Fairness, Opportunity and Security
Policy series edited by Michael Keating and John Menadue.

The policy rationale behind a national broadband network would appear to be a simple one. The objective would be to part subsidise the construction of a national network that ensures two policy elements would be achieved. The first is a broadband infrastructure that ensures that Australian homes and businesses have broadband at a level that does not limit the national competitiveness compared to its trading partners. The second is to ensure that this broadband service is universal.

The policy challenge is that this was never the original policy rationale and that current policy positions in the national broadband network are inconsistent with a deregulatory stance.

The policies associated with the national broadband network are trying to solve a very broad range of problems and moist of these do not fit in with delivering a telecommunications network. Even the title of the policy is misleading. The term “national” is associated with universality. However, the national broadband network is actually a set of access networks and the connectivity between these access networks is provided by commercial players.

It’s worth looking at how we go to the current situation. To do this, there is an overview of technology and then a look back at the start of national broadband network planning as an outcome of the 2007 election.

Technology

One of the problems with policy clarity is that there are technology debates which can cloud matters. There are two ways in which broadband services can be delivered. These are fixed line and wireless. In the wireless space, delivery can either use a territorial system, in the same way that mobile broadband is delivered or via satellite. Fixed line delivery uses a combination of optical fibres and (optionally) copper wire of some type. Current ADSL (which is a mercifully short acronym for asymmetric digital subscriber line) uses the copper pairs that historically delivered telephone services. The closer the fibre is to the premises, the higher the bit rate that will be able to be delivered. This is a result of the fact that copper pairs are not good at supporting big bit rate services. Coaxial cable is much better at delivering services over longer distances.

These issues lead to a set of acronyms and the need for standardisation. The existing Telstra copper network has two segments. The first is between the exchange building and the pillar in the street. The pillar typically provides about 300 copper pairs for about 150 premises. These premises are the “distribution area” (DA). The copper between the exchange and the DA is usually in very good condition as the cables are kept pressurised with compressed air to prevent water ingress. The copper in the DA may well have moisture issues and these can limit the data rates that can be delivered. When the fibre runs all the way to the premises, the technology is called “fibre to the premises” or FTTP. If the fibre runs to a new box of electronics serving a DA, this is “fibre to the node” or FTTN. If the last part is coaxial, using the cable which can deliver cable television, then this is a hybrid of fibre and coaxial or HFC.

A FTTP network uses one fibre that feeds a splitter which provides service to up to 32 premises and is normally designed to deliver to half that number. As a practical matter, co-locating ten splitters per DA – usually in the pavement near the pillar is a practical solution.

The FTTN solution requires power to be delivered to the electronics in the node. This is awkward as there is rarely a meter available.

History

The original approach for national broadband network planning sometimes known as NBM Mark I was for a limited government subsidy of a broadband network that would provide 12 Mbps downstream and 1 Mbps upstream. The requirement was set out in a tender process in 2008. The likely (and assumed) technology was fibre to the node, which is described below. The government offer was $4.7 billion and the tender process was designed to be in the form of a least-cost subsidy auction. That is, the winner would provide “best bang for the buck” without the government paying for the whole of the network.

The bids were expected to be a mixture of a little FTTP, mainly for new construction areas (greenfield sites) and FTTN in established neighbourhoods (brownfield sites). In practice, Telstra’s bid was only 12 pages long and was knocked out because it did not have the required industry plan. Telstra’s more detailed proposal was not submitted as Telstra was seeking assurances that there would be no structural remedies (specifically, structural separation) applied. Other bidders put in bids which were conditional on access to elements of Telstra’s network. This NBN Mark I process led to a report to the Minister in January 2009 that none of the other bids was appropriate.

In April 2009, the government announced that it would form a government business enterprise (now NBN Co) and invest $43 billion to roll out an FTTP network to 90% of homes and businesses, with the balance receiving broadband services using wireless technologies. The investment was critical to making sure that the project was “off balance sheet” for budgetary purposes. Over subsequent years, and specifically in a Shareholder Ministers’ Statement of Expectations in December 2010, the technology mix was changed to 93% FTTP, 4% terrestrial wireless and 3% satellite wireless.[1] There was also a policy requirement that there should be uniform national wholesale pricing. That is, the price should not be determined by the cost. This is important when NBN Co planned a $3.5 billion capital expenditure to deliver wireless services to 200,000 homes. Its subsequent review realised that this plan underestimated demand and costs meaning that the cost per premises will fall but the absolute costs will rise.[2]

The effect of the policy was that NBN Co was mandated to cross-subsidise regional and remote services from the lower costs in metropolitan areas.

There was also a concurrent policy which gave Telstra the choice between voluntary structural separation and legislated functional separation. However, it was barely a choice as the consequences for failing to “volunteer” included preventing Telstra from accessing spectrum, the lifeblood of mobile services and requiring it to divest its interest in box Foxtel and the HFC over which some viewers receive subscription television.

The reviews after the 2013 election have changed the fixed line technology to a mix of FTTP (26%), FTTN (44%) and HFC (30%).[3] Seven per cent of premises will still be served by wireless. This is the current government’s multiple technology mix.

The policy challenges

The most major policy challenge is the fact that deploying a different technology mix in response to a new government’s Statement of Expectations[4] is not a rapid process. The agreements between NBN Co, the government and Telstra, which took more than a year first time around, were more complicated given that each of Telstra and Optus were selling their HFC networks to NBN Co. The previous deal had provided a “disconnect fee” when customers were moved from HFC to the national broadband network.

Another issue is that technology marches on. This aspect of productive efficiency has three implications. The first is that the expectations of consumers change. When NBN Mark I was released, the iPhone 3GS was months away and the iPad had not been launched. The consumer expectation of multiple devices using fixed and mobile networks was in its infancy. Now consumers expect to get 25 Mbps from their 4G mobile devices and for this to remain a target for fixed broadband seems odd. After all the US Federal Communications Commission has raised the minimum bit rate in their definition of broadband to 25 Mbps.[5] The second problem is that the best technology is always the next one. NBN Co is proposing to use a standard called DOCSIS 3.1 for HFC services and this will deliver near fibre bit rates. However, it requires significant expenditure on “node splitting” in the deployed cable network and will only work when there are commercial quantities of DOCSIS 3.1 modems. In an irritating twist, this will be after the election that is most likely to take place in 2016.[6] The third effect of productive efficiency is that it is not a government monopoly. When TPG decided to use its a lower cost technology to extend its network to blocks of units using a variant of FTTN called fibre to the basement (inevitably, FTTB), the Minister for Communications imposed a new licence condition on fixed line carriers requiring that they offer wholesale services for FTTB to try and dissuade TPG from competing with NBN Co.[7] This is an odd course of action for a government that favours free markets. However, it reflects the continuing policy of implicit cross-subsidisation from the metropolitan areas to the bush.

Form an economic perspective, there is no real rationale as to why this subsidy should come from telecommunications users, rather than consolidated revenue. If there needs to be a policy to provide telecommunications services into remote areas, and this type of universal service policy is widely adopted on a global basis, then there is no reason why the subsidy could not be explicit (a line item on a bill) if it is not to come from Treasury. The newly established Bureau of Communications Research at the Department of Communications will be looking at this issue.[8] However, there is a technological matter which will change the economics.

When the first Shareholder Ministers’ Statement of Expectations was issued, this mandated NBN Co not to bid for spectrum in the 700 MHz band. We now have a situation where NBN Co is in the process of building 1,400 base station sites using 2.3 GHz spectrum which is not optimised for coverage. There are two parameters in designing a fixed wireless network, coverage and capacity. Coverage determines who will receive a service and capacity is based on how many people use that service concurrently. For most applications, spectrum below 1 GHz is best for coverage and above 1 GHz for capacity. The reason that the 700 MHz spectrum was not made available to NBN Co was that its value (in terms of budget estimates) was too great. In practice, there is spectrum that was unsold at auction which could be used to provide NBN Co services, Public Safety Mobile Broadband services and still have value for its use in supplying consumer mobile broadband services.

Solutions

It’s clear that trying to solve universal service policy matters at the same time as limiting the competitive effect of Telstra and rolling out a network whose design parameters are constantly falling behind the Pareto curve established by productive efficiency is problematic. There are areas where there is poor or no broadband. This is not tolerable in an advanced economy, ever. Solutions that simply transfer consumer wealth to incumbent operators are not the solution. Perhaps it’s time to take another look at what government intervention (financial or regulatory) is required to deliver a tightly specified outcome. This might mean making some subsidies explicit and it might also mean that spectrum which holds a valuation set by the previous government is reassessed for use in delivering that outcome.

At the end of March 2015, there were 389,000 premises actually connected to the national broadband network.[9] That’s not a lot to show for a process that started seven years earlier.

There are a few approaches that the parliament could take which actually reflect the rapid changes in technology and the cross-subsidisation issues. The first is that the Statement of Expectations should not be based on bit rates in election years. Far better to follow the approach pioneered by David Murray in the Financial Systems Inquiry and have a target which moves with either the OECD or, and this is a much tougher ask, in line with our major trading partners. The target should be a basket of service (expressed as an average bit rate served and amount of data served, a set of service levels and retail price). In line with the final recommendation, meeting this target need only be subsidised in the areas where commercial offerings have not kept up. The second is a rationalisation of universal service. It does not make sense to mandate that NBN Co should be the wholesaler of last resort in remote areas and Telstra is the retailer of last resort and then to require that both use different delivery technologies. The third is to provide those subsidies that are needed for the rationalised universal service from consolidated revenue, rather than in the form of cross-subsidies from metropolitan areas. Once this is done, the final approach is logically to target government subsidies at the under-served suburban and regional areas where current broadband access is poor. In this environment, it will not matter that TPG has a better fibre to the basement solution than NBN Co; there will be no need for special licence conditions. Instead, just let the market do its job. If this means that we end up with FTTP networks deployed by Telstra and others because people want to watch more than one Netflix ultra-high definition streaming service, then intervention by government will be fruitless.

Dr. Rob Nicholls is a Research Fellow at each of Swinburne University of Technology and the Centre for International Finance and Regulation. He is a visiting fellow at UTS Sydney Law. He is the Independent Telecommunications Adjudicator in a regime established to deal with wholesale disputes arising over both legacy services and migration to the NBN.

[1] At http://www.nbnco.com.au/content/dam/nbnco/documents/statement-of-expectations.pdf accessed 5 May 2015

[2] NBN Co, Fixed Wireless and Satellite Review, NBN Co http://www.nbnco.com.au/content/dam/nbnco/documents/NBNCo_Fixed_Wireless_and_Satellite_Review_07052014.pdf (2014) page 9 accessed 5 May 2015

[3] NBN Co, Strategic Review – 12 December 2013, NBN Co http://www.nbnco.com.au/content/dam/nbnco/documents/NBN-Co-Strategic-Review-Report.pdf (2013) page 19 accessed 5 May 2015

[4] At http://www.communications.gov.au/__data/assets/pdf_file/0014/221162/SOE_Shareholder_Minister_letter.pdf accessed 5 May 2015

[5] At https://www.fcc.gov/document/fcc-finds-us-broadband-deployment-not-keeping-pace accessed 5 May 2015

[6] At http://www.nbnco.com.au/corporate-information/media-centre/media-releases/nbn-co-to-unleash-fibre-speeds-for-cable-customers.html accessed 5 May 2015

[7] The condition is at http://www.comlaw.gov.au/Details/F2014L01699 and the consultation at http://www.communications.gov.au/consultation_and_submissions/consultation_on_draft_carrier_licence_condition accessed 5 May 2015

[8] At http://www.communications.gov.au/the_bureau_of_communications_research accessed 5 May 2015

[9] NBN Co, National Broadband Network – Rollout Information, 23 April 2015, NBN Co http://www.nbnco.com.au/content/dam/nbnco2/documents/nbnco-rollout-metrics-23042015.pdf (2015) page 3 accessed 5 May 2015

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