While the details are vague, it would appear Malcolm Turnbull is committed to a national broadband model that includes competitive infrastructure. That may mean that an issue that proved intractable in the past — and which ultimately led to Labor’s NBN — may yet resurface.
The current NBN was devised as an absolute wholesale monopoly to the point that Stephen Conroy and Mike Quigley were prepared to pay Telstra a handsome amount to agree not to use its HFC network for broadband and Optus to hand its HFC network over to NBN Co.
Under the current plan, massive amounts of existing fibre would be overbuild and rendered redundant — and Telstra’s copper network progressively ripped up — to ensure NBN Co eventually had a fixed line monopoly.
Turnbull has said the Coalition government will remove or waive any impediments to infrastructure competition that have been introduced to create the NBN Co monopoly and that, subject to an ‘’equitable re-negotiation’’ of the contracts with Telstra and Optus, the government’s goal would be to remove any contractual impediments to the use of existing HFC networks for broadband and voice. The networks would have to be open-access networks.
It should be noted that Turnbull remains committed to the structural separation of Telstra’s retail and wholesale operations that the NBN would progressively create as Telstra decommissions its copper lines.
Turnbull will want and need a similar outcome from his negotiations with Telstra over the fibre-to-the-node network, which will use Telstra’s final strands of copper to the premises.
Telstra and Optus may not be the only infrastructure-based players in a Turnbull NBN environment. TPG Telecom has already announced plans to build its own network in metro areas.
The ‘’problem’’ with infrastructure-based competition to the NBN is, of course, that the competitors will target or ‘’cherry pick’’ the more densely populated and wealthier urban areas that would provide NBN Co’s core profitability. In the process, this would undermine its ability to internalise a significant cross-subsidy to rural and regional Australia in order to have broadly uniform wholesale prices across the country.
It is conceivable that the Coalition could mandate wholesale pricing and open access regimes for competitive networks to prevent competitors under-cutting NBN Co on price, but that would undermine the perceived benefits of competition: lower prices and more innovation and investment.
This is not a new issue. It was Telstra’s then CEO, Sol Trujillo, who first raised the concept of a national broadband network in the middle of the last decade, proposing a fibre-to-the-node network that would have required a $4.7 billion taxpayer contribution.
The problem Telstra had, first with Helen Coonan and subsequently with Kevin Rudd and Stephen Conroy, was that Trujillo insisted that, while the network would be an open-access network with regulated pricing, he wanted to the price of access to be set at levels that enabled Telstra to what it had effectively always done — to use urban profits to offset losses or sub-economic profits in rural and regional Australia.
However, the Australian Competition and Consumer Commission, which ultimately played a pivotal role in the development of the Labor NBN, insisted that Telstra should continue to charge averaged retail prices while its wholesale charges would continue to be ‘’de-averaged’’ and to reflect its actual costs. (Telstra always complained that the ACCC’s pricing formulas always gave competitors access at prices below its actual costs).
In effect, the average retail prices and de-averaged wholesale prices would see its profitable urban base targeted by competitors, undermining its ability to use those profits to subsidise its rural and regional operations and therefore lowering its returns to shareholders.
If Turnbull is to pursue a competitive broadband infrastructure model, he will have to resolve the tension between competition and the cross-subsidy.
It is improbable that he or the National Party would countenance wholesale prices in rural and regional Australia that were significantly out of kilter with those in urban Australia. (Retail prices would inevitably be somewhat different because of the likely varying intensity of retail competition.)
His version of the NBN might help. Because it avoids the biggest cost of Labor’s NBN – connecting individual premises to the network – Turnbull’s NBN will be a lot cheaper to build and therefore wholesale prices ought to be significantly lower.
The structural separation of Telstra (Trujillo’s NBN would have been owned by an integrated Telstra) also removes a factor that could compromise or distort infrastructure-based competition.
Turnbull has also committed to the current fixed wireless broadband and satellite plan for the ‘’last’’ 7 per cent of the country, which will cover the highest cost to serve areas of the country.
If the capital costs are substantially lower, then the range of actual costs outcomes — the differential between urban and regional costs -— ought to be narrower than it would otherwise be. Nevertheless, rural and regional customers will be higher-cost and inevitably there will be less competition for those customers.
If NBN Co were to continue to pursue uniform wholesale prices, the impact of competition on its metro network would gut its already skinny (some would say delusional) forecasts of profitability. Despite the problems and delays that have afflicted the NBN roll-out, NBN Co is sticking with the 7.1 per cent rate of return which keeps it off-budget.
It is possible that Turnbull will dispense with the creative accounting and accept that the rural and regional aspects of the network aren’t economic.
If the government were prepared to write-off a large proportion of the capital costs of building the various networks to service non-urban Australia, it could create an outcome where NBN Co could generate acceptable returns from the regions. In effect he would be capitalising an ongoing subsidy.
Alternatively there could be an explicit on-budget subsidy paid to NBN Co to allow it to maintain uniform wholesale prices across the country.
The issue of how to reconcile the existence of a taxpayer-funded and owned NBN Co within a competitive environment shouldn’t come to a head in the near term.
If Telstra and Optus do operate their HFC networks as competing infrastructure, it is unlikely that in the near to medium term they will actually be competing with NBN Co.
It will (quite sensibly) be directed to focus on rolling fibre to the node (or, in some areas, to the premises) in places where there is no competing infrastructure. The areas serviced by the HFC networks (which are capable of download speeds of 100 Mbps or more) will be the last areas in which the government rolls out the NBN.
At some point, however, if the NBN isn’t to be a legislated total monopoly with a single schedule of national wholesale prices, the hoary issue of how to reconcile infrastructure-based competition at the wholesale level with the political and policy imperative of broadly uniform retail prices is likely to re-emerge.