Final Vertigan Report Released

On 2 October 2014, the Vertigan Panel (Panel) released the final document in its suite of reports concerning the National Broadband Network (NBN).  This final report, entitled “Market and Regulatory Report” (Report), considers the most appropriate overall structure and regulatory framework for Australia’s future including the role of infrastructure based competition and NBN Co’s role in that market.

The Report contained 7 principal conclusions and 19 recommendations that are summarised in detail below.  In our view, the key recommendations coming out of the report include:

  • In the interests of promoting competition and decreasing financial risk, NBN Co should be disaggregated according to its different broadband technologies to allow the new entities compete against each other.  The Panel noted that this would ensure, for example, that FTTN and FTTP could compete against HFC, rather than the opportunity of existing copper being lost in HFC areas.  If the Government decided not to immediately demerge NBN Co, the Panel recommended that NBN Co design and deploy the separate technologies such that they could be readily disaggregated in the future.
  • The Panel considered that infrastructure competition should be further encouraged, and consequently the statutory disincentives to non-NBN networks should be substantially wound back.  The requirement for supply of a layer 2 wholesale service on non-exempt superfast networks (Part 7 of the Telecommunications Act) ought to be repealed.  The requirement for non-exempt superfast networks to be wholesale-only (Part 8) should be substantially amended by defining ‘default’ conditions entrants must meet, including structural separation.  However, the ACCC would have a discretion to accept undertakings that override these ‘default’ conditions unless doing so would not be in the long term interest of end-users.  The Panel also considered that any available exemption power should be exercised by the regulator, not by the minister because, as the Government owned NBN Co, he or she would have a perceived conflict of interest.
  • In the Panel’s view, NBN Co’s ongoing service delivery obligations should be legislatively specified in light of the significant publiccommitment that has been made:   NBN Co would be obligated to supplyhigh speed broadband to all Australian premises where it is not beingprovided by another entity. Taking into account that deployment is inits early stages the Panel recommended that the Infrastructure ProviderOf Last Resort (IPOLR) obligations should only take effect after theinitial NBN rollout has been completed in an area.
  • The proposed service delivery obligations also affect new estates, where the Panel recommended that property developers should have the optionof acquiring broadband from NBN Co and, in turn, NBN Co has obligationto supply broadband as well as the right to charge for costs it wouldnot normally incur.   However, developers would bear the costs forconnecting new estates to the NBN.
  • In regards to funding high cost areas, the Panel heavily criticised theapproach of the previous Government to create a de facto NBN Co monopoly so as to generate an internal cross subsidy.  The Panel preferred anexplicit subsidy provided directly to consumers and proposed that the best option would be funding through consolidated revenue.  If this is not adopted (due to difficulties in accurately estimating costs if disaggregation does not occur), another option is to impose single, annual broad-based industry levy covering both broadband and voice.  However, if NBN Co is not disaggregated, the Panel does not consider that there is a case for providing a fully integrated NBN Co with any form of assistance towards the costs of non-commercial services.
  • The terms of reference required the Panel to consider whether retail price controls should be considered.   The Panel concluded that there was no reason for retail price controls to apply to Telstra’s retail services on the NBN where it will be competing with other service providers on a level playing field.
  • In a recommendation that echoes the Harper panel, the Panel recommended responsibility for telecommunications regulation should be transferred from the ACCC to a ‘networks regulator’ with responsibility for regulating all major infrastructure.

Government response

The Government has released an initial response to the Vertigan report. Its main points are:

  • While disaggregation of NBN Co is not out of the question, now is not the time as breaking up NBN Co would delay delivery of high speed broadband to Australians.
  • Amending existing laws governing competing broadband networks will take time and in the meantime, competing vertically integrated carriers that do not provide wholesale access could undermine the level playing field.  Therefore, the Government is consulting on a carrier licence condition to protect the level playing field.
  • The Government recognises that the private sector has been placed at a substantial competitive disadvantage by the current new estates arrangement, where NBN Co provides fibre infrastructure to new developments at no charge while the private sector has to recover costs in the normal way. The Government will consult with industry stakeholders with a view to finalising reforms in this area that address the imbalance in competition in a manner that is fair to all parties, including new home buyers.

Principal conclusions and recommendations

  1.   Upgrading Australia’s broadband network can deliver substantial economic benefits. The most efficient way to deploy this network is through a “multi technology” approach as opposed to relying solely on FTTP.  The Multi-Technology Mix (MTM) approach can be upgraded should demand growth prove much greater than expected, consequently better manages the uncertainty of future demand.  Providing high speed broadband to regional and remote areas is inherently complex and expensive and fundamentally uneconomical.
  2.   Relying on NBN Co as an integrated entity to be the principal means of delivering high-speed broadband is deeply problematic as it is inhibits the development of competition, is difficult to effectively regulate, and results in unacceptable risks to and costs on taxpayers and consumers.
  3.   The current situation does create opportunities for a transition to effective competition potentially by disaggregating NBN Co into separate business units to create roughly equally matched networks.
  4.   Consistent with the Competition Principles Agreement, creating an environment that supports competition and promotes the long-term interests of end-users should take precedence over any impacts microeconomic reform might have on NBN Co’s financial position.
  5.   Regardless of whether disaggregating NBN Co occurs, the regulatory structure in Australia should be adjusted to better support competition.
  6.   Consumers, industry participants and tax payers should be given clarity and certainty over the objectives and obligations of high-speed broadband service provision.
  7.   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.  Responsibility for economic regulation should be transferred from the ACCC to a ‘networks regulator’ with responsibility for regulating all major infrastructure.

In light of these principal conclusions, the Panel made 19 recommendations in the following key areas of:

a)   Future market structure

b)   Broadband service provision

c)   Regulation of NBN Co's productions, pricing and expenditure

d)   Privitisation and governance of NBN Co

e)   Administration of economic reglation of the telecommunications industry

Each of the recommendations is explored in more detail below. 

Future market structure

  • The Panel’s report was shaped by the context of broadband development in Australia, noting that there have been many shifts in the direction of broadband policy and debate that has not been entirely rational.  The Panel also noted that Australia’s position in re-establishing a monopoly is highly unusual in comparison to most other countries, except limited examples in New Zealand and Singapore and this is not the ideal starting point.
  • The Panel’s recommendations turn around a strong commitment to infrastructure-based competition.  The Panel considered that Australian broadband policy had gone off the rails when it moved away from a strong commitment to infrastructure-based competition.  However, the Panel accepted that any recommendations for future market structure needed to take into account the current context of the market and the historical lack of telecommunications infrastructure based competition.  The result of this is that in some instances, a gradual, but credible transition to a more competitive market may be required.  However, it should be encouraged to happen sooner rather than later.

Recommendation 1: Infrastructure competition be the guiding policy for the delivery of wholesale broadband services. This policy be implemented expeditiously to the maximum extent practicable.

  • Overall the Panel considered that the approach of delivering the NBN through a single entity will inevitably lessen opportunities for diversity, innovation, competition and choice in the long term.  Given NBN Co’s high degree of market power, it would be difficult to regulate effectively. 
  • Further, entrenching an infrastructure monopoly imposes too great a risk on consumers, government and taxpayers, and is unlikely to meet the objective of timely and cost efficient deployment as the demands being placed on NBN Co are likely stretch it.  In the Panel’s opinion, the most effective option for increasing competition and decreasing the burden on NBN Co and consequently, consumers, would be to disaggregate NBN Co in line with the recommendation below.  This may take time  but would improve prospects for infrastructure now and in the future.
  • Concerns were also raised by the Panel that any extensive Telstra involvement in the design, construction, maintenance and operation of FTTN may run the risk of perpetuating many of the problems that the SSU was designed to address.  Conversely, if all responsibility for management of the copper assets used as part of FTTN passes to NBN Co, this would magnify the management task faced by NBN Co and risk achieving the Government’s goals.

Recommendation 2: The basis for a competitive wholesale broadband market structure be created through the disaggregation of NBN Co. This be done through: 

a) the disaggregation and divestment of NBN Co’s transit, satellite and fixed wireless business units;

b) aim to have the HFC network owned and managed by a non‐NBN Co operator or disaggregate NBN Co’s HFC network from its FTTx network to the greatest extent possible;

c) were full disaggregation not to proceed immediately, the Government direct NBN Co to move to the transitional internal arrangements; and

d) the copper network remaining active in the supply of ADSL services within the HFC network area pending upgrade to FTTN or FTTP.

  • The Panel considered the superfast broadband rules and subsequently recommended that Part 7 of the Telecommunications Act be repealed as preventing alternative superfast network providers from entering the retail market could seriously compromise the incentives for investment in competitive infrastructure.  The Panel considered claims that the restrictions were required to ensure NBN Co’s ability to fund its service obligations to be unproven and inconsistent with good public policy.
  • Further to the above recommendation, to promote competition, Part 8 should be substantially amended to address vertical integration issues by defining ‘default’ conditions entrants must meet, including structural separation.  However, the Panel was not opposed to vertical integration per se, it accepted that the need for and type of broadband specific regulation to address vertical integration issues depended on the nature and characteristics of a network.  Consequently, the Panel recommended the introduction of more flexibility into Part 8, by giving the ACCC discretion to accept undertakings from carriers which could override these ‘default’ conditions when doing so would be in the long term interest of end-users.  The panel also considered that any available exemption power should be exercised by the regulator, not by the minister.
  • The Panel also noted that the kilometre exemption has an artificial character, and should be revoked since any workable alternative will be similarly artificial, creating the risk of unexpected market entry as well as of unintended consequences in adversely affecting the ongoing functioning of existing networks.

Recommendation 3: Part 7 of the Telecommunications Act 1997 and associated provisions of the Competition and Consumer Act 2010 be repealed.

Recommendation 4: Part 8 of the Telecommunications Act 1997 be amended to:

a)   remove the 1 kilometre exemption and the Ministerial exemption process (but protect existing providers’ rights in relation to infrastructure already installed under the exemption);

b)   provide for an undertaking process under which superfast network undertakings, if accepted by the ACCC, replace the Part 8 provisions that require supply of superfast broadband carriage services on a wholesale‐only structurally separated basis;

c   require the ACCC to accept such superfast network undertakings unless to do so would be contrary to the long‐term interest of end‐users; 

d)   require the ACCC to publish and implement guidelines on how it will apply the long‐term interest of end‐users test to undertakings;

e)   require the ACCC to consult publicly on the acceptability of superfast network undertakings received, and approve or advise of concerns with an undertaking within three months of its receipt; and make its final decision within a further three months of that advice, with the undertaking being deemed to be accepted if the ACCC makes no decision;

f)   subject an ACCC decision to accept or reject such an undertaking to merits review or, in the event merits review is not provided, ensure the process for the assessment of such an undertaking is subject to clear and specific decision‐making criteria specified in legislation; and

g)   enable a provider to combine a special access undertaking and an undertaking under Part 8.

Broadband service provision

  • The Panel believes there are compelling reasons for specifying any universal service objective and associated obligations in legislation.
  • Taking into account that deployment is in its early stages, the Panel recommended that the Infrastructure Provider Of Last Resort (IPOLR) obligations only take effect after the initial NBN rollout has been completed in an area.  The effect of these obligations should be such that NBN Co is obligated to supply high speed broadband to all Australian premises where it is not being provided by another entity.

Recommendation 5:  NBN Co’s ongoing service delivery obligations be enshrined in legislation. New legislative provisions provide that:

a) all Australian premises be in a position to access high‐speed broadband, so where it is not being so provided by another entity, or is not likely to be so provided by another entity, NBN Co (or an alternative designated provider) has an obligation to supply that access (as the infrastructure provider of last resort ‐ IPOLR). That obligation become effective when NBN Co has commenced service provision in an area;

b) where premises are currently served (or in future served) by a third party, and that third party exits the market, NBN Co (or the designated provider) has an obligation to provide continuity of supply using the most practical means, subject to arrangements being made for recovery of costs necessarily incurred; and

c) the price and non‐price terms and conditions of NBN Co (or the designated provider) provision of a broadband connection service to premises be established through a requirement that NBN Co (or the designated provider) have a Broadband Connection Service Undertaking approved by the ACCC setting out the terms and conditions on which it will fulfil its IPOLR obligations.

  • The deployment of infrastructure in new real estate developments has been the subject of much debate in the industry.  The Panel believes that improving competition in the provision of telecommunications infrastructure in these developments can help hold down costs and improve the long-term affordability of communication services.  However, the Panel did not think it was appropriate for NBN Co or anyone else to subsidise developers.  Rather, developers should factor in the full costs of providing all the infrastructure required when making their investment decisions rather than having those costs borne by tax payers or by consumers.  The Panel acknowledges that these costs will be passed onto the land owners and purchasers. 
  • One of the key difficulties with this recommendation is that it will require the Commonwealth to negotiate changes to planning laws with the States and Territories. 
  • The Panel recommended that there should be transitional measures to allay developers’ fears about the long lead times for projects and potential for unbudgeted costs.

Recommendation 6: Nothing should prevent a developer from requesting any provider (whether it be NBN Co or some other provider) to supply infrastructure in, and to service, their estate. The Government should create a fair and effective market for this work by implementing the following arrangements:

a)   the costs of provision of broadband telecommunications infrastructure in new developments should be borne by developers and customers through connection charges, thereby facilitating competition in the supply of these services;

b)   providers servicing new developments should have freedom in setting their charges for developers and connection charges for customers; NBN Co’s charges should be competitively neutral and established through its ACCC‐approved broadband connection service undertaking; and

c)   to ensure developers meet the cost of providing telecommunications infrastructure, the Commonwealth should use Council of Australian Government processes to secure changes to State and Territory planning laws to require the provision of such infrastructure as a condition of development approval and occupancy; the Government should also further explore its ability to legislate to achieve the same outcome.

Recommendation 7: Transitional measures be used to assist with implementation of the recommended new development arrangements so it is least disruptive to service provision objectives. As part of these measures, the Government should:

a) set a date for the introduction of developer charging that minimises the impact on the cost of developments already in planning or underway, but does so in a way that avoids a rush of developments being lodged with NBN Co and Telstra with a view to securing free installation of infrastructure;

b) investigate whether NBN Co’s existing contracts could be reallocated to alternative providers in a fair and efficient way with a view to maximising operational efficiency;

c) publish a clear roadmap and timetable for the introduction of the new arrangements and the transitional rules that are to apply, including for developments already under contract; and

d) put in place a communications program to explain the rationale for developers being required to meet the cost of telecommunications infrastructure in their estates.

  • Even with competition in place, important issues still remain, in particular, affordability.  NBN’s Special Access Undertaking (SAU) establishes price caps that provide some flexibility for NBN Co to vary the geographical structure of its charges, but only so long as the caps are met.  The Panel believes a price capping approach should be retained, but was mindful of the distortions uniform price requirements impose (such as cherry-picking), consequently, the Panel recommends a gradual move to cost reflective wholesale pricing.

Recommendation 8: A policy of price capping for NBN‐type services be adopted, under which prices continue to be affordable but not necessarily uniform nationally. This should be accompanied by a gradual move towards cost‐based wholesale pricing, with directly targeted subsidies used to address any concerns regarding user affordability that may result from this change.

Recommendation 9: If the Government accepts the Panel’s recommendations to divest NBN Co of its fixed wireless and satellite operations, the setting of caps on the prices that can be charged for services supplied by those networks should be part of the divestment program.

Recommendation 10: Division 16 of Part XIB of the Competition and Consumer Act 2010, which provides authorisations for NBN Co to conduct activities reasonably necessary to achieve uniform national wholesale pricing that may otherwise be found to be anti‐competitive, be repealed. The repeal date should be delayed to provide NBN Co with an opportunity to apply for any authorisations it may require under Part IV of the Competition and Consumer Act 2010.

  • In respect of subsidies, the Panel dismissed the model of an internal cross subsidy underpinned by a monopoly as it would provide no transparency as to the extent of the transfers and impose no benchmarks on whether future claimed transfers are reasonable compared with the actual costs of supply and revenues received.  Any subsidies should be transparent and minimise inefficient burdens on taxpayers.
  • The Panel noted that the options differed in terms of the form such subsidies could take and the manner in which they are financed.  Thus, a subsidy may be upfront or ongoing; it may be funded by tax payers generally, consumers or industry and may be paid to suppliers or consumers.  The Panel preferred an explicit subsidy provided directly to consumers and proposed that the best option would be funding through consolidated revenue.  However, if this is not adopted (due to difficulties in accurately estimating costs if disaggregation does not occur), another option is to impose single, annual broad-based industry levy covering both broadband and voice.
  • If NBN Co is not disaggregated, the Panel does not consider that there is a case for providing a fully integrated NBN Co with any form of assistance towards the costs of non-commercial services as the risks of error in determining quantum will be too great, as would the danger of undermining the incentives for NBN Co to operate efficiently.

Recommendation 11: The implications of different future structural scenarios for NBN Co and changed market‐entry conditions for the funding of non‐commercial services be addressed in the following way:

a) explicit mechanisms for funding non‐commercial services be put in place if the satellite and fixed wireless networks are divested, and the quantum of the subsidies required for those networks is market‐tested;

b) an industry levy be used to fund service provision in uneconomic areas within the satellite and fixed wireless footprints, with that levy combining the amounts required for telephony and high‐speed broadband services; over time, the subsidy should become contestable, and be provided to consumers rather than to a particular supplier; and

c) were the disaggregation options not accepted, no specific mechanism for funding any subsidies within NBN Co be put in place, with this arrangement subject to review in five years’ time; if this market structure is maintained, NBN Co be required to report annually on any cross‐subsidies using a methodology designed by the Productivity Commission.

Regulation of NBN Co's products, pricing and expenditure

  • The Panel noted that NBN Co has been more politicised than is desirable. One objective of the Panel’s recommendations in this area was to reduce to the scope of this politicisation. 
  • First, the Panel addressed industry concerns re product development, noting that the combination of vertical separation and upstream monopoly may prove harmful to dynamic development.  The Panel noted that there was no mechanism in the SAU for the ACCC to intervene in a decision by NBN Co to reject a product idea, but the ACCC could potentially intervene by declaring a service NBN Co should supply.  This approach could be problematic, consequently, the Panel recommended that the ACCC issue guidelines in respect of this power. 
  • Secondly, the Panel considered whether the correct incentives are in place for an integrated NBN Co to upgrade its network over time, for example in terms of additional capacity upgrades.  The Panel came to the view that the best way of dealing with this issue was to ensure the regulatory framework offers incentives for investment and to ensure the board of NBN Co operates on a clearly commercial basis.
  • In addition, the Panel recommended that the Government should legislate for regular reviews of the national broadband service standard in Australia.

Recommendation 12: The ACCC issue guidelines setting out its general approach in dealing with issues relating to new product development by NBN Co.

Recommendation 13: To ensure national standards for broadband infrastructure and services are appropriate, an independent body, such as the Productivity Commission, review them at least once every six to 10 years, with the results used by the Government to confirm or adjust the national broadband standard. This review requirement be set out in legislation.

Recommendation 14: If, following an independent review, the Government decides to raise the national broadband service standard, it should initiate a process with NBN Co and other relevant operators to establish the most cost‐effective way of implementing that new standard.

  • Under the current regulatory framework, NBN Co is only permitted to supply services that are declared for the purposes of the Part XIC access regime.  NBN Co submitted that in certain circumstances, it should be allowed to provide services that are not declared and hence, not subject to ACCC oversight.  In light of NBN Co’s market power, the Panel did not think it appropriate to relax this requirement entirely, but did consider that it would be appropriate to provide some flexibility if it was in the long term interests of end-users.

Recommendation 15: NBN Co should generally continue to be permitted to supply only declared services within the meaning of Part XIC of the Competition and Consumer Act 2010. However, to provide flexibility to deal with situations such as pilots and trials, the integration of new networks, the provision of services in contestable markets, and greater competition following full disaggregation, Part XIC should be amended to allow the ACCC to determine that specified NBN Co services are not to be treated as declared services in circumstances where the ACCC is satisfied this is in the long‐term interests of end‐users.

  • The Panel considered that NBN Co should be subject to an obligation to act in a manner consistent with competitive neutrality other than where it is clearly fulfilling explicitly defined social and economic policy objectives or where it has received authorisation for conduct from the ACCC.  How this should be enforced depends on whether NBN Co remains integrate or disaggregates.

Recommendation 16: Were the Government to decide to retain NBN Co as an integrated entity, competitive neutrality requirements in respect of decisions about entry and expansion be established in legislation. Should NBN Co be disaggregated, the Government give NBN Co clearer instructions through the Shareholder Ministers’ Statement of Expectations about how it is to behave in situations where market failure is not usually an issue. This includes:

a) instructing NBN Co to act in a manner consistent with competitive neutrality principles other than where it is clearly fulfilling explicit social and economic policy objectives or has ACCC authorisation;

b) instructing NBN Co as to its priorities and its commercial objectives, including ensuring that where it overbuilds an existing network it acts as a prudent investor, takes full account of the opportunity cost of capital and is mindful of the fact that overbuilding premises that have adequate alternatives reduces its ability to service those that do not; and

c) ensuring that concerns about anti‐competitive behaviour by NBN Co in relation to overbuilding are appropriately dealt with through Part XIB and Part IV of the Competition and Consumer Act 2010.

  • The terms of reference required the Panel to consider whether retail price controls should be considered.   The Panel concluded that there was no reason for retail price controls to apply to Telstra’s retail services on the NBN where it will be competing with other service providers on a level playing field.  If there were areas where competitive mechanisms were not working, the Panel considered that such concerns should be primarily addressed through properly targeted and transparent subsidiaries rather than inherently distorted and poorly targeted price controls. 

Recommendation 17: Retail price controls not be applied to Telstra services on the NBN unless there is clear evidence of consumer detriment due to Telstra facing inadequate actual and potential competition in a particular market segment. The Minister’s power to make price control determinations be retained in a form that allows it to be applied to services provided over the NBN, for use only as a reserve power and subject to that power being confined to areas of clear market failure.

Privitisation and governance of NBN Co

Recommendation 18: Arrangements relating to the privatisation of NBN Co as a company are not an issue that requires immediate consideration; they be revisited once the NBN is further established.

Administration of economic regulation of the telecommunications industry

  • The Panel considers that the need for industry specific regulation will not diminish in the future (particularly if NBN Co remains integrated).  The sheer scale of these regulatory tasks and the high costs of error suggest a need for these tasks to be undertaken by an entity primarily focussed on regulatory functions, although not necessarily an industry specific regulator, rather, a ‘networks regulator’ whose sole responsibility would be the economic regulation of network industries.  Such a transfer would leave the Part XIB powers with the ACCC.  In support of this approach, the Panel noted that  no other national competition regulator had a similar kind of access power.

Recommendation 19: The current telecommunications‐specific functions of the ACCC, with the exception of those related to Part XIB of the Competition and Consumer Act 2010, should be transferred to a ‘networks regulator’. The current Competition Policy Review, which is to report by December 2014, should examine the establishment of such a regulator which would have responsibility access regulation for all infrastructure industries.