NBN Co – driving wholesale broadband prices ever higher

If you are a retail user of fixed broadband services in Australia today, the single most important person in determining the price you pay is David Thodey – the Chief Executive of Telstra.

Most Australians get their fixed broadband in the form of DSL (digital subscriber line) over the Telstra copper network.  Telstra is the market leader in retail DSL, and it also sets wholesale prices.

Fortunately, there are some limits on Telstra’s capacity to charge whatever it wants.  For one thing, about 1.4 million households (nearly 20 per cent of the total) are passed by the Optus cable network – so those households can go to another provider if Telstra charges too much.

But another limit is that Telstra is forced by law to rent its copper wires to its competitors.  This is called the ‘unconditioned local loop service’ (ULLS) and the ACCC sets the price – presently about $16 a month in most of Australia. 

Competitors can use the ULLS to combine Telstra’s copper with their own electronic equipment and provide broadband services to customers.  The competitive pressure from these offerings acts as a constraint on Telstra driving up its retail broadband prices.

If Labor’s national broadband network (NBN) comes to fruition, however, things will be very different.   Every home will be connected to the NBN; all other networks (including Telstra’s copper network and its cable network, and Optus’ cable network) will be legally barred from providing services to retail users; and the most important person in determining the price you pay will be Mike Quigley – the Chief Executive of NBN Co.

Mr Quigley will control the only fixed broadband network in Australia; using his network will be the only way for retail service providers (RSPs) such as Telstra, Optus, iiNet and TPG to provide you with a fixed broadband service.  So the wholesale price which Mr Quigley charges the RSPs will be critical to the price that your RSP charges to you.

Mr Quigley will not be free to charge whatever he wants; NBN Co’s wholesale pricing will be regulated by the ACCC.  But a discussion paper recently issued by NBN Co gives a good insight into how much Mr Quigley wants to use his monopoly power to drive up prices.

The discussion paper concerns a ‘special access undertaking’ that NBN Co will soon lodge with the ACCC.  This is a legal document which, if accepted by the ACCC, will determine the amount that NBN Co is able to charge for a thirty year period.

NBN Co is seeking ACCC approval, on its higher level plans, to increase prices by inflation plus five per cent each and every year.  Assuming inflation of two per cent, this would allow an opening price of $100 to rise to $711 by year thirty!

Broadband prices in Australia, and around the world, have been falling steadily for the last decade.  NBN Co is seeking approval to reverse this trend – and drive prices up very sharply.

Even in today’s imperfectly competitive broadband market in Australia, market leader Telstra could not get away with the kind of pricing which NBN Co proposes.

But in the new world, NBN Co will be a monopoly; indeed that is the explicit and stated policy objective of the Gillard Labor Government. 

To achieve this objective Labor has struck contracts between NBN Co and Telstra and NBN Co and Optus for Telstra and Optus to cease providing services over their own networks.  It has also passed legislation which makes it illegal to use new fixed networks to deliver retail broadband services in competition with NBN.

As a result, Labor has handed NBN Co extraordinary market power.  NBN Co plans to use that power to sharply increase its charges, over a thirty year period, on all but its most basic services. 

If you are a retail broadband user, you had better hope that the ACCC does not approve Mr Quigley’s special access undertaking.  If it does, broadband is going to be getting much, much more expensive.