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National Broadband Network Companies Bill 2010; Telecommunications Legislation Amendment (National Broadband Network Measures—Access Arrangements) Bill 2011

CHAIR —Welcome. Thank you for coming along today. Do you wish to make a brief opening statement before we go to questions?

Ms Lovell —Yes, we do. NBN Co. welcomes the opportunity to appear before the committee today. The two bills that are the subject of this inquiry are very important to NBN Co. as they will formalise our governance, ownership and operating arrangements. Accordingly, the timely passage of these bills is very important to NBN Co.

As this committee is well aware, NBN Co. has been established with the explicit objective that it will promote competition in retail communications markets by being a wholesale only open access network provider of high-speed broadband services. NBN Co. believes that the proposed bills will allow NBN Co. to achieve this important objective.

In relation to being a wholesale only open access network, the companies bill contains a wholesale only supply obligation along with lines of business restrictions. Accordingly, NBN Co. will not compete in downstream retail markets, nor will it have the incentive to supply services to itself on terms and conditions that are more favourable than what it provides to NBN Co.’s customers. In this way the companies bill addresses the industry’s longstanding concerns about vertical integration and discriminatory behaviour in favour of the network owner’s downstream business units.

In relation to the promotion of competition in retail markets, the non-discrimination obligations contained in the access bill mean that NBN Co. will be unable to favour any one access seeker or group of access seekers to the detriment of competition in the downstream retail market. NBN Co. does not in fact have any incentive to do this. In relation to the efficiency based exceptions to the non-discrimination obligations, NBN Co. acknowledges the concerns of some industry participants. However, we believe that such concerns may be overstated. In particular, discrimination is commonplace in competitive markets. This is particularly so where the provision of a good or service involves high fixed costs or when customers are not homogenous. Indeed, both of these features are pervasive in telecommunications markets. It is not clear to us why telecommunications should be treated any differently.

Additionally, and perhaps more importantly, the access bill allows for discrimination when such behaviour will result in measurable benefits. Moreover, the details of any favourable terms and conditions offered by NBN Co. must be made available to and published by the ACCC. This will allow all other access seekers to determine whether they have like circumstances and in which case they will qualify for the same terms and conditions of access. Accordingly, in our view, the proposed non-discrimination regime strikes a balance between promoting the efficient supply of broadband network services and safeguarding a level playing field for ISPs.

While NBN Co. is operating in a manner consistent with the bills, as requested by the government’s statement of expectations, this does not diminish the importance of the timely passage of the bills through parliament. This is for several reasons. Firstly, the passing of the bills will allow NBN Co. and other industry stakeholders legislative certainty. Secondly, the passing of the bill will formalise the ACCC’s role in relation to the NBN. For example, it will provide the ACCC with the necessary legislative authority to provide guidance on the legislation, and it will enable NBN Co. to lodge a special access undertaking and to publish a standard form of access agreement.

CHAIR —Thank you. Senator Birmingham.

Senator BIRMINGHAM —I turn firstly to the measurable benefit that you speak of in terms of what might allow the provision of different price regimes. What type of benefits does NBN Co foresee that would justify it?

Ms Lovell —It is fair to say that we have done a lot of work in trying to come up with various examples and hypothetical situations in which benefits might be achieved whether for us or access seekers or for the industry more generally. We have done that in anticipation of our customers approaching us in due course and ask us for such terms and conditions and also as part of an ongoing dialogue we have been having with the ACCC. I might get James to give you a few specific examples, but it is fair to say we have put a lot of thinking into it since this was put into the draft bill, in preparation for making sure that we have thought it through carefully.

Mr Endres —There are a lot of potential efficiency benefits but it depends on what sorts of things access seekers come to us with. It is not for us to go to access seekers and say, ‘We think you are more efficient so we will offer you this price.’ It is up to them to come to us. There are a range of different things ranging from technical and operational efficiencies in billing or ordering and provisioning or potentially there could be things like lowering our risk profile and that may result in a lower cost of capital for us somewhere down the track, immediately or even further. So there are a range of benefits that may or may not eventuate but it is not for us to speculate at this stage. It is up to the industry to come to us with proposals about where they believe they can bring us cost savings and efficiency gains. Then we can go away, measure them and then say, ‘Look, this is what it is worth to us.’ We can translate that then into what that means to our terms and conditions and then we would negotiate on that basis.

Senator BIRMINGHAM —I will come back to a couple of those examples. Firstly, I ask around the issue of volume, which is a key part of this discussion and debate. Does the NBN Co see volume in and of itself as an efficiency element?

Ms Lovell —No. I think our CEO has made that very clear in the press and in our industry forum most recently to say that is not something that we see as a current intention. It has come under a great deal of focus since the bills were introduced into parliament because it has been added to the list of things in the particular provision, but the first hurdle is to get through of efficiency. Even if we were to design some sort of mechanism by which volume discounts were to be made available, it will have to be embedded in our undertaking and approved by the ACCC and therefore scrutinised by the ACCC, and we will have to continue complying with whatever mechanisms are in the undertaking or we will be in breach of the undertaking. So there is no concept of volume discounting at large, although it has been a great focus of attention in many submissions.

Senator BIRMINGHAM —So would an RSP of small magnitude which comes along and seeks access to identical services as an RSP of large magnitude and volume expect from the outset, if neither were offering any particular efficiency benefits, to be charged the same price for access to the same service?

Ms Lovell —I think the key thing is not offering any particular efficiency, so the answer is they would receive the same terms and conditions as anyone else in the same circumstances.

Senator BIRMINGHAM —In that case, what is the benefit of leaving volume flexibility in there as something that could be a determinant of efficiency?

Mr Endres —There may be examples where in the future an access seeker comes to us and seeks a volume discount on the clear proviso that there is an efficiency benefit related to it. That is just a flexibility. It is not saying it will happen, it is just a possibility.

Ms Lovell —It is probably also worth noting how that provision came to be in there. After the exposure draft went out without that subclause that refers specifically to volume discounting, the department that is responsible for policy decisions about whether there will be such a provision there at all took into account feedback that was received. A view was taken that what was required was that flexibility but appropriately constrained and with appropriate transparency. So in the event that anyone came to us and sought to justify an efficiency based differentiation of their terms and conditions that happen to include a volume element, firstly we would have to comply with the arrangements and the undertakings for that purpose—and we have not even made a decision about whether there would even be any such arrangements in any undertaking. We would then have to make sure that it was consistent with the guidance that the ACCC is going to be publishing as soon as practicable in relation to these terms and concepts in the legislation. We would then have to publish and provide to the ACCC the differences between any standard terms and conditions and the ones which had provided some sort of benefit justifying a differential, and then they would be available for all of our customers to see publicly on the internet. So if anyone looks at that and says, ‘Right, I think I’m in the same circumstances and I can bring to bear the same efficiencies,’ they will be coming to us and asking for that the very next day, one would imagine. It is not happening behind closed doors. It is all out there in public and scrutinised by the ACCC.

Senator BIRMINGHAM —Technically is there any capacity in which NBN Co. can see obtaining a volume discount that would not be something that could be offered by a company that thinks it can be obtained even if volume were not an option to seek a discount? In essence, if a company, by having a particular volume, thinks they are going to be able to apply a different billing mechanism that achieves efficiencies where the volume was not on the table, they can still come to you and say, ‘We’ve got a billing mechanism that offers efficiencies.’ So is there any area in which you can see volume itself providing a discount?

Ms Lovell —It is hypothetically possible. I think that as a policy matter that is how it came to be in the bill in the first place. A policy decision was made by the government that they wished that flexibility to be preserved with appropriate constraints and scrutiny around it. As we sit here right now, at the beginning of the project, there is some time to go before we will be either rolling out or providing services at volume. I do not really think it is appropriate or possible for us to speculate about all the terms and conditions that people may seek from us in the future over the next 10, 20 or 30 years. They are trying to set up a regime that will be appropriate for the period of time over which we may operate.

Senator BIRMINGHAM —Have you had a chance to review the proposed amendments of Optus and Telstra?

Ms Lovell —Yes, we have.

Senator BIRMINGHAM —In this space Optus have proposed further amendments to, as they claim, tighten the public scrutiny of and the accessibility to the type of arrangements that may be struck with RSPs. What is your response to Optus’s proposal? Is there any reason why that would harm the commercial operation of NBN Co.?

Ms Lovell —I do not know that that is appropriate for the company to comment upon. I think that might be something perhaps to be explored with the representatives of the department this afternoon. It is their role to review these proposals and to form views about whether those things are appropriate or not. We have been working within the parameters of the bills as introduced into parliament and on the basis of the statement of expectations that we have been given. It is a different way of going about the scrutiny and we are working with the one that has been presented to us to work with so far.

Senator BIRMINGHAM —Surely though the department has consulted with NBN Co. as it has been going backwards and forwards in the drafting of these bills to ensure that they obviously meet the government’s objectives and that NBN Co. believes they are commercially and operationally functional.

Ms Lovell —Indeed, but I think you asked me about our view about the Optus proposals where we are commenting on the provisions as in the bill. That is what we discussed with the department.

Senator IAN MACDONALD —If I could interpose there, but you were involved with the drafting of the bill—not as the principal doer but you were consulted all the way through the drafting.

Ms Lovell —We were a stakeholder whose views were obtained in that process.

Senator IAN MACDONALD —But are you absolutely and entirely happy with the bills as they are? Would you like to see amendments?

Ms Lovell —I think NBN Co. understands that it is the position that has been reached after due consultation with relevant stakeholders.

Senator IAN MACDONALD —No, no. That is not my question. NBN Co. is a government business entity which is completely independent of government. Is that not right?

Senator FISHER —They are a government business enterprise, according to their CEO.

Senator IAN MACDONALD —But they are completely independent of government.

Senator BIRMINGHAM —They are probably independent of the FOI Act too.

Senator IAN MACDONALD —But, as a commercial entity, when you looked at the bills was there anything where you said, ‘It would be better for us if we did X or if we cut out Y and put in Z or something’?

Ms Lovell —I think I can say that when the volume discounting subclause was added to that provision we could see that it was likely to elicit the reaction that it has. We saw that it would indeed involve some challenges in making sure that relevant stakeholders were comfortable.

Senator IAN MACDONALD —But you are happy with it as it is.

Ms Lovell —Yes.

Senator BIRMINGHAM —Has the government sought your opinion on the proposed amendments, either those that were debated in the House or in the submissions of Telstra, Optus or any other parties?

Ms Lovell —No. We have been informed about them and we have seen them in the submissions, but our views have not been sought.

Senator BIRMINGHAM —You have your own internal analysis of them?

Ms Lovell —Yes, we have.

Senator BIRMINGHAM —It does go to how NBN Co. thinks these things could operate. This committee will make decisions in its report as to what amendments it may or may not recommend to the parliament. The Senate will then make its decisions, partly based on this committee and the evidence given here. So I do think it is important to know whether NBN Co. has an opinion as to, operationally, whether the more transparent arrangements that Optus proposes for striking agreements with RSPs would impact on NBN Co., whether you would be able to live with them or whether there would be any marked detriment to NBN Co. compared to those in the draft legislation.

Ms Lovell —May I ask which particular bit you are referring to?

Senator BIRMINGHAM —We can go through each of them if you would like.

Ms Lovell —I am just wondering what I am comparing.

CHAIR —We do not have time to do that, Senator.

Senator BIRMINGHAM —In particular, could we look at the reporting obligations of NBN Co. to start with, please.

Ms Lovell —We reviewed this only at a relatively high level, given that we are being asked to implement the bill as it currently stands. Nevertheless, I think our view on this one would be that it does not really add very much to what is already in the bill as it stands, nor to the overall reporting arrangements to which NBN Co. will, in any event, be subject.

Senator BIRMINGHAM —Does it impose unnecessary obligations on NBN Co., in your opinion? Will it impede the commercial operation activities of NBN Co.?

Ms Lovell —We do not think it is substantially an improvement or much of a difference. If you put them next to each other, we think the one that is already in the bill is perfectly adequate for the purpose.

Senator BIRMINGHAM —But if it were this one it would not necessarily get in your way either?

Ms Lovell —We have been preparing to use the one that is in the bill for some time, so we do not see any point in drafting another version of that that has a similar effect. Why not just go with the one that is already there, if it achieves very much the same purpose?

Senator BIRMINGHAM —I appreciate your judgment on that. So if this were the requirement in place for the long term you could live with it?

Ms Lovell —No, I did not say that. What we have become comfortable with is the one that is in the access arrangements bill as it currently stands and the other reporting obligations to which we are subject. We do not think there would be any need for this. It is effectively an additional overlay of further record-keeping rules. We do not know why you would need to use that particular path for making record-keeping rules when you already have the things which are in the access arrangements bill about publishing every difference from our standard terms and conditions. What is the need for an additional overlay? It could be complied with but at extra cost and time. It is not terribly efficient.

Senator BIRMINGHAM —I will move on to page 4 of Telstra’s submission. They highlight, and go through over several paragraphs, issues around the definitions of the carrier and carriage service provider. They cite various examples of types of entities that may be able to access services directly through NBN Co. Are Telstra’s concerns in this area warranted?

Ms Lovell —No, we do not believe so.

Senator BIRMINGHAM —Why not?

Ms Lovell —I understand the same amendments have been proposed by the opposition. Telstra’s concerns are really about controlling the nature of the customers to which NBN Co. can supply. They do not seem to be about anything NBN Co. does or does not do. In fact, we are rather curious about them. In preparing for today we took another look at them. The effect of these provisions, by requiring customers to only acquire in order to supply end users, would in fact be to prevent any wholesale competition of layer 3. Telstra appear to be proposing a change which would stop Telstra from being an aggregator or buying our services on a wholesale basis to sell to wholesale customers of their own. Telstra must be intending not to have any further wholesale operations in this area, because this amendment would appear to preclude them from doing so. We are quite curious about that.

Senator BIRMINGHAM —That is something that we can go back and ask Telstra to respond on, or if Telstra are reviewing the Hansard—as I am sure they will be—they will be able to write to the committee and respond on how it may or may not impact on them. In relation, though, to the operation of NBN Co., Telstra claim that this would, for example, allow NBN Co. to have a direct retail relationship with business customers such as Woolworths, with local government customers such as the Banana Shire Council and the Towong Shire Council and with the Library Board of Victoria. Are these real concerns—that NBN Co. could have a retailer relationship with those entities?

Ms Lovell —If those entities are prepared to acquire a carrier licence or comply with the obligations of a service provider, surely that is just more customers for the network and more competition as between our customers. That would add additional retail competition, so we are not sure where the problem is.

Senator BIRMINGHAM —These entities are, according to the Telstra submission, already carriage service providers, but they are carriage service providers because, in the case of the supermarkets, we understand, they are a mobile reseller. If they were not reselling the fixed-line services of NBN Co., then why should NBN Co. be able to provide them with a retail service that they may just use purely for their own businesses and ends?

Ms Lovell —I think it is a policy question essentially, as to what the government is trying to achieve in relation to retail competition, but if that just leads to another entity buying a large amount of services to be used by their individual consumers within those organisations, then that is just more competition as between Telstra and others. We are not sure we see the difficulty. That ought to be a positive.

Senator BIRMINGHAM —It is not more competition if they are purely using it for themselves. It is them bypassing the retail outlet to buy direct from the wholesaler, and you have NBN Co. effectively then operating for any large entity that feels that it can validly define itself as a carriage service provider and meet the conditions of that, which, if all of these types of organisations do meet those conditions, clearly are not to onerous to meet and would not prevent a major bank or anybody else who saw this as a good shortcut way of getting a cheaper service from going through a wholesale means and cutting out all of the retail providers. Doesn’t this potentially circumvent the entire goal of NBN Co. being a wholesale-only operation?

Ms Lovell —No. I do not think so. I think we are underestimating what is required to comply with the requirements of being a service provider. I think we are also underestimating the types of services those organisations may need. If they wish to buy layer 2 services directly from us, that will not meet the needs of a Woolworths or a bank. They will still be needing the types of services that a Telstra or an Optus will be packaging up from our services and providing. It is either competition at the retail level, which surely could not be perceived to be a bad thing, or they are just buying those particular services because they have a need for those services and they are prepared to become a service provider or a carrier to do so. I am really not sure we see the problem.

Senator BIRMINGHAM —I understand that NBN Co. may not see the problem, because it is potentially more customers for NBN Co., but the object of this from the government’s perspective, which has been spelt out time and time again, is that NBN Co. is very clearly designed to be a wholesale service provider. Isn’t it a reasonable requirement to ensure that anybody purchasing NBN Co.’s services is in fact an on-seller of those services to third parties?

Ms Lovell —I think the suggestion would cause the problem we identified at the outset. I think we also should not lose sight of what it is NBN Co. is actually selling. We are not selling services which are suitable for end-user consumption in anything except quite a small subset of cases. If those people are prepared to meet the requirements of being a carrier or a carriage service provider, then perhaps they are entitled to become a customer and to compete with those who are also prepared to take that role. You asked us if we saw a problem with it and whether it undermined the policy. We do not. We think it is consistent with the policy and in fact could lead to further competition at the very level that the government wishes to encourage it.

Senator FISHER —How would they be competing in that scenario? Wouldn’t you be the competition in that scenario?

Ms Lovell —I am not sure I understand.

Senator FISHER —In your answer just then, you said, ‘And they could be in competition with’. But it would be NBN Co. with whom the competition is being contested.

Ms Lovell —No, those entities would be buying the same thing. There may be differences as to what they do with it. If Woolworths or Coles wanted to buy our services and then add additional capabilities to those services and sell them on, they would be able to enter the market to do that. It would be up to them what they do with the services they buy from us. We would be selling the same thing into both channels.

Senator FISHER —Swinging the question around the other way: what would be the operational impact on NBN Co. of removing the exemptions?

Ms Lovell —It could reduce the number of customers to whom we could supply services. It would also cause, we think, quite a number of issues at the layer of those who might be our customers. We really do not think the amendment which Telstra suggested has been fully thought through.

Senator FISHER —Would the reduction in customers to NBN through that route matter and, if so, how?

Ms Lovell —I cannot answer that question in detail. We would have to take that on notice. Our corporate plan was devised and our uptake and revenue figures were devised on the basis of the legislation as introduced into parliament where that restraint was not imposed.

Senator LUDLAM —You said a couple of times that you cannot see the problem of NBN Co. being perceived to have moved into the retail space. Telstra’s submission, which I presume you have had a quick look at, lists large corporate and business customers including Woolworths, some universities and big government departments and some local government authorities as already being technically carriers or CSPs.

Ms Lovell —I would like to correct one thing. I did not say we would be moving into the retail space. We are very clear that the types of services we provide are normally needed by wholesalers. We have not suggested that we move into the retail space. We are selling at layer 2 service, which is normally of no use to anyone except a wholesale customer.

Senator LUDLAM —Thank you for that clarification. But Telstra has made the point, which I will bounce back to you, that these large entities are already technically carriers and could, therefore, be directly supplied by NBN Co. and, if they have the technical wherewithal to take the service you are offering, could bypass the retailer altogether. Is that a fair point?

Ms Lovell —We would be speculating about what they require the services for but I believe it is more likely to be a concern for those at the retail level than it is for us.

Senator LUDLAM —Yes, we have had retailers in here being very concerned about that.

Ms Lovell —I am not sure there is much more we can say about that point.

Mr Endres —To the extent that they do that, there is obviously an efficiency benefit for them to acquire a layer 2 service from us. We are still selling exactly the same service but they can obviously find it more beneficial and more efficient to do all the bits they have to do in order to make it a usable service for their staff or whoever it may be than to buy directly from an ISP.

Ms Lovell —So perhaps Telstra would prefer that they have to buy them through Telstra but that provides a margin, another overlay and another efficiency concern.

Senator LUDLAM —That was the issue I put to them this morning. I think you have characterised that quite correctly. I cannot see the point of inserting a retailer if all they are doing is adding another mark up on the way through, but then they are going to have to stop calling you a wholesale-only provider because you have just skipped the retail.

Mr Endres —No, we are selling a wholesale service to a carriage service provider and whether or not that carriage service provider sells it on to a mum and dad or whether or not they use it internally for their own business it is still a wholesale service.

Senator LUDLAM —That is very interesting.

Ms Lovell —It makes the people who buy from us another layer of wholesaler; it does not make them a retailer.

Senator LUDLAM —They are wholesaling to themselves.

Ms Lovell —Yes. They may create another wholesale layer and that may be perfectly consistent with the policy.

Senator LUDLAM —That is very interesting.

Ms Lovell —It does not make us a retailer.

Senator LUDLAM —I think we are dancing around with some pretty fine semantics.

Senator BIRMINGHAM —It is like mum or dad going to a factory outlet to buy clothes rather than going to a retailer to buy clothes. They are buying the same product.

Senator LUDLAM —Does NBN Co. hold a view over eventual public or private ownership of itself? Is that something you are able to contemplate?

Ms Lovell —Not at this stage.

Senator LUDLAM —The other issue that we have heard quite a bit about today is the cherry-picking provisions. I think we heard from Mr Quigley at our recent estimates hearing that it is quite important. You are being tasked with providing a subsidised service to regional areas and you are taking that out of margins in the cities. Is that oversimplifying it or is that what your business does.

Ms Lovell —That is part of it.

Senator LUDLAM —How important are the anti-cherry-picking provisions to you, to the figures in the business plan, for example?

Ms Lovell —Extremely important. Our corporate plan talks about the potential adverse impact that cherry-picking could have on our financial return. I refer you to page 52 if you wish to look it up at some later time. We have done quite a bit of sensitivity analysis. There could be a decrease in lucrative regions or greenfield areas of up to 50 per cent. If we are required to roll out across the country and we are not able to selectively pick high-revenue, high-density, low-cost areas and we have to go everywhere then we are at risk of being cherry-picked.

Senator LUDLAM —Telstra have proposed—and they have even been helpful enough to draft amendments for us—that those provisions be knocked out altogether. What happens to NBN Co. if they are successful and someone is mischievous enough to introduce those amendments?

Ms Lovell —It could have a very significant impact on our uptake and revenue. Our ability to, in fact, achieve the objectives have been set for us by the government. If we are not ultimately able to supply everywhere, including the cross-subsidy elements that you have mentioned, it has the potential to undermine the government’s investment in NBN Co.

Senator LUDLAM —I have been on board with that up till now, and I think the legislation was draft with the idea of somebody like Telstra coming in and nibbling away at the good bits that they think they can get a margin on. How do you handle an existing incumbent, albeit a smaller one like Transact, who were here a little bit earlier, who have had a quite successful business for 10 years or so and are directly in your path and will fall foul of the cherry-picking provisions as they stand?

Ms Lovell —We acknowledge there is some complexity in terms of achieving the provisions. I think the most recent articulation of them is in the statement of expectations of late last year. We have been working with the department about this and no doubt you can speak to them about that later this afternoon, but there is certainly some complexity in making sure that the scope of the provisions in terms of timing and application and so on are appropriate and do not overreach. We understand that clearly.

Senator LUDLAM —Thank you for your time. Thank you, Chair.

Senator IAN MACDONALD —On the last point, has it actually been determined that you will cross-subsidise from your own revenue or is the option still open for government to do what governments have been doing for decades which is to effectively subsidise those services that are not commercially viable?

Ms Lovell —Do you mean directly; a direct subsidy?

Senator IAN MACDONALD —Well, a universal service obligation just to direct subsidy to NBN Co. to provide this so it does not impact on your bottom line. Has that decision been made was my question. You have answered as if you have to bear it, and I know the minister has said there will be the same price across Australia. I have not seen anything and I am asking if I missed something and whether the government has said that you will do it out of your revenue and there will not be any outside help to you to do it.

Ms Lovell —We are operating in accordance with the statement of expectations, which I think makes it fairly clear that we are expected to provide a uniform wholesale national price, which inevitably will involve some cross-subsidy.

Senator IAN MACDONALD —You are providing uniform across-the-board national price, but are you going to get subsidised by government for the non-commercial bits? Your answer is that you have not worked on that.

Ms Lovell —No.

Senator IAN MACDONALD —You have worked on the basis that you will be paying it.

Ms Lovell —Yes, we have.

Senator IAN MACDONALD —In all of your assessments in this legislation and to do everything you do—whether you are going to be successful and, as you say, whether you are going to meet the government’s goals, which you are charged to do—you must have some idea of the pricing you are going to charge Mr and Mrs Stringbag—as Senator Vanstone used to call them.

CHAIR —Stringbag? You could get a better name than that.

Senator IAN MACDONALD —Senator Vanstone used to use that. She used to talk about Mr and Mrs Stringbag. That is going back a long time. I do not think she was here where you were here, Chair.

CHAIR —She would say it in Italian now, wouldn’t she?

Senator IAN MACDONALD —Yes, she would. But for the average mum and dad consumer—if there is such a thing?

Ms Lovell —We will not charge consumers anything, we will supply services on a wholesale basis to ISPs, who will then package them up and come up with retail prices.

Senator IAN MACDONALD —Sure, okay—you are perfectly correct. But what you supply to the retail service provider will depend upon what they charge the customer. For example, in Tasmania—and I have raised this point before—nobody knew what you were going to charge the retail service providers until fairly recently. Now you have got a figure; but perhaps this is not the inquiry to ask if you are going to make a profit on your Tasmanian operations. Or perhaps I could throw that in; do you know if the sums have been done? Is what you are charging the retail service providers going to give you a commercial return on your investment in Tasmania.

Ms Lovell —I am not in a position to comment on that this afternoon. I think our corporate plan sets out what our revenue expectations are in relation to the pricing that our plan is based upon.

Senator IAN MACDONALD —I am not sure that it did, because nobody could tell me until a couple of months ago what you were going to charge in Tasmania.

Ms Lovell —There will not be anything different about Tasmania to anywhere else, eventually.

Senator IAN MACDONALD —So what you are charging the retail services providers in Tasmania is what you are going to charge Telstra and Optus right around Australia?

Ms Lovell —We will have one price nationally, yes—that is what—

Senator IAN MACDONALD —But you have got a price for Tasmania now, haven’t you? It starts in two months time, so I assume you have?

Ms Lovell —That pricing will be the same nationally.

Senator IAN MACDONALD —Okay—what you have done in Tasmania will apply across Australia. So we do know your costings?

Ms Lovell —Our proposed prices are as announced in our corporate plan just before Christmas. We are in the process of aligning all of our activities across Australia, and I am not in a position to comment on what has or has not been done in Tasmania in the first release trial, trying to—

Senator IAN MACDONALD —No, the trial has finished.

Ms Lovell —Yes.

Senator IAN MACDONALD —On 1 July you come on stream for big-time, real-time activities—

Ms Lovell —And our pricing will be as announced in our corporate plan, yes.

Senator IAN MACDONALD —So I can look at your corporate plan and find out what every retail service provider is going to be charged—not in dollars and cents, but how it is going to be calculated?

Ms Lovell —That is our current intention, yes. We would like these bills passed so that we have a regime finalised under which we do it.

Senator IAN MACDONALD —I am assuming the bills will pass. But you are saying that what you are charging in Tasmania is what is going to be charged elsewhere, so we can look at the long-term return for NBN Co. and how you are going to pay back the return on investment and the capital cost of the $55 billion or whatever it is?

Ms Lovell —It is a uniform wholesale national price.

Mr Endres —And it is detailed in our corporate plan.

Senator IAN MACDONALD —Is it detailed in actual figures?

Ms Lovell —Yes.

Senator IAN MACDONALD —Okay. And that is based on what sort of take-up?

Ms Lovell —We would have to look at the detail of that, but that is all in the corporate plan.

Senator IAN MACDONALD —When was the corporate plan released?

Ms Lovell —It was 20 or 17—

Mr Endres —It was 17 December 2010.

Senator IAN MACDONALD —I confess to not having read it in detail yet, but perhaps I should.

Ms Lovell —It is all in there.

Senator IAN MACDONALD —You said somewhere that in dealing with efficiency—and these are my words—and dealing with the big players that you ‘lower your risk profile’.

Mr Endres —We may.

Senator IAN MACDONALD —What do you mean by that? In simple terms, are you saying that the little fellas may not pay you but you know that the big guys will?

Ms Lovell —I think we should just qualify that. I do not think we said anything about larger or smaller players; we said that one hypothetical example of an efficiency could be a different approach to risk sharing to that which is in standard terms and conditions.

Senator IAN MACDONALD —My question really is: what is the risk profile you are trying to avoid?

Ms Lovell —We are not trying to avoid it; it may be the way in which a contract allocates liability, for example—it could be a different way of sharing risk. That is a very simplified example.

CHAIR —Telstra and Optus have been concerned about what Telstra calls ‘scope creep’. Could you outline to the committee what checks and balances are in place against scope creep?

Ms Lovell —First of all, I think we would possibly take a little bit of an issue with that characterisation. We do not see what has been happening over the last year, 18 months, et cetera as scope creep. We would describe it as an iterative and consultative process to define and implement NBN Co.’s activities. This has included a lot of engagement with our potential customers as to what type of service they want to have supplied to them, which is one of the reasons for the layer 2 requirement. The bills that we are considering today will provide a very clear framework as to what we are supposed to be doing, in what way, under what terms and conditions and subject to what transparency and scrutiny arrangements. In addition, we were provided with a detailed letter late last year which also gives us considerable guidance as to what we are supposed to be doing and in what way, and that is reflected in our corporate plan as well.

There are various mechanisms in the bills under consideration which would provide ongoing ability and mechanisms to deal with any issues that may arise. For example, the minister has powers to make licence conditions, should that become necessary, which has traditionally been a way of dealing with things in this industry where a carrier needed to be required to do something or, alternatively, to not do something.

CHAIR —So it is ministerial control, but there are aspects other than simply ministerial control.

Ms Lovell —The bills provide the primary framework. They are consistent with and will implement the directions and the information we have already been given by our shareholders. Sitting underneath the legislation, like any other bill, and it is traditional in this industry, there are various delegated lawmaking powers to make ministerial instruments or for the ACCC to issue guidances and all of those things we will be operating in accordance with in due course.

CHAIR —There has been some discussion about level 2, which is the wholesale level, and level 3, which is the retail level, and there has been discussion about the requirement for some aspects of level 3 to apply to your satellite and wireless operations but not as a level 3 retailer. Can you explain that position?

Ms Lovell —We are possibly not best qualified for that, because neither of us are engineers, but we will give it a go. Essentially our services will be layer 2, but there is some what I think is described as layer 3 awareness in relation to some of the services—satellite and multicasting being another example—and some of our internal network management, the protocols and signals that will be sent backwards and forwards to manage our network, will involve what I think could be described as some layer 3 awareness. Our view is that it is not necessary to try to define all of this in legislation. It would be quite complicated. It is not usual to include those sorts of technical definitions in primary legislation and we are quite clear about what we are supposed to be doing and it has been based on substantive engagement with our potential customers. We think they are pretty clear about what we are providing too.

CHAIR —Do you have an ability to go to some of the financial aspects of your business plan?

Ms Lovell —No, I do not think that is something that we have come this afternoon to address.

CHAIR —Could you take a question on notice, thanks, in relation to the issue Senator Macdonald raised earlier about the cost of NBN and the cost that has to individual taxpayers? I would like you to have a look at what Senator Macdonald has put on record.

Senator IAN MACDONALD —Not taxpayers, users.

CHAIR —I do not want to verbal Senator Macdonald, but the Hansard will have what he has indicated. It is about the cost to the individual and the cost to the taxpayer overall of the NBN. Could you then come back and tell me whether you would want to change your financial forecasts—which are on page 133 of your corporate plan—arising from what Senator Macdonald has raised.

Ms Lovell —I am not sure I understand what it is that has been raised that could have an impact—

CHAIR —Senator Macdonald has raised costs. Your business plan—exhibit 10.1—shows that by 2033 you will have paid back the funding that has been brought to NBN by government.

Ms Lovell —Yes.

CHAIR —Could you have a look at what Senator Macdonald has said and see how his proposals change the financial forecasts in exhibit 10.1?

Ms Lovell —Could I ask for clarification? What is it that has been suggested? We are not clear about what has been suggested and what the flow-on you are asking about could be.

Senator IAN MACDONALD —This is where you multiply $55 billion. I can give it to you.

Ms Lovell —But why are we multiplying $55 billion by anything?

Senator IAN MACDONALD —It is by seven per cent to get your annual commercial return and then dividing it by 22 million, or every man, woman and child in Australia, then seeing what you come up with. I am sure your corporate plan is not that simple—more is the pity—but that is what he is talking about. I am not asking the question—the chair is—but that is what I think he is referring to.

Ms Lovell —We are happy to take a question on notice if it can be articulated. We are still not sure what the question is.

CHAIR —The report has to be back tomorrow, so you will not have Hansard. Could you take this on notice? With regard to exhibit 10.1 in your corporate plan, is there anything that would cause you to change the financial forecasts?

Ms Lovell —Such as?

CHAIR —Any of your financial forecasts about paying back.

Ms Lovell —Are you asking us whether there has been any change to what is forecast in our corporate plan? As far as I am aware, the answer to that is no.

Senator IAN MACDONALD —If you did it in December last year I would assume it has not changed, but put your hand up if you believe it.

CHAIR —All I am raising is that Senator Macdonald has raised the spectre of the cost to the public purse. 10.1 demonstrates that the cost to the public purse is diminished over time and, by 2033, there is not a cost but a net return.

Ms Lovell —The amount of government equity involved in the project and the financial forecast over which that might be repaid is clearly detailed in our corporate plan. As far as I am aware, nothing has changed.

Senator BIRMINGHAM —I have a question on the issue of cherry picking. If amendments were made to the bill that had an impact on cherry picking and the share of greenfield sites were Mr Endres spoke of earlier, what would that mean to the returns for NBN Co. and the return on government equity investment?

Ms Lovell —That is discussed on page 52 of our corporate plan.

Mr Endres —Section 3.2.

Senator BIRMINGHAM —If you think that adequately covers it—I do not have it right in front of me. If there is anything you would like to add, please feel free to take that part on notice.

Ms Lovell —That is the sensitivity analysis.

CHAIR —Thank you both for your contribution. It has been helpful.

[2.53 pm]