Turnbull's gift to NBN Co

Malcolm Turnbull's announcement of a new licencing condition for telecommunications carriers could put NBN Co on a surer footing in its battle with TPG.

At face value, TPG Ltd appears to have jumped through the loophole left in the legislation protecting the national broadband network’s NBN Co from 'cherry-picking'. But has it?

Earlier this year, TPG began rolling out fibre to the basements of multi-unit dwellings in apparent defiance of provisions in the 2011 legislation designed to protect NBN Co from competition.

The 'level playing field' provisions were supposed to prevent competitors from using new networks to supply high-speed broadband to residential or small business customers, or upgrading existing networks, and therefore undermining NBN Co’s wholesale monopoly.

The legislation, however, contained an exemption. Networks that already existed at January 1 2011 and which were capable of carrying high-speed services could still be used and could even be extended, provided the extensions weren’t more than a kilometre from the network as it existed at that date.

TPG, which had acquired a large fibre network in 2010 with the acquisition of PIPE Networks, was seeking to exploit that exemption.

Its rollout has alarmed NBN Co because of its potential to 'cherry-pick' valuable slabs of its prospective urban end-customer base. NBN Co’s chairman, Ziggy Switkowski, has warned that that TPG could wipe between five and 10 per cent of the already-fragile value of the NBN if it were allowed to proceed and that the scale of value destruction would be far greater if Telstra and Optus were to emulate it, as they have threatened to do.

Today the Australian Competition and Consumer Commission announced that it had completed its investigation of TPG’s plans and that it does not propose to take any action to stop the rollout. As many in the sector had suspected, the rollout fits within the exemption and therefore is lawful.

There was, however, a caveat next to the ACCC clearance -- and an even bigger one from Malcolm Turnbull.

Earlier this year the Vertigan Committee, charged by Turnbull with a review of the NBN legislation (among other things), recommended the ACCC conduct an inquiry into whether it should 'declare' vectored VDSL services, which enable higher speeds via copper networks and therefore are a key to fibre-to-the-basement technologies.

The ACCC will hold that inquiry, which raises the prospect that TPG’s network would be forced to become a wholesale-only open-access network where the terms and conditions of access were set by the commission. That could give TPG pause for thought.

Turnbull’s intervention will furrow TPG's brows further.

In response to the ACCC announcement he said that, because the commission’s inquiry could take up to a year, he was proposing a new telecommunications licence condition, to apply to all carriers.

The condition would require owners of high-speed networks affected by the ACCC’s declaration process to "functionally separate" their wholesale operations and provide access to competing service providers on the same terms as they provide it to their own retail operations. The condition would remain in place for two years to allow longer term regulatory arrangements for the sector to be settled.

The proposed licence condition probably puts a halt to any plans Telstra or Optus might have to (reluctantly, it should be said) copy the TPG strategy.

When Stephen Conroy was threatening Telstra with a range of punitive measures unless it co-operated with the NBN, one of those 'sticks' was functional separation, or the separation of the management, operations and decisions of retail and infrastructure-owning units within a business and complete equivalence of treatment of the retail unit and its competitors.

Telstra estimated that the cost of functional separation could be as much as $1.5 billion and said it could take five years to implement the separation.

TPG may not be anywhere as large and complex as Telstra but there would be costs, inefficiencies and value leakage if it were forced into functional separation and an open-access regime.

NBN Co, demonstrating its relatively new-found commerciality, has already responded to the threat posed by TPG. It has already laid fibre-to-the premises technology in 12 apartment blocks (coincidentally, or not, in areas targeted by TPG) and has said it will roll out its fibre-to-the-basement technology from February next year. It has plans to ramp that roll-out up very aggressively in the first half of 2015.

Bundled with the ACCC inquiry and Turnbull’s licence condition, NBN Co’s aggressive and competitive counter-strategy could severely limit the impact TPG’s rollout might have on its network, its economics and its ability to fund the estimated $5bn or so cross-subsidy between its profitable metropolitan networks and the unprofitable rural and regional networks.