NBN: Telstra payments for the Turnbull Node Plan

Turnbull is very coy about payments to Telstra. This is besides his tight-lipped response ("they will") to any questions related to his primary Project Risk: securing Telstra's co-operation.

While the VDSL2 service and Nodes may be 5%-10% cheaper overall than the current full Fibre Plan, Telstra copper-loop rental payments must be met out of FTTN revenues.

Estimates of what NBN Co will need to pay Telstra to use their copper local loops:

• Lowest: $30/yr/service (3% of $1,000, only for active services) as Interest on a single payment.
• Highest: $180/yr/service (10% of $1,500, with 20%  inactive connections) as indefinite on-going payments to Telstra.
• Sting-in-the-tail: After renting the copper for 10 or 20 years, NBN Co will still have to honour the current contract and pay Telstra around $1,000 per service to buy the lead-ins.
  

For the current direct Fibre Network, my per-service estimate of Telstra payments for the copper local loop was $1,000, Turnbull's figure is $1,500.

Telstra cannot agree to lower payments because the current deal is what their Shareholders agreed to. For Telstra to agree to another, less lucrative, arrangement they would need to run another Shareholder vote. This is expensive and time-consuming process with an uncertain outcome.

There's a significant difference between the current direct Fibre agreement and the Turnbull Node Plan:

Under the Turnbull Node Plan, all Telstra lines are cut at the Pillar and moved to a Node. All Telstra lines must be paid for, at a rate Telstra sets, as an on-going rental fee. Only active services migrated to Fibre are paid for under the current agreement. My estimate is that at least 20% of copper loops connected to Nodes will be inactive: they must be rented from Telstra but will generate no customer revenue.

On top of this, the Turnbull Node Plan is designed to be thrown away ["all FTTN designs must be upgradeable"]. Even if half the cost of FTTN goes towards a full FTTP, Telstra has never sold the copper local loop, only rented it. The raises a fundamental question:

When the Turnbull Nodes are upgraded to direct Fibre, will the existing Phone Service disconnection fee still be payable? Customers, via NBN Co, get to pay Telstra twice for the copper service. That's seems incredibly Bad Business.

At the moment, NBN Co only makes a payment to Telstra when they take-over an active Phone Service. This one-off payment is a Capital Expenditure, but the dollar amount, with indexing, is not public. Reverse calculating the public figure, "$4 billion, after-tax NPV at 10% discount rate", led to my estimate of $850 per passed premise, or $1,000 per active service.

Calculations:

Same cost as current direct Fibre:
One-off payment, only for active services: $1,000 CapEx
Interest: 3% [Government borrowing]
Yearly charge: 3% of $1,000 = $30/yr per active service

Using the higher Coalition figure of $1,500 CapEx would yield $45/yr.

Rental from Telstra:
The Coalition calculates the 'PSAA' figure as $1,500, Telstra cannot accept a lower valuation.
Telstra demands a 10% Return (Discount Rate) on these assets.
Rental: $1,500 * 10% = $150/yr per service.

But, as control of all copper services, not just active (revenue generating) lines, is passed to NBN Co, the cost per active service is higher.
Assuming 20% inactive lines: $150 * 1.2 = $180/yr per active service


Sources:

Telstra 2011 Definitive Agreement:
 10% Discount Rate applied to sale of Lead-ins and Phone Service disconnection.

$1100 - $1400 final build cost per Fibre service. NBN Co, April.

Pg 6 of Coalition Background doc: $1,500

NBN Co has separately signed contracts that involve payments over forty years to Telstra with a face value exceeding $50 billion if paid in full. These include a ‘PSAA’ payment of about $1500 each time NBN Co takes over a premise previously connected to Telstra’s networks.

Pg 14 of Coalition Background doc:

IS IT REALLY CHEAPER TO BUILD FIBRE TO THE PREMISES NOW THAN LATER?
Discount Rate  8%
Capex Reused 50%

Pg 10 of Coalition Broadband Plan.

Where the NBN is rolled out using FTTN, existing communications services at a given node will cut over to NBN Co control on the same date.

Pg 12 of Coalition Broadband Plan.

Future upgrade pathWhere NBN Co extends fibre beyond an exchange but not to user premises (i.e. deploys FTTN) it will be required to plan and build in readiness for future upgrades that take fibre further into the field. all FTTN designs must be upgradeable. 

Also on Pg 12:

NBN Co and TelstraWe may seek to negotiate variations to commitments to provide efficiencies, allow the nBn to be more quickly deployed or otherwise create benefit.
NBN Co will seek permanent access to Telstra’s copper between premises and concentration points such as pillars, cabinets or exchanges. Telstra has publicly stated the copper has minimal economic value, leading us to anticipate cost-effective access will be attainable.