Attack of the NBN zealots

In the months following the Federal election, the Communications Minister Malcolm Turnbull commissioned six National Broadband Network (NBN) related reviews and audits, a convoluted process that ended this month.

It has cost a bit of money and while the various reports have copped plenty of criticism, the Vertigan panel’s final report has been severely chastised, with critical analysis of the recommendations including references to Karl Marx’s doctrine of ‘historical materialism’ and the failed capitalist experiment that was the 1970’s US telephone industry policy.

With the Coalition government opting to steer clear of the recommendations in the final report, it’s worthwhile questioning whether the NBN related reviews and audits have achieved anything positive. It’s a great exercise in tainting Labor’s NBN legacy but other than that, its merits may be questionable.

A broadband bonfire

Was the government attempting to light a broadband bonfire upon which “economic zealots” could throw hypothetical logs made from macro-economic theory? An effort to build a blaze so dazzling that criticism of the government’s NBN policy would become impossible.

Or was the government looking to build a raft of plausible arguments upon which wavering Senators could sit in coming months when they must decide whether or not to support telecommunication- and NBN-related legislative and regulatory amendments?

Has the government finally completed the public demonstration of its willingness to slip Telstra a Christmas hamper full of goodies so that NBN Co can finalise a renegotiated agreement with Telstra? Just what the hamper holds has once again prompted Telstra’s rivals to cry foul.

Disaggregating NBN Co based on access network infrastructure type sounds great doesn’t it? The idea of turning the wholesale monopoly into a clutch of smaller competing wholesale infrastructure providers ripe for privatisation is right out of the economics textbook.

It makes you giddy thinking about it but when should disaggregation occur, now or when the NBN rollout is complete? And if the NBN rollout is complete, wouldn't it be wise to sit back for a while and see what the telecommunications competition landscape looks like with a near monopoly wholesale provider?

Proponents of the NBN Co disaggregation idea have yet to explain what this would mean in the context of broader open telecommunications competition and the evident need for companies that own access network infrastructure to structurally separate and be subjected to a regulated pricing regime. Like a cat chasing its tail, the “economic zealots” would then argue against regulated pricing of the structurally separated telcos or argue that there is no need for telcos to structurally separate after NBN Co’s demise as the less regulated open telecommunications market will find its own way.

In 2012, Telecom New Zealand was split to form two companies, Chorus (wholesale access) and Spark (retail and backhaul) and proponents of Telstra remaining one company have recently taken to quoting the recent fall in Chorus’s share price due to competitive pricing pressures set by New Zealand’s Commerce Commission, which is similar to the Australian Competition and Consumer Commission (ACCC). The New Zealand experience has seen reduced connection fees and increased activity by Chorus to entice customers onto FTTP, where it’s anticipated that customers will eventually spend more for faster high quality connections.

Disaggregation chaos a trump card for Telstra

If NBN Co was at some point split into “baby cos” they would not be equally sized, with the smaller baby cos providing wholesale products for regional and remote Australia dependent on subsidies.

Privatisation might satisfy the government’s desire to step away from direct participation in the telecommunications industry but the baby bos will be snapped up by existing telcos and the opportunity for increased infrastructure competition will be lost.

But what will the government’s announcement that telcos owning access networks be required to structurally separate mean for competition and integration of the baby cos? Will this arrangement really lead to a level playing field with increased competition? Whatever happens the baby cos, or their new owners, will continue to lease infrastructure and facilities from Telstra.

By 2018, NBN Co will have given Telstra between $8-10 billion of the seemingly endless river of gold flowing from the first NBN Co Telstra agreement and other infrastructure leasing and maintenance charges.

If you think that Telstra will return funds to shareholders, you might be correct, but the smart money is on Telstra carrying out a number of share buybacks or strategic purchases over the next five years to minimise tax and effectively park the funds by increasing the company’s stock value. By 2018, Telstra will be in a position to buy all of the baby cos.

What happens if the government attempts to limit Telstra’s ability to buy all of the baby cos and stipulates that Telstra can only buy one of the baby cos? Guess which one Telstra will buy.

And what about Telstra’s HFC network? NBN Co buys Telstra’s HFC network then proceeds to upgrade it and integrate OSS and BSS functions into the existing NBN Co systems. At this point, NBN Co could be split into baby cos and, other than from Telstra, would there be any other interest in the HFC network?

After privatisation, the smaller Baby Cos would need to lease OSS and BSS functionality until such time as they could duplicate this capability or be integrated with the OSS and BSS of the baby cos new owner. The additional costs and risks associated with disaggregation are not fully accounted for by the Vertigan panel.

If Telstra is limited to purchasing one baby co it will logically pick the largest and most profitable, which is not likely to be the HFC network by this time, and, if another company decides to purchase the HFC network based baby co, then the pre-existing Foxtel deal effectively ensures that Telstra gets revenue from the HFC network whether it owns it or not.

And Telstra’s ownership of the exchanges, pits, ducts and traps would permit a rapid fibre rollout if Telstra wanted to compete in areas where it does not own an access network.

It’s no wonder that the disaggregation thought bubble has been put on hold.

ACCC on the hit list

The Vertigan panel opened the seven recommendations with what we can assume to be a red herring because the report quickly moves on to the government’s immediate goal of shifting telecommunications competition responsibility from the ACCC to a new ‘networks regulator’.

The report states “regulatory arrangements and processes should be better focussed, streamlined and made more accountable, including by providing for merits review of all regulatory decisions with lasting impacts.”

Turnbull has publicly castigated the former ACCC chair Graeme Samuel and the ACCC for telecommunications regulatory decisions and advice provided to the former government about the NBN, so it is no surprise that the Coalition government aims to lance the boil that is the ACCC.

It is unlikely that the smaller players in the telecommunications industry will be happy with the government’s proposal to reduce regulation, increase ministerial control and create an environment that favours the larger telcos using an approach that can only be described as an economic mirage of what a utopian open and competitive telecommunication market should look like.

The ‘NBN Tax’ and the fate of universal service

The Vertigan panel’s final report included a number of other recommendations that just can’t be taken seriously in the current climate. The proposal for NBN Co to charge greenfield developers for fibre installation, the removal of the cross-subsidy for regional and remote Australia effectively ending universal service and giving a green light to TPG to continue its FTTB rollout were just a few of the more contentious recommendations.

NBN Co is a natural monopoly, just as power, water and gas distribution are also natural monopolies. It is time for the government to put the “economic zealots” back into their box and take a fresh approach to solving the telecommunication market chaos facing Australia. The government would be wise to take a close look at New Zealand and to think hard.

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