NBN Update 7 – The Current State of Play

26 May 2011

Contacts

By Nick Abrahams and Warwick Andersen

Barely a day goes by without the NBN making front page news. However, it can be difficult to know what is actually happening with NBN. This article summarises the progress of the NBN and some of the major issues.

Corporate Plan

The NBN Co corporate plan was released in December 2010.  This plan shows total funding requirements of $40.9 billion with $27.5 billion to come from the government and the remainder from earnings and private debt.  The NBN will have a total of 121 points of interconnect and a wholesale price of $24 per premises for a basic 12Mbps service.  There has been significant debate in the media recently over the CVC (effectively a usage charge) which is also to be charged by NBN Co.  It has been argued that this charge significantly disadvantages smaller Retail Service Providers (RSPs) as they will not have the subscribers over which to spread the charge.  Smaller RSPs may have to contract with larger service aggregators rather than contracting directly with NBN Co.  Some other key points from the plan are as follows:

  • services of up to 1Gbps will be offered over fibre reaching 93% of the population;
  • 4% of premises will be connected by wireless and 3% by satellite;
  • network construction is to be complete by June 2018 (but this has recently been extended to December 2020); and
  • a peak of 5900 premises will be passed per day during construction.
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Services so far

In Tasmania, commercial NBN services commenced in August 2010 in the three first release sites.  A few key points in relation to the Tasmanian rollout:

  • seven second release sites are currently under construction;
  • the third release sites include the large population centres of Hobart and Launceston;
  • Tasmania has passed “opt-out” legislation to increase take-up (i.e. every premises will have the NBN installed unless the owner opts out); and
  • five RSPs are offering services in Tasmania and pricing varies significantly between the providers.

On the mainland, trial services have commenced in Armidale, the first of the first release sites.   The current state of the rollout can further be summarised:

  • the remaining four first release sites are under construction, and trial services will be offered in these areas soon;
  • construction of the 19 second release sites has been delayed (though agreement has now been reached with Telstra for access to its facilities for the purposes of building the second release sites); and
  • 14 RSPs have signed up to provide trial services in the first release sites and others have indicated interest.
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Tender Process

A number of significant tenders have already been awarded by NBN Co, including as follows:

  • the recently announced $100m deal with Optus and IPSTAR to provide the interim satellite solution (covering the final 3% of the population) which will be in place until NBN Co launches its own satellites in 2015;
  • Corning’s $1.2 billion deal to provide fibre optic cabling; and
  • IBM’s $200m prime systems integration agreement.

The main construction tenders have however stalled.  NBN Co considered that all 14 tenders (a “who’s who” of construction in Australia) offered poor value.  Patrick Flannigan (NBN Co's head of construction) also resigned and was followed shortly thereafter by Nick Sotiriou (NBN Co’s manager of cost and resource).  NBN Co has indicated that it is now negotiating with just one tenderer and that an announcement is imminent.

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Telstra

An agreement with Telstra is essential for the NBN to be delivered on time and on budget.  The timeline of NBN Co’s relationship with Telstra is as follows:

  • September 2009: Legislation was introduced by the Government to achieve the separation of Telstra’s wholesale and retail business.  Under the legislation Telstra would be barred from bidding from future wireless spectrum and be forced to sell its hybrid fibre coaxial cable assets should it choose not to separate.
  • June 2010: NBN co and Telstra reached an in-principle agreement worth $11 billion (if completed) under which Telstra would:
    • allow NBN Co access to its infrastructure (pits, ducts, exchanges) for the purposes of building the NBN;
    • progressively migrate its fixed-line customers from its copper and cable networks to the NBN as it is rolled out;
    • be permitted to continue to use its cable network for the delivery of pay television services only; and
    • be relieved of the obligation to provide universal service.
  • February 2011: Interim deal reached between Telstra and NBN Co for access to Telstra’s infrastructure for the purposes of construction of the mainland first release sites.
  • March 2011: Planned shareholder agreement to vote on the final agreement between Telstra and NBN Co.  This meeting was delayed and commentators suggest that this vote will now not take place until Telstra’s AGM in November.
  • May 2011:  Interim deal reached between Telstra and NBN Co for access to Telstra’s infrastructure for the purposes of construction of the mainland second release sites.
  • Negotiations continue between Telstra and NBN Co with a deal rumoured to be close.
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Legislation

The legislation which establishes NBN Co and the regulatory environment in which it is to operate passed both houses of parliament in March (after extensive debate) and has since received Royal Assent.

There are two main parts to the legislation, the first of which is the National Broadband Network Companies Act.  This Act:

  • limits NBN Co to operating as a wholesale only telecommunications company, but there are extensive exemptions to this general rule which allow NBN Co to sell direct to carriers for any purpose (i.e. not just for resale), to utilities and to state and territory government road authorities; and
  • establishes the framework for the eventual sale of NBN Co and the making of regulations to set limits on private control of NBN Co post privatisation.

Existing carriers objected to the broad range of NBN Co’s potential direct customers, but the Acts were passed despite these objections.  NBN Co is therefore permitted to offer somewhat more than “wholesale only” services.

The second Act substantially related to the NBN is the Telecommunications Legislation Amendment (National Broadband Network – Access Measures) Act.  This Act:

  • subjects NBN Co to Freedom of Information laws;
  • is intended to make NBN Co’s activities transparent;
  • makes all of NBN Co’s services “declared” for the purposes of the telecommunications access regime, with the result that any access seeker can obtain services for the same price and on the same terms as any other access seeker;
  • makes NBN Co subject to ACCC oversight in relation to its services;
  • includes amendments to limit third parties “cherry picking” high profit areas and offering services in competition to NBN Co.

The anti-cherry picking provisions have been subject to significant comment.  It has been argued that the effect of these provisions is to lessen (rather than improve) competition.  However, it is difficult to see how the NBN could be successful on a nation-wide basis if it is subject to significant competition in high profit areas.

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Where to from here?

The next steps for NBN Co are to finalise arrangements with Telstra and also to lock in the main construction contracts.  NBN Co will then be in a position to rapidly progress with the rollout of the NBN.

 

Nick Abrahams is a specialist technology M&A and projects lawyer and is a partner.  Warwick Andersen is a Senior Associate in Nick's team.

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