Sunday, 25 November 2012

NBN: Framing the Questions - What's Good Policy?

There's a simple methodology to assess any Public Policy:
Roll forward in time 25-50 years, then look back and ask "Is this what we wanted for ourselves?".
We don't have Time Machines, but we do have our imaginations, and can answer some, or most, aspects the question about the competing NBN Policies.

I believe there are four areas to consider:
  • Competition
  • Regulatory Environment
  • Technical Solutions
  • Commercial Arrangements


The "last mile" of any utility network, the Customer Access Network, is a "natural monopoly". The right number is of networks is one, if your objective is to minimise cost and maximise Public Utility. Allowing competition leads to poor, expensive services, where no player gets good returns discouraging investment and upgrade. We saw the Optus/Telstra HFC Cable TV debacle that destroyed billions in shareholder funds and failed to create a viable Cable TV industry.

The problem is "how do you keep them honest and motivated?" not "Fat, Dumb and Happy" or complacent, inefficient and possibly corrupt.
How does a society grant any body, public or private, a monopoly on anything, let alone essential infrastructure, and expect them to operate efficiently, selflessly and altruistically for decades on end?

It's an impossible task when real people with their many failings and drivers, like greed and ambition, are involved.
Certainly some degree of regulation and oversight/governance will stop, or eventually detect, most excesses.

I suggest two things are desirable in a natural monopoly:

  • Private ownership, under the close control of a Regulator, to allow incentives for management and prevent business being "captured" by Trade Unions. Making a profit, while preserving a fixed asset in good order, is a discipline missing within Public bodies.
  • Micro-competition: New entrants should be allowed to enter niche markets where new technologies or business/funding/ownership approaches can offer users a substantial benefit. The Regulator needs to prevent "cherry-picking", where an operator runs the same technology past the same premises, but only in the cheapest deployment areas. Providing a Universal Service at a consistent, affordable price is a Social Benefit that implies some degree of cross-subsidy.
The on-going challenge is encouraging the Operator to both maintain their assets and invest in upgrades, but not to "game" the Regulatory system with over-investment or other strategies, such as we've seen with New South Wales retail electricity pricing in the last 5-10 years.

We know from the past in Australia with the PMG/Telecom/Telstra that a self-regulated monopoly does not put the National Interest first, that some form of external discipline is needed to replace that normally provided by Free Market competition.

From the USA and the break-up of AT&T into a number of local "Operating Companies", a number of which recombined, we know that geographical monopolies are not "competitive".

Regulatory Environment

Whilst a natural monopoly exists for the Customer Access Network and no, or tightly controlled competition, is in the best National Interest there, strong competition should be enabled and encouraged for the provision of full retail services. To maximise both the Public Utility from the C.A.N. and the economic viability of the Operator, necessary for efficient operations and minimising customer pricing, there cannot be wide-scale alternatives, they will undermine the Network, destroy the economies of scale and inevitably lead to higher prices, limited availability and poorer service: none of which are in the National Interest.

The problem the Regulator has is preventing near-monoply players, like Telstra, from manipulating the market and driving out competitors, or using predatory pricing in high-demand/low-unit-cost markets to use other services to undermine the profitability of the C.A.N. operator. Telstra can over-dimension a 4G mobile network in dense urban networks and, via "special bundles", price it to undercut the C.A.N. in just those areas.

Technical Solutions

NBN Co has currently defined a single network topology, layer 2 Ethernet VLAN-in-VLAN, and is currently rolling-out three C.A.N. technologies:
  • direct-fibre, GPON, to 93% of premises. Up to 25% will be strung on poles, i.e. "aerial".
  • Fixed Wireless, or 3G/4G mobile to fixed base stations in premises for marginal areas.
  • Satellite delivery to remote areas outside the economic areas of GPON and Fixed Wireless.
In 30 years, the end of the current NBN plan, still having a copper C.A.N. analogue phone service, ADSL, VDSL and limited Fibre-from-the-Node in addition to GPON/Fixed-Wireless will produce an catastrophic environment, very similar to the National Railways until the 1960's: fractured, expensive, inefficient, unattractive to new operators and new investment only limited to the already well-served, advantaged "low-cost" areas.

Deliberately fracturing the market and undermining the economics of a full-fibre GPON roll-out now, will inevitably lead to being trapped in a digital ghetto: prices will be high, speeds low and coverage poor, with no commercial operator willing to invest because competing providers will always destroy their business model.

From the first century of Australian Railways, we know that "good" short-term decisions can, in the long-term, be not just a "drag" on the economy, but a positive millstone, actively preventing wide-spread economic development.

From the Optus/Telstra Cable TV rollout, we know that once it is clear a business model is destroyed, no further investment will be made.

Like it or not, the only "technically correct" and viable Customer Access Network in 15 years is one technology per service area. After the sunk costs are recovered, the most profitable, least expensive to run and most upgradeable/extensible is a full-fibre GPON for the majority of premises.

The 2009 Expert Panel observation, from Prof. Reg Coutts, that an FTTN was a wasted investment because it did not provide a bridge to even current technology still stands.

Commercial Arrangements

Transferring ownership of NBN Co from Pubic to Private hands only after it has established a reliable positive cash-flow, so that it can be reasonably priced by the Stock Market, is essential.

Preventing Telstra, or any other Retail Telco Service Provider from controlling a privatised NBN Co is also essential. This suggests wide-ownership and a preponderance of small shareholders is in the National Interest.

The core objection the Coalition has to the current NBN plan is centred around costs and funding: it is unclear from their many statements just what they object to...
Is it solely Government funding, is it that $30B is too large for their tastes, do they want to limit ownership to a select few large investors, do they want Telstra to once again control the Access Network or is it a solely Partisan Political stance: not what they said?

What may be more useful to explore is non-centralied funding and ownership models:
  • NBN Co, if it offered good, guaranteed returns, could access some of the large pool of "DIY" superannuation funds, either as fixed-rate bonds, equity (shares) or pre-paid instalment costs - a lease/buy-back scheme offered to small- and mid-size investors, not the large end of town.
  • Promotion of local Co-Op building and ownership of small regional Access Networks to NBN Co specifications. Operation of the Co-Op Networks would be by NBN Co. Maintenance could be contracted out or undertaken by locally employed staff.
Digital Network Infrastructure in 2050

  • A single, national solution offering Ubiquitous, Universal Digital Network access with simple pricing regimes, internationally competitive pricing for basic and high-end bandwidth, latency and volume.
  • A privately owned and viable major Access Network Operators with possibly other small niche Access Network Operators.
  • A highly competitive, multi-player Retail Network Services sector.
  • Per service area, an economically sustainable choice of connection types.
  • A Competition, Regulatory and Commercial regime that encourages efficiency, investment, good asset stewardship  and non-predatory competitive behaviour.

  • Telstra still as the dominant, controlling player across all sectors.
  • A fractured, inefficient, divided and undercapitalised/under-maintained Access Network and Retail Services.
  • Highly variable and complex local charges, unavailability of basic or premium services enforced by geographical boundaries.
  • Highly variable services and "preferred areas": an entrenched Social and Digital Divide.
  • Disincentives or Perverse Incentives for investment, upgrade and asset maintenance.

Both major Political Party policies do not adequately address all issues and ensure the most desirable National Outcomes will ensue. The Political Debate needs to start from a basis of National Interest, Social, Economic, Environmental and Human-Capital, rather than short-term political gaming.

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