Rob Nicholls. NBN – election issue or fizzer?

Apr 22, 2016

Cable competition

NBN Co has let a contract worth $1.6 billion for Telstra to construct the hybrid fibre coaxial (HFC) network in the mainland state capital cities. The deal has the ACCC on edge with Rod Sims expressing concern that Telstra will get a retail edge. As he said in a media release: “It is important that Telstra doesn’t get a head-start selling retail services over the NBN just because its technical expertise is being used in the construction and maintenance of the NBN”.

Although the ACCC is signalling a potential concern, other than Telstra’s current ring-fencing, it’s difficult to see what can be done. Malcolm Turnbull and Mathias Cormann wrote the Statement of Expectations for NBN Co calling for the multi technology mix. The Statement of Expectations did not amend vast range of of documentation such as Telstra’s Structural Separation Undertaking and Migration Plans given to the ACCC, that were based on a fibre to the premises network. The ACCC continues to accept variations that reflect practical network rollout experience. However, Telstra, acting reasonably and in the interests of its shareholders, did not give new commitments in respect of HFC construction.

The effect is that NBN Co’s fastest deployment option is to get Telstra to build the required HFC. Telstra will do that effectively. It will try to avoid using the information gained in the construction phase to give itself a retail advantage. It is quite difficult to think of any contracting party that would be in a position to do this work.

It is not clear where these competition issues lie in the context of the Competition and Consumer Act. The industry structural changes that arose out of Telstra’s Structural Separation Undertaking create a policy issue here. In addition, there is the wealth transfer from NBN Co, a government business entity, to Telstra, a public company. More specifically, the double handling that arises when Telstra could have been contracted directly by the Commonwealth and thereby avoided a level of bureaucracy. If the contract management is expressed as a fraction of a percent of the contract value, then it’s useful to remember that 1% of $1.6 billion is $16 million!

More acronyms

At the same time, Internet Australia has called for a focus on the technology called “fibre to the distribution point” or FttDP. The main reason for the call is not that it’s the best technology. Instead, it is a technology that lends itself well to upgrade to fibre to the premises. That is, Internet Australia sees it more as a least worse technology. It certainly offers a good pathway as the “distribution point” is close to the premises. NBN Co is already considering the technology as part of the fibre to the node project. However, NBN Co has a focus of using FttDP for premises that are a long way from a potential node (at least a kilometre). This makes sense in terms of ensuring that the best range of bit rates is available to end users. However, FttDP has a significant operations and maintenance advantage over fibre to the node. The copper (which is the part of the network that goes wrong) is short in FttDP – it’s from the street to the premises. The second issue is that one of the premises provides the power. This means that the electricity costs (and the metering of that electricity) are no longer NBN Co’s problem. Another driver for Internet Australia is that there is a prospect that there could be bipartisan support for FttDP, on the basis that it is consistent with the multi technology mix.

Election issues

Heading into the election we are not likely to see the wide gap on NBN issues that was apparent in 2010 and to a lesser extent in 2013. There have been hints that Labor’s Jason Clare will spruik FttDP, but the LNP response is likely to be that “we’re doing that”. There will be reasonable criticisms that the Lib’s NBN will be neither quicker nor cheaper.

The more difficult challenges do not lend themselves to three word slogans. These are derived from NBN Co’s charging model which has a use charge with no directly associated cost (referred to as the Connectivity Virtual Circuit or CVC charge). This was set at a time before Presto, Netflix and Stand and without a comprehension of the massive increase in data consumption that Australians have engaged in. The solution to part of this problem is actually simple. These large deliverers along with Facebook and Google could connect to the NBN at each of the points of interconnection, but downstream of the CVC. Netflix even provides the precise hardware (at no charge to high traffic use internet service providers) required to implement the solution. However, these commercial issues and the associated policy viewpoints are not easily digestible in retail politics. The fear is that this may mean that workable solutions without associated slogans will be directed towards the “too hard” basket.

Dr Rob Nicholls, Lecturer, School of Taxation and Business Law, UNSW.


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