Turning NBN Co into another Telstra

Something unexpected happened last week. Both sides of the National Broadband Network (NBN) were getting ready for a knockdown stoush but the fireworks never got started. As far as anti-climaxes go the first report released by the Coalition’s hand-picked Cost-Benefit Analysis and Review of Regulation panel led by Dr Michael Vertigan was a doozy.

A quick scan of Vertigan’s covering letter to the Communications Minister Malcolm Turnbull left the protagonists bewildered and looking for answers.

But the answers that they desperately wanted were not to be found in the panel’s statutory review. Wasn’t the Vertigan panel meant to find the NBN was a train wreck, a gross waste of public funds and, as Professor Alan Fels wrote in his submission to the government’s competition policy review, the “biggest anti-competitive arrangement ever in Australia, as far as I can see”?

Sitting on a barbed-wire fence

If the Vertigan panel’s first report is any guide, then the black-and-white answers that both sides of the debate are seeking may not be forthcoming in the other two reports the panel is expected to deliver in August.

Sitting on a barbed wire fence is not comfortable but that’s what the Vertigan panel appears to be doing -- unless you read the full report and start to look at it from the stakeholder’s perspective.

Vertigan’s letter to Turnbull states that “Overall, the review found a high level of satisfaction among stakeholders with the 2010-11 changes to the legislative framework and its operation. The report recommends the broad framework should be retained for the time being but with some important modifications.”

Maintain the status quo but make a few changes? Sounds like a win for supporters of the NBN, doesn’t it? But when you read a covering letter and see a phrase like “important modifications” hidden at the end of a position summary, you should be worried.

What could the “important modifications” be, and who will be affected?

Middle-of-the-road perspective

In a signal to the government’s competition policy review panel led by Professor Ian Harper, the Vertigan panel has provided clear guidance that wrapping the NBN in cotton wool has been a success, more or less, according to stakeholder submissions.

Ultimately, the question remains whether the Harper panel will come to the same conclusion or decide to tackle the broader issue of the NBN’s influence on competition in the telecommunication sector. The smart money will be on the Harper panel taking the same line as the Vertigan panel which stated that “the broad framework should be retained for the time being”. The Coalition government already has more than enough headaches to see out its first term in government and it’s unlikely the idea of tackling the telecommunication sector's woes in this term will get any traction.

At first glance the Vertigan report takes a middle-of-the-road perspective but the more you read into the report the more concerned you become.

What the report means for Telstra

Earlier this year, Turnbull indicated the renegotiated NBN Co-Telstra agreement would be completed in June but as his predecessor Stephen Conroy found out, Telstra is in no hurry to sign on the dotted line.

Unsurprisingly, the Vertigan panel report has agreed with concerns identified by Telstra chief executive David Thodey, highlighting that TPG Telecom's Fibre to the Basement (FTTB) rollout should be tackled and that the NBN should be legislated to be an access network monopoly.

Several other bugbears that Telstra has raised in one forum or another over the past four years have all found their way into the Vertigan panel report.

The Australian Competition and Consumer Commission’s (ACCC) role and powers identified in the Competition and Consumer Act 2010  have been under constant attack in recent months and the Vertigan panel has 34 recommendations, with a large number effectively reducing the ACCC’s ability to influence matters.

The report highlights arguments for and against particular issues, but invariably falls on the side of making recommendations that open the door to outcomes that provide Telstra with greater wriggle room than it currently has.

For example, Recommendation 13 states that “Sections 152AXC and 152AXD of the Competition and Consumer Act 2010, which apply to NBN Co alone, should be replaced by provisions that allow discrimination by NBN Co where it aids efficiency or is otherwise authorised by the ACCC".

The explanatory text goes on to say:

“Understandably, there are concerns that NBN Co may use its scope to discriminate to favour its larger customers. Whether that would occur is difficult to say. For example, under the Definitive Agreements, Telstra has certain obligations to use NBN Co services that other RSPs do not have. To that extent, NBN Co may be more concerned about ensuring those other RSPs use its services than with Telstra’s choices, at least during the period covered by the DAs. Moreover, strengthening the smaller RSPs may serve NBN Co’s interests by reducing the bargaining power Telstra would have in the longer run. These factors can mitigate any incentive on NBN Co’s part to systematically favour Telstra, or for that matter, Optus.”

What this means is that the panel believes that NBN Co might focus on ensuring smaller RSPs use its services rather than worry about what Telstra or Optus is doing.

The explanatory text goes on to say “the risk of discrimination being anti-competitive cannot be fully ruled out".

Yet iiNet wrote in its submission that “on balance, prohibiting discrimination completely is the best approach to take because it is the option that leads to the biggest net gain".

To think that NBN Co or any company for that matter would not discriminate in favour of its largest clients is a fantasy and legislation that includes Recommendation 13 would entrench this outcome to the detriment of the smaller retail service providers.

Trying to plug a loop hole

You get an idea where this is going when you read Recommendations 26 and 32 and then the explanatory text. Recommendation 26 states “In relation to NBN Co’s wholesale-only obligations, the government should be prepared to investigate the operation of the retail market should a situation eventuate where large corporate customers seek to bypass retail service providers as a matter of course and acquire services directly from NBN Co for their own internal use".

What this means is that NBN Co would be allowed to sell wholesale products directly to large corporate customers bypassing retail service providers. This discrimination provision would be detrimental to retail service providers that would otherwise attract business from the large corporate customers.

The overall effect would be a loss of available business for retail service providers and competition between retail service providers would suffer due to a resulting reduction in the number of retail service providers.

But it’s only a matter of time before large corporations and local government start to exploit a rather large loophole, albeit one that has a reasonable annual administrative and license cost associated with it. By registering as telecommunication companies and effectively becoming carriers/retail service providers by the back door, the corporations or local governments can run their own fibre, roll out FTTP or Wi-Fi and gain access to wholesale products from companies like Telstra and NBN Co.

What this means is unknown at this point but one possible scenario could see local government rolling out FTTP or Wi-Fi around the municipality and linking into the NBN at a fibre access node (FAN) or points of interconnection (PoI).

If you were facing the prospect of a multi-technology NBN coming to town wouldn’t you look for alternatives?

NBN Co becomes a retail service provider

Recommendation 32 states: “If the Government accepts the panel’s recommendations to relax NBN Co’s non-discrimination obligations, in the event that NBN Co proposes to invest in a retail service provider, even on a transitional basis, the Government should impose additional measures to ensure that NBN Co does not favour that retail service provider over others.”

Optus supported the continuation of restrictions on the investment activities undertaken by NBN Co and called for the restrictions to be strengthened, noting that “this provision currently allows NBN Co to effectively become a shareholder in any company that is engaged in the business of supply of a carriage service, for example this can include an RSP who purchases an NBN eligible service to supply to its end-user”.

So rather than supporting Optus’ position, the Vertigan panel chose to argue that NBN Co should be able to invest in a retail service provider with the proviso that it should “not favour that retail service provider over others".

Like a movie that didn’t know how to get to the ending without an unexpected plot twist, the Vertigan panel report takes on a whole new perspective at this point.

By recommending that NBN Co become a legislated wholesale access network monopoly that can discriminate against companies on efficiency grounds (whatever that means) and invest in one or more retail service providers, is the Vertigan panel trying to create a second Telstra?

Perhaps the panel is trying to make NBN Co more palatable for future privatisation, product and service partnerships or infrastructure investment partnerships.

Recommendation 33 picks up the thread and looks to build on the idea of how to make it easier for NBN Co to participate in joint ventures and under what rules the joint venture would operate.

Would the larger carriers think twice about purchasing NBN Co if the current NBN legislation were to be applied to the resulting corporate entity?

Recommendation 34 provides some guidance on the Coalition’s vision for the future of NBN Co and states, “In relation to NBN migration arrangements, including in a future multi‑technology mix environment, appropriate multi-stakeholder processes should be developed with a view to improved migration processes being put in place".

What this means is that we should anticipate NBN Co becoming a Telstra FTTN and HFC reseller and this will be couched in legalese to make it appear that it is a joint venture arrangement. Or is this just a shade too pessimistic?

The Coalition government wants total and unfettered control

The “Rules about the operation of NBN corporations” recommendations appear to open the door to Telstra becoming a joint-venture partner for the provision of FTTN and HFC products and services and for government to have greater control without the need to get legislative approval for what NBN Co does and with whom.

Recommendation 29 aims to make it easier for government to change NBN Co’s direction by recommending that “the NBN Companies Act should be amended to enable NBN Co’s field of operation to be expanded through regulations".

The NBN is a nation-building project that will cost $43 billion to roll out. For government to want total and unfettered control is unwarranted given the NBN’s importance to the nation’s future participation in the global digital economy and the funding involved.

Where to from here?

The first of the Vertigan panel’s reports includes a large number of recommendations that the ACCC’s role and powers be watered down and legislative changes made to facilitate the multi-technology mix NBN 2.0. Nothing less should have been expected from the Coalition’s hand-picked team and both sides of the debate were expecting this.

Should the Vertigan panel’s recommendations that NBN Co be allowed to discriminate on efficiency grounds and invest in a retail service provider be taken seriously?

Turnbull would be wise to shelve some of the Vertigan panel’s more controversial recommendations for now.