NBN revenue, procurement, cost recovery approved by ACCC

The Australian Competition and Consumer Commission (ACCC) has approved the National Broadband Network (NBN) company's revenue control alteration proposal, and deemed the company to have been compliant with pricing and procurement controls during 2014-15 in its final decision.

Under the special access undertaking (SAU) submitted to the ACCC in 2013, NBN must provide yearly information on its revenue, operating expenditure, capital expenditure, and services pricing.

"The ACCC is satisfied that the values proposed by NBN Co for 2014-15 for determining allowable revenues for 2014-15 are consistent with the revenue control provisions in the SAU," ACCC Commissioner Cristina Cifuentes said on Friday.

The NBN Co Special Access Undertaking Long Term Revenue Constraint Methodology 2014-15: Final Determination and Price compliance reporting 2014-15 [PDF] is consistent with the draft decision made in March.

"The ACCC has ... decided to accept NBN Co's proposed values for the ABBRR [Annual Building Block Revenue Requirement], RAB [Regulatory Asset Base], and ICRA [Initial Cost Recovery Account]," the final decision says.

At the end of each June, NBN is required to provide forecasts on its capex, opex, asset disposals, and capex that has yet to be placed in service for the financial year ahead, and on October 30, it must submit its Long Term Revenue Constraint Methodology (LTRCM) proposal.

The LTRCM consists of its actual financial information, proposed financial information, an expenditure compliance report, a procurement compliance report, a price compliance report, and several independent limited assurance reviews conducted by PricewaterhouseCoopers.

The ACCC thus regulates the amount of revenue NBN may earn each financial year, the pricing caps for its services, the net value of its assets, and the accumulation of its unrecovered costs. Under the price controls, NBN is permitted the opportunity to recover shortfalls in predicted revenue once take-up of NBN services grows.

The ACCC must each year also consider whether NBN has adequate rules for procurement, whether there are controls and processes for compliance with the SAU's prudency conditions, and whether those controls and processes operate well.

NBN had last year requested that its 2013-14 LTRCM be altered in order to account for an error it made in omitting the value for "working inventory". It also suggested that the ACCC change the categorisation of working inventory, making it distinct from "spares inventory".

"NBN Co proposes that working inventory should form part of the construction in progress allowance. NBN Co has further clarified that working inventory is distinct from 'spares inventory', which consists of equipment held for network maintenance purposes and is reflected in capital expenditure," the ACCC's final decision says.

"The ACCC understands that working inventory expenditure would have been subject to the same procurement processes and controls as other items of construction in progress that were included in the 2013-14 LTRCM Determination. The ACCC considered that it is reasonable to include the value of the working inventory account in construction in progress.

"NBN Co demonstrated that the value of working inventory can be reconciled with the regulatory information submitted by NBN Co. The ACCC considered this reconciliation, along with the assessment of compliance with the prudency provisions in the SAU in making its draft decision, and was satisfied that the proposed value of working inventory complied with the relevant prudency requirements."

Such a change will allow NBN to recover a further AU$6 million in future.

"NBN Co's proposed amendment to the 2013-14 LTRCM Determination to include working inventory in construction in progress would increase the ICRA by about $6 million as at 30 June 2014," the ACCC noted.

"This effectively means that NBN Co will be able to recover additional revenue in later stages of the project lifecycle," the draft decision had pointed out.

The ACCC also found NBN to have been compliant with procurement requirements.

"The ACCC's draft decision was that it was satisfied that the information provided by NBN Co was reasonable for the purpose of demonstrating that it had procedures and processes in place to enable compliance with the prudency conditions and procurement rules set out by the SAU.

"The ACCC did not receive any submissions in relation to NBN Co's expenditure compliance and therefore confirms its draft decision that NBN Co's expenditure complies with the relevant prudency conditions."

Earlier this week, the ACCC also published the proposed SAU variations submitted by NBN in order to take into account the multi-technology mix (MTM).

The MTM NBN model involves a mix of technologies including fibre to the premises (FttP), fibre to the node (FttN), fibre to the basement (FttB), and hybrid fibre-coaxial (HFC); the former SAU took into account only FttP.

According to the ACCC, NBN already offers FttN, FttB, and HFC technologies in an SAU-consistent manner, with the SAU variation to simply formalise the process. However, several other amendments would see NBN forced to provide rollout progress information to access seekers, as well as changing the dispute resolution mechanism to allow a body corporate to be appointed as a resolution adviser.

"None of the changes which NBN proposes alter the underlying regulatory principles, structure, and incentives embedded in the SAU, which the ACCC has previously accepted as being reasonable, including being in the long-term interests of end users," NBN said in its supporting submission [PDF].

"NBN's changes are limited in scope and mechanical in nature; they represent an incremental change to reflect current policy settings.

"Fundamentally, the change to the MTM model does not change the underlying regulatory principles, structure, or incentives embedded in the SAU and they apply equally to the MTM as they do currently to the services and products under the SAU."

NBN submitted the proposed variation [PDF] on May 27 alongside prolific independent evaluations from professor Janusz Ordover and Dr Allan Shampine [PDF], Analysys Mason [PDF], and Dr Steven Bishop and professor Bob Officer [PDF].

The ACCC is accepting submissions on the proposed variation until August 26, after which it will decide whether to accept or reject it.