NBN Co is taking a big risk – building a network without knowing how much it will be allowed to charge users

To spend tens of billions of dollars to build a telecommunications network – without knowing how much you can charge customers to use the network – is an extremely risky move.

But it is clear from today’s hearing of the NBN parliamentary committee – that is exactly what NBN Co is doing.

When the ACCC appeared at today’s hearing, it was asked about the ‘special access undertaking’ (SAU) to be lodged by NBN Co.

This is the legal document, to be lodged with the ACCC by NBN Co, which will set out the prices NBN Co intends to charge. If the ACCC approves the SAU, then NBN will be permitted by law to charge these prices.

We learned today that the ACCC has not yet approved the SAU.  In fact, the ACCC has not even received it – because NBN Co has not yet lodged it (even though, in NBN Co’s December 2010 corporate plan, the company said it would lodge the SAU by March 2011.)

With NBN Co going full steam ahead with building the network – it announced last week plans to connect another 485,100 premises – it is taking an extraordinary risk.

NBN Co has announced the prices it plans to charge. For example, it will charge a wholesale price of $24 per line per month for the entry level service (12 Mbps down and 1 Mbps up.)

But these prices have not been approved by the ACCC – and there is no guarantee that they will be. Since the SAU mechanism was introduced for telecommunications networks, there have been three SAUs lodged with the ACCC – and it rejected two of them.

The SAU will not set just one price, it will set prices for multiple services – the entry level 12 Mbps service, and a range of higher speed services.  It will also set a ‘price path’ – that is, how those prices will change over a period of up to thirty years.

It is quite possible that the ACCC might decide it is comfortable with the 12 Mbps price – but not with the 100 Mbps price. Or it might find that the opening prices are acceptable, but not the price path over time.

Unless the ACCC is comfortable with every substantial aspect of the SAU, it cannot approve it.  The law does not allow the ACCC to accept some parts of the SAU and reject others. (All it can do is reject the whole document while indicating the changes it would need to approve a modified document.)

All of this takes time – and the clock has not yet even started ticking because NBN Co has not yet lodged its SAU. 

The Act gives the ACCC at least six months to consider the SAU, with a power to extend the timeline if required.  Allowing for the various steps in the process – including for example issuing a discussion paper and seeking comment – in practical terms it is likely to take six to twelve months before a final decision is handed down.

Unless and until the SAU is accepted, NBN Co is facing major commercial risk.  It does not know whether its proposed wholesale prices will be accepted. 

The risk is compounded by the fact that the SAU is not the only way of setting pricing.  Another approach is for the ACCC to make an access determination which will set the prices NBN Co may charge.  It is perfectly possible that the ACCC will reject NBN Co’s SAU, and then make an access determination setting the prices which the ACCC thinks are appropriate.

To achieve the government’s required seven per cent return on the forty billion dollars plus of taxpayers’ money to be invested, NBN Co has a corporate plan which depends on two key variables – the number of services delivered on the network and the price it charges per service per month. 

But the ACCC will not even consider the seven per cent target in deciding whether or not to approve the pricing.  By law, it must consider different issues altogether – is the pricing ‘reasonable’ and is the SAU in the long term interests of end users?

No private sector company would commence building a network in these circumstances.  Indeed it was for precisely this reason that Telstra could not reach agreement with the Howard Government on upgrading its broadband network.  Telstra could not get certainty about the wholesale prices it would be permitted to charge, so its management concluded that it was too risky to proceed with investing the billions of dollars required for the upgrade.

Extraordinarily, though, NBN Co is off and racing – investing billions of dollars of money, all obtained from taxpayers, in building a network when it does not yet know what prices it will be permitted to charge.

The NBN is a venture which is fraught with financial risk. Proceeding to build without knowing what prices it will be allowed to charge substantially increases that risk.

It is a bit like bidding for a house at auction without knowing how much the bank will lend you. 

And it is a risk to which all taxpayers are exposed – because thanks to the Rudd-Gillard Government we are all compulsory investors in this ill-judged venture.