ACCC rejects NBN Co’s special access undertaking

Today the ACCC issued a draft decision to reject the ‘special access undertaking’ lodged with it by NBN Co.

Why should Australians care?  What exactly is a special access undertaking? And what does the refusal mean?

Australians should care because NBN Co has been set up to be a monopolist, owning the only fixed line broadband network serving most Australian homes.  It will be a wholesaler; internet service providers will buy services from it and sell them to retail customers.  That means the prices which NBN charges will be crucial in determining how much Australians pay for broadband services in the future.  It is up to the ACCC to approve – or reject – the prices NBN Co proposes to charge – and that’s where the special access undertaking comes in.

A special access undertaking (or “SAU”) is a document which a telecommunications company submits to the ACCC.   In the document, the company sets out the prices the company proposes to charge for providing services on its network.  It is the ACCC’s job to consider those prices and accept or reject them.  Not all telcos require such pricing approval – only ones which have market power because they own the only network serving a significant number of customers.   The ACCC can’t just accept or reject on a whim – it must decide whether the prices proposed meet the requirements set out in the law.  For example, they must be in “the long term interests of end users.”

NBN Co lodged its special access undertaking last year, with a view to getting regulatory approval so it knows what prices it will be allowed to charge.  Its SAU is an extremely complex document.  Rather than setting out specific prices, instead it sets out various rules by which prices will be set (for example, rules dealing with the maximum percentage increase in a price each year).  The rules will apply for a very long time – until 2040.  In effect, if the ACCC approves the SAU, it means that for a 27 year period the ACCC has very little power to challenge prices charged by NBN Co, provided those prices comply with the rules in the SAU.  Hence if the ACCC makes a mistake now, it could have very serious, long term effects.

That is perhaps why the ACCC has today announced that it is rejecting the SAU.  It lists several reasons why it is doing so.  In particular, the ACCC is evidently concerned that over a 27 year period, the circumstances facing NBN Co could change a lot.  In the early years, while it is still building out its network, and while the number of customers who choose to take services on the network is uncertain, NBN Co will have a strong incentive not to set its prices too high.  But later on – particularly after it has been going for a while, and if significant numbers of people end up on the network – NBN Co could find itself with both the means and motivation to charge much higher prices.    In the ACCC’s economic jargon, it is “unable to be satisfied that [the proposed price structure] will encourage efficient use of the network for the full proposed term of the SAU.”

The ACCC raises other concerns: for example, the SAU as drafted would allow NBN Co to withdraw certain products from the market (which are subject to the pricing rules in the SAU) and to set new prices for new products.  There are also some technical legal concerns about whether existing ACCC powers would become ineffective if the SAU is accepted.

On one level, it’s all pretty dry and technical stuff.  But on another level, this is a decision which is absolutely critical to the future of broadband services in Australia.  The Rudd-Gillard Labor Government has established arrangements for NBN Co which create a serious conflict: by mandating that it will achieve a commercial rate of return, and by choosing an extremely expensive network design which means a massive amount of capital needs to be spent on the network (capital on which a return must be earned), it has effectively mandated that NBN Co must generate very high revenues and in turn charge high prices. 

The SAU is the proof of this: NBN Co is seeking the freedom to earn large and increasing amounts of revenue per user over time, which is fundamentally why the ACCC has rejected the SAU; and NBN Co has done this because of the mandate it effectively faces from government.  

AS part of its decision, the ACCC gave clear directions about changes it would need to see to the SAU before it could accept it.  NBN Co has indicated it will now work with the ACCC to finalise the SAU. That means the ball is in NBN Co’s court for now – it needs to determine which, if any, of the ACCC’s requested changes it will agree to.  There is considerably more distance to go in this process; the final resolution will be critical in determining the price that Australians will pay for fixed line broadband services for the next 27 years.