What's good for Telstra is good for NBN Co

The draft carrier licence condition released by the government penalises the industry in favour of Telstra and NBN Co. With the fate of both entities closely intertwined Telstra's rivals are running out of options.

The government plans to introduce a carrier licence condition in response to the Australian Competition & Consumer Commission finding on September 11 that TPG’s plan to roll out a Fibre to the Basement (FTTB) network was consistent with the legislation and therefore TPG could continue rolling out FTTB to the premises identified in TPG’s FTTB plan.

But the draft carrier licence condition released on October 15 would prevent open and fair competition by unfairly discriminating in favour of Telstra and NBN Co. It looks like we have reached a point where what’s good for Telstra is also good for NBN Co and with the fates of the two intertwined, Telstra’s rivals are running out of options.

Where the watchdog stands

The ACCC has announced a review of TPG’s plans to build an access network competing with the National Broadband Network (NBN) utilising a legislative loophole in the Competition and Consumer Act 2010 Section 152AGA (6) in response to an initial ‘NBN level playing field’ complaint under Parts 7 and 8 of the Telecommunications Act, which were enacted in April 2011 by the previous government.

The regulator found that “networks that were capable of supplying superfast carriage services to residential or small business customers at 1 January 2011 can still be used for that purpose without triggering the NBN level playing field provisions.”

According to ACCC boss Rod Sims, the regulator’s decision is based on information and evidence that TPG’s networks were capable of supplying superfast carriage services and confirmation that TPG is not extending the footprint of these networks by more than one kilometre.”

Separation straitjacket for TPG?

So far so good, but there’s that little matter of functional separation, with the government keen for carriers to functionally separate wholesale and retail operations into two subsidiary companies as a condition of building a FTTB network.

In a media release in response to the ACCC’s announcement, the Communications Minister Malcolm Turnbull states that “the Government is conscious that the ACCC has announced a declaration inquiry under Part XIC of the Competition and Consumer Act 2010, which is relevant to the issue of access. However, such inquiries take time and cannot provide for functional separation.”

“The licence condition would remain in place for two years, allowing long-term regulatory arrangements for the sector to be settled.”

The draft licence condition goes further to set a price per port (customer connection) for a “Layer 2 Wholesale Service to other carriers and service providers, with the price of that service set at $27 per month.”

A key factor that needs to be looked at is whether TPG would have made the decision to commence a FTTB rollout under Labor’s NBN plan. The answer to this question is central to what happened when the government changed the NBN technology mix, slowed the FTTP rollout, asked NBN Co to renegotiate the Telstra agreement and failed to think through the consequences.

TPG saw an opportunity and moved to fill the void created by the government. Why should TPG be penalised retrospectively for the government’s lack of forethought?

TPG is exploiting a well-known mechanism in the Competition and Consumer Act 2010, so why not solve the problem at the root by amending the Act? Could it be that the government does not want to attempt legislative amendment because one or more of the larger carriers with existing optical fibre networks are against the removal of the loophole or is it because the government could fail to get the Senate to agree to the legislative amendments?

Perhaps it’s the fact that TPG has already commenced its FTTB rollout and the horse has bolted.

Whatever the reason, the government’s solution should have legal firms salivating at the thought of the upcoming legal battles that will ultimately cost consumers considerable sums.

How can the government insist that TPG retrospectively signup to a licence condition that includes a requirement for immediate structural separation when Telstra was given six years to structurally separate? Is there a magic potion that the government will give to TPG so that it can structurally separate in a few months when Telstra insists structural separation will take many years.

Telstra’s copper leverage

Also worth bearing in mind is that the government has agreed that Telstra can hang on to the copper access network (CAN) for many years providing ample opportunity for Telstra to leverage this asset for additional financial gain during the period leading up to Telstra’s “gifting” the CAN to NBN Co.

Given that Telstra will effectively be a part owner of NBN Co’s FTTN network why doesn’t the government’s proposed licence condition include FTTN networks thereby forcing Telstra to structurally separate as TPG would be required to do if it continues with its FTTB rollout.

NBN Co and Telstra have commenced the FTTN rollout and Telstra retains ownership of the CAN, making Telstra a part-owner of the NBN FTTN network until such time as it “gifts” the CAN to NBN Co. As there has been no public announcements that all or part of the CAN have been “gifted” to NBN Co, we can assume that Telstra retains ownership of the CAN for now.

Telstra and NBN Co have attempted to hide what is happening by calling the FTTN rollout a series of “pilots,” but this weak obfuscation is unlikely to hold up in court because more than 200,000 FTTN customers could be connected to the NBN over the next year.

And why would TPG agree to the licence condition when there is a strong argument that the ACCC might find that TPG’s FTTB network should not be subject to access regulation. One reason for this outcome is the existing competitive access market for high rise apartment and office buildings in Melbourne, Sydney and Brisbane.

It will be interesting to see what the industry makes of the government’s decision to set a price per port of $27 when it should be expected that this price be set by the ACCC.

Telstra and NBN Co are one

The telecommunications industry appears bewildered by the government’s apparent loss of differentiation between NBN Co and Telstra. Why is the government acting against TPG at a time when the government’s ‘Telstra Tax’ will potentially have a more significant detrimental impact on the telecommunications industry and consumers?

Telstra’s recent request to the ACCC for permission to raise access fees by 7.2 per cent over the next four years -- because it is losing money as customers move to the NBN -- is remarkable, and the government is directly responsible by asking NBN Co to use Telstra’s CAN in the FTTN rollout.

The total cost of Telstra’s request will amount to more than $50 million per year for the next four years and Australian’s utilising ADSL2 are being asked to pay 7.2 per cent more for sub-standard connections. The whole point of the NBN was for consumers to get a much better connection at lower cost, so the government has a lot of explaining to do about how its NBN plan is actually achieving this.

Optus vice president of corporate and regulatory affairs David Epstein was reported by the ABC to say that the Telstra proposal means that “consumers would be hit with bigger bills” and that he thought that “any increase in the wholesale price would be unfair for competitors.”

iiNet CEO David Buckingham told ABC that Telstra’s proposal was “outrageous.”

"I think the claims are ludicrous. For years our customers have been seeking lower prices on their broadband and this goes against that and against all that's been said in the market already in terms of regulation."

"In terms of switching across to the NBN, they're already being paid for that process in terms of the NBN payments they're going to receive going forward as migration occurs.

"In terms of the actual copper network and its maintenance and its ongoing working costs, those are reducing right now and they'll continue to reduce so there's absolutely no reason or a substantiated claim for higher revenue when costs are going down."

Representatives of other carriers including Vodafone, which does not utilise Telstra’s fixed access networks, were equally loud when criticising Telstra’s proposed access price increase.

The ACCC has announced that it will not include Telstra’s NBN payments when considering Telstra’s proposed price increase. This will be a surprise for some as it could be argued that Telstra is being well compensated for customer transition to the NBN.

What does not appear to have been identified by the industry is that Telstra’s ongoing ownership of the CAN during NBN Co’s FTTN rollout is likely to result in maintenance and upgrade costs associated with preparing the CAN for transition to FTTN. These increased costs are being foisted on the consumer through the ‘Telstra Tax’ thereby reducing the real cost of the FTTN rollout -- making the government’s task of arguing that its NBN plan is cheaper than Labor’s NBN easier.

The ACCC must identify clearly what component of Telstra’s additional costs can be attributed to the CAN transition to FTTN and the extension of the CAN’s life due to the government’s multi-technology mix NBN.

The ACCC is a party to the Telstra NBN Co agreement renegotiation, so the question should be asked -- does the ACCC intend to ignore what it has learnt and is there any cost shifting occurring?

Don’t blame Telstra

Don’t blame Telstra for wanting to milk the CAN because the real culprit is the government and in recent weeks the government appears to be doing its best to shoot itself in the foot by getting the entire telecommunications industry offside for one reason or another.

The Communications Minister Malcolm Turnbull has been doing his best to ignore industry complaints about his handling of the telecommunications portfolio and the number of unanswered questions about how the government intends to successfully implement its NBN plan is growing daily.

It is time for the telecommunications industry to step up to the plate. The government is providing ample opportunity for the industry to come together and fight what is clearly a spectacular mess. Speaking out in the media is not really going to achieve anything because Turnbull’s silence indicates he is not listening.

There are two questions that the telecommunications industry needs to mull over - Will the telecommunications industry come together and turn its wrath on the government rather than lambasting Telstra in the media? And is it prepared to go to the courts to stop the government’s ill-advised changes to the NBN and telecommunications regulation?

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

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