Competitive_Carriers_Coalition_Inc by cuiliqing


									Response to NBN Fibre-to-the-Premises in Greenfields
             Estates Consultation Paper

                     June 2009

Cost Versus Value – the Market has Spoken

The Discussion paper raises the issue of the higher cost of deploying FTTH compared to
copper access networks. The CCC submits that the higher costs associated with FTTH
should not be overstated, and are now so close that the consumer service benefit far
outweighs any cost advantage

      The major cost component of any terrestrial access technology in earth works, and
       this cost is not affected by the choice of fibre over copper.

      The cost difference of the Layer 1 infrastructure (copper vs. fibre), is now very
       little, particularly when copper is installed in a form to accommodate ADSL
       based broadband. To enable broadband over copper either a copper cable must be
       installed from the nearest exchange to the Housing development boundary or an
       ISAM or CMUX must be installed operating off a fibre cable from the nearest
       local exchange.

      Maintenance costs on fibre are generally lower than for copper.

Another area where costs are thought to be higher in an FTTH network is customer
premises equipment. Comparison between fibre and copper is difficult in Australia
because of the closely integrated nature of Telstra. For example, in Australia, a consumer
who wants a phone, broadband service and Pay TV is forced to pay for three items of
CPE, (copper boundary box, ADSL modem and set-top box) whereas in other markets
around the world these three CPE devices would be integrated into a single Fibre to the
Home CPE device.

Telstra is able to reduce initial upfront costs by cross-subsidising these start-up costs
against on-going upstream network costs in the form of line rental. Consumers still face
additional charge for copper based broadband services such as a modems or set-top-boxes
which are either paid for up-front or attract a minimum contract term. The impression of
lower CPE costs is therefore somewhat artificial and dependent on continuing
arrangements that lock in sub-optimal competitive conditions.

Therefore, discussions about overall costs are obscured somewhat by the question of who
pays for the installation. However, ultimately, all costs are passed on to the home buyer
either in the form of up front costs added to the property or through an on-going cross
subsidy. This tends to make the costs historically charged by Telstra look lower because
the on-going high line rental charge represents a monopoly rent.

Nevertheless, the market is moving inexorably toward a higher standard requirement for
telecommunications infrastructure in new residential developments.

Land developments occur in a competitive market. Increasingly, the deployment of
FTTH in those developments is becoming a competitive necessity, not an optional extra.

The announcement of the NBN with its strong FTTH component will only hasten the
universal expectation by consumers that any new home they are offered will be
connected to a future proof, FTTH access network.

Today home buyers, developers and local governments are not only increasingly insisting
on FTTH, they are also refusing to allow Telstra to deploy RIM (remote integrated
multiplexer) access networks. RIM networks represent a lower capital cost than even
copper to exchange networks, yet the limitation they put on broadband connectivity has
created a serious backlash in neighbourhoods such as Gungahlin in the ACT.

Currently, estates where copper and RIM solutions have been deployed in favor to fibre
attract criticism and it is left to the local community to find a way to overcome the
handicaps imposed by regulatory failure and the consequential decisions to deploy RIM
technology. The true costs on the impact that this has on land values will never be known
as potential buyers simply look for other properties rather than take this issue on.

Developers are required to meet technology and interconnect standards at present for
communications and other utility infrastructure (see below).

It is in this context – one where FTTH is now clearly becoming the technology of choice
for a market has that has drawn its own conclusions about value versus costs – that the
choices about the regulatory arrangements pertaining to these developments must be

From this, it can be concluded that:

      The Government should legislate to directly require that all developments deploy
       FTTH technologies, knowing that this will not place an unreasonable burden on
       home buyers, but will rather ensure that their reasonable expectations of standards
       of service will be met.

Market design in NBN and other Utilities

The Government has clearly indicated that the NBN will be strictly structurally separated
from any retail activity. In this regard, the post NBN communications infrastructure
market will be structurally similar to the power and gas industries. It is instructive to
therefore consider how these industries recover the cost of new infrastructure and the
applicability of this model to communications.

The CCC understands that developers must meet the specifications required by the owner
of the network with which their development will interconnect. The power utility
provides the “trunk” connection into new developments, and the developers pay for the
extension of the access or distribution network from that point. The costs of this
infrastructure – along with the cost of roads, sewerage and other basic facilities – are
recovered from the sale of land.

Communications has been somewhat different because the existence of the USO and
Telstra as the USP. This has meant that Telstra is in effect subsidized to provide access to
new homes.

Currently developers have the obligation for the costs of installing the ducts used by
Telstra. Only where they provide an alternate to Telstra can they be released from this
obligation, with Telstra having an effective ‘veto’ sign-off power on all developments.
This is because Telstra has “sign off” authority to declare if the facilities meet the
appropriate standard to deliver the USO.

Where the developer wants a Telstra solution, they either build the ducts and are forced to
sign over the ownership of these assets to Telstra, or they pay Telstra to install the ducts.
Telstra then charges access to any third party who wants to install competitive
infrastructure using those ducts.

In some places where developers have had third parties install FTTH, Telstra has
exercised its rights as the USP to lay copper alongside the FTTH, with the effect that this
undermines the business case for the FTTH owner. In other places, Telstra’s privileged
access to Foxtel content has been leveraged to disadvantage alternative FTTH access
providers. Telstra’s vertical and horizontal integration means it can deny access to
services that the FTTH owner needs to be able to attract consumers to their network.

In other more recent cases, it is understood that Telstra has handed over the USO to the
alternative network owner, with some payment representing the portion of the USO
applicable to that area.

Several things can be concluded from the above.

      The future design of the USO is important to the viability of independent FTTH
       developments, both because it provides a direct subsidy and because it can be
       used to frustrate competition in other ways by Telstra.
      The industry structure envisaged for the NBN fits neatly with the industry
       structure in power, and there is therefore a model for the various roles parties of in
       financing and responsibilities for meeting standards and other requirements.
       Figure 2 on Page 8 of the discussion paper appears to reflect such an arrangement
      Conversely, any regulatory arrangement that does not effectively end Telstra
       vertical and horizontal integration can not succeed, as evidenced by the many
       failed attempts at making the regulatory access arrangements in Australia function
      Structural separation of the network owner/wholesaler should be strictly required
       in all Greenfields developments.

USO Distortions

The future of USO in NBN world is yet to be determined but in a structurally separated
industry where there is a new publicly funded network owner with an obligation to reach
100% coverage, it clearly requires major overhaul.

A “clean sheet” approach in a post NBN world would most likely logically suggest that
the appropriate USO provider is the network operator/wholesaler. They would have an
obligation to provide access services capable of delivering a minimum set of services.

These services should be strictly defined, but it should create no hardship for the NBN
network owner to suggest that the access platform should be capable of delivering
interconnected voice services and broadband to a minimum 100mbps, which is simply in
line with the Government’s already stated requirements.

On top of the obligation on the NBN company to provide this basic access as the new
USP could be a retailer of last resort arrangement similar in nature to the Australian
Broadband Guarantee.

This arrangement should also be in place for greenfields developments in the interim. The
precise nature of the future USO need not be defined to allow developments to proceed
immediately, only the general outline of its future operation.

Separated network owner/wholesalers should receive USO payments in exchange for
taking on the obligation to provide a basic access service. The ABG could be used as a
model in the short term to ensure that a retailer of last resort option was available.

In practice, it would seem unlikely that a retailer of last resort would ever be called upon
in new developments as the market should develop such that the developer and network
owner/wholesaler have a shared interest in attracting competing retail service providers.

The CCC is aware that Telstra is presently proposing to assume more of the deployment
cost of FTTH networks from developers on the basis that it is vertically integrated and
the recipient of USO subsidy.

This is a dangerous development. Clearly, it will appeal to developers in the short term to
shift this cost to Telstra, and they are likely to advocate in favor of this approach.

But in the longer term it will be to the detriment of consumers and create complication in
the transition to the NBN. It is clearly a strategy by Telstra intended to cement its
position of market dominance, in the face of explicit indications from the Government
that it intends for this vertical dominance to be removed. If this was not the case, Telstra
would have shown greater enthusiasm for FTTH years ago instead of seeking to
discourage its deployment in other locations.

The Government should be guided by its judgment that the long term interest of end users
is best served by a structurally separated industry and insist that there is structural
separation of FTTH assets in new estates. The Government should also indicate to
developers that it would expect that FTTH facilities of an appropriate standard could be
vended into the NBN at a later stage. This would provide further comfort to developers
that they could “cut the apron strings” to Telstra.


David Forman

Executive director
02 62625821


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