NBN Might Breach of Competitive Neutrality Requirements

The Australian Government Competitive Neutrality Complaints Office (AGCNCO) released "NBN Co Investigation Report 14" on 8 December 2011. The office, which is part of the government's Productivity Commission, found the NBN plan might breach competitive neutrality requirements. This is not surprising, as the NBN was designed as a new monopoly, initially government owned. It is intended to deliver subsidized broadband across Australia, and has been exempted from anti-monopoly laws for social equity and national development reasons.

Essentially what the AGCNCO is saying is that the government has not shown that the social benefits of the NBN justify the cost of the project. That would be a useful exercise, but is politically impractical as the government is already committed to the project. There will, in practice, be some competition for the NBN, from technological developments with wireless broadband and that might be sufficient to keep the project efficient.

Contents

Competitive neutrality policy IV

1 The complaints 1

1.1 The nature of the complaints 1

1.2 About NBN Co 2

1.3 The role of the AGCNCO in investigating complaints 3

2 Background 7

2.1 Some background on NBN Co 7

2.2 NBN Co and new developments 13

3 Assessment of issues 17

3.1 Issues which fall outside competitive neutrality policy 17

3.2 Issues relevant to competitive neutrality policy 23

3.3 Summary of findings and recommendations 37

References 39

Figures

2.1 Announced timeline for the NBN 13

3.1 WACC estimates over NBN Co roll-out 31

Tables

3.1 Sensitivity of the internal rate of return 28

3.2 Risk broad-banding estimates 32

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3 Summary of findings and recommendations

In relation to the issues raised in the complaints that fall within competitive neutrality policy, the AGCNCO found that:

NBN Co’s decision to be an alternative provider of fibre in greenfield developments (rather than only the provider of last resort) is not dependent on a competitive advantage by virtue of its government ownership, and is not a breach of competitive neutrality policy.

NBN Co’s use of its profile to promote itself to the development industry as a provider of fibre to the home in greenfield developments is an operational decision, and is not a breach of competitive neutrality policy.

NBN Co’s long term contracts with Telstra are enabled by the size of the corporation, and are not a breach of competitive neutrality policy.

NBN Co’s tender process for establishing a panel of appropriately qualified and experienced providers who can build and install fibre on its behalf is not a breach of competitive neutrality policy.

NBN Co’s pricing model for individual goods or services in particular market segments, in itself, is not a breach of competitive neutrality policy.

In the absence of a quantification of the non-commercial benefits to be delivered by NBN Co, the targeted rate of return of NBN Co represents a potential ex ante breach of competitive neutrality policy.

In the absence of a quantification of NBN Co’s community service obligations, the expected timeframe for achieving a commercial rate of return represents a potential ex ante breach of competitive neutrality policy.

The Australian Government’s equity funding of NBN Co is not subject to the debt neutrality provisions of competitive neutrality policy.

As no relevant Ministerial determinations have been made to date, there has been no breach of competitive neutrality policy. Further, if such determinations do not exempt NBN Co from regulations that apply to other competitors they would not be a breach of the regulatory neutrality provisions within competitive neutrality policy.

The AGCNCO has found that NBN Co is in potential ex ante breach of competitive neutrality requirements. The AGCNCO recommends that to comply with the Australian Government’s competitive neutrality policy:

The Australian Government should arrange for an analysis of the nature and magnitude of the non-commercial benefits required to be delivered by NBN Co. On receipt of the analysis, the Australian Government should put in place accountable and transparent community service obligation funding.

To comply with competitive neutrality policy, NBN Co would need to adjust its pricing model by taking into account funding by the Australian Government for its community service obligations and would need to demonstrate that the adjusted pricing model is expected to achieve a commercial rate of return that reflects its risk profile.

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From: NBN Co Investigation Report 14, Australian Government Competitive Neutrality Complaints Office, Productivity Commission, 8 December 2011