Too late for Vertigan's best NBN lessons

The core element of the Vertigan Committee's attempt to introduce infrastructure-based competition to broadband won't be adopted any time soon. That makes TPG's efforts more meaningful at this point in time.

If the National Broadband Network (NBN) was still a concept, rather than a half-formed reality, the latest and final set of policy recommendations from the Vertigan Committee would have been welcomed as a vision for a competitive landscape for a telecommunications future.

Unhappily, however, the reality that the best part of $9.5 billion has already been sunk in the NBN and billions more irrevocably committed means that many of the recommendations of the committee on market and regulatory arrangements for the NBN are in either the “impossible” or “too hard” baskets, which is where Malcolm Turnbull has instantly dumped them, at least in the medium term.

The underlying philosophy of the recommendations is that in the long term the interests of consumers would be best served by infrastructure competition. The current wholesale monopoly over broadband that has been awarded to NBN Co inhibits competition, is difficult to regulate and results in unacceptable risks and costs to taxpayers and consumers, the committee says.

It recommends “disaggregating” NBN Co into competing business units based on the different technologies -- fibre to the node or premises, HFC, satellite and fixed wireless -- to generate competition, encourage innovation, drive down costs and reduce the need for intense and intrusive regulation.

The reason the NBN has been structured as a wholesale monopoly is because of the economics of a national broadband network, where there is a large-scale cross-subsidy -- perhaps $4 billion to $5 billion in net present value terms -- between profitable metropolitan areas and rural and regional areas. The monopoly approach enables NBN Co to internalise that cross-subsidy and deliver uniform wholesale pricing across the country.

The committee’s response to that issue is to say the government -- either in the context of disaggregation or of the committee’s preferred approach of “cost-reflective” pricing -- could write down the value of sub-economic assets as they were brought into service and then have an on-going subsidy either funded directly from the budget or by an industry levy.

The government, particularly given its current fiscal challenges, was never going to accept a direct and deficit-swelling subsidy by taxpayers generally of consumers in rural and regional areas.

It would also be aware that NBN Co’s Bill Morrow and his team are only just starting to get an out-of-control network roll-out and dysfunctional organisation under control and that a radical change in the regulatory context and structure of the roll-out would only further distract and delay.

Thus it isn’t surprising that Turnbull immediately ruled out disaggregation of NBN Co’s business units today (while not completely ruling it out in the long term), which means that the core element of the committee’s attempt to introduce infrastructure-based competition to broadband won’t be introduced any time soon.

A more marginal, albeit meaningful, source of prospective competition has been TPG Ltd’s efforts to squeeze through a “loophole” in the legislation protecting NBN Co from infrastructure-based competition by exploiting an exemption within it that allows pre-existing networks to be extended by up to a kilometre.

TPG is busily “fibre-ing” up the basements in apartments, with Telstra and Optus threatening to follow suit unless it is stopped. That could decimate NBN Co’s economics.

Turnbull has already proposed imposing a new licence regime in response, requiring the owners of high-speed networks to functionally separate their wholesale and retail operations and provide open and equal access to competing retail service providers. He made it clear today that he remains committed to that response.

There is no doubt that infrastructure-based competition produces better outcomes for consumers than a regulation and regulator-dominated regime.

One of the problems with the existing telecommunications sector is that, encouraged by the Australian Competition and Consumer Commission’s continual driving down of access costs, none of Telstra’s competitors has had any incentive to build their own fixed-line infrastructure. It has been cheaper and far less capital intensive to get below-cost access to Telstra’s infrastructure through the access regime.

There was a similar situation in the US until the regulators there relaxed some of the regulated access rules affecting the former RBOCs (the regional Bell operating companies formed from the break-up of AT&T), which sparked a wave of infrastructure investment. There is also intense competition in the US from cable companies pursuing “triple-play” bundling strategies and the traditional telcos.

The Vertigan Committee’s approach could, had Stephen Conroy and Kevin Rudd commissioned similar cost-benefit and regulatory analyses to Turnbull’s, have seen the NBN used to create infrastructure-based competition here. They didn’t and it would now appear to be too late, at least until the NBN has finally been built and NBN Co has demonstrated financial viability without taxpayer support.

Neither the committee nor Turnbull have given up completely on the idea that once the network has been completed the issue of disaggregation could be re-visited. But a future government (whatever its political colours) is still likely to baulk at the notion of being left with the loss-making business units in the less-dense regions of Australia and the consequent need for continuing large-scale subsidies.

An easier decision, and one supported by the interim recommendations of the Harper review of competition law, would be to create a new network industries regulator to oversee pricing of access to telecommunications networks, displacing the ACCC.

The committee has previously endorsed NBN Co’s revised “multi-technology” approach to the NBN roll-out, concluding there would be net economic benefits (in net present value terms) of $16 billion from that approach relative to the former fibre-to-the-premises roll-out under Labor, as well as greater and more cost-effective optionality to respond to future changes in telecommunications technologies and in demand for broadband services.

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