The NBN phony war is over

Breaking Telstra's dominance was never going to be easy and the Coalition's NBN 2.0 has inevitably compounded the problem. With its rivals up in arms how is the Telstra split going to play out?

The Coalition’s plan for a better National Broadband Network (NBN) was announced in April 2013 and it has taken just 18 months for the extent of the damage that will be caused by the government’s flawed broadband plan to become known.

The efforts of Telstra’s competitors to build a hopeful veneer in the last twelve months have all but crumbled and the industry silence that has marked the phony war is now over.

As we head into one of the most chaotic and unproductive periods in the history of an Australian industry there appears to be only one winner and it's not the Australian public.

Let the battle begin anew

The telecommunications industry is quickly realising that it's time to renew the battle with the government lest all opportunity will be lost.

The Competitive Carriers Coalition’s (CCC) opening salvo on October 2 held nothing back when it described the government’s keystone review of the NBN as “nothing more than rehashed, discredited theoretical arguments promoted by opponents of regulatory reform and the NBN.”

The CCC’s statement went on to say that “the time for historical revisionism and point scoring is long gone. The priority for the Government should be speeding up the structural separation of Telstra, the building of the NBN and the reduction of prices for basic services to all Australians, which remain disgracefully high – among the highest in the developed world.”

Telstra’s main rival Singtel-Optus entered the fray on October 8 when chairman Paul O’Sullivan called for Telstra to be broken up using the model similar to that adopted in the UK with BT Group.

O’Sullivan is concerned that Telstra will use the $8.4 billion that it is forecast to receive from NBN Co over the next five years to strengthen its market dominance, stating "if Telstra is going to have a key role to play in the NBN because we are now dependent on their copper in order to get from the node to the home, then there is a huge conflict of interest if they are owning and operating that network."

His point that "competition in telecommunications in Australia is under more threat than at any time since it was introduced in 1992" does not appear to be a concern for the Coalition government. The communications minister Malcolm Turnbull has not deemed it necessary to respond to what's essentially a strong rebuke for the government’s lemon of a broadband plan.

Telstra’s response to O’Sullivan’s comments on October 9 was informative because it confirms that the incumbent has no intention of voluntarily splitting into two companies. It is rethinking its position on undertaking voluntary separation and wants to use the current discussions with government to enhance its dominant position. 

The argument provided by Telstra’s executive director of regulatory affairs Jane van Beelen that “these debates have already been had in Parliament, at industry events, in the media and through numerous Government reviews” provides a very slanted view of history and the strongest guidance to date that Telstra will not voluntarily take steps to head off what will inevitably be government intervention to break up the company.

It's not possible to have an open and competitive industry where there is one dominant company with more than 50 per cent of the customers and more than 70 per cent of revenues.

And to make matters worse the government appears determined to put into action a flawed plan that will not only entrench Telstra’s dominant position but also let it slowly squeeze the competition using anti-competitive internal subsidies with the profits arising from the ownership of key properties and infrastructure.

The Telstra conundrum

In the decades since the telecommunications market reform and deregulation began in 1997 successive Australian governments have been confronted with the Telstra conundrum and the task of creating an open and competitive telecommunications market.

There are four options:

  1. Telstra remains a single entity
  2. Telstra undertakes structural separation but retains a centralised accounting system that would permit full or partial revenue redistribution between the wholesale and retail divisions. An example of a partial cross-subsidy is shifting revenues or profits from the wholesale division to the retail division or vice versa
  3. Telstra undertakes structural separation and the wholesale and retail divisions operate separate unlinked accounting systems that prohibit revenues from one division being transferred to the other division
  4. Telstra splits into two companies – wholesale and retail

Countries around the world are grappling with the dominance of incumbent telcos, so Australia’s Telstra conundrum is not unique. O’Sullivan has pointed out that there's a need to push Telstra towards the UK BT model, which is similar to option 3, but van Beelen’s rather frank response suggests that any attempt to shift Telstra away from option 2 will be strenuously resisted.

Telecom New Zealand was split into two companies in 2012 and what's interesting about the Telecom New Zealand split into Chorus (wholesale) and Spark (retail) was the retention by Spark of the backhaul network on top of the mobile network.

What the New Zealand experience shows is that splitting Telstra into two companies is doable and the asset distribution can be tweaked when the split occurs so we should watch Chorus and Spark with interest over the next five years.

Coalition’s Telstra tax

The cost of retaining the copper access network and associated infrastructure for the Coalition’s multi-technology mix NBN plan was always going to balloon and the government has remained steadfast in the face of repeated warnings.

Telstra’s increased involvement with the NBN resulting in increased direct or indirect costs (including double dipping) to consumers associated with the retention of the copper access network can be classified as the Coalition government’s inadvertent ‘Telstra Tax’.

The first component of the ‘Telstra Tax’ was made public this week when Telstra asked the Australian Competition and Consumer Commission (ACCC) for permission to raise charges for access to its fixed-line wholesale products and services by about $50 million per year (7.2 per cent) over the next four years arguing that the cost of maintaining, upgrading and operating aspects of its existing wholesale network, prior to handing the infrastructure to NBN Co, were not taken into account in the original NBN Co agreement.

And Telstra has also correctly argued that the slow pace of the NBN rollout has increased costs that should be taken into account when the ACCC considers this matter. NBN Co has been negotiating with Telstra for two and a half years in the last four, so it is little wonder that the rollout is glacial.

The government might argue that Telstra’s decision to seek a price increase is not of its making but the fact is the government’s decision to redirect the NBN was always going to slow the rollout, create uncertainty, increase costs and strengthen Telstra’s ability to take control.

No more changes

Telstra CEO David Thodey speaking after Telstra’s annual general meeting in Brisbane on October 14 stated that the company was seeking clarification from the government about what would happen if there were future NBN policy changes.

“There’s a shared desire from the government, the NBN and ourselves to get it done as quickly as possible. But there’s quite a few regulatory issues to work through. We’ve made really good progress on the contractual side, but it’s still got a way to run.

“We do say that it's very dependent on the government processes, but it's getting through all the considerations involved in moving to fibre to the node and how customers are treated in that process.”

What this means is that Telstra wants regulatory changes to be agreed to prior to signing off on the renegotiated NBN Co agreement and this includes protection from an incoming Labor government. 

Preventing a future Labor government redirecting the NBN back to a FTTP network for 93 per cent of Australians will be difficult to do but Telstra is well aware that significant penalty clauses included in the renegotiated NBN Co agreement could effectively prevent this from occurring.

The ACCC is a party to the renegotiation of agreement between NBN Co and Telstra so it would fall to the ACCC chairman Rod Sims to explain what could only be described as an attempt by the Coalition government to saddle Australians with a white elephant. Thodey hinted at the ACCC hurdle when he stated that there were a “few regulatory issues to work through.”

Only a royal commission will be able to find out why Telstra is insisting on a favourable regulatory scenario and penalty clauses now when it could have taken this step with the first NBN Co agreement, effectively preventing the incoming Coalition government from implementing a MTM NBN.

Could it be that Telstra was not happy with the first NBN Co agreement and was looking forward to the day when it could get a much better deal from a Coalition government?

Malcolm in the middle?

Turnbull has been absent from the debate for the past month and it's time that he explains why the Coalition government appears to have lost control over the telecommunications portfolio. 

A short list of questions that Turnbull has been avoiding includes:

  • What are the current and projected FTTP and FTTN rollout costs and whatever happened to his pledge that NBN Co would be open and transparent?
  • Why is NBN Co’s FTTP rollout slowing and what is really happening in Tasmania?
  • Why has Telstra not signed the renegotiated NBN Co agreement which the government said would be completed last June?
  • What extra goodies does Telstra want in the new agreement that it now says will not be completed until sometime in 2015?

It is time for Turnbull to speak up.

Mark Gregory is a Senior Lecturer in the School of Electrical and Computer Engineering at RMIT University