NBN Co's financial returns take backseat to affordability, usability

NBN Co’s ability to make a return on fresh investments in fibre will require some hoop-jumping, with the regulator emphasising price and usability over the company’s ability to generate returns.

Australian Competition and Consumer Commission (ACCC) chair Rod Sims told senate estimates that NBN Co’s ability to generate returns on its investments is effectively a secondary concern.

Sims faced questioning by Labor late on Tuesday night on the extent to which NBN Co might be able to make a return on its fresh investment in fibre upgrades by raising it’s entry-level and mid-tier pricing.

He said this would not be permissible “if we have anything to do with it.”

“It’s a modelling exercise as to whether, with current price constructs, they could ever get a return on that capital,” Sims said.

“My own view is that whether they do or not is really not an important issue. 

“The important issue is that we price the NBN effectively so that we get the benefit of the NBN for Australians and we get maximum use out of the NBN.”

Sims indicated that more broadly, he took a user-centric view of government investments in infrastructure.

He criticised the privatisation of assets “in a way that often sees the price go up”. 

“Users lose just so we can sell them for a very big price, which I don’t think is a very good idea,” he said.

“Here [with NBN Co] what we’ve got to do is just make sure that we get the benefit of this very important technology that can provide very fast data.

“The good news is it was built in time as Covid arrived so we’ve all been able to take advantage of it, but we’ve got to keep in mind that what’s important here is getting the most efficient use of this $50 billion spend, as distinct from necessarily getting a return on that spend.

“I think that’s a principle that applies for a lot of infrastructure, where government has fundamentally been the one that’s built it.”

Issues of cost recovery and long-term returns would likely be picked up in revived preparation of a new special access undertaking (SAU), which Communications Minister Paul Fletcher asked for in an inaugural statement of expectations (SOE) to the ACCC this month.

The current SAU set price and service terms for a majority fibre-to-the-premises (FTTP) NBN, and hasn’t been updated for the current multi-technology mix (MTM) model.

“The essence of the SOE is to keep the minister informed of what we’re doing and to start work on a new structural access undertaking which will govern the regulatory arrangements of the NBN, which have been somewhat in abeyance because the previous structural undertaking applied to the FTTP model and when we went to the MTM model it was just sort of left hanging,” Sims said.

Sims said constraints on price, cost recovery and returns on future investments would be issues for the new SAU process.

“The idea of what NBN spends in future is really what this overarching agreement is going to do,” he said. 

“There’s going to have to be arrangements in place where regulatory approval of these things is needed and you’ve got a construct for how that’s going to be priced. 

“But given where NBN Co is at, we’re going to have to put in place price constructs that limit them simply getting a return on whatever they invest. 

“There’s going to have to be other mechanisms that mean they’re going to have to jump certain hoops to recover their investment.”

Avoiding a more immediate undertaking

NBN Co is meanwhile closing in on inserting agreeable terms into its revised wholesale broadband agreement with retailers that would avoid a more immediate access undertaking on entry-level pricing and service standards.

Sims said that differences of opinion between the two parties had narrowed significantly.

The ACCC still intended to “peg the price of [NBN Co’s] entry-level product” at ADSL levels, a principle it first outlined in April last year.

“We went down the path of looking at an access undertaking, and when we started on that journey, the price that we had in mind for that 12/1 product was very different to the price that NBN Co had in mind,” Sims said.

“Now, we’re so close. We’ve also been talking to them about service standards, [and] our judgement is that we’re so close that they’ve agreed they’re going to put [the changes] ... into their WBA4 agreement with the retailers.

“If they do that, we’ll probably hold off issuing an access undertaking; firstly, because we’ve achieved what we wanted to achieve, and secondly that gives us flexibility not having made the undertaking to keep an eye on a very dynamic market.”

Sims said the ACCC was unlikely to depart from the idea that users at the entry-level should not pay more than necessary for internet services.

“The issue we have to keep in mind is we want to make sure that the pricing on the NBN bears some relationship - certainly at the entry-level - to the pricing that existed before the NBN was built,” Sims said.

“We don’t think people should be paying more for getting the same thing or getting what they would have got had the NBN not been built. 

“Sure, pay a lot more for the massive extra speed that people are able to get, but don’t pay more for what you could have got before. 

“So we want that to continue to underpin the arrangements, and of course that plus other limitations on how NBN Co can do its pricing, will have to work in concert with their ability to get a return on their assets.”

NBN Co agreed to abide by new service standards back in August. It said at the time they would be reflected in WBA4, which is meant to come into effect from December.

Legal basis for SOE

Brief questions were raised last night on the legal basis for Minister Fletcher to direct an SOE at the ACCC.

ACCC officials were unable to confirm, but said they would take the question on notice.

Sims took the SOE in his stride, despite it being the first the ACCC had ever received from a Communications Minister.

“This hasn't struck us as being out of the ordinary although as you observe we haven’t had one from the Minister of Communications before,” he said.

The ACCC has three months to make a formal response.