Retail service providers strike back
Not surprisingly, the SAU was greeted with universal disapproval from retail service providers. Five leading retail broadband providers – Aussie Broadband, Optus, TPG Telecom, Telstra and Vocus – immediately wrote to the ACCC.
“If NBN Co’s proposed changes are accepted, there is a real risk that this infrastructure will become even more underused and cause harm to consumers, the market and the economy,” the RSPs said in a letter to the ACCC, which was obtained. by Chanticleer.
“NBN Co wholesale prices will continue to rise and rise every year thereafter at a rate that exceeds inflation, exacerbating household livelihood pressures and making NBN high-speed broadband unaffordable for many Australians.
“NBN Co’s returns will become excessive in relation to the returns needed to realize efficient infrastructure investments.
“The proposed changes would not deliver the stable regulatory regime developed in the ACCC industry workshops, which aimed to give RSPs the predictability needed to support independent RSP investment decisions.
“There have been many decisions in the past that have led to the inefficiently high costs of NBN Co, causing NBN Co to prioritize returns for its shareholders over results for end users. NBN Co’s proposed changes continue to ignore the legitimate needs of end users and RSPs.”
A central problem for the RSPs is the continued inclusion of a data usage fee, the so-called Connectivity Virtual Circuit charge. The $8 CVC cost would remain for 50 Mbps plans, but these plans would have a price cap on the virtual circuit entry fee.
The CVC costs has been the bane of RSPs as it brings uncertainty to the cost of providing retail broadband plans. RSPs that offer fixed, monthly plans can often be hit with unplanned CVC costs due to higher-than-average data downloads.
ACCC wears teeth
But the bigger and more intriguing story about the SAU is the reaction of the ACCC and the apparent blindness of NBN Co management.
After nearly a year of consultations between NBN Co, RSPs and the ACCC, NBN Co’s leadership, led by CEO Stephen Rue, believed the new pricing plan was in line with what the antitrust regulator wanted.
It appears the ACCC led the NBN Co on a conciliatory path only to be reprimanded with a response that opens the door for the new minister to lead a fundamental reassessment of NBN’s economy.
NBN Co was made fun of by the ACCC despite its decision to make some significant concessions to the regulator in its SAU.
What makes this doubly intriguing is that the SAU was supposed to be published two weeks before the federal election, but was delayed until after the election.
In exchange for higher prices, NBN Co would agree to much stricter regulation by the ACCC, which currently only has the power to ensure that the costs of NBN Co’s fiber-to-the-premises, fixed wireless and satellite services are “reasonable”.
Under the terms of its SAU, NBN Co would give the ACCC the power to price all of NBN Co’s technologies and agree to increase the ACCC’s functions and powers.
The ACCC would be able to review NBN Co’s spending each year, review and approve the passing on of certain costs to customers, conduct public inquiries into the proposed cap on revenue, and give the ACCC a role in determining whether products fit into either core business. regulated services or competing services with less regulatory oversight.
In a consultation paper published on Monday, the ACCC said maintaining CVC costs could escalate access costs over time as peak data demand continues to grow.
“It could also expose retailers and customers to cost increases due to demand shocks, such as those observed during COVID-19 lockdowns. Costs could escalate as the CVC entitlements for the bundles appear to be designed not to grow as fast as peak data demand,” the ACCC said.
“The level of CVC coverage fee of $8 Mbps/month also appears to exceed NBN Co’s cost to make additional CVC capacity available to retailers.
“The level of this CVC charge adds to the amount of cost escalation that could occur from CVC charges failing to keep up with peak data demand.”
The ACCC says that according to the SAU filed by NBN Co, the cost to retailers of the 50 Mbps product is expected to equal that of the 100 Mbps product within a few years, and similarly for the 25 Mbps product before the end. of the SAU term.
“This dynamic indicates that [there will be] a narrowing of reasonably priced entry products to the market, which in turn could be detrimental to the level of retail competition, and result in the supply of retail products to the market at higher prices and speeds that exceed the needs of the end customer” , the ACCC says.
Rowland can draw a line in sand
Rowland, who will be sworn in as minister next Wednesday, has campaigned for a policy to force NBN Co to spend $2.4 billion on upgrading 1.5 million fiber-to-the-node customers on the network to fiber-optic. to the premises.
This was not a big question as NBN Co was already upgrading the network with more fiber so that 8 million households would have access to 1 gigabit speeds by the end of 2023. Also, the $2.4 billion was a drop in the ocean compared to the total cost of the NBN.
Thanks to the ACCC’s strongly negative response to NBN Co’s SAU, Rowland now has a chance to finally bury the much hated CVC levy and have a say in NBN Co’s proposed new cost of capital.
When the National Broadband Network was built, NBN also published a return on investment of 3.5 percent in its business plan. This was an ambitious number, as it intentionally incurred significant losses because it was unable to charge enough prices to recoup its cost of capital.
It now believes that because it has connected the network to 8.5 million households, it deserves to “normalize” its weighted average cost of capital to levels associated with other regulated infrastructure assets.
The SAU is considering a forward-looking WACC of 6.5 percent, which includes the weighted average of the return on debt and return on equity needed to ensure efficient investments.
The NBN Co uses a standard model for regulated infrastructure and this has been approved by advisor Frontier Economics.
Rowland will definitely want to know if the difference between the 3.5% return on investment and the 6.5% WACC could explain the aggressive price hikes that NBN Co is proposing.
She might conclude that to ensure that NBN Co charges “reasonable” wholesale prices, the government must work with the ACCC to impose stricter regulations on NBN Co.
NBN Co’s response to the ACCC’s reprimand is that it welcomes the start of the SAU’s consultation process.
“Our proposed SAU variation addresses the RSP’s calls for changes in our pricing architecture and the need for greater regulation and price predictability,” it says.
“We look forward to an ongoing discussion, as part of this consultation process, with the ACCC and industry.”
Those discussions are likely to include vehement disagreements with the ACCC over its analysis of NBN Co’s proposed price increases, which are intended to encourage NBN users to move to 100 Mbps plans, which would have no CVC fees.
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