NBN Co overestimates costs of providing better service

NBN Co is vastly overestimating the costs associated with improving service standards on its network, according to economic analysis prepared for the Australian Competition and Consumer Commission.

The national network operator argues that an ACCC plan to raise benchmark service standards, currently being negotiated as part of its special access undertaking (SAU) for the next regulatory cycle, would cost it $538.2 million over five years.

The service standards cover activities such as connection and fault handling to service reliability and performance. Failure to meet these standards can incur financial penalties.

However, an analysis of NBN Co’s costings by economics consultancy HoustonKemp [pdf] estimates NBN Co could meet higher standards than it does today at zero extra cost, in many cases.

HoustonKemp estimates the total cost to NBN Co of adopting the ACCC-proposed service standards would come in at around $44.1 million over the five-year period - almost 92 percent lower than NBN Co's own calculations.

Closing the gap

Broadly, the economics firm found the disparity is due to a combination of NBN Co overstating service levels expected of it across regional and urban areas, faulty assumptions and underestimation of its current service level performance.

For instance, the ACCC is proposing that NBN Co agree to keep 95 percent of its connection and fault appointments, up from the current 90 percent.

NBN Co has told the regulator this would cost $69.8 million over five years. HoustonKemp argues it could actually be achieved at no cost to NBN Co.

HoustonKemp said NBN Co's much larger number is based on incorrect assumptions.

Specifically, the firm said that NBN Co is "already meeting the 95 percent objective" across much of its network footprint, meaning nothing would need to change.

"We have seen no clear evidence to indicate that NBN Co will struggle to meet this performance
objective in the future," HoustonKemp wrote.

"We understand that as NBN Co completes its fibre rollout, this will likely reduce connection activity over time across its network, and also assurance activity, since fibre tends to experience
fewer faults than other technologies."

Similarly, HoustonKemp is critical of NBN Co’s cost estimates for meeting higher standards for connection reliability and faults.

Overall, HoustonKemp argued that NBN Co was overestimating costs for meeting almost all of the ACCC’s proposed benchmark service standards, including for priority assistance, physical connections, and for disaggregating and expanding connection reliability.

Notably, it questioned a bill of $39.4 million over five-years to address congestion on its fixed wireless network and sustain average connections throughputs of 50Mbps – a threshold below which NBN Co would be required to pay rebates.

In some cases, it argued, NBN Co appeared completely able to justify costs for system enhancements it claimed would be required to meet the proposed benchmarks.

NBN Co has long sought to delay committing to higher service standards until most users are connected with fibre.

Fibre is more reliable and less prone to faults and underperformance, which would give the company confidence that it could meet higher service standards without an increased risk of financial penalties.