Chapter 2 - The Companies Bill

2.1        The National Broadband Network Companies Bill 2010 (the Companies Bill) establishes the regulatory framework covering the ownership and operations of NBN Co, and the arrangements for the eventual sale of the Commonwealth's stake in NBN Co.

2.2        An exposure draft of the bill was released for public comment on 24 February 2010.[1] Twenty-one submissions were received and made publicly available.[2]

2.3        The exposure draft was also discussed in submissions to the Senate Select Committee on the National Broadband Network, and in that committee's fourth report of May 2010.[3]

2.4        In response to concerns raised at the exposure draft stage, the government has made significant changes to the bill.[4] For instance, the bill strengthens the status of NBN Co as a wholesale-only business.

2.5        The bill adds to the general obligations on NBN Co as a carrier under the Telecommunications Act 1997 and the Competition and Consumer Act 2010. Key provisions of the bill are that it:

• defines 'NBN corporations' to include NBN Co, NBN Tasmania and any company NBN Co controls (Schedule 1);
• limits NBN corporations to supplying wholesale-only services (with some exceptions) and the investments they make (Part 2 Division 2);
• establishes powers to require functional separation, and transfer or divestment of assets of NBN corporations (Part 2 Division 3);
• clarifies that the Communications Minister may make licence conditions, including to require NBN Co to provide or not provide specified services (Part 2 Division 6);
• provides that the Australian government must retain full ownership of NBN Co until the NBN rollout is complete (Part 3 Divisions 1 and 2);
• establishes the framework for the eventual sale of NBN Co Ltd (Part 3 Divisions 1 and 2);
• enables the making of regulations to set limits on private control of NBN Co post-privatisation (Part 3 Division 3);
• establishes reporting obligations on NBN Co once it is no longer wholly Commonwealth-owned (Part 4); and
• exempts NBN Co from the Public Works Committee Act 1969 (Section 96).

2.6        Aspects of the bill that raised concerns in submissions are enlarged below.

2.7        On 1 March 2011 an amendment to the Freedom of Information Act 1982 was passed in the House of Representatives, which if agreed by the Senate, will subject NBN Co to the FOI Act with a targeted exemption to protect the confidentiality of its commercial activities.[5] This issue is discussed in chapter 3.

Definition of an 'NBN corporation'

2.8        A core provision of the bill is that an 'NBN corporation' must supply services only on a wholesale basis.[6] In the exposure draft of the bill, an 'NBN corporation' was defined as:

• NBN Co; or
• NBN Tasmania; or
• a company that is a wholly-owned subsidiary of NBN Co.

2.9        Submissions on the exposure draft were concerned that the limitation to 'wholly owned' subsidiaries could create an incentive for NBN corporations to set up joint ventures or partly owned subsidiaries that would be free of the regulatory framework.[7]

2.10      The bill responds to this concern with a new definition of 'NBN corporation':

• NBN Co; or
• NBN Tasmania; or
• a company over which NBN Co is in a position to exercise control.

2.11      This is to ensure that 'in the event that NBN Co enters into an arrangement whereby it obtains control of a company, the obligations that apply to NBN Co will also apply to that company.'[8]

Timeframe to dispose of acquired retail operations

2.12      There is a proviso that if NBN Co takes a controlling interest in a company with retail operations, after a 12 month delay the company will become an 'NBN corporation' and thus subject to the restrictions in the bill. This allows NBN Co 12 months to dispose of the retail operations. [9]

2.13      This provision reflects the government's view that such acquisitions may advance the rollout of the NBN. However, according to the explanatory memorandum, 'it should be understood that such arrangements are expected to be the exception, rather than the general rule...'

To the greatest extent possible, NBN Co would be expected to arrange any acquisition so that it would not need to acquire any retail operations along with the assets it wished to acquire.

Moreover, NBN Co will need to notify the Commonwealth of any proposed acquisitions, including acquisition of a significant shareholding, as part of its reporting obligations under the CAC Act and under Part 4 of the Companies Bill.

The ACCC could also, under section 50 of the Competition and Consumer Act 2010, assess such an acquisition to determine if it would have the effect, or be likely to have the effect, of substantially lessening competition in a market.[10]

2.14      Submissions which addressed this point opposed the 12 months grace period to dispose of a retail operation. For example, Telstra said:

There is a loophole in the definition that would effectively allow NBN Co to extend the period beyond 12 months by simply transferring the retail business into a new company before the period expires... It is not difficult to structure an acquisition such that the retail business is disposed of separately at the time of the acquisition. There is no need or justification for a twelve month (or any) grace period.[11]

2.15      In the government's view the 12 months grace period is reasonable and 'long enough to avoid NBN Co having to engage in fire sales at possibly reduced prices'.[12]

Wholesale-only supply obligations

2.16      An NBN corporation may provide eligible services only to a 'carrier' or a 'service provider' (as defined in the Telecommunications Act 1997).[13] According to the explanatory memorandum, this 'ensures that NBN Co will only supply services on a wholesale basis...'[14]

2.17      Telstra argued that the statutory terms 'carrier' and 'carriage service provider' are ill-suited to define NBN Co's scope of business. Firstly, a carrier licence can be easily obtained and there is no requirement to use it to supply services to the public:

It is very easy for a customer to “convert” from a retail customer to a carrier, because a carrier licence can be readily obtained with minimal investment requirements, and there is no requirement that a person who holds a carrier licence actually use a network unit to supply services to the public. Once an entity becomes a carrier, NBN Co can supply that person, and the services supplied can be self consumed (by the entity or within its corporate group). This is a simple loophole enabling a corporate customer to buy communications services directly from NBN Co without being a retailer.[15]

2.18      Similarly in relation to the definition of 'service providers', Telstra argued:

An entity may become a [carriage service provider (CSP)] by reason of supply of one particular kind of service – for example, a supermarket chain that is a mobile reseller. Such an entity would operate under the CSP class licence, and – under the proposed NBN Companies Bill – could acquire all of its fixed services from NBN Co directly, even though they may be entirely unrelated to functions as a mobile reseller.[16]

2.19      Telstra suggested that clause 9 of the bill should include a requirement that an NBN corporation's customers must acquire the services for the purpose of on-supply, not for their own consumption.[17]

2.20      NBN Co did not agree:

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... 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.[18]

2.21      The Australian Telecommunications Users Group also did not support limiting NBN corporations in this way, 'as we feel this will reduce the emergence of specialist service providers who may otherwise emerge to provide services in the mining sector, health sector, energy sector and the like'.[19]

2.22      The government argues that the suggested further restriction on the definition of the persons that an NBN corporation may supply is not necessary or appropriate since:

• the Layer 2 service which the government intends that NBN Co should provide is by nature a wholesale service; and
• it would prevent a currently permitted arrangement in which a person can become a carrier even if that person wishes to provide services primarily to his or her own operations.[20]

2.23      In evidence on this point the Department of Broadband, Communications and the Digital Economy (DBCDE) noted that:

Since 1997 the Telecommunications Act has not sought to restrict any person from becoming a carrier, nor has it sought to require a carrier to supply to the public. On the contrary, it has encouraged entry to the market with the wider benefits that this can bring. However, the costs and inconvenience to an organisation of becoming a carrier should not be underestimated. In this case, it would include purchasing equipment to transform NBN Co.’s basic connectivity services into services that it could use for its own telephony, internet and other services. They would also include regulatory obligations... If a company finds it more efficient to take on these costs than to purchase from existing retail service providers then the law, as it has stood since 1997, does not stand in its way, and the government has not sought to change this.[21]

Wholesale-only supply exemption for utilities

2.24      The exposure draft provided that the Communications Minister could make a legislative instrument with the effect that an NBN corporation could supply services to specified end users. This was intended to allow flexibility for NBN Co to offer retail services directly to certain end users, for example government agencies.[22]

2.25      Submissions on the exposure draft objected to this ministerial discretion as too broad and contrary to the basic principle of NBN Co as a wholesale-only provider.[23]

2.26      In the bill, this provision has been replaced with a provision that allows an NBN corporation to provide network management services directly to a variety of utilities bodies such as transport, electricity, water and sewerage authorities. The explanatory memorandum states that these bodies may need a network management service directly from an NBN corporation to assist in monitoring their networks:

A number of these entities have advised the Government that, for security reasons, they could not use a service provided by a reseller for these network management purposes and would need direct access to a Layer 2 bitstream service from an NBN corporation (it should be noted that these entities will still be required to acquire their regular communications services, for purposes other than network management, from a reseller).[24]

2.27      Under a provision of the Access Bill, these services will have to be 'declared' by the Australian Competition and Consumer Commission (ACCC) and so subject to supply and equivalence requirements and ACCC oversight.[25]

2.28      Submissions on this point were mixed. Utilities stakeholders supported the exemption. For example, Energy Networks Association (ENA) said 'maintenance of this exemption is very important to the ability of electricity and gas network businesses to meet 21^st century expectations around affordability, reliability and quality of energy supplies'.[26] Similarly, Smart Grid Australia said:

Removing these exemptions would require electricity utilities to have to deal with a carrier (or service provider) in working through network design and architecture issues to connect with NBN Corporation's communications network. This is an impractical and unworkable proposition...[27]

2.29      The Competitive Carriers Coalition argued that 'the sorts of services that the utilities would be seeking to supply are in no way overlapping in any sense with the markets we currently operate in, nor the markets that we expect will emerge as the NBN is rolled out.'[28] ENA argued that if electricity network businesses are prevented from dealing directly with an NBN corporation, their next most efficient option would probably be to deploy their own infrastructure; but this would potentially result in inefficient duplication.[29]

2.30      On the other hand, Telstra and Optus opposed the utilities exemption. Telstra argued that 'there does not appear to be any meaningful justification for this', and 'the scope of the services that fall within the exemption are very broad':

For example, it would be possible for NBN Co to supply services to a private rail operator (such as a mining company), provided the service is ‘necessary or desirable for the workings of train services’. Arguably, all of the communications needs of a rail operator are ‘necessary or desirable’ for the workings of train services, so it is difficult to see how the proposed exception would put any limit whatsoever on the kinds of services that NBN Co could offer... Sections 10–16 are so broadly drafted that they place almost no constraint on the nature of the services that could be supplied, except as to the sector it is provided in.[30]

2.31      The government responds that the utilities exemption is appropriate because:

• under the existing legislation utilities may do things that would otherwise make them carriers or carriage service providers, without being classified as carriers or carriage service providers. The bill simply allows NBN Co to treat them as carriers or carriage service providers;
• the exemption will support the growth of smart infrastructure management including smart management of electricity supply; and
• the exemption will put pressure on telcos to give utilities the services they need.[31]

2.32      DBCDE expanded on these points in evidence:

You can envisage a situation where the RSP can come up with a more innovative bundle of products so that they are providing the basic connectivity service that the utility could purchase directly from NBN Co. along with something to provide the internet and telephony services the utility wants. In some ways this is creating scope for RSPs to be more innovative in the nature of the services that they are offering to the utilities... The exemption for utilities is designed to leave that option open and to enable them to make judgments themselves about the best way to meet their needs.[32]

2.33      In relation to the possible concern that exempt bodies could onsell telecommunications services in unfair competition with regulated retail service providers, ENA noted that the exemption relates only to utilities maintaining and charging for their own network services:

These dedicated services are separate from any purchase by energy network businesses of carriage services to on-supply to the public. In the few cases where energy network businesses have on-sold telecommunications services to the public they have, appropriately, been subject to carrier and carrier licensing provisions for this supply.[33]

Committee comment

2.34      The committee supports the wholesale-only provisions in the bill. In the committee's view they will drive innovation and competition amongst RSPs. The committee also supports the utilities exemption, noting that utilities will still have the choice to purchase network management services from RSPs or other intermediaries.

Definition of the services that NBN corporations can provide

2.35      In the exposure draft there was no general constraint on the types of services that an NBN corporation could provide, but only a constraint on the types of persons that an NBN corporation could provide services to, as noted above. Some stakeholders had concerns that this places no restriction on NBN Co 'moving up the value chain' or providing other types of supplies that are not regulated 'eligible services', contrary to the policy goal.[34]

2.36      The bill has added provisions that an NBN corporation may not supply a content service, or a non-communications service, or goods unless the goods are for use in connection with the supply of an eligible service.[35] The government stresses that 'NBN Co's corporate plan and the government's statement of expectations very clearly set out that NBN Co will operate at layer 2 of the network stack...'[36]

2.37      Submitters to this inquiry still have concerns on this issue, which many referred to as the risk of 'scope creep'. Some suggested that the bill should specifically prohibit an NBN corporation from providing services higher than layer 2.[37] Submitters also noted that such a limitation would need to have some exceptions for practical reasons.[38]

2.38      The bill does not include the suggested restriction because 'the government is reluctant to include technology specific limitations on NBN Co unless and until there is a demonstrated need to do so. An inflexible rule could be counterproductive in terms of the services provided to customers.'[39] In evidence DBCDE officials noted that for technical reasons NBN Co will have to have 'some limited layer 3 awareness or functionality', for example multicasting.[40]

2.39      The government notes that the bill allows the minister to impose a licence condition on an NBN corporation mandating or prohibiting certain services. This power could be used to specify the layer at which NBN Co operates.[41] In the government's view a restriction on NBN Co's activities to answer these concerns would be done most appropriately by a licence condition if the need arises.[42] DBCDE noted that licence conditions similar those proposed have been used for many years.[43]

2.40      Ms Lovell, Principal, Regulatory Affairs, NBN Co, confirmed the arrangements for NBN Co's service level mandate:

The bills that we are considering today will provide a very clear framework as to what we [NBN Co] 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 [the statement of expectations] 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.[44]

Committee comment

2.41      The committee acknowledges the concerns of certain submitters regarding the services provided by NBN Co. However, the committee is of the view that it is potentially problematic to define this sort of highly technical matter in primary legislation.

2.42      The committee notes the government's clear instructions to NBN Co, that the company 'will offer open and equivalent access to wholesale services, at the lowest levels in the network stack necessary to promote efficient and effective retail level competition, via Layer 2 bitstream services.'[45]

2.43      Furthermore, the committee considers the well established arrangements of the telecommunications regulation regime, which allow the Minister to impose a licence condition mandating or prohibiting certain services, to be a suitable and appropriate safeguard mechanism.

Conditions for selling NBN Co

2.44      The exposure draft provided that the Commonwealth must retain majority ownership of NBN Co until such time as the minister declares that the national broadband network should be treated as built and fully operational. However a minority selldown would be possible even before the minister's declaration.[46] Submissions on the exposure draft had concerns that this discretion was too broad.[47]

2.45      The present bill has changed provisions such that the Commonwealth may not sell any of NBN Co until certain conditions are met. The conditions for sale of NBN Co are:

• the Communications Minister has declared that, in his or her opinion, the national broadband network should be treated as built and fully operational;
• there has been tabled in parliament a report by the Productivity Commission on various matters listed in the bill;
• the Parliamentary Joint Committee on the Ownership of NBN Co has examined the Productivity Commission's report; and
• the Finance Minister has declared that, in his or her opinion, conditions are suitable for entering into and carrying out an NBN sale scheme (this declaration is disallowable, and takes effect only after the period for disallowance has passed).[48]

2.46      The bill has rules about how an NBN sale scheme is to be carried out. The Finance Minister may also make a determination setting out rules that are to be complied with in an NBN sale scheme.[49]

2.47      There was little comment in submissions or evidence about this issue, suggesting that the changed provisions have largely satisfied stakeholders' concerns.[50] However the Communications Expert Group argued that 'built and fully operational' is too vague a term, and the government should be able to sell NBN Co at the time that maximises its return:

The proposed safeguards of a Productivity Commission inquiry and a review by a Parliamentary committee are sufficient protection without the need for additional restrictions.[51]

2.48      In relation to the ownership of NBN Co after selldown, clause 69 of the bill allows the Minister (after consulting the ACCC) to make regulations to prevent an unacceptable level of private ownership or control. An 'unacceptable private ownership or control situation' would be defined in the regulations.[52]

2.49      This responds to concerns that retail service providers could invest in NBN Co with a view to gaining control of it and favouring their downstream services, contrary to the intention of NBN Co's wholesale only mandate.

2.50      Some submitters were concerned that leaving this matter for regulations is insufficient. The Australian Communications Consumer Action Network (ACCAN), said:

The measures in the Bill to handle such a situation are weak. The definition of an “unacceptable private ownership or control situation” (Clause 69, Companies Bill) is left to regulations, which can be easily and swiftly modified under pressure from industry.[53]

2.51      Optus suggested that there should be a 15 per cent limit on ownership of NBN Co by any one retail telecommunications service provider (as was recommended in the Implementation Study).[54]

Committee comment

2.52      The committee supports the provisions concerning the future sale of NBN Co. The committee considers they provide a reasonable balance between flexibility for government and NBN Co, and regulation in the public interest. The committee notes that ownership and control of NBN corporations would be one of the matters considered in the Productivity Commission inquiry mentioned at paragraph 2.45.[55] The committee considers that the concerns of ACCAN that the use of regulations makes for weak protection are misplaced, having regard to the fact that such regulations would be subject to Parliamentary scrutiny and the possibility of disallowance.

NBN Co not subject to the Public Works Committee

2.53      Some submissions argued that NBN Co should be subject to the Public Works Committee Act 1969 (PWC Act).[56] This involves referring works with an expected cost of more than $15 million to the Parliamentary Standing Committee on Public Works. The definition of 'work' in section 5AA of the PWC Act is very broad, opening up the possibility that the Public Works Committee may be tasked with the review of many aspects of the NBN rollout. Referred projects cannot be commenced until the committee has made its report to Parliament and the House of Representatives receives that report and resolves that it is expedient to carry out the work.[57]

2.54      The bill provides that the PWC Act does not apply to an NBN corporation.[58] According to the explanatory memorandum 'this is to ensure NBN Co has sufficient commercial flexibility to undertake the investments needed to rollout the NBN and is consistent with arrangements that apply to Australia Post and that previously applied to Commonwealth-owned carriers such as Telstra, the Overseas Telecommunications Corporation and Aussat'.[59]

2.55      Mr Quinlivan, explained the rationale behind the exemption:

The primary logic is that the need to have individual projects above $15 million reviewed and approved by the Public Works Committee would be a significant commercial disadvantage to them because they are doing a very large number of those projects, replicated over and over again across the nation. I think it is not so much that it is in competition as that it would be commercially disadvantaged by the need for that kind of scrutiny on an ongoing basis, as opposed to scrutiny of the overall project, which it is getting plenty of. That logic has been previously accepted with Australia Post and other telecommunications carriers which have similar networks.[60]

Committee comment

2.56      The committee accepts the government's argument that exempting NBN Co from the PWC Act is consistent with past practice, and it would be impractical to do otherwise.

Recommendation 1

2.57      The committee recommends that the Companies Bill be passed.

Navigation: Previous Page | Contents | Next Page