By Clancy Yeates and Lucy Battersby
WHEN Julia Gillard switched on the national broadband network in Armidale last month, critics were quick to ridicule the tiny number of test customers.
The fact that just seven households were taking part in the trial, Coalition critics thundered, was proof of the shonky business case for the $36 billion network.
Telecommunications in 1972 with Sydney switchboard operators.Credit: Mathers
Nationals MP Luke Hartsuyker compared the ''magnificent seven'' with the queues of people lining up to buy the iPhone 4, while Malcolm Turnbull mocked the fact that NBN's staff outnumbered customers.
''Who knows what tumultuous celebrations will occur when the NBN's customers actually exceed their staff. It will possibly be declared a national holiday,'' Turnbull told a national newspaper.
The highly politicised nature of the NBN will ensure such attacks on the network continue, despite Armidale being only atrial. But after this week's landmark deal between NBN Co and Telstra, serious expansion of the national network is all but locked in.
Both Telstra and Optus have agreed to shut down their fixed-line networks, which guarantees NBN Co a steady stream of households switching on to fibre if they want to retain a landline.
With the two telco giants onside, NBN Co is now in a race to roll out the network to its targeted 1.7 million premises by June 2013, likely to be around the next election.
Construction will soon move from testing to high-volume rollout, and NBN Co has already secured contractors to hook up 400,000 homes by the next election. A tender for a further 600,00 homes is in its final stages.
To pay for it all, the May budget also injected $3.1 billion into the network in the financial year about to begin, and a further $18.2 billion between 2011-12 and 2014-15.
In short, the political battle of the NBN has moved from debates about legislation and implementation to oversight of costs in the mass rollout of the country's biggest-ever infrastructure project. Once shareholders approve Telstra's deal and regulators sort out a few pricing issues, it will have long-term regulatory certainty for its fixed-line business for the first time since privatisation.
But it will remain the monopoly owner of the copper network, and is expected to leverage this power to sign up as many customers as possible to cement its power as a retailer on the NBN.
Optus executives were this week lobbying for tougher instructions to Telstra's chief supervisor, the Australian Competition and Consumer Commission.
But Communications Minister Stephen Conroy's yesterday finalised advice that does not require Telstra to undertake functional separation, as Optus and others requested.
''[The instructions] are intended to provide meaningful improvements to existing arrangements for industry access to Telstra's copper network,'' he says.
Chief executive David Thodey was emphatic that Telstra would not have to separate its wholesale and retail functions into two companies. He reminded analysts the board had two options - to co-operate with the government-owned NBN Co or not. As it has chosen one option, the other is now irrelevant.
''The legislation does not provide for this double separation and Telstra will not consider it,'' he says.
However, the Greens take the balance of power in the Senate next month, and Greens communications spokesman Senator Scott Ludlam signals that they may push for further action to restrain Telstra's power while it still holds its monopoly.
''We are concerned that Telstra will do what you could argue is in its culture … to leverage its monopoly power before the copper is deactivated,'' Ludlam says. ''They [the ACCC] have got the powers that we legislated them late last year and, to my mind, what we legislated them wasn't sufficient.''
As the NBN Co expands its reach, the opposition will target hip pockets, arguing that a government monopoly will inevitably force prices up.
Tony Abbott this week branded the NBN a ''great leap backwards,'' while Malcolm Turnbull rammed home the message that it was unwinding decades of competition reform.
In the deal, Telstra receives $9 billion, post-tax from NBN Co: $4 billion for moving customers off copper and on to NBN Co's fibre network, and $5 billion over 35 years for leasing space in underground ducts and pipes and inside telephone exchanges.
On top of that, Telstra will receive $2 billion worth of contracts and assistance from the government.
For Telstra shareholders, the deal is far from perfect, but better than the alternative. Brokers at Morgan Stanley yesterday downgraded the shares, the only brokers to do so, because the deal had no positive surprises. Analysts were turned off by news that Telstra will spend about $2 billion fixing up the pipes and ducts before NBN Co uses them, which means no reduction in capital expenditure.
Payment for infrastructure will be settled in future years using a model called ''provide or pay'' (for Telstra) and ''take or pay'' (for NBN Co). NBN Co will tell Telstra its minimum infrastructure needs and Telstra will provide that infrastructure in good working order. The price is agreed to upfront but paid progressively, and each party has incentive to use or provide what they promised.
This deal complicates matters for the Coalition because it makes the network much harder - though not impossible - for a future government to untangle.
For instance, a government that abandoned the network could have to pay Telstra up to $500 million in compensation, but only once the network had passed 20 per cent of all premises, about 2 million properties.
Passing this number of homes is unlikely by the next election, according to Goldman Sachs analysts, but other aspects of the deal could add further costs to changing track midstream.
''If there was desire felt by a Labor government or a future coalition government to try to save … tens of billions of dollars and, even only in some areas, have a fibre-to-the-node approach, you would have to go back to Telstra and pay them even more money,'' Turnbull says.
Telstra is relaxed about the break fee because it knows that NBN Co is on the cusp of signing 35-year leasing agreements. It expects most of those contracts will be locked in before fibre is rolled out to enough households to trigger the break fee.
While the $500 million break fee disappointed analysts, at least compared to the billions it was rumoured to be, Telstra says it has found a balance between locking in those long-term infrastructure payments and the tipping point for losing customers from the high-margin copper telephone network.
''For all the network they are using, duct, backhaul, and exchange space and so on, that they have contracted for in [order] to get to the 20 per cent, they have to pay for [it] for 30 or 40 years,'' chief financial officer John Stanhope said at an analyst briefing on Thursday.
''[Payment] does not stop if the whole thing is stopped.''
Despite potential costs for a Coalition, Turnbull is confident he can press ahead with a cheaper broadband plan if the opposition wins government. He rejected Gillard's claim he wanted to rip up the NBN.
NBN Co chief executive Mike Quigley is keen to get his staff inside Telstra's exchanges straight away. The deal allows NBN Co technicians and engineers access to Telstra's network and exchange buildings before it gets final approval. They are about to start a 12-week planning process and will then announce when and where NBN is rolling out fibre over the next few years, he says.
The priority is setting up leasing deals for a ''transit network'' inside Telstra's network before December 2014. That will carry data from the edge of rollout sites all the way back to central exchange buildings. However, Mr Quigley says the bulk of infrastructure leasing will be the ducts and pipes set in and under footpaths around the country.
''When you have got to the complete end of the rollout and have connected all 12 million premises, then you have locked in for long-term leases for a long time,'' he said.
''You are progressively building the network, so you are progressively making commitments.'' Unscrambling the commercial deals is only one side of the NBN, of course. Crucial legislation to break up Telstra's wholesale and retail arms has already passed Parliament and the Coalition now supports ''structural separation'' in principle.
So whatever happens in the next few years, a return to the old days of Telstra controlling the telecommunications industry looks unlikely.