccessfultenderer
adopting(totheextentexistingcontractualarrangementsallow)aquitedifferentdelivery
approachtotheonechosenbyNBNCo.Moregenerally,itislikelysuchanownerwouldmore
aggressivelypursueeconomiesofscopewithotherwirelessmarkets,andbemorewilling
thananintegratedNBNCowouldbetodealfairlywithanycompetitorsNBNComayfaceto
itsfixednetwork.
ThequestionconcerninghowtoensureGovernmentretainstheoptiontospecify/approve
modifiedminimumperformancelevelsisaveryimportantone,notleastbecausethatoption
willberequiredwhenNBNCoisprivatised.Intheshortterm,theGovernmentcouldretain
thisabilityaspartofitscontractualarrangements.Inthelongerterm,performancestandards
shouldbeestablishedusingtheapproachsetoutinchapter9,wherebyproposednew
standardsaresubjecttoindependentreviewbeforebeingadopted.TheGovernmentsscope
tothusvarythestandardswouldbemirroredintheconditionsofsale.
160of169
Theassetsbeingdivestedwouldhavethefinancialattractionofapotentialongoingsubsidy
stream.Aspartofthedivestitureprocessesoutlinedabove,tendererscouldbeaskedtobid
forspecifiedassetscoupledwithanobligationtosupplyandoperatetherequiredservicesin
thespecifiedfootprintstotheextentanongoingsubsidywassought,tendererscould
specifywhatthatamountwouldbeortheformulabywhichitwouldbedeterminedand
(whereappropriate)revised.Animportantbenefitofthatapproachisthatitwouldensure
markettestingofthesubsidyrequiredincontrast,asnotedinthereport,intheabsenceof
markettestingthecomplexitiesinvolvedinassessingrequiredsubsidiesmakeitunduly
hazardoustoimposeanykindoflevyschemeinthenearfuture.
Thisapproachwouldalsoavoidconcernsaboutsubsidiesbeingwasted.Totheextentto
whichmarkettestingdemonstratedasubsidyforsupplyoffixedwirelessandsatelliteservice
wasrequired,itwouldbelimitedviathetenderprocesstocustomersintherequired
coverageareas.Therewouldthereforebenoriskofwastedsubsidiesbecausethesubsidies
wouldbeconfirmedbymarkettestingandtheywouldbeconfinedtothefootprintrequiring
subsidisation.Moreover,thesubsidycouldbedesignedtofollowthecustomer,allowing
competitiveneutralityinthesupplyofinfrastructureandretailservices.
RemovingtheNBNCocrosssubsidyassociatedwiththewirelessnetworksalsogivesits
remainingpartsgreaterscopetocompete.Thoseopportunitiescouldbefurtherenhancedif
financialsupportthatmightberequiredinthefuturetoassistwithprovisionofanyinherently
lossmakingserviceoperationswereprovidedthroughdemandsidesubsidiesratherthan
directpaymentstoNBNCo(orothercarriers)orthroughcrosssubsidisationwithinNBNCos
FTTxactivitiesseechapter8.
Satelliteandfixedwirelessdivestitureprocesseswillprovideinformationabouttheforward
lookingcostsofservicingcustomersinthewirelessfootprints.Acomparisonbetweenthose
revealedcostswiththecorrespondingfiguresinNBNCosRegulatedAssetBaseunderNBN
CosSAUshouldallowtheACCCtoestablishorconfirmthatwholesalepricesgoing
forward(ofbothNBNCoandthenewoperatorsofthewirelessassets)arereasonableand
meetthenormalcriteriaofPartXIC.Totheextentthosevaluesimplyacapitallossonthe
infrastructureinvestmentdecisionsalreadymade,itisbetterifthatlossisbroughttoaccount
early,ratherthantaxingconsumersthroughexcessivecostsintothefuture.
WithregardtoanypotentialadverseimpactsonNBNCosfinancialpositionandprospects,as
indicatedabovethepanelstronglyadvocatesagainstretaininganyparticularstructuremerely
becausethebusinessprospectsofNBNCowouldbemostassured.Todosowouldbeentirely
inconsistentwiththeNationalCompetitionPrinciplestheCommonwealthadoptedin1995
andwouldarguablybreachthespirit,ifnottheletter,oftheCompetitionPrinciples
Agreement.Moreover,thoseimpactsmustbeweighedagainstthelikelihoodofattracting
privateinvestmentsoonerthanwouldbethecaseinthecurrentmodel.Thatwouldrelieve
161of169
thepressureontaxpayersandmakeitmorelikelythatdeploymentcouldproceedfullyand
efficiently.
TheissueofreducedNBNCooperationalflexibilityonhardtoreachpremisesinthefixedline
footprintcouldbeaddressedbyNBNCoseekingservicesupplyfromsatelliteoperatorsor
itselftenderingforsupplyoffixedwirelessservicesforthepremisesinitsFTTxfootprint
whereithasaserviceprovisionobligation.ThatwouldensureNBNCodidnotincurexcess
costsinaddressinganygapsinitscoveragearea.
Withregardtoretailcompetition,thedivestitureprocessescouldrequireboththesatellite
andfixedwirelessoperatortoeachprovidetheopportunityforaccessseekerstoaccessall
customersintheirfootprintviaaspecifiedmaximumnumberofPOIs.Itisunderstoodthat
RSPsofferingsatelliteserviceswillnowonlyhavetoaccessonePOIandasimilararrangement
oratleastasmallernumberofPOIsthancurrentlyplannedcouldapplytothefixed
wirelessnetwork.ByreducingaccesscostsforsmallerRSPs,thiswouldensuregreaterretail
competitionthanseemslikelyunderthecurrentstructure.Inanyevent,thesituationof
concerndescribedbyNBNCohowshouldRSPsbeenabledtoworkonbothnational
infrastructureseffectivelyandefficiently,andswitchendusersseamlesslyoverlooksthe
factthatRSPscurrentlyacquirearangeofservicesfromdifferentsuppliersandthatthereare
marketintermediaries(mostobviouslythewholesalesuppliers)whoprovideefficient
aggregationservices.Finally,iffacilitatingseamlessserviceandportabilitywereconcerns,
theycouldbedealtwithbyensuringcommonalityoftheRSPaccessplatformsusedbythe
disaggregatedentities,weretheACCCtodeemthatreasonable.
162of169
Appendix5Newdevelopments:Implementationofthe
panelsserviceprovisioningframework
Thisappendixprovidesfurtherdetailonhowthepanelenvisagesitsproposedframeworkfor
newrealestatedevelopmentsmightbeimplemented.Itisintendedasguidanceonlyandthe
panelrecognisesthattheGovernmentwillneedtoadapttheproposedapproachinsome
areasinlightoffurtherinformation.Italsorecognisesthatgiventhelongtimeframeover
whichdevelopmentproposalsareplannedandimplemented,alongtransitionalprocesscould
berequired.Assuchtheoverallframeworkrelatestoasteadystateenvironmentwhichmay
takesometimetoachieve,withfullimplementationperhapsnotbeingachieveduntilthe
NBNrolloutisnearingcompletion.
Objectives
Thefundamentalobjectivesthepanelsapproachseekstoachieveare:
ensurepeopleinnewdevelopmentshavereadyaccesstoquality,affordablehighspeed
broadbandandvoiceinfrastructureandservices;
createalevelplayingfieldforthecompetitivesupplyofsuchinfrastructureandservices;
thefundingofsuchinfrastructureandserviceiseconomicallyefficient;and
asfaraspossible,consistencyofapproachacrossmarkets(e.g.newestate
developmentsversusbrownfields).
Proposed framework
Thekeyelementsofthepanelsframework,representingthesteadystateoutcome,areas
follows.
Responsibilities and funding
1.
2.
3.
4.
Developersandendusersshouldberesponsibleformeetingthecostoftheprovisionof
telecommunicationsinfrastructureinnewdevelopments.
StateandTerritoryplanninglawsshouldbeamendedtoensuredevelopershave
appropriatetelecommunicationsinfrastructureprovidedintheirdevelopments.
NBNCo(ordisaggregatedbusinessunits)shouldhavealegislatedobligationtooperate
asabroadbandIPOLRcarrier,butonacostrecoverybasis.
NBNCo(oradisaggregatedbusinessunit)wouldnotberequiredtooverbuilda
developmentbeingservicedbyanotherproviderthatwasdeliveringNBNconsistent
outcomes.(NBNCowouldhaveIPOLRobligations,however,wheretheincumbent
carrierfailedtofulfilthisrole.)
163of169
5.
6.
7.
NothingwouldpreventNBNCofromoverbuildinganestatewhereitconsidereditwas
commerciallybeneficialforittodoso.(Thiswouldplacecompetitivepressureonother
providerstodevelopoptimaloutcomes.)
NBNCo(ordisaggregatedbusinessunits)shouldbeobligedtoprovidebackhaulona
commercialbasistoothercarriersservicingnewdevelopments.
Carriersservicingnewdevelopmentswouldbefreetosettheirchargesonacost
recoverybasisandreflectingmarketfactors(e.g.theymayseektorecoversomecosts
overtime).
Carrier obligations
8.
9.
10.
11.
12.
13.
Carriersservicingnewestateswouldberequiredtosupplyanywholesaleservice
declaredunderPartXICoftheCCA.(Part7oftheTelecommunicationsActwouldbe
repealed.)
Carriersservicingnewestateswouldneedtocomplywiththeseparationarrangements
underPart8,amendedasproposedbythepanel.Thatis,carrierswouldneedtobe
wholesaleonlyunlesstheyhaveanundertakingacceptedbytheACCCexemptingthem
fromthisrequirement.
IftheGovernmentisconcernedtoensureappropriatesolutionsareprovidedinnew
developmentsonanationallyconsistentbasis,itcouldestablishminimumbenchmarks
forstateandterritorygovernmentstoreflectintheirplanninglawsand/orforcarriers
tocomplywithinservicingnewdevelopments.(However,thepanelnotesthatcarriers
arenotnormallysubjecttosuchrequirementswhenotherwiseenteringthemarket.)
Minimumbenchmarkscouldrelatetoaspectssuchasminimumbroadbandspeedstobe
offered,abilitytosupportvoiceservicesandappropriatelegacyservices,and
affordability.
Carriersservicingnewdevelopmentswouldbesubjecttosuchaccesschargesthatwere
determinedunderPartXIC.
NBNCo,insettingitschargesandnonpricetermsandconditionsfornewdevelopment
solutionsinitsBCSU,wouldneedtoemployacommercialcostofcapitalsoastocomply
withcompetitiveneutralityprinciples.
IPOLR arrangements
14.
15.
PendingtherolloutoftheNBN,TelstrashouldgenerallybetheIPOLRinsmall
developmentswherecopperinfrastructureisreadilyavailableandwherecopperisthe
mostcosteffectiveoptionassumingandpendingupgradetoFTTN.
WhereadeveloperwishestouseNBNCoasIPOLR,itmustprovideNBNCowithnotice
thatitwillneedtoprovideinfrastructurebyapredeterminedperiod(e.g.sixmonths)in
advanceoftrenchesbeingopened/theestimatedfirstoccupancydate.NBNCodoesnot
needtoprovideinfrastructureearlierifithasnotbeengiventhenoticerequired.
164of169
16.
17.
18.
19.
Acompetingcarrierservicingadevelopmentwouldgenerallybeexpectedtoserviceall
premiseswithinthedevelopment.Intheeventitfailedtodoso,NBNCowouldcontinue
tohavetheobligationtoservicethepremisesasIPOLR.NBNCocouldfulfilthese
obligationsbyoverbuildingthedevelopment(thusprovidinganincentiveforthe
incumbentcarriertoserviceallpremises)orbycontractingwiththeincumbentcarrier.
Theincumbentcarrierwouldbesubjecttosuchaccesschargesthatweredetermined
underPartXICwhichwouldrestrictitfromseekingexcessivechargesfromNBNCoas
theIPOLR.
Asasafetynet,theGovernmentcouldindicateitreservedtherighttoimposeanIPOLR
obligation(generallyorindividually)bylicenceconditionorstatuteonanycarrier
servicinganewdevelopment.
TheGovernmentcouldconsiderwhetheranyfuturelevyarrangementsshouldalsobe
usedtoprovidefinancialassistanceforservicesupplyofoutliercustomersinnew
developments(e.g.anoriginalfarmhouse)thatattractedsignificantIPOLRcosts.
Pit and pipe

20.
21.
22.
NBNCoshouldnotberequiredtoserviceanewdevelopmentasIPOLRunlesspitand
pipeisprovidedbythedeveloper.
Nothing(asisthecasenow)shouldpreventothercarriersofferingtheprovisionofpit
andpipeaspartofaturnkeysolution.Carriersarefreetorequiretheprovisionofpit
andpipeandthetransferofitsownershipasaconditionofprovidingfurther
infrastructure.
Tofacilitatetheprovisionofqualitypitandpipeinfrastructurewhilefostering
competitioninitssupply,industryshouldagreeonlowestcostfitforpurposefibre
readypitandpipespecifications,compliancewithwhichwillbeacceptabletoall
carriers.Ifindustryhasfailedtomakesubstantiveprocesstowardthisgoalwithinsix
monthsofagovernmentdecision,thespecificationsshouldbepreparedbytheACMA
ortheMinister.
Industry coordination
23.
Ifitsawbenefitinit,industry(forexample,throughtheCommunicationsAlliance)could
consider:
a)
mechanisms(e.g.aclearinghouse)tohelpcoordinatestrategicplanning,theprovision
ofinfrastructurebycompetingprovidersacrossdevelopments,bringnetworkoperators
andRSPstogetherandinformconsumersaboutwhoisservicingtheirestate;
b)
anindustrybasedaccreditationschemetoidentifycapableandexperiencedcarriersto
assistdevelopersintheirchoiceofprovider;and
165of169
c)
themeritsofacommonorstandardisedbusinesstobusinessinterfaceforthe
wholesalingofservicesinnewdevelopments,potentiallyoperatedbyNBNCoona
competitivelyneutralbasisoranotherentity.
RSP obligations
24.
25.
26.
TelstrawillremainsubjecttoitsgeneralUSOtoprovidevoiceservicesAustraliawide,
includinginnewdevelopments.
Telstrashouldnotberequiredtoprovidevoiceservicesinadevelopmentinwhich
anotherproviderisofferingvoiceservices.
IfTelstraisrequiredtoprovidevoiceservicesundertheUSOinanewdevelopment,
subjecttoanyregulatoryrequirementstothecontrary,itisitscommercialdecisionas
towhatplatformitusesanditisfreetoprovidetheservicebywirelesstechnologyifit
chooses.
Transitional arrangements62
27.
28.
29.
30.
31.
InestablishedareaswhereTelstrahascopperinfrastructure,pendingNBNCobeingable
todeliverbroadband,Telstrashouldbeabletocontinuetoservicesmallnew
developmentswiththatinfrastructurependingtheavailabilityoftheNBNwhereitis
costeffectivetodoso,subjecttorulesbeingestablishedaboutwhenafibre,FTTNor
HFCsolutionmustbesoughtbythedeveloper.
Telstrashouldbeabletochargeforcopperinfrastructureaccordingtothesame
principlesgenerallyapplyingtotheprovisionoftelecommunicationsinfrastructure.
EnduserchargingbyNBNCoinnewdevelopmentsshouldbeintroducedassoonas
practicable.
Infrastructurechargingshouldapplyimmediatelytoallnewdevelopmentprojectsnot
alreadyunderway.
Fordevelopmentsalreadyunderwaybutforwhichinfrastructurehasnotbeen
contracted,pendingacceptancebytheACCCofNBNCosBCSU,infrastructurecharging
byNBNCobeintroduced;initiallyatalowrateandthenincreasedprogressivelyoveran
appropriateperioduptoanacceptablemaximumamount.
62Therearefivebroadtransitionalscenariosthatneedtobeaddressed:(1)Constructioncompleted(NBNCo
continuestosupply;nodevelopercharges;enduserscharges);(2)Constructionalreadyunderwaytoservice
development(NBNCocontinuestosupply;nodevelopercharges;enduserscharges);(3)Development
alreadyundercontracttobeserviced(trytoterminate;NBNCootherwisecontinuestosupply;nodeveloper
charges;enduserscharges);(4)Developmentplanning(well)advancedandtelecomscostsnotfactoredin
(graduateddevelopercharges;enduserscharges);(5)Earlieststages,fullscopetofactorincosts(full
developercharges;enduserscharges).
166of169
32.
33.
ChargingforanyNBNCobackhaulcostsinexcessofaspecifiedreasonableamount
shouldcommenceinlinewithNBNCosintroductionofnetworkextensioncharges,or
immediatelyifitisalreadybeingchargedaspartofstandardcarrierchargingpractices.
Alternatively,aspecifiedcommencementdatebedeterminedinconsultationwithNBN
CoandtheACCC.
Inallinstances,thenewarrangementsshouldbefullyinplaceandoperationalassoon
aspractical.
167of169
Glossaryofterms
ACCC
AustralianCompetitionandConsumerCommission
ACMA
AustralianCommunicationsandMediaAuthority
ADSL
Asymmetricdigitalsubscriberline
AVC
AccessVirtualCircuit
BCSU
BroadbandConnectionServiceUndertaking
CBA
Costbenefitanalysis
CBAReport
ThepanelsreportonthecostbenefitanalysisoftheNational
BroadbandNetwork
CCA
CompetitionandConsumerAct2010
CVC
ConnectivityVirtualCircuit
DPC
Dataprocessingcentres
DSL
Digitalsubscriberline
DSLAM
Digitalsubscriberlineaccessmultiplexer
DOCSIS
Dataovercableserviceinterfacespecification
FTTN
Fibretothenode
FTTP
Fibretothepremises
FTTx
Fibretothex:agenerictermforarangeoffibrerollouts,
includingFTTNandFTTPamongothers
HFC
Hybridfibrecoaxial
IPOLR
Infrastructureprovideroflastresort
kbps
kilobitspersecond
LSS
LineSharingService
LTIE
Longterminterestsofendusers
LTSS
LongTermSatelliteService
Mbps
Megabitspersecond
MTM
MultiTechnologyMix
NBN
NationalBroadbandNetwork
NBNCompaniesAct
NationalBroadbandNetworkCompaniesAct2011
NBNCo
NBNCoLimited
NPV
NetPresentValue
OECD
OrganisationforEconomicCooperationandDevelopment
PDF
Productdevelopmentforum
PGPAAct
PublicGovernance,PerformanceandAccountabilityAct2013
POI
PointsofInterconnect
MarketandRegulatoryReport
NationalBroadbandNetworkMarketandRegulatory
Report(thisreport)
RSP
Retailserviceprovider
SAOs
Standardaccessobligations
168of169
StatutoryReview
ThepanelsreportontheStatutoryReviewunders.152EOA
oftheCompetitionandConsumerAct2010.
SAU
Specialaccessundertaking
SFAA
Standardformofaccessagreement
SNU
Superfastnetworkundertaking
SOE
StatementofExpectations
SSU
StructuralSeparationUndertaking
TelecommunicationsAct
TelecommunicationsAct1997
TPG
TPGTelecomLimited
TUSMA
TelecommunicationsUniversalServiceManagementAgency
ULLS
Unconditionedlocalloopservice
USO
UniversalServiceObligation
VDSL
Veryhighbitratedigitalsubscriberline
VHA
VodafoneHutchisonAustralia
WACC
Weightedaveragecostofcapital
WBA
Wholesalebroadbandagreement
169of169

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Independentcostbenefit

Volume II: Cost Benefit Analysis

Broadband service provision

Regulation of NBN Cos products, pricing and expenditure

Guidance for readers

Consultation and submissions

Evolution of broadband in Australia

Policy framework for broadband availability

Table 3.1: Government commitments to availability of high-speed broadband

Context for the industry structure and regulatory review

Source: ACCC report: Telecommunications competitive safeguards for 201213, p.26.

4.2 Policy principles used in assessing structural and regulatory

The nature and purpose of costbenefit analysis

The panels CBA

Net benefits relative to no further rollout ($b)

Data source: The CIE.

Net benefit of MTM scenario mix over FTTP

Threshold to prefer FTTP scenario

Net benefit of MTM scenario over FTTP scenario without upgrade

Net benefits of MTM with upgrade over FTTP

Data source: The CIE.

Context and relevant principles

Concerns with the current NBN structure

Options for future NBN structures

Option 4: Status quo NBN Co model with enhanced regulatory settings

Conclusions and recommendations

The current rules

Vertical integration issues

Networks already exempted

Infrastructure provider of last resort obligations

Infrastructure and service in new developments

Policy principles relating to funding of lossmaking service provision

Implementation of subsidy arrangements in different structural scenarios

Current regulatory framework

NBN Cos capital expenditure products and pricing

General issues raised in submissions

Operational issues relating to terms of access

Issues where the panel does not share submitters concerns

NBN Co overbuilding and competitive neutrality

Telstras price controls

Telstras pricing on the legacy copper network

10.1 Privatisation arrangements

10.2 Management of NBN structure and assets

11.2 Stakeholders views on the ACCCs role

11.3 Future administration of economic regulation of the

Source: ACCC report: Telecommunications competitive safeguards for 201213.

Mobile and wireless networks

Source: ACCC, Telecommunications competitive safeguards for 201213.

Telecommunications competition regulation and broadband infrastructure

Causes for the slowdown in fixedline infrastructure investments

The establishment of NBN Co and amendment of the telecommunications

Key changes to the telecommunications access regime

Pit and pipe

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