NBN predicts CVC charge will drop to AU$10

While in the midst of industry consultation over the oft-criticised CVC pricing, NBN CEO Bill Morrow has said the company expects pricing to eventually fall to AU$10.
Written by Corinne Reichert, Contributor on

The National Broadband Network (NBN) company has forecast its connectivity virtual circuit (CVC) wholesale pricing will be pushed down to AU$10 thanks to increased usage of data across the network.

"We continue to consult with the industry on all of our product decisions. CVC is no different. Our CVC pricing has come down more than 20 percent over the past 20 months, from AU$20 in February 2015 to AU$15.75 now," NBN CEO Bill Morrow said during Senate Estimates on Tuesday evening.

"Part of this reduction comes with an industry-average volume-based discount model, and we are now consulting on a discount model that moves this to an RSP-average -- allowing retailers to further differentiate their product offering and pass along lower price as end users demand more data.

"If all goes well, we hope to implement this change early in 2017. As data usage continues to increase over the network, we expect CVC pricing to drop further; in fact, with our forecasted usage, we see the CVC price approaching AU$10 a unit."

NBN in April announced its discounted CVC pricing involving a series of industry-wide tiers rather than being calculated separately for each RSP amid continuing widespread industry criticism of the CVC wholesale pricing.

In what Shadow Communications Minister Michelle Rowland earlier this month called a "burning issue", she said the CVC in combination with the access virtual circuit (AVC) charge discourages usage of the NBN at a time when data demand is increasing.

NBN's wholesale pricing incorporates a two-part model, with the CVC charge paid in addition to the AVC charge levied across all speed tiers. The CVC charge reserves a consumer's bandwidth from the point of interconnect (POI), and sees dimension-based discount (DBD) pricing structure to encourage more dimensioning of CVC capacity -- or greater usage of data.

"The biggest issue with the CVC charge is that it does not relate to the cost associated with the CVC itself. Instead, the AVC picks up the usage concept that is applied by others. The effect of the current CVC design is to discourage usage," Rowland said.

"National retail service providers will simply throw all the backhaul to match the retail price to the CVC. In effect, the CVC pricing arrangement signals to RSPs that they should under-use the capability of the network."

This invokes political and economic challenges, Rowland argued.

"Applying an economic lens, this is about setting a CVC price signal that can reflect actual costs. And on a political level, it's fundamentally about how quickly the invested capital is to be paid off. If it's quickly, then RSPs and by extension consumers are paying too much for services; if it's slowly, then the government needs to be a patient investor, waiting longer to recover its investment," she said.

"Then there is the political question: Does government want to stimulate the use of broadband in the economy or not? A sensible resolution in this area would be consistent with an LTIE [long-term interest of end users] approach, placing consumers at the policy core. Lowering costs will be of greatest benefit to those whom we are trying to help the most."

The Australian Competition and Consumer Commission (ACCC) is looking into whether the CVC charges are affecting downstream market competition.

Last month, NBN said it was about to begin another consultation period with retail service providers (RSPs) on its CVC, with an "evolved model" expected to be implemented at the start of 2017.

"NBN is working to evolve the CVC pricing model to an RSP-specific discount structure. This will provide further scope for retailers to differentiate their offerings, which in turn will promote competition and assist consumers in accessing a wider choice of broadband plans," NBN told ZDNet at the time.

"We are about to begin a consultation period with retail service providers on this evolved model.

"Based on feedback from the consultation, we anticipate this evolved model will be implemented in the second half of this financial year."

The new pricing structure, implemented for two years starting in June this year, is calculated as an average of CVC dimensioning per end user across all customers on the NBN.

In November last year, NBN had trialled discounted CVC pricing, rewarding telcos offering customers high-usage plans across high-speed services with a lower levy.

Sarah Palmer, executive general manager of NBN Product and Pricing, flagged at the time that the CVC pricing was planned to "evolve over time".

NBN first committed to dropping its CVC charge for RSPs from AU$20 per 1Mbps to AU$17.50 per 1Mbps in November 2014, bowing to industry pressure.

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