Dialling up the pressure on Turnbull's NBN

The Australian Competition and Consumer Commission’s submission to the Vertigan Committee conducting the cost-benefit analysis of the national broadband network favours infrastructure-based competition over an NBN Co monopoly. The same issue that sunk Sol Trujillo’s original broadband vision, however, remains unresolved.

It isn’t surprising that the ACCC supports infrastructure-based competition over an NBN Co wholesale monopoly despite the implications of urban competition for NBN Co’s ability to cross-subsidise high-cost rural and regional end-users from the more densely-populated and lower-cost metropolitan markets.

Almost a decade ago it was the ACCC’s opposition to Telstra’s insistence on nationally averaged wholesale prices in order to create that internal cross-subsidy that led to the incoming Rudd government’s failed “request for proposal” process for a fibre-to-the-node network and ultimately to the decision by Kevin Rudd and Stephen Conroy to announce their ambitious and expensive and problem-plagued fibre-to-the-premises network.

The ACCC is right to argue that as a general statement infrastructure-based competition is in the long-term interests of end-users and that competition between networks can drive efficiencies and innovation.

It advocates allowing the deployment of competing networks, with the proviso that where non-NBN Co networks have a monopoly of their own access to them should be open and regulated.

The problem with competition, as discussed last week (Solving Turnbull’s NBN dilemma, March 14) in relation to the threat posed to NBN Co by TPG’s roll-out of its own infrastructure to provide broadband to multi-units, is its impact on NBN Co’s ability to offer the same wholesale price in rural and regional areas as it does in metropolitan areas.

If the NBN is a national wholesale monopoly there isn’t an issue, as the cross-subsidy is internalised, with the urban profits compensating for and funding the rural and regional losses. If its urban end-users are “cherry-picked” by competitors’ infrastructure, however, the funding base for the cross-subsidy would be diminished and its ability to offer uniform national wholesale prices would be jeopardised.

The ACCC’s position envisages duplication of infrastructure, which might or might not be wasteful. Telecommunications networks have natural monopoly characteristics. If NBN Co were to compete with other networks there’s little doubt wholesale prices would be driven down.

The ACCC’s solution to the cross-subsidy issue is the obvious one, an explicit subsidy to non-commercial regions, either from the federal budget (which would alarm Joe Hockey) or from levies on industry participants.

The history of industry levies (Telstra always complained that the funding of its universal service obligation left it hundreds of millions of dollars a year short) and the complexity of calculating appropriate levels of direct subsidy would make NBN CO nervous about that option.

The variant raised last week in relation to TPG’s roll-out was the concept of tendering the rights to build non-NBN Co wholesale infrastructure in defined areas and giving the proceeds to NBN Co to fund the cross-subsidy.

That wouldn’t necessarily result in competitive infrastructure. Indeed, to generate sufficient funds to finance NBN Co’s cross-subsidy, it would probably require the granting of a wholesale monopoly and the “sale” of retail exclusivity for some limited period. It might, however, result in a faster roll-out of the NBN and reduce the amount of taxpayer capital required

There would be a lot of quite complicated detail to be resolved for any of the alternatives to an NBN Co monopoly to be introduced, not the least of which is that the NBN is already being rolled out and therefore the time it would take to create a new industry structure becomes an issue in itself.

There are also a host of technical and commercial issues, given that in a competitive model there would need to be provision for retail service providers and their end-users to be able to switch between network providers.

A completely new set of technical specifications and standardised protocols would need to be devised for any new networks to be compatible with the NBN and subject to the same, or at least similar, standards as well as an entirely new and complicated set of regulatory arrangements.

Probably overriding every other consideration, given the stretched state of the nation’s finances, would be the cost of the delays and the impact of competition on NBN Co’s finances.

The “new” NBN may be a lot cheaper than Stephen Conroy’s $73 billion fibre-to-the-premises NBN (if that had ever been fully rolled out) but at an estimated $41 billion for the new multi-technology roll-out it still represents a massive commitment of taxpayer funds.

Anything that further delays it or siphons margin and profit from the most attractive clusters of end-users risks completely undermining the already marginal economics of the NBN.

The simplest and cheapest (albeit definitely not cheap) option would be to preserve, protect and regulate its monopoly at the wholesale level while facilitating competition and innovation at the retail level by maintaining the current regime but closing off the “loophole” that TPG is exploiting and others have warned they might use.

It will be fascinating to see how the Vertigan committee reconciles the conflict between the broad appeal of competitive infrastructure and the social and financial imperatives of the government and NBN Co.

In the meantime, Malcolm Turnbull probably needs to halt the building of any competitive infrastructure so that the committee’s ability to design its own industry landscape isn‘t compromised by a scramble to roll out competitive infrastructure and the evolution of the industry structure towards a new status quo ahead of its recommendations.