Money Well Spent

The federal government this week formally tabled its response to the recommendations included in August's Vertigan cost-benefit analysis of the rollout and operation of the National Broadband Network.

Most of the Vertigan review's major recommendations have been endorsed, which isn’t especially startling given how diligently the review cleaved to positions already advocated by the federal government. Thus did a largely pointless exercise come full circle, forming a closed loop: the government endorses the review that endorsed the government. Money well spent.

The meatiest of the endorsements seem disproportionately designed to combat TPG’s foray into FttB deployment, a move that most analysts agree will only have a minor impact upon the NBN.

NBN Co is to abandon universal wholesale pricing.

You may recall that universal wholesale pricing was a core component of the original NBN design. This stipulated that users in rural or regional areas would pay the same prices as users in metropolitan areas, despite the fact that running infrastructure to remote areas is considerably more expensive.

Thus of course meant that metropolitan customers would effectively cross-subsidise other customers - a deliberate measure aimed at shrinking the crippling digital divide separating country and city. Such a mechanism is inimical to competition, but deliberately so. Competition is what created the digital divide in the first place; free markets are ill-equipped to ensure equitable delivery of services.

Such regulation was anathema to a conservative government, and it hardly proved surprising when the Vertigan review recommended it be changed. The goal is to enabling NBN Co to compete with alternative infrastructure providers (i.e. TPG) in lucrative (i.e. high-density) areas. It could only do this, apparently, by being able to sell services cheaper in the city than in the country.

There will be a ‘wholesale price cap’, which will legislate that the basic NBN service – a 12/1 Mbps service – cannot cost more than $24 per month (that is the wholesale price, not retail). However, there’s no price cap on higher speed tiers.

The upshot is that country users will continue to pay more than city users, especially if they want anything better than the basic NBN service.

NBN Co competitors must structurally separate.

Part of the original vision for the NBN was the removal of Telstra as the dominant infrastructure provider in Australia. For many years Telstra had retained a monopolistic position that was anything but ‘natural’, since it had been bequeathed to it as a former government owned entity (first as part of the Post Master General’s office, then as Telecom Australia).

Thus did Australia’s largest telecommunications retailer also own most of the infrastructure, which meant that its retail services inevitably had a clear advantage over competitors, even after Telstra was compelled to sell wholesale services to those competitors. Structurally separating Telstra’s wholesale and retail components in theory curtailed this competitive advantage. It also meant that Telstra would compete with NBN Co at an infrastructure level.

The Vertigan review recommends that this same condition be applied to any other NBN Co competitor. For argument’s sake, let’s call this competitor TPG. TPG, or anyone else who installs infrastructure that competes directly with NBN Co (such as the Australian mainland), will now have to maintain a wholesale division that is disconnected from the retail division. The wholesale division will have to sell services to competitors at the same rates as it sells them to its own retail division. Given that this would largely take away the commercial advantage of running your own fibre, this should effectively stop anyone from competing with NBN CO in FttB deployments.

The ACCC will be given new powers to police this.

NBN Co must get ready to separate itself, just not yet.

Although this wouldn't happen until the NBN rollout is compete, the goal now is that NBN Co will separate into various divisions, for satellite, fixed wireless, FttX, HFC and transit networks: "However, optionality for future restructuring or disaggregation should be retained, to provide future governments with greater policy and financial flexibility."

Reading between the lines - and reading the actual lines of someone who uses 'optionality' with a straight face is a harrowing task - it seems clear that the goal of this fragmentation - sorry,disaggregation - would be to make NBN Co more attractive when it is to be sold off. Thankfully there's no reason to believe the privatisation of a national telecommunications monopoly will have anything but positive ramifications. 

The Vertigan Panel's CBA also advocated the deployment of a Multi-technology Mix version of the NBN, instead of the original full fibre version. The government has of course already endorsed this. Indeed, they endorsed as vigorously as they could, by going ahead with it months before the CBA was even delivered.