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Efficiency, Quality and Innovation in an NBN Environment

How can a regulator incentivise a monopoly provider of an essential input to be efficient, to deliver quality and be innovative? This report for Australian communications services company Optus proposes regulatory action to achieve these aims

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The Australian government is investing public funds, initially AUS$27.5 billion, in a National Broadband Network (NBN) to be owned and operated by NBN Co. Ltd, a Government Business Enterprise. As with any state owned monopoly, there is a concern that NBN Co. could take on the negative characteristics of a monopoly operator, in particular poor customer service and inefficiency.

This report examines: i) Methods of ensuring that monopolies are efficient and customer focussed; and ii) Corporate governance of public sector bodies that set a fair balance between political and market objectives. Bearing the interests of the different stakeholders in mind, we have developed a proposed objective for the Australian Competition and Consumer Commission for the regulation of the NBN Co.: When applying its statutory functions, the ACCC should incentivise NBN Co. to provide access to the NBN for Service Providers at the lowest feasible cost commensurate with the quality expectations of Service Providers and their users (including disabled users, elderly users, and users with special social needs) whilst ensuring that NBN Co. is adequately financed. NBN Co.’s wholesale access products should be provided to Service Providers on a non-discriminatory basis and should allow Service Provider customers of the NBN to develop broadband products and services to meet the current and future needs of consumers and citizens. To achieve this objective, we propose that NBN Co is subject to a form of incentive regulation that links its ability to set price according to its quality performance in addition to inflation. The structure of the price cap should be such that NBN Co has the incentive to deliver the welfare maximising level of quality, in particular where quality and quantity are complements. Quality should not only be measured against the previous year’s performance, but also against changing customer expectations and against service quality in other countries. We also propose governance arrangements designed to increase the transparency of decision making.