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2016-2017
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TELECOMMUNICATIONS (REGIONAL BROADBAND SCHEME) CHARGE BILL
2017
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Communications,
Senator the Honourable Mitch Fifield)
TELECOMMUNICATIONS (REGIONAL BROADBAND SCHEME) CHARGE BILL
2017
OUTLINE
The purpose of the Telecommunications (Regional Broadband Scheme) Charge Bill 2017
(Bill) is to establish an ongoing funding arrangement for fixed wireless and satellite
infrastructure though the imposition of a charge. The funding arrangement is called the
Regional Broadband Scheme (the Scheme). The Bill is a taxation measure.
NBN Co Ltd's (nbn) fixed wireless and satellite networks are essential to address the
broadband access disadvantage historically experienced by regional Australia. These
networks improve social, education and health outcomes for regional Australians and better
enable them to participate in the digital economy.
These substantial benefits come at a high cost. Fixed wireless and satellite technologies are
the quickest and most cost effective way of providing broadband services to regional
Australia. However, these networks are expected to incur a net cost of $9.8 billion (in net
present value terms) over thirty years. nbn currently funds these net costs through an internal
cross subsidy from its fixed line networks. This cross subsidy is not sustainable and ongoing
funding for essential regional broadband services is at risk.
The Bill will establish a sustainable funding mechanism to ensure nbn can continue to deliver
the benefits of high speed broadband to regional Australia. It will require all carriers,
including nbn, to contribute funding at a rate of approximately $7.10 per month, per
chargeable premises. Chargeable premises are premises where a carriage service provider
(i.e. a provider of retail broadband services) provides a designated broadband service. A
designated broadband service is a carriage service provided over a fixed line that is
technically capable of providing download transmission speeds of 25 megabits per second
(Mbps) or more.
The technical speed requirement is on the line, not the service. This ensures nbn's 12 Mbps
services are captured and carriers cannot avoid the charge by offering sub-25 Mbps services
over lines capable of 25 Mbps or more. For example, it is intended that the charge would
apply to all premises serviced by fibre to the premises (FTTP), fibre to the node (FTTN),
fibre to the basement (FTTB), fibre to the curb (FTTC) and hybrid-fibre coaxial (HFC).
Once established, the charge to be levied under the Bill will fund:
the administrative costs incurred by the Australian Competition and Consumer
Commission (ACCC) and the Australian Communication and Media Authority
(ACMA) in administering the Scheme, and
payments made by the Secretary of the Department of Communications and the Arts
(the Department) to nbn under contracts and grants for the provision of fixed wireless
and satellite services (and any other eligible funding recipient under item 13 of
Schedule 4 to the Telecommunications Legislative Amendment (Competition and
Consumer) Bill 2017 (TLA(CC) Bill)). These contractual and funding arrangements
will support nbn's ability to fulfil its obligations under the Statutory Infrastructure
Provider provisions proposed in Schedule 3 to the TLA(CC) Bill.
2
Under the Bill, the initial $7.10 monthly charge will comprised of a $7.09 base component
and a $0.01266 administrative cost component. The base component is indexed annually to
the consumer price index (CPI). The administrative cost component is set for each of the first
five years at $0.01266, $0.00172, $0.00, $0.0027 and $0.00 respectively. The administrative
component will be indexed annually to CPI thereafter.
Both the base component and the administrative cost component may be changed by the
Minister for Communications (the Minister) via disallowable legislative instrument.
However, the sum of the base and administrative cost components for any month cannot
exceed $10, indexed annually to CPI. Any adjustments made by the Minister will not
commence until after the disallowance period has elapsed.
The ACCC will review the base and administrative cost components at least once every five
years to ensure they are sufficient to meet the reasonable net costs associated with nbn's fixed
wireless and satellite networks and the administrative costs of the Scheme. It is intended that
nbn's reasonable costs would be the costs nbn incurs to build and maintain its fixed wireless
and satellite networks to a standard that enables it to meet its statutory infrastructure provider
obligations. The ACCC will give the Minister advice based upon its review, and the Minister
must take the advice into account when deciding to change the base and administrative cost
components.
The Bill also establishes a charge concession period, so that the first 25,000 residential and
small business chargeable premises on each carrier's network are exempt from the charge for
the first five years. This lessens the burden on smaller carriers and helps them transition to
paying the charge.
The Bill operates in conjunction with Schedule 4 of the TLA(CC) Bill, which establishes:
the types of broadband services caught by the charge;
the types of broadband services exempt from the charge;
penalties for avoiding the charge;
the administrative arrangements for assessing and paying the charge, including yearly
reporting requirements for carriers;
the arrangements for paying nbn (and other eligible funding recipients) for its fixed
wireless and satellite services through contract or grant;
the Special Account into which funds from the charge will be credited and debited;
an offset mechanism to allow eligible funding recipients to offset their charge liability
against money owed to them under the Scheme;
information gathering and disclosure powers for the ACCC and the ACMA,
information reporting obligations for carriers, the ACMA and the Department's
Secretary;
a one off reporting requirement on carriers, which will give the ACCC an initial
snapshot of the high speed, fixed line broadband market, and
a requirement for the Scheme to be reviewed during the first four years or as soon as
practicable after.
Together, the two Bills establish a suitably flexible, equitable, transparent and sustainable
funding mechanism for fixed wireless and satellite networks and ensure the continuity of
essential regional broadband services.
3
FINANCIAL IMPACT STATEMENT
The Regional Broadband Scheme (the Scheme) is budget neutral in the medium to long term.
All funds paid to nbn, other eligible funding recipients, the ACMA and the ACCC will be
collected as revenue via the charge. There is a small initial impact on the Budget to fund the
ACMA and ACCC's initial set up costs in financial years 2016-17 and 2017-18 before
funding raised by the charge becomes available. However, once the charge is collected from
2019-20 onwards this initial funding will be reimbursed to the Consolidated Revenue Fund
and future administrative costs will be paid from the charge proceeds.
Under the Scheme, all fixed line infrastructure providers will compete on the same basis. To
ease the financial burden on smaller carriers, it is proposed that the first 25,000 residential
and small business premises on each carrier's network would be exempt from the charge for
the first five years of the Scheme. This will help smaller carriers transition to paying the
charge.
The Scheme introduces a charge at the wholesale level of the telecommunications market. It
is a commercial decision for carriers to decide whether to pass on the charge to retailer
service providers (RSPs), and a decision for RSPs whether to then pass on the charge to
consumers. If the charge is passed through to consumers, the vast majority of consumers will
not experience a price rise, since NBN Co is already 'paying' the charge, through its opaque
internal cross-subsidy, and passing the costs onto its customers. The Government estimates
this will be the case for 95 per cent of consumers by 2020. For the remaining 5 per cent, the
Government expects competition will put downward pressure on prices.
The Scheme has the following impact over the Forward Estimates:
Impact on underlying cash ($ millions)
2016-17 2017-18 2018-19 2019-20 Total
Expenditure -0.6 -0.1 0.0 -29.0 -29.7
Revenue 0.0 0.0 0.0 30.0 30.0
Total -0.6 -0.1 0.0 1.0 0.3
4
REGULATION IMPACT STATEMENT
The Regional Broadband Scheme
Introduction
This Regulation Impact Statement (RIS) has been prepared by the Commonwealth Department
of Communications and the Arts. The purpose of this RIS is to assist the Australian Government
to make a decision about the design and implementation of a funding arrangement for providing
broadband services to regional areas, which due to high costs and low population density, cannot
be provided on a commercial basis. These services are currently being provided by NBN Co
Ltd's (nbn) fixed wireless and satellite networks and are funded through an opaque internal
cross-subsidy from nbn's profitable fixed line networks.
In 2013 the Government commissioned the Independent Cost-Benefit Analysis of Broadband
and Review of Regulation (the Vertigan Review). The Vertigan Review considered funding
arrangements for fixed wireless and satellite services. In December 2014 the Government
responded to the Vertigan Review, deciding to introduce a new funding arrangement for those
services. The Government published its decision in the Telecommunications and Structural
Reform paper (the 2014 policy paper).1 The funding arrangement would take the form of an
industry charge to fund the net costs generated by nbn's fixed wireless and satellite networks,
replacing the company's opaque internal cross subsidy. This proposed funding arrangement is
known as the Regional Broadband Scheme (the Scheme).
In bringing its broadband policy reforms forward, the Government has adopted the following
overarching principles:2
regulation should allow competition at both the retail and wholesale infrastructure levels
to the greatest extent possible, industry players should be treated consistently under the
regulatory framework, and
new high speed broadband access networks (which control 'last mile' connections to
consumers) should be vertically separated.
The effect of implementing the first principle, allowing and encouraging competition at the
infrastructure level, is that nbn's internal cross-subsidy to its fixed wireless and satellite
networks is at a risk of becoming unsustainable. The proposed Scheme goes directly to the
second principle by treating all fixed line carriers consistently. Under the Scheme all carriers that
operate high speed fixed line networks, not just nbn, will contribute to the significant net costs of
building and operating the fixed wireless and satellite networks that provide essential broadband
services to regional Australia.
This RIS is supported by the work and consultation undertaken by the Department of
Communications and the Arts' Bureau of Communications and Arts Research (BCAR) in 2015.3
1
Telecommunications and Structural Reform paper, published in December 2014.
https://www.communications.gov.au/sites/g/files/net301/f/Telecommunications_Regulatory_and_Structural_Reform_Paper_-
_11_December_....pdf
2
See the Telecommunications and Structural Reform paper, published in December 2014.
https://www.communications.gov.au/sites/g/files/net301/f/Telecommunications_Regulatory_and_Structural_Reform_Paper_-
_11_December_....pdf
3
https://www.communications.gov.au/departmental-news/further-consultation-nbn-non-commercial-services
5
This RIS should be read in conjunction with the 2014 policy paper and the BCAR's final report
released in December 2016 (the 2016 Report).
This RIS has been developed in accordance with the Australian Government Guide to
Regulation, March 2014, issued by the Office of Best Practice Regulation (OBPR) in the
Department of the Prime Minister and Cabinet, and in consultation with the OBPR. Relevant
guidance notes issued by the OBPR have also been taken into account.
The Department has prepared a standard form RIS as the proposal is considered to have a
relatively minor impact on the economy and is likely to impact a limited number of businesses.
An early assessment draft of this RIS was provided to OBPR in 2014 and then considered by the
Government when it developed its response to the Vertigan panel (set out in the 2014
Telecommunications Regulatory and Structural Reform policy paper). The Minister also
considered an early draft of the RIS in finalising his decisions as part of the development of the
response. The draft RIS was published with draft legislation in December 2016 and the
Government sought submissions on the RIS. The RIS was submitted to OBPR for First and
Second Pass Final Assessment in May 2017.
What are the non-commercial services?
Non-commercial services are those where the revenue from the service is less than the full cost
of providing the service. In its 2016 Report, the BCAR confirmed high speed broadband services
delivered by nbn over its fixed wireless and satellite networks were non-commercial.
The BCAR used the incremental cost test to determine whether the fixed wireless and satellite
networks provided by nbn were non-commercial. In the case of the fixed wireless and satellite
networks, revenues are less than direct costs and so it is clear that they are non-commercial.
More detail is at Attachment D.
Even if nbn were to increase its prices for the non-commercial services to reflect the true costs of
providing these services, they would likely remain non-commercial, because fewer people would
take up services. This is because there is a limit to how much consumers are willing to pay
(WTP) for broadband. The Vertigan Review found that the WTP for services was substantially
lower than costs for fixed wireless and satellite services.4
What is the problem being solved?
This RIS considers how best to sustainably fund non-commercial broadband services provided
by nbn in regional Australia. In 2009, the Government established nbn to roll out high speed
broadband across Australia. The company had planned to roll out fixed wireless and satellite
services to approximately one million premises5. The retail prices for services were to be largely
the same across different parts of Australia, regardless of the costs of providing services. nbn's
fixed wireless and satellite services are provided predominantly in regional areas, although they
may also service urban fringe areas.
4
See Independent cost-benefit nnalysis of broadband and review of regulation, page 49,
https://www.communications.gov.au/sites/g/files/net301/f/Cost-Benefit_Analysis_-_FINAL_-_For_Publication.pdf
5
When the rollout is complete, the fixed wireless network will cover approximately 600,000 premises, and the satellite
network will cover approximately 400,000 premises. For comparison, nbn's fixed line network will cover 10.9 million premises.
6
The most recent analysis from the BCAR estimates that the total net cost incurred by nbn's
satellite and fixed wireless networks will be approximately $9.8 billion (net present value)
between financial years 2010-11 and 2039-40.6 Because these services (in aggregate) cost more
than they earn in revenue, they are known as 'non-commercial' services. This definition is used
throughout this document. A part of the cost has already been expended. For example,
approximately [CIC] of capital expenditure has been spent by nbn rolling out the fixed wireless
and satellite networks from 2009-10 until 2014-15. A further $1.69 billion in capital
expenditure is expected to be spent by 2017-18, by which time the rollout of the fixed wireless
and satellite networks will almost be complete.7
Originally it was intended that the net costs from nbn's fixed wireless and satellite networks
would be funded through a cross subsidy from its commercial fixed line services. The current
arrangements implicitly expect that customers on nbn's fixed line network will fund the net costs
of the fixed wireless and satellite services through the prices their retailers are charged. nbn was
originally intended to be an effective monopoly. This arrangement was supported through
regulatory protections.8 In 2011, the Government introduced amendments to the
Telecommunications Act 1997, seeking to ensure that non-nbn providers operated on the same
structural basis. The provisions grandfathered existing networks, built before 1 January 2011.
The provisions have not succeeded, as network providers have expanded into population dense
areas with existing infrastructure beyond what was originally conceived through the
grandfathering provisions.
Competition is occurring in the high speed broadband infrastructure market. For example, the
rollout of TPG's fibre to the basement network now covers almost 1,000 high value apartment
blocks.9 There are also a number of smaller carriers, including OPENetworks, Comverge
Networks, Service Element and Pivit, that collectively have passed over 400,000 homes and
businesses in new developments. 10
The Government's policy is to support infrastructure competition and there are a number of non-
nbn fixed line broadband providers operating in the market. However, the current method of
funding non-commercial services is not aligned with the reality of greater competition for high
speed fixed line infrastructure provision. As currently structured, if competition intensifies, there
is a risk that nbn will be less able to support its internal cross subsidy. While nbn is able to
reduce its prices in commercially viable areas to respond to competition, if it does so, it will be
less capable of funding cross subsidies to fixed wireless and satellite services.11
The size of the net costs from fixed wireless and satellite services that are borne by nbn's
commercial services is in the order of [CIC] per service per month (in 2017-18 nominal terms).
In terms of the competitive impact, the average revenue per user obtained by nbn is ~$40 per
6
As nbn does receive revenue from customers using the fixed wireless and satellite networks, some of the costs involved with
providing these services are already recovered by nbn. A breakdown of this cost appears at Attachment D.
7
See nbn's 2016 Corporate Plan, page 16.
8
These regulatory protections were chiefly made through the amendments to Parts 7 and 8 of the Telecommunications Act
1997 in 2011. More information on the legislative history of Parts 7 and 8 is below.
9
See https://www.finder.com.au/tpg-fttb.
10
Answers to Questions on Notice by OPENetworks, Service Elements, Comverge and Pivit who are Members of the GFOA
http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=jcnbn/./bill/subs/s
ub1.1.pdf
11
Supported by the Government's decision to move to a price cap model - see the Telecommunications and Structural Reform
paper, published in December 2014.
https://www.communications.gov.au/sites/g/files/net301/f/Telecommunications_Regulatory_and_Structural_Reform_Paper_-
_11_December_....pdf
7
month, meaning that the funding of those services is a significant share of the cost recovered
from commercial users. The size of the competitive impact is large because, even though the
fixed wireless and satellite networks will only make up about 1 million of nbn's approximately
12 million premises reached by the network, the net cost for each service is very large, at $105-
110 per premise per month. Or to put this another way, the net cost of those services are
expected to be $9.8 billion (in net present value terms) over thirty years.12
Why is Government action needed?
The Government has committed to rolling out a ubiquitous high speed broadband network and
the rollout of broadband services to non-commercial areas (i.e. nbn's fixed wireless and satellite
networks) is expected to be completed in 2018. Hence this is not a question of whether
Government should be involved but what the best form of funding should be, given that fixed
wireless and satellite services are being provided.
In considering how the problem should be solved, the Government has had regard to the
principles it adopted in the 2014 Policy paper, particularly that to the greatest extent possible,
industry players should be treated consistently under the regulatory framework.
From these general principles, a series of six objectives have been developed. These objectives
must be considered against each other in context. These objectives have been adapted from the
principles used by the BCAR in consulting with stakeholders. These six objectives are:
Objective Description
Transparency The design, implementation and costs of a non-commercial funding
mechanism should facilitate scrutiny and evaluation.
Transparency allows stakeholders and the Government to monitor
performance of funding arrangement outcomes, and cost information
supports decisions to improve arrangements as appropriate.
Contestability The arrangements should minimise barriers to entry or other
impediments for all participants.
The arrangements should be equitable to all segments of market
participants.
Competitive The arrangements should address advantages (or disadvantages) that
neutrality some participants would otherwise have over others.
12
A discount rate of 6.46 per cent was used by the BCAR.
8
Objective Description
Sustainability The mechanism used to fund the provision of the non-commercial
service should be viable for the anticipated period the non-commercial
obligation will be in effect.
The mechanism should be secure and reasonable in the face of
changing social, political, technological and economic circumstances
to fund fixed wireless and satellite net costs over the longer term.
The mechanism should provide certainty to industry stakeholders of
any obligations.
The design of the arrangements should not conflict with or undermine
other regulatory objectives.
The funding schemes should be simple. The more complex the scheme
is to administer, monitor and implement, the less likely it is that its
objective will be achieved and the more costly it will be to administer.
Economic efficiency Non-commercial funding models should be assessed by whether they
(allocative/productive support or constrain productive, allocative or dynamic efficiency.
and dynamic) Allocative efficiency includes consideration of the distortionary impact
of taxes and levies on demand for goods and services.
Productive efficiency is minimising the cost of providing a particular
service.
Dynamic efficiency is ensuring that allocative and productive
efficiency improve through time.
Equity The funding models should consider how any funding arrangement
will fall across society. Equitable outcomes for beneficiaries and
funders of fixed wireless and satellite services should also be
considered.
Existing policies and regulatory settings
Funding options for fixed wireless and satellite services detailed in this RIS fit within the context
of a range of the legislation and Government policies that apply to nbn. These are summarised
below:
nbn's Statement of Expectations (SOE) is issued by the Government and sets out the
relevant government policies and expectations on how nbn should conduct its operations.
nbn's Special Access Undertaking (SAU), as accepted by the Australian Competition and
Consumer Commission (ACCC) on 13 December 2013, is a key part of the regulatory
framework that governs the price and other terms on which nbn supplies services to access
seekers who are supplying services in downstream retail and wholesale markets.
Parts 7 and 8 of the Telecommunications Act 1997 provide rules about the supply of high
speed broadband, and were put in place in their current form in 2011. The intention of Parts
7 and 8 is to ensure that other non-nbn providers of high speed broadband can provide
customers with similar services to nbn (that is provide access to a broadband service of 25
Mbps or more) and do so on an open access basis.
Superfast broadband access service (SBAS) and local bitstream access service (LBAS)
declarations are made by the ACCC and set the price and non-price terms and conditions
that must be used by non-nbn retail service providers offering superfast fixed line broadband
services.
Future Reforms: The Regional Broadband Scheme is part of a broader Telecommunications
Reform Package that also includes:
9
o Amendments to Parts 7 and 8 of the Telecommunications Act 1997: The Government
will amend existing separation rules in the Telecommunications Act to allow superfast
networks to operate on a functionally separated basis if authorised by the ACCC, and
o Statutory Infrastructure Provider: The Government will introduce Statutory
Infrastructure Provider obligations on nbn and, where appropriate, other superfast
network providers.
The funding arrangements for fixed wireless and satellite services are being put forward as a
package of reforms, along with the amendments to Parts 7 and 8 and the Statutory Infrastructure
Provider reforms because they are integrated and dependent. While the Parts 7 and 8 reforms are
designed to provide greater structural flexibility for firms and therefore more commercial
opportunities, this could impact on nbn's ability to fund its fixed wireless and satellite services.
Sustainable funding arrangement for those services will assist in balancing this arrangement.
Similarly, while the Statutory Infrastructure Provider obligations will make clear nbn's
obligations to deliver infrastructure, including in rural and remote areas, it is important that there
is a mechanism to contribute to the cost of non-profitable fixed wireless and satellite
infrastructure. Conversely, industry is likely to want to see a legally binding requirement on nbn
to provide infrastructure if it is to contribute to its cost.
Further detail about the existing and planned policy and regulatory settings can be found at
Attachment E.
Consultations
The options explored in this RIS have undergone consultation at four different points. A
summary of each phase of consultation is provided below. More detailed stakeholder comments
are provided at Attachment F.
1. Vertigan Review
In August 2014 the Vertigan Review delivered its report, titled "Independent cost-benefit
analysis of broadband and review of regulation--Volume I--National Broadband Network
Market and Regulatory Report".
In developing this report, the panel consulted broadly. On 13 February 2014 the panel released a
Regulatory Issues Framing Paper that focused on structural issues and sought views from
industry and the public on the structure and regulatory environment for Australia's future
broadband market. The panel received 43 public submissions.13 To encourage submissions the
panel also held an industry forum on 24 February 2014, inviting a number of key stakeholders to
attend and express views. The framing paper was a broad ranging consultation process that
considered a range of commercial and regulatory issues relevant to the nbn.
The key issues noted by stakeholders relevant to non-commercial funding arrangements
included:
Consumer groups stating that post market subsidies would potentially be complex to
administer, especially in the context of a network that uses multiple technologies across the
fixed line network.
The ACCC agreeing that nbn's fixed wireless and satellite networks were non-commercial
and that some form of subsidy may be required to fund the shortfall between costs and
13
Available here: https://www.communications.gov.au/have-your-say/regulatory-framing-paper-nbn
10
revenues. However, a subsidy provided to support the Scheme should be as transparent and
effectively delivered as possible, while minimising market distortions.
Industry views were mixed with some arguing that funding for fixed wireless and satellite
services should come through Commonwealth Budget (the Budget) funding and others
arguing that the funding mechanism should be spread as broadly as possible across the
profitable parts of the telecommunications industry.
BCAR's consultations
Members of the telecommunications industry, including nbn, were consulted on the amount and
structure of the proposed funding arrangements through two consultation processes in 2015. The
initial consultation period was 24 days (8 May--1 June 2015), and the second consultation
period ran for 21 days (13 October--3 November 2015). In addition to this, some industry
participants also met with the Department of Communications and the Arts outside these two
consultation periods. The consultation periods received thirteen and ten submissions respectively
from interested parties, including all major carriers. The summary of both consultations is below.
The Department would like to acknowledge the substantial assistance provided by nbn during
the consultation process. Without the assistance of nbn, the financial projections included as part
of this proposal would not have been possible. Additional information about the findings from
the BCAR Reports can be found at Attachment G.
2. BCAR Consultation 1
In general, the submissions received in the first consultation did not indicate a significant
opposition to the introduction of nbn non-commercial service funding arrangements. However, a
number of issues and concerns were raised particularly with regards to cost measurement,
eligibility and implementation.
3. BCAR Consultation 2
The BCAR considered issues raised by interested parties in the first consultation round and
released a second paper for consultation, which included the proposed funding arrangements.
The following issues were raised:
Industry views were mixed, with some raising significant concerns with an nbn comparable
funding approach (i.e. a charge that targets fixed line services only), citing that it would
increase fixed line pricing to the point of pushing customers to mobile broadband, and others
supporting a fixed line only base, stating that it is an appropriate response to the emergence
of infrastructure based competition.
The ACCC suggested it is suitably placed to handle future calculations of the charge,
including considering the charge in the context of broader nbn regulatory requirements (such
as the prudency and efficiency requirements under the SAU) and managing industry
consultations.
4. Exposure Draft consultation
On 12 December 2016 the Government released an Exposure Draft of the telecommunications
reform package legislation for consultation for a period of six weeks. The views expressed in the
thirty submissions received from stakeholders have been taken into account in considering
potential policy adjustment.
The public consultation demonstrated that most stakeholders agreed with the policy principle of
establishing a funding mechanism for essential fixed wireless and satellite networks primarily
serving regional Australia. Overall feedback was consistent within three distinct groups.
11
Regional and consumer groups were strongly supportive of the Scheme and see it as necessary to
sustainably fund regional broadband services; smaller carriers were strongly opposed to the
Scheme as described at the time, which they argued would place substantial pressure on their
business models; and larger carriers would prefer the Scheme was Budget funded and object to
the inclusion of medium and large business premises.
What policy options are being considered?
There are four options that are being considered. These options reflect the options considered at
the time of the Government's 2014 Policy paper and additional options that have arisen through
consultation.
Beyond these four options, two other options are possible, but have not been considered. That is,
the Government could:
Provide nbn with a regulated monopoly for wholesale high speed broadband.
Cease the rollout of the fixed wireless and satellite networks and sell these assets.
These options have not been considered because they are inconsistent with the Government's
election commitments. For example, the "Coalition's Plan for Fast Broadband and an Affordable
NBN" document states that "The Coalition will remove or waive impediments to infrastructure
competition introduced to provide a monopoly to Labor's NBN ... "and that "NBN Co will
proceed with its existing satellite and fixed wireless networks ... ".14 These options are not
considered to be preferable in any case.
A regulated monopoly on provision of services would deny end customers the benefits of
infrastructure competition and reduce competitive pressure on nbn to provide services
rapidly and efficiently. It may also be prohibited under Australia's free trade agreements.
Ceasing the fixed wireless and satellite rollouts at this point would leave these substantially
complete, although there would be some households and businesses that would not obtain
broadband. The sale of these assets would occur at a substantial loss on expenditure to date
and potentially they could not be sold at a positive price. This would leave nbn in a similar
position to now in terms of having to fund net costs on its fixed wireless and satellite
services, because the revenue from the sale of assets would be insufficient to cover costs
expended.
Options under consideration are as follows:
Option 1: Do nothing: nbn would continue to fund net costs from its fixed wireless and
satellite services through an internal cross subsidy. This would minimise government
intervention in the operations of nbn comparable businesses, however this would leave nbn,
and the customers on nbn's network, as the only funding source for those services.
Option 2: Budget funding: The provision of broadband services to non-commercial areas is
a loss-making activity undertaken for community benefit. If looked at from the perspective
of maximising allocative efficiency funding a loss-making community benefit through
Budget funding may minimise market distortions and be economically efficient. This would
capture the largest funding base possible to support the Government's objective of providing
high speed broadband services to all Australians. However, there are other costs which
include the additional impost on the Budget.
14
See "The Coalition's Plan for Fast Broadband and an Affordable NBN",
http://lpa.webcontent.s3.amazonaws.com/NBN/The%20Coalition%E2%80%99s%20Plan%20for%20Fast%20Broadband%20and
%20an%20Affordable%20NBN.pdf page 9 and 10.
12
Option 3: The Regional Broadband Scheme: A transparent and more effective funding
arrangement would be introduced to fund nbn's non-commercial services through
contributions sourced from owners of high-speed fixed-line broadband access networks--i.e.
the nbn and networks comparable to the nbn. Relative to current arrangements the opaque
part of nbn's cost recovery would be made explicit. The Government would provide the
ACCC and the Australian Communications and Media Authority (ACMA) with sufficient
powers to monitor, review and administer these arrangements.
Option 4: Targeted post-market subsidies: This option would involve consumers paying
charges that reflected the full costs faced by nbn and retailers in non-commercial areas
(likely to be upward of $170 per service per month).15 Customers facing difficulty meeting
these charges could apply for assistance, for example, in the form of a means tested subsidy
payment. The assistance could be funded from the Budget. This would allow nbn to set cost
based prices, require consumers with an ability to pay those rates to do so, and provide
subsidies for those who could not. This would involve substantial administration costs to
manage the subsidy eligibility and would likely leave the capital expenditure made in nbn
fixed wireless and satellite services stranded as prices would be too high for many users who
are not eligible for a subsidy to take-up services.16 Administration costs would be lower if
eligibility was linked to eligibility for existing welfare programs. This option would also be
inconsistent with nbn being subject to a price cap under its SAU.
Who is affected and what is the impact?
The options considered in this RIS have both financial and economic costs and benefits.
Financial impacts
This section considers the financial impact of each option on different parts of the community. It
considers the impact on:
nbn
customers on nbn's network
nbn comparable providers
customers on non-nbn networks, and
the Budget
All financial impacts are approximate and presented in net present value terms, discounted at
6.46 per cent, and calculated until 2039-40. The discount rate of 6.46 per cent is consistent with
the discount rate used by the BCAR and the rate accepted by the ACCC for nbn's SAU. Further
information about the methodology for determining the discount rate can be found at
Attachment D.
15
The service price would reflect nbn's standard wholesale prices, the non-commercial service loss estimated by the BCAR, of
$105-110 per month (BCAR final report, p. 8) and retail costs.
16
The Independent Cost Benefit Analysis of Broadband and Review of Regulation, Volume II, The Costs and Benefits of High-
Speed Broadband found that there would be net costs per premises connected of almost $7000, from delivering fixed wireless
and satellite services. The willingness to pay was estimated at one quarter of the cost in total, indicating that willingness to pay
is substantially below cost for these services and hence nbn could not charge prices that would enable it to recover costs.
13
Option 1: Do nothing -
Maintain nbn's internal cross-subsidy. The whole $9.8 billion net cost from the fixed wireless
and satellite networks would be recovered from customers on nbn's fixed line networks
(expected to be around 8 million active customers by 2020).17 Customers of nbn comparable
providers would not contribute to the provision of the satellite and fixed wireless networks.
At present, customers on nbn's fixed line networks pay approximately [CIC]18 in subsidy per
service per month to support those services. There is a risk that in response to market forces the
funding base will diminish and increase the required subsidy per service. This option would
increase the likelihood that the Government (and taxpayers) would have greater exposure to
nbn's market value reducing.
As this is the base case, the financial impact has been set to nil and other options are compared
to this option.
Party impacted Financial impact
nbn Nil.
Customers on nbn's Nil.
network
nbn comparable providers Nil.
Customers of nbn Nil.
comparable providers
Budget impact Nil.
Option 2: Direct Budget funding
The net cost generated by the fixed wireless and satellite networks would be funded from the
Budget.
It is likely that there would be less cost discipline on nbn, as the constraints from regulatory
arrangements and the Government equity cap would become looser, but this is not reflected in
the estimates of financial impacts. The BCAR and ACCC both noted that nbn would face greater
incentives for cost efficiency if the costs for providing those services were mainly borne by nbn
itself.19
nbn comparable providers would be negatively impacted, as nbn would be competing without its
cost disadvantage. This would either result in lower entry, lower market share or lower
profitability for nbn comparable providers.
In the current fiscal environment and the Budget being substantially in deficit it is unlikely that
direct Budget funding would be a desirable option for the Government. The BCAR modelling
shows that, on average, nbn requires approximately $1 billion per year to recover its $9.8 billion
costs (in net present value terms). This is the amount of Budget funding that nbn would require.
While broad based taxation is generally more efficient than a levy on a targeted base, it is likely
that greater efficiencies would be achieved through providing nbn with adequate incentives to
17
See nbn's 2017 Corporate Plan, page 7.
18
This is the projected real cost per service per month in 2017-18 dollars.
19
Bureau of Communications and Arts Research 2015, NBN non-commercial services funding options: final report, December;
ACCC submission to the NBN non-commercial services funding options -final consultation paper, November 2015.
14
build and operate its fixed wireless and satellite networks as efficiently and cost effectively as
possible. The incentives for nbn are most likely to be achieved through a targeted charge base
where nbn is the main contributor. Additional information about the Budget funding option can
be found in the 'What are the limitations of the other options considered?' section below.
Party impacted Financial impact
nbn Gains as it will be able to compete on the same cost basis as
other providers (estimated to be [CIC]).20
Customers on nbn's Gains as prices could fall.
network
nbn comparable providers Losses, as nbn would be better able to compete.
Customers of nbn Gains, as nbn competition would lead to lower prices.
comparable providers
Budget impact Losses, as funding would come direct from the budget
(-$9.8 billion npv).
Option 3: Regional Broadband Scheme
The net costs generated by nbn's fixed wireless and satellite networks would be shared across all
users of high speed fixed line broadband, through a charge known as the Regional Broadband
Scheme (the Scheme).
This option would not result in users of high speed fixed line broadband paying any more in total
when compared to Option 1 as nbn is already 'paying' the charge, through its opaque internal
cross-subsidy, and passing the costs onto its customers. nbn is expected to make up 95 per cent
of the fixed line broadband market by 2020.
For the remaining five per cent of fixed line broadband market, it will be up to these networks to
decide whether the charge will be passed on. However, in a competitive market there are
limitations on how much charge will be passed on.
Under the Regional Broadband Scheme all fixed line Infrastructure providers would compete on
the same basis. There would be some administrative costs in facilitating payments from the
charge. In total, customers on nbn's network would pay less in the long term and the net
proceeds from the charge may enable nbn to reduce its prices faster.21
To ease the burden on smaller carriers, it is proposed that the first 25,000 residential and small
business premises on each carrier's network would be exempt from the charge for the first five
years of the Scheme. This change would also help smaller carriers transition to paying the
charge. This is further explained under in the Implementation section below.
20
This estimate is based on advice provided by nbn, which considered the impact of not introducing a funding arrangement
relative to its current business outlook. This net present value of the impact is [CIC], and assumes an average revenue per user
of [CIC] and is based on conservative assumptions of the marginal impact of each additional 100,000 premises rolled out by
competing carriers.
21
It is expected that competitive pressure will act to induce nbn to drop its prices in the fixed line market. More broadly, over
the long term the SAU will require nbn to drop its prices commensurate to the revenue it generates from the funding
arrangement. (Importantly, as nbn will be the largest contributor to the charge it will only be able to drop its prices by the
amount paid by other network operators not by the amount of the total charge.)
15
The BCAR undertook a projection of the market until 2022 in the event that the charge was
introduced, and estimated that there could be 380,000 nbn comparable services provided by
other providers by this time.22 Note that this competition impact applies equally to Option 2. In
these circumstances nbn would pay approximately 95 per cent of the charge, resulting in a net
transfer to nbn of ~$40-$60 million each year.
There would be no long-term impact on the Budget.
Party impacted Financial impact
nbn Gains as it will be able to compete on the same basis as other
providers (estimated to be between [CIC]).
Customers on nbn's Gains, from slightly lower nbn prices.
network
nbn comparable providers Losses, as nbn would be better able to compete and some
minor compliance costs.23
Customers of nbn Losses, as non-nbn providers will now bear some of the
comparable providers burden of funding fixed wireless and satellite services, and
may choose to pass this on to their customers. At most this
cost will be [CIC] inclusive of administration costs over ten
years.
Budget impact Nil.
Option 4: Targeted post-market subsidies
nbn and non-nbn networks would be able to charge market rates for their fixed wireless and
satellite services and customers would have access to ongoing Government payments to offset
their higher monthly broadband costs compared to typical metropolitan customers. Under this
option additional safeguards would be needed to ensure that carriers did not arbitrarily raise
prices to accommodate the level of subsidy available. The amount of offset available for
customers would likely be means tested.
This option has significantly higher administrative and compliance costs than the other options
considered. It also has the greatest level of uncertainty as a detailed scheme would need to be
devised to estimate the quantitative impact. In particular, the level of means testing would need
to be determined. If the income threshold for means testing was set low, a substantial number of
consumers would not take up a satellite or fixed wireless service, leaving nbn's assets
underutilised. If the income threshold was set high, this option would not have substantial
positive impacts above Options 2 and 3 (i.e. it would simply be a more expensive way of
delivering the outcomes outlined in Options 2 and 3).
The detailed modelling and analysis required to determine appropriate subsidy levels and income
thresholds has not been undertaken because Option 2 (direct Budget funding) and Option 3 (the
Regional Broadband Scheme) are viewed as much more viable options. Similarly the
administrative arrangement required to implement this option (i.e. how households report
income and how often they would have to report income) have not been explored in detail.
22
Bureau of Communications and Arts Research 2015, NBN non-commercial services funding options: final report, December,
page 10.
23
See Attachment C. Across industry these are expected to be approximately $43,000 per year.
16
In determining the regulatory burden of this option it has been assumed that individuals would
be required to spend around 2 hours per year undertaking tasks to receive the subsidy including
researching the subsidy, reporting income and preparing required documentation.
Party impacted Financial impact
nbn Some overall revenue gain from flexibility to raise prices
above current price caps in non-commercial areas, resulting in
higher prices but lower uptake.
Customers on nbn's Gains for customers in commercial areas as there would be
network marginally lower cross subsidisation by nbn. Losses for
consumers in non-commercial areas as prices would increase
to match the cost of providing the service (less any subsidy
provided).
nbn comparable providers Losses, as nbn would be somewhat better able to compete in
commercial areas. To a large extent nbn would continue to
provide the bulk of funding for fixed wireless and satellite
services from its commercial services, which would mean
impacts would be small.
Customers of nbn Gains, as nbn competition would lead to marginally lower
comparable providers prices.
Budget impact Loss, depending on the amount of post-market subsidies
provided, and the cost of administering the scheme.
Economic impacts
Economic efficiency impacts--As the BCAR has noted, the economic welfare of society is
typically maximised when the following three components of economic efficiency are
achieved24:
Productive efficiency--It is important that a funding mechanism does not distort a
provider's incentives to adopt the best mix of technologies and exploit economies of scale,
thus delivering services at the lowest possible cost. Similarly, it is important that the funding
mechanism does not lead the service provider to be more concerned about devoting
resources to protect their subsidy rather than investing in more economical and innovative
delivery solutions.
Allocative efficiency--Economic resources should move freely towards their most highly
valued uses. That is, as far as possible the design of the Scheme should minimise the
additional costs imposed on society due to the diversion of resources away from their more
highly valued uses. If resources are diverted into activities that are less highly valued from a
national perspective, then the community will be worse off.
Dynamic Efficiency--A funding arrangement should aim to not deter a provider from
investing in and innovating their service delivery approach. A funding arrangement may
create dynamic inefficiencies if it undermines incentives to innovate to contain costs over
time, or to provide new services. Flexibility also supports dynamic efficiency. If the delivery
mechanism for funding the Scheme is too rigid, it could create market distortions if changing
technologies and consumer preference generate potentially cheaper ways of achieving the
objective of the funding arrangement.
24
Bureau of Communications and Arts Research 2015, NBN non-commercial services funding options: final report, December.
17
All options to fund fixed wireless and satellite services will have efficiency impacts, in terms of
distorting decisions relative to those that would be made were services to be provided in a
competitive and efficient market.
Quantifying these efficiency impacts is difficult--however, we can identify the direction of
differences. The overall efficiency impacts of different options reflect how they impact on
allocative, productive and dynamic efficiency, as set out in the table below, with impacts
measured relative to the do nothing option.
Option 2 (Budget funding) would likely improve allocative efficiency relative to doing nothing,
but would reduce cost and service level pressure on nbn and therefore could lower productive
and dynamic efficiency.
Option 3 (Regional Broadband Scheme) would improve allocative efficiency, because nbn and
nbn comparable providers would be treated equally. It would have only a small negative impact
on productive/dynamic efficiency as long as most of the revenue from the charge was from nbn
(i.e. a charge whereby nbn and nbn comparable, but not mobile broadband, were captured). If the
funding base was expanded to mobile broadband providers (for example) nbn would have less
incentives to control costs. See the discussion in the 'Who should contribute to the Regional
Broadband Scheme?' section for further consideration of the funding base.
Option 4 (post-market subsidies) would reduce allocative efficiency, largely because the capital
costs for fixed wireless and satellite services would be sunk, and at cost-reflective prices, few
people would use the network.
18
Productive / dynamic
Allocative efficiency
Option Name efficiency impacts
impacts relative to option 1
relative to option 1
1 Do nothing N/A N/A
2 Direct budget funding Increased distortions from Lower
funding from tax revenue productive/dynamic
Reduced distortions from efficiency
funding from only nbn users
3 The Regional Reduced distortions from Similar to do nothing
Broadband Scheme funding from only nbn users
4 Targeted Reduced distortions for Similar to do nothing
post-market subsidies commercial areas
Substantial net costs in non-
commercial areas, as costs
incurred regardless
A detailed explanation of the different allocative, dynamic and productive efficiency impacts is
at Attachment A, estimating the magnitude of the various distortions.
19
What is the likely net benefit of each option?
In the table below each option is mapped out and compared against each other option across the objectives set out in the "Why is Government
action needed?" section. The table over the page also gives the direction financial and economic efficiency impact.
Objective / Option 2: direct budget Option 3: Regional Broadband Option 4: targeted post
Option 1: do nothing
option funding Scheme market subsidies
Transparenc nbn's internal cross subsidy The cost of providing fixed The cost of providing fixed The cost of providing fixed
y would remain opaque wireless and satellite services wireless and satellite services wireless and satellite services
would be transparent in would be transparent and published would be transparent in Budget
Budget papers. by ACMA each year. papers.
Contestabilit Without a funding In the future nbn could In the future nbn could compete In the future nbn could
y arrangement in place, it is compete with other providers with other providers to provide compete with other providers to
unlikely that the fixed to provide fixed wireless and fixed wireless and satellite services. provide fixed wireless and
wireless and satellite services satellite services. satellite services.
could be made contestable.
Competitive nbn would continue to face nbn could lower its prices The cost of fixed wireless and Customers would receive
neutrality costs that its competitors do in line with the amount of satellite services would be shared direct subsidies.
not. additional funding it received. proportionally across all
comparable providers.
Sustainabilit nbn would be increasingly The cost of the fixed The cost of the fixed wireless The proposal would be
y uncompetitive. It may be wireless and satellite services and satellite services would be complex and costly to
unable to continue to fund would be sustainably funded. sustainably funded. administer.
services.
20
Objective / Option 2: direct budget Option 3: Regional Broadband Option 4: targeted post
Option 1: do nothing
option funding Scheme market subsidies
Economic This proposal would lead to This proposal would not Entry decisions would be This proposal would not
Efficiency: inefficient entry decisions by distort investment choices by efficient as nbn and other distort investment choices by
Allocative nbn comparable providers. broadband providers or broadband providers would face the broadband providers or
efficiency customers. There would be same incentives. commercial customers.
Customer decisions for distortions associated with However, it would be likely that
commercial services are also direct budget funding, which Customers would shift away from few people would take up fixed
impacted as they implicitly could be in the order of $1.5 nbn comparable services, because wireless or satellite services in
fund fixed wireless and billion (net present value).25 these providers would no longer the absence of a subsidy, with
satellite services. have a cost advantage. costs likely to be greater than
$170 per month. As costs will
There could be broader distortions, still be incurred, this implies
such as investment decisions to inefficient use of the network.
avoid paying the proposed charge
(for example by favouring
alternative technologies).
Economic nbn would face incentives This may reduce cost This may reduce cost constraints This may somewhat reduce
efficiency: for cost and service efficiency constraints on nbn, and lead on nbn, and lead to service quality cost constraints on nbn, by
Dynamic / over time due to increased to service quality decisions decisions that are inefficient loosening the price cap
Productive competition, the regulatory that are inefficient because because nbn would not itself bear arrangements. This would be
efficiency arrangement, shareholder nbn would not itself bear the the costs. The impact would be expected to be minimal given
(Government) pressure and costs. small if most of the revenue from the small amount of revenue
debt market pressure. the charge was from nbn (i.e. a recovered from fixed wireless
charge whereby nbn and nbn and satellite services.
comparable, but not mobile
broadband, were captured).
25
See Attachment A in relation to the likely size of distortions from Budget funding.
21
Objective / Option 2: direct budget Option 3: Regional Broadband Option 4: targeted post
Option 1: do nothing
option funding Scheme market subsidies
Equity Customers on nbn's Taxpayers would fund Customers in commercial areas Users in non-commercial
networks in commercial areas fixed wireless and satellite would be subsidising non- areas would be responsible for
would be subsidising services. This would mean commercial areas, regardless of the funding their own services
non-commercial areas, that there would be subsidies income and hardship levels of except in cases of hardship.
regardless of the income and for high income people in either user.
hardship levels of either user. non-commercial areas. Take-up of services would be
Customers of other fixed line very low in the absence of a
services would not contribute subsidy, with prices higher than
to the costs of providing fixed most people would pay.
wireless and satellite services.
Net financial Nil Strong net benefits. Strong net benefits. Weak net benefits.
impact
22
What is the best option from those you have considered?
On balance Option 3, the Regional Broadband Scheme, is the recommended approach. The
Regional Broadband Scheme option is unlikely to have a substantive negative impact on
competition and provides a natural incentive for nbn to build and operate its fixed wireless
and satellite networks as efficiently as possible. While Option 2 (direct Budget funding) is
also unlikely to have any substantive negative impact on competition, the 2014 RIS
concluded that direct Budget funding was not feasible because of the large negative impact
on the Budget. Funding nbn's net costs of $9.8 billion (in net present value terms) would
require Budget funding of around $1 billion per year out to 2040.
While the precise difference in net benefits between this option and the others are not able to
be measured, both the BCAR and the ACCC noted that nbn would face greater incentives for
cost efficiency if the costs for providing its fixed wireless and satellite networks were mainly
borne by nbn itself.26 The BCAR also recommended a charge on fixed line broadband
providers on the basis that the benefits in productive and dynamic efficiency from ensuring
costs were mainly borne by nbn itself outweighed the lower allocative efficiency from a
narrower charge. These arguments favour Option 3 (Regional Broadband Scheme) as the
option with the highest net benefit, although there are some uncertainties about the potential
magnitude of the different impacts of these options.
Under the Scheme, the opaque cross subsidies currently embedded in nbn's wholesale prices
will be replaced by transparent funding provided via contributions sourced from all owners of
high-speed broadband access networks--i.e. nbn and networks comparable to the nbn. The
proposed funding arrangement does not represent a new cost for the industry--or
consumers--as a whole as the cost of the fixed wireless and satellite networks is already
being recovered by nbn, it would simply mean that the distribution of the cost would now
extend to fixed line networks competing with nbn.
As nbn is already paying for the costs of the fixed wireless and satellite networks, end users
of nbn's network will face not price changes. The nbn is expected to make up 95 per cent of
the fixed line broadband market by 2020. For the remaining five per cent - many of these
networks service medium and large businesses which will for the first time contribute to
funding regional broadband. For non-nbn networks servicing residential and small businesses
- it will be up to these networks to decide whether the charge will be passed on. However, in
a competitive market there are limitations on how much charge will be passed on. The
Scheme is expected to raise around $40 million per year from non-nbn fixed-line networks
over the next four years. However, this could change depending on nbn's fixed line market
share.
The intended impact of the new funding arrangement is further illustrated in the diagram
below. The diagram is illustrative only and it is not expected that there will be price parity
between nbn and all of its competitors. The diagram below refers to cost, not price. Whether
non-nbn providers pass on the charge is dependent on many factors, from the ACCC's SBAS
and LBAS FAD (considered above), the extent to which competition imposes discipline, and
the relevant tax incidence (which in turn depends on the elasticity of the supply and demand
curve).
26
Bureau of Communications and Arts Research 2015, NBN non-commercial services funding options: final report,
December; ACCC submission to the NBN non-commercial services funding options -final consultation paper
November 2015.
23
What are the limitations of the other options considered?
Option 1 (Do nothing) is not a feasible option because under this approach there is no
certainty that nbn can continue providing essential broadband services to regional Australia.
Option 2 (Direct Budget funding) would likely have net benefits relative to Option 1 (Do
nothing). This option would have lower levels of distortive effects on the economy than
Option 1 (Do nothing) because it would lead to an equal funding of fixed wireless and
satellite services across highly substitutable high speed broadband services. While there are
many benefits associated with Direct Budget Funding, this option is seen as inferior to the
Regional Broadband Scheme because:
Relative to Option 3 (Regional Broadband Scheme), Option 2 (Direct Budget funding)
would likely reduce productive and dynamic efficiency. Option 2 (Direct Budget funding)
would lead to less pressure on nbn to constrain costs and constrain service levels to those
already committed (as long as nbn was itself paying the majority of the charge in Option
3). This is because under Option 2 (Direct Budget funding) funding for services would
not come under the Government equity cap for nbn, leaving nbn in a less constrained
financial position. There may also be pressure from stakeholders to increase expenditure,
such as additional satellite capacity, that would not be subject to nbn's current
commercial constraints.
Relative to Option 3 (Regional Broadband Scheme), Option 2 (Direct Budget funding)
would likely increase allocative efficiency. This is because a larger funding base (general
taxes) would be expected to have a smaller economic cost than an industry charge. This
difference may be relatively small because demand for nbn comparable services is likely
to be relatively inelastic, and other taxation instruments impose distortions of their own
that are not insignificant.
While Budget funding would result in a lower level of economic loss from the tax than
the Regional Broadband Scheme, it is not desirable for the Government because of the
large negative impact on the Budget (estimated at $1.8 billion over the Forward Estimate
and around $1 billion per year thereafter to recover nbn's net costs of $9.8 billion in net
present value terms).
Also, while Budget funding would reduce nbn's costs substantially, who benefited from
this would depend on what nbn decided to do. Most likely nbn would increase its Internal
Rate of Return to government, alternatively it could lead to lower AVC/CVC prices but
24
these would be spread over long-term due to pricing formula in nbn's SAU and even then
consumers might not benefit because retail service providers could take these lower
wholesale prices as extra profit margin.
Option 4 (Targeted post market subsidies) would likely leave the capital expenditure in
fixed wireless and satellite services as underutilised, as few people would be willing to pay
upwards of $170 per month for services. This is likely to be true even if customers would be
able to recover some or all of this cost at a later time through a post market subsidy. The
Vertigan Review found that the willingness to pay for fixed wireless and satellite services
was substantially below costs, which indicates that if the price was set on a cost basis people
would not be willing to pay for the service. On this basis, this option would likely have net
costs relative to Option 1 (Do nothing).
Implementation
Under the Scheme all carriers (i.e. owners of network infrastructure) would contribute
funding at a rate of approximately $7.10 per month, per chargeable premises. Chargeable
premises are premises where a carriage service provider (CSP) (i.e. a provider of retail
broadband services) provides a designated broadband service. A designated broadband
service is a carriage service provided over a fixed line that is technically capable of providing
download transmission speeds of 25 megabits per second (Mbps) or more. The technical
speed requirement is on the line, not the service. This ensures nbn's 12 Mbps services are
captured and carriers cannot avoid the charge by offering sub 25 Mbps services over lines
capable of 25 Mbps or more. It is intended that the charge would apply to all premises
serviced by fibre to the premises (FTTP), fibre to the node (FTTN), fibre to the basement
(FTTB), fibre to the curb (FTTC) and hybrid-fibre coaxial (HFC).
The initial $7.10 charge is comprised of a $7.09 base component and a $0.01266
administrative cost component. The base component will be indexed annually to the
consumer price index (CPI). The administrative cost component has been set for each of the
first five years at $0.01266, $0.00172, $0.00, $0.0027 and $0.00 respectively. The
administrative component will be indexed annually to CPI thereafter. Both the base
component and the administrative cost component can be changed by the Minister for
Communications (the Minister) via disallowable legislative instrument. Additionally, both the
base component and the administrative cost component would be reviewed by the ACCC at
least once every five years to ensure they are sufficient to meet the net costs of nbn's fixed
wireless and satellite networks, and the administrative costs of the Scheme.
Each year, carriers would report the number of chargeable premises they have to the ACMA
along with the names of any other carriers with which they are associated. The ACMA would
assess each carrier's charge liability and carriers would pay their base and administrative
contributions into a Special Account administered by the Secretary of the Department of
Communications and the Arts.
The total amount raised by the administrative cost component is intended to be paid from the
Special Account to the ACCC and the ACMA for administering the Scheme. As the total rate
is based on forecasts, there is a risk that the Scheme would over or under recover the net costs
of nbn's fixed wireless and satellite networks, or the costs to administer the Scheme. In this
eventuality, the ACCC would undertake an assessment to determine what the charge amount
should be and advise the Minister, who could then change the charge amount for future years.
25
It is intended that any excess funding would be returned to industry through a lower charge
amount for future years rather than refunded in a given year.
The total amount raised by the base component would be paid to nbn under a contract or
grant in order to fund its fixed wireless and satellite networks. Because nbn would receive
money from the Special Account, it can apply to have its charge contribution offset against
the amount of funding it is owed so it does not have to raise funds to pay its charge liability,
only to receive that money back from the Commonwealth.
While it is expected nbn would be the only recipient of funding under the Scheme, the
proposed legislation allows for the Minister to determine additional carriers to be eligible
funding recipients by legislative instrument. This power provides flexibility for the
Government to make funding contestable if this becomes feasible.
Who should contribute to the Regional Broadband Scheme?
While the Government's decision to implement an industry funding mechanism focused on
contributions sourced from owners of high-speed fixed-line broadband access networks,
another option would be to apply the charge to all telecommunications industry participants,
including mobile broadband providers. The extension of the funding arrangement across the
whole of the telecommunications market was considered as part of the BCAR's final report.
Under an industry wide contribution option, the number of firms contributing to the funding
mechanism would increase, reducing the industry amount on a per line basis. It may be the
case that consumers treat non-fixed line services (chiefly mobile broadband) as close
substitutes to high speed fixed line broadband services.
However, the evidence to date suggests that this is not the case, and that mobile broadband
and high speed fixed line broadband services are not directly substitutable, mainly due to the
high cost of data usage. For example, the cost of data on a per gigabyte basis is often around
five times more expensive on mobile networks than on fixed line networks. The Government
has committed to reviewing the Scheme on a regular basis. In the event that mobile
broadband services become substitutable for fixed line services, the Government would
consider changing the funding base.
As part of its 2015 Superfast Broadband Access Service (SBAS) declaration inquiry27, the
ACCC found in its final report that while mobile broadband may be a substitute for high
speed broadband services for some customers, this is not generally the case because of the
functional differences between the services. For example, mobile networks may not support
data intensive applications and that there appears to be a substantial difference in the data
allowances and per gigabyte pricing between mobile and fixed line broadband services.
For example, the ACCC found that high speed fixed line broadband services are typically
around the 25/5 Mbps level with monthly download limits of around 100GB. One such offer
from Exetel costs $5028 per month on a 12-months contract. In contrast, one of the latest large
mobile offerings from Optus with a month download limit of 50 GB29 costs $70 per month on
a 24-months contract.
27
See https://www.accc.gov.au/system/files/SBAS%20-%20ACCC%20draft%20decision%20-%20public%20version%20-
%20November%202015.pdf for a copy of the final decision.
28
Exetel website as at 17 Mar 2017
29
Optus website as at 17 Mar 2017
26
Given this disparity of pricing and capacity, the ACCC's draft SBAS decision found that it is
unlikely that customers would substitute mobile broadband services in the event of a small
but significant non-transitory increase in price in the provision of superfast broadband
services.30
The chart below further illustrates the point. This chart graphs representative samples of
mobile broadband plans against nbn fixed line plans. This demonstrates the substantial
disparity between the mobile and fixed line broadband plans currently available on the
market.
Given the likelihood that mobile and fixed line broadband form two different markets, to
include mobile broadband in the funding arrangements would effectively create a cross
subsidy from mobile broadband to the fixed line market.
The legislation includes a requirement for a statutory policy review of the Scheme by the
Department of Communications and the Arts within the first four years of the Scheme or as
soon as practicable. If mobile broadband become increasingly substitutable for fixed line high
speed broadband then the Department could initiate a review of the legislative arrangements.
The statutory review mechanism is described in more detail below.
Clarifying the charge base
The charge base has been clarified to implement the Scheme more efficiently and to provide
more certainty to carriers and regulators about when the charge would be incurred. These
clarifications do not represent a change in policy direction.
30
The ACCC formed a similar view in relation to ADSL services that they are likely to be a weak substitute for superfast
broadband services from a customer perspective.
27
Premises-based charge base
The inclusion of business services in the charge base raised a number of issues during public
consultation around what would constitute a service and how the charge would apply in
different scenarios. Under the Scheme carriers will pay the charge in relation to each
premises with at least one active designated broadband service provided over a local access
line, rather than paying the charge in relation to each service. This enables the Scheme to deal
with complex service types more simply whilst remaining consistent with the original policy
intent.
The Scheme will rely on the ordinary meaning of the word 'premises' and will be clarified in
the explanatory memorandum. The Minister will also have the power to determine, by
disallowable legislative instrument, whether locations that satisfy specified conditions are or
are not premises. Special disallowance provisions apply to this determination in order to
reduce constitutional risk.
Excluding voice-only and television broadcast and other similar services
Voice-only services (including those provided on nbn's network) and television broadcast
services have been excluded from the charge base. These are not broadband services and
should not be caught by the Scheme. The Minister will also have the power to exclude other
classes of carriage services by disallowable legislative instrument. This would enable the
Minister to adjust the charge base should the definition of a designated broadband service
result in unintended consequences. Special disallowance provisions apply to this
determination in order to reduce constitutional risk.
Lines in multi-unit buildings are caught
There are certain companies that operate networks in multi-dwelling units, over 'in-premises'
lines that are not considered local access lines because they are on the customer side of the
network boundary (for example, the entity may roll out one local access line to an apartment
block and use customer cabling to provide a service). To ensure that all premises within
apartment blocks are captured, the Scheme has adopted a definition of a local access line
which includes any lines used to supply a designated broadband service, no matter which side
of the customer boundary the local access line is on. This would ensure that mechanisms that
may be used to circumvent the customer boundary in multi dwelling unit buildings do not
enable carriers to avoid paying the charge.
Should there be any exemptions?
A number of exemptions are proposed in order to mitigate the negative impacts of the
Regional Broadband Scheme:
Charge concession period: The first 25,000 residential and small business premises on
each carrier's network, where a designated broadband service is provided by a carriage
service provider, would be exempt from the charge for the first five years of the Regional
Broadband Scheme. This change lessens the burden on smaller carriers and helps them
transition to paying the charge. The threshold of 25,000 has been selected because it
preserves the revenue base and ensures that small carriers are not initially caught by the
charge but will progressively contribute as their businesses grow. Given all carriers would
only incur a charge for the number of chargeable premises above 25,000, the effective tax
rate per premises would be lower than the full charge amount (i.e. for a network of 50,000
active premises, the effective tax rate is ~$3.55, because the total $7.10 charge could be
recovered over the carrier's entire consumer base). During the five year charge
28
concession period there would be approximately 125,000 fewer premises per year
contributing to the Scheme. Foregone revenue, due to the charge concession period,
would be recovered over the life of the Scheme through a marginally higher charge
amount.
Exempt networks transitioning under the definitive agreements: The BCR's final
report recommended that migrating networks should be exempt from charge
contributions, given the complexity and cost involved in capturing services that will not
be in operation beyond 2020. This exemption has been adopted.
Exempt networks that are small: The BCAR's final report recommended excluding
small networks with less than 2,000 SIOs on the basis that the administrative costs of
applying the charge to these networks would outweigh the benefits. This exemption has
been included.
Networks serving medium and large businesses
The BCAR also considered an exemption for networks serving medium and large businesses.
In its final report, the BCAR noted that the nbn was competing for business in the medium
and large business markets. On this basis the BCAR noted that "it seems reasonable that nbn
should contest these markets on a level playing field basis, suggesting grounds for
introducing funding arrangements that ensure equal contributions towards NBN non-
commercial services"31. At the same time, the BCAR noted that including networks servicing
medium and large businesses would expand the charge base and improve allocative
efficiency outcomes. Against this, the BCAR considered the policy rationale of the existing
Parts 7 and 8 of the Telecommunications Act 1997, noting that the provisions in these parts
do not extend to networks serving medium and large businesses because infrastructure
competition generally exists in these markets. Further, the BCAR noted that while access
lines to medium and large businesses were potentially high value, they are expected to be
relatively small in number compared to lines serving residential and small business
customers. Consequently, on balance the BCAR favoured excluding networks servicing
medium and large business customers.
Since the BCAR's final report a number of other issues have come to light. In particular:
nbn has increasingly sought to expand its network to service medium and large businesses
and is actively pursuing these commercial opportunities
it is reasonable to include networks serving medium and large businesses as they are also
consumers of high speed broadband, and
there are compliance costs for networks to determine whether the customers on their
networks are small or medium businesses. For example--it may be difficult for a
wholesale network provider to determine how many employees the customers of its
retailers have. This is particularly difficult if staffing numbers fluctuate from month to
month.
On this basis, it is proposed that networks servicing medium and large businesses be included
in the charge base.
An exemption for pre-existing networks is not proposed because it would be complex to
administer and open the arrangements to challenge (in terms of whether an individual SIO
was active pre-2011 for example).
31
BCAR's Non-Commercial Services Funding Arrangement Final Report, March 2016, page 60.
29
In addition, the possibility of a charge has been forecast since the Implementation Study (see
the explanatory memorandum and revised explanatory memorandum for the National
Broadband Network Companies Bill 2010 Telecommunications Legislation).
Start date of the Scheme
It is intended that the accrual of Regional Broadband Scheme charges commence on 1 July
2018.
This timeframe will provide industry, the ACCC and the ACMA time to update their systems
and prepare for the coming changes from implementing the Scheme.
The ACCC will also have a chance to review the Scheme charge and advise the Minister
before the start date of 1 July 2018.
Delaying the start date for the Scheme by one year will not impact the overall operation of
the Scheme and will not impact nbn's ability to deliver fixed wireless and satellite services to
regional Australia. Any shortfall from the delay would be recovered over the life of the
Scheme.
Offset provisions
It is proposed that an offset provision would be introduced to allow payments made to nbn to
be counted against payment made by nbn. This would avoid the transactional burden of nbn
transferring money then receiving it back again. The operation of the offset provisions would
not impact on the transparency of the Scheme.
Wholesale price impact
The 2014 policy paper indicated there will be no additional costs to consumers as a whole
relative to current nbn pricing--an opaque part of the costs of the nbn will be made explicit,
and would be spread across all consumers of comparable broadband services. The paper also
indicated that the Government would provide the ACCC with sufficient powers to monitor
the introduction of these arrangements.
Consequently, it is expected that nbn will drop its wholesale prices commensurate to the net
proceeds from the charge it receives under the funding arrangements. There are options to
implement the position outlined in the 2014 policy paper. The Government could:
Apply the current SAU arrangements. nbn would be permitted to maintain its prices to
recover costs it incurs in the initial build phase. When nbn has operated profitably for
some time it will 'pay back' these initial losses, and it is expected that further downwards
pressure will then be placed on its prices. This framework is already in place, is already
monitored by the ACCC, meets the requirements of the 2014 policy paper and provides
nbn with pricing flexibility.
Require nbn to drop its prices immediately, commensurate with the amount of the
proceeds from the charge it is paid each year under the funding arrangements. This
would require the Commonwealth to impose an additional binding obligation on nbn and
would reduce nbn's pricing flexibility (in a period in which it is making very substantial
losses). In practice it would be very difficult to monitor this approach. It would mean
though that nbn Retail Service Providers would experience an immediate small wholesale
price drop.
30
The current arrangements are sufficient and nbn should consider the revenues from the
funding arrangements as revenues for the purposes of the SAU. This arrangement is already
monitored by the ACCC, is already implemented, and provides nbn with pricing flexibility.
How should the administrative costs of the charge be funded?
The administrative costs of the Scheme include costs incurred by:
the ACCC in terms of calculating the charge amount on commencement and at the end of
each five year cycle, and costs incurred in monitoring nbn's prices
the ACMA in monitoring compliance, undertaking enforcement action, collecting funding
arrangement revenues and in publishing funding arrangement payments and receipts, and
the Department of Communications and the Arts for administering the contract with nbn
and undertaking a policy review of the Scheme.
A portion of these costs are expected to be absorbed by these administering entities.
Costs are estimated to be $0.9 million in aggregate from 2016-17 through to 2019-20.32
There are three options for how these costs can be funded:
Administrative costs of the funding arrangements would be funded through the
charge: This is expected to include the ACMA's costs to collect the charge and undertake
any necessary reporting, and the ACCC's costs to monitor and periodically review the
charge amount, and the Department of Communications and the Arts' cost to administer
the contract. This option would have no direct impact on the Budget and ensures that the
entities that have caused the need for regulatory intervention bear the cost of that
intervention. This option would increase the cost of the charge per-SIO, but because
administration costs are expected to be low, the impact is expected to be minor.
All administration costs associated with the funding arrangements would be funded
through the Budget: This would spread the cost of administration of the funding
arrangements across the widest tax base.
Partial Budget funding: The ACCC's role would be funded through the Budget, and the
ACMA's costs would be funded through its existing funding mechanism, taking
contributions across the general fees on the telecommunications industry. This option
would reduce the impact on the Budget, and there is substantial crossover between those
entities that fund the ACMA and those entities that are expected to be covered by the
charge.
The administrative costs should be included in the charge, on the basis that administrative
costs are expected to be minor.
Other implementation detail is at Attachment B.
32
See Attachment C.
31
Review
A review of the policy on the Scheme was flagged when the policy was released for exposure
draft consultation. It is proposed that the funding arrangements are regularly reviewed.
During consultation, small carriers (and nbn) have argued that there should be regular
reviews of the policy basis of the charge base as technology and other telecommunications
developments continue to rapidly evolve, especially with the expected emergence of 5G
mobile networks. A review is required to ensure that the charge base and threshold
exemptions remain relevant to the Scheme. The review would consider advice from the
ACCC on the monthly charge amount and the ACMA on the collection of charges.
One of the key policy adjustments in the legislation is a requirement for a statutory policy
review of the Scheme by the Department of Communications and the Arts within the first
four years of the Scheme or as soon as practicable. The Department would review, for
example, if the charge base of the Scheme is still applicable in the telecommunications
market in Australia. The Minister would be required to cause such a broad scope policy
review to commence within the first four years. The Department would undertake subsequent
reviews at regular intervals to make sure the Scheme continued to operate efficiently and
effectively. In addition, there are a range of mechanisms built into the charge implementation
that would allow the Government to adjust the charge in the event that there are unintended
consequences. For example, the Government could set the charge per-SIO to $0 if it wanted
to delay the impact of the charge, or put the arrangement on 'hold'.
Cost control measures for nbn's fixed wireless and satellite networks
It is expected that nbn would make up 95 per cent of the fixed line broadband market by 2020
and as such, would be contributing 95 per cent of the total funds collected by the Scheme. As
recommended in the BCAR report, limiting the Scheme charge to nbn and nbn-comparable
industry participants provides the greatest commercial incentives for nbn to control costs for
its fixed wireless and satellite networks because it would be paying the bulk of the charge
itself. If, for example, the funding base was expanded to mobile broadband providers, nbn
would not be the main contributor and would have less incentives to control costs because
other entities would be providing the bulk of the net costs nbn incurs for its fixed wireless
and satellite networks.
The ACCC will also have a role in keeping nbn's fixed wireless and satellite costs in check
through its regular review of the charge amount for the Scheme. As part of the ACCC review,
nbn would be required to submit information to substantiate the reasonable losses it has
incurred in building and operating its fixed wireless and satellite networks. This role
compliments the ACCC's existing evaluation of nbn's prudent capital expenditure undertaken
as part of its compliance assessment for the SAU. The ACCC will use this information (and
information on the number of premises in the market) to determine the amount of the base
charge.
Additionally, the Government's Statement of Expectations issued to nbn on 24 August 2016
states that company should be rolling out the network as cost effectively as possible. While
nbn is a Government Business Enterprise, the Department of Communications and the Arts
will continue to monitor the costs of nbn's fixed wireless and satellite networks as part of its
annual review of nbn's corporate plan.
32
If in the future the fixed wireless and satellite networks were to be provided by a different
entity to nbn, the cost control mechanisms would need to be revised. In this case, there would
be weaker incentives for the entity providing fixed wireless and satellite networks to control
costs, because it would largely be paid for by another entity. In this case, risks for cost over-
runs and under-runs should be shifted to the provider of those services.
Conclusion
The funding of broadband services to rural and regional Australia addresses a long standing
issue in the Australian telecommunications market. Whilst different approaches have been
taken over the past two decades, the sustainability and transparency of arrangements have
always raised questions.
The arrangements in place at the moment are not transparent, not effective and are
unsustainable. The full cost of the fixed wireless and satellite networks are recovered through
an opaque internal cross subsidy from nbn's fixed line networks. nbn is now at a competitive
disadvantage to comparable providers that do not face similar costs of providing non-
commercial broadband services. nbn will be less able to support its internal cross subsidy as
competition intensifies. If nbn loses market share or experiences a reduction in its profit
margins in commercially viable areas, it will be less capable of supporting cross subsidies for
its fixed wireless and satellite networks.
The magnitude of this competitive impact is relatively large, because while nbn's fixed
wireless and satellite networks will only make up eight per cent of the total nbn rollout, the
net costs are very large, and the markets that nbn is under pressure in are relatively profitable.
This RIS has considered a range of options to address this issue.
The relative net benefits between Budget funding and the introduction of the Scheme are
difficult to measure, but on balance, the introduction of the Scheme through an industry
charge is recommended because Budget funding would reduce incentives on nbn to contain
costs (resulting in a reduction of productive and dynamic efficiency). Additionally, Budget
funding is unlikely to be feasible in the current fiscal environment as nbn's net costs of $9.8
billion (in net present value terms) would require Budget funding of around $1 billion per
year out to 2040.
The introduction of the Scheme through contributions sourced from owners of high speed
access networks will sustainably fund nbn's non-commercial service net costs in regional
Australia. It will also reduce the likelihood of a future call on the Budget to renew or replace
satellite and fixed wireless assets.
Under the arrangements, nbn will pay approximately 95 per cent of the charge, resulting in a
real transfer of between $40 million and $60 million to nbn each year. At the same time the
reform will mean that nbn will be capable of competing in the highly profitable fixed line
market on the same basis as other providers.
The proposed funding arrangement does not represent a new cost for the industry--or
consumers--as a whole, although the distribution of the cost would now extend to networks
competing with the nbn. It is an option familiar to the industry as a result of the Universal
Service Obligation funding arrangements and is therefore likely to be accepted by market
participants.
33
Attachment A--Allocative, Dynamic and Productive Efficiency Impacts
Allocative efficiency impacts from Government budget funding
If non-commercial net costs are funded from the Government budget then this would require
taxes to be higher than would otherwise be the case. The Treasury's 2015 report
Understanding the economy-wide efficiency and incidence of major Australian taxes (2015
Treasury Report) presents evidence of the distortionary impacts of different types of taxes.
Previous studies have also examined distortions from taxation, as inputs into tax discussions
such as the Henry tax review. A summary of three previous studies is set out in the table
below.
The distortionary impacts of taxation vary from zero or even negative for a land tax to 70
cents per dollar of revenue raised for taxes such as stamp duty. A relatively efficient tax, such
as a GST or personal income tax, is estimated to have a distortionary impact of ~15-20 cents
per dollar of revenue raised, based on estimates from the 2015 Treasury Report.
For funding non-commercial services, a distortionary impact of 15 cents per dollar would
equate to overall net costs of $1.5 billion (net present value) relative to doing nothing, based
on the BCAR's estimated net costs of $9.8 billion for non-commercial services. For an
increase in the GST, the distortions would be marginally higher at $1.9 billion (net present
value).
34
Relative efficiency of selected taxes by study
KPMG Econtech Margina KMPG Margina 2015 Treasury Margina
201033 l excess Econtech 2011 l excess Report l excess
burden burden burden
Municipal rates 0.02 Land tax 0.09 Broad based -0.1
land tax
GST 0.08 GST 0.12 Personal 0.16
income tax
(labour &
capital)
Land taxes 0.08 Personal income 0.24 Broad based 0.17
tax GST
Labour income 0.24 Motor vehicle 0.33 Current GST 0.19
tax stamp duty
Conveyancing 0.34 Payroll tax 0.35 Labour income 0.21
stamp duties tax
Motor vehicle 0.38 Company tax 0.37 Company tax 0.50
stamp duties
Corporate income 0.40 Commercial 0.74 Stamp duty on 0.72
tax transfer duty conveyances
Payroll tax 0.41 Residential 0.85
transfer duty
Note: Marginal excess burden is the cost of the tax due to changing it by a small amount
(usually such that total government revenue increases by $1).
Sources: KPMG Econtech 2010, CGE analysis of the current Australian tax system, prepared
for Department of Treasury, 26 March 2010; KPMG Econtech 2011, Economic analysis of
the impacts of using GST to reform taxes; Australian Treasury 2015, Understanding the
economy-wide efficiency and incidence of major Australian taxes.
Allocative efficiency impacts from funding from users
The distortionary impact of funding the fixed wireless and satellite services net costs from
customers will depend on how many customers decide not to take up services as a result of
the charge. This in turn will reflect the price change that the charge leads to (relative to
budget funding) and the price responsiveness of users.
If all of the charge were passed through to consumers, the price change from a charge of $7
(in real, 2015 terms) applied to nbn comparable services would be similar to an increase of
10%, with a retail plan costing ~$70 on average.
The responsiveness of consumers to price (the price elasticity of demand) is likely to be
relatively low. For example, Dutz et al (2009) found that elasticities from dial-up to
broadband were about -0.69 in 2008--that is, a 10 per cent rise in the price of broadband
33
Modelling and results were prepared for and incorporated into the Henry Tax Review
35
would lead to a 6.9 per cent decline in the number of people choosing broadband versus dial-
up internet.34 At higher speeds, Dutz et al (2009) found much higher elasticities--generally
larger than -4. This makes sense, as another high-speed plan (such as 50/20) is a closer
substitute to a very high-speed plan (100/40) than is dial up internet. The former estimates are
most relevant for the application of a charge across nbn comparable services. There is the
potential for elasticities to change depending on technological advances such as in mobile
broadband.
The estimated net costs of funding fixed wireless and satellite services from users of nbn and
nbn comparable services (Option 3), for different measures of consumer responsiveness, are
set out in the table below. The most likely estimate of net costs is $235 to $470 million (net
present value). Option 1 (do nothing) would have higher allocative efficiency costs than this,
because it would distort decisions across different suppliers of comparable broadband
services--or, if nbn lowered prices to compete, would lead to higher prices for commercial
users in areas where competition did not emerge.
The estimated net costs from funding from users are somewhat below the losses from the
taxation literature relevant for direct government funding. However, the measures of the
losses from taxation account for flow-on distortions across the economy, while the estimates
below are for the market for nbn comparable services only.35
Efficiency impacts of funding from users
Price responsiveness of Per cent of customers not Estimated net costs
consumers (elasticity of taking up services as a ($m. npv)
demand) result of the charge
-0.2 -2.0% -94
-0.5 -5.0% -235
-1 -10.0% -470
-1.5 -15.0% -705
Productive and dynamic efficiency impacts
Different options are likely to lead to different levels of cost constraint on nbn, in its
provision of fixed wireless and satellite services and more generally. It is very difficult to
measure how much this could impact on costs. To give a sense of the order of magnitude, we
have mapped out different levels of net cost if nbn becomes less efficient than anticipated
(see below).
The loss of productive efficiency is a cost increase applied across time. A 1% reduction in
productive efficiency would have a net cost of $120 million (net present value), a 5%
reduction a net cost of $600 million and a 10% reduction a net cost of $1.2 billion.
Dynamic efficiency is where costs or allocative efficiency do not improve or worsen over
time. For example, if efficiency worsens by 0.5% per year, relative to current
expectations, then this would cost $573 million (net present value). Higher levels of
efficiency loss over time could lead to losses of over $1 billion.
34
Dutz, M., Orszag, J. and Willig, R. 2009, The substantial consumer benefits of broadband connectivity for US households,
Commissioned by the Internet Innovation Alliance. See http://internetinnovation.org/files/special-
reports/CONSUMER_BENEFITS_OF_BROADBAND.pdf
35
Technically, taxation impacts are measured in a general equilibrium framework, while the estimated losses from user
funding are estimated in a partial equilibrium framework.
36
Overall levels of inefficiency reached by organisations whose incentives to control costs are
not as strong as a private sector business can reach levels of 20-30 per cent:
Economic Insights 2014 found that efficiency (based on operating costs) for NSW
Government owned electricity distributors ranged from 40% to 60% of an efficient firm.36
Based on this and other analysis, the Australian Energy Regulator considered that
AusGrid, the largest of the NSW electricity distributors, should be allowed costs 24%
below their proposed operating costs.37
The CIE 2015 found that government operated train and bus services in Sydney were 20-
30% less efficient than a benchmark efficient operator.38
PWC 2015 considered that privatisation of public utilities could have productivity gains
of 5 to 15% for electricity, water and nbn and 35% for transport.39
The main option that we consider would reduce productive and dynamic efficiency is
Option 2 (direct budget funding), as this option would fund the net costs from nbn
providing fixed wireless and satellite services through the Budget, and outside of existing
regulatory and shareholder constraints. A broad-based industry charge could also reduce
productive and dynamic efficiency. The BCAR and ACCC both noted that nbn would
face greater incentives for cost efficiency if the costs for providing those services were
mainly borne by nbn itself.40 The changes in efficiency incentives from alternative
funding options for those services are not as different as between a government owned
and regulated business, and a private business. The impact of a greater part of funding for
those services coming from Budget or other outside services would be expected to be
considerably smaller than this, and would also depend on what other mechanisms could
be put in place to control costs and service standards.
Efficiency impacts of funding from users
Change in Net cost Change in dynamic Net cost
productive efficiency
efficiency
Per cent $m, npv Per cent/year $m, npv
-1% -120 0.5% -573
-5% -600 1.0% -1,187
-10% -1,200 2.0% -2,556
36
As reported in Australian Energy Regulator 2015, Overview: AusGrid final decision 2015 to 2019, p. 39.
37
Australian Energy Regulator 2015, Overview: AusGrid final decision 2015 to 2019, p. 41.
38
The CIE 2015, Efficiency of NSW public transport services, prepared for IPART, December.
39
PWC 2016, Modelling of potential policy reforms, prepared for Infrastructure Australia, February.
40
Bureau of Communications and Arts Research 2015, NBN non-commercial services funding options: final report,
December; ACCC submission to the NBN non-commercial services funding options - final consultation paper
November 2015.
37
Attachment B--Regional Broadband Scheme Implementation detail
Options surrounding design of the charge have been considered by the Department, in
consultation with interested parties including members of the telecommunications industry.
This attachment summarises the aspects of that design which the Department considers best
underpins a sustainable and effective arrangement to fund nbn's fixed wireless and satellite
services including a charge on nbn and nbn comparable providers.
Objectives
The charge will introduce sustainable and transparent funding of nbn's fixed wireless and
satellite services and ensure that nbn's competitors are subject to the same costs as nbn. The
arrangement will ensure that nbn and its competitors operate on a more level playing field to
sustainably fund the provision of those services in regional Australia, including asset renewal
and replacement (thereby avoiding a future call on the Budget). The funding reforms will
complement other market reforms, for example, promoting network competition in
greenfields by allowing nbn to charge for the installation of network infrastructure in
greenfields sites.
Costs to be recovered
The net costs to be funded will be those generated by the nbn fixed wireless and satellite
services. Other net costs (for example in relation to some areas of nbn's fixed line services)
should not be included as they cannot currently be quantified and these networks are
profitable overall.
The net costs associated with those services should be assessed over the period 2010-11 to
2039-40 (a longer period or an increase in the charge per service would be required if the
arrangements are delayed). This will allow a sufficient timeframe to average the net costs
incurred during the initial build phase while allowing for consideration of reasonable
operating and replacement capital costs.
Determination of the charge amount
The charge amount will be determined by the Minister for Communications after considering
advice from the ACCC. This will allow the charge to take into account the ACCC's expert
opinion and provide substantial flexibility to the Government in determining and adjusting (if
needed) the charge's coverage or operation.
Cost calculation methodology
A discounted cash flow (DCF) approach will be used, because it directly and transparently
aligns with financial projections, can readily accommodate future updates, aligns with the
SAU and provides the most consistent outcomes.
Legislative provision will allow flexibility in the event that circumstances change such that
an alternate approach can be introduced at a later time.
38
Cost allocation methodology
The avoidable cost methodology will be used because it is consistent with the approach taken
in calculating the community service obligations of other Government Business Enterprises,
such as Australia Post, and best recognises efficient asset usage and expenditure. This
approach was also recommended by the BCAR.
Implementation date
The legislation for the Scheme will begin on Royal Assent, with carriers to begin accruing the
charge from 1 July 2018.
Carriers have a one-off reporting obligation in December 2017. The first annual reporting
period will be between 1 July 2018 and 30 June 2019, with collection in late 2019. Aligning
the funding arrangement with financial years will lower compliance costs for industry.
Setting the first accrual period from 1 June 2018 will avoid retrospectivity issues, aligns with
the Government's policy statement, allows industry to adapt to the reform and allows
government agencies to put in place the necessary administrative arrangements.
Review of charge amount
A review of the charge amount will be undertaken by the ACCC at least every five years,
whilst permitting the ACCC to undertake a review outside of the set review points. The
proposed five year period will provide industry with some investment certainty, and allowing
the ACCC to undertake reviews outside of the set review points will allow the Minister to
adjust the charge in the event that major changes to the charge forecasts were expected.
It is intended that the ACCC collects information in December 2017 to allow it to recalculate
the monthly per-premises amount, if necessary, prior to the commencement of the first annual
reporting period on 1 July 2018.
At each review point, there will be an adjustment to allow over (or under) recovery of costs to
be returned (or charged) to industry as a whole through a lower (or higher) monthly charge
per-premises. Retrospective refunds are not proposed due to the high administration costs.
Transparency of payments
As outlined by the Government's 2014 policy paper, the transparency of the funding
arrangement is a critical element of the proposal.
The aggregate amounts paid to the ACMA under the funding arrangements will be published
each year.
Revenue collection
The ACMA will be tasked to collect the charge as it administers existing telecommunications
levy mechanisms (i.e. the Eligible Revenue reporting process) and because it is familiar with
the sector.
39
An offset provision will be introduced, to allow charge payments made by nbn to be counted
against funding payments made to nbn. The operation of the set off provisions will not impact
on the transparency of the arrangements.
A special account will be introduced and administered by the Department of Communications
to further improve the transparency of the funding arrangements.
Policy review
Under the legislation there is a requirement for a statutory policy review of the Scheme by the
Department of Communications and the Arts within the first four years of the Scheme or as
soon as practicable. The Department would review, for example, if the charge base of the
Scheme is still applicable in the telecommunications market in Australia. The Minister would
be required to cause such a broad scope policy review to commence within the first four
years.
Additionally, it is expected that the Department of Communications and the Arts will
undertake periodic policy reviews (probably on a similar schedule to the ACCC's reviews of
the charge amount), and on an ad-hoc basis in the event of major market changes, asset
renewal or technology changes. This would support the sustainability of the fixed wireless
and satellite networks funding arrangement.
Note that should fixed wireless and satellite networks be provided by a different entity to nbn,
then there would be a need to revise mechanisms for cost control. In this case, there would be
weaker incentives for the entity providing fixed wireless and satellite networks to control
costs, because it would largely be paid for by another entity. In this case, risks for cost over-
runs and under-runs should be shifted to the provider of those services.
Changes in the telecommunications market
Because of rapid changes in broadband technology, new and improved technologies may
warrant an expansion of the categories of entities captured by the charge. These changes will
be considered as part of the policy reviews outlined above.
40
Attachment C--Implementation costings
Under the preferred model, the expected implementation and operating costs of
administration for the funding agreements are expected to be $0.9 million over 4 years to
2019-20.
Entity Function
ACCC Recalculating the charge for the first 5 year cycle
On commencement the ACCC would re-calculate the charge based on
the latest premises figures and cost estimates from nbn of its fixed
wireless and satellite networks. This would require the ACCC to
undertake complex financial calculations and undertake market
forecasts.
ACCC Consulting on approach/setting up framework
On commencement the ACCC would consult on various
options/considerations in relation to performing its role under the
legislative framework and amending any record-keeping rules (where
relevant) to enable the ACCC to perform its monitoring role.
ACCC Monitoring
Each year the ACCC would consider the information provided by
industry on the actual number of premises in the market and consider the
financial information provided by nbn. In considering this information,
the ACCC would make a decision on whether it ought to initiate a
pricing review earlier than planned.
ACCC Re-calculating the charge amount for 5 year cycles
This cost component is similar to the pricing review for the first five
year cycle, although the ACCC expects this would be a more extensive
task in which they would consider any lessons from the first five years of
the funding arrangements, or otherwise alter the approach in response to
the scheduled policy review.
ACCC Price monitoring
The ACCC would monitor nbn's prices to determine the extent to which
the proceeds from the charge had resulted in lower wholesale prices. It is
proposed that these costs are absorbed into the ACCC's existing nbn
price monitoring function.
TOTAL ACCC $0.2 million
over 4 years
ACMA Staffing
ACMA staff would consider whether premises information provided by
industry is consistent with its expectations, or whether enforcement
action should be considered. Staff would also receive information from
providers, prepare invoices, collect monies and reconcile receipts. It is
expected that this work would be partly absorbed into the ACMA's
existing Telecommunications Industry Levy (TIL) work. In addition the
ACMA would also assess the amounts providers were liable for and
enforce the charge obligations.
41
Entity Function
ACMA IT upgrade
The ACMA reports that it will be implementing the secure online system
(TELLER) for telco carriers to report eligible revenue for TIL
calculations. The TELLER system is an "off the shelf" product that the
ACMA has customised to meet the particular needs of the telco industry
for the reporting of eligible revenue and collection of the TIL. The
ACMA anticipates modifying this system to collect the charge to be the
most effective method of administering the Regional Broadband
Scheme. The modifying of the ACMA's established CRM/Intelledox
system for the charge collection involves a moderate setup cost.
Total ACMA $0.6 million
over 4 years
Department of Contract administration
Communications As part of arrangements, the Department of Communications and the
and the Arts Arts (DCA) would need to negotiate and administer a contract with nbn
for the payment of proceeds from the charge. It is expected that
negotiation would take three months, and require four FTE (one FTE
annualised). Each year, the DCA would need to pay nbn the charge
proceeds. It is estimated that this would take 0.5 months and require
three FTE (0.125 FTE annualised). The Department would absorb these
costs.
Policy Review
The DCA would need to undertake a policy review of the Scheme within
the first four years or as soon as possible, and subsequently at regular
intervals.
Total $0.9 million
administration
costs
Compliance costs
Under the preferred model, the expected compliance costs (excluding costs of administering
the charge) per annum are expected to be $67,000 in aggregate per year, or approximately
$4,333 per year on average per firm currently in the market. As per Guidance Note
'Regulatory Burden Measurement Framework' issued in February 2016, because the
compliance costs fall beneath $2 million per annum, these costs have not been agreed by the
Office of Best Practice Regulation.
42
Under the preferred model, the expected compliance costs per annum are as follows:
Entity Cost Function
estimate
nbn and nbn $43,000 p.a. Enforcement and record keeping: As part of the arrangements,
comparable providers will need to determine how many eligible premises they
providers provide eligible services to and advise the ACMA. It is expected
that providers will be aware of the number of eligible premises they
operate on a month to month basis for billing purposes. Likewise,
providers already need to provide information to the ACMA for
other telecommunications purpose (e.g. as part of carrier license
requirements). Nonetheless, we estimate that eligible carriers may
need to undertake some work to ensure that they are compliant with
the charge requirements, particularly in determining whether
premises they operate are eligible for the charge. We estimate that a
regulatory officer in each provider would spend approximately 0.5
months undertaking this work, each year41.
nbn $0 nbn has advised that there are no material ongoing compliance
costs, relative to budget, even though additional resources may be
required in administering the charge. However, there may be
substantial transaction costs for nbn. Consequently, an 'offset'
provision is proposed.
Cost estimates have also been prepared for other options:
Option Entity Cost Explanation
estimate
Option 1: Nil $0 There would be no compliance costs if the net costs
Do nothing from the fixed wireless and satellite services continue
to be funded by nbn.
Option 2: Nil $0 There would be no compliance costs if the net costs
Direct from the fixed wireless and satellite services were
Budget funded directly from the Budget.
funding
nbn has advised that there are no material ongoing
compliance costs for providing its net costs for building
and operating its fixed wireless and satellite networks
to the ACCC.
Option 4: Consumers $12.7 Individuals seeking access to post-market subsidies
Targeted million42 would face some compliance burden in demonstrating
post- that they are eligible for a subsidy. The level of
market compliance burden would be commensurate to the
subsidies standard of proof required to demonstrate eligibility.
For the purposes of developing compliance costings, it
is assumed that a reasonably small number of
documents would be required: proof of identity, proof
41
An annual salary of $100,000, and that there are 10 eligible firms operating in the market.
42
This figure is equal to OBPR's average wage rate for leisure time ($31) multiplied by 2 (for the number of hours spent
researching options) multiplied by the number of eligible households (in this case: 204,600).
43
Option Entity Cost Explanation
estimate
of residence and proof of income. It is assumed that on
average the typical consumer would spend two hours
per year researching the Scheme, gathering the
necessary documents and checking that they meet the
requirements. The number of consumers that this
burden would apply to is dependent on the income (or
other) threshold set. This RIS assumes that the
threshold is set at $52,000 (consistent with other
Government programs, such as Family Benefit Part A).
We assume that, based on nbn's forecast penetration
rate and the ABS' estimate of income distribution
across Australia, that 204,600 households would be
eligible for a subsidy.43
This RIS assumes that assessment of consumers' claims
is undertaken by the Government. If another body (such
as the service provider) were to undertake this work,
the Budget cost estimated in "Who is affected?" would
apply as a compliance cost instead.
Regulatory compliance costs for the four options explored in this document are set out below.
The offsets referred to in this section refer to the proposed reforms to Parts 7 and 8
announced in the Government's 2014 Policy Paper. The Department warrants that the
regulatory costs imposed by the preferred option will be offset by regulatory savings from
these reforms.
Option 1: Do nothing
Average Annual Regulatory Costs (from Business as usual)
Change in costs Business Community Individuals Total
($million) Organisations change in
cost
Total by Sector $0 $0 $0 $0
Cost offset ($million) Business Community Individuals Total by
Organisations Source
Agency $0.9 m $0 $0 $0.9 m
Are all new costs offset?
Total (Change in costs--Cost offset) $0.9 m
43
See ABS' Household income in Australia, http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6523.02013-
14?OpenDocument
44
Option 2: Direct Budget funding
Average Annual Regulatory Costs (from Business as usual)
Change in costs Business Community Individuals Total change
($million) Organisations in cost
Total by Sector $0 $0 $0 $0
Cost offset ($million) Business Community Individuals Total by
Organisations Source
Agency $0.9 m $0 $0 $0.9 m
Are all new costs offset?
Total (Change in costs--Cost offset) $0.9 m
Option 3: Regional Broadband Scheme
Average Annual Regulatory Costs (from Business as usual)
Change in costs ($) Business Community Individuals Total change
Organisations in cost
Total by Sector $43,000 $0 $0 $43,000
Cost offset ($million) Business Community Individuals Total by
Organisations Source
Agency $0.9 m $0 $0 $0.9 m
Are all new costs offset?
Total (Change in costs--Cost offset) $0.85 m
Option 4: Targeted post-market subsidies
Average Annual Regulatory Costs (from Business as usual)
Change in costs ($) Business Community Individuals Total change
Organisations in cost
Total by Sector $0 $0 $12.7 m $12.7 m
Cost offset ($million) Business Community Individuals Total by
Organisations Source
Agency $0.9 m $0 $0 $0.9 m
Are all new costs offset?
Total (Change in costs--Cost offset) $11.8 m
45
Attachment D--Breakdown of satellite and fixed wireless net costs
In its final report, the BCAR estimated that nbn's fixed wireless and satellite networks will
have a net cost of approximately $9.8 billion from 2010-11 to 2039-40 (net present value).
This attachment provides greater detail on how this estimate was developed.
Methodology
The BCAR used an avoidable cost methodology. In essence, the BCAR considered all costs
(including capital costs) which would have otherwise been 'avoided' had the service not been
provided. The BCAR has adopted the following approach to identifying the avoidable costs
of the satellite and fixed wireless services:
1. Categorise all nbn costs into:
a. costs that are directly attributable to the provision of satellite and fixed wireless
services (e.g. satellite costs, fixed wireless tower costs, etc.)
b. costs that are directly attributable to the provision of fixed line services (e.g. cost
of pit and pipe), or
c. common and indirect costs from assets and activities shared by fixed wireless,
satellite and fixed line services (e.g. transit and labour costs).
2. Identify whether the common and indirect costs (under 1c) are:
a. unavoidable, as they do not vary irrespective of the deployment of the satellite
and fixed wireless networks, or
b. partly avoidable, because they would be less if the satellite and fixed wireless
networks were not deployed.
3. For those common and indirect costs that are partly avoidable, the BCAR allocated
costs between the fixed line, fixed wireless and satellite networks based on the
percentage of SIOs in a given financial year.
This approach resulted in around 1.2 per cent of all indirect or common costs being allocated
to the fixed wireless and satellite networks from 2010-11 through to 2021-22. By
comparison, the fixed wireless and satellite networks are expected to account for around eight
per cent of all premises covered by nbn's network.
The BCAR modelled non-commercial net costs to 2039-40.44 This approach provides
consistency between non-commercial service forecasts and the business case period
considered under the SAU.
The BCAR modelling included replacement costs for the capital in the fixed wireless and
satellite networks. The BCAR estimated that satellite assets (that is, the satellite and ground
stations) would have a useful life of 15 years. The BCAR estimated that the fixed wireless
assets would have a useful life of 5 years for customer equipment, between 15 and 16 years
for the fixed wireless base stations, and 7 years for the core network assets.
In considering the financial outcomes of the fixed wireless and satellite services, the BCAR
adopted the discounted cash flow (DCF) methodology. The DCF methodology involves
44
'Historical' costs of the interim satellite service were also included in BCAR's modelling.
46
estimating the future cash inflows and outflows, and applying an appropriate discount rate to
those future cash flows.
In the context of fixed wireless and satellite services, which are characterised by negative
cash flows throughout the life of the project, the discount rate decreases net present value
(NPV) net costs. In other words, the greater the discount rate, the smaller the overall net cost.
The BCAR considers that the most appropriate discount rate for quantifying non-commercial
net costs is the weighted average cost of capital (WACC) calculated by the method approved
by the ACCC for nbn's SAU--the risk free rate (10-year Commonwealth Government Bond
spot rate) plus 350 basis points.
The WACC contemplated in the SAU is consistent with the Government's competitive
neutrality guidelines for determining a target rate of return. A risk-based approach allows for
the application of a benchmark base cost of capital such as the Commonwealth long-term
bond rate and the addition of a risk premium. The BCAR used this approach to calculating
the WACC value, and has used a discount rate of 6.46 per cent to give indicative NPV net
costs estimates.
Once the NPV real charge per-SIO is estimated (estimated to be $6.76 by the BCAR,
excluding services provided to medium and large businesses in 2014-15 dollars45), it is
inflated each year by the consumer price index to generate the nominal charge per-SIO.
Net costs of the fixed wireless and satellite services
The total net present value net costs of the fixed wireless and satellite services was estimated
by the BCAR to be $9.8 billion. The figure below46 shows the split of the expected overall
spend for fixed wireless capital expenditure (capex) and operational expenditure (opex) from
2010-11 to 2017-2018, including common costs.
45
Note that the Department has recalculated the charge amount per service to include services provided to medium and
large businesses. This results in a charge of approximately $7.10 per month per service, including administrative costs.
46
See BCAR's NBN Non-Commercial Services Final Report, page 16, page 19.
47
The following figure shows the expected Satellite capex and opex from FY2011 to FY2018,
including common costs.
Because the net cost is calculated in NPV terms, the loss is also sensitive to the discount rate
chosen. The sensitivities shown below highlight the need to carry out periodic forecasting of
non-commercial service losses, particularly to reflect updated cost estimates.
48
Figure 1: NPV loss, sensitivity by discount rate
12
$[VALUE] billion
10
NPV loss ($ billion)
8
6
4
2
0
4.46% 4.96% 5.46% 5.96% 6.46% 6.96% 7.46% 7.96% 8.46%
Source: BCR (2015).
49
Attachment E - Existing policies and regulatory settings
Statement of expectations
Following the recommendations of the 2003 Review of Corporate Governance of Statutory
Authorities and Office Holders (the Uhrig review)47 Statements of Expectations (SoE) are
issued by the Government to Commonwealth Companies, setting out relevant government
policies and expectations on how these companies should conduct their operations. The latest
SoE for nbn was issued on 24 August 2016.48
Relevant to the delivery of fixed wireless and satellite services, the SoE specifies that nbn
should build the network in a cost-effective way, using the technology best matched to each
area of Australia within the constraints of the Government's public equity capital limit, as set
out in the Equity Funding Agreement, and deliver a network capable of wholesale download
data rates of at least 25 megabits per second to all premises.
Special Access Undertaking
The Special Access Undertaking (SAU), as accepted by the ACCC on 13 December 2013, is
a key part of the regulatory framework that governs the price and other terms on which nbn
supplies services to access seekers who are supplying services in downstream retail and
wholesale markets.49
The SAU has a term that runs to 30 June 2040 and operates via a modular structure. The first
part (known as Module 1) applies for the first 10 years (during which time the network will
be built). Module 1 includes detailed price terms and a limited set of non-price terms. The
second part of the SAU (known as Module 2), commences on 1 July 2023 and its terms are
generally expressed at a higher, more principled level. The SAU contemplates that further
detail will be incorporated over time via nbn submitting replacement modules for ACCC
consideration.
To account for the transition to the multi-technology mix approach, nbn lodged a variation to
the SAU with the ACCC on 27 May 2016. The variation proposes to:
retain the current SAU arrangements, most aspects of which are technology neutral
(including the modular structure)
extend the SAU's service, product and price coverage to incorporate FTTB, FTTN and
HFC (and the option to incorporate future variants such as FTTdp, and
make a very small number of changes based on experience with operating under the SAU
to date.
The ACCC has rejected the proposed changes to the SAU put forward by nbn, but has
indicated that it does not have fundamental concerns with the overall approach nbn has taken
to incorporate the additional technologies. The ACCC has provided nbn with clear guidance
and what changes are required before it can accept the variation to the SAU. The SAU works
47
See http://www.finance.gov.au/sites/default/files/Uhrig-Report.pdf
48
The SoE is available here: http://www.nbnco.com.au/content/dam/nbnco2/documents/soe-shareholder-minister-
letter.pdf
49
The SAU is available here: http://www.nbnco.com.au/content/dam/nbnco/documents/NBN%20Co%20SAU%20-
%20Varied%20on%2018%20November%202013%20(clean%20version).pdf
50
in conjunction with nbn's Wholesale Broadband Agreement (WBA).50 Whereas the SAU
includes a mechanism to set the maximum price (for example) that nbn can charge for
services, the WBA is the contractual agreement between nbn and its retailers that specifies
price and non-price terms.
In providing a service over the nbn, nbn's access seekers must purchase both Access Virtual
Circuit (AVC) and Connectivity Virtual Circuit (CVC) services from nbn (amongst other
things51). In simple terms, AVC is the supply charge and CVC is the capacity charge (or
usage charge).52 Retailers can aggregate multiple AVCs on one CVC (with options for
different 'traffic class' qualities)--in essence CVC capacity is shared between customers.
The amount of CVC an access seeker purchases for each AVC and its traffic class has a large
bearing on the quality of the service experienced by customers, particularly during the peak
period on the access seeker's network. Access seekers mix and match different AVC and
CVC combinations as part of developing their retail products.
Parts 7 and 8 of the Telecommunications Act
Parts 7 and 8 of the Telecommunications Act (the Tel Act) provides rules about the supply of
high speed broadband, and were put in place in their current form in 2011.
Part 7 provides that networks built or upgraded after 1 January 2011 must not supply a fixed
line broadband services to residential and small business customers if they do not also
provide a layer 2 bit stream service. A layer 2 bit stream service has the normal meaning
used in the telecommunications industry, which is generally taken to be an Ethernet service
for the transmission of data between two points on a network.53 nbn is not bound by Part 7 as
it is required to operate on a wholesale only basis and offer services at the lowest practical
layer of the OSI stack. Part 8 requires that operators of high speed broadband offer services
on a wholesale basis.
Taken together, the intention of Parts 7 and 8 are to ensure that other non-nbn providers of
high speed broadband can provide customers with similar services to nbn (that is provide
access to a broadband service of 25 Mbps or more) and do so on an open access basis.
Parts 7 and 8 include a range of exemptions. In particular, exemptions are provided to
networks in place prior to 1 January 2011. This exemption remains in force in the event of
small upgrades extending the existing infrastructure by no more than 1 kilometre.54
In September 2013, TPG Telecom announced its intention to build a fibre-to-the-basement
(FTTB) network with the potential to reach more than 500,000 premises in metropolitan areas
in Sydney, Melbourne, Brisbane, Perth and Adelaide. However, it is not subject to Part 7 and
8 of the Act because it had a network (albeit one that was focussed on the business market)
50
See http://www.nbnco.com.au/sell-nbn-services/supply-agreements/wba2.html
51
For example, clause 1A.4.2 provides that nbn can require that the supply of an AVC to a retail providers can be on the
condition that the retailer also acquire another product.
52
See clauses 1A.3.2 and 1A.3.3 for the definitions used in the SAU.
53
See the ACCC's Layer 2 bitstream service declaration Final report, February 2012 for more discussion about the definition
of a layer 2 bit stream service, available here:
https://www.accc.gov.au/system/files/Local%20bitstream%20access%20service%20declaration%20-
%20final%20report.pdf
54
See 141B(4)(c)(i).
51
that was already capable of supplying superfast carriage services before 1 January 2011, and
is extending that network by less than 1 kilometre.
On 11 September 2014, the ACCC announced that it did not consider TPG was in breach of
Part 7 or 8. On the same day as the ACCC's announcement, the Minister for Communications
announced that he would consult on a new carrier licence condition declaration relating to
superfast networks. Subsequent to this, the Minister for Communications made a new carrier
licence condition declaration requiring that specified carriers provide high speed broadband
on a wholesale non-discriminatory and equivalent basis until 30 June 2015, and after that be
required to comply with general separation and supply obligations, and layer 2 wholesale
service obligations.55 The carrier licence condition is part of the Government regulatory
transition process, explained in more detail below under 'Future reform'.
Superfast Broadband Access Service (SBAS) and Local Bitstream Access
Service (LBAS) declarations
Superfast broadband access service (SBAS) and local bitstream access service (LBAS) are
wholesale broadband services56 on non-NBN networks. The services are used by retail
service providers (RSPs) to supply downstream superfast broadband to customers. Both
services are referred to as layer 2 bitstream fixed line services; they are capable of a data
transmission speed rate of 25 Mbps or higher. Fixed wireless, satellite and mobile services
are not included in these services.
These services have been declared by the ACCC which means that the ACCC can set price
and non-price terms for these services.
SBAS refers to broadband services delivered on eligible networks built before 1 Jan 2011.
However, they do not include services supplied to locations where there is effective
competition, for example, services supplied exclusively to businesses, public bodies or
charities in major central business districts (CBDs). Services supplied by nbn or on HFC
networks (transferring to nbn) are excluded.
LBAS refers to wholesale broadband access services delivered on networks built,
upgraded or altered by more than 1km cable distance after 1 January 2011, unless they
have a Ministerial exemption or are exempt under Part 7 of the Telecommunications Act
1997. These services are subject to structural separation requirements.
Layer 2 bitstream access is a wholesale product consisting of a high-speed access link
installed in the local access network (which itself is linked to a backhaul backbone
network) and made available to third parties (i.e. RSPs) to enable them to provide high
speed broadband services to customers. It is a key feature of the broadband market that
enables RSPs to offer their own products to customers even if they do not operate the
local access network.
SBAS providers include:
Telstra: fibre to the premises (FTTP) networks in the South Brisbane Exchange and
Velocity Estates Fibre Access Broadband networks (FAB), and
55
See Carrier Licence Conditions (Networks supplying Superfast Carriage Services to Residential Customers) Declaration
2014, https://www.legislation.gov.au/Details/F2014L01699
56
http://registers.accc.gov.au/content/index.phtml/itemId/1035508.
52
TPG: FTTB networks, VDSL network in the ACT and HFC networks in Victoria
(acquired via iiNet57)
LBAS providers include:
Opticomm Co Pty Ltd
CNT Pty Ltd
OPENetworks
the Local Broadband Network Company (LBNCo), and
Vocus Communications: fibre networks
Process for declaration and determination
The general process for the ACCC issuing a Service Access Determination or Product
Declaration is outlined in its draft guidelines58. It may start by making a declaration or issuing
a discussion paper on the matter for input by access seekers and consumers then making an
interim/draft decision (which it issues out for further consultation) before making its final
decision or determination.
The SBAS declaration came into effect on 29 July 2016 (expiring 28 July 2021) and applies
to all non-nbn pre-2011 superfast fixed-line broadband networks delivering download speeds
of 25 Mbps or higher.
LBAS was declared on 22 February 2012 (with an indefinite expiry date) and came into
effect on 13 April 2012. The LBAS service declared was required to have a download speed
rate of 25 Mbps.
On 26 May 2017, the ACCC released its final decision for the combined SBAS/LBAS Final
Access Determination public inquiry. In its final decision the ACCC has allowed
LBAS/LBAS to pass on the Scheme charge beyond the existing $27 price cap if required.
Future reform
In its 2014 policy paper, the Government acknowledged that an effective telecommunication
regulatory regime was compromised by legislative and regulatory reform undertaken between
2009 and 2011, particularly in relation to Parts 7 and 8.
In the 2014 policy paper the Government announced that it would introduce a package of
reforms to move towards a more effective regulatory arrangement. The reforms would
proceed in an ordered sequence to minimise disruption to the industry and enable nbn to
complete its rollout.
The transition period and pre-nbn privatisation phases set out in the 2014 policy paper are
beyond the scope of this RIS, however it is intended that legislation allowing for greater
structural flexibility for non-nbn providers and establishing a Statutory Infrastructure
Provider proceeds at the same time as legislation implementing transparent funding for fixed
57
iiNet is owned by TPG
58
https://consultation.accc.gov.au/regulated-infrastructure/draft-guidelines-for-part-xic-declaration-
provisio/supporting_documents/Draft%20Part%20XIC%20declaration%20guideline%20June%202016.pdf
53
wireless and satellite services. These two other measures are subject to a separate RIS, and
are summarised below:
1. Amendments to Parts 7 and 8: The Government will amend existing separation rules
in the Telecommunications Act to allow superfast networks to operate on a functionally
separated basis if authorised by the ACCC; and
2. Statutory Infrastructure Provider: The Government will introduce Statutory
Infrastructure Provider obligations on nbn and, where appropriate, other superfast
network providers.
It is important that the funding arrangements for fixed wireless and satellite services,
amendments to Parts 7 and 8 and the Statutory Infrastructure Provider reforms proceed as a
package because they are integrated and dependent. While the Parts 7 and 8 reforms are
designed to provide greater structural flexibility for firms and therefore more commercial
opportunities, this could impact on nbn's ability to fund its fixed wireless and satellite
services. Sustainable funding arrangement for those services will assist in balancing this
arrangement.
Similarly, while the Statutory Infrastructure Provider obligations will make clear nbn's
obligations to deliver infrastructure, including in rural and remote areas, it is important that
there is a mechanism to contribute to the cost of non-profitable fixed wireless and satellite
infrastructure. Conversely, industry is likely to want to see a legally binding requirement on
nbn to provide infrastructure if it is to contribute to its cost.
54
Attachment F - Detailed stakeholder comments from consultations
1. Vertigan Review
The key issues noted by stakeholders relevant to non-commercial funding arrangements were
as follows:
Complexity of subsidy arrangements: the Australian Communications Consumer
Action Network (ACCAN) argued that post market subsidies would potentially be
complex to administer, especially in the context of a network that uses multiple
technologies across the fixed line network. ACCAN advocated reconsideration of a
charge (as noted in the earlier implementation study) to support the proposed Scheme.
Potential distortions: The ACCC agreed that nbn's fixed wireless and satellite networks
were non-commercial, and that some form of subsidy may be required to fund the
shortfall between costs and revenues. The ACCC advocated that a subsidy provided to
support the Scheme should be as transparent and effectively delivered as possible, while
minimising market distortions. The ACCC noted that Budget funding via a grant could
potentially have a low distortionary impact. The ACCC also noted that an alternative
would be the introduction of a charge or other fee on market participants.
Industry contributions: The Communications Alliance argued that, as a matter of
principle, funding for fixed wireless and satellite services should come through
Government, rather than the imposition of a charge or other industry funding mechanism.
Telstra also argued that net costs generated by those services should be absorbed by nbn's
shareholder. In contrast, OptiComm was in favour of an industry funding mechanism. It
argued "Industry generated funding of non-NBN Co fixed access providers in regional or
metro-fringe areas would enhance competition and reduce the reliance on government
financed NBN Co networks. Those services should not be cross subsidised, they should be
funded through an industry generated funding mechanism". Similarly, TPG was opposed
to 'do nothing'. It argued that the delivery of nbn's fixed wireless and satellite services
could be achieved through an industry wide charge (albeit, TPG argued that the charge
should be applied to all telecommunications infrastructure providers and retailers, and on
the basis that a portion of those services may be commercial). TPG also noted that Budget
funding would be acceptable, noting that "[the current] cross-subsidy model will tend to
entrench inefficiencies in the important economic drivers of the Australian economy,
being the major population centres."
2. BCAR Consultation 1
Key issues raised:
Cost measurement: A number of submissions considered that nbn non-commercial
service costs should be assessed on an avoidable or incremental cost basis, as opposed to
a fully allocated cost approach. VHA, Telstra and iiNet all advocated cost measurement
on an avoidable or incremental cost basis as being more economically appropriate and
reflective of the costs of an efficient competitor.
Use of a discounted cash flow approach: Optus and John de Ridder advocated for the
use of a Regulated Asset Base (RAB) / Building Block model (BBM) for determining
non-commercial service net costs. All other respondents accepted a discounted cash flow
analysis as being suitable. The ACCC accepted the use of a discount cash flow while also
discussing how a BBM approach could be implemented.
55
Discount rate and terminal value: In general, respondents indicated that prevailing
market conditions should drive the discount rate. All respondents that addressed questions
relating to the terminal value expressed concerns with including such a value.
Forecast period: A number of respondents suggested that useful asset life should be used
to determine the forecast period.
Eligibility: Telstra argued that high speed networks that existed prior to 1 January 2011
(e.g. contemplated in the original nbn business case) and greenfields network investments
made to date on the basis of no charge, should not be required to contribute to the charge.
While there was general support for eligibility based on a service standard, some (e.g. nbn
and John de Ridder) consider that mobile broadband should contribute to the fund. Others
(e.g. iiNet) considered that eligibility should be extended beyond owners of high speed
broadband access networks targeting consumer and residential services.
Contestability of fixed wireless and satellite services and access to the Scheme:
Submitters were divided over the issue of contestability. Telstra and Optus did not favour
contestability of non-commercial service provision.
Universal Service Obligation: There was some support for reviewing and merging the
funding arrangements for the USO with arrangements for the Scheme. However, Telstra
and Optus did not support changes to the current USO arrangements. Telstra argued
funding arrangements for the USO target the provision of retail services whereas the
charge arrangements for fixed wireless and satellite services should focus on the
provision of wholesale services. Optus cited the incompatibility of the calculation base
between arrangements for the USO which is based on eligible revenue and its preferred
option of using the number of SIOs for the calculation of the funding for those services.
nbn also supported the establishment of separate processes for the calculation and funding
of non-commercial services.
3. BCAR Consultation 2
Key issues raised:
Eligibility: nbn, TPG, OptiComm and Vocus expressed significant concerns with an nbn
comparable funding approach (i.e. a charge that targets fixed line services only ), citing
that it will increase fixed line pricing to the point of pushing customers to mobile
broadband. In support of these claims, these network operators provided market analysis
suggesting that mobile broadband is emerging as a substitute to nbn comparable fixed line
services. TPG indicated it may commence offering services via fixed wireless in order to
avoid meeting the proposed eligibility criteria. There is a risk that a fixed line only charge
will lead to market exit or entrench barriers to entry, which contradicts the 'competition
ready' outcomes sought by Government. Conversely, Optus and Telstra made
submissions supporting a fixed line only base, stating that it is an appropriate response to
the emergence of infrastructure based competition. The ACCC also made a submission
supporting a fixed line only approach as it maintains cost incentives for nbn.
Treatment of legacy networks: Telstra flagged concerns that the proposed charge would
capture a number of networks that were in existence at the inception of the nbn and that
are not in direct competition with nbn (e.g. the South Brisbane exchange). Telstra
recommended that the charge should focus on competing networks only. Separately,
OptiComm argued the Telstra ADSL and HFC networks are nbn comparable and should
be considered eligible for the charge, regardless of the fact that these are transitioning to
the nbn. Finally, TPG argued that placing a charge on networks in place prior to the
inception of the nbn would act as a deterrent for investment in telecommunications.
56
Role of the ACCC: the ACCC suggested it is suitably placed to handle future
calculations of the charge, including considering the charge in the context of broader nbn
regulatory requirements (such as the prudency and efficiency requirements under the
SAU) and managing industry consultations.
Consultation on final model outcomes: Optus, Telstra and OptiComm indicated they
are unable to fully consider model outcomes without greater visibility into model
assumptions and inputs.
Competitive neutrality: The OptiComm submission (which included a commissioned
paper from Frontier Economics) raised competitive neutrality concerns whereby firms
such as OptiComm are at a competitive disadvantage compared to nbn as they believe
that nbn is not required to earn a commercial rate of return (based on a long term IRR of
3.5%).
4. Exposure Draft consultation
Key issues raised:
The Regional Broadband Scheme is a sustainable option to equitably fund regional
and rural broadband services - consumer and regional interest groups supported the
Scheme; they include the Australian Communications Consumer Action Network
(ACCAN), Better Internet for Regional, Rural and Remote Australia (BIRRR), the
National Farmers Federation (NFF), Cotton Australia and the Isolated Children's Parents
Association (ICPA). Some of them (ICPA and ACCAN) are concerned that retail prices
may rise and ACCAN has proposed that direct Budget funding is also included to assist
low-income groups to better afford services. BIRRR suggested minimum enforceable
performance standards on nbn's fixed wireless and satellite services through the statutory
infrastructure provider obligations. The NSW Farmers Association proposes introducing
the Scheme in parallel with the recently reviewed Universal Service Obligation (USO) as
well as provisioning voice services with the fixed wireless and satellite services in
regional areas.
The Scheme impacts on small carriers' business viability - the Greenfield Fibre
Operators of Australia (GFOA) and OptiComm said the Scheme's charge equates to
about 30 per cent of their operational revenue per service per month which would have a
flow-on effect on their profitability. They argue that the charge base is too narrow and
propose it be expanded to include at least mobile and fixed wireless broadband services.
These operators argue that the provisions that allow the Minister to require performance
guarantees are unnecessary and would cause substantial investment uncertainty.
The charge base of the Scheme should be expanded - some submissions argued that
the funding base should be expanded. Some proposed inclusion of mobiles, fixed wireless
and networks transitioning to nbn. TPG, Vocus, OptiComm and GFOA want to broaden
the Scheme charge base to include (superfast) mobile broadband and fixed wireless
services. While nbn supports the Scheme, it argued that mobile broadband and fixed
wireless services should be included in the charge base.
The charge base of the Scheme should be reduced - Telstra, Vocus and Optus argue
that the charge base should not include services provided to medium and large businesses.
Optus says this distorts the market and also suggests that they do not have visibility on
business dark fibre services they offer to the retail market. Telstra generally supports the
policy intent of the Scheme but does not support the inclusion of these services; in
particular it's Velocity and South Brisbane fibre networks do not directly compete with
nbn's networks since they cannot technically provide speeds greater than 12 Mbps
57
without costly upgrades. They also propose that administration costs of the Scheme
should be funded from Government revenue.
The network size exemption threshold should be lifted - some operators, such as
Spirit, have argued that the small provider exemption should be higher than 2,000
premises to improve investment incentives for small providers.
58
Attachment G - Overview of the BCAR Reports
Following the Government's decision in 2014 to fund nbn's non-commercial services (fixed
wireless and satellite services) with industry contributions, several options were considered:
first, during the BCAR's review in 2015 and, second, post release of an Exposure Draft of the
legislation in December 2016.
What options were considered in the 2015 BCAR review?
The BCAR considered sub-options for the development of a charge on industry to cover non-
commercial service net costs, as well as advising on the implementation of such as charge.
The BCAR found that:
overall, the net costs from providing fixed wireless and satellite services would be
$9.8 billion in net present value terms to 2040, and
on a per premises basis, the net costs are estimated at $105 per month for fixed
wireless services and $110 per month for satellite services.59
The BCAR recommended a charge of $7 (in real 2015 terms) per month per SIO60 be applied
to nbn comparable services to fund the identified non-commercial services net costs. The
charge would apply to nbn commercial services (i.e. nbn's fixed line networks) and owners of
nbn comparable networks.
The BCAR also considered a funding option that included mobile and other
telecommunications providers. The BCAR concluded that mobile services be excluded from
the funding base as the services were not substitutable for fixed-line services. The BCAR
recommended a charge on nbn comparable providers and the key reason for that was that a
funding arrangement limited to nbn and comparable industry participants would maintain
existing commercial incentives for nbn to control costs, determine appropriate service
standards and innovate.
The following table summarises the financial outcomes based on updated modelling
undertaken by the Department of Communications and the Arts:
Financial estimates 2018-19 2021-22
Per-SIO contribution monthly amount $7.27 $7.82
(nominal)
Per-SIO contribution annual amount $87.2 $93.8
(nominal)
non-nbn annual contribution $39 million $44 million
nbn annual contribution $552 million $781 million
Total annual collection $592 million $825 million
59
See the BCAR's final report, page 8.
60
This amount includes administration costs for the scheme, and is an approximation.
59
Following the BCAR's work, a draft non-commercial funding arrangement model has been
developed. This section considers key policy questions associated with the implementation of
the model. Administrative details about the proposed model appear at Attachment B.
60
STATEMENT OF COMPATABILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Telecommunications (Regional Broadband Scheme) Charge Bill 2017
This Bill is compatible with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011.
Overview of the Bill
The Bill will establish a sustainable funding mechanism to ensure NBN Co Limited (nbn) can
continue to deliver the benefits of high speed broadband to regional Australia. It will require
all carriers, including nbn, to contribute funding at a rate of approximately $7.10 per month,
per chargeable premises. Chargeable premises are premises where a carriage service provider
(i.e. a provider of retail broadband services) provides a designated broadband service. A
designated broadband service is a carriage service provided over a fixed line that is
technically capable of providing download transmission speeds of 25 megabits per second
(Mbps) or more.
This Bill operates in tandem with Schedule 4 to the Telecommunications Legislation
Amendment (Competition and Consumer) Bill 2017 (TLA (CC) Bill). The TLA (CC) Bill sets
out the various charge collection and other administration arrangements associated with the
Regional Broadband Scheme. Together, the two Bills ensure the continuity of essential
regional broadband services.
Rolling out superfast broadband infrastructure to regional Australia is very expensive and nbn
has determined that utilising fixed wireless and satellite technologies is the quickest and most
cost effective way to do so. Even still, these networks are expected to incur a net cost of
$9.8 billion (in net present value terms) over thirty years.
nbn currently funds these net costs through an internal cross subsidy from its fixed line
networks. The money collected from the proposed new industry charge will be used to fund
nbn's net costs for constructing and operating fixed wireless and satellite network
infrastructure in order to supply wholesale services in regional Australia, replacing the
company's opaque internal cross subsidy.
The assistance will be in the form of contracts and/or grants made by the Secretary of the
Department to nbn. The proposed charge will be known as the Regional Broadband Scheme
(the Scheme) and was foreshadowed by Government in its December 2014 response to the
Vertigan Review (the Independent Cost-Benefit Analysis of Broadband and Review of
Regulation).
No human rights issues were raised during consultation.
Human rights implications
The Bill does not engage any of the applicable rights or freedoms.
Conclusion
This Bill is compatible with the human rights and freedoms recognised or declared in the
international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny)
Act 2011.
61
NOTES ON CLAUSES
TELECOMMUNICATIONS (REGIONAL BROADBAND SCHEME)
CHARGE BILL 2017
Clause 1 - Short title
Clause 1 provides that the Bill, once enacted, may be cited as the Telecommunications
(Regional Broadband Scheme) Charge Act 2017.
Clause 2 - Commencement
Clause 2 of the Bill provides for the commencement of the provisions in the Bill.
Clauses 1 and 2 of the Bill, and any other provisions not covered in the table provided at
subclause 2(1), will commence on the day on which the Act receives the Royal Assent.
Clauses 3 to 19 of the Bill commence at the same time that Schedule 4 to the
Telecommunications Legislation (Competition and Consumer) Bill 2017 (TLA(CC) Bill).
Schedule 4 to the TLA(CC) Bill commences on the day after it receives the Royal Assent.
Linking the commencement of clauses 3 to 19 to the commencement of Schedule 4 to the
TLA(CC) Bill ensures that the new industry charge imposed under this Bill comes into effect
at the same time as the legislative requirements relating to the assessment, collection and
recovery of the new charge.
Subclause 2(2) provides that any information in column 3 of the table is not part of the Act.
Clause 3 - Definitions
Clause 3 sets out definitions of key terms used in the Bill.
'ACCC' refers to the Australian Competition and Consumer Commission.
The term 'administrative cost component' has the meaning given by clause 16 of the Bill.
The ordinary meaning of the term, 'amount' has been modified to include a nil amount. This
is important as it is possible for a charge liability to be nil.
The term 'annual administrative cost amount', for an eligible financial year, has the meaning
given by clause 14.
The term 'annual base amount', for an eligible financial year, has the meaning given by
clause 10.
The term 'annual chargeable premises amount', for an eligible financial year, has the
meaning given by clause 9.
62
The term 'base component', for a month in a financial year, has the meaning given by clause
12.
The terms 'carriage service provider', 'fixed wireless broadband service', 'person' and
'telecommunications network' have the same meaning as in the Telecommunications Act
1997 (Tel Act).
The terms 'chargeable premises associated with a local access line', 'designated
administrative costs', 'eligible financial year', 'eligible funding recipient', 'potentially
concessional premises' and 'satellite broadband service' are defined as having the same
meaning as in Part 3 of the Telecommunications (Consumer Protection and Service
Standards) Act 1999 (TCPSS Act), as proposed to be amended by Schedule 4 to the
TLA(CC) Bill.
The term 'combined component cap' for a month has the meaning given by clause 17A.
The term 'connection', in relation to a telecommunications network, has the same meaning as
in the Tel Act. A note accompanies the definition to refer readers to section 7 of the Tel Act
and section 18A of the Acts Interpretations Act 1901.
The term 'eligible service' has the same meaning given by clause 152AL of the Competition
and Consumer Act 2010.
The term 'indexation factor' for a financial year has the meaning given by clause 18.
The term 'index number', in relation to a quarter, means the All Groups Consumer Price
Index number, being the weighted average of the 8 capital cities, published by the Australian
Statistician in respect of that quarter.
The term 'month' means calendar month.
The term 'monthly administrative cost amount' relating to a month in an eligible financial
year, has the meaning given by clause 15.
The term 'monthly base amount' has the same meaning given by clause 11.
Clause 4 - Extension to external Territories
Clause 4 extends the Bill to each external Territory referred to in section 10 of the Tel Act.
That Act refers to the Territory of Christmas Island, the Territory of Cocos (Keeling) Islands
and any other external Territories prescribed by regulations. A note is also included to remind
readers of a similar application provision under section 7 of the TCPSS Act.
Clause 5 - Act to bind Crown
Clause 5 provides that the Bill binds the Crown in right of each of the States, of the
Australian Capital Territory and of the Northern Territory. However, it does not bind the
Crown in right of the Commonwealth.
63
Clause 6 - Imposition of charge
Clause 6 provides that if a person has an annual chargeable premises amount for an eligible
financial year, the charge will be imposed on that amount. This provision establishes the tax
for constitutional purposes.
Proposed new Part 3, Division 4 of the TCPSS Act (refer item 13 of Schedule 4 to the
TLA(CC) Bill) sets out the entities which must pay the charge and the type of premises which
are chargeable premises (i.e. specified premises associated with a local access line). It also
establishes exemptions for small networks and local access lines transferring to nbn, and
potentially concessional premises that may be excluded for the first five eligible financial
years from a person's chargeable premises in the (see clause 20 of this Bill).
Clause 7 - Amount of charge
Clause 7 provides that the amount of the charge imposed by the Bill on an annual chargeable
premises amount for a particular eligible financial year will be equal to that annual
chargeable premises amount.
Clause 8 - Person liable to pay charge
Clause 8 provides that the charge imposed by this Bill on a person's annual chargeable
premises amount for an eligible financial year is payable by that person.
Proposed new Part 3, Division 7 of the TCPSS Act (refer item 13 of Schedule 4 to the
TLA(CC) Bill) establishes administration of the charge, including the method and deadline
for the Australian Consumer and Media Authority's (ACMA) assessment of a carrier's
charge liability and the due date of the charge.
Under proposed new section 102E of the TCPSS Act (refer item 13 of Schedule 4 to the
TLA(CC) Bill), the charge is a debt due to, and is recoverable in a court of competent
jurisdiction, by the ACMA on behalf of the Commonwealth.
Clause 9 - Annual chargeable premises amount
The annual chargeable premises amount is the amount of charge a person will have to pay for
an eligible financial year.
Under clause 9 of the Bill, a person's annual chargeable premises will be the total of the
person's annual base amount and the person's annual administrative cost amount for the
eligible financial year (see Table 1). Annual base amount and annual administrative cost
amount have the meanings provided in clause 10 and clause 14 of the Bill respectively.
Table 1. Example - calculation of a carrier's annual
chargeable services amount in the first eligible financial
year
Annual base amount $1,276,200.00
Annual administrative cost amount $2,278.80
Annual chargeable services amount $1,278,479.00
64
Subclause 9(2) provides for the annual chargeable premises amount that is not a whole
dollars amount and is above zero, to be rounded to the nearest dollar (rounding 50 cents
upwards). Subclause 9(3) specifies that the term 'dollar' includes $0 for the purposes of
subclause 9(2).
The ACMA invoices the charge on an annual basis because doing so limits the reporting
compliance burden on industry and facilitates the Commonwealth providing funding to
eligible funding recipients on a regular basis. The method for providing this funding is
established in Division 2 and 3 of proposed new Part 3 of the TCPSS Act (refer item 13 of
Schedule 4 to the TLA(CC) Bill).
Clause 10 - Annual base amount
A person's annual base amount is the annual amount of Table 2. Example -
charge attributable to the base component of the charge calculation of a carrier's
(refer clause 12). Money raised from carriers' annual base annual base amount in the
amounts will be used to pay eligible funding recipients first eligible financial year
under contracts or grants made in reliance of section 80 of Monthly
proposed new Part 3 of the TCPSS Act. A person's annual base amount
base amount is summed with the person's annual July $70,900.00
administrative cost amount to calculate their annual August $70,900.00
chargeable services amount. September $70,900.00
October $70,900.00
Subclause 10(1) sets out the calculation for deriving a
November $70,900.00
person's annual base amount: the annual base amount is the
sum of the person's monthly base amounts for each of the December $70,900.00
January $141,800.00
months in the eligible financial year (see Table 2). Monthly
February $141,800.00
base amount has the meaning provided in clause 11 of the
Bill. March $141,800.00
April $141,800.00
Subclause 10(2) provides that if there are no chargeable May $141,800.00
premises associated with a local access line of the person June $141,800.00
for a particular month, that month should be disregarded for Annual base $1,276,200.00
the purposes of calculating the annual base amount. amount
Clause 11 - Monthly base amount
A person's monthly base amount is the amount of charge attributable to the base component
of the charge (refer clause 12) for a particular month.
Clause 11 sets out the calculation for deriving a person's monthly base amount for a
particular month. In simple terms, the amount is derived by multiplying the total number of
chargeable premises in relation to the person for that month by the base component (refer
clause 12). This means that if the person's number of chargeable premises varies from month
to month, the monthly base amount for a particular month will reflect that variation.
The clause includes a note that if the month is in one of the first five eligible financial years, a
person's total number of chargeable premises may be reduced under clause 20 of the Bill.
This would have the effect of reduce the person's monthly base amount for that month.
65
The charge is calculated on a monthly basis to help ensure that fluctuations in a person's
number of chargeable premises are accurately reflected in their charge liability. Monthly
charging also aligns with the telecommunications industry's billing cycle.
Table 3. Example - calculation of a carrier's monthly base
amount in the first financial year
Month Number of Base Monthly
chargeable premises component base amount
July 10,000 $7.09 $70,900.00
August 10,000 $7.09 $70,900.00
September 10,000 $7.09 $70,900.00
October 10,000 $7.09 $70,900.00
November 10,000 $7.09 $70,900.00
December 10,000 $7.09 $70,900.00
January 20,000 $7.09 $141,800.00
February 20,000 $7.09 $141,800.00
March 20,000 $7.09 $141,800.00
April 20,000 $7.09 $141,800.00
May 20,000 $7.09 $141,800.00
June 20,000 $7.09 $141,800.00
Clause 12 - Base component
Subclause 12(1) outlines the base component that will apply for a month in the first eligible
financial year that the charge accrues, that is financial year 2018-19. The base component
will either be:
(a) $7.09; or
(b) any other amount the Minister has determined under subclause 12(4).
Subclauses 12(2) and (3) outline the base component that will apply for a month in the
second and subsequent eligible financial years that the charge applies. The base component
will be either the previous base component multiplied by the indexation factor (refer clause
18 of the Bill), or any other amount the Minister has determined under subclause 12(4).
Under subclause 12(4), the Minister is conferred the discretion (by legislative instrument) to
determine a specified amount for the base component in relation to each of the months in the
first financial year or another specified financial year. A note is included to refer readers to
clause 19, which provides for disallowance of determinations.
This discretion is necessary to ensure that the base component continues to reflect the size of
the charge base as it evolves over time. This will reduce the risk that the Scheme over or
under recovers the amount of money necessary to fund nbn's (and other eligible funding
recipient's) fixed wireless and satellite networks.
The Minister's determination power is not unconstrained. Under subclause 12(5) the Minister
must have regard to the following matters in making a determination under subclause 12(4):
(a) the most recent advice that the ACCC has given to the Minister under clause 13;
66
(b)such other matters (if any) as the Minister considers relevant, for example, advice
from the Department.
Per subclause 12(6), the Minister cannot make a determination about the base component
unless the ACCC has given advice to the Minister under clause 13. Additionally, per
subclause 12(7) the Minister may not raise the base component and administrative cost
components above the combined component cap of $10 (see clause 17A).
Clause 13 - Advice by the ACCC about base component
Subclause 13(1) provides for the ACCC to give the Minister advice in relation to the exercise
of the Minister's power to determine the base component under subclause 12(4). The ACCC
is required to do so at least once every five years from commencement of the Act. Once every
five years is often enough that the ACCC can recommend the base component be adjusted in
the face of changing market conditions but not so often that it erodes carriers' certainty about
the amount of change they are required to pay. It is expected that the ACCC will consult with
industry as it prepares its advice.
Subclauses 13(2) and (3) set out the matters which the ACCC must and may have regard to in
giving its advice. The ACCC must be guided by the principle that charge amounts received
by the Commonwealth under the Bill as are attributable to the base amount should be
sufficient to offset reasonable losses incurred by the eligible funding recipients in relation to:
the connection of premises to a fixed wireless or satellite telecommunications
network;
the supply of eligible services to a carriage service provider (CSP) in order that a CSP
can provide fixed wireless or satellite broadband services to a consumer at the
premises;
facilities used to supply fixed wireless and satellite broadband services; or
matters incidental or ancillary to the above.
The ACCC may also have regard to any other matters it considers relevant. For example,
these may include the availability of new technologies and any charge offset certificates
issued under the TLA(CC) Bill. The ACCC should, in conducting its analysis, consider the
Special Access Undertaking assessments undertaken to date, and the extent to which nbn has
incurred prudent costs in the deployment and operation of its fixed wireless and satellite
networks.
Subclause 13(4) makes clear that it is immaterial whether the losses incurred by eligible
funding recipients in relation to fixed wireless and satellite services were incurred before or
after the commencement of this Act. For example, nbn's losses began in 2010 when it began
rolling out its fixed wireless and satellite networks and are expected to continue into the
future. The amount received by the Commonwealth that is attributable to the base amount
should be sufficient to offset the whole of these losses.
Subclause 13(5) outlines that, in giving their advice under subclause 13(1), the ACCC must
assume that Division 6 of Part 3 of the Telecommunications (Consumer Protection and
Service Standards) Act 1999 had not been enacted. Division 6 relates to charge offset
certificates.
67
Subclause 13(6) outlines that the use of the word "Regional" in the short title of the Act, in
the name of the Regional Broadband Scheme Special Account, or in new section 92A of the
TCPSS Act does not limit subclause 13(3).
Clause 14 - Annual administrative cost amount
A person's annual administrative cost amount is the Table 4. Example - calculation
annual amount of charge attributable to the of a carrier's annual
administrative cost component of the charge (refer administrative cost amount in
clause 16). Money raised from carriers' annual the first eligible financial year
administrative cost amounts will be used to pay the Monthly
ACMA and the ACCC for their administration of the administrative
Scheme. A person's annual administrative cost amount cost amount
is summed with the person's annual base amount to July $126.60
calculate their annual chargeable services amount. August $126.60
September $126.60
Subclause 14(1) sets out the calculation of a person's October $126.60
annual administrative cost amount for an eligible November $126.60
financial year. The amount is derived from the total of December $126.60
the person's monthly administrative cost amounts for January $253.20
each of the months in the eligible financial year February $253.20
(see Table 4). March $253.20
April $253.20
Subclause 14(2) clarifies that any month in which the May $253.20
carrier does not have any chargeable premises June $253.20
associated with a line for that month is disregarded from Annual base $2278.80
the annual calculation. amount
Clause 15 - Monthly administrative cost amount
A person's monthly administrative cost amount is the amount of charge attributable to the
administrative cost component of the charge (refer clause 16) for a particular month.
Clause 15 sets out the calculation for deriving a person's monthly administrative cost amount
for a particular month. It is derived by multiplying the total number of chargeable premises in
relation to the person for that month by the administrative cost component (refer clause 16,
and see Table 5). Like the monthly base amount, this means that if the person's number of
chargeable premises varies from month to month, the monthly administrative cost amount for
a particular month will vary.
The clause includes a note that if the month is in one of the first five eligible financial years, a
person's total number of chargeable premises may be reduced under clause 20 of the Bill.
This would have the effect of reducing the person's monthly administrative cost amount for
that month.
68
Table 5. Example - calculation of a carrier's monthly administrative
cost amount in the first financial year
Month Number of Administrative Monthly
chargeable premises cost component administrative
cost amount
July 10,000 $0.01266 $126.60
August 10,000 $0.01266 $126.60
September 10,000 $0.01266 $126.60
October 10,000 $0.01266 $126.60
November 10,000 $0.01266 $126.60
December 10,000 $0.01266 $126.60
January 20,000 $0.01266 $253.20
February 20,000 $0.01266 $253.20
March 20,000 $0.01266 $253.20
April 20,000 $0.01266 $253.20
May 20,000 $0.01266 $253.20
June 20,000 $0.01266 $253.20
Clause 16 - Administrative cost component
Subclauses 16(1) - (5) (inclusive) sets out the administrative cost component for each month
in the first five eligible financial years. The first year amount is $0.01266, the second year
amount is $0.0172 and the fourth year amount is $0.0027. Nil amounts are the default
amounts for years three and five. The Minister can determine another amount for any of these
years or subsequent years under subclause 16(8).
The administrative cost component reflects the amount of funding necessary for the ACCC
and ACMA to administer the Scheme. This is why the amount is highest in the first and
second years, when the ACCC and ACMA are setting up their systems and operationalising
their processes. There is an amount in the fourth year, when the ACCC is expected to review
the base and administrative cost components. A nil amount occurs in the third and fifth year
because the ACCC and ACMA do not expect to have any new additional direct costs in those
years.
Subclause 16(6) provides that the administrative cost component for each month in the sixth
eligible financial year or a later financial year will be the amount calculated to five decimal
places (rounding up if the sixth decimal place is five or more) using the formula in subclause
16(7) or any other amount determined under subclause 16(8). The formula is the
administrative cost component for a month in the previous financial year multiplied by the
indexation factor for the financial year (see clause 18).
Under subclause 16(8), the Minister may, by legislative instrument, determine a single
specified amount in relation to each of the months in a specified financial year. This ensures
the Minister can change the administrative cost component if it is under or over recovering
the ACCC and ACMA's administrative costs. A note is included to refer readers to clause 19,
which provides for disallowance of determinations.
Like the Minister's power to determine the base component, the Minister's power to
determine the administrative cost component is constrained. Under subclause 16(9), the
Minister is required to consider the following when deciding to make a determination:
69
(a) the most recent advice that the ACCC has given to the Minister under clause 17;
(b) any other matters considered relevant by the Minister.
The Minister cannot make a determination under subclause (8) unless the ACCC has given
advice to the Minister under clause 17 (see subclause 16(10)), and in compliance with
subclause 16(11), the Minister may not increase the base component and administrative cost
components above the combined component cap of $10 (see clause 17A).
Clause 17 - Advice by the ACCC about administrative cost component
Clause 17 largely mirrors clause 13, however it relates to the advice the ACCC gives in
respect of the administrative cost component.
Subclause 17(1) provides for the ACCC to give the Minister advice in relation to the exercise
of the Minister's power under subclause 16(8). The ACCC is required to provide advice to
the Minister at least once every 5 years from the commencement of the Act.
Paragraph 17(2)(a) sets out that the ACCC must be guided by the principle that charge
amounts received by the Commonwealth under the Bill as are attributable to the annual
administrative cost amount should be sufficient, over time, to offset designated administrative
costs incurred after the start of the first eligible financial year. The ACCC may also have
regard to any other matters it considers relevant (see paragraph 16(2)(b)).
Clause 17A - Combined component cap
Subclause 17A(1) provides that the sum of the base component for a month and the
administrative cost component for that month must not exceed the combined component cap
for that month. Setting a cap on the sum of the base and administrative cost components
supports wholesale market competition by providing regulatory certainty for investors that
the level of taxation under the new Act cannot exceed the specified amount.
Subclause 17A(2) provides that the combined component cap for a month in the first eligible
financial year is $10. Under subclause 17A(3), the combined component cap for the second
and subsequent financial years is calculated by multiplying the previous combined
component cap by the indexation factor (see clause 18).
Clause 18 - Indexation factor
Subclause 18(1) provides that the indexation factor for a financial year is the number
calculated, to 3 decimal places (rounding up if the fourth decimal place is 5 or more), using
the stated formula.
Subclauses 18(2) and (3) outline the correct index number to be used and the index reference
period for the purposes of the indexation factor calculation. Subclause 18(3) provides that if
the Australian Statistician changes the index reference period for the Consumer Price Index
(CPI), then only the index number published in terms of the new index reference period must
be used. However, subclause 18(2) provides that any later publication of an index number by
the Australian Statistician must be disregarded for the purposes of clause 12.
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This method of indexation is consistent with that used in the Income Tax Assessment Act
1997. The CPI was chosen as the index number in accordance with Commonwealth
standards.
Clause 19 - Disallowance of determinations
To maximise opportunity for Parliamentary scrutiny of determinations made under
subclauses 12(4) or 16(8), the Bill provides that such determinations only take effect after the
disallowance period outlined below.
Subclauses 19(2) and (3) set out the process for disallowance of determinations under this
Act. Either House of Parliament may, following a motion upon notice, pass a resolution
disallowing the determination. Notice and timeframe requirements are set out at subclauses
19(2)(a) and (b). If a resolution is not passed, the determination will take effect on the day
immediately after the last day upon which such a resolution could have been passed
(assuming fulfilment of notice requirements).
Subclause 19 (4) makes clear that section 42 (disallowance) of the Legislation Act 2003 does
not apply to the determination. Two notes are included to remind readers that the
15 sitting day notice period mentioned in paragraph (2)(a), and the 15 sitting day
disallowance period mentioned in paragraph (2)(b), are consistent with paragraphs 42(1)(a)
and (b) of the Legislation Act 2003, respectively.
Clause 20 - Transitional - reduction in total number of chargeable premises
Clause 20 provides for transitional arrangements for a carrier's chargeable premises for a
month in the first five eligible financial years to be reduced by up to 25,000 if the carrier has
up to 25,000 potentially concessional premises for that month. Potentially concessional
premises is defined in section 96A of proposed new Part 3 of the TCPSS Act. In summary,
they are chargeable premises that are residential or small business premises.
Subclause 20(1) provides that if the total number of potentially concessional premises in
relation to a person for a month in one of the first five eligible financial years is 25,000 or
more, then the total number of chargeable premises associated with a local access line of the
person for that month is to be reduced by 25,000 (see Table 6 and 7).
Subclause 20(2) provides that if the total number of potentially concessional premises in
relation to a person for a month in one of the first five eligible financial years is less than
25,000, then the total number of chargeable premises associated with a local access line of
the person for that month is to be reduced by the total number of potentially concessional
premises for that month (see Table 8 and 9).
The threshold of 25,000 maintains a sizeable charge base while giving carriers time to adjust
to paying the charge. The transitional charge concession supports wholesale market
competition by providing relief to smaller carriers that may be disproportionately affected by
the charge. It also provides a smooth transition for small carriers if they grow their businesses
above 25,000 premises over the first five years of the new tax arrangement.
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Table 6. Example - impact of clause 20 on a carrier that has more than 25,000
potentially concessional premises in a month in the first financial year
Month Number of Number of Number of Monthly Monthly
chargeable potentially chargeable base administrative
premises concessional premises amount cost amount
before premises after
application of application
clause 20 of clause 20
July 100,000 30,000 75,000 $531,750 $949.50
August 100,000 30,000 75,000 $531,750 $949.50
September 100,000 30,000 75,000 $531,750 $949.50
October 100,000 30,000 75,000 $531,750 $949.50
November 100,000 30,000 75,000 $531,750 $949.50
December 100,000 30,000 75,000 $531,750 $949.50
January 200,000 60,000 175,000 $1,240,750 $2215.50
February 200,000 60,000 175,000 $1,240,750 $2215.50
March 200,000 60,000 175,000 $1,240,750 $2215.50
April 200,000 60,000 175,000 $1,240,750 $2215.50
May 200,000 60,000 175,000 $1,240,750 $2215.50
June 200,000 60,000 175,000 $1,240,750 $2215.50
Table 7. Annual amounts calculated from Table 6 above
Annual base amount $10,635,000
Annual administrative cost amount $18,900
Annual chargeable premises amount $10,653,900
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Table 8. Example - impact of clause 20 on a carrier that has less than 25,000 potentially
concessional premises in a month in the first financial year
Month Number of Number of Number of Monthly Monthly
chargeable potentially chargeable base administrative
premises concessional premises amount cost amount
before premises after
application of application
clause 20 of clause 20
July 100,000 10,000 90,000 $638,100 $1139.40
August 100,000 10,000 90,000 $638,100 $1139.40
September 100,000 10,000 90,000 $638,100 $1139.40
October 100,000 10,000 90,000 $638,100 $1139.40
November 100,000 10,000 90,000 $638,100 $1139.40
December 100,000 10,000 90,000 $638,100 $1139.40
January 200,000 20,000 180,000 $1,276,200 $2278.80
February 200,000 20,000 180,000 $1,276,200 $2278.80
March 200,000 20,000 180,000 $1,276,200 $2278.80
April 200,000 20,000 180,000 $1,276,200 $2278.80
May 200,000 20,000 180,000 $1,276,200 $2278.80
June 200,000 20,000 180,000 $1,276,200 $2278.80
Table 9. Annual amounts calculated from Table 8 above
Annual base amount $11,485,800
Annual administrative cost amount $20,509.20
Annual chargeable premises amount $11,506,309
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