ACCC approves Optus NBN deal

Australia's consumer watchdog has given the green light for NBN to take ownership of Optus' HFC network, with the telco to also transition its customers over to the NBN.
Written by Corinne Reichert, Contributor

The Australian Competition and Consumer Commission (ACCC) has granted final approval for the revised agreement covering the transition of Optus' hybrid fibre-coaxial (HFC) customers onto the fixed-line National Broadband Network (NBN), and the progressive acquisition and integration of parts of the telco's network with the NBN.

The ACCC said the final approval, announced on Friday morning, was based on whether the acquisition and transition would reduce competition in the field.

"The ACCC's assessment turns on the extent to which Optus and NBN Co are likely to compete absent the proposed acquisition," ACCC chairman Rod Sims said.

"Regardless of whether the proposed acquisition occurs or not, we judged that Optus and NBN Co would not compete with each other.

"As a result, the ACCC concluded that the proposed acquisition is unlikely to substantially lessen competition in any relevant market."

The original deal between NBN and Optus was approved by the ACCC in 2012, but Optus and NBN entered into a revised AU$800 million deal in December last year, allowing NBN to take ownership of Optus' HFC network.

The modified agreement came as a result of the Coalition government's decision to move away from a full fibre-to-the-premises (FttP) rollout to the present so-called multi-technology mix (MTM) network incorporating fibre to the node (FttN), fibre to the building (FttB), and HFC.

The ACCC on Friday said the original deal would have seen Optus eventually decommission its HFC infrastructure.

"The ACCC had regard to the need for regulatory certainty and its view that the balance of benefits and detriments identified by the ACCC in 2012 was not likely to have changed, despite policy and technological changes since then," Sims added.

"This was partly because Optus would still be unlikely to invest in significant upgrades of its HFC network in order to provide infrastructure-based competition beyond the short to medium term."

The revised agreement will place obligations on Optus to use the NBN for the next 15 years, and share spectrum with NBN before the HFC network is progressively handed over.

An estimated 3.27 million premises could be serviced by the HFC networks being taken over from Telstra and Optus, with customers beginning to be connected from March 2016.

Sims said the deal would also provide benefit to the public in providing greater choice for consumers.

"The ACCC acknowledges the broader proposal for NBN Co to acquire Optus' HFC network assets will allow it to utilise existing HFC infrastructure in rolling out the NBN, which is likely to generate cost savings," Sims said.

In June, the ACCC gave final approval to Telstra's customer migration plan, seven months after Telstra and NBN entered into a revised AU$11 billion deal allowing NBN to take ownership of Telstra's copper and HFC network assets.

Last month, the government released its draft Migration Assurance Policy detailing the process for customers to be migrated from Telstra's legacy copper network to the NBN. However, following this, both Telstra and the Department of Communications disputed the policy, arguing that the ACCC's draft decision to slash Telstra's wholesale fixed-line prices by 9.6 percent could hamper customer migration, as retailers would "have a profit motive to keep their customers on the higher-margin copper network for as long as possible".

"This would make migration to the NBN even harder to achieve, and put important revenue to NBN Co at risk. In this way, a cut to prices on the legacy network poses a serious danger to the success of the NBN policy," Telstra warned in a blog post.

The federal government mirrored this perspective, saying, "The department is concerned that the proposed price decrease for fixed-line services will discourage migration throughout the migration window, and could lead to a significant number of customers remaining on the old network in the lead-up to the disconnection date."

Optus, TPG, and the telcos that are part of the Competitive Carriers' Coalition (CCC) hit back at these arguments, saying a price slash would not impact customer migration to the NBN and that Telstra's costs had been misconstrued. They also claimed the submission by the federal government to an independent inquiry was inappropriate and "dangerous".

"At the core of the department's submission is the request that access prices be kept high now so that consumers don't face any price changes when they migrate to the NBN. This proposition is inconsistent with consumer interests and the matters that the ACCC has to take into account in setting access prices," Optus said in its submission [PDF].

Optus also claimed that the government department "appears to misunderstand" the basis upon which the ACCC made its draft decision into fixed-line pricing.

"The proposed access prices are largely based on Telstra's data and cost allocation factors. Costs in the model reflect the relevant use of Telstra's assets by services which caused those costs to arise. Changes to Telstra's cost of capital are the main driver of the price decline; and specifically lower government bond rates. This has little to do with ACCC discretion and nothing to do with NBN," Optus said.

"In addition, it is incorrect to claim that the decision limits Telstra's ability to recover costs. The modelling allows Telstra to recover all costs across all users. Consistent with the fixed principles, only costs caused by the provision of regulated services are to be recovered from access seekers. Other costs are recovered by Telstra across its full suite of non-regulated wholesale products and retail services.

"In fact, the current approach is more likely to achieve cost over-recovery because of the rollover of existing prices."

Earlier this month, Optus released its financial results for the second quarter of 2015, announcing an increase in net profit of 19.5 percent, from AU$164 million last year to AU$196 million this year.

Operating revenue was AU$2.3 billion for the second quarter of 2015, an 11.3 percent year-over-year growth in constant currency terms from the AU$2.1 billion reported during the same period last year.

Earnings before interest, tax, depreciation, and amortisation (EBITDA) grew by 7.3 percent for the quarter ending June 2015, from AU$597 million in the three months to June last year, to AU$641 million this year.

NBN, meanwhile, released its results for FY15 on Monday this week, reporting that over the past 12 months to June 30, it had grown revenue to AU$161 million, from AU$60 million last year; the number of premises connected to the network and ready for service had jumped to 1.2 million from 553,000; and the number connected services had grown from 210,000 to 486,000.

Despite the AU$1.5 billion loss, NBN claimed that it had met significant milestones and its full-year targets, as well as stating that its rollout is gaining momentum.

"NBN has not only met its targets; it has exceeded them," Morrow said in a statement. "These achievements come as a direct result of refinements we have made to the organisation, including improved business processes, the resetting of relations with our delivery partners, and increasing employee morale."

However, NBN also revealed in its three-year corporate plan that peak funding cost for the project will reach between AU$46 billion and AU$56 billion, with a base case peak funding target of AU$49 billion.

"Due to the long-term uncertainties, management is forecasting a range of possible outcomes. The corporate plan, together with an initial forecast of years beyond FY18, estimates a peak funding in the range of AU$46 billion to AU$56 billion," the company said on Monday.

"Management are targeting a base case peak funding of AU$49 billion, which includes a contingency of AU$4.6 billion for unforeseen risks inherent in a complex infrastructure build over multiple years. This contingency is intended to cover revenue, operating costs, and capex risks."

Australian Minister for Communications Malcolm Turnbull claimed the project would have cost around AU$30 billion more had the government retained Labor's pure FttP NBN model.

"The corporate plan shows that the multi-technology mix remains the most cost- and time-efficient means of completing the NBN, delivering upgrades six to eight years sooner, and at around AU$30 billion less cost than an all-fibre to the premises alternative," Turnbull and Finance Minister Mathias Cormann said in a joint statement on Monday.

"The government's broadband policy is technology agnostic. NBN Co is free to use whatever mix of technologies is required to get the job done as quickly and cost-effectively as possible. The company therefore has, in the light of its extensive experience building FttP, determined what the peak funding requirement and time to complete would be for an all-FttP build.

"The company's conclusion is that an all-FttP approach, as proposed by Labor, would have a peak funding requirement of AU$74 billion to AU$84 billion, and would not be finished until as late as 2028."

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