Australia - One danger of the NBN is of regulatory capture, ACCC has made the first set of recommendations

[business spectator] One of the big risks posed by the intensity of the Gillard government’s commitment to the national broadband network and by the marginal, at best, economics of the network is that of regulatory capture.

The regulator, the Australian Competition and Consumer Commission, has been intimately involved in developing the NBN concept, which represents its own triumph after nearly a decade and a half of battling Telstra. With the NBN paving the way for structural separation of Telstra, it would be tempting for the ACCC to do what it can to help the parlous economics of the project.

The first real test of the commission’s approach to regulating the NBN relates to its recommendations on the numbers of points at which retail service providers can connect to the NBN.

The ACCC’s recommendations on the number of points of interconnection had to be handed to the government by 30 November and there have been a number of reports, which the commission won’t confirm or deny, that it has recommended against NBN Co’s preferred model.

NBN Co’s preferred option of 14 POIs – two in each capital city – ignited a fierce backlash from the industry because that option would strand or undermine the returns on a vast amount of existing backhaul fibre. At the moment there are about 550 POIs in Telstra’s network.

A limited number of POIs would also effectively extend NBN Co’s monopoly.

NBN Co has argued that having fewer POIs would enable it to lower the combined costs of accessing the NBN and providing backhaul to the retailers and help to promote greater competition at the retail level. It would also make it easier for it to meet the government policy of national uniform pricing.

The ACCC would be conscious that it is firm government policy that there will be national uniform pricing at the wholesale level and that having only a handful of POIs would be the most obvious way of delivering that objective. Conversely, the fewer the number of POIs the bigger the NBN Co monopoly and the less competition.

It would appear the ACCC favours having a larger competitive dimension in backhaul provision, presumably using other mechanisms – like direct subsidies – to produce uniform pricing.

If the ACCC has advocated several hundred POIs it would be difficult for the government to reject that advice, particularly as those telcos with their own fibre – and there is a lot of fibre out there – have been threatening to seek compensation if their fibre is stranded.

In the summary of the NBN Co business case that was released last week, however, NBN Co warned that a rejection of its preferred option would cut 50 to 80 basis points from its own projected internal rate of return, although the IRR would still remain above the long-term government bond rate.

The implication in the summary was that the IRR would be marginally above the risk-free rate but substantially below NBN Co’s estimate of its weighted average cost of capital of 10 per cent to 11 per cent.

While the ACCC may have been frustrated in the past at the extent to which Telstra managed to retain its dominance of fixed line telecommunications, the access regime had allowed competitors to install their own infrastructure within Telstra exchanges and compete for its customers. NBN Co’s monopoly, while wholesale, will be more complete.

That, and the shaky economics of a project that will cost $35.7 billion – and potentially far more – means that it is imperative that the ACCC protect the long-term interests of end users of the network by emphasising competition wherever it can and ensuring that the footprint of the monopoly is as small as possible.

Ironically, that will provide common interest between the ACCC and Telstra and the rest of the sector, who have also found themselves in the novel position of siding with Telstra on the POI issue.

NBN Co will inevitably try to improve its financial position as much as possible. As we’ve seen with Telstra that is a natural and indeed desirable organisational ambition – NBN Co needs to be as efficient and commercial as possible if consumers and taxpayers’ interests are to be maximised – but it does demand vigilance and a ‘’competition first’’ mentality from the regulator if the natural instincts of a commercial organisation are to be disciplined.

By the sound of it, the ACCC is off to a good start – provided the government heeds its advice.

The ACCC's NBN temptation